Docket No. 4372.
W. A. McSwain, Esq., for the petitioner. Ned Fischer, Esq., for the respondent.
Settlor, in conveying property to trustee, provided that the trustee should divide the trust estate into three equal shares, one for each of settlor's children, and that the share set aside for each child should be held in trust for such child for life, the share to descend at the death of beneficiary to his descendants per stirpes. The trustee was authorized to keep the trust property in a common fund instead of making an actual division thereof. Held, the trust indenture created three separate trusts rather than a single trust having three equal beneficiaries. W. A. McSwain, Esq., for the petitioner. Ned Fischer, Esq., for the respondent.
Respondent determined a deficiency of $512.45 in petitioner's income tax liability for the calendar year 1940. The only question in this proceeding for a redetermination is whether a trust agreement entered into on December 22, 1939, between Louise R. Kohtz, as settlor, and Harris Trust & Savings Bank, as trustee, created a single trust or three separate trusts.
Most of the facts have been stipulated by the parties, and we incorporate the stipulation herein by reference. In summary, the pertinent facts are as follows:
FINDINGS OF FACT.
Louise R. Kohtz, of Chicago, Illinois, entered into a trust agreement on December 22, 1939, with Harris Trust & Savings Bank, an Illinois corporation, whereby the former conveyed to the latter certain property, consisting of various securities, to be held in trust, ‘for the uses and purposes and upon the terms, conditions and trusts‘ set forth in the instrument. The agreement, so far as material for discussion here, reads as follows:
I. This trust agreement shall be known as and designated the ‘KOHTZ FAMILY TRUST, dated December 22nd, 1939‘ or ‘Trust Number 7408.‘
II. The Trustee shall divide the trust estate into three equal shares, setting aside one such share for ELSIE K. FLEMING, daughter of the Settlor, one such share for IDA LOUISE STEVENSON, daughter of the Settlor, and one such share for JOHN LEWIS KOHTZ, son of the Settlor.
III. The share set aside for each child shall be held in trust for such child, and the net income shall be paid to such child in convenient installments, so long as such child shall live.
IV. Upon the written request of a child entitled to income hereunder, the Trustee shall pay to such child annually from the principal of the trust estate set aside for such child an amount not exceeding five per cent. (5%) of the principal of such share as it from time to time shall be constituted.
V. Immediately upon the death of a child the Trustee shall pay over and distribute the share set aside for such child (including income then undistributed) among the then living lawful descendents of said child, per stirpes.
X. In case any inheritance or estate taxes are assessed against this trust or the interests of the beneficiaries thereof, the Trustee shall pay them out of principal of the trust estate as a whole without charging them against the interests of the several beneficiaries.
XII. The Trustee shall not be required to make an actual division of the trust estate pursuant to any provision of this agreement, except in so far as may be necessary on a whole or partial distribution of the trust estate, but, in its discretion, it may hold, administer and invest the several shares of the trust estate as one or more common funds, and may assign undivided interests in said common fund or funds to the several shares and divide the net income therefrom among the beneficiaries of the several parts proportionately.
XV. The Settlor hereby states that she has been advised that she may retain her powers of revocation, amendment or alteration, but nevertheless she desires to and hereby does expressly waive all right and power to revoke, amend, or alter this agreement or the terms of the trust hereby created, in any respect, either in whole or in part.
Harris Trust & Savings Bank duly qualified as trustee and at all times since has been and now is acting as trustee under the agreement. It did not make a physical division of the assets transferred to it by Mrs. Kohtz, but has held them in one common fund. For the calendar year 1940 the trustee filed separate fiduciary income and defense tax returns with the collector for the first district of Illinois for Kohtz Family Trust for the benefit of Elsie K. Fleming, Kohtz Family Trust for the benefit of Ida Louise Stevenson, and Kohtz Family Trust for the benefit of John Lewis Kohtz.
The respective returns showed ‘net income (taxable to the fiduciary)‘ in the amounts of $3,692.88, $3,692.87, and $3,692.86, and ‘total income and defense taxes due‘ in the amounts of $158.09, $158.08, and $158.08. Respondent determined that the trust agreement of December 22, 1939, created a single trust with three beneficiaries, that the net taxable income thereof was $11,078.61 for the year 1940, and that the income and defense tax thereof for that year was $986.70. Notice of deficiency in the amount of $512.45 was accordingly mailed to petitioner.
This is another of the numerous cases in which the taxpayer contends that a given legal instrument establishes multiple trusts and the Commissioner argues that it creates but one. In this, as in the others, the ultimate question is what the intention of the settlor was. The rule of law is simple, but the difficulty lies in its application.
It is our opinion that the intention of the settlor in this case, as gathered from the entire trust indenture, was to create three trusts, one for each of her children, rather than a single trust wherein the three beneficiaries should have equal interests. Here the trust agreement provides that the trustee ‘shall divide the trust estate into three equal shares,‘ one for each of the three children of the settlor, and that the ‘share set aside for each child shall be held in trust for such child.‘ The net income from each share is to be paid to the beneficiary of that share for life. The trustee is directed to pay, upon the written request of a beneficiary, ‘from the principal of the trust estate set aside for such child,‘ an amount not exceeding 5 percent of the principal of such share. At the death of a child the trustee is directed to distribute ‘the share set aside for such child‘ among the descendants of that child.
In the first five or six articles of the trust indenture, at least, we discern a pattern or plan that is indicative only of an intent to establish three separate and distinct trusts. The question then arises whether the tokens of intent there to be gleaned are rendered ineffectual and the pattern destroyed by the later somewhat indiscriminate references, here in the singular and there (although less frequently) in the plural, to ‘this trust,‘ ‘the trust estate,‘ and ‘the trust estates.‘ We think not. Such references in the singular, particularly with respect to the management of the property transferred by the settlor to the trustee, are not unnatural in view of the authority given the trustee not to make a physical division of the assets. We find here no fatal inconsistency impelling us to the conclusion that the purpose of the settlor to create separate trusts was abandoned. That purpose still remains.
The fact that the trustee, pursuant to the authority given by the instrument, did not make a physical division of the assets but held them in a common fund does not militate against the conclusion that there are separate trusts. We have it on the authority of the Supreme Court that an undivided interest in property may constitute the corpus of a trust, and that, if there is an intention to establish separate trusts, the fact that the property is kept in a common fund does not defeat the intention. United States Trust Co. of New York v. Commissioner, 296 U.S. 481. We think that the provision authorizing the trustee not to make an actual division of the property is itself indicative of an intent to create more than one trust, for, if only one trust were intended, such a provision would be quite out of place in the instrument. In this connection the following language from the opinion in Fiduciary Trust Co. v. United States, 36 Fed.Supp. 653, 655, seems most appropriate:
Nor is the provision of Article Five D without significance. Authority is there given the trustees, in their discretion, to ‘keep the property held under this agreement in one or more consolidated funds in which one or more of the separate shares, parts or funds herein provided for shall have undivided interests, rather than to make physical division thereof, except when necessary for purposes of distribution.‘ If a single trust was intended, the discretionary power here given the trustees would be unnecessary. However, if three separate trusts are provided for, the power to keep the corpus of the separate trusts as a single unit rather than to physically divide the corpus requires specific authorization by the settlor. The grant of discretionary power in the present agreement is indicative of the intention to create separate trusts.
Precedents adduced by the respective parties here are perhaps not entirely harmonious. If that be true, it is probably due to the fact that no two wills and no two trust instruments are exactly alike. As we have said before, in a case of this character other decisions and the instruments they construe are not particularly helpful. Charles B. Van Dusen et al., Trustees, 33 B.T.A. 662, 667. So far as other decisions may furnish helpful analogies, we think those in Leonard Marx, 39 B.T.A. 537, and St. Louis Union Trust Co. et al., Trustees, 40 B.T.A. 165, support our conclusion. Marian Neal Trust, 40 B.T.A. 1033, relied on by respondent, undoubtedly bears marks of resemblance to the instant case, but, while there was a direction to the trustee to divide the fund into three equal shares, it was not there provided, as in the instant case, that each such share should be held in trust. Furthermore, there was a provision that after-born grandchildren should share equally with the three provided for in the agreement— a factor which, to some extent at least, influenced the decision that but a single trust was there set up. McGinley v. Commissioner, 80 Fed.(2d) 692, also relied on by the respondent, while having points of similarity to the instant case, was decided prior to the Supreme Court's decision in United States Trust Co. of New York v. Commissioner, supra, and at that time much emphasis was given to the fact that the trust corpus was not divided.
Decision will be entered for the petitioner.