Opinion
Docket Nos. 111066 111067.
1946-03-6
HENRY F. HALDEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CLARA B. HALDEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas R. Dempsey, Esq., and Arthur H. Deibert, Esq., for the petitioners. Ralph E. Smith, Esq., and E. A. Tonjes, Esq., for the respondent.
Petitioners, husband and wife, separately created five family trusts, in each of which one or the other was the trustee and their minor daughter or the wife the primary or the secondary beneficiary. They conferred upon themselves, as trustees, powers of management and control in excess of normal fiduciary authority. As trustees, they invested the corpus of each trust in partnerships in which one or both were partners, as individuals. The amount of trust income depended largely upon petitioners' experience, skill, and ability in conducting the partnership businesses. Petitioners anticipated a tax savings by this family trust-partnership arrangement. Held, each is taxable upon the income of the trusts controlled by him or her under section 22(a), Revenue Acts of 1936 and 1938. Thomas R. Dempsey, Esq., and Arthur H. Deibert, Esq., for the petitioners. Ralph E. Smith, Esq., and E. A. Tonjes, Esq., for the respondent.
These consolidated cases involve deficiencies in income tax for the years 1937 and 1938 as follows:
+--------------------------------------------+ ¦Petitioner ¦Docket No.¦Year¦Deficiency¦ +-----------------+----------+----+----------¦ ¦Henry F. Haldeman¦111066 ¦1937¦$4,030.31 ¦ +-----------------+----------+----+----------¦ ¦Henry F. Haldeman¦111066 ¦1938¦11,814.43 ¦ +-----------------+----------+----+----------¦ ¦Clara B. Haldeman¦111067 ¦1938¦1,246.83 ¦ +--------------------------------------------+
The only issue for our determination is (1) whether the income of certain trusts established by petitioners is taxable to them under section 22(a), Revenue Acts of 1936 and 1938. An issue as to the deductibility of California sales taxes has been settled by stipulation of the parties. The petitioners abandoned all other issues. The cases were submitted upon oral testimony, stipulated facts, and documentary evidence.
FINDINGS OF FACT.
Petitioners are husband and wife, residing in Los Angeles, California. They paid Federal income taxes to the collector of internal revenue for the sixth district of California for 1937 and 1938 as follows:
+--------------------------------------+ ¦ ¦1937 ¦1938 ¦ +-----------------+----------+---------¦ ¦Henry F. Haldeman¦$17,900.12¦$4,417.54¦ +-----------------+----------+---------¦ ¦Clara B. Haldeman¦10,712.64 ¦4,545.04 ¦ +--------------------------------------+
Henry F. Haldeman entered the automobile business in 1912 with the service department of the Chalmers Motor Co. In 1916 he entered the sales end of the business. In 1921 he went into business for himself. From 1916 until 1927 Clara B. Haldeman worked almost continuously in the automobile business with Henry F. Haldeman or for others. Since 1927 Clara B. Haldeman has been almost as interested in the business and business affairs as her husband, neither of whom acts without consulting and securing the approval of the other. Prior to the taxable years Henry F. Haldeman had had a number of automobile agencies, including agencies for Willys-knight, Chandler, Cleveland, Hudson, and Essex automobiles.
On June 1, 1937, Henry F. Haldeman created a trust, naming himself trustee and his daughter, Dayl Haldeman, beneficiary, to which he concurrently transferred $50,000. Said trust will hereinafter be referred to as ‘Dayl Haldeman Trust No. 1.‘
On July 1, 1937, he created a trust naming his wife, Clara B. Haldeman, trustee and Dayl Haldeman beneficiary, and concurrently transferred thereto the sum of $10,000. This trust will be referred to as ‘Dayl Haldeman Trust No. 2.‘
On October 11, 1937, he created another trust, with himself as trustee and Dayl Haldeman as beneficiary, to which he concurrently transferred $1,000. Later, on July 21, 1938, he transferred to this trust an additional $4,000. This trust will be known as ‘Dayl Haldeman Trust No. 3.‘
Also on October 11, 1937, he created a trust, with himself as trustee his wife, Clara B. Haldeman, beneficiary, transferring $1,000 to it concurrently and, on July 21, 1938, an additional $4,000. This trust will be referred to as the ‘Clara B. Haldeman Trust.‘
Petitioner Clara B. Haldeman on July 1, 1937, also created a trust, naming Henry F. Haldeman trustee and Dayl Haldeman, beneficiary. She concurrently transferred to this trust the sum of $10,000. This trust will be referred to as the ‘Dayl Haldeman Trust, Clara B. Haldeman, trustor.‘
The money transferred to these trusts was from the separately owned property of the respective grantors.
Dayl Haldeman was born on October 17, 1918, and was under twenty-one years of age at all times material hereto.
Pursuant to powers contained in these various trust indentures, the trustees, as such, invested the corpora, severally, in the three partnerships hereinafter named, becoming either general or limited partners therein. The constituent interests in these partnerships for the years in question are indicated by the following table:
+-----------------------------------------------+ ¦1. Henry F. Haldeman (dissolved June 11, 1937).¦ +-----------------------------------------------¦ ¦ ¦ ¦ +-----------------------------------------------+
Members Profit distribution Henry F. Haldeman Adjusted capital basis Clara B. Haldeman Adjusted capital basis
2. Henry F. Haldeman, agreement dated June 1, 1937.
Members Profit distribution Henry F. Haldeman Adjusted capital basis Clara B. Haldeman Adjusted capital basis Henry F. Haldeman, trustee for Dayl Haldeman (Trust No. 1) Adjusted capital basis 3. Greene-Haldeman Co. Ltd., partnership certificate dated October 11, 1937.
Members Profit distribution Henry F. Haldeman (general) * 3/14 Burch E. Greene (general) * 6/14 Henry F. Haldeman, trustee for Clara B. Haldeman (Ltd.) 3/14 Henry F. Haldeman, trustee for Dayl Haldeman Trust No. 3 2/14 (Ltd)
4. Savage-Haldeman Co. (a) Prior to dissolution on July 1, 1937. Members Profit Distribution Clair R. Savage 25% Henry F. Haldeman 25% Margaret D. Savage 25% Clara B. Haldeman 25% Total 100% (b)Agreement dated Oct. 14, 1937, as of July 1, 1937.
Members Profit distribution Clair R. Savage 19% Henry F. Haldeman 19% Margaret D. Savage 19% Clara B. Haldeman 19% Clair R. Savage, trustee for Wm. Clair Savage 3% Clair R. Savage, trustee for Marilyn Savage 3% Margaret D. Savage, trustee for Wm. Clair Savage 3% Margaret D. Savage, trustee for Marilyn Savage 3% Henry F. Haldeman, trustee for Dayl Haldeman 6% Clara B. Haldeman, trustee for Dayl Haldeman Trust No. 2 6% Total 100%
FN *On Oct. 25, 1938, by amendment, Henry F. Haldeman's interest was decreased to 2/14 and Burch E. Greene's interest increased to 7/14.
The first Henry F. Haldeman Co. partnership aforementioned was created on April 23, 1936. It had the agency for Plymouth and Desoto automobiles in Hollywood, California. The partnership which succeeded it had the same name, was located at the same place, and continued handling the same line of cars. Both partnership agreements provided that the partners' interests should be on an adjusted capital basis, that is, the profits for the year were to be divided among the partners in the proportion that each left his or her money in the business. At the time the trust corpus of Dayl Haldeman Trust No. 1 was invested in the Henry F. Haldeman Co., the partnership was an established, going business, with capital assets estimated at $200,000.
The Greene-Haldeman partnership was organized to take over the Chrysler and Plymouth agency in Los Angeles that the Greer-Robins Co. had operated at a loss for two or three years. The partnership took over the same location and the same personnel used by the Greer-Robins Co. Greene and Haldeman improved the business operations and shortly placed the agency on a profitable basis. The original capital of the Greene-Haldeman Co. is not shown; the record only shows that two of the aforementioned trusts each invested $5,000 in the partnership.
The Savage-Haldeman Co. was incorporated August 2, 1935, to engage in selling and servicing Pontiac automobiles in Los Angeles. About a year later the corporate name was changed to Savage-Haldeman Finance Corporation. The paid-up capital stock of the corporation was $100,000 of 6 percent preferred stock and $500 of common stock. The preferred stock was held equally by the petitioners and was retired at par on April 22, 1936. The common stock was owned equally by the petitioners and Clair R. Savage and Margaret D. Savage, husband and wife. The corporation was liquidated and dissolved on December 30, 1936, being succeeded by a partnership of the same name formed July 31, 1936. The corporation distributed $91,565.60 in complete liquidation, $500 of which represented capital stock and $91,065.60 surplus earned from August 15, 1935, to July 31, 1936. The partnership formed on July 31, 1936, continued until July 1, 1937, when it was succeeded by a new partnership of the same name which is still in existence. The net worth of the Savage-Haldeman Co. on July 1, 1937, was $242,529.38, of which $150,963.78 represented earnings since July 31, 1936.
None of the trusts aforementioned had a fixed date of termination. The petitioners, as grantors, reserved only the right to add to the trusts. The trustee in each trust is given broad powers of control and management, including the right to participate in general or limited partnerships, regardless of the fact that the trustee, individually, may be a member of such partnership; the right to invest freely and without limitation to securities or other property authorized by law for the investment of trust funds; the right to deal with securities as if he were the individual owner thereof, including the right to hold securities in his own name, vote stock, give proxies, and participate in foreclosures, reorganizations, consolidations, etc.; the right to determine whether items are income or principal, with stated exceptions; the right to lend his own funds to the trust at prevailing interest rates, the loans to be a first lien on gross income and/or principal of the trust estate. All discretions conferred upon the trustee, except as expressly limited, were absolute and uncontrolled and their exercise conclusive upon all persons interested in the trust or the trust estate. The powers and discretions enumerated were not to be construed as a limitation upon the general powers and discretions of the trustee, except that he was to be liable and strictly accountable for any loss or damage caused by reason of bad faith or failure to use ordinary case. The Dayl Haldeman Trust No. 1 omitted the above exception and provided instead that ‘the Trustee in addition thereto is hereby vested with * * * the same and all the powers and discretions that an absolute owner of property has, or may have, except as otherwise specifically limited herein.‘ No beneficiary could anticipate, alienate, or in any other manner assign or transfer her interest, and such interest was not to be subject to the claims of creditors. The trustee in his sole discretion could at any time or from time to time pay over to the primary beneficiary any part or all of the corpus as might ‘be necessary in case of illness, want or emergency affecting any beneficiary hereunder, to provide reasonable support and care consistent with the station in life, financial means and other circumstances of such beneficiary.‘ This provision is omitted from the Dayl Haldeman Trust No. 3 and the Dayl Haldeman Trust, Clara B. Haldeman trustor.
In addition to the provisions common to all the trusts the Dayl Haldeman Trust No. 1 contains the following material provisions:
Henry F. Haldeman, grantor, is named trustee. In the event he ceases to act, Clara B. Haldeman, grantor's wife, if living and competent, is to succeed as trustee. Otherwise, a corporate trustee is named in the instrument to succeed as trustee. Clara B. Haldeman is given the power to amend or modify the trust agreement, except that she may not use the power to increase her own or Dayl Haldeman's beneficial present or remainder interest. Nor may she by amendment enlarge the power of amendment or revocation. The trustee is, in his discretion, to distribute income currently to or for the benefit of Dayl Haldeman or accumulate it as corpus. The trust is irrevocable during the minority of Dayl Haldeman, but it may thereafter be revoked by the joint action of Clara B. Haldeman and Dayl. Upon revocation the entire trust estate is to vest in and be distributed to Dayl Haldeman.
As first written the trust agreement was to terminate upon the death of Dayl Haldeman or when revoked in the manner described above. The indenture was amended on July 29, 1937, about two months after its execution, to provide that if Henry F. Haldeman, but not Clara Haldeman, shall survive Dayl, the trust is to continue as to accumulated income and corpus gains until the death of Henry F. Haldeman, but is to terminate as to the remainder of the corpus, which is to vest in Henry F. Haldeman. Upon termination the trust estate is to vest in and be distributed to Dayl Haldeman, if living; otherwise to Clara B. Haldeman, if living; otherwise to designated beneficiaries.
The Dayl Haldeman Trust No. 2 contains the following material provisions:
Clara B. Haldeman is named trustee. If she ceases to act as trustee, she is to be succeeded by Henry F. Haldeman, if alive and competent; otherwise a designated corporate trustee is to succeed. Clara B. Haldeman has the power to alter, amend, or modify the trust, except that she can not increase her own or Dayl Haldeman's interest therein. Nor may she enlarge, by amendment, her powers of amendment or revocation. The trustee, in her discretion, is to distribute income currently to or for the benefit of Dayl Haldeman or accumulate it as corpus.
The trust is irrevocable during Dayl's minority, but may thereafter be revoked by the joint action of Clara B. Haldeman and Dayl, at which time the entire trust estate is to vest in and be distributed to Dayl Haldeman. Unless sooner revoked in the manner above provided, the trust is to continue until the happening of that one of the following events which shall first occur: (a) Death of Dayl Haldeman, if she survives both Henry F. Haldeman and Clara B. Haldeman, or if she survives Henry F. Haldeman and predeceases Clara B. Haldeman; (b) death of the last survivor of Henry F. Haldeman, Clara B. Haldeman and Dayl Haldeman. If Dayl Haldeman survives Clara B. Haldeman but predeceases Henry F. Haldeman, the trust will terminate only on the death of Henry F. Haldeman. If the termination of the trust under any of the foregoing provisions would result in the distribution to Henry F. Haldeman of any part of the accumulated income of the trust, then the trust will not terminate as to such accumulated income, but will continue with respect thereto until the death of Henry F. Haldeman.
Upon the termination of the trust under any of the foregoing conditions, the trust estate is to vest in and be distributed to Dayl, if living; otherwise to Clara B. Haldeman, if living; otherwise to certain other beneficiaries.
Dayl Haldeman Trust No. 3 contains the following material provisions:
Henry F. Haldeman is both trustor and trustee. Dayl Haldeman and Clara B. Haldeman have the power, after Dayl reaches majority, by joint action to alter, amend, or modify the trust agreement, but no such amendment may enlarge the beneficial present or remainder interest of Dayl. The trust may be revoked by Dayl, after she reaches her majority, with the written consent of Clara B. Haldeman, if living; otherwise the written consent of Henry F. Haldeman is required. In the event of the death of Dayl, Clara B. Haldeman, with the consent of Henry F. Haldeman, may revoke. Otherwise the trust is irrevocable. No amendment may enlarge the powers of amendment or revocation.
The income of the trust is, in the discretion of Clara B. Haldeman, to be either currently distributed to or for the benefit of Dayl Haldeman or accumulated by the trustee, but ‘shall not be accumulated for future distribution to Henry F. Haldeman or applied to the payment of premiums upon policies of insurance on the life of Henry F. Haldeman‘ If either Dayl or Clara B. Haldeman shall die prior to the trust's termination, the net income, in the discretion of Henry F. Haldeman, shall be either currently distributed to or for the benefit of the survivor of Dayl or Clara B. Haldeman or accumulated by the trustee. If both Dayl and Clara B. Haldeman die prior to termination of the trust, the net income is to be distributed currently to Henry F. Haldeman, but accumulated income is to be retained by the trustee as part of the trust estate. ‘Dayl Haldeman may, with the consent in writing of Clara B. Haldeman, or if she be not then living, with the consent in writing of Henry F. Haldeman, direct the Trustee to distribute the whole or any portion of the Trust Estate to or for the benefit of herself. Clara B. Haldeman, if she shall survive Dayl Haldeman, may, with the consent in writing of Henry F. Haldeman, direct the Trustee to distribute the whole or any portion of the Trust Estate to or for the benefit of herself.‘
The trust is to terminate upon the death or incompetency of Henry F. Haldeman, unless previously revoked pursuant to provisions noted above, but not if the effect would be to vest in and cause to be distributed to Henry F. Haldeman the whole or any part of the corpus or accumulated income of the trust estate. Upon termination the entire trust estate is to vest in and be distributed to Dayl Haldeman, if living; ‘otherwise to or for the benefit of Clara B. Haldeman.‘ If neither Dayl nor Clara B. Haldeman is living, the estate is to go to Dayl's lawful issue, if any survive, in equal shares per stirpes; otherwise to named relatives of the trustor and his wife.
The material provisions of the Clara B. Haldeman Trust are, so far as here material, similar to those of the Dayl Haldeman Trust No. 3, except in the following respects:
Clara B. Haldeman is primary beneficiary and may alter, amend, or modify without the concurrence of any other person, but may not increase her own present or remainder interest; she may revoke with the consent of Dayl Haldeman, if living, or of Henry F. Haldeman, if Dayl is not living; the income may be (1) distributed currently to Clara if living, otherwise to Dayl, or (2) accumulated by the trustee. If both Dayl and Clara B. Haldeman die before the termination of the trust, current but not accumulated income is to go to Henry F. Haldeman. Clara B. Haldeman may, with the consent in writing of Dayl Haldeman, or if she be not then living, with the consent in writing of Henry F. Haldeman, direct the trustee to distribute the whole or any portion of the trust estate to or for the benefit of herself. Dayl Haldeman, if she shall survive Clara B. Haldeman, may, with the consent in writing of Henry F. Haldeman, direct the trustee to distribute the whole or any portion of the trust estate to or for the benefit of herself. Upon termination the trust estate is to go to Clara B. Haldeman, if living, otherwise to Dayl, if living; otherwise to Dayl's issue, if any; otherwise to the issue of designated sisters of Henry F. and Clara B. Haldeman.
The Dayl Haldeman Trust, Clara B. Haldeman, trustor, is similar in all material respects to Dayl Haldeman Trust No. 2, except that Clara B. Haldeman is trustor, Henry F. Haldeman is trustee, and wherever one of these persons is referred to by name in Dayl Haldeman Trust No. 2, the other is substituted in the trust created by Clara B. Haldeman.
All of the income of each of the trusts was accumulated by the trustee.
The partnerships in which petitioners were interested and in which the funds of the several trusts were invested have been profitably operated, as shown by the increase in value of the trust assets:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Value ¦Value ¦ +------------------------+---------------+--------------+----------+----------¦ ¦Trust ¦Company ¦Original ¦Dec. 31, ¦Dec. 31, ¦ ¦ ¦ ¦investment ¦1938 ¦1942 ¦ +------------------------+---------------+--------------+----------+----------¦ ¦Dayl Haldeman No. 1 ¦Henry F. ¦$50,000 ¦$61,603.00¦$64,830.99¦ ¦ ¦Haldeman ¦ ¦ ¦ ¦ +------------------------+---------------+--------------+----------+----------¦ ¦Dayl Haldeman No. 2 ¦Savage-Haldeman¦10,000 ¦16,468.93 ¦52,595.26 ¦ +------------------------+---------------+--------------+----------+----------¦ ¦Dayl Haldeman No. 3 ¦Greene-Haldeman¦5,000 ¦17,730.27 ¦93,318.31 ¦ +------------------------+---------------+--------------+----------+----------¦ ¦Dayl Haldeman, Clara B. ¦Savage-Haldeman¦10,000 ¦16,468.93 ¦52,595.26 ¦ ¦Haldeman ¦ ¦ ¦ ¦ ¦ +------------------------+---------------+--------------+----------+----------¦ ¦trustor. ¦ ¦ ¦ ¦ ¦ +------------------------+---------------+--------------+----------+----------¦ ¦Clara B. Haldeman ¦Greene-Haldeman¦5,000 ¦24,040.75 ¦134,540.38¦ +-----------------------------------------------------------------------------+
One of the purposes in creating the Dayl Haldeman trusts was the desire on the part of petitioners to share their property with her, to provide for her future security, and to create in her an interest in the businesses with the hope that she and her husband, should she marry, would ultimately take over the businesses. One of Henry F. Haldeman's purposes in creating the trust for his wife was his desire to create for her a limited interest in the Greene-Haldeman Co. The petitioners anticipated a saving in taxes as a result of their action. The creation of the trusts had no effect in the operation of the partnerships.
During the period from July 1 through December 31, 1938, Savage-Haldeman Co. made certain sales upon which the State Board of Equalization of the State of California assessed additional retail sales taxes in the amount of $4,156.65, no part of which was claimed by the partnership Savage-Haldeman Co. on its Federal income tax return for the year 1938 or allowed by the respondent as a deduction from the net income of said partnership, or from the distributive shares of the partners thereof for the year 1938. These taxes have not yet been paid to the State of California. By reason of the assessment of the aforesaid sales taxes for the year 1938, each petitioner's distributive share of the net income of the Savage-Haldeman Co. for the year 1938, as determined by the respondent in his respective deficiency notices; is overstated in the sum of $789.77. A claim for refund of income taxes overpaid by virtue of the reduction in each petitioner's net taxable income for the year 1938 resulting from the assessment of the aforesaid sales taxes was filed by each petitioner on March 15, 1942, and no action thereon has yet been taken.
The Savage-Haldeman Co. kept its books and filed its returns on the accrual basis of accounting for the years in question.
In determining the deficiencies herein the Commissioner increased petitioners' income for each year by the amount of partnership income reported by the trusts and reduced income by adjusting the distributive shares on account? of accrued California sales taxes and interest but excluding a penalty with respect thereto. The Commissioner explained the increase in the petitioners' income as follows: ‘It is held that the creation by you of the mentioned trusts (trust) effected merely a reallocation of income within a family group and that you remained the owner of the corpus and subject to the tax upon the income therefrom under section 22(a) of the Revenue Act of 1936.‘
The stipulated facts not hereinabove summarized are incorporated herein by reference.
OPINION.
ARNOLD, Judge:
The principal question is whether, as contended by respondent, the income of certain trusts created by petitioners is taxable to them as grantors by reason of their alleged failure completely to divest themselves of control over trust corpus or income. Respondent claims that petitioners are taxable under the broad language of section 22(a) of the Revenue Acts of 1936 and 1938 as interpreted by the Supreme Court in Helvering v. Clifford, 309 U.S. 331, or under the more specific language of section 167 of the same acts. Since we agree with respondent on the applicability of section 22(a), only the pertinent portions of that section are set forth in the margin.
The applicable provisions are the same in both of the taxable years in question.
SEC. 22. GROSS INCOME.(a) General Definition.— ‘Gross income‘ includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *
Whether the trust income should be taxed to the petitioners requires consideration not only of the broad language of section 22(a) and the specific provisions of the five trust indentures, but also the family relationship, the three partnerships, and the circumstances under which the trusts were created. As pointed out by the Supreme Court in the Clifford case, supra, ‘where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as Sec. 22(a) is concerned.‘
We shall consider first the specific provisions of the trust indentures with respect to the family relationship since the scope of section 22(a) is amply covered by the decided cases, including those cited herein. An analysis of each trust shows that the grantor, the trustee, the primary beneficiary, and the secondary beneficiary were always the husband, wife, and daughter of an intimate family group. Any trust income distributed by the trustee in the exercise of his discretion had to go first to one member of the family and then to another. Likewise, trust corpus, whether original or accumulated, had to go first to one member of the family and then to another. Obviously, the arrangement was a family affair, with no intention that trust income or corpus should escape the intimate family group. These facts suggest that the trusts were created to provide two or more economic units where but one had previously existed.
From the standpoint of the Haldeman family, the creation of the trusts brought about no appreciable change in their dominion or control over the property transferred in trust. Henry, as grantor, gave himself wide powers of management and control, as trustee, over the Dayl Haldeman Trust No. 1 and No. 3, and the Clara B. Haldeman Trust. In the Dayl Haldeman Trust No. 2 and the trust created by Clara for Dayl, the husband and wife gave each other, as trustee, the same wide powers of management and control as in the other trusts. Under similar circumstances we have held that a husband and wife should be treated as the settlor of the trust estate which he or she dominated and should be taxed on the income of that trust. Werner A. Wiebolt, 5 T.C. 946, and cases there cited. Here, the facts and circumstances in Dayl Haldeman Trust No. 2 and the trust created by Clara for Dayl are within the rule there followed.
Secondly, it should be noted that each trust indenture specifically authorized the grantor-trustee, or spouse-trustee, to invest the trust funds in partnership enterprises even though the trustee, individually, was a member of the partnership. Consequently the trustee had dominion and control over trust property far in excess of normal fiduciary powers, as trust funds are not normally subject to the risks of a trade or business. Sec. 227, Restatement of Law of Trusts. Pursuant to this express authority the petitioners, in their fiduciary capacities, invested all the funds of the five trusts in three partnerships the earnings of which depended in large measure upon the experience, skill, and ability of petitioners in conducting the partnership business. Petitioners' individual interests in the Haldeman and the Savage-Haldeman partnerships decreased in the amounts acquired by the trusts. Their control over the partnerships producing the income was in no way diminished. It does not appear that any of the partners in the three partnerships differentiated between the individual interests of the Haldemans and the interests they held in trust. In other words, whether held individually or in trust, the interest was recognized as a Haldeman family interest.
Furthermore, the making of the five trusts did not affect the management and control by petitioners of the partnerships in which they were general partners. As general partners, their control and management of the partnerships was limited only by the general scope of the partnership business. This power of control remained after the execution of the trusts as before.
Considering the family relationship, the specific provisions of the trust indentures, the benefits flowing directly and indirectly to the petitioners, the other facts and circumstances in connection with the creation of the trusts and investment of trust funds, and the principles announced in the decided cases, we are convinced that the trusts created by petitioners were, for tax purposes, mere contrivances to avoid surtaxes. Certainly, if not so designed, the arrangement was, as Judge Hand said in Stix v. Commissioner, 152 Fed. (2d) 562, ‘strangely suited to that purpose.‘
Finally, we note Henry Haldeman's testimony that petitioners primary purpose in creating the trusts for Dayl was to share their property with her, provide for her future security, and create in her an interest in the business. It does not appear, however, that Dayl's interest increased or that she became any more active in partnership affairs after the creation of the trusts. Management and control of the Haldeman interests continued unchanged. Henry or Clara could and did continue to use corpus and accumulated income in connection with their partnership operations. The benefits flowing to petitioners from the arrangement were sufficient in our opinion to make section 22(a), as interpreted by the Clifford and other cases,
Stockstrom v. Commissioner, 148 Fed.(2d) 491; certiorari denied, 10/8/45, affirming 3 T.C. 255; Brown v. Commissioner, 131 Fed.(2d) 640; certiorari denied, 318 U.S. 767, affirming 42 B.T.A. 693; Helvering v. Elias, 122 Fed.(2d) 171; certiorari denied, 314 U.S. 692, modifying 41 B.T.A. 1109; Commissioner v. Buck, 120 Fed. (2d) 775; reversing on this point, 41 B.T.A. 99; Anna Morgan, 5 T.C. 1089.
Haldeman's purpose in creating a trust for Clara in the Greene-Haldeman partnership seems to be a tax avoidance matter. He testified that he wanted Clara to participate in the enterprise. He could have made her a limited partner without endangering her other property rights, sec. 2483, Civil Code of California (1933), or she could have invested some of her own funds in the business as a limited partner. But he preferred to create a trust for her and invest the trust funds in the partnership. Oddly enough, Clara's trust acquired a three-fourteenths interest in the partnership for a $5,000 investment, whereas Dayl's trust invested the same amount and acquired only a two-fourteenths interest. We can only explain the discrepancy by the fact that Henry allocated the family interests as he desired, since he held all the Haldeman interests in the Greene-Haldeman partnership, either individually, or as trustee. With such a close family relationship and his control over the operations it made little difference, except tax-wise, how the family income was allocated among the members. Cf. Commissioner v. Tower, 327 U.S. 280, reversing 148 Fed.(2d) 388, reversing 3 T.C. 396; and Lusthaus v. Commissioner, 327 U.S. 293, affirming 149 Fed.(2d) 232, and affirming 3 T.C. 540.
We have found no cases precisely in point. Several of the decided cases have involved family trusts and family partnership combinations. In Morris Eisenburg, 5 T.C. 856, we held that the petitioner-grantors retained such dominion and control over the corpus and income of the trusts by virtue of the trust indentures and partnership agreements as to render them taxable on the income under section 22(a) of the Internal Revenue Code, as construed in Helvering v. Clifford, supra. In A. R. Losh, 1 T.C. 1019; affd., 145 Fed.(2d) 456, and Rose Mary Hash, 4 T.C. 878; affd., 152 Fed.(2d) 722, decided December 31, 1945, family trusts and partnership agreements were considered and the trust income was held taxable to the grantors. For the foregoing reasons and upon authority of the cases cited, we hold that the grantors should be taxed upon the income of the trusts, as determined by the Commissioner.
We hold further, as stipulated by the parties, that petitioners are entitled to an additional income tax deduction for 1938 by reason of the California sales taxes accrued during that year by the Savage-Haldeman Co.
Reviewed by the Court.
Decision will be entered under Rule 50. FN1. On Oct. 25, 1938, by amendment, Henry F. Haldeman's interest was decreased to 2/14 and Burch E. Greene's interest increased to 7/14.