Docket No. 1238.
W. R. Gilbert, Esq., for the petitioner. Richard A. Jennings, Esq., for the respondent.
On December 23, 1936, petitioner created a trust for the benefit of his children and authorized the trustee to invest principal and accumulated income in insurance policies on the settlor's life. On December 29 the trustee applied for such a policy and it was issued to the trustee on December 31. The premiums due upon such policy during the taxable years were paid by the trustee from the accumulated income of the trust. Held, the income of the trust so used was taxable to petitioner under section 167(a)(3), Internal Revenue Code. W. R. Gilbert, Esq., for the petitioner. Richard A. Jennings, Esq., for the respondent.
This case involves deficiencies in income tax as follows:
+--------------+ ¦1939¦$665.83 ¦ +----+---------¦ ¦1940¦1,206.40 ¦ +----+---------¦ ¦1941¦3,535.35 ¦ +--------------+
Only one question is raised, whether that part of the income of the trust used to pay premiums on insurance policies on the life of petitioner is taxable to him under section 167(a)(3), Internal Revenue Code, the other issues originally raised having been settled before trial. The facts, which were stipulated, are as follows.
FINDINGS OF FACT.
Petitioner is an individual, residing in the county of St. Louis, Missouri. He filed his individual income tax returns for the calendar years 1939, 1940, and 1941, all on a cash basis, with the collector of internal revenue at St. Louis. On December 23, 1936, petitioner, as grantor, and the Security National Bank Savings & Trust Co. of St. Louis, as trustee, entered into a trust indenture. The pertinent parts are set out below:
ITEM ONE: The Trustee is authorized * * * 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 may purchase policy or policies of insurance of such kind and character and with such benefits as the Trustee may determine on the life of the Grantor or on the life of any child of the Grantor, and other class or classes of property * * * The Trustee shall have full power to hold, possess, manage and control any policy or policies of insurance which the Trustee may have purchased for this trust as above provided. The Trustee shall as to any due and unpaid premium on any policy of insurance which the Trustee may have purchased for the trust, apply in or toward the payment of such premium any principal funds that may be then in the trust estate or the Trustee may if it deems the same to the best interest of the trust estate exercise the power to borrow money hereinafter set forth and apply such borrowed funds or any part thereof in or toward payment of such premium. As to any policy of insurance which the Trustee may elect to purchase hereunder the Trustee is authorized to assign or transfer the same or to abandon or surrender the same or to surrender the same and receive the surrender value thereof; to cause any lapse or forfeited policy or policies to be reinstated or revived; to collect the proceeds of said policies as and when otherwise and for said purpose the Trustee may institute any suit or suits at law or in equity in order to enforce any such policy, and, in case of controversy or litigation over the collection of same, may adjust, compromise or otherwise settle any controversy or contest concerning said policy or the collection thereof it being understood, however, that the Trustee shall not, except at its option, enter upon or maintain any litigation to enforce any such policy until it shall have been indemnified to its satisfaction against all expenses to which it may be subjected by any such action on its part, but that if it does enter into or maintain any such litigation it shall have the right to reimburse itself from the proceeds of any policy subject to this trust, for such expenses as it may thereby incur; to exercise any right or privilege in respect to any policy subject hereto that may be exercised by the absolute owner thereof, and generally, to do any act or thing in respect to any such policy or policies that could be done by the absolute owner thereof. The Trustee is further authorized to determine, except when otherwise directed in this Indenture, 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; * * *
ITEM TWO: The entire trust estate shall be divided into four separate equal shares and one such share shall be set apart for Grantor's daughter, Margaret Joan Stockstrom, and another such share shall be set apart for Grantor's daughter, Mary E. Stockstrom, and another such share shall be set apart for Grantor's son, Louis Stockstrom II and the remaining share shall be set apart for Grantor's son, Arthur Stockstrom, Jr. Should the Trustee elect to purchase any policy or policies of insurance as authorized in ITEM ONE hereof then division of each such policy of insurance shall be made among the respective shares or portions of the trust estate by apportioning undivided interests in the relative amounts to which such shares or portions respectively may be entitled. Each share set apart as aforesaid although subject to the relevant provisions of this Indenture shall be administered and considered as a separate trust estate.
SEC. A. Each hereinabove named child of Grantor for whom an estate is set apart as hereinabove in this ITEM Two directed shall enjoy such estate in the following manner, that is to say that until such child attains twenty-one years of age the Trustee shall accumulate the net income of his or her said estate and the Trustee may in its discretion from time to time as the Trustee may determine add accumulated income of such child's estate or portion or portions of such accumulated income as the Trustee may determine, to the principle of such child's estate in which event such addition or additions of accumulated income shall become and be administered as a part of the principal of such child's estate. The Trustee may, however, in its discretion invest and reinvest accumulated income with like power as is set forth in ITEM ONE hereof in regard to principal funds, and in such event such funds shall not lose their identity as accumulated income of such child's estate. On the twenty-first birthday of such child the income of his or her estate then accumulated and which shall not have been added to the principal of his or her estate, and the net income of such child's estate thereafter received (including income accrued at the twenty-first birthday of such and thereafter collected) shall until the death of such child be paid to him or her or be accumulated as the Trustee may determine, that is to say, the Trustee shall decide as to the advisability and amount of any disbursement to such child of any current or accumulated income of his or her estate and the decision of the Trustee in such matter shall be conclusive and binding on all parties in interest. Accumulated income of such child's estate after such child attains twenty-one years of age may in the discretion of the Trustee be invested and reinvested with like power as is set forth in ITEM ONE in regard to principal funds.
The beneficiaries under the trust agreement are petitioner's four children, whose names and dates of birth are as follows:
+---------------------------------------+ ¦Arthur Stockstrom, Jr ¦Jan. 9, 1925 ¦ +-------------------------+-------------¦ ¦Louis Stockstrom, II ¦Jan. 9, 1925 ¦ +-------------------------+-------------¦ ¦Mary E. Stockstrom ¦July 27, 1922¦ +-------------------------+-------------¦ ¦Margaret Jones Stockstrom¦Feb. 12, 1920¦ +---------------------------------------+
Pursuant to the terms of the trust agreement, Gladys T. Stockstrom, petitioner's wife, became a cotrustee of the trust on or about May 15, 1937.
For the calendar year 1939, 1940, and 1941 the cotrustees filed for each of the above named beneficiaries a fiduciary income tax return with the collector of internal revenue at St. Louis, Missouri, reporting for each of the beneficiaries taxable income in the amounts of $1,135.34, $1,052.33, and $756.09 for the respective years. Taxes in the amounts of $40.06, $41.30, and $65.16 were paid for each of the beneficiaries for the respective years.
On December 29, 1936, the Security National Bank Savings & Trust Co. of St. Louis, Missouri, acting as trustee under the trust indenture referred to above, applied for Policy No. B-473852 in the Northwestern National Life Insurance Co. of Minneapolis, Minnesota, on the life of petitioner. The amount of the policy is $100,000, which, under the terms of the trust indenture, was divided equally among the four beneficiaries. A photostatic copy of the insurance policy was put in evidence and is incorporated by reference. The application for the policy designated the Security National Bank Savings & Trust Co. of St. Louis as ‘The Beneficiary (The Owner),‘ and on the policy was endorsed the following typewritten statement:
Pursuant to the provisions contained in the application for this policy No. B-473852, it is agreed that this policy shall belong to the Security National Bank of St. Louis, Trustee, (the Owner) and be subject to its exclusive control and disposition, and that the rights reserved to the Insured by the terms of the policy shall accrue to and may be exercised by said Owner without the consent of the Insured.
Dated December 31, 1936
W. M. JOHNSON Ass't. Secretary
Original Beneficiary Designation
Security National Bank of St. Louis, Trustee under written trust agreement dated December 23, 1936, or its successor or successors in trust, on payment of the proceeds of this policy to said trustee or successor or successors, shall fully and finally discharge the Company from all liability, irrevocable.
Dated December 31, 1936
W. M. JOHNSON Ass't. Secretary
The initial premium on this policy was $3,580. The annual premiums thereafter amounted to $3,059. The policy was issued on December 31, 1936, and by its terms it will become a paid-up endowment policy when petitioner reaches the age of 85. Petitioner was born on October 23, 1892. During the taxable years under consideration the trustees paid out of the accumulated income of the trust the amount of the annual premium on the insurance policy. The term ‘accumulated income,‘ by stipulation of the parties, has the same meaning here as in the trust instrument.
Petitioner was never a director, officer, or employee of the Security National Bank Savings & Trust Co. of St. Louis, but in 1929 he owned 3 out of 3,5000 shares outstanding of a par value of $100 each and continued to own same; and in 1940, the par value of the stock having been changed to $25, he received 12 out of 14,000 shares outstanding in exchange for his 3 shares.
In his income tax returns for the taxable years under consideration petitioner did not include any of the income of the trust, but respondent in his deficiency notice determined that the annual premiums on the insurance policy paid by the trustees should be included in the petitioner's income and increased petitioner's taxable income by these amounts.
By stipulation, the claim of deduction of certain trustees' fees and investment and management expenses is waived; and the deduction of $3,275 as bad debts in the calendar year 1941 is agreed to be allowed only in the sum of $1,237.50.
If petitioner had owned life insurance policies written upon his life and then assigned them to a trust which he created for the purpose of using the trust income for the payment of the premiums thereon, the trust income so used would clearly have been taxable to petitioner under section 167(a)(3) of the Internal Revenue Code. Burnet v. Wells, 289 U.S. 670.
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.(a) Where any part of the income: of a trust—(3) 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, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(o), relating to the so-called ‘charitable contribution‘ deduction);then such part of the income of the trust shall be included in computing the net income of the grantor.
Here the petitioner created a trust of which his children, the natural objects of his parental solicitude, were the beneficiaries, and specifically provided that the trustee should have the right to purchase life insurance upon petitioner's life and use the principal or accumulated income of the trust for the payment of premiums upon such policies. This trust was created on December 23, 1936. On December 29, 1936, the trustee applied for a life insurance policy upon the life of petitioner, and such a policy insuring the life of petitioner for $100,000 was issued to the trustee on December 31, 1936. The annual premiums due upon this policy during the taxable years were paid from the accumulated income of the trust.
Does the fact that the insurance upon petitioner's life was taken out directly by the trustee after the creation of the trust instead of by the petitioner himself before the creation of the trust, being later assigned to it by him, prevent the taxation to petitioner of the trust income used for the payment of premiums under section 167(a)(3)? We are of the opinion that it does not. See Alfred F. Pillsbury, 19 B.T.A. 1229; affd., 67 Fed.(2d) 151; Frank C. Rand, 40 B.T.A. 233; affd., 116 Fed.(2) 929; and concurring opinion in Frederick K. Barbour, 39 B.T.A. 910, 915; reversed on other grounds, 122 Fed.(2d) 165.
In order to hold otherwise, it would be necessary to read into the unequivocal provisions of the statute a nonexistent limitation; and such a limitation would open such a loophole in the application of the statute as to completely defeat the legislative purpose. That purpose is to prevent the avoidance of tax by the allocation of income through a trust device to the payment of life insurance premiums, which are universally recognized as a normal expense of protecting dependents but which are personal, as distinguished from business, expenses, and are therefore not deductible from gross income. Whether the trust antedated the policies, or the policies antedated the trust, seems as irrelevant in construing the legislative purpose as any question concerning the chronological priority of the egg and the chicken. The relevant fact is that the income of a trust created by the petitioner for the benefit of his children is authorized by him to be used and is used for the payment of premiums upon policies of insurance on his life, ultimately payable, through the trust, to the children. Under the plain language of the statute the trust income so used is taxable to petitioner.
Our holding upon this issue does not, we think, contravene the due process clause of the Fifth Amendment.
Any controversy on the boundaries of legislative power, Cardozo, J., pointed out, ‘must be dealt with in a large way, as questions of due process always are, not narrowly or pedantically, in slavery to forms or phrases‘ (Burnet v. Wells, supra, pp. 677, 678). In the present case, the policies were not the contracts of the settlor as in Burnet v. Wells, but those of the trustee. In the Wells case undoubtedly the Court emphasizes the fact that the trust income is used for the satisfaction of the settlor's contractual obligations; but it also emphasizes the peace of mind of the settlor which flows from his adopted method of providing for his children and dependents. It upholds the statutory provision, since in general it would apply only to trusts for the care of dependents. Cases beyond the line are left for future determination: ‘The exceptional, if it arises, may have its special rule. ‘ (Ibid, p. 681.)
The petitioner-settlor here allowed the insurance to be laid on his own life, to increase the investment range of a trust which he had created. The proceeds of the policies so purchased would ultimately benefit his own children. The peace of mind which such a settlement would bring to the settlor would not be any different in kind from the repose he would find in having the trust pay premiums on policies which he still nominally owned, or had owned and latter assigned. The trust was specifically authorized to invest its income in such policies on petitioner's life. Within eight days after its creation, the trust acquired such a policy. The guardian hand of the father and settlor reaches out here with every premium payment to protect his children, the beneficiaries, by safeguarding the trust income meant ultimately for them. The trustee opposes no adversary force to the settlor's will, but becomes the willing utensil of his power. It is unnecessary in these circumstances to analyze or define under local law the settlor's legal or equitable interest in a contract which he has authorized to be brought into being for the benefit of persons whose care and protection are the natural objects of his paternal desire and which is paid for by the income from property which he has given to the trust. We can not say in these circumstances that this case is so exceptional as to put it beyond the reach of legislative power and is not covered by the principle set out in the Wells case, supra. That that case did not in its facts go so far in no way vitiates its principle, which still germinates and lives in a different soil and somewhat different circumstances. See Frank C. Rand, supra, p.238.
Reviewed by the Court.
Decision will be entered under Rule 50.