Docket Nos. 666 1126.
Harry Thom, Esq., for the petitioner. Lester M. Ponder, Esq., for the respondent.
Petitioner created a trust in 1935, to which he transferred six policies of insurance on his life, and certain securities. Petitioner reserved the right to add other insurance policies to the trust, and provided that the premiums on all policies forming a part of the trust should be paid out of the trust income. During the years in controversy there was in existence one other policy upon petitioner's life, which was not a part of the trust, upon which petitioner paid the premiums. The trust each year
paid the premiums on the policies forming a part of the trust corpus and petitioner reported the amounts thereof as taxable to him. Held, the balance of the trust income is not taxable to petitioner under section 22(a), 166, or 167, Revenue Act of 1938 and the Internal Revenue Code. Harry Thom, Esq., for the petitioner. Lester M. Ponder, Esq., for the respondent.
The respondent determined deficiencies in income tax against Joseph Weil for the years 1938, 1939, 1940, and 1941 in the respective amounts of $879.02, $675.59, $1,516, and $2,074.34.
The only issue now in controversy is whether the income from a trust created by the petitioner on December 3, 1935, is taxable to him under section 22(a), 166, or 167 of the Revenue Act of 1938 and the Internal Revenue Code. The respondent also increased the petitioner's income for 1938 by $601.69, representing additional compensation received by him in that year. The petitioner concedes the correctness of that adjustment and effect will be given thereto under Rule 50.
FINDINGS OF FACT.
The facts have been stipulated by the parties and as so stipulated we adopt them as our findings of fact. In so far as material to the issue presented, they may be summarized as follows:
The petitioner is a resident of Chicago, Illinois. His income tax returns for the years in controversy were filed with the collector of internal revenue at Chicago, Illinois.
On December 3, 1935, the petitioner created a trust known as the Blanch Weil trust, naming himself trustee. To this trust he assigned six life insurance policies of a total maturity value of $60,000 which he had previously taken out on his own life. He also transferred to the trust certain securities which he had owned prior to the date of the creation of the trust, the value of which is not shown.
The trust instrument provided that the net income of the trust properties should be used to pay all premiums, assessments, and charges necessary to keep the insurance policies in force, as well as all other policies which might thereafter be transferred to the trust. It was provided that if the income were not sufficient for this purpose the principal of the trust might be used and that ‘my determination that such invasion of principal is necessary shall be conclusive on all the beneficiaries thereunder.‘
As trustee the petitioner retained broad powers of management of the trust estate, including the power to exercise any and all options or rights under the policies, to obtain loans on the policies in order to pay the premiums, to surrender the said policies at any time, to add further insurance policies or other property to the trust estate, and to make investments without regard to restrictions imposed by law on the character of investments to be made by trustees.
So much of the net income as was not needed to pay the premiums on the insurance policies was to be accumulated and added to the trust corpus until the death of the petitioner, after which distributions were to be made as follows:
1. The entire net income of the trust was to be paid to the petitioner's wife, Blanch Weil, during her lifetime.
2. Upon the death of the survivor of the petitioner and his wife, or when their son, David Weil, should reach the age of 25, whichever event should last occur, one-half of the principal was to be paid to David Weil. The remaining half of the principal was to be paid to the petitioner's son upon his reaching the age of 30 or upon the death of the survivor of the petitioner and his wife, whichever event should last occur. If both the petitioner and his wife died before David Weil reached the age of 30, the net income of the trust was to be paid to him until he reached such age.
3. If the son survived the petitioner but did not survive the time fixed for final distribution of the trust estate to him, then upon his death or that of the petitioner's wife, whichever should be the last to occur, the principal of the trust estate was to go to the persons appointed by the son in his will, or in default of such an appointment to the son's heirs, and in default of both, to the Jewish Charities of Chicago.
4. In the event that the petitioner survived both his wife and son the total of all the properties were to revert to him, absolutely free and clear of the trust.
By its terms the trust could be revoked at any time during the petitioner's life by an instrument in writing, signed and acknowledge by the petitioner's wife and son, or the survivor of them. Upon such revocation title to all trust property vested in petitioner. In all other respects the trust was irrevocable.
At the time the trust was created the petitioner was 62 years of age, his wife, Blanch Weil, was 54, and their only child, David Weil, was 23.
During the years in controversy, besides those which had been transferred to the trust, three other insurance policies were in existence on the petitioner's life, all of which had been taken out by him prior to the creation of the trust. Two of these were paid-up policies. The petitioner paid premiums on the third policy, known as policy number 3068693, in the following amounts for the years stated:
+-------------+ ¦1938¦$899.25 ¦ +----+--------¦ ¦1939¦968.25 ¦ +----+--------¦ ¦1940¦952.00 ¦ +----+--------¦ ¦1941¦957.00 ¦ +-------------+
Neither the petitioner nor any member of his family was, or is, an employee, officer, or director of any of the corporations whose securities were transferred to the trust, and no member of his family had, or has, any interest in any of these corporations other than as an investor.
During all of the times herein material a separate bank account and a separate set of books were maintained for the trust. The trust assets were not commingled with the petitioner's personal assets, but were kept in a separate safe deposit box.
On or about April 2, 1936, the petitioner filed a gift tax return in which he listed all of the properties transferred to the trust at their full value, without any diminution for any reversionary or other interest, if any, in said property, and paid the amount of gift tax due thereon.
On July 31, 1940, the petitioner resigned as trustee of the trust and his son, David Weil, succeeded him as trustee.
The premiums due on the insurance policies which had been transferred to the trust were paid in the years 1938, 1939, 1940, and 1941 out of the trust income. The amounts of such premiums were as follows:
+---------------+ ¦1938¦$1,890.55 ¦ +----+----------¦ ¦1939¦1,949.95 ¦ +----+----------¦ ¦1940¦1,890.65 ¦ +----+----------¦ ¦1941¦1,884.20 ¦ +---------------+
These amounts were included by the petitioner in his taxable income for the respective years and he paid income tax thereon. The trustee filed a fiduciary return for each of the above years, in which he reported the balance of the trust income and paid the tax due thereon.
The respondent determined that the entire income of the trust was taxable to the petitioner and assessed the deficiencies above noted.
VAN FOSSAN, Judge:
The issue for our determination in these cases is whether the entire income of the Blanch Weil trust is taxable to the petitioner under section 22(a), 166 or 167 of the Revenue Act of 1938 and the Internal Revenue Code. The petitioner concedes that under the provisions of section 167(a)(3) that portion of the trust income is taxable to him which was used to pay the premiums on the insurance policies constituting a part of the trust corpus. He denies, however, that the balance of such income was taxable to him.
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(d, 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.
To be rendered liable for taxes on the trust income under section 22(a) the petitioner must have retained such control over the trust estate that he remain in substance the owner of the trust corpus, and consequently is to be treated as such for income tax purposes. Helvering v. Clifford, 309 U.S. 331.
In the instant cases the broad powers of management retained by the petitioner as trustee were the usual broad powers of management vested in trustees. No part of the trust income could be distributed to him, but was to be accumulated until his death. The petitioner had no power to revoke the trust or revest the trust properties in himself. The most he had was a possibility of reverter in the event he survived both his wife and son. Such a possibility is to remote to fix liability under section 22(a). See Commissioner v. Branch, 114 Fed. (2d) 985, and Commissioner v. Betts, 123 Fed.(2d) 534.
While it is true that the beneficiaries of the trust were the petitioner's wife and son, this did not result, as contended by the respondent, in a ‘temporary reallocation of income within an intimate family group,‘ see Helvering v. Clifford, supra, since no income was to be distributed during the petitioner's life, but was to be accumulated until after his death.
The petitioner retained no power to change the beneficiaries of the trust or to reapportion the income among existing beneficiaries. It is thus apparent that the petitioner had given up all substantial control over the trust income. He therefore can not be held taxable under section 22(a), for, as said in Commissioner v. Branch, supra:
* * * Where the grantor has stripped himself of all command over the income for an indefinite period, and in all probability, under the terms of the trust instrument, will never regain beneficial ownership of the corpus, there seems to be no statutory basis for treating the income as that of the grantor under Section 22(a) merely because he has made himself trustee with broad power in that capacity to manage the trust estate.
In his notice of deficiency the respondent relied also upon section 166 as a basis for taxing to the petitioner the income of the trust. He has evidently abandoned this contention, however, for in his brief he makes no argument urging the applicability of this section. We shall, therefore, not dwell upon the section in detail, but merely point out that a similar contention was rejected in Commissioner v. Betts, supra, which we here follow.
The major portion of the respondent's brief is devoted to his contention that the trust income was taxable to the petitioner under section 167. He argues that, because the trust instrument provides that the petitioner may add other insurance policies to the trust, the premiums upon which would be paid out of the trust income, therefore, the entire income of the trust may be applied to the payment of premiums on insurance policies on the life of the petitioner, and hence the entire income of the trust is taxable to the petitioner under section 167(a)(3).
A similar argument was presented in Genevieve F. Moore, 39 B.T.A. 808. In rejecting the respondent's contention, we said:
* * * application of the provision in question depends upon the existence in the tax year of policies upon which it would have been physically possible for the trustees to pay premiums and upon the amount of the premiums so payable. The same rule was applied in Frank C. Rand, 40 B.T.A. 233; affd., 116 Fed.(2d) 929; certiorari denied, 313 U.S. 594.
The respondent, however, asserts that these cases have, in effect, been overruled by Helvering v. Stuart, 317 U.S. 154. That case involved a trust created for the benefit of the grantor's minor child. The trustees were directed to pay to the beneficiary so much of the trust income or to apply so much of the income for his education or maintenance as to them should seem advisable. Only a part of the trust income was actually used for this purpose. The Supreme Court nevertheless held the entire income of the trust taxable to the grantor under section 167(a)(2), saying:
* * * The applicable statute says, ‘Where any part of the income * * * may * * * be distributed to the grantor * * * then such part * * * shall be included in computing the net income of the grantor.‘ Under such a provision the possibility of the use of the income to relieve the grantor, pro tanto, of his parental obligation is sufficient to bring the entire income of these trusts for minors within the rule of attribution laid down in Douglas v. Willcuts.
We are unable to give to the Stuart case the construction for which the respondent contends. To do so, we think, would unduly extent the doctrine of that case. The Court carefully limited the scope of its decision to the facts before it, and we see no reason for extending the doctrine of the case to the cases at bar, involving wholly different facts and a different statutory provision.
We, therefore, adhere to our previous decisions on this matter. Under these decisions, as has been shown, the grantor's liability for tax depends upon the existence in the tax year of policies upon which it would have been physically possible for the trustees to pay premiums. There was in existence during the taxable years no policy that fell in the described category. Petitioner, as an individual, owned and paid the premiums on one other policy, but the trust instrument gave the trustee no power to pay such premiums. We can not approve respondent's contention.
Decision will be entered under Rule 50.