Docket No. 1122.
Milton J. Levitt, Esq., for the petitioners. Laurence F. Casey, Esq., for the respondent.
After the termination of a trust set up by the petitioner for his minor children, he retained the accumulated income during their minority as ‘guardian‘ for them as owners, as provided by the trust instrument (the instrument provided that it should ‘belong to the said children‘), with power of direction of investments and reinvestments and to hold and administer the accumulations. At majority the accumulations were to go to the children, and they have been so distributed as to those attaining majority. In case of death of a child before majority, the accumulations were to go to the estate of the child. Held, the income from such accumulations is not includible in petitioner's income. Milton J. Levitt, Esq., for the petitioners. Laurence F. Casey, Esq., for the respondent.
This proceeding involves the redetermination of deficiencies of $392.78, $688.88, and $1,041.96 in income taxes for 1938, 1939, and 1940, respectively. The issue is whether certain income is taxable to petitioners or to their children. Petitioners conceded at the hearing that so much of the income as represents interest on personal savings accounts of the husband is taxable to them.
FINDINGS OF FACT.
Petitioners, husband and wife, were at all times here pertinent residents of New York City. They filed joint returns for the taxable years with the collector for the third district of New York. The husband will sometimes be referred to herein as petitioner.
On March 30, 1932, petitioner irrevocably transferred certain securities to himself in trust for the benefit of his four minor children, whose names were George, Amy, Robin, and Jane Abraham. They were born, respectively, on July 15, 1918, August 24, 1920, May 4, 1923, and August 6, 1925. The trust indenture gave the trustee the right to invest and reinvest the corpus and change the investments, and directed him to apply the income of the trust to the use of his children:
* * * at such times, in such amounts and in such manner as said Trustee may, in his uncontrolled discretion, decide, so much of the net income from this trust fund as in the sole and absolute discretion of the Trustee may be necessary and proper for the maintenance, education and well-being of said children, and shall accumulate the balance of such net income, if any, for the benefit of said children.
The trustee was not required to apply the income equally among the children or to the use of all of the children, and could in his absolute discretion apply principal of the trust in the event there was insufficient income for that purpose. The trust was to terminate five years from its date or upon the death of the grantor or his wife, whichever occurred first.
The trust indenture provided in article II that:
Upon the termination of this trust, the entire amount of accumulations which are then held by the Trustee shall belong to the said children of the Grantor who are living at such time, in equal shares, but since all of said children will at such time be under the age of twenty-one years, the equal shares of said respective children shall be held and administered by the Trustee in the capacity of Guardian for said children, respectively, until they, respectively, reach the age of twenty-one years, and as and when each child reaches the age of twenty-one years, his or her accumulations shall be distributed to him or her, absolutely;
During the time when said accumulations are held by the Trustee as such Guardian, the Trustee shall have the same powers and authorities with respect to investments and reinvestments as are herein specifically provided with respect to such investments and reinvestments during the term of the trust hereby created.
If any such beneficiary, after the termination of this trust, should die before reaching the age of twenty-one years, all of his or her theretofore unapplied accumulations shall thereupon be transferred, paid over and delivered to the estate of such deceased beneficiary, to be distributed as part thereof. Upon the said termination of this trust, the principal thereof, as then constituted, shall be transferred, paid over and delivered, absolutely, to the Grantor, individually, if he is then living, or if said Grantor is not then living, then to the estate of the Grantor, to be distributed as part thereof.
Articles III and VII of the trust indenture read as follows:
III. If the Trustee should for any reason cease to act as Trustee hereunder before the administration of this trust has been completed, then, and in any such event, DOROTHY ABRAHAM, wife of the Grantor, shall act as Successor Trustee; Such Successor Trustee shall have the same powers and be subject to the same duties as are herein conferred and imposed upon the original Trustee herein, and shall, while acting as such Successor Trustee, also act for the purposes of this trust as the Guardian of said children.
Whenever the designation Trustee is used in this document, it shall be understood to refer to the person at the time acting in the office of Trustee.
VII. The Trustee may, in his sole discretion, cause the securities which from time to time comprise the trust fund or any part thereof, to be registered in his name as Trustee hereunder, or in his individual name, or in the name of his nominee, or may take and keep the same unregistered, and may retain them, or any part thereof, in such condition that they will pass by delivery.
In 1932, 1933, 1934, and 1935 some of the income of the trust was used for the support and maintenance of the grantor's children. These amounts were restored to the trust before it terminated. Within about one week after the termination of the trust on March 30, 1937, the trustee prepared a statement of the corpus and accumulated income of the trust, and in accordance with the provisions of article II of the trust indenture he retained, as ‘guardian‘ for the children, the cash and securities representing the accumulated income, and transferred the corpus to himself as grantor. At the same time, petitioner made the following notation in the check book maintained by him for the checking account: ‘Termination of trust for children, March 30, 1937.‘ The petitioner did not make any segregation of the cash and securities into the names of the beneficiaries. He endeavored at all times to have the shares of stock in the trust in multiples of four, and most of the certificates were for 100 shares of stock. He placed the securities belonging to his children in an envelope marked ‘Trust for Children‘ and deposited the envelope in his safe deposit box. The securities were registered in the name of petitioner in his individual capacity and were endorsed by him. Petitioner retained the cash in a checking account which he opened on March 30, 1932, in the name of ‘Herbert Abraham, Trustee.‘
Among the securities was some stock of Proctor & Gamble Co. On May 15, 1939, there was received thereon a stock dividend of one share of common stock, together with 15/75 of a share of script; whereupon, petitioner purchased additional script, making the additional amount two shares.
The only withdrawals made from the checking account during the taxable years were small amounts in 1938 and 1939 for Federal and state income taxes, the amount of $4,244.66 in 1939 to purchase 96 shares of General Motors stock as an investment of accumulated income and $300 in 1940 as an advance to Robin Abraham to open a bank account. Dividends received during the minority of the children on the stock purchased with accumulated income were deposited in the checking account. No other funds were deposited in the account.
Petitioner continued to hold the stock in his name. A short time after Amy became 21 years of age on August 24, 1941, petitioner had the securities reissued. The certificates for the stock belonging to George and Amy were issued in their names and the shares set apart for the children who were still minors were reissued to himself ‘as trustee.‘
In July 1939, after George Abraham reached his majority, the petitioner made a notation in the check book for the checking account to indicate the son's share of the accumulated income in the account. On July 22, 1939, George Abraham signed the following document, which had been prepared by his father:
To whom it may concern:
I hereby appoint my Father, Herbert Abraham as my agent and nominee to safeguard and administer my equity in the Trust created by him on March 30th, 1932, of which as one of the beneficiaries named therein I duly received on July 15th, 1939 upon my having attained 21 years age, one-quarter share of said Trust, the receipt of which is hereby acknowledged, consisting of the following securities and cash:
+-------------------------------------------------+ ¦Cerro-de-Pasco common stock ¦25 shares. ¦ +---------------------------------+---------------¦ ¦Congoleum common stock ¦25 shares. ¦ +---------------------------------+---------------¦ ¦Dupont common stock ¦50 shares. ¦ +---------------------------------+---------------¦ ¦General Motors common stock ¦25 shares. ¦ +---------------------------------+---------------¦ ¦Mission Corp. common stock ¦1 1/2 shares. ¦ +---------------------------------+---------------¦ ¦Proctor & Gamble common stock ¦25 shares. ¦ +---------------------------------+---------------¦ ¦Woolworth common stock ¦25 shares. ¦ +---------------------------------+---------------¦ ¦Cash in savings banks ¦approx $600.00.¦ +---------------------------------+---------------¦ ¦Cash in Chemical Bank & Trust Co.¦$231.31 ¦ +-------------------------------------------------+
It is further agreed that my Father shall be vested with full power to retain, sell or exchange, invest and reinvest the said assets, and without liability by reason of any loss that may result from any such transaction. Moreover, I empower my Father in his sole discretion to register my securities in his name as agent, or in his individual name, or in the name of a nominee, or keep them unregistered, or in such condition as they would pass by delivery.
Petitioner advised his son fully concerning the subject matter of the document. The sone was attending college at the time, and had no facilities for safekeeping the securities or selling them in the event that such course was advisable, and for these reasons the securities were not physically delivered to him. The cash and securities were delivered to him in 1942, after he graduated from college and obtained a job. Until then, the securities were registered in petitioner's name. In 1939 and until he obtained a job in 1942, George was dependent upon his father for support.
On August 24, 1941, when My Abraham became of age, she executed an instrument in all respects (except for the amount of cash and an additional one-half share of Proctor & Gamble stock) the same as the one signed by her brother George. Petitioner retained the securities for the same reasons that he continued to hold them for his son George. At that time she was dependent upon her father for support. The cash and securities representing her share of the accumulated income were delivered to her in 1942.
In 1936 petitioner used a small amount of funds of the trust to deposit with an offer he made to purchase a small piece of property adjacent to his residence in Spring Lake for the use of his children. The deposit was subsequently refunded and the proceeds were restored to the trust fund.
Prior to March 30, 1937, petitioner used the checking account for depositing dividend checks and buying government bonds in which the trust had an interest. No such transactions were put through, and no amounts were borrowed from the account after March 30, 1937.
In 1935, $7,000 of funds of the trust were borrowed and used to pay a mortgage on petitioner's family residence, title to which was in his wife's name. No evidence of indebtedness was given for the amount other than a ‘satisfaction piece,‘ which was placed among the records of the trust. Petitioner paid the loan a short time thereafter, without interest.
During the taxable years dividends were received in the following amounts on the securities held by petitioner for his minor children:
+---------------+ ¦1938¦$1,577.00 ¦ +----+----------¦ ¦1939¦2,358.14 ¦ +----+----------¦ ¦1940¦2,104.39 ¦ +---------------+
The amounts do not include dividends received after July 15, 1939, on the securities listed in the instrument signed by George Abraham on July 22, 1939. In his determination of the deficiencies the respondent included the amounts in the taxable income of petitioners.
In Helvering v. Abraham, 115 Fed.(2d) 368, we were reversed in holding, as to the year 1934, that the same petitioner here involved was not properly taxed upon the income of a certain trust, the stated term of which terminated on March 30, 1937. We have here the question as to whether, after such date, the trustor should be taxed upon the accumulations of income, administered by him as ‘guardian,‘ as provided in the trust instrument. The present contention of respondent is that there was not a substantial surrender of control over the property by the grantor after March 30, 1937, and that the same answer should be reached here as by the court in the earlier case.
The parties differ on the legal capacity in which petitioner exercised his power over the property during the taxable years. There is no need to resolve the difference of opinion, for the decisive question is whether from the facts the control of petitioner was such that he must be treated as the owner of the property or its income, under section 22(a). Helvering v. Clifford, 309 U.S. 331; Jones v. Norris, 122 Fed.(2d) 6; Frederick B. Rentschler, 1 T.C. 814; John Stuart, 2 T.C. 1103; Edward Mallinckrodt, Jr., 2 T.C. 1128; Brown v. Commissioner, 131 Fed.(2d) 640.
The effect of the court's decision in Helvering V. Abraham, supra, is that there was no gift of the accumulated income of the trust prior to the termination thereof on March 30, 1937. Two things were to occur at that time to carry out provisions of the trust deed. Petitioner, as grantor-trustee, was to receive the corpus, free of trust, and the accumulated income was to become the property of the surviving children in equal shares, but held by the trustee for administrative purposes ‘in the capacity of guardian‘ until they, respectively, became 21 years of age, when the share was to be distributed to the child without any strings attached to it. Promptly upon the termination of the trust, the trustee so separated the assets of the trust by conveying the corpus to himself, as grantor, and retaining, as a self-appointed guardian for the four surviving children, the income accumulated during the life of the trust, one-fourth for each child. Thereafter the property so transferred to the children was administered by petitioner independent of the corpus from which it was derived, and in 1939 and 1941, when George and Amy, respectively, reached their majority, their shares were delivered to them. Ownership of the assets by the children after such delivery at majority, free of any control by their father, is not being questioned by the respondent.
The trust deed contains no provision for transferring the share of any child to petitioner at any time after the termination of the trust. Contrary thereto, it provided that in the event of death any child after the termination of the trust and before reaching the age of 21, his or her ‘unapplied accumulations‘ were to become a part of the deceased beneficiary's estate. Petitioner had no power after the termination of the trust to use income from the property being held as ‘guardian‘ for the maintenance of his children and used none of it for that purpose. The terms ‘unapplied accumulations‘ used in the third paragraph of article II of the trust indenture refers to each child's share of the income of the trust which had not been used for maintenance and support of the children during the life of the trust, plus net accretions thereafter. We do not agree with the respondent's contention that the use of the expression indicates power, after the five-year period, to apply to maintenance and support of the children.
The powers of petitioner as ‘guardian‘ were not identical with his authority as trustee of the trust, as contended by respondent. His powers as ‘guardian‘ were limited to investment and reinvestment and such powers were not exercised during the taxable years, except in 1939, when accumulated cash was invested in additional shares of General Motors stock. The shares of stock of Proctor & Gamble were increased in May 1939 by a stock dividend and script purchase of additional stock rights with funds of petitioner, so that the holding of that stock was increased by two shares. Though the receipt given by George does not indicate that he received one-fourth thereof, the receipt given by Amy does so show, since she received one-half share in addition to the original 25 shares, while George's receipt indicates only 25 shares. Petitioner testified, however, that he did not withhold any of this stock dividend or script. This slight discrepancy, in the light of petitioner's testimony, does not establish, as respondent contends, that petitioner retained the one-half share of stock because he considered himself to be the owner of all of the accumulations until his children reached their respective majorities. Neither do we attach any great significance to the fact that petitioner advanced $300 to Robin in 1940 for the purpose of opening a bank account, and during his testimony spoke of himself as ‘trustee‘— though he explained that the accumulated income was for the benefit of the children until majority and they took it over. The use of that word in the instrument, as to the period after the five years, is clearly ‘as guardian.‘ Other acts of petitioner clearly demonstrate that he did not regard himself as the absolute owner of the property; rather that it belonged to his children in equal shares, subject only to his management for a specified comparatively short time with limited powers and without financial benefit to himself.
It is not material that petitioner did not maintain a separate bank account for the cash belonging to the children or divide the stock certificates until after the taxable years, as the share of each child was ascertainable at all times important. United States Trust Co. of New York v. Commissioner, 296 U.S. 481; Justin Potter, 47 B.T.A. 607.
It thus appears that petitioner, the natural guardian for his children, had no power over the accumulated income set apart for each child after the trust expired other than to invest and reinvest, and could not derive any economic benefit from such powers. Broad powers of management without any economic benefit do not bring a grantor within the provisions of section 22(a). Jones v. Norris, supra; Commissioner v. Branch, 114 Fed.(2d) 985; John Stuart, 2 T.C. 1103; W. C. Cartinhour, 3 T.C. 482. We do not construe Central National Bank of Cleveland v. Commissioner, 141 Fed.(2d) 352, as being contrary to this rule. The court in that case merely stressed the power of the grantor of the trust of which the Banker's Trust Co. of New York was trustee. It pointed out that the doctrine of the Clifford case requires consideration of every circumstance. There the beneficiary of the trust involved in the proceeding, as to which the income was held to be that of the trustor, was an adult child of the grantor, with a domestic establishment of his own; not, as here, minor children incapable of transacting financial matters, a situation where direction of investments by the father and natural guardian is a minimum of indication of reservation of ownership in the grantor. In both the Norris and Cartinhour cases, supra, the father had power to direct investments for minor children.
The case of Murphy Shannon Armstrong, 1 T.C. 1008, is distinguishable. There the father retained very broad powers of control and had a right to use and used funds of the trust to pay law school expenses of one of the beneficiaries. The trustor provided for himself the power ‘to have and exercise all of the powers and privileges of an owner.‘ Here the petitioner definitely provided that upon the termination of the original trust the accumulated income ‘shall belong to the said children.‘
It was error for the respondent to tax petitioners on the income of the property in question. Accordingly,
Decision will be entered under Rule 50.