Docket Nos. 110686 111713.
Percy W. Phillips, Esq., for the petitioner. Brooks Fullerton, Esq., for the respondent.
The income from trusts for the benefit of donor's children who had become of age, distributable directly to them when attaining that age, upon the donor's written order, and in amounts determined by him, held not taxable to donor. Percy W. Phillips, Esq., for the petitioner. Brooks Fullerton, Esq., for the respondent.
The respondent determined deficiencies in the petitioner's income taxes for the years 1936, 1937, 1938, and 1939 in the amounts of $18,135.86, $39,868.28, $4,211.30, and $5,418.03, respectively. Several issues were settled by agreement and concession. The sole issue remaining in controversy is whether or not income from certain trusts established by the petitioner for the benefit of his children is taxable to him after such beneficiaries attained their majority.
FINDINGS OF FACT.
The facts material to the single issue before us are as follows:
The petitioner is an individual residing at York, Pennsylvania. He filed his income tax returns for the taxable years with the collector of internal revenue for the first district of Pennsylvania.
On June 12, 1935, the petitioner created four trusts, identical in form, for the benefit of each of his minor children. Virginia Whiteley, Morgan S. Whiteley, Purdon B. Whiteley, and George H. Whiteley, III, and known as trusts Nos. 100, 200, 300, and 400, respectively. Virginia and George H. Whiteley, III, became of age on December 2, 1935, and March 12, 1938, respectively. Morgan S. Whiteley and Purdon B. Whiteley were not of age during the taxable years. The First National Bank of York, Pennsylvania, was named trustee in all of the trusts.
The trusts contained the following typical preamble:
Whereas, the Donor desires to assign, transfer and deliver to the Trustee, certain securities hereinafter described for the purpose of creating a voluntary living irrevocable trust * * * .
Each corpus was 1,000 shares of the common stock of the Dentists' Supply Co. of New York, hereinafter called Supply. The following are pertinent excerpts from the trust:
To pay the income from this trust to the Donor, as, if and when ordered in writing by him to do so, during the minority of his daughter, Virginia Whiteley, to be used solely and entirely by him for her support, maintenance, education and enjoyment. If any income is accumulated and not distributed during the minority of the said Virginia Whiteley, such income shall be invested in securities if ordered and approved by the Donor, not limited to investments that are legal for trust funds in the State of Pennsylvania, and become part of the corpus of this trust. Upon her attaining the age of twenty-one years, the Trustee shall distribute and pay over direct to the said Virginia Whiteley, the income from this trust fund and any of the corpus in such amounts and at such times as the Donor in writing orders such distribution or distributions to be made.
If Purdon Smith Whiteley, wife of the Donor, survives the Donor, she shall succeed to and have the same rights as to ordering and directing distribution of the corpus and income of this trust and investment of undistributed income, as hereinabove provided for the Donor.
Upon the death of the survivor of the Donor and his wife, Purdon Smith Whiteley, the Trustee is hereby directed and authorized to distribute and pay unto Virginia Whiteley, the daughter of the donor, in quarterly installments, the income from this trust, and upon the death of Virginia Whiteley, if she dies without a child or children surviving her, the corpus of this trust fund shall be divided, share and share alike, and added to the similar trusts created even date herewith in favor of George H. Whiteley, III, Morgan S. Whiteley and Purdon B. Whiteley, and be subject to the terms thereof. If Virginia Whiteley dies leaving a child or children to survive her, the corpus of this trust shall remain intact and the income therefrom distributed, share and share alike, among such surviving children, during their respective minorities, if necessary and required for their support, maintenance or education, and upon each of said children attaining the age of twenty-one years, the Trustee shall transfer and set over to such child as he or she attains the age of twenty-one years, his or her equal share of the corpus of this trust including accumulated income, with the right of survivorship among such surviving children in the event of the death of any prior to attaining the age of twenty-one years, and in the event of all of such surviving children dying before attaining the age of twenty-one years, the corpus of this trust fund shall be distributed equally and added to the similar trusts created even date herewith for my other children, George H. Whiteley, III, Morgan S. Whiteley, and Purdon B. Whiteley, and be subject to the terms of their trusts.
During the life of the Donor, and if his wife survives him, during her life, all investments and reinvestments shall be made only by and with the approval of the Donor herein and after his death with the approval of his wife, Purdon Smith Whiteley, if she survives him, and when thus made the Trustee hereunder shall be without liability or responsibility to any person whatsoever.
POWERS OF DONOR
First: To vote at corporate meetings in person or by proxy; with or without power of substitution, all shares of stock constituting part of this trust. The wife of the Donor shall succeed to this power and right during her lifetime, if she survives the Donor. After the decease of the survivor of the Donor and his wife, the Trustee shall exercise this right and power.
Second: The Donor reserves the right to add to the investments, securities, or other property, real or personal, to the corpus of the fund herein created as he may in his discretion, from time to time deem advisable, the same to be thereafter held subject to the terms and conditions hereof.
The trustee was given broad powers of management. It was required, however, to retain the 1,000 shares of Supply stock and not to sell it or substitute other securities for it unless the donor, during his lifetime, or his wife, after his death, should consent to such action. It was authorized to make distributions in cash or in kind at values to be fixed by it. The following specific power was included:
From the date of death of the Donor, George H. Whiteley, and his wife, Purdon Smith Whiteley, the Trustee is authorized, directed and empowered to distribute and use any part of the corpus and/or income of this trust fund as in its opinion, in the exercise of its sole and uncontrolled judgment, may be proper for the comfort, education, maintenance and support of any beneficiary, or that might be necessary as the result of sickness or emergency.
The trustee was exonerated from liability for all payments made pursuant to such authority. It could also borrow money for the trust estate and secure the loan by hypothecating trust securities.
The provisions in the trust instrument relating to the distribution of the corpus, upon the beneficiary becoming of age, in such amounts and at such times as the donor in writing may order, were inserted to enable his children to benefit from the trusts if the corpora thereof should fail to yield income. The donor retained the power to make such distributions because the corpus was Supply Co. stock, of which company the petitioner was an officer and director. He felt he was in a position to know the financial condition and progress of Supply and that he and his wife were aware of their children's needs and could better decide what was to their best advantage, thereby securing to their children the maximum income from the trusts by the exercise of such power on the part of their parents. The donor expressed his purposes in so establishing the trusts to his attorney and to the trustee at the time of drafting the trust instrument.
The same underlying reasons apply to the provisions of prohibiting the sale of Supply stock without the consent of the donor or his wife (in case of his death), reserving the right to vote the shares of stock comprising part of the trust corpus, and governing the making of investments or reinvestments.
At the time the trusts were established the petitioner held about 20,000 of the 300,000 outstanding shares of Supply stock. Supply had been in existence for over 40 years and there had never been any dissension among the stockholders. The 4,000 shares constituting the trust corpora did not represent balance of power in voting the stock. No part of the corpus of any of the trusts has been distributed to the children. Since the beneficiaries have reached the age of 21 years, all the income has been paid over to them.
The law of Pennsylvania provides:
Sec. 3251. Trusts for accumulation regulated; certain trusts excepted; not to prevent payment for maintenance; termination by agreement.
No person or persons shall, after the passing of this act, by any deed, will or otherwise, settle or dispose of any real or personal property. so and in such manner that the rents, issues, interest, or profits thereof shall be wholly or partially accumulated for any longer term than the life or lives of any such grantor or grantors, settler or settlers, or testator, and the term of twenty-one years from the death of any such grantor, settler, or testator, that is to say, only after such decease during the minority or respective minorities with allowance for the period of gestation of any person or persons, who, under the uses or trusts of the deed, will, or other assurance directing such accumulation, would, for the time being, if of full age, be entitled unto the rents, issues, interest, and profits so directed to accumulate, and in every case where any accumulation shall be directed otherwise than as aforesaid, such direction shall be null and void in so far as it shall exceed the limits of this act, and the rents, issues, interests and profits, so directed to be accumulated contrary to the provisions of this act, shall go to and be received by such person or persons as would have been entitled thereto if such accumulation had not been directed. * * * (Decedents' and Trust Estates, Title 20, Sec. 3251, Purdon's Pennsylvania Statutes.)
The rights and powers reserved to the petitioner donor did not constitute the equivalent of ownership of the trust corpus or income.
VAN FOSSAN, Judge:
The single issue is whether the income of trust No. 100 and trust No. 400 was taxable to the petitioner grantor after the respective beneficiaries thereof became of age. The petitioner makes no contention that the income is not taxable to him during the minority of the beneficiaries. See George H. Whiteley, Jr., 42 B.T.A. 402; affd. (C.C.A. 3d Cir.) 120 Fed.(2d) 782.
The determination of this question rests on the proper application of section 22(a), Revenue Act of 1936 and 1938, to the facts before us in the light of Helvering v. Clifford, 309 U.S. 331, and Helvering v. Stuart, 317 U.S. 154.
The respondent has carefully combed the trust instrument and has found the following rights reserved which, he argues, constitute the incidents of ownership in the donor sufficient to charge him with the taxable income therefrom: (1) to approve all investments and reinvestments; (2) to determine what portion of the income or corpus shall be paid to the beneficiaries after they attain their majority; (3) to vote all shares of stock in the trust; and (4) ‘the trustee was prohibited from selling or exchanging the stock of the Dentists' Supply Company of New York, except in a consolidation or merger, or if the stock became a bad investment, and in those cases only with the approval of the donor or his wife, if she survived him.‘
In opposition to these powers of the donor, we find that the trust was irrevocable and was for a long term. The bank was named as the trustee and was given broad powers of management. The donor divested himself absolutely of the property and had no right of reversion or right to recover any share of the corpus. The donor had no right to share in any income in any event. Since the beneficiaries presently before us are of age, there is involved no right to or duty of parental support. No question of the bona fides of the trust is suggested.
Cases of this type, involving the taxability of trusts, are seldom easy of decision. No two are exactly alike. Each case requires the study of the powers reserved to the donor and of his opportunity to benefit under the trust, either immediately or at some future time. The adjudicated cases indicate that no single factor is determinative— a fact may be vital in the background of one case and of small importance in another situation. Reduced to its essence, the decision of such a case requires a nice balancing of the powers and rights granted to the trustee and beneficiary and those retained by the donor, to the end of determining where lies the real right of ownership of the income.
While recognizing the merit of respondent's position, after carefully weighing the facts before us in the light of the above considerations, we have come to the conclusion that the present case falls without the scope of the line of cases stemming from Helvering v. Clifford, supra, and that the petitioner is not taxable on the income of the trust distributable to the adult beneficiaries. In our judgment the bundle of rights which the donor retained were not the equivalent of ownership contemplated by the cited case.
Decision will be entered under Rule 50.