Opinion
Docket No. 1237.
1944-02-14
LOUIS STOCKSTROM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Richard A. Austin, Esq., for the petitioner. J. W. Marshall, Esq., and James J. Waters, Esq., for the respondent.
Petitioner created 10 irrevocable long-term trusts and constituted himself trustee in each, with broad administrative powers. The primary beneficiaries of the trusts were his children and grandchildren. In those trusts in which a child was beneficiary the petitioner had the right in his discretion to distribute the income in amounts deemed proper to the child or to the child's children. In those trusts in which a grandchild was beneficiary the petitioner had the right in his discretion to either pay the trust income to the beneficiary or to accumulate it. Held, under the facts, the income of the several trusts is taxable to petitioner under Helvering v. Clifford, 309 U.S. 331. Richard A. Austin, Esq., for the petitioner. J. W. Marshall, Esq., and James J. Waters, Esq., for the respondent.
Respondent has determined deficiencies in petitioner's income tax for the years 1938, 1939, 1940, and 1941 in the total amount of $33,505.59. Of the deficiencies thus determined that part is here in issue which arose by reason of respondent's determination that the income from ten trusts created by petitioner was includible in petitioner's gross income for the taxable years.
FINDINGS OF FACT.
A written stipulation of facts has been filed herein. We find the facts to be as stipulated and incorporate herein by reference the stipulation of facts together with the exhibits attached thereto. They may be summarized as follows:
Petitioner lives in St. Louis County, Missouri, and filed his Federal income tax returns for the taxable years with the collector of internal revenue for the first district of Missouri. At all times material he was a stockholder and chairman of the board of directors of the American Stove Co.
Petitioner is the father of three adult children (one son and two daughters) and has seven grandchildren. On January 6, 1936, petitioner executed a separate declaration of trust for each of his three children, and a declaration of trust by which he created a separate trust for each of his seven grandchildren. Pursuant to the trust instrument petitioner transferred to himself as trustee certain securities described in the various trust instruments as constituting the original corpora of the trusts, to which he later added other securities as provided for in such instruments. In all material respects the terms of the trust instruments were the same. The powers of the trustee are defined as follows:
ITEM ONE: The Trustee is authorized to retain, during any part or all of the trust and without liability for loss in so doing, any property at any time received in trust hereunder; to sell, grant options on, lease for a period shorter or longer than the duration of this trust, exchange, transfer or convey any property held hereunder for such consideration and upon such terms as the Trustee may deem reasonable; and to invest and reinvest principal funds of the trust estate in such bonds, common or preferred stocks, notes secured by first mortgage or first deed of trust on improved real estate, debentures and other class or classes of property, either real or personal, and in such relative proportions as the Trustee may in his discretion determine and select, and in the exercise of such discretion the Trustee shall not be limited to investments of such nature as are now or may at that time be legally authorized for the investment of trust funds; to borrow money for the benefit of the trust estate and mortgage or pledge assets of the trust estate to secure the repayment thereof; to determine whether any money or other assets received hereunder shall be considered part of the principal of the trust estate or part of the income thereof or shall be apportioned between principal and income of the trust estate and the manner and extent of such apportionment; to determine except when otherwise herein elsewhere directed, whether any loss to, expenditure from or funds borrowed for the benefit of the trust estate should be charged to the principal or income of the trust estate or apportioned between principal and income of the trust estate, and the manner and extent of such apportionment; to compromise any claim of or against the trust estate; to vote in person or by proxy any or all of the shares of stock that may at any time belong to the trust estate at corporate meetings and for all corporate purposes; to consent to the reorganization, consolidation or merger of any corporation and to exchange any of its securities held hereunder for securities issued in connection with such reorganization, consolidation or merger; to pay such assessments, subscriptions or other sums of money as the Trustee may deem expedient for the protection of his interest as holder of any stocks, bonds or other securities or of any other property, real or personal; to exercise with respect to any stocks, bonds or other securities any option which a holder thereof may be entitled to exercise, to purchase for the benefit of the trust estate at any foreclosure sale any real estate or personal property upon which the Trustee may have or hold a mortgage, deed of trust, lien or other encumbrance; to cause to be organized or join in causing to be organized a corporation or corporations in any State or States of the United States of America and to transfer to any such corporation any part or parts of the assets of the trust estate either real or personal and receive in lieu thereof shares of stock in such corporation; to cause in his discretion any property of the trust estate to be registered or held of record in his own name or in the name of his nominee or in the name of the corporate Trustee while there be a corporate co-trustee of this trust or the Trustee may retain said property without changing its record or registered owner, and in any such event the Trustee may or may not in his discretion divulge the trust; to purchase with assets of this trust estate and for this trust estate from the executors, administrators or trustees of any estate, any stocks, bonds, or any other property either real or personal which may be a part of said estate, each such purchase to be for the then fair market value of the property thus acquired; to make as and when authorized by this trust, distribution of principal from the trust or division of principal within the trust in cash and/or other assets of the trust estate as selected, apportioned and evaluated by the Trustee whose action therein shall be conclusive and binding on all parties in interest; to keep any or all of the trust estate in the State of Missouri or in any other State of the United States of America, and to keep the same in his own custody or in custody of or on deposit with any bank or trust company that he may select in the State of Missouri or in any other State of the United States of America to employ the services of any organization engaged in the business of furnishing investment counsel, or the services of any agent or attorney and to delegate to such organization, agent or attorney the right to execute any power, authority or discretion conferred in this ITEM ONE on the Trustee or the right to discharge any administrative function incidental to the administration of the trust and to pay for the services of any such organization, agent or attorney out of the principal or income of the trust estate as determined by the Trustee; and to do any and every such other act and thing and enter into and carry out any and every such agreement with respect to the trust estate or any part thereof as the Trustee would have the right to do if he were the individual owner thereof and as he may deem best in the interests of the beneficiaries of the trust.
In the trusts set up for petitioner's children it was provided that the trust income during the life of each child should be paid the child, or (in the case of the trust for petitioner's son) the child's spouse, or the child's children ‘in such proportions as the Trustee may determine, it being the intent of (petitioner) that the Trustee in deciding whether or not do disburse any income to or for the benefit of any beneficiary as above provided, * * * shall be guided by the need * * * of such beneficiary for funds in order that he or she may continue to live in a manner which in the opinion of the Trustee befits the standard of living of such beneficiary. The decision of the Trustee as to the apportionment of income as above provided and as to the date or dates respectively for disbursement of income shall be conclusive and binding upon all parties in interest.‘
In the trust instrument by which were created the seven separate trusts for petitioner's grandchildren it was provided that the trust income was to be ‘paid‘ to (the grandchild) or accumulated as the Trustee may determine, that is to say, the Trustee shall decide as to the disbursement to (the grandchild) of any current or accumulated income of his estate and as to whether any income of his estate shall be accumulated and the decision of the Trustee in such matter shall be conclusive and binding upon all parties in interest.‘
The trust instruments also provided that the trustee in his absolute discretion could pay out sums from the principal of the trusts to the beneficiaries if they should on account of illness or infirmity be in need of funds in excess of the trust income.
The trusts were irrevocable. They were to last at least during the respective lives of the beneficiaries, with remainders over either equitable or free from trust, so that no part of the corpus of the respective trusts could revest in the petitioner and no part of the income could be held or accumulated for distribution to the petitioner.
Each of the three trusts contained spendthrift provisions which prohibited the beneficiaries from realizing any financial benefit on their trust interests through assignment, pledge, or other transfer.
Upon the grantor ceasing to be a trustee of the various trusts, a corporation and an individual beneficiary were to become cotrustees of each trust. Annual statements were to be rendered to each adult beneficiary of the income from his or her trust.
The property transferred by petitioner to himself as trustee under the various trust instruments has been administered by him in the manner provided for under the trust instruments.
On October 19, 1937, petitioner was the owner or in control of 6,990 shares of American Stove Co. common stock, and on that date he transferred 1,500 of these shares to the trust for his son, Arthur Stockstrom, Sr., and Gladys T. Stockstrom and their descendants; and on the same date he also transferred shares of stock of other corporations to the other trusts. Before and after transferring the 1,500 shares of stock of American Stove Co. to the trust for Arthur Stockstrom, Sr., and Gladys T. Stockstrom and their descendants, petitioner owned or controlled in addition to said 1,500 shares, a sufficient number of shares in the company to enable him to elect one member of the board of directors, which consists of fifteen members. Petitioner is not an officer or director of any corporation the stock of which was transferred to these trusts, except the American Stove Co.
At all times material hereto petitioner's three adult children were married and were living separate and apart from petitioner and separate and apart from each other. None of petitioner's grandchildren lived with him, but each grandchild lived with his or her respective parents.
During the taxable years practically all of the trust income was distributed to petitioner's children who were beneficiaries under the trusts. However, the income of the trust of which his son, or his son's wife, or his son's children were beneficiaries was paid to his son's wife, and the income of the trust of which his daughter, Jessie S. Russell, was beneficiary was not distributed to the beneficiary in1938. With regard to the income of the seven trusts created for the benefit of petitioner's grandchildren, no income was distributed to five of the beneficiaries in 1938 and 1939; no income was distributed to four in 1940; and no income was distributed to three in 1941.
OPINION.
KERN, Judge:
The apparent purpose of the trusts involved in this case was to allocate the income from property owned by the donor-trustee-taxpayer to members of his immediate family, vix., his three children and seven grandchildren, and at the same time to effect a retention by the donor during his life of control over that property equivalent for all practical purposes to the control which he held before the trust gifts, and a control over the amount of income available to the beneficiaries of the trusts thus established by him. It is stipulated that petitioner ‘at all times material‘ was worth over a million dollars, and we can infer therefrom that at the time of the creation of the trusts he had ‘income in excess of normal needs.‘ There is nothing to suggest that the family relationship was not close and affectionate. In these respects the instant case is similar to Helvering v. Clifford, 309 U.S. 331.
The fact that the trust involved in the Clifford case was a short term trust, whereas in the instant case all of the trusts were of long and indefinite terms, does not of itself make the rule of the Clifford case inapplicable to this case. Verne Marshall, 1 T.C. 442; Frederick B. Rentschler, 1 T.C. 814; Commissioner v. Buck, 120 Fed.(2d) 775. The petitioner does not contend that the length of the term of the trusts of itself removes the instant case from the ambit of The Clifford case, but does contend that in cases involving long term trusts the settlor can be taxed on the income of the trust only if he has retained so much control over the corpus or the disposition of the income as to warrant the conclusion that he has realized economic gain. Petitioner relies upon Jones v. Norris, 122 Fed. (2d) 6; Commissioner v. Katz, 139 Fed.(2d) 107; Commissioner v. Branch, 114 Fed.(2d) 985; Commissioner v. Betts, 123 Fed.(2d) 534; Bush v. Commissioner, 133 Fed.(2d) 1005; Hogle v. Commissioner, 132 Fed.(2d) 66; Commissioner v. Armour, 125 Fed.(2d) 467; Lura H. Morgan, 2 T.C. 510; George H. Whitely, 2 T.C. 618; Robert S. Bradley, 1 T.C. 566; Emma B. Maloy, 45 B.T.A. 1104; and Christopher L. Ward, 40 B.T.A. 225. As examples of economic gains derived from the retention of powers by the settlor such as to justify the taxing to the settlor of the income of long term trusts, petitioner points to the power to vote corporate stock which has been made a part of the trust corpus, by which power he retains a control over the corporation of which he is an officer or director, and the power to change beneficiaries.
We agree with petitioner that in cases of long term trusts the factor of control over the trusts is more important in determining the taxability of the trust income to the settlor than in cases of short term trusts. See Case, the Circuit Courts of Appeals Examine the Clifford Doctrine, VII Maryland Law Review 201. However, we are not willing to agree with petitioner that the settlor of a long term trust is taxable on the income thereof only where the corpus contains the stock of a corporation of which he is an officer or director and by the trust instrument the power to vote this stock is retained by him, and where the right to change beneficiaries is retained by him. In the present state of the law upon this subject it is difficult and dangerous to lay down dogmatic statements of general principles. As we said in George H. Whitely, supra, ‘the decision of such a case requires a nice balancing of the power and rights granted to the trustee and beneficiary and those retained by the donor, to the end of determining where lies the real right of ownership of the income.‘
It may be that in cases of long term trusts the settlor is to be taxed on the trust income only if in addition to broad administrative powers over the trust corpus there are also powers over the distribution of the income. We are of the opinion that such powers were held by the settlor-trustee in this case. There is no question but that he had the broadest administrative powers over the trust corpus. His powers over the distribution of the trust income were not as complete as in the case of Commissioner v. Buck, 120 Fed.(2d) 775, but were nevertheless substantial. Here, as In Ellis H. Warren, 45 B.T.A. 379; affd., 122 Fed.(2d) 312, ‘he was not required to distribute any part of the income to any of the beneficiaries during his lifetime,‘ and in the trusts created for his children petitioner, as trustee, had the right to pay the income either to his child or his grandchildren. In all of the trusts the immediate payment of any income to any beneficiary was in his sole discretion. While it is true that any trust income not paid out was to be accumulated in the trust, this retention of the power over the purse strings with regard to the members of his immediate family who were beneficiaries would warrant our conclusion that ‘the direct satisfactions of pater familias are thus virtually undiminished, as are those indirect satisfactions (stemming from the vicarious pleasure of consumption of the income by his wife and children (in this case children and grandchildren)) which the Supreme Court regards as noteworthy indicia of taxability.‘ See Commissioner v. Buck, supra, P. 778. When this power of the settlor-trustee over the distribution of the trust income is combined with extraordinarily broad administrative powers over the trust corpus, we can not escape the conclusion that the doctrine of Helvering v. Clifford is applicable and the incomes of the trust are taxable to the settlor.
Decision will be entered for the respondent.