Russell
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Oct 24, 1945
5 T.C. 974 (U.S.T.C. 1945)

Docket No. 5706.

1945-10-24

CLIFTON B. RUSSELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Robert A. B. Cook, Esq., J. N. Welch, Esq., and Lawrence E. Green, Esq., for the petitioner. J. T. Haslam, Esq., for the respondent.


1. In 1939 petitioner established a trust and named his mother as principal beneficiary. He transferred to the trust 350 shares of stock, against which there was an indebtedness of $25,000 which was petitioner's personal indebtedness. In 1940 the trustees paid this indebtedness with $5,000 of the income of the trust from 1939 and $20,000 borrowed from petitioner in 1940. This $20,000 was subsequently repaid to petitioner by the trustees out of income of the trust. Held, the trustees had no interest adverse to petitioner, they paid the $20,000 out of income of the trust under authority and discretion granted to them by petitioner in the trust indenture, and the amount so used was used to discharge what was in effect petitioner's own obligation and is taxable to petitioner under section 167, Internal Revenue Code.

2. In 1941 petitioner was voted a bonus of $50,000 by a corporation of which he was vice president. Such bonus was payable to petitioner ‘in such form, manner and proportions, and at such time or times during the present fiscal year as the Treasurer of this Corporation in his sole discretion may determine. ‘ The treasurer determined to pay and did pay $25,000 in cash to petitioner in 1941 and to have the corporation set up a trust in his behalf with the other $25,000. This trust was set up and the $25,000 was paid over to it in March 1942, prior to the end of the corporation's fiscal year. Petitioner, on the cash basis, returned in his income tax return for 1941 the $25,000 he received in that year, but did not return the $25,000 which was put in trust for his benefit in March 1942. Held, the latter $25,000 was neither actually nor constructively received by petitioner in 1941 and he is not taxable on it in that year. Robert A. B. Cook, Esq., J. N. Welch, Esq., and Lawrence E. Green, Esq., for the petitioner. J. T. Haslam, Esq., for the respondent.

The Commissioner has determined deficiencies in petitioner's income tax for the years 1940 and 1941 of $4,122.53 and $18,765.87, respectively. In the determination of the deficiencies the Commissioner stated, among other things, in his deficiency notice as follows:

3. It is held:

(a) That for the taxable years ended December 31, 1940 and December 31, 1941, the income of the irrevocable trust which you created under an indenture dated December 28, 1939 is taxable to you as grantor of the said trust under section 167 of the Internal Revenue Code and Section 19.167-1 of Regulations 103, as amended, to the extent that such income for the taxable years mentioned has been applied in satisfaction of your legal obligation or obligations. Such income has been applied in this manner in amounts not less than the following:

+-------------------+ ¦Year 1940¦$7,182.31¦ +---------+---------¦ ¦Year 1941¦4,000.00 ¦ +-------------------+

5. It is also held that for the year 1941 you realized taxable compensation for services rendered to Emery and Conant Company, Incorporated, * * * in the total amount of $70,000.00, in lieu of the lesser total amount of $45,000.00 which you included in your return.

The Commissioner also disallowed a net long term capital loss of $550 claimed by petitioner on his income tax return for 1940. Assignment of error as to this latter adjustment has not been pressed and apparently petitioner has abandoned it.

Petitioner, by appropriate assignments of error, contests the correctness of the other adjustments made by the Commissioner as described above.

At the hearing the Commissioner amended his answer and alleged that he should have added to petitioner's income for 1941, as ‘income from fiduciary,‘ $11,409.43 instead of $4,000 used in the determination of the deficiency. He asks for an increased deficiency based on this ground. Petitioner filed a reply denying that he was subject to such increased deficiency.

FINDINGS OF FACT.

The petitioner is a resident of the city of Medford, Massachusetts. During the taxable years ended December 31, 1940, and December 31, 1941, he was, and still is, vice president and a director of Emery & Conant Co., a Massachusetts corporation engaged in buying and selling and generally dealing in wool and mohair at wholesale, with its principal place of business in Boston, Massachusetts.

Issue 1— Trust Indenture of Dec. 28, 1939.

On December 28, 1939, Clifton B. Russell, the petitioner, created a trust, of which the Boston Safe Deposit & Trust Co. and Allan C. Emery were trustees. They continued to be trustees at all times material to this action. The property which petitioner conveyed to the trust was described in a schedule attached thereto as follows:

50 Shares Emery & Conant Company, Incorporated, Common. All the right, title and interest of Clifton B. Russell in and to 350 shares of stock of Emery & Conant Company, Incorporated, represented by a certain certificate now in the possession of and held by Allan C. Emery as security for a loan of $25,000 thereagainst.

Pertinent provisions of the trust indenture are as follows:

1. This trust shall terminate at the expiration of five years from and after the decease of the survivor of Clifton B. Russell and his mother, Alice G. Russell, provided Nancy Russell, daughter of said Clifton B. Russell, shall, at the time of the decease of the survivor, have attained the age of thirty years; otherwise this trust shall continue in force as hereinafter provided.

2. After making provisions for the expenses of this trust, including the fee of the trustees as hereinafter fixed, and after setting up proper reserves for such taxes as may accrue hereunder, the net income of this trust fund shall be paid in equal quarterly installments, or oftener in the discretion of the Trustees, to Alice G. Russell, unless she shall have exercised the right to designate and appoint such income either in whole or in part, for any portion or the whole of the term of this trust, which power is hereby expressly conferred upon her. Any exercise of this power shall not be limited to the single use thereof but the same may be repeatedly employed with respect to any income theretofore accrued but undistributed and to any income thereafter accruing. Any written designation or appointment made by her, however informal in tenor or form the same may be, shall suffice and shall become operative upon its delivery to the Trustees herein named.

3. The said Alice G. Russell and the individual trustee herein named or his successor in office, acting together, are hereby invested with the power and authority to cancel or revoke this trust at any time in whole or in part by a writing to that effect addressed to the Trustees hereof, with the further and additional power to said Alice G. Russell and said individual Trustee, acting together as aforesaid, to alter or amend this trust in such manner and at such time or times as they may see fit, such alterations or amendments to become operative, however, only when the Trustees herein named shall be supplied with a copy of each thereof. In the event of the cancellation or revocation by the said Alice G. Russell and the individual Trustee, it shall be the duty of the Trustees forthwith to pay unto said Alice G. Russell the whole of the principal of this trust fund, or such part or portion thereof as she may designate, together with any accrued and undistributed income, less the charges thereagainst, free and discharged of all trusts.

5. Upon the decease of the said Alice G. Russell without the full power of revocation or cancellation having been exercised and without the said Alice G. Russell having exercised the power of designation or direction of net income hereinbefore conferred upon her, or if such latter power shall have been exercised but shall have been cancelled by her or relinquished by the appointee, the said net income shall be payable in equal quarterly installments to Nancy Russell if she shall survive the said Alice G. Russell, or if she shall have predeceased her or shall decease during the term of this trust, leaving issue surviving, then the net income of this trust fund shall be payable to such issue in equal shares, the child or children of any deceased child to take the parent's share or if the said Nancy Russell shall have deceased without leaving issue but with a spouse surviving, then to such surviving spouse. Should the said Nancy Russell decease without leaving any issue or a spouse surviving, the net income shall then be payable to A. Douglas Brewer, of 51 Fifth Avenue, New York City, and if he shall have previously deceased, or if he shall decease while receiving income from this trust, then to those persons who are his heirs-at-law at the time of his decease.

7. The Trustees acting hereunder shall have full power and authority throughout the continuance in effect of this trust to do and perform the following things:

(a) To hold, maintain and continue in trust the securities and property so transferred to and vested in it, together with any additional securities, monies or properties which may hereafter be transferred to or vested in it by anyone whomsoever, with the consent of the Trustees hereunder, as evidenced by the receipt of said Trustees; to sell, exchange, or otherwise dispose of said securities and properties, with the limitation, however, that the shares of any mercantile or business corporations which the Donor may transfer into the trust and with which businesses the Donor shall to the knowledge of the Trustees be associated in any capacity as officer or director shall be retained in the trust so long as to the individual Trustee and the beneficiary hereunder, or in the event of there being more than one beneficiary, a majority of the adult beneficiaries, the said businesses shall prove the investment in the securities thereof to be profitable, without liability, however, to the Trustees, or either of them, for any loss, cost or charge which may arise as the result of such retention; to discharge any indebtedness which may exist against any property or interest in property conveyed into this trust, and for this purpose to make loans upon the trust property or any part thereof, and to pay such loans out of income; to receive and collect all dividends, interest or other income, and to invest and reinvest both principal and income of the trust, with the sole limitation hereinbefore in this paragraph set forth, in such manner and in such property, or securities as to the Trustees may appear proper.

14. The Donor does not reserve to himself any right, title or interest whatsoever in the property hereby conveyed or to any property which he may hereafter convey into this trust, but expressly divests himself of all thereof, nor does he reserve any rights whatsoever with respect to amending, varying, controlling or revoking this trust, except as is provided in the preceding paragraph with respect to the appointment of a succeeding trustee or trustees. Should any interest in the principal fund now or hereafter transferred into this trust ever revert or accrue to the Donor, such interest is hereby irrevocably given to those persons who would constitute and be the heirs-at-law of the Donor had the Donor deceased at the time such interest became vested in him.

In January of 1940 the trustees paid the loan of $25,000 which was against 350 shares of the stock which were transferred to the trust by petitioner. To accomplish this the trustees borrowed $20,000 from the petitioner, to whom they issued their interest-bearing note. The remaining $5,000 necessary to pay off the loan was undistributed trust income of 1939. The total income of the trust for 1939 was $7,200, which was reported by the trustees as distributable to the beneficiary and was reported by the beneficiary, Alice G. Russell.

After payment of the loan, the trustees held the shares of stock of Emery & Conant Co. free from any lien, but the trustees were indebted to the petitioner on the note for $20,000.

The fiduciary return filed for the year 1940 reported:

+-----------------------------------------------------------+ ¦Income: ¦ ¦ ¦ +---------------------------------------+---------+---------¦ ¦Dividends ¦ ¦$9,600.00¦ +---------------------------------------+---------+---------¦ ¦Deductions: ¦ ¦ ¦ +---------------------------------------+---------+---------¦ ¦Interest ¦$1,126.25¦ ¦ +---------------------------------------+---------+---------¦ ¦Taxes ¦451.44 ¦ ¦ +---------------------------------------+---------+---------¦ ¦Trustees' expenses ¦840.00 ¦2,417.69 ¦ +---------------------------------------+---------+---------¦ ¦Net income distributable to beneficiary¦ ¦7,182.31 ¦ +-----------------------------------------------------------+

The beneficiary, Alice G. Russell, reported the amount of $7,182.31 in her Federal income tax return for the year 1940.

The fiduciary return filed for the year 1941 reported:

+----------------------------------------------------------+ ¦Income: ¦ ¦ ¦ +---------------------------------------+-------+----------¦ ¦Dividends ¦ ¦$16,000.00¦ +---------------------------------------+-------+----------¦ ¦Deductions: ¦ ¦ ¦ +---------------------------------------+-------+----------¦ ¦Interest on loan ¦$509.62¦ ¦ +---------------------------------------+-------+----------¦ ¦Taxes ¦601.92 ¦ ¦ +---------------------------------------+-------+----------¦ ¦Trustees' expenses ¦282.00 ¦1,393.54 ¦ +---------------------------------------+-------+----------¦ ¦Net income distributable to beneficiary¦ ¦14,606.46 ¦ +----------------------------------------------------------+

The beneficiary, Alice G. Russell, reported the amount of $14,606.46 in her Federal income tax return for the year 1941.

The payments by the trustees to the petitioner in 1940 and 1941 in partial discharge of the loan left a remainder of $7,409.43 owing to the petitioner as at December 31, 1941, which remainder was paid in 1942.

The 350 shares of stock of Emery & Conant Co. which were held as collateral security for a loan (the equity of said shares having been transferred by the petitioner to the trust created by him in 1939) were at all material times worth more than the amount of the loan.

The petitioner created this trust in order to provide for the future of his mother and daughter and to prevent his divorced wife from securing any part of the trust property. He empowered the trustees within their discretion to pay off the $25,000 indebtedness which existed against part of the trust corpus at the time it was transferred to the trustees. After the creation of the trust petitioner did not give any instructions to the trustees as to payment of either trust income or indebtedness. Petitioner's mother, Alice G. Russell, beneficiary of the trust, exclusively gave the trustees of said trust directions as to application of trust income and the discharge of the trust's indebtedness.

Issue 2.— Bonus Received in 1941.

At all times material to this case the petitioner was vice president and director of Emery & Conant Co. In his return for the calendar year 1941 the petitioner reported the sum of $45,000 as compensation received from the corporation for his services in that year. The petitioner kept his books and made his income tax returns on a cash receipts and disbursements basis. Emery & Conant Co. kept its books and made its tax returns on the basis of a fiscal year ending March 31. On December 29, 1941, at a meeting of the directors of Emery & Conant Co., it was voted:

That the Treasurer of this corporation be, and he hereby is, authorized, empowered and directed to pay out of this year's profits as bonus or additional compensation for the exceptionally efficient and fruitful services rendered by them to this corporation during the fiscal year, the aggregate sum of $200,000 to be divided among

Allan C. Emery

Ralph W. Conant

Clifton B. Russell and

Richard I. Goodrich,

and payable to them in such form, manner and proportions, and at such time or times during the present fiscal year as the Treasurer of this corporation in his sole discretion may determine.

In performance of the duty and discretion conferred upon him in the above resolution, the treasurer of the corporation, Allan C. Emery, caused an entry to be made in the books of account under date of December 30, 1941, charging to expense an amount of $137,500. The treasurer also caused the following entries to be made upon the books of account of the corporation. In each case the figure opposite the name of the account represents a credit.

+-----------------------------------------------------------------------------+ ¦(1) Allan C. Emery ¦ ¦$50,000¦ +-------------------------------------------------------------+-------+-------¦ ¦(2) Ralph W. Conant ¦ ¦20,000 ¦ +-------------------------------------------------------------+-------+-------¦ ¦(3) Richard I. Goodrich ¦ ¦17,500 ¦ +-------------------------------------------------------------+-------+-------¦ ¦(4) Clifton B. Russell ¦ ¦25,000 ¦ +-------------------------------------------------------------+-------+-------¦ ¦(5) Allan C. Emery as Trustee for Clifton B. Russell ¦ ¦25,000 ¦ +-------------------------------------------------------------+-------+-------¦ ¦ ¦ ¦137,500¦ +-------------------------------------------------------------+-------+-------¦ ¦Under date of January 26, 1942, furthur charge was made to ¦ ¦ ¦ ¦expense,the following accounts being credited: ¦ ¦ ¦ +-------------------------------------------------------------+-------+-------¦ ¦Allan C. Emery ¦$25,000¦ ¦ +-------------------------------------------------------------+-------+-------¦ ¦Ralph W. Conant ¦20,000 ¦ ¦ +-------------------------------------------------------------+-------+-------¦ ¦Richard I. Goodrich ¦17,500 ¦62,500 ¦ +-------------------------------------------------------------+-------+-------¦ ¦Total compensation voted December 29, 1941, and ¦ ¦ ¦ +-------------------------------------------------------------+-------+-------¦ ¦credited to the four officers during the fiscal ¦ ¦ ¦ +-------------------------------------------------------------+-------+-------¦ ¦year of the corporation ended ¦ ¦ ¦ +-------------------------------------------------------------+-------+-------¦ ¦March 31, 1942 ¦ ¦200,000¦ +-----------------------------------------------------------------------------+

In 1941 the petitioner's health was impaired to such an extent that his business associates had serious doubts as to whether he would be able to continue his business association with Emery & Conant Co. In December of that year Emery notified the petitioner that he had decided to give the petitioner a bonus of $25,000 in cash and that in view of the petitioner's illness and divorce he was going to give the petitioner an additional $25,000 in trust. He told the petitioner that he intended to have Emery & Conant Co. create the trust in order to provide an income for the petitioner for the balance of his life which would enable him to maintain his customary standard of living, by a combination of the payments to be received from the trust and from the petitioner's own annuity program.

Under date of March 26, 1942, a trust indenture was entered into between Emery & Conant Co. and Boston Safe Deposit & Trust Co. with reference to the $25,000 which Emery had agreed should be placed in trust for petitioner. At a meeting of the board of directors of Emery & Conant Co. held on March 24, 1942, it was voted:

That the action of Allan C. Emery as Treasurer of the corporation and in its name and stead, be and it hereby is, ratified and approved, in executing a certain trust indenture and in paying into such trust the sum of $25,000, said sum being a part of the bonus money allocated by the Treasurer to Clifton B. Russell in pursuance of the power vested in him under vote of the directors passed December 29, 1941.

The trust indenture of March 26, 1942, among other things, provides:

WHEREAS, said Allan C. Emery, as Treasurer of said Donor, did accept and has performed the duties imposed upon him under the said vote and, in the performance of such duties and in the exercise of the discretionary powers vested in him thereunder, he has determined for reasons which he believes to be sound and sufficient to have said Donor pay a part of the bonus or additional compensation of Clifton B. Russell of Medford, * * * so allocated to him by said Allan C. Emery into a trust for the benefit of said Russell and upon the terms and conditions determined by said Emery and hereinafter set forth:

NOW, THEREFORE, said Donor at the request and direction of said Allen C. Emery does hereby assign, transfer, set over, and convey unto said Trustee, its successors and assigns, the sum of Twenty-Five Thousand Dollars * * * .

The purposes of the trust as expressed in the trust indenture included the following:

II. Income to be added to principal each year and, beginning January 1, 1943, $250 paid to petitioner each month.

I. The trust to continue until the fund was exhausted or upon the prior death of the petitioner.

Any part of the stipulation of facts not included in the foregoing findings of fact is incorporated herein by reference.

OPINION.

BLACK Judge:

We shall take up and decide the issues in their order.

The question raised by issue 1 is whether petitioner is taxable on the income of a trust which he created in 1939, where certain of the income of the trust was used in the taxable years to discharge the debts of petitioner incurred prior to the creation of the trust and to repay a loan made by petitioner to the trust. The facts with relation to the creation of the trust, the relevant terms and conditions of the trust indenture, the amounts of the income of the trust in the taxable years, and how such income was used are all set forth in our findings of fact and need not be repeated at length in this opinion.

Respondent makes no contention that petitioner reserved any powers to alter, amend or revoke the trust so as to make the income taxable to him under section 166 of the Internal Revenue Code, nor do we understand him to contend that petitioner reserved any such extensive powers of control over the trust corpus or income as to make the trust income taxable to petitioner under section 22(a) and the doctrine of Helvering v. Clifford, 309 U.S. 331. Respondent relies principally upon section 167(a) of the code, which is printed in the margin.

SEC. 167. INCOME FOR BENEFIT OF GRANTOR.(a) Where any part of the income of a trust—(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; orthen such part of the income of the trust shall be included in computing the net income of the grantor.

Regulations 103, section 19.167-1, deals with the scope of section 167 and is printed in part in the margin.

Sec. 19.167-1. Trusts in the income of which the grantor retains an interest.— (a) Scope.— Section 167 prescribes that the income, or any part of the income, of certain trusts shall be taxed to the grantor, not because the grantor has retained a certain interest in the corpus of the trust (as in section 166), but because of his retention of a certain interest in the income of the trust. * * *(b) Test of taxability to the grantor.— The test prescribed by the Internal Revenue Code as to the sufficiency of the grantor's retained interest in the trust income, resulting in the taxation of such income to the grantor, is whether he has failed to divest himself, permanently and definitely, of every right which might, by any possibility, enable him to have such income, at some time, distributed to him, either actually or constructively. * * *

Petitioner contends that he can not be taxed upon any portion of the income of the trust which he created in 1939 for the benefit of his mother and daughter because he irrevocably divested himself of all interest in and command over both principal and income of said trust and because the petitioner's mother had complete dominion of the trust income. In support of this contention petitioner cites Lillian M. Newman, 1 T.C. 921, and Phipps v. Commissioner, 137 Fed.(2d) 141.

Petitioner next contends that, when a beneficiary is entitled to receive trust income without restriction upon its use, the grantor can not be taxed upon such income even if the beneficiary actually applies the income in discharge of a legal obligation of the grantor. He cites Henry A. B. Dunning, 36 B.T.A. 1222; Ralph L. Gray, 38 B.T.A. 584; and Stephen Hexter, 47 B.T.A. 483. Petitioner points out that under the terms of the trust indenture the income of the trust was to be paid in quarterly installments to Alice G. Russell, his mother, or whomever she should appoint to receive it. He further points out that the evidence shows that the income of the trust was used to pay the indebtedness against the trust corpus at the request of Alice G. Russell and not at the request of petitioner and that he had nothing to do with making such a request.

If this were all, petitioner's contention would seem to be well taken. But this is not all. Section 7(a) of the trust indenture provides:

7. The Trustees acting hereunder shall have full power and authority throughout the continuance in effect of this trust to do and perform the following things:

(a) * * * to discharge any indebtedness which may exist against any property or interest in property conveyed into this trust, and for this purpose to make loans upon the trust property or any part thereof, and to pay such loans out of income; * * *

When petitioner created the trust in December of 1939 he transferred to it 50 shares of Emery & Conant Co. stock which were free from indebtedness. He also transferred 350 shares against which there was an indebtedness of $25,000 which was the personal indebtedness of petitioner. It has been stipulated that:

In January of 1940, the trustees paid the loan of $25,000 * * * . To accomplish this the trustees borrowed $20,000 from the petitioner to whom they issued their interest bearing note. The remaining $5,000 necessary to pay off the loan was undistributed trust income of 1939. * * *

The stipulation goes on further to show that this loan of $20,000 obtained from petitioner was subsequently paid with income of the trust.

All this, it seems to us, adds up to the fact that petitioner's indebtedness of $25,000 which existed when he transferred the 250 shares of Emery & Conant stock to the trust was ultimately paid out of the income of the trust. It is true that the trustees in doing this appear to have been authorized to do so by Alice G. Russell, petitioner's mother, who was one of the beneficiaries of the trust, but, as we read the trust indenture, the trustees did not have to obtain the authorization from Alice G. Russell to do what they did. They had full power to do it under the language which we have quoted above from the trust indenture. These trustees had no adverse interest to that of petitioner. Section 167(a)(2) of the code provides:

(a) Where any part of the income of a trust

(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor;

While it is true that the grantor did not reserve the right to direct the distribution of any of the income of the trust to pay off the $25,000 indebtedness which existed against the 350 shares of stock, he did confer such discretion upon the trustees and clearly these trustees did not have any interest adverse to petitioner. While these trustees adopted the method of paying off $20,000 of the indebtedness by borrowing $20,000 from petitioner and then repaying this $20,000 out of the income of the trust, we think the substance of the transaction was that the original indebtedness of $25,000 which existed against 350 shares of stock was paid out of the income of the trust, and that appears to have been the intent of the petitioner when the trust indenture was executed. We are frequently admonished to give effect to substance rather than to form. Cf. Commissioner v. Court Holding Co., 324 U.S. 331. We do so in this case.

Construing what was done as we do brings the instant case, we think, within the ambit of Lucy A. Blumenthal, 30 B.T.A. 591; reversed, 76 Fed.(2d) 507; reversed per curiam, 296 U.S. 552.

Of course, it seems clear enough that after the income of the trust in the instant case had been used to pay off the $25,000 of petitioner's indebtedness he had no further interest in the trust income or corpus, for the trust was irrevocable and after the payment of the $25,000 indebtedness none of the income could be distributed to petitioner or used to pay any of his obligations. But as to the $7,182.31 in the year 1940 and $4,000 in the year 1941, included by the Commissioner in petitioner's income for those years, we sustain the Commissioner.

We must next decide whether we should grant respondent's motion for an increased deficiency on the ground that he should have added to petitioner's income in 1941 $11,409.43 representing income of the trust instead of the $4,000 which he added. Respondent's argument in support of this contention is in substance this: The payments to petitioner by the trust in the years 1940 and 1941 left a balance of $7,409.43 owing to him at December 31, 1941, which was paid to him in 1942. The respondent contends that the trust income, to the extent of the indebtedness due against the stock, was petitioner's income because it could be used by the trustees in their discretion to discharge such indebtedness and all interest due thereon and was taxable in the years earned by the trust, under section 167 of the code.

It, of course, needs no citation of authorities to support the proposition that the burden of proof is upon respondent to sustain his request for an increased deficiency. However, the facts as to the terms and conditions of the trust indenture and its income for the taxable years 1940 and 1941 are all before us and the question therefore to be decided is one of law, rather than of fact. As we have already pointed out, section 167(a)(2) taxes to the grantor such part of the income of a trust which ‘may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor. ‘ While the trustees of the trust did not actually use the $7,409.43 which respondent seeks to add to petitioner's income for 1941 to pay on petitioner's indebtedness until 1942, it was 1941 income, the net income of the trust for that year being $14,606.46, and it was within their power and discretion to have so used it in 1941, and this fact, we think, makes the $7,409.43 a part of petitioner's income for the year 1941 under section 167. It should be so included in a computation under Rule 50, and if any increased deficiency results therefrom it will be allowed.

Issue 2.— This involves the question as to whether petitioner's income for 1941 should be increased by adding thereto $25,000 which was credited in 1941 on the books of Emery & Conant Co. to ‘Allan C. Emery as Trustee for Clifton B. Russell.‘ Petitioner contends that this $25,000 so credited on the books of Emery & Conant Co. in 1941 should not be taxed to him in that year because it was neither actually nor constructively received by him in 1941. Respondent's contention is that, while the amount was not actually received by petitioner in 1941, it was constructively received by him in that year.

Both parties cite and comment upon Richard R. Deupree, 1 T.C. 113. Respondent contends that case supports his contention of constructive receipt while petitioner contends that the Deupree case is clearly distinguishable on its fact. We agree with petitioner. In the Deupree case we pointed out that he had the right in the taxable year which was before us to receive his bonus in cash and that of his own choice he directed that, instead of being paid to him in cash, it be used to purchase a paid-up annuity policy in which he was named as the annuitant. We held that these circumstances amounted to constructive receipt by Deupree of his bonus within the taxable year. In the instant case the facts show that petitioner did not have the choice of receiving the $25,000 in question in cash nor did he direct that it be used to set up a trust in his behalf. The decision as to how the payment of this $25,000 was to be made was delegated by the corporate resolution to Allan C. Emery, treasurer of the corporation. The resolution adopted by the board of directors December 29, 1941, voting a bonus of $200,000 to four of the employees of the company, of whom petitioner was one, had provided: ‘and payable to them in such form, manner and proportions, and at such time or times during the present fiscal year as the Treasurer of this Corporation in his sole discretion may determine.‘ In the exercise of the discretion granted to him by the resolution, Emery decided that there should be paid to petitioner in 1941 $25,000 in cash. That amount petitioner has included in his income for 1941 and it is not in controversy in this proceeding. Emery decided that the remaining $25,000 of the $50,000 bonus allocated to petitioner should not be paid to petitioner in cash, but should be used to set up an annuity trust for petitioner. This annuity trust was set up in 1942, as shown in our findings of fact.

The facts in the instant case are much more like those present in Renton K. Brodie, 1 T.C. 275, than they are like those present in the Deupree case. However, there is a distinction of substance, we think, between the facts of the instant case and those present in the Brodie case. In the Brodie case, while the bonus due him was not credited to him in such a manner as to enable him to draw it in cash if he had so elected, it was used to purchase a paid-up annuity policy in his behalf and this policy was turned over to him as his property in the taxable year which we had before us. We held that under those circumstances the lump sum used to purchase the annuity policy was income to him in the year it was so paid and the policy was delivered to Brodie. Cf. Oberwinder v. Commissioner, 147 Fed.(2d) 255.

In the instant case the trust in petitioner's behalf to pay him an annuity of $250 a month until the $25,000 was exhausted was not set up until 1942. It was in that year that the trust indenture was executed and Emery & Conant Co., petitioner's employers, as donor of the trust, paid over the $25,000 to Boston Safe Deposit & Trust Co., trustee of the trust. This was done just prior to the end of the corporation's fiscal year ended March 31, 1942. Petitioner was on the cash basis and we think the $25,000 was neither actually nor constructively received by him in 1941. If it was income to him under the doctrine of the Brodie case, when the trust was set up and the $25,000 paid over to the trust, that was not until 1942. Therefore, we hold that the $25,000 in question was not income to petitioner in 1941. On this issue, the Commissioner is reversed.

Decision will be entered under Rule 50.