Lamont v. Commissioner , 43 B.T.A. 61 ( 1940 )

ELIZABETH K. LAMONT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lamont v. Commissioner

Docket No. 97407.

United States Board of Tax Appeals

43 B.T.A. 61; 1940 BTA LEXIS 852;

December 11, 1940, Promulgated

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">*852 Short term trusts examined, and upon the facts held that the trust income was not properly included in computing the net income of the settlor, under section 22(a), Revenue Act of 1934, but that, under section 167(a)(1), capital gains accumulated as corpus were properly included in computing petitioner's net income.

Percy W. Crane, Esq., for the petitioner.

Leonard A. Spalding, Jr., Esq., for the respondent.

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DISNEY

">*61 In this proceeding there is involved a deficiency of $360.68, determined by the Commissioner in income tax for the year 1935. The question involved is the taxability to the petitioner of the income of two trusts set up by her. All facts were stipulated, except those adduced by the testimony of one witness. We find the facts to be as stipulated. We epitomize the stipulated facts, and find from the testimony additional facts, all as follows.

FINDINGS OF FACT.

The petitioner, a resident of New York, on January 16, 1928, set up a trust for the benefit of the Lamont Memorial Free Library and certain other educational, charitable, or religious corporate organizations, and in addition one adult individual, who was not">*853 related to petitioner by blood or marriage, nor a member of her household. On January 3, 1931, the petitioner likewise set up another trust for the benefit of the Young Women's Christian Association, two other educational, charitable, or religious corporate organizations, and three individuals, all adult first cousins of the petitioner, but who did not reside with the petitioner and to whom petitioner was under no legal obligation for maintenance and support. The trustee named in both trust instruments was Francis L. Robbins, who is not related to the petitioner by blood or marriage, but has been her attorney ">*62 and personal friend for many years. Each trust was for a period of the life of petitioner, or a period of approximately one year, that is, the first trust should terminate upon petitioner's death, or upon December 31, 1928, whichever date should first occur, and the second trust should terminate upon petitioner's death, or January 10, 1932, whichever date should first occur. The term of each trust was successively extended year by year by written extensions of approximately one year each (with provision for termination in the meantime upon petitioner's death) until">*854 January 10, 1938, upon which date both trusts terminated and the corpus in each trust was transferred and paid over to the petitioner. Both trusts were created by the petitioner for the purpose of minimizing her tax burden, through the exclusion from her taxable income of the imcome distributed to the individual beneficiaries, or by increasing the tax benefit from charitable contributions which might otherwise exceed the 15 percent limitation provided by law, or both. The petitioner, at the time of creation of the trusts and from time to time thereafter, indicated to the trustee how she would like to have the income distributed and the trustee made distributions in accordance with her wishes. No part of the net income of the trusts was paid to the petitioner.

Each of the trusts provided, in pertinent part, as follows: That certain stocks and bonds were transferred and that others might later be delivered in trust to pay the net income, in such proportions as the trustee in his absolute discretion may determine, to certain beneficiaries named; that, upon the death of the settlor prior to the date of termination of the trust, the trustee should transfer and pay the principal of">*855 the trust to the settlor's executors, administrators, or assigns, and to the settlor, if living, or her assigns; that the trustee in his discretion should hold, sell, convey, mortgage, or pledge the trust corpus, and invest the proceeds thereof, as he in his absolute discretion should deem proper; that the settlor might at any time and from time to time withdraw from the trust fund the whole or any part of the trust corpus, substituting in her absolute discretion other securities or property of the same or substantially the same fair market value, to be held by the trustee subject to the trust; that the trustee might in his discretion and upon such terms as he should deem proper exchange the securities held by the trust for other securities issued by the same or any other corporation, and might assent to consolidation or merger of any corporation the securities of which were held in trust and to the lease by such corporation or company of its property to any other corporation or company, and upon any such consolidation, merger, lease, or similar arrangement might exchange the securities held in trust for other securities issued in connection with such arrangement; that the trustee">*856 might generally exercise as to the trust securities all rights exercised by ">*63 persons owning similar property in their own right; and that no bond should be required of the trustee for faithful performance of duty.

The trustee, Francis L. Robbins, Jr., is a member of a firm of lawyers. At the time of the hearing he had known the petitioner for 34 years and had been her attorney for 29 years. At the time of the creation of the two trusts, not knowing what the changes might be in the condition of the beneficiaries, he advised her to make short term trusts, which might be renewed indefinitely. He was familiar with petitioner's business affairs and advised her with reference thereto. He was entirely familiar, both as petitioner's friend and counselor, with the gifts she made to individuals and to charitable, religious, and educational organizations. The petitioner in conversations with him put no limitation upon his exercise of discretion in the performance of his duty as trustee, and he never at any time told her that he was doing only what she had asked him to do. In fact, the distributions made by him as trustee have generally been in accord with petitioner's wishes. ">*857 Petitioner never said to him that she required or expected him to do just as she requested, and he never promised that he would do only as she requested. Towards the end of each year he would ask her if she would let him know what payments she had made on her own account to certain of the charitable institutions and individual beneficiaries, so that he would know what she had done and might supplement the income available to be distributed at the end of the year. From time to time he would discuss with her what income distributions he had made, and in some cases she would write for a statement, so that she would know what income he had distributed. He was entirely free to distribute to any one of the beneficiaries without consulting her, but, excepy for very good reasons, would not have done it because he would have felt he was taking a little too much on himself, and there was no good reason why he should give the income to one beneficiary. He did in the taxable year 1938 distribute the entire taxable income of one of the trusts to the Lamont Memorial Free Library, although there were other beneficiaries listed in the trust. He was familiar with petitioner's business affairs">*858 and give her financial advice and had always managed her business affairs as her attorney; also those of her mother, who died in 1917. In managing her affairs, he acted under a power of attorney in may cases, and as trustee, as in the two trusts here involved. He never had any disagreements with her about investments. She has always been satisfied. He has never taken a statutory fee from the petitioner for trustee's services, but his firm sends a bill to her to reimburse it for the time spent in connection with the trusts, the bill usually being more than the statutory commission. The trustee's from is not on an annual retainer ">*64 with petitioner, but upon a fee basis, and that has been the arrangement since 1911. The trustee's firm has for many years received substantial fees from the petitioner, not only for management of the trusts here involved, but for other services in managing the petitioner's affairs. The petitioner was away for long periods of time and the trustee made distributions without consulting her, but would write about the matter. Generally, he discussed the matter and the distribution of income with her. At the end of the year he might ask her what">*859 she had given to a certain beneficiary to determine whether he should allocate some of the income to such beneficiary. There was no oral or written agreement between the trustee and the petitioner with respect to the trusts, other than the provisions contained tained in the two trust instruments. Capital gains were not distributed, but retained as corpus of the trust.

For the year 1935 the net income of the trust set up in 1928, as reported in its fiduciary return, Form 1041, and the amounts distributed were as follows:

Gross income: Dividends		$4,043.77
Deductions:
Taxes	$0.04
Other deductions	221.87	221.91
Net income		3,821.86
Distributed to Lamont Memorial Library		3,821.86

For the year 1935 the net income of the trust set up in 1931, as reported in its fiduciary return, Form 1041, and the amounts distributed were as follows:

Income:
Interest (not tax free covenant)		$1,930.00
Interest (tax free covenant)		539.77
		2,469.77
Dividends		1,776.00
Capital gain		1,293.45
Gross income		5,539.22
Deductions:
Taxes	$33.66
Other deductions	161,71	195.37
Net income		5,343.85
Distributions:
Benjamin I. Kinney	1,800.00
Julia K. Roberts	1,950.00
Retained by trustee as income accumulated for future distribution and reported by the trustee as taxable to him	1,593.85
		5,343.85

">*860 ">*65 The respondent included in petitioner's income for 1935 all of the $4,043.77 income reported as to the first, or Library trust, except $900, nontaxable dividends received. Deductions claimed were allowed and the distribution to the Lamont Memorial Free Library of $3,821.86 was allowed as a charitable contribution. As to the second, or Y.W.C.A. trust, the respondent included in petitioner's income all of the $5,539.22 income reported and allowed the deductions claimed. He also determined that no tax was owing by the trustee and that there was an overassessment as to the trust of $17.69. The trustee on March 6, 1939, filed with the collector a claim for refund of $17.69. No disposition of the claim has yet been made.

OPINION.

DISNEY: We have for consideration here, in substance, one-year trusts containing no power of revocation, with beneficiaries in part of charitable, educational, or religious organizations, and in part of individuals. In one trust the individual is not a relative of the trustor; in the other the individuals were the settlor's first cousins. However, none of the individuals were menbers of the settlor's household, and to none did the settlor">*861 owe any obligation of support. All were adults. The trustee was neither a relative of the settlor, nor a member of her household. He was, however, her intimate friend and attorney for many years and had for many years given her financial adivice and managed her affairs.

Is the income of such trusts taxable to the settlor? The petitioner takes the view that the whole income was that of the two trusts. The Commissioner in determining the deficiency held that the trust income was that of the petitioner as settlor, "in accordance with the provisions of section 166 of the Revenue Act of 1934", and the regulations based thereon. Upon brief, he does not rely on section 166, his position being, first, that the trust income is taxable to the settlor under section 22(a) of the Revenue Act of 1034; second, that there was in effect a mere assignment of future income by the petitioner; and, third, that certain capital gain reported by one of the trusts is taxable to the settlor under section 167(a)(1) of the Revenue Act of 1934.

The petitioner admits that the trusts were set up for tax-saving reasons. That is immaterial, under authority too well settled to require citation.

">*862 Do the principles announced in Helvering v. Clifford,309 U.S. 331">309 U.S. 331, principally relied upon by the respondent, apply to the facts here involved? The petitioner contends in sum that the doctrine of family solidarity is there controlling, but is absent herein, while the respondent argues that, though not parallel in fact, the case in ">*66 principle is determinative here, where the trusts are for the short period of one year and the trustee, though not a member of the family group, is a long-time intimate friend and attorney and because of such relation is subject to the influence of the settlor in a manner and to an extent analogous to that of a member of the family in the Clifford case. In his view, the settlor in substance did not alter her position of control of the income, under section 22(a) of the Revenue Act of 1934.

After review of the Clifford case and others touching this subject, we come to the conclusion that there is not evident in the trusts such retention of control by the settlor as to cause taxation of the trust income to her. The trusts were for a short period, but during that period they were irrevocable. Neither trustee nor">*863 beneficiaries were members of the settlor's family group, though in one trust three individual beneficiaries were her first cousins. She had no legal duty to support them. In the case of one trust, practically all of the income of the taxable year went to an educational corporation; in the other, approximately two-thirds of the income went to individuals and about one-third was accumulated for future distribution. The petitioner-settlor retained no discretion or power, save that of substitution of securities of equal value for those in trust. The respondent suggests that she might have destroyed the income of the trusts by substituting non-income-producing securities. We see no materiality in such a possibility. The trustee had full and complete discretion as to management and disposition of trust corpus, and of distribution among the beneficiaries. The respondent urges that she did make suggestions as to distribution of the income and that the trustee-attorney was in no position, in effect, to oppose her wishes. In fact, distributions were made in her absence and without her advice or consent, though it is plain that in general she knew what was being done, for the matters">*864 were discussed by her and the trustee. He would have felt free, he said, to disregard her wishes had he at any time considered her unwise. Though in fact such never occurred, it is not to be denied that the trust instrument gave him full freedom from control by the settlor. Though no doubt the fact of the relation of attorney and client and fees to be earned by the attorney or his firm in the settlor's affairs would have effect upon his mind, and we do not blind ourselves to such realities, nevertheless, we think the same may be said, in some degree, of almost any trustee which serves for hire. Disagreement with a settlor would, no doubt, in general be avoided, if reasonably possible. If the idea of family relationship and influence as involved in the Clifford case is to be extended, we see no line of demarcation, and the ordinary commercial truster, such as a trust company, might ">*67 be said to be under the influence of its client-settlor. We think the Supreme Court in 309 U.S. 331">Helvering v. Clifford, supra, indicated a fair limit to consideration of influence upon the trustee in the absence of legal control in the trust instrument. ">*865 "Where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary * * *." We can not believe that the Court intended to disregard the trust where neither of these circumstances is present and where, instead of the broad powers in the trustee-trustor there considered, the trustor has no discretion or power whatever, except to substitute securities of equal value. The respondent, however, relies also upon the shortness of the trust term, much shorter here than in the Clifford case, and urges that such element alone is sufficient to sustain his position here. The fact of short term is to be considered, under the Clifford case, but also under that case "no one fact is normally decisive," so we can and do consider it only as cumulative. We think the addition does not reasonably cause treatment of the income as that of the settlor. In Helvering v. Achelis, 112 Fed.(2d) 929, the court considered a trust of about five years, with an educational corporation as beneficiary, and no power over the property left in the trustor. Discussing the effect of the Clifford case, the court said in">*866 part:

* * * The rationale of that decision was that the nexus of powers reserved by the settlor so nearly approached full dominion as to be its equivalent; the court did not suggest that the settlor of a trust could not so completely sever himself from the income of property, for a period - even a short period - as to make it no longer his. We should hesitate to assume that the contrary was intended. Probably it is true that this lady sought this means of enlarging the exemption of fifteen per cent which the statute allowed her for educational gifts. By stripping herself for the period in question of all command whatever over the income, she succeeded; for it has been held again and again that the motive in such situations is irrelevant. 300 U.S. 5">Kraft v. Commissioner, supra.

The respondent cites, with other cases found less parallel to this one, Graham Sumner,40 B.T.A. 811">40 B.T.A. 811, wherein was involved a one-year trust. But, as emphasized in the headnote to that proceeding, the settlor was trustee and the family group idea was present, since the trustor-trustee's wife was beneficiary. We said: "* * * here we have the minimun indicia of a separation of individual">*867 and trustee ownership." The case does not turn upon the thought of one-year trust. In United States v. First National Bank of Birmingham, 74 Fed.(2d) 360, a one-year trust was involved, with an educational foundation as beneficiary, and the income was held not to be that of the grantor, though it was contended that the grantor exercised power to possess and use the net income for his own purposes. In Benjamin F. Wollman,31 B.T.A. 37">31 B.T.A. 37, the trust was for one year ">*68 and the income was held to be that of the trustor, but the trustor was trustee, his wife was beneficiary, and broad powers were exercised by the trustor. In Dunlevy Milbank,41 B.T.A. 1014">41 B.T.A. 1014, we held that two short term trusts, one of three years and one of five years, with grantor's sister-in-law and uncle as beneficiaries, respectively, and his wife as trustee, were not within the scope of the Clifford case, distinguishing it with respect to control retained by the grantor's relationship of beneficiaries and identity of the trustee. We pointed out that the beneficiaries were not of the grantor's immediate family circle, and there was no duty on the part">*868 of grantor to support them; also that the grantor was not trustee and retained no control over trust principal.

We conclude and hold, upon consideration of the term of trust, and relationship of trustor, trustees, and beneficiaries and the powers remaining in the trustor, that such elements of ownership did not remain in the trustor as to require taxation of the income to her under the broad terms of section 22(a) of the Revenue Act of 1934.

We next consider whether the trusts here involved constituted mere assignments of income. The respondent relies chiefly upon Lucas v. Earl,281 U.S. 111">281 U.S. 111, and Burnet v. Leininger,285 U.S. 136">285 U.S. 136. The petitioner points out that they involve true assignments of future earnings, and not property from which income is derived, as here placed in trust. He cites Nelson v. Ferguson, 56 Fed.(2d) 121, and comments upon Blair v. Commissioner,300 U.S. 5">300 U.S. 5, as indicative that an assignment by a beneficiary under a trust was one of a property right in the trust corpus, and not merely of income. Here there was also assignment of property, to wit, stock and bonds, in trust, ">*869 in due form of law, and the income involved is derived therefrom. We conclude and hold that there was no mere assignment of income, and that the petitioner is not taxable with the income upon such theory.

Lastly, we have for consideration the position of $1,293.45 capital gain reported by the second or "Y.W.C.A." trust. The respondent takes the position that such capital gain must be treated as principal and returned to the petitioner at the termination of the trust, and that therefore under section 167(a)(1) of the Revenue Act of 1934, ¹ the income is taxable to the grantor-petitioner. The trustee's income tax report for the year 1935 included $1,293.45 as taxable ">*69 gain "retained by Trustee as income accumulated for future distribution and reported by the Trustee as taxable to him." The petitioner was a resident of New York. The law of that state is that capital gains received by a trust constitute corpus, in the absence of provision in the trust instrument. No provision of the trust instrument indicates otherwise. The evidence shows that the parties to the trust instrument interpreted it as providing that capital gains should be corpus. The capital gains were">*870 not actually distributed to the beneficiaries. We conclude therefore that such capital gains were, within the purview of section 167(a)(1) of the Revenue Act of 1934, "held or accumulated for future distribution to the grantor," who took the principal of the trust upon termination thereof; and that therefore the amount of such capital gain was properly included in computing the petitioner's net income.

Decision will be entered under Rule 50.

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Footnotes

• 1. 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;

  * * *

  then such part of the income of the trust shall be included in computing the net income of the grantor. ↩