Opinion
Docket No. 1575.
1944-08-23
J. O. WHITELEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John F. Greaney, Esq., and Vincent K. Keesey, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
Income from certain irrevocable trusts which petitioner created in 1931 for the benefit of his eight children, who were then minors, and in which he made himself trustee with broad powers of administrative control, held not taxable to petitioner under section 22(a) and the Supreme Court's decision in Helvering v. Clifford, 309 U.S. 331. Held, further, that, assuming that certain provisions of the trusts conferring upon petitioner's wife the power to use so much of the income of the trusts for the support, education, and maintenance of the minor children as she saw proper would cause the net income of the trusts to be taxable to petitioner under Helvering v. Stuart, 317 U.S. 154, the effect of that decision under certain circumstances has been repealed by the enactment of section 134, Revenue Act of 1943. The latter section is applicable to the instant case and the income of the trusts is not taxable to petitioner because none of the income of the trusts was used for the support, education, or maintenance of the minor children in either of the taxable years. John F. Greaney, Esq., and Vincent K. Keesey, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
The Commissioner has determined deficiencies in petitioner's income tax as follows:
+----------------+ ¦1936¦$22,454.49 ¦ +----+-----------¦ ¦1937¦22,691.32 ¦ +----+-----------¦ ¦1938¦18,169.90 ¦ +----+-----------¦ ¦1939¦16,750.90 ¦ +----------------+
In his determination of the deficiencies the Commissioner has added to the income reported by petitioner on his return the net income of certain trusts which petitioner had established in the year 1931 for the benefit of all his eight children, who were then all minors. The Commissioner has explained this adjustment in his deficiency notice as follows:
(a) Your taxable income for the years 1936 to 1939, inclusive, has been increased by the net income of the eight trusts created by you under date of December 8, 1931, for the reason that it is held that the income of the trust is taxable to you.
Other adjustments were made by the Commissioner in his determination of the deficiencies, which are not controverted. Effect will be given to these adjustments under Rule 50. The petitioner by an appropriate assignment of error contests the correctness of adjustment (a) above described.
FINDINGS OF FACT.
The petitioner is an individual, residing in York, Pennsylvania. The return for each of the taxable years was filed with the collector for the first district of Pennsylvania at Philadelphia, Pennsylvania.
J. O. Whiteley, the petitioner, was in 1931 the secretary of the Dentists' Supply Co. of New York, a New York corporation with authorized issued and outstanding capital stock of 300,000 shares of common no par value stock and certain preferred stock. The common stock only had voting power. At that time the petitioner was the registered owner of 7,330 shares of this common stock. His wife, Lillian S. Whiteley, at that time owned 5,000 shares of common stock of the same company. The petitioner and his wife in 1931 were the parents of 8 children, all of whom were living at that time and are still living.
Prior to December 8, 1931, the petitioner formulated a desire to set up a trust for each of his 8 children, using the best securities he had so that each child would have an estate of its own. The enactment of the gift tax law of 1932 which was pending in Congress and was being discussed at that time had something to do with his decision to create the trusts at that particular time. Also he was influenced to some extent by the thought that his income tax would be diminished thereby. He decided to create a trust for each child, with 1,000 shares of the stock of the Dentists' Supply Co. of New York as the corpus of each trust. To accomplish this he borrowed 4,000 shares of the stock in the company owned by his wife and put in 4,000 shares of his own stock. The 4,000 shares borrowed from Lillian S. Whiteley by the petitioner were returned to her on June 1, 1933, shortly after the petitioner received 10,000 shares of the stock from the estate of his father.
On December 8, 1931, the petitioner created 8 separate trusts, the beneficiary in each trust being one of his 8 children. The corpus of each trust consisted of 1,000 shares of the common stock of the Dentists' Supply Co. of New York and each 1,000 share lot of stock was issued in the name of the petitioner as trustee for the child who was named the beneficiary in the trust. The terms of each trust were identical, with the exception of the name of the beneficiary.
Each trust instrument provided that the trustee should collect the income of the trust and should pay it to Lillian S. Whiteley in trust to apply the income or so much thereof as she should deem proper to the support, maintenance, and education of the child named as beneficiary until such child arrived at the age of 21 years and to accumulate for the benefit of the named child all net income not so used. Upon the arrival of the child at the age of 21 years the trustee was to pay over to it the entire principal of the trust fund and Lillian S. Whiteley was to pay to it all of the accumulated income then held for its benefit. The trust instrument further provided that, in the case of the decease of the child before arrival at the age of 21 years, the principal of the trust fund was to be paid to the issue of the child surviving, or, in default of such issue, to Lillian S. Whiteley, the mother of the child, if then living, and in case Lillian S. Whiteley were then deceased, to the brothers and sisters of the child in equal shares. In case any child became mentally incapacitated before arriving at the age of 21 years, then the trust would terminate and the principal of the trust fund was to be paid to Lillian S. Whiteley or, in case she be deceased, then to the petitioner or, in the event of his decease, to the brothers and sisters.
The trust instrument conferred powers on the trustee which may be summarized as follows:
(a) To hold and retain the stocks, bonds, and other investments, securities, real estate, and property which may at any time comprise the capital or principal of the said trust for any length of time the trustee or his successors may deem expedient or advantageous, without liability of any kind by reason of such holding or retention.
(b) To invest, reinvest, and keep invested the capital or principal of the trust in such securities as the trustee or his successors may deem prudent, without restriction to so-called legal investments for trustees, and with power and authority to purchase investments and securities as aforesaid at a premium and to deduct such premium from income, and to purchase investments and securities as aforesaid at a discount and to credit such discount to principal.
(c) To make subscription for stock and bond privileges and allotments to such extent as such trustee or his successors may deem proper in companies in which said trust may from time to time have an interest and to surrender or deposit shares of stock and bonds from time to time belonging to the trust for the purpose of taking part in any foreclosure, merger, or reorganization proceedings and in the discretion of the trustee to pay assessments in connection therewith.
(d) To sell and dispose of all or any part of the investments, securities, real estate, and property which may from time to time, or at any time, comprise the capital or principal of the trust, either at public or private sale, for such prices and on such terms as to said trustee may seem fit and proper, and to make, execute, and deliver to the purchasers thereof good and sufficient deeds of conveyance therefor and all assignments, transfers, and other legal instruments either necessary or convenient for passing the title and ownership thereto, free and discharged of all trusts, without liability on the part of such purchasers to see to the application of the purchase money.
(e) To treat as principal and not as income for the purpose of the trust, all stock dividends or proceeds of sales of rights to subscribe for stock issued with respect to any stock which may from time to time be held by said trustee, or his successors, as part of said trust.
In the event of the death or resignation of the trustee provision was made for successor trustees. The trusts were irrevocable and the grantor had no powers to amend or alter the trust.
At all meetings of the stockholders of the Dentists' Supply Co. of New York J. O. Whiteley voted the shares of common stock of the Dentists' Supply Co. of New York that were registered in his name as trustee. Throughout the entire period the dividends on the 1,000 shares of the common stock of the Dentists' Supply Co. of New York comprising the corpus of each trust were paid by dividend check issued in the name of J. O. Whiteley, trustee. Petitioner endorsed the checks and deposited them in the individual savings account of Lillian S. Whiteley maintained at the York National Bank & Trust Co., York, Pennsylvania. Lillian S. Whiteley was the only one authorized to draw against this account and all moneys belonging to the 8 separate trusts were deposited in the savings account of Lillian S. Whiteley.
Prior to January 1, 1936, Lillian S. Whiteley had purchased from the income of the 8 trusts $24,000 of Cities Service 5 percent bonds due 1950, $16,000 of Federal Farm Loan 3 percent bonds, 800 shares of stock of the General Electric Co., and 240 shares of common stock of the Dentists' Supply Co. The certificates for the General Electric Co. stock and the Dentists' Supply Co. of New York were taken in the name of J. O. Whiteley as trustee for the beneficiary named in each trust instrument.
From and after January 1, 1936, Lillian S. Whiteley made additional purchases of securities from the income of the eight separate trusts, and whenever stock was purchased during that period it was issued in the name of the individual child who was the beneficiary of the trust.
The petitioner and his wife discussed how the trust income should be invested. Mrs. Whiteley accepted the advice of J. O. Whiteley, the petitioner, in the purchase of securities with income from the trusts. She ordered the securities from a broker and paid for them out of her checking account. The eight trusts were indebted at various times during the years 1936 to 1939, inclusive, to Lillian Whiteley for moneys advanced by her to purchase securities. A record was kept by petitioner with respect to each trust showing the income thereof, the securities purchased with such income, and the amounts to which the beneficiary was entitled. In addition to stocks and securities, a policy of insurance on the life of the child named as beneficiary in each of the eight trusts was purchased and the premiums thereon were paid by Lillian S. Whiteley with the income of the trust funds or by J. O. Whiteley from his individual funds. No amounts paid by J. O. Whiteley as premiums on the said policies were ever repaid to him. The insurance policy in each case was payable to the mother of the insured as beneficiary, and in the event the mother did not survive it was payable to the brothers and sisters of the insured.
During the years 1932 and 1933 the income from the eight trusts was used by the petitioner for the maintenance and support of his children. No part of the income of any of the eight trusts was used during the years 1934 to 1939, inclusive, to pay for the support, education, or maintenance of any of the children, but all bills in connection therewith and all household bills were paid by petitioner out of his own personal income throughout the entire period.
In 1937, J. O. Whiteley, Jr., became 21 years of age on April 10. His trust terminated and there were handed over to him the stock comprising the corpus of the trust, additional securities purchased from income, and a life insurance policy on his own life in the amount of $20,000.
On October 22, 1938, Daniel E. Whiteley reached the age of 21 years and the trust wherein he was named beneficiary terminated and the stock comprising the corpus of the trust was handed over to him, together with the securities purchased from the accumulated income of the trust for his benefit. In addition to such securities, a life insurance policy on his life in the amount of $20,000 was also turned over to him.
On October 20, 1939, Catherine L. Whiteley reached the age of 21 years and the trust wherein she was named beneficiary terminated. The stock comprising the corpus of the trust was handed over to her and at the same time the accumulations purchased from the income of the trust, consisting of stocks, bonds, and a life insurance policy on her own life in the amount of $20,000, were also turned over to her.
Throughout the entire period here in question Lillian S. Whiteley always had in her savings account more money than was necessary to provide for the uninvested income of the eight trusts. It was always possible from the records of the trust to tell accurately how much interest each trust had in the funds in her savings account. At no time throughout the entire period did the petitioner ever demand, nor did he ever receive, for his own benefit any of the income of any of the eight separate trusts.
Throughout the years 1936 to 1939 the petitioner, as trustee, filed income tax returns on Form 1040 and fiduciary returns on Form 1041 for each of the trusts in existence during those years. He included as income on each return not only the income on the stock comprising the corpus of the trust, but the income on securities purchased for each trust from the accumulated income thereof.
Any of the stipulated facts which have not been embodied in the foregoing findings of fact are incorporated herein by reference.
OPINION.
BLACK, Judge:
The Commissioner in stating in his deficiency notice that he was including in petitioner's income for each of the taxable years the net income of the eight trusts created by petitioner on December 8, 1931, did not state what section of the statute he relied upon in making his determination. However, respondent in his brief states that he relies upon section 22(a) of the applicable internal revenue acts and the rationale of Helvering v. Clifford, 309 U.S. 331. Respondent further states in his brief that if the Tax Court should hold that the Clifford decision and the related cases cited in the argument are not controlling and that respondent's determination is supported only by Helvering v. Stuart, 317 U.S. 154, ‘it is requested that the Court make specific findings of fact and of law in this regard so that the respondent may determine whether relief should be afforded petitioner under Section 134 of the Revenue Act of 1943 and the Regulations promulgated thereunder, upon application therefor, and upon compliance by petitioner with the terms of said Act and Regulations.‘
We shall first determine whether Helvering v. Clifford, supra, is controlling.
In support of his contention that petitioner retained such control over the trust properties as to be virtually the owner thereof, and therefore the income of the properties is taxable to the petitioner under section 22(a), the respondent cites the following alleged powers and duties of petitioner as trustee under the terms of the trust indentures:
1. The custody of the indentures of trust,
2. The sole custody of all principal assets of the eight trusts,
3. The exclusive right to vote the shares of stock comprising the principal assets of the eight trusts,
4. The duty to keep all books and records of the eight trusts, which duty he did perform,
5. The duty to invest all income of the eight trusts since none of the income of these trusts was used by his wife for the maintenance and support of his eight children,
6. The custody of all securities purchased with the income of these trusts, and
7. The right to sell and dispose of all or any part of the trusts assets for such prices and on such terms as he, and he alone, may deem fit and proper.
As a matter of fact, petitioner did not have as trustee the duties and powers enumerated in 5 and 6 above. These were conferred exclusively upon Lillian S. Whiteley, the wife of petitioner and the mother of the eight children. However, it is true, of course, that in the matters covered by 5 and 6 above there was close cooperation between petitioner and Lillian S. Whiteley, and if on this account it be assumed that all seven of the enumerated paragraphs above are applicable to petitioner as the settlor of the trusts, they still would not be sufficient to make the income of the trusts taxable to him under section 22(a). Such powers of direction and control mentioned in said paragraphs were administrative in character and of the kind usually conferred upon a trustee to be exercised in his fiduciary capacity.
The conclusion reached by us in W. C. Cartinhour, 3 T.C. 482, we think, is applicable in the instant case. In the Cartinhour case, among other things, we said:
While it is true that Cartinhour was given rather broad powers with respect to the management of the trust estate, they were given to him in the fiduciary capacity of trustee, and not as an individual. As heretofore pointed out, he did not have the power to alter, amend, revoke, or terminate the trust, nor could he vest title to the corpus in himself. The only benefit he could receive from the income was in the event he and his co-trustee exercised the discretionary power given to them to distribute it for the support, education, or assistance of the beneficiaries, his minor children. The discretionary power was not exercised and no part of the income was used for this purpose during the taxable years.
In the instant case petitioner had no power to alter, amend, revoke, or terminate the trusts, nor could he vest title to the corpus or any part thereof in himself. The only benefit that he could receive from the income was in the event that Lillian S. Whiteley should exercise the discretionary power conferred upon her in the trust indentures to use so much of the income as she might think proper for the support, education, or maintenance of petitioner's minor children. This power was not exercised in either of the taxable years which are before us.
Our findings of fact show that three of the trusts terminated in the taxable years which are before us on account of the beneficiaries reaching the age of 21 years. In each such case the corpus of that particular trust, as well as all investments made from accumulated income, was turned over to the beneficiary. In case of the trusts which did not terminate because the children still remained minors, the income of each trust was turned over to Lillian S. Whiteley and she invested such income in such securities as she thought good investments and these securities, when purchased, were placed in the name of the beneficiary for whom purchased and retained for his benefit. In making such investments Lillian S. Whiteley always sought the advice of her husband, the petitioner, and, so far as the record shows, she always followed that advice. In doing so we see nothing adverse to petitioner so far as the decision of this case is concerned. We think it was the perfectly natural thing to do under the circumstances of the case. J. O. Whiteley was an experienced investor. Lillian S. Whiteley was not experienced in such matters.
Considering all the facts in the record, which we have endeavored to set forth fully in our findings of fact, we do not think there is any more reason to say that the income of the several trusts was taxable to the petitioner under section 22(a) than there was in such recent cases decided by this Court as David Small, 3 T.C. 1142; Herbert T. Cherry, 3 T.C. 1171; and Estate of Benjamin Lowenstein, 3 T.C. 1133. Respondent's contention that the net income of the trusts is taxable to petitioner under section 22(a) is not sustained.
We shall next take up respondent's request that, if we should hold that Helvering v. Clifford, supra, is not controlling and that the respondent's determination is supported only by Helvering v. Stuart, supra, we then make specific findings of fact and of law in that regard so that the respondent may determine whether relief should be afforded petitioner under section 134 of the Revenue Act of 1943 and the regulations promulgated thereunder. Section 134 of the Revenue Act of 1943
consummated a retroactive legislative repeal of the Stuart case. See David Small, supra. With respect to the Stuart case, petitioner first argues that case has no application because petitioner, himself, had no power to use any of the income of the trust for the support, education, and maintenance of his minor children. He says that power was lodged solely in the discretion of his wife, Lillian S. Whiteley, and that under the terms of the trust she possessed a substantial adverse interest as that term is used in section 167(a)(2) of the applicable revenue acts.
(a) INCOME FOR BENEFIT OF GRANTOR.— Section 167 (relating to income for benefit of grantor) is amended by adding at the end thereof the following subsection:‘(c) Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this chapter merely because such income, in the discretion of another person, the trustee, or the grantor acting as trustee or cotrustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. * * * ‘
Petitioner next contends that, even if he is in error in contending that Lillian S. Whiteley had a substantial adverse interest to petitioner and therefore the Stuart case is applicable, nevertheless, section 134 of the Revenue Act of 1943 is applicable and should be applied, under the facts, in petitioner's behalf. On this point the petitioner states in his brief, among other things, as follows:
The record in this case shows that returns were filed for each of the trusts; that the income of the trust was included in that return for each of the years in question that the trust was in existence, and the taxes thereon were paid by the trustee. The petitioner individually and the petitioner as trustee has always contended that the income was properly taxable to the trusts as shown by the returns. In the event further consents are essential or necessary, the petitioner is ready and willing to file such consents.
Therefore, both parties seem to agree that section 134 of the Revenue Act of 1943 is applicable. For this reason it seems unnecessary for us to take up and decide petitioner's contention that Lillian S. Whiteley possessed an adverse interest to that of petitioner and therefore the Stuart case is not applicable. Section 134 of the Revenue Act of 1943 would seem to afford the petitioner the necessary relief even if the income of the trusts would be otherwise taxable to him under the doctrine of the Supreme Court's decision in the Stuart case. We so hold. Cf. W. C. Cartinhour, supra.
Decision will be entered under Rule 50.