Peierls v. Commissioner , 12 T.C. 741 ( 1949 )

Edgar S. Peierls, Petitioner, v. Commissioner of Internal Revenue, Respondent

Peierls v. Commissioner

Docket No. 17363

United States Tax Court

12 T.C. 741; 1949 U.S. Tax Ct. LEXIS 201;

May 12, 1949, Promulgated

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Decision will be entered for the respondent.

Trustees of trust created by grantor for benefit of his two minor daughters distributed $ 4,067.71 of the income of trust for 1943 to the guardian of children for their support, education, and maintenance. A small part of the amount distributed was not used by guardian during 1943 and no attempt was made by trustees to recover it. Held, under the provisions of section 167 (c), the entire amount distributed is includible in the taxable income of grantor.

James Allen Bernson, Esq., for the petitioner.

Charles R. Johnston, Esq., and John E. Mahoney, Esq., for the respondent.

Harlan, Judge.

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HARLAN

The respondent determined a deficiency in income tax in the amount of $ 413.73 for the calendar year 1943. The sole question is whether amounts distributed in 1943 by trustees from income of trusts created by petitioner for the maintenance, education, and support of his two infant daughters are taxable to the petitioner.

FINDINGS OF FACT.

The petitioner is a resident of Upper Montclair, New Jersey. He filed his income tax returns for the year 1943 with the collector of internal revenue for the fifth district of New Jersey.

On February 2, 1935, petitioner created a trust, with himself as grantor, for the benefit of his two minor children, in connection with a separation agreement entered into between him and his then wife, known since her remarriage as Babette V. Evans. The pertinent provisions of the trust are the following:

(b) Upon the death or sooner remarriage of the Settlor's wife, Babette V. Peierls, the trustees shall divide the corpus or principal of said trust estate into two equal shares or portions, one to be held in trust for the benefit of the Settlor's daughter, Barbara Ginette Peierls, and the other for the Settlor's daughter, Emily Ann Peierls, upon the following terms and conditions:

(1) To invest one of said equal shares or portions, and to keep the same invested, to receive the net income, rents, issues and profits thereof, and to apply so much of the net income, rents, issues and profits so received as may be necessary for the proper maintenance, education and support of the Settlor's daughter, Barbara Ginette Peierls, until she reaches the age of twenty-one (21) years. Any excess of such net income, rents, issues and profits so received in any given year over and above what is used and applied for the proper maintenance, education and support of said Barbara Ginette Peierls, shall be set aside and accumulated by said trustees, and the whole or any part of such accumulated income may be applied and used by them in any subsequent year should the total net income, rents, issues and profits so received for any given subsequent year be insufficient for the proper maintenance, education and support of said Barbara Ginette Peierls. * * *

If in any given year the net income, rents, issues and profits derived from this trust estate, in addition to any other income of said Barbara Ginette Peierls, shall be insufficient for her needs, or if at any time the said trustees shall determine that it will be to her interests to transfer to her absolutely the whole or any part of the corpus of said trust fund, then and in either of such events, the trustees shall pay and transfer to said Barbara Ginette Peierls absolutely so much of the principal or corpus of such trust fund hereby created for her benefit, as they in their uncontrolled discretion may deem wise and proper.

The trust instrument contained similar provisions for the benefit of Emily Ann Peierls.

Barbara Ginette Peierls was born June 7, 1933, and Emily Ann Peierls November 24, 1934.

The ex-wife of the petitioner had the sole and exclusive custody, care, and control of the children during their respective minorities.

During the calendar year 1943 the total income of the trust for Barbara Ginette Peierls was $ 2,047.36, and for Emily Ann Peierls, $ 2,047.35. The amounts of trust income distributed during 1943 by the trustees to the guardian of the children for their support, education, and maintenance were $ 2,033.86 for Barbara and $ 2,033.85 for Emily. According to the records of the trustees the amounts actually applied by the guardian of the children for their support, education, and maintenance during 1943 were $ 1,984.89 for Barbara and $ 1,749.50 for Emily.

No attempt was made by the trustees to recover any portion of the amounts distributed by them for the support, education, and maintenance of said minors.

OPINION.

The respondent contends that in 1943 the trustee distributed $ 4,067.71 ¹ of the income of the trust for the support and maintenance of the minor daughters of petitioner, and that, under the provisions of section 167 (c) of the Internal Revenue Code, ² the entire amount distributed is includible in the net income of petitioner.

The petitioner contends that under the provisions of section 167 (c) only $ 3,734.39, that part of the trust income actually used for the support, maintenance, and education of minor children of the grantor, is taxable to him.

We do not agree with petitioner. The purpose of section 167 (c), which became part of the Internal Revenue Code in 1943, was to overcome the effect of the decision in Helvering v. Stuart, 317 U.S. 154">317 U.S. 154, that the mere possibility of the use of the income of a trust in discharge of the grantor's legal obligations was sufficient to make the total income taxable to the grantor. Prior to this decision the Bureau of Internal Revenue had issued a ruling that, in cases where the trust income might, in the discretion of the trustees, be used to support the minor children of the grantor, there should be taxed to the grantor only so much of the trust income as was "actually distributed for the support and maintenance of the beneficiaries whom the grantor is legally obligated to support." G. C. M. 18972, C. B. 1937-2, p. 231. The purpose of enacting section 167 (c) was "to return to the rule approved in G. C. M. 18972." H. Rept. No. 871, 78th Cong., 1st sess.

The language of section 167 (c) is clear and unambiguous. Under its provisions the income of a trust is taxable to the grantor to the extent that it is "applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain." The evidence discloses that during 1943 the trustees distributed $ 4,067.71 for the support and maintenance of petitioner's minor children. The application by the guardian of only $ 3,734.39 for their support during 1943 does not relieve petitioner of tax on the balance of $ 333.32. We are concerned with what the trustees did, and not what the guardian did. The trustees distributed $ 4,067.71. They made no effort to recover any part of this amount and the evidence does not disclose that the amount they distributed was not used to carry out the obligations of the grantor. The fact that it was not all applied for this purpose in 1943 is immaterial.

We do not agree with the petitioner's contention that, since the trust agreement provided that any excess of net income over that used and applied for the maintenance, education, and support of the children should be accumulated by the trustees for use in subsequent years, the retention of such excess by the guardian prevented it from being legally distributed for income tax purposes within the meaning of section 167 (c). Whether or not under the terms of the trust instrument the guardian had the right to retain the excess is not determinative of the question here presented. The statute taxes to the grantor income of the trust to the extent applied or distributed by the trustees for the support of minor children. It does not read applied and distributed. Inasmuch as the evidence discloses that the trustees distributed $ 4,067.71 of the 1943 income of the trust for the support, education, and maintenance of petitioner's minor children, the respondent did not err in including this amount in the income of the grantor.

Decision will be entered for the respondent.

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Footnotes

• 1. The deficiency notice carries this amount as $ 4,067.72, but evidence indicates it should be $ 4,067.71.↩

• 2. SEC. 167. INCOME FOR BENEFIT OF GRANTOR.

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  (c) Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this chapter merely because such income, in the discretion of another person, the trustee, or the grantor acting as trustee or cotrustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income for the taxable year, such amounts shall be considered paid out of income to the extent of the income of the trust for such taxable year which is not paid, credited, or to be distributed under section 162 and which is not otherwise taxable to the grantor.↩