Court Opinion

ID: 4476227
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:54.815225+00
Date Added: 2024-06-11T14:51:48.887336
License: Public Domain

Black, J., dissenting: I dissent from the majority opinion wherein it holds that certain undistributed income received in 1934, 1935, 1936, and 1937 by a trust created by petitioner’s father and known as Trust No. 3660 was taxable to petitioner in the respective years. I think the income in question was clearly taxable to the trust as a separate legal entity under the provisions of sections 161 and 162, Revenue Act of 1934, printed in the margin.1  Trust No. 3660 here involved was no mere tax saving device. It was unquestionably a real trust set up for legitimate purposes and one which, it seems to me, Congress intended to tax according to the provisions of sections 161 and 162. Under section 161 it was the duty of the trust to include in its income tax return all taxable gross income and from this gross income it was entitled to take all the ordinary deductions granted to an individual by the statute. In addition to these deductions the trust was entitled to take the deductions granted by subparagraph (b) of section 162, printed in the margin. The trust was directed to pay annually out of the net income of the trust $10,000 to Elizabeth E. Mallinckrodt, wife of petitioner. This was income which was clearly “to be distributed currently” to her within the meaning of (b) of section 162 and under the terms of that subparagraph was deductible by the trust and taxable to the beneficiary, Elizabeth E. Mallinckrodt. Concerning this $10,090 there is no issue in this case. The remainder of the net income of the trust was not currently distributable to petitioner, Edward Mallinckrodt, Jr., but only such part of the remainder of the net income of the trust, after the $10,000 distribution to Elizabeth, was distributable to him as he might request. The settlor of the trust directed that such part of the net income of the trust as might not be requested by petitioner should be accumulated and should at the end of the year become a part of the principal of the trust estate, subject to such further disposition as was in the trust indenture provided for the principal of the trust estate. Under these provisions only that part of the net income requested by petitioner was currently distributable to him and taxable to him under the provisions-of section 162 (b). The balance of the net income not so requested was “income accumulated or held for future distribution under the terms of the will or trust” within the meaning of section 161 (a) (1) and was taxable to the trust. The findings of fact show that “the trustees filed income tax returns with respect to the undistributed taxable income of the trust and paid the tax shown on the returns.” In my opinion the law does not require more. The Board of Tax Appeals, now The Tax Court of the United States, expressly decided this question in Elizabeth S. Sprague, 8 B. T. A. 173. In that case, among other things, we said: The Commissioner held that because the petitioner could receive the income of the trust funds by making a written request therefor, the entire income is taxable to her, and determined the deficiency accordingly. This position can not be sustained. The trust instruments all provided that the income should be added to the principal. To this extent such income was accumulated for unascertained persons or persons with contingent interests. There was the further provision that upon written request (by the settlor in one case and by the petitioner in the others) certain portions of the income were to be paid to the petitioner. Any such request constituted the exercise of a power which, to the extent that such power was validly exercised, removed such income from the provision for accumulation and made it distributable. Such distributable income was thereupon severed from the trust property and was taxable to the beneficiary under the provisions of section 219, quoted above. So much as was not distributable pursuant to the exercise of the power given by the trust instrument, remained a portion of the trust property, taxable to the fiduciary. The majority opinion concedes that the Elizabeth S. Sprague case supports petitioner in the instant case but takes the position that inasmuch as it was decided prior to Helvering v. Clifford, 309 U. S. 331, and Corliss v. Bowers, 281 U. S. 376, it is no longer authority. Of course, if the Sprague case is in conflict with Helvering v. Clifford, supra, and Corliss v. Bowers, supra, it requires no argument to say that it must give way to those decisions of the Supreme Court. But I do not think there is any conflict. In the dase of Corliss v. Bowers, supra, the settlor of a trust had reserved unto himself the power “to modify or alter in any manner or revoke in whole or in part, this indenture and the trusts then existing, and the estates and interests in property hereby created.” After quoting the above language from the trust indenture the Supreme Court said: “It is not necessary to quote more words because there can be no doubt that the petitioner fully reserved the power at any moment to abolish or change the trust at his will.” The Supreme Court held that under such a reservation of control over the property, the income from such property was taxable to the settlor under section 219 (g) of the Revenue Act of 1921, a section practically the same as section 166 of the Revenue Acts of 1934 and 1936. In holding that the income in that case was taxable to Corliss, the settlor of the trust, the Supreme Court, among other things, said: “The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income whether he sees fit to enjoy it or not.” The majority opinion lays much stress on the language used in the foregoing quotation. I think it has no application to the facts of the instant case. In the Corliss v. Bowers case, supra, the settlor of the trust was the owner of the corpus of the trust at the time he executed the trust indenture and retained such complete power over the disposition of the trust income and corpus throughout, the taxable year as to make the income taxable to him under section 219 (g) of the Revenue Act of 1921. Here the petitioner is not the settlor of the trust at all. True, he is made the beneficiary of such part of the net income of the trust as he may request, after the $10,000 is paid to Elizabeth E. Mallinckrodt, but until he requests it the income does not become his property at all. Until such time as he requests it. the income is the property of the trust and the settlor of the trust, Edward Mallinckrodt. Sr., has given direction as to what shall be done with it. He has directed that at the end of each year any part of the net income of the trust which has not been requested by Edward Mallinckrodt, Jr., shall be accumulated and added to the principal of the trust and disposed of as therein provided for the principal of the trust estate. I submit there is nothing in Corliss v. Bowers which, under such circumstances, would tax the income not requested to petitioner. The case of Helvering v. Clifford, supra, was a case where a husband declared himself trustee of securities under agreement, expiring in five years or on death of husband or wife, which provided that net income should be held for wife’s benefit and paid to wife in husband’s discretion, that husband should have extensive control over corpus, and that on termination of the trust the corpus should go to the husband and accrued or undistributed income and proceeds from investment thereof should go to wife, so that mere temporary reallocation of family income was effected. Under these circumstances the Supreme Court held that the husband to all intents and purposes remained “owner” of the corpus after the trust was created and hence was subject to income tax under section 22 (a) of the applicable statute. It seems to me that it should not require any extended argument to establish the premise that the facts of the instant case are wholly unlike those present in the Clifford case* and that there is such a wide dissimilarity as to make the Clifford case not applicable. I shall not prolong this dissent by comparing the facts of the two cases to show their dissimilarity. The facts in the two cases speak for themselves. Likewise, I think H. S. Richardson, 42 B. T. A. 830; affd., 121 Fed. (2d) 1, and Jergens v. Commissioner, 136 Fed. (2d) 497, are clearly distinguishable on their facts. For example in the H. S. Richardson case the trust instrument, among other things, contained this important provision: Eleventh: During his lifetime, H. Smith Richardson, husband of the Grantor, may cancel and terminate this agreement by an instrument in writing duly executed and acknowledged and filed with the Trustee or Trustees then acting, and upon such termination and cancellation the said H. Smith Richardson shall be entitled to receive the corpus of the trust fund absolutely and free from all trusts. Under such a provision we held that H. Smith Richardson was to all intents and purposes made the owner of the trust corpus by the trust indenture and, therefore, the income was taxable to him under section 22 (a). Our decision was affirmed by the Second Circuit. To the same effect is the court’s decision in Jergens v. Commissioner, supra. Likewise to the same effect is our decision in Ella E. Russell, 45 B. T. A. 397. Petitioner was not granted by the trust indenture in the instant case the power to cancel the trust at will and thus terminate it and take over the property for his own use and benefit. Article twelfth provided that the trust might be terminated and the property therein delivered to petitioner, but it had to be done upon the written direction of both trustees. One of these trustees was the St. Louis Union Trust Co. and the other was petitioner. Certainly it will not be assumed that the corporate trustee was the mere alter ego of petitioner and was so completely responsive to his wishes as to make the trust one terminable at will by petitioner, as was the fact in the cases cited above, and thus make petitioner to all intents and purposes the owner of the trust corpus and the net income thereof taxable to him. As I have already stated, this is a case where it seems to me the trust must be recognized for what it is and should be taxed under the provisions of sections 161 and 162 of the applicable revenue acts. I see no occasion for taxing the income to petitioner under section 22 (a) by what I regard as a strained application of the Supreme Court’s decision in the Helvering v. Clifford case. From the majority opinion which seeks to do so, I dissent. Abundell, Leech, and Hareon, JJ., agree with this dissent.   SEC. 161. IMPOSITION OF TAX. (a) Application op Tax. — The taxes imposed by this title upon individuals shall apply to the Income of estates or of any kind of property held in trust, including— (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an Infant which is to be held or distributed as the court may direct; • *»*»*• (b) Computation and Payment. — The tax shall be computed upon the net Income ot the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). • * • SEC. 162. NET'INCOME. The net income of the estate or trust shall be computed in the same manner and on the the same basis as in the case of an individual, except that— *»••••* (b) There shall be allowed as an additional deduction in computing the net income ot the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the Income collected by a guardian of an Infant which is to be held or distributed a* the coifrt may direct, but the amount so allowed aB a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year; ******* [Sections 161 and 162 of the Revenue Act of 1936, applicable to the taxable yean 1936 and 1937, are identical with the above.]