Court Opinion

ID: 4618151
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:38:01.415257+00
Date Added: 2024-06-11T07:55:25.320743
License: Public Domain

Seymour H. Knox, Petitioner, v. Commissioner of Internal Revenue, RespondentKnox v. CommissionerDocket No. 107622United States Tax Court1 T.C. 575; 1943 U.S. Tax Ct. LEXIS 238; February 11, 1943, Promulgated *238 Decision will be entered for the respondent.  The income of a New York trust created by a father for the maintenance, support, and welfare of his two children, who were minors, in which the trustees were required to pay over the net income to or for the benefit of the settlor's children, is within the gross income of the settlor, even though the father provides for the children and none of the income of the trust is used for their support but all of it is distributed to the guardian for accumulation for them.  Ralph M. Andrews, Esq., and John L. Kenefick, Esq., for the petitioner.Z. N. Diamond, Esq., for the respondent.  Sternhagen, Judge.  STERNHAGEN *575  The Commissioner determined a deficiency of $ 62,530.14 in income tax for 1937.  Petitioner assails the inclusion in his income of the income of a trust created by him for the benefit of his children.FINDINGS OF FACT.Petitioner, a resident of Buffalo, New York, filed his income tax return for 1937 in the twenty-eighth collection district of New York.Petitioner has a wife and two children, Seymour H. Knox, III, born March 9, 1926, and Northrup R. Knox, born December 24, 1928.  He is not engaged in business, *239  but handles investments of his own and as trustee under numerous family trusts.On December 26, 1934, petitioner transferred certain securities to himself and the Marine Trust Co. of Buffalo, as trustees under a trust agreement which recited that "the Grantor is desirous of making provision for the maintenance, support and welfare of his children and descendants." The agreement provided that the trustees should hold, invest, and reinvest the corpus and additions thereto, collect the income, *576  and from time to time "pay over the net income to or for the benefit of the Grantor's children" and lawful issue of a deceased child in equal shares per stirpes, "with the right to the trustees in their discretion to accumulate income for the benefit of the Grantor's children * * * during minority, paying over any such accumulations to the child for whose benefit the same were accumulated" upon his reaching the age of 21 years, or on earlier termination of the trust.  The trust was to terminate upon the death of the survivor of the two children, and the trustees were to distribute the property to the then surviving children of the grantor and the then surviving issue of his deceased*240  children; if there were no surviving children or grandchildren, the property was to be transferred and delivered to the persons entitled to take as distributees of the grantor as then determined by the intestate laws of New York, such determination to be made as if the grantor had died on the date of the termination of the trust.The trustees were given full power and authority to sell, exchange, mortgage, pledge, and register trust property and:to exercise in respect to all of the property held by them as Trustees all the rights and powers which are or may be exercised by individuals owning similar things in their own right.The trustees were not limited in their investments to securities authorized by New York law and were empowered to determine whether money or property received should be treated as principal or income.  The trustees were freed from responsibility for losses which might result from the exercise of their discretion.  The two children would, with their consent, become trustees upon reaching 21.  The agreement also provided that:The Grantor shall have the right at any time, by written instrument duly executed and acknowledged, to remove the corporate trustee*241  hereunder, or any successor to it as trustee, and to substitute a successor trustee, to be designated in such instrument, to act in the place and stead of the said The Marine Trust Company of Buffalo or any successor trustee to it hereunder, and upon any such substitution, all rights, powers and duties hereunder of the displaced trustee shall thereupon cease and terminate * * *.The trust was a New York trust and was governed by New York law.  Petitioner did not reserve power to revoke the trust.In a gift tax return for 1934 petitioner reported the transfer of securities in trust as a gift, paying a gift tax of $ 37,854.65, and, pursuant to decision of the , a deficiency in gift tax of $ 475.  On August 7, 1935, petitioner transferred additional securities to the trustees, and for that year reported and paid a gift tax of $ 144,929.73, and, pursuant to decision of the Board of Tax Appeals, a deficiency of $ 1,335.  After delivery to the trust company, trustee, the securities were immediately transferred to and have *577  been continuously held by nominee partnerships, members of which are officers of the trust company*242  or its affiliates.  The stock comprising the trust is not voted by direction of the petitioner.  Throughout 1937 substantially all of the stock of the trust company was owned by the Marine Midland Corporation, of which petitioner owned approximately 3 percent of the outstanding stock and was one of its twenty-three directors.  He was one of the twenty-one directors of the trust company.  The trust company placed the income of the trust in an account standing in the name of the trustees.  The only withdrawals from the account are made by the trust company, which keeps the trust accounts and files the tax returns for the trust.  The purchases or sales of trust property are made by the trustees after joint consultation.Shortly before the trust was created, petitioner's mother expressed a desire to create trusts for him and his two sisters. Since he and his sisters had substantial income at the time, he suggested to his mother that the trusts be created for her grandchildren instead; but she declined to follow his suggestion and carried out her original design.  Petitioner then created this trust and his sisters created like trusts for the benefit of their children.  Petitioner had *243  previously made a will in which he provided for his children's future welfare.In 1935 the children had substantial amounts of cash and the trust company suggested that a distribution of trust income to them would reduce the trust's taxes.  Petitioner was, on December 31, 1935, appointed by the court as their general guardian. The trust company began making distributions of income to petitioner, as guardian, on December 31, 1935, and such distributions have been made at quarterly intervals since.  The amounts of the distributions are determined by the trust company's officers without investigation of the needs of the children.  Separate checks are issued with respect to the income of each child and the funds are deposited in separate accounts held in the name of the petitioner as guardian of the respective children.All of the income received by petitioner as guardian, except that used for the payment of taxes, has been either deposited in the bank or invested in securities kept in the guardian safe deposit box.  None of the income derived from the trust has ever been distributed to the children or used for their benefit except to pay taxes on their incomes.Net income of the trust*244  for 1937 was $ 79,761.23: $ 13,029.26 was not distributed, and the remainder was equally divided and separately distributed to petitioner as guardian for each of his children.  The trustee filed a fiduciary return for 1937, which disclosed the distributions and the distributions were included in the income shown on the separate returns filed as guardian. Petitioner did not include any of the income of the trust in his individual return.*578  OPINION.The question is whether the income from the trust created by the petitioner for the maintenance, support, and welfare of his minor children is within his gross income. Since the trial, the Supreme Court has decided , and supplemental briefs have been filed giving consideration to that opinion.We can see no essential distinction between this case and that of R. Douglas Stuart, supra.  The beneficiaries were the minor children of the settlor and the purpose of the trust was to provide for their maintenance and support.  Although no part of the trust income was acually used for the maintenance and support of the children, the possibility of such use "is sufficient*245  to bring the entire income of these trusts for minors within the rule of attribution laid down in Douglas v. Willcuts." The trustee had an untrammeled discretion in the use of the income for the benefit of the children, and would have violated no provision of the trust if he had seen fit to use it for their support and thus, pro tanto, to relieve the petitioner of the burden of his parental duty.The petitioner argues that, since the Supreme Court in the Stuart opinion held that the law of Illinois was controlling, it is important that under the law of New York, by which this trust is governed, the trust is in the class in which the income is to be "paid over" to the beneficiary or his guardian and not in the class in which the income is to be "used and applied" directly by the trustee for the beneficiary. In the John Stuart case, No. 48, involving adult children, Illinois law was considered in respect of the right of the settlor to direct the transfer of the corpus to him.  The rule of the R. Douglas Stuart case relating to the support of minor children was not predicated upon Illinois law.  The duty of the trustee of the Knox trust is to "pay over the net*246  income to or for the benefit of the Grantor's children." In the interest of the beneficiary, the trustee may pay over some or all of the net income to someone other than the guardian; and, if he were to do so in providing for the maintenance, support, or welfare of the beneficiary, the father would be relieved of the burden of such expenditure.  It may be, as petitioner contends, that the trustee is not required to contribute to the children's maintenance or support; but by the express terms of the trust, he is permitted to do so; and that is the important fact under the statute.  Section 167 (a) (2), Revenue Act of 1936, 1 attributes the income of the trust to the settlor for tax *579  purposes not only when it is in fact distributed to the settlor but also when it may be so distributed, either directly or indirectly, by applying it for his use.  R. Douglas Stuart, No. 49, supra; . By the terms of the instrument, the income may, in the discretion of the grantor or of a person who has no substantial adverse interest in the disposition of the income, be distributed constructively to the grantor; and it is, therefore, *247  to be included in computing his net income.Although this proceeding was presented originally upon other grounds, we feel bound to decide it upon the reasoning of the most recent decision of the Supreme Court.  We, therefore, do not discuss the correctness of the Commissioner's determination upon the stated application of sections 167 and 22.Decision will be entered for the respondent.  Footnotes1. SEC. 167. INCOME FOR BENEFIT OF GRANTOR.(a) Where any part of the income of a trust --* * * *(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; * * *↩