Court Opinion

ID: 4625068
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:27.985498+00
Date Added: 2024-06-11T07:56:38.219687
License: Public Domain

GRACE SCRIPPS CLARK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clark v. CommissionerDocket Nos. 20103, 36901.United States Board of Tax Appeals16 B.T.A. 453; 1929 BTA LEXIS 2576; May 10, 1929, Promulgated *2576  The petitioner, under a trust established by her father in 1906, had an equitable life interest therein consisting of the right to receive one-fourth of the distributions of the trust.  On December 24, 1919, petitioner, in consideration of love and affection assigned to her husband a "one-half interest in all income, grants, interest, reversion, remainder, and remainders" which might thereafter be payable to her from the trust.  The instrument of assignment was executed before a notary public on February 19, 1920.  The trustees were not notified of the assignment until April 30, 1924.  All payments made by the trustees of the distributions of the trust fund payable to the petitioner under the terms of the trust instrument prior to 1924 were made by check payable to the order of the petitioner and deposited in a bank to the joint account of petitioner and her husband.  Held that the portion of each distribution belonging to the husband by virtue of the assignment was not income of the petitioner but of her husband, the assignee.  Byron C. Hanna, Esq., for the petitioner.  F. R. Shearer, Esq., for the respondent.  SMITH *453  These proceedings, *2577  consolidated for hearing and decision, involve deficiencies in income tax for the years 1918, 1922, and 1923, as follows: 1918$4,978.08192276,794.14192344,235,83The only point involved with respect to the year 1918 is the running of the statute of limitations.  At the hearing of these proceedings counsel for the petitioner admitted that the statute of limitations had not run upon the assessment of the deficiency for 1918 by reason of the filing by petitioner of a consent in 1924, knowledge of which he did not have at the time the appeal to the Board was prepared.  The question presented for the years 1922 and 1923 is whether the petitioner is liable to income tax in respect of all of the income payable to her under the terms of a certain trust instrument, in view of the fact that she had assigned to her husband, Rex B. Clark, on December 24, 1919, one-half of her interest in the trust fund.  The petitioner admits liability to income tax upon only one-half of the income payable to her.  The petitioner admits certain errors with respect to the amount of income returned by her for the years 1922 and 1923.  *454  FINDINGS OF FACT.  The petitioner*2578  is a daughter of James E. Scripps, who died in Detroit, Mich., on May 29, 1906.  On May 4, 1906, he executed an instrument, hereinafter referred to as the trust instrument, by which he purported to transfer to William E. Scripps, George G. Booth, and Edgar B. Whitcomb as trustees certain shares of stock therein described.  Contemporaneously with the execution of this instrument James E. Scripps delivered and transferred to the above-named trustees the shares of stock referred to in said trust instrument.  The said trustees ever since have claimed to hold such stock and the proceeds thereof pursuant to the trust instrument.  The petitioner is and for many years has been a resident of California.  Prior to December 24, 1919, she became the wife of Rex B. Clark.  As a beneficiary of the trust fund created by her portion of she received each year sums of money representing her portion of the distributions of the trust fund.  On December 24, 1919, she executed the following instrument: This indenture, made the twenty-fourth day of December, in the year nineteen nineteen, between Grace Scripps Clark, of the City of Pasadena, County of Los Angeles, State of California, the party of the*2579  first part, and Rex B. Clark, her husband, of said City, the party of the second part, witnesseth: That the said party of the first part, for and in consideration of the love and affection which the said party of the first part has and bears unto the said party of the second part, does by these presents give, grant, alien, and confirm unto the said second party, and to his heirs and assigns forever, one half interest in all income, rents, interest, reversion, remainder and remainders which may from time to time be payable to me or to which I may be hereafter entitled, under a certain trust agreement executed and delivered by my father James E. Scripps, now deceased, to William E. Scripps, George G. Booth and Edgar B. Whitcomb as trustees, dated May fourth, A.D., 1906, a copy of which is hereto annexed, and made a part hereof, marked Exhibit A, also under the will of my said father, dated May fourteenth, A.D., 1906, a copy of which is also hereto annexed, made a part hereof and marked Exhibit B.  In witness whereof, the said first party has hereunto set her hand and seal, the day and year first above written.  GRACE SCRIPPS CLARK.  In the presence of - REX S. CLARK E. H. *2580  BAGBY On February 19, 1920, petitioner duly acknowledged the execution of the above recited instrument, hereinafter referred to as the assigning instrument, before a notary public in and for the County of Los Angeles, State of California.  At all times subsequent to December 24, 1919, all sums distributed as income by the trustees of the above-mentioned trust, which under the terms of the trust instrument were distributable to petitioner, have been deposited *455  in the joint bank account of petitioner and her husband, Rex B. Clark, in the First National Bank of Detroit, in the City of Detroit, State of Michigan, and said funds so deposited from time to time have been withdrawn from said bank and until June 15, 1921, deposited in a joint bank account of petitioner and her husband, Rex B. Clark, in the First National Bank of Los Angeles, in the City of Los Angeles, State of California, and after June 15, 1921, in a joint bank account of petitioner and her said husband, in the Farmers & Merchants National Bank of Los Angeles, in the City of Los Angeles, State of California.  Petitioner's husband, Rex B. Clark, has caused accounts to be kept of the sums so received, including*2581  a cash book and a ledger, and in those accounts the funds so received at all times since December 24, 1919, have been credited one-half to petitioner and one-half to her husband, Rex B. Clark.  The trustees were not immediately notified of the assignment, the petitioner being advised that such notification was not necessary in order to create a valid assignment.  The trustees were, however, notified of the assignment on April 30, 1924, since which date separate checks have been drawn by the trustees of the portion of the income distributable to the petitioner and the portion distributable to her husband, Rex B. Clark.  Commencing with the calendar year 1920, and for each calendar year thereafter, petitioner and her husband, Rex B. Clark, have each made income-tax returns to the collector at Los Angeles, showing the receipt by each of one-half of the total income distributed from said trust fund accruing to the petitioner and to the petitioner's assignee, Rex B. Clark.  The respondent has amended petitioner's income-tax returns for 1922 and 1923 by adding to the reported income the amount returned by her husband as received from the trust fund by virtue of the assignment.  *2582  The asserted deficiency for the year 1922, in the sum of $76,794.14, is predicated upon the hypothesis that all of the income of the said trust which the petitioner was or which petitioner and petitioner's husband were entitled to receive in the year 1922, in the total amount of $311,423.66, should properly be charged to petitioner as her income.  In her income-tax return for 1922, petitioner showed net income in the amount of $104,116.51, which included $155,000 as income received from the above trust.  The petitioner admits that the latter amount should have been $155,711.83 and that the total net income should have been $104,828.34, instead of $104,116.51, the amount returned.  If the petitioner is chargeable upon the entire income of the trust fund distributable to her under the terms of the trust instrument in the amount of $311,423.66, the petitioner should *456  be charged with additional income for the year 1922, in which event the total net income of the petitioner for the year 1922 would be $260,540.17.  Petitioner filed an income-tax return for 1923 showing net income in the amount of $43,387.33, and including as income received from the above trust $63,110.70. *2583  It is admitted by the petitioner that the latter amount should have been $121,306.89 and that the total net income should have been $101,583.52.  It is further admitted that if the assigning instrument of December 24, 1919, is to be ignored and the petitioner is chargeable with all of the income distributable to her under the trust instrument as contended by the respondent, the corrected net income of petitioner for 1923 is $222,890.41.  OPINION.  SMITH: The question presented in these proceedings is whether the legal effect of the assignment made by the petitioner December 24, 1919, was to vest in her husband one-half of her interest in the trust fund of which she was a beneficiary and to relieve her from liability to income tax in respect of one-half of the income distributable to her under the trust instrument during the taxable years 1922 and 1923.  In accordance with the petitioner's and her husband's understanding of the assigning instrument each returned one-half of income of the trust fund for the years 1922 and 1923 in their individual income-tax returns for those years.  It is the contention of the respondent that the assignment did not vest in the husband a one-half*2584  interest in the petitioner's distributable share of the income from the trust fund, and that the petitioner is liable for income tax on the entire amount.  We can not doubt from the record that the petitioner, in executing the assigning instrument, intended to vest in her husband a one-half interest in the trust fund of which she was beneficiary.  Both the petitioner and her husband have consistently acted upon that understanding of the instrument.  At the time of the execution of the assigning instrument the petitioner and her husband were residents of the State of California, and they have continued to reside therein since.  The property comprising the trust fund and the trustees of the fund were located in Michigan.  It is well established in California, and also in Michigan, that a beneficiary of a trust of the nature of that here under consideration may assign his interest therein.  California Civil Code, sec. 1135; Title Insurance & Trust Co. v. Duffill,191 Cal. 629">191 Cal. 629; 218 Pac. 14; Curtin v. Kowalsky,145 Cal. 431">145 Cal. 431; *2585 78 Pac. 962; Bridge v. Kedon,163 Cal. 493">163 Cal. 493; 126 Pac. 149; Henderson v. Sherman,47 Mich. 267">47 Mich. 267; 11 N.W. 153">11 N.W. 153. In Michigan there is a statutory restriction on assigning an interest in a trust for the receipts of rents and profits of land, but the restriction *457  does not affect a trust of personal property.  The only assets of the trust fund here consisted of shares of stock in Michigan corporations and dividends therefrom.  It is not material that the notice of the assignment here was not given to the trustees.  The general rule of law prevails in California that the validity of an assignment does not depend upon notice to the debtor.  Title Insurance & Trust Co. v. Williamson,18 Cal. App. 324">18 Cal.App. 324; 123 Pac. 245. The courts of California have held in numerous cases that instruments similar to the assigning instrument here under consideration create valid assignments.  See Driscoll v. Driscoll,143 Cal. 528">143 Cal. 528; *2586 77 Pac. 471; Curtin v. Kowalsky, supra;Francoeur v. Beatty,170 Cal. 740">170 Cal. 740; 151 Pac. 123; Burkett v. Doty,176 Cal. 89">176 Cal. 89; 167 Pac. 518; Belden v. Farmers' & Mechanics' Bank of Healdsburg,16 Cal. App. 452">16 Cal.App. 452; 118 Pac. 449. The decisions in Michigan are to the same effect. Henderson v. Sherman, supra;Dunn v. Swan,115 Mich. 409">115 Mich. 409; 73 N.W. 386">73 N.W. 386; Brownson v. Roy,133 Mich. 617">133 Mich. 617; 95 N.W. 710">95 N.W. 710. We think it beyond doubt that the legal effect of the assigning instrument executed by the petitioner December 24, 1919, was to vest in the petitioner's husband all right, title, and interest in and to one-half of her interest in the trust fund, including the income therefrom.  The fact that the trustees during the taxable years 1922 and 1923 paid the entire amount of the income to which the petitioner was entitled under the trust instrument to her rather than one-half to her and one-half to her husband is immaterial.  Such part of the income as belonged to her husband under the assigning*2587  instrument the petitioner received and held as trustee for her husband.  The Revenue Act of 1921 and prior revenue acts make an individual liable for income tax on all the income that the individual receives as his own, with certain exemptions not material here.  In Earl v. Commissioner, 30 Fed.(2d) 898, it was held that under California law the husband and wife may lawfully agree by contract that their joint earnings shall belong to them jointly and not otherwise, and that under an agreement that earnings of either spouse shall be received, held, taken and owned by them as joint tenants, the earnings of the husband were received, taken, and held from the beginning as the joint property of both; that accordingly the wife was liable to income tax in respect of one-half of the joint earnings of husband and wife.  We think that upon this same principle one-half of the income of the trust fund distributed to the petitioner is taxable income of the petitioner's husband, Rex B. Clark, and that the petitioner is not liable to income tax in respect of it.  The facts in the instant case are similar to those in *2588 Edith H. Blaney,13 B.T.A. 1315">13 B.T.A. 1315, where the petitioner under a trust established *458  by the will of her father had an equitable life interest therein consisting of the right to receive one-sixth of the income of the trust.  On February 21, 1921, the petitioner, in consideration of love and affection, assigned to her husband and her children the right to receive portions of her income from the trust.  Thereafter, payments were made by the trustees to the assignees.  We held that the amounts paid to the assignees which were accumulated subsequent to the assignments did not constitute taxable income to the petitioner.  See also O'Malley-Keyes v. Eaton, 24 Fed.(2d) 436; Young v. Gnichtel, 28 Fed.(2d) 789. Also compare Board decisions Wm. W. Parshall,7 B.T.A. 318">7 B.T.A. 318; C. R. Thomas,8 B.T.A. 118">8 B.T.A. 118; M. A. Reeb,8 B.T.A. 759">8 B.T.A. 759; William I. Paulson et al.,10 B.T.A. 732">10 B.T.A. 732. The instant case is distinguishable from Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; *2589 9 Fed.(2d) 414; 15 Fed.(2d) 287 (C.C.A.).  Mitchel, who was a member of a copartnership, attempted to assign to his wife one-half of the profits which might come to him from the copartnership.  The assignment provided that upon receiving the profits plaintiff would hold for and pay to his wife the share thereof to which she would be entitled thereunder.  The assignment further provided that it might be terminated at any time at the option of either party.  It amounted to nothing more than a voluntary concession to his wife temporarily of a part of whatever was distributed to him by the partnership.  It was pointed out in that case that the Revenue Act of 1918 specifically holds a partner taxable upon his distributable share of the partnership profits.  The case is also distinguishable from Maud Dunlap Shellabarger,14 B.T.A. 695">14 B.T.A. 695. The petitioner therein was a principal beneficiary under her father's will and the recipient of income from a trust created thereby.  To avoid a contest of her father's will, petitioner executed an instrument by which she agreed that upon the receipt by her of income under the trust she would pay three-tenths thereof*2590  to another party, and one-fifth thereof to a bank to be held and used for certain purposes.  Petitioner contended that this amounted to an assignment of the income.  The Board held that the instrument was so worded that it did not assign or transfer the income or any interest in the trust, but only bound the petitioner to use a portion of the income in a certain manner when received by her, and that the total income of the trust fund was income of the petitioner and taxable to her.  The instant proceedings are also distinguishable from Bing v. Bowers, 22 Fed.(2d) 450; 26 Fed.(2d) 1017 (C.C.A.).  In that case the plaintiff assigned to his mother the income and profits from certain property up to a certain amount.  But what was assigned was not the income from the property but the petitioner's net income and profits from the operation of the property.  It was held that the instrument of assignment did not pass to the mother an interest in *459  the property, or create a rent charge or any ownership pro tanto of the grantor's interest in the property, but that the grantor maintained the right of control and was therefore liable to income tax*2591  in respect of the income received by him.  No question is raised as to the correctness of the deficiency determined by the respondent for 1918.  Judgment will be entered under Rule 50.