Court Opinion

ID: 4602448
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:29:44.816473+00
Date Added: 2024-06-11T07:52:40.724040
License: Public Domain

ELLA E. RUSSELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Russell v. CommissionerDocket No. 102162.United States Board of Tax Appeals45 B.T.A. 397; 1941 BTA LEXIS 1122; October 22, 1941, Promulgated *1122  Petitioner's husband created trusts for petitioner and their four minor children, giving the petitioner the right to the income of her trust for life and the income of the children's trusts during their minority and also the right to withdraw any or all of the principal of the trust created for her benefit and the right to withdraw any or all of the principal of the other trusts "for application to her own use or the maintenance, education, care and support of children and issue as she shall determine." Held, that petitioner is taxable on all of the income from the trusts, including the profits from the sale of a part of the principal of the trusts, which was not paid over to her but retained by the trustees as principal.  Wallace C. Magathan, Esq., and Herman A. Tufel, Esq., for the petitioner.  Roy N. McMillan, Esq., for the respondent.  SMITH *398  This proceeding is for the redetermination of a deficiency in income tax for 1936 in the amount of $1,992.01, only a part of which is contested.  The only question for our determination is whether the petitioner is taxable on the profits realized from the sale of a portion of the corpora of*1123  the trusts created by petitioner's husband for the benefit of petitioner and their four minor children.  FINDINGS OF FACT.  Petitioner is a resident of Edgewater Park, New Jersey.  She filed her income tax return for 1936 on the cash basis with the collector at Camden, New Jersey.  On December 30, 1935, petitioner's husband, Norman F. S. Russell, president of the United States Pipe & Foundry Co., created trusts for the benefit of the petitioner and their four minor children, aged 14, 12, 10, and 8, respectively, transferring to the Pennsylvania Co. for Insurances on Lives and Granting Annuities and the petitioner, as cotrustees, the following securities: 2,750 shares United States Pipe & Foundry Co. first preferred 1,100 shares United States Pipe & Foundry Co. common stock 900 shares Centrifugal Pipe Corporation capital stock 125 shares Reynolds Metals Co. common stock 400 shares Servel Inc. common stock 100 shares Great Northern Railway Co. preferred stock 100 shares Northern Pacific Railway Co. capital stock.  100 shares Colgate Palmolive Peet Co. common stock.  There were five separate trusts created, one for the petitioner, consisting of a six-tenths interest, *1124  and one for each of the four children, consisting of a one-tenth interest in all of the trust assets.  Under the provisions of the trust agreement the petitioner was entitled to receive, quarterly, all of the income from her six-tenths share of the trust property for life and also the income from all of the children's shares during their minority.  Upon petitioner's death her six-tenths share of the trust corpus was to be added prorata to the children's shares.  After reaching majority the sons were to receive the income from their respective shares until they reached the age of 30 years, when the principal was to be distributed to them.  The daughters, after maturity, were to receive the income from their shares for life, with the principal over to their issue.  In addition to her rights to receive the income from all of the trust property, including the children's shares during their minority, the petitioner also had the right, by directing the corporate trustee in writing, to withdraw any or all of the trust corpora for her own use and *399  without liability to account for such application.  The material portions of the trust instrument read as follows: IN TRUST, to*1125  take, receive, hold, invest, reinvest, manage and administer the trust estates, and all additions thereto, to collect the rents, issues and profits therefrom, and to pay and distribute the same as hereinafter provided; and IN TRUST, to hold the trust estate six-tenths thereof for Ella E. Russell, wife of the Settlor, and one-tenth thereof for each of the children of the Settlor, Louis Eisenbrey Russell, Ella King Russell, Grace Felt Russell and Norman F. S. Russell, Jr., each as set forth on schedules thereof hereto attached, in the manner and for payment and distribution as hereinafter set forth; and to hold any additions to the trust estate in like proportions for the said wife, children and issue of the Settlor in like manner and for like payment and distribution, as may be set forth in schedules hereafter hereto attached, unless otherwise provided in such schedules; and IN TRUST, to hold six-tenths of the trust estate, and additions thereto, as a special trust for the wife of the Settlor, and to pay to her during her life, at least quarter-yearly, the entire net income therefrom, and such part or parts or the whole of the principal thereof as she may from time to time, by writing*1126  lodged with the Trustees, direct, and from and after her death then to hold the then remaining principal of the said trust one equal share thereof as a part of each then existing trust under the next succeeding paragraph hereof, for payment and distribution as therein provided; and IN TRUST, to hold one-tenth of the trust estate, and additions thereto, as a special trust for each the said children of the Settlor, and to pay and distribute the net income therefrom at least quarter-yearly to the child or issue entitled thereto, and to pay and distribute the principal from which each son is receiving income unto such son when he shall have attained age thirty (30), and to pay and distribute the principal of the share of each daughter from which she is entitled to net income during her life, upon her death, to her issue, the issue to take by representation, per stirpes, the deceased parent's share; and if any child shall have died before receiving any principal or income to which such child is entitled hereunder leaving issue surviving at the time for distribution thereof, then such issue shall take by representation, per stirpes, the deceased parent's share, and if no such issue shall*1127  survive at the time for distribution of any income or principal then such income and principal shall be paid and distributed unto the other then surviving children and issue of deceased children as provided for the original shares; and any balance of principal of the share of the wife of the Settlor shall be held upon her death by the Trustees for like payments and distributions, and each son who shall then have attained age thirty (30) shall be entitled to receive all principal from which he is entitled to income; and any income or principal payable to any minors shall be held by the Trustees for application and distribution as hereinafter provided, except, nevertheless, that the wife of the Settlor during her life shall be entitled to receive all net income payable to minors, and such part or parts or the whole of the principal of the share of each minor as she may, by writing lodged with the Trustees, direct, for application to her own use or the maintenance, education, care, and support of children and issue as she shall determine, and without liability to account for such application; issue of each child to include issue living on the date hereof or born thereafter but within*1128  the term of the trusts hereof; and if any part of the trust estate shall not be paid and distributed under the foregoing provisions *400  hereof by reason of the death of all of the persons entitled thereto, then upon the death of the last survivor thereof to pay and distribute the then remaining trust estate unto the then surviving next of kin of the Settlor entitled thereto under the intestate laws of the State of New Jersey if the Settlor had then died possessed thereof leaving no creditor surviving; and IN TRUST, anything hereinbefore to the contrary notwithstanding, if by reason of misfortune, lack of income or other cause, the share of principal and/or income payable to any person hereunder shall not be sufficient, in the opinion of the Trustees, for the necessary care, maintenance and support of such person, then the Trustees shall be entitled, in their sole and absolute discretion, to apply out of the principal from which such person is receiving or entitled to receive income such part or parts thereof as the trustees shall determine, and to the extent of such application the interest of all persons therein shall be thereby diminished; and if any income or principal*1129  shall be payable to any person who shall be a minor, or who shall be incapacitated for any reason, then the Trustees shall hold such income and principal during such minority and/or incapacity, and shall be entitled to apply such income and/or principal to the proper care, maintenance, education and support of such person during such minority and/or incapacity without the appointment of any guardian or committee or any authority of court, and the Trustees shall be entitled to make direct application hereunder or to make application by payment thereof to the parent or other person in charge of such minor or incapacitated person, and any remaining income and principal to which such person shall be entitled shall be paid and distributed unto such person upon the termination of minority or incapacity if then entitled thereto under the foregoing provisions hereof.  * * * It is hereby expressly stipulated and agreed * * * that this indenture of trust, except as hereinbefore specifically provided with respect to distribution, shall be construed under and in accordance with the laws of the Common-wealth of Pennsylvania, and that this trust is created by a non-resident of Pennsylvania for*1130  the benefit of beneficiaries who are also non-residents of Pennsylvania.  It is hereby expressly stipulated and agreed that the Trustees shall be entitled to exercise all rights and privileges, including voting rights, under any stocks, bonds or other securities of corporations forming a part of the trust estate hereunder, * * * The settlor reserved no right to receive any principal or income from the trust estates or to alter, amend, or modify any rights or interests therein.  Prior to the creation of the several trust estates the settlor (petitioner's husband) provided for the maintenance, education, and support of the children and the running of the home by giving the petitioner a monthly allowance.  In addition he paid the tuition and certain other expenses of the children.  There was no change in the method of handling these matters after the establishment of the several trust estates and the same procedure has been followed to date.  The petitioner has her own separate estate and separate bank account.  In the taxable year 1936 she had income from her separate estate in the amount of $19,427.81.  *401  In the taxable year 1936 all of the net income of the trust*1131  estates, exclusive of capital gains, was distributed to the petitioner and accounted for by her in her individual income tax return.  The petitioner has not at any time directed, by a writing lodged with the trustees, that any part of the principal of the trust estates be paid to her.  During the taxable year 1936 the corporate trustee sold certain securities at a profit.  The amount of profit reported as capital gain in the trust income tax return on Form 1040 for 1936 was $5,738.81.  In the deficiency notice in this proceeding the respondent has increased the profit as reported by the trustees from $5,738.81 to $7,255.54 and has included the entire amount in petitioner's taxable income for the calendar year 1936.  OPINION.  SMITH: The respondent's contention is that the trust conveyance described above conferred upon the petitioner such complete enjoyment of and control over the trust property, both as to income and principal, as to render her taxable under the broad provisions of section 22(a) of the Revenue Act of 1936 on all of the income therefrom, including the profits from the sale of a portion of the trust properties.  *1132  Among the cases relied upon by the respondent are ; affd. (C.C.A.2d Cir.), . In that case the taxpayer's wife transferred to him in trust for the benefit of their five children certain shares of stock which the taxpayer had previously conveyed to her as a gift.  In the trust instrument the taxpayer, as trustee, was given broad powers over the trust property, including the right to expend the trust income in payment of premiums for life insurance upon his own or his wife's life, and to make loans to either of them without security or liability for any loss.  In addition, the taxpayer had the right to terminate the trusts at any time and to take over the trust property as his own.  We held that under the trust conveyance the taxpayer acquired such substantial rights of ownership in the trust property as to make him taxable personally on all of the trust income.  In our opinion we said: Under the facts in the instant case we are not so much concerned with the refinements of title to the property which has been ostensibly passed around the immediate family circle as with the actual dominion and control over the*1133  property.  Here, the property and the income therefrom is so clearly subject to the petitioner's unfettered command that they are, in substance, his and, even though he did not see fit to use the property or the income during the taxable year, the latter may be taxed to petitioner as his income under the broad general tax provisions of section 22(a) supra. Cf. ; *402 ; ; ; , affirming ; ; ; ; ; ; and *1134 . The instant case is not distinguishable from the Richardson case either in principle or on the facts, except that here the petitioner had no specific power under the trust indenture of the terminate or revoke the trust, and thus acquire the trust property as her own.  However, the petitioner did have the express right at any time to withdraw any part or all of the principal of the several trusts for her own use.  By that method she could just as effectually terminate the trusts.  Evidence was adduced at the hearing of this proceeding through oral testimony of Norman F. S. Russell, settlor of the trusts, and George E. Lloyd, the officer of the corporate trustee who assisted in drawing up the trust agreement, that it was the intention and understanding of the settlor and all of the parties concerned that the petitioner was not to be permitted to take down any substantial part of the principal of the trusts except in the case of some emergency, and then only with the consent of the cotrustee and with authorization from the court having jurisdiction of the administration of the trust estate.  These conditions, however, were not put in*1135  the trust agreement and no good reason is offered for their omission.  As the trust instrument stands, there is no restriction or limitation on the petitioner's right to take down any part or all of the principal of the trusts for her own use.  The provision in the trust agreement is that: * * * the wife of the Settlor during her life shall be entitled to receive all net income payable to minors, and such part or parts or the whole of the principal of the share of each minor as she may, by writing lodged with the Trustees, direct, for application to her own use or the maintenance, education, care and support of children and issue as she shall determine, and without liability to account for such application; * * * It is to be noted that provision is made in a separate paragraph of the trust instrument for the invasion of the principal of any of the trusts where in the discretion of the trustees it becomes necessary by reason of "misfortune, lack of income or other cause" for the care, maintenance, and support of any of the beneficiaries.  This provision, however, can not be construed to subject the petitioner's right to withdraw the principal of the trust to any fiduciary discretion. *1136  It contemplates a situation which might arise among the several beneficiaries independently of any volition on the part of the petitioner.  *403  The trust agreement was carefully drawn after long consideration by the settlor and his wife and with the advice and assistance of an officer of the corporate trustee with whom they had discussed the matter on several occasions.  We must assume, notwithstanding the testimony of the settlor and the trust officer, that the trust instrument was drawn in accordance with the intentions of the settlor.  In any event the plain provisions of the trust agreement can not be altered by oral testimony.  The rulings stated in Scott on Trusts, vol. II, § 164.1, are as follows: In determining the terms of the trust, resort is had in the first place to the instrument if any under which the trust is created.  As to any matter expressly covered by the instrument, the provisions of the instrument, if unambiguous, determine the terms of the trust.  In such a case, extrinsic evidence in the absence of fraud or mistake is not admissible to vary or add to the terms of the instrument.  * * * * * * * * * Such evidence [parole evidence] is inadmissible*1137  not only where it contradicts or is inconsistent with express provisions of the trust instrument, but also where it changes the legal effect of the instrument, that it where if given effect it would lead to results which would not be reached in the absence of such evidence.  * * * In , it was said that: * * * While the intent of the parties is a prime factor in construing such an instrument [trust instrument] and in case of doubt is accorded high evidentiary value, yet the instrument itself, where it is sufficiently plain, must determine its character and scope.  ;  (C.C.A. 7);  (C.C.A. 8).  See also , and authorities there cited.  The express provisions of the trust agreement here with respect to the petitioner's rights to the income as well as the principal of the trusts are clear and unambiguous and are binding upon*1138  the parties in the determination of their resulting tax liabilities.  It follows that all the income of the trusts, including the profits from the sale of a portion of the principal, is taxable to the petitioner by reason of her right to the complete use and enjoyment of such income.  Reviewed by the Board.  Decision will be entered under Rule 50.MURDOCK dissents.  MELLOTTMELLOTT, dissenting: The rule applied by this Board and the Circuit Court of Appeals for the Second Circuit (121 Fed.(2d), 1) in the Richardson case seems to me to be inapplicable under the facts *404  before us.  In the cited case the settlor's husband had recently given the property to her.  She conveyed the property to him as sole trustee, giving him the power to cancel and terminate the trust at any time and to take the trust corpus free from all trusts.  He was given full power and authority in his absolute and uncontrolled discretion to sell or exchange the trust property at any time for such price as he should deem advisable and to reinvest the proceeds in any character of property.  It was pointed out that he had complete control of the use of the res*1139  and the income therefrom, even to the extent of paying the premiums for life insurance upon the lives of himself and his wife.  Holding was made, in which I concurred, that the property and the income were so clearly subject to his unfettered command that they were, in substance, his.  In the instant proceeding petitioner had not previously owned the property; she is not the sole trustee; and it is obvious that the settlor was motivated primarily by a desire to create special trusts for his children as to four-tenths of the trust estate.  The evidence indicates that the provision under which the Board holds that she could just as effectively terminate the trust as could the petitioner in the Richardson case was included in the trust instrument upon the suggestion of the trust officer; that it was adopted only after full understanding of the parties that it was to be used only in an emergency arising out of the income of the trust "evaporating" or decreasing; and that the trustees would not pay out money on a request of petitioner until a finding was made by a court having jurisdiction that a real emergency existed.  Although the trust instrument does not contain these restrictons, *1140  it appears that the trust has always been operated in accordance with this understanding; that there has been no change in the corporate trustee; that there has been distributed to petitioner only the net income of the trust; and that no part of the corpus has ever been distributed to her.  The trust by its terms is to be construed under, and in accordance with, the laws of Pennsylvania.  A cursory examination of the decisions by the courts of that state does not indicate that they would hold that the trust was without substance, that the settlor had made a complete inter vivos gift of the property to his wife, or that she had become owner of the trust res by operation of law.  There seems to be no contention by the respondent or holding by the majority that capital gains under the laws of Pennsylvania must be included in trust income.  They are taxable to the petitioner only in the event that she is the owner of the trust corpus or it is so clearly subject to her unfettered command as to be hers.  Being of the opinion that no such conclusion is justified, I respectfully note my dissent.  ARUNDELL agrees with this dissent.