Opinion · United States Tax Court
Leonard v. Commissioner
4 T.C. 1271
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1945-04-30
- Topic
- general
OPINION. Black, Judge: The only question remaining to our determination is whether the income of trusts No. 1 for the years 1938, 1939, and 1940 is taxable to the grantors thereof under section 22 (a), 166, or 167 of the Revenue Act of 1938 (as to the year 1938) and of the Internal Revenue Code (as to the years 1939 and 1940), or is taxable to the trusts under section 161 of the Revenue Act of 1938 and of the Internal Revenue Code; and whether the income of trusts No. 2 for the year 1940 is taxable to the grantors thereof under code section 22 (a), 166, or 167, or is taxable to the trusts under code section 161. We shall consider first whether the income of the six trusts is taxable to the grantors thereof under section 22 (a). That section is so familiar that it need not here be quoted. The respondent contends that the income of the six trusts is taxable to the grantors thereof under section 22 (a) and relies principally upon Helvering v.
Citator
UpLaw has not yet analyzed Leonard v. Commissioner. The absence of a flag is not a finding that it is good law.
- Cited by
- 2 opinions
LEONARD v. COMMISSIONER OF INTERNAL REVENUE,4 T.C. 1271(1945)
J. M. LEONARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
MARY LEONARD (MRS. J. M. LEONARD), PETITIONER, v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.
MARY LEONARD TRUST #1, J. M. LEONARD, TRUSTEE, PETITIONER, v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT.
MIRANDA LEONARD TRUST #1, J. M. LEONARD, TRUSTEE, PETITIONER, v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
MARTHA LEONARD TRUST #1, J. M. LEONARD, TRUSTEE, PETITIONER, v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Docket Nos. 555, 556, 578, 577, 579.
United States Tax Court.
Promulgated April 30, 1945.
Petitioner Docket No. Year Deficiency
{1938 $4,437.81 J. M. Leonard ....................... 555 {1939 8,610.46 {1940 45,826.42 {1938 4,437.81 Mary Leonard ........................ 556 {1939 8,610.46 {1940 45,826.42 Mary Leonard Trust #1 ............... 578 1940 2,455.77 Miranda Leonard Trust #1 ............ 577 1940 2,455.87 Martha Leonard Trust #1 ............. 579 1940 2,455.33
In statements attached to the deficiency notices in Docket Nos. 555 and 556, the respondent adjusted the net community income as disclosed by each petitioner's returns for the calendar years 1938, 1939, and 1940 by adding to such net community income the amounts of $29,033.74, $30,700.44, and $140,112.56, respectively, which adjustments he explained in six separate explanations that we consolidate into one, as follows:
{1938 $4,437.81 J. M. Leonard ....................... 555 {1939 8,610.46 {1940 45,826.42 {1938 4,437.81 Mary Leonard ........................ 556 {1939 8,610.46 {1940 45,826.42 Mary Leonard Trust #1 ............... 578 1940 2,455.77 Miranda Leonard Trust #1 ............ 577 1940 2,455.87 Martha Leonard Trust #1 ............. 579 1940 2,455.33
It is held that the net income of the trusts listed below [NOTE: The net income of the trusts listed below for 1940 was referred to in the separate explanations as the "adjusted" net income] constitutes income taxable as community income to J. M. Leonard and Mrs. J. M. Leonard, grantors of such trusts:
1938 1939 1940
Mary Leonard Trust No. 1 ........... $9,677.91 $10,233.48 $37,354.12 Miranda Leonard Trust No. 1 ........ 9,677.92 10,233.50 37,354.91 Martha Leonard Trust No. 1 ......... 9,677.91 10,233.46 37,350.53 Mary Leonard Trust No. 2 ........... 9,351.00 Miranda Leonard Trust No. 2 ........ 9,351.00 Martha Leonard Trust No. 2 ......... 9,351.00 ___________ __________ _____________ Total ......................... $29,033.74 $30,700.44 $140,112.56
Page 1273
Mary Leonard Trust No. 1 ........... $9,677.91 $10,233.48 $37,354.12 Miranda Leonard Trust No. 1 ........ 9,677.92 10,233.50 37,354.91 Martha Leonard Trust No. 1 ......... 9,677.91 10,233.46 37,350.53 Mary Leonard Trust No. 2 ........... 9,351.00 Miranda Leonard Trust No. 2 ........ 9,351.00 Martha Leonard Trust No. 2 ......... 9,351.00 ___________ __________ _____________ Total ......................... $29,033.74 $30,700.44 $140,112.56
By appropriate assignments of error petitioners in Docket Nos. 555 and 556 contest the above adjustments to their net community income and they allege further that the respondent erred in his failure to find that any deficiency in the tax for 1938 is barred by the statute of limitations. At the hearing counsel for petitioners waived the assignment of error relative to the statute of limitations. In the above mentioned statements the respondent also made several other adjustments to the net community income, but these adjustments are not contested and will be given effect in a recomputation under Rule 50.
In statements attached to the deficiency notices in Docket Nos. 578, 577, and 579 the respondent adjusted the net income as disclosed by each petitioner's return for the calendar year 1940 by adding thereto as "short-term capital gain" the amount of $5,331.91. By appropriate assignments of error each petitioner contested this adjustment, and in addition alleged that:
(b) Respondent erred in adding one-half of petitioner's adjusted net income [$37,354.12 in Docket No. 578, $37,354.91 in Docket No. 577, and $37,350.53 in Docket No. 579] for 1940 to the taxable income for that year of each J. M. Leonard and Mary Leonard, as community income, as set forth in deficiency notices to each dated October 19, 1942.
Petitioners in Docket Nos. 578, 577, and 579 now concede that the respondent was correct in making the "short-term capital gain" adjustment, and they also concede the correctness of the deficiencies so determined by the respondent, providing this Court should hold and decide in Docket Nos. 555 and 556 that the adjusted net income of the respective trusts for the year 1940 is taxable to the trusts and not to the grantors. If, on the other hand, this Court should hold and decide in Docket Nos. 555 and 556 that the adjusted net income of the respective trusts for the year 1940 is taxable to the grantors and not to the trusts, then petitioners in Docket Nos. 578, 577, and 579, in connection with assignment of error (b) above, claim overpayments for 1940 in the amounts of $6,854.65, 6,864.88, and $6,863.63, respectively. The respondent concedes that if the latter should be our holding and decision relative to whom the adjusted net income of the trusts for the year 1940 is taxable, then the claimed overpayments can be disposed of under Rule 50.
FINDINGS OF FACT.
Many of the facts have been stipulated. The stipulation is incorporated herein by reference.
Petitioners, J. M. Leonard, born on February 10, 1895, and Mary Leonard, born on January 12, 1907, are husband and wife, both residing during the taxable years 1938, 1939, and 1940 and at all times materialPage 1274to these proceedings at Fort Worth, Texas, where they were married on March 8, 1931. Each filed a separate income tax return for each of the years 1931 to 1940, inclusive, on the community property basis with the collector of internal revenue for the second district of Texas, at Dallas, Texas, and reported large amounts of community income thereon.
On April 1, 1931, Leonard Bros. was organized and incorporated under the laws of the State of Texas, with an outstanding capital stock of 90,000 shares of common stock with a par value of $10 per share. During the period April 1, 1931, to December 31, 1940, inclusive, this corporation was engaged in diverse merchandising, both wholesale and retail, dealing in clothing, food stuffs, drugs, furniture, etc. During this period the capital stock and surplus (including reserve for income taxes), the gross sales, officers' salaries paid to J. M. Leonard and O. P. Leonard, and the net income of this corporation as reported on its income tax returns were as follows:
Officers' salaries paid Year Capital stock Gross sales J.M. O.P. Net Income and surplus Leonard Leonard
1931 ..... $1,124,714.27 $4,974,012.69 $22,500 $22,500 $199.356.70 1932 ..... 1,322,514.66 5,405,142.15 30,000 30,000 224,251.49 1933 ..... 1,663,067.60 5,715,053.61 30,000 30,000 382,502.49 1934 ..... 1,957,627.11 6,279,319.42 30,000 30,000 423,732.25 1935 ..... 2,057,058.78 6,316,139.92 30,000 30,000 333,024.26 1936 ..... 2,131,869.59 6,921,599.80 30,000 30,000 390,108.13 1937 ..... 2,120,349 00 7,397,329.06 30,000 30,000 283,408.30 1938 ..... 2,316,481.50 7,817,810.70 30,000 30,000 398.434.20 1939 ..... 2,456,025.16 8,128,633.82 30,000 30,000 450,394.19 1940 ..... 2,603,387.78 8,999,710.05 42,000 42,000 514,214.02
During the years 1935 to 1940, inclusive, the capital stock of Leonard Bros. was registered in the names of the persons or trusts, and dividends were paid by Leonard Bros. to the registered owners thereof, as follows:
1931 ..... $1,124,714.27 $4,974,012.69 $22,500 $22,500 $199.356.70 1932 ..... 1,322,514.66 5,405,142.15 30,000 30,000 224,251.49 1933 ..... 1,663,067.60 5,715,053.61 30,000 30,000 382,502.49 1934 ..... 1,957,627.11 6,279,319.42 30,000 30,000 423,732.25 1935 ..... 2,057,058.78 6,316,139.92 30,000 30,000 333,024.26 1936 ..... 2,131,869.59 6,921,599.80 30,000 30,000 390,108.13 1937 ..... 2,120,349 00 7,397,329.06 30,000 30,000 283,408.30 1938 ..... 2,316,481.50 7,817,810.70 30,000 30,000 398.434.20 1939 ..... 2,456,025.16 8,128,633.82 30,000 30,000 450,394.19 1940 ..... 2,603,387.78 8,999,710.05 42,000 42,000 514,214.02
Close of year 1935 Close of year 1936
1935 1936 Stockholder Shares dividends Shares dividends owned received owned received
J. M. Leonard ........ 48,801 $78,081.60 48,801 $141,522.90 O .P. Leonard ........ 40,099 64,158.40 34,099 108,487.10 Carl Bruner .......... 1,100 1,760.00 1,100 3,190.00 Obie Paul Leonard Trust 1,500 1,950.00 Robert Wooldridge Leonard Trust ....... 1,500 1,950.00 Margery Ann Leonard Trust ............... 1,500 1,950.00 Martha Jane Leonard Trust ............... 1,500 1,950.00 ________ _____________ ____________ ____________ Total .......... 90,000 144,000.00 90,000 261,000.00
Page 1275
1935 1936 Stockholder Shares dividends Shares dividends owned received owned received
J. M. Leonard ........ 48,801 $78,081.60 48,801 $141,522.90 O .P. Leonard ........ 40,099 64,158.40 34,099 108,487.10 Carl Bruner .......... 1,100 1,760.00 1,100 3,190.00 Obie Paul Leonard Trust 1,500 1,950.00 Robert Wooldridge Leonard Trust ....... 1,500 1,950.00 Margery Ann Leonard Trust ............... 1,500 1,950.00 Martha Jane Leonard Trust ............... 1,500 1,950.00 ________ _____________ ____________ ____________ Total .......... 90,000 144,000.00 90,000 261,000.00
Close of year 1937 Close of year 1938 Stockholder 1937 1938 Shares dividends Shares dividends owned received owned received
J. M. Leonard ............. 49,350 $123,377.50 49,350 $74,026.50 O. P. Leonard ............. 34,649 86,622.50 31,049 46,573.50 Obie Paul Leonard Trust ................... 1,500 3,750.00 2,400 3,600.00 Robert Wooldridge Leonard Trust .................... 1,500 3,750.00 2,400 3,600.00 Margery Ann Leonard Trust ................... 1,500 3,750.00 2,400 3,600.00 Martha Jane Leonard Trust ................... 1,500 3,750.00 2,400 3,600.00 M. S. Leveridge ........... 1 1 _________ ______________ _______ _____________ Total .................. 90,000 225,000.00 90,000 135,000.00
Close of year 1939 Close of year 1940 Stockholder 1939 1940 Shares dividends Shares dividends owned received owned received
J. M. Leonard ............. 49,350 $123,377.50 30,000 $90,003 O. P. Leonard ............. 31,049 77,622.50 27,049 81,147 Obie Paul Leonard Trust ................... 2,400 6,000.00 3,400 10,200 Robert Wooldridge Leonard Trust .................... 2,400 6,000.00 3,400 10,200 Margery Ann Leonard Trust 2,400 6,000.00 3,400 10,200 Martha Jane Leonard Trust 2,400 6,000.00 3,400 10,200 M. S. Leveridge 1 Mary Leonard Trust #1 ..... 3,333 9,999 Miranda Leonard Trust #1 ................ 3,333 9,999 Martha Leonard Trust #1 ................ 3,333 9,999 Mary Leonard Trust No. 2 ................... 3,117 9,351 Miranda Leonard Trust No. 2 3,117 9,351 Martha Leonard Trust No. 2 3,117 9,351 E. J. Henderson 1 ___________ __________ _________ ___________ Total ................ 90,000 225,000.00 90,000 270,000
At the close of the years 1935 to 1940, inclusive, the shares of capital stock of Leonard Bros. were voted at annual stockholders' meetings as follows:
J. M. Leonard ............. 49,350 $123,377.50 49,350 $74,026.50 O. P. Leonard ............. 34,649 86,622.50 31,049 46,573.50 Obie Paul Leonard Trust ................... 1,500 3,750.00 2,400 3,600.00 Robert Wooldridge Leonard Trust .................... 1,500 3,750.00 2,400 3,600.00 Margery Ann Leonard Trust ................... 1,500 3,750.00 2,400 3,600.00 Martha Jane Leonard Trust ................... 1,500 3,750.00 2,400 3,600.00 M. S. Leveridge ........... 1 1 _________ ______________ _______ _____________ Total .................. 90,000 225,000.00 90,000 135,000.00
Close of year 1939 Close of year 1940 Stockholder 1939 1940 Shares dividends Shares dividends owned received owned received
J. M. Leonard ............. 49,350 $123,377.50 30,000 $90,003 O. P. Leonard ............. 31,049 77,622.50 27,049 81,147 Obie Paul Leonard Trust ................... 2,400 6,000.00 3,400 10,200 Robert Wooldridge Leonard Trust .................... 2,400 6,000.00 3,400 10,200 Margery Ann Leonard Trust 2,400 6,000.00 3,400 10,200 Martha Jane Leonard Trust 2,400 6,000.00 3,400 10,200 M. S. Leveridge 1 Mary Leonard Trust #1 ..... 3,333 9,999 Miranda Leonard Trust #1 ................ 3,333 9,999 Martha Leonard Trust #1 ................ 3,333 9,999 Mary Leonard Trust No. 2 ................... 3,117 9,351 Miranda Leonard Trust No. 2 3,117 9,351 Martha Leonard Trust No. 2 3,117 9,351 E. J. Henderson 1 ___________ __________ _________ ___________ Total ................ 90,000 225,000.00 90,000 270,000
Stockholder 1935 1936 1937 1938 1939 1940
J. M. Leonard ........... 48,801 48,801 49,350 49,350 49,350 30,000 J. M. Leonard, Trustee .. 19,350 O. P. Leonard ........... 40,099 40,099 34,649 32,649 31,049 27,049 O. P. Leonard, Trustee .. 6,000 8,000 9,600 13,600 All others .............. 1,100 1,100 1 1 1 1 _______ _______ _______ ________ ________ _______ Total ............... 90,000 90,000 90,000 90,000 90,000 90,000
On December 24, 1938, J. M. Leonard and his wife created separate irrevocable trusts for the benefit of each of their three children, Mary, Miranda, and Martha, born January 12, 1932, March 26, 1934, and November 3, 1936, respectively. These trusts are referred to herein as Mary Leonard Trust #1, Miranda Leonard Trust #1, and Martha Leonard Trust #1. In all essential matters the three trusts were identical except for the name of the beneficiary. The Mary Leonard Trust #1 provides that for a valuable consideration J. M. Leonard and wife, Mary Leonard, "granted, bargained, sold, conveyed, assigned, and delivered * * * unto J. M. Leonard, as Trustee, and his successors in trust, the property described in Schedule A, which is signed byPage 1276grantors and made a part hereof, together with the appurtenances and all the estates and rights of the grantors thereto."
J. M. Leonard ........... 48,801 48,801 49,350 49,350 49,350 30,000 J. M. Leonard, Trustee .. 19,350 O. P. Leonard ........... 40,099 40,099 34,649 32,649 31,049 27,049 O. P. Leonard, Trustee .. 6,000 8,000 9,600 13,600 All others .............. 1,100 1,100 1 1 1 1 _______ _______ _______ ________ ________ _______ Total ............... 90,000 90,000 90,000 90,000 90,000 90,000
Paragraph first provides that the trustee shall immediately take possession of and manage all the trust property, "with full power and authority at any time and from time to time to sell, transfer, assign, lease, mortgage, pledge, exchange, and partition all or any part of the trust estate, including undivided interests therein, as well as execute mineral and royalty deeds, oil and gas leases, all on such consideration, terms, and conditions as he in his discretion deems proper." Under subparagraph (b) thereof, the trustee is authorized to invest and reinvest money coming into his possession "in such loans, stocks, bonds, securities, notes, or other evidences of debt, secured or unsecured, or any real or personal property, of any kind, under such condition and upon such agreement as may be determined by the Trustee, and shall not be restricted to class of investments which a trustee is or may hereafter be permitted by law to make" and the trustee "is hereby expressly relieved of all liability to any of the beneficiaries hereof or anybody because of any loss that may develop from complying with these directions." Paragraph first also provides that:
(d) The Trustee shall be empowered to act in the management investment, and preservation of the trust properties as an absolute owner, and the special enumeration of powers herein granted shall in no event be construed as limiting or excluding the general powers conferred hereby.
(e) No bonds shall be required of the Trustee unless required as hereinafter stipulated * * *
(f) The Trustee and each co-trustee except J. M. Leonard and Mary Leonard (which two shall serve without compensation), shall receive for services such charges as are made by the Trust Department of the Fort Worth National Bank, or its successors, for such services, unless they waive such compensation.
(g) The Trustee shall at all times have authority to determine the value of the trust properties * * * and in making payments or distributions the authority to pay in cash or property, or partly both, and his decision in all instances shall be final.
(h) Wherever the word "trustee" is used herein, it shall be construed as meaning trustees where more than one is acting, and in all cases where three trustees are acting as co-trustees, decision of a majority shall be final.
Paragraph second provides for successor trustees and the manner in which trustee vacancies are to be filled as follows:
J. M. Leonard, Trustee, during the period in which he acts as such, or as co-trustee with any others, shall have the power:
(a) To substitute in lieu of O. P. Leonard, Carl P. Bruner, and Fort Worth National Bank, or either of them, or in lieu of any other successor Trustee (except Mary Leonard), any party he may desire individual or corporate; and provide that O. P. Leonard shall not become a co-trustee with him on February 10, 1950.
(b) To name a third trustee to act with O. P. Leonard and Mary Leonard, if such two named parties become, under the Third paragraph hereof, the sole co-trustees, or to prescribe, in the event O. P. Leonard and Mary Leonard become co-trustees under the Third Paragraph hereof, that they shall have equal power.Page 1277
(c) To impose such limitation as he may deem proper upon all successor trustees (except O. P. Leonard and Mary Leonard while acting as sole co-trustees) with respect to investment and reinvestment of trust properties, including the right to require of all such successor trustees except Mary Leonard and O. P. Leonard a reasonable surety bond at the expense of the trust.
(d) To fill all vacancies in successor trustees (including Mary Leonard) arising from death.
O. P. Leonard and Mary Leonard, should they become sole co-trustees, shall, during the period in which they so act as such, have the power:
(a) To name in lieu of Carl P. Bruner and Fort Worth Nat'l. Bank, and any other successor trustees, or any of them, such party they may desire, individual or corporate.
(b) To impose such limitations as they deem proper upon successor trustees with respect to investment and reinvestment of trust properties, including the right to require all of such successor trustees a reasonable surety bond at the expense of the trust.
The powers granted to J. M. Leonard, and to O. P. Leonard and Mary Leonard, in this section, if exercised, shall be accomplished by filing with the records of this trust a written declaration duly executed and acknowledged.
Paragraph third also deals with the subject of trustees and provides in part that:
Beginning February 10, 1950, if J. M. Leonard is still acting as Trustee, Mary Leonard and O. P. Leonard, if living, or the survivor of the two if only one be living, shall become co-trustees with J. M. Leonard, and the trust administered by all of such parties so living so long as J. M. Leonard shall continue to act as co-trustees, acting by a majority in the event of three co-trustees, unless J. M. Leonard has under authority of Paragraph Second, provided that O. P. Leonard shall not become such co-trustee, in which event Mary Leonard only shall become a co-trustee with the said J. M. Leonard. No successor trustees shall ever be appointed to O. P. Leonard and Mary Leonard, should they die, one or both while so serving with J. M. Leonard, but the trust shall be administered in such event by J. M. Leonard and the survivor, or alone, until he is succeeded as herein provided. Should J. M. Leonard and the one other become sole co-trustees, the decision of J. M. Leonard shall be final and observed. If J. M. Leonard should die, resign, or for any reason be unable to act as Trustee, either before or after the date mentioned, we name and appoint Mary Leonard and O. P. Leonard co-trustees to act in his place, and if Mary Leonard and O. P. Leonard, being the only trustees, are unable to agree upon any matter, the decision of O. P. Leonard shall be final and shall be observed, unless at the time they become sole co-trustees J. M. Leonard, under authority granted under Paragraph 2nd hereof, shall have made them of equal power. * * *
Paragraph fourth provides in part that:
This trust is created for the benefit of our minor child, Mary Leonard, born January 12, 1932, and her successors in interest, if any, to be distributed as hereinafter provided:
(a) The Trustee, only in the event the grantors as parents are unable to support the beneficiary, Mary Leonard, from other sources, may make such advances as in his sole discretion he deems proper at any time and from time to time from the money or property of the trust, principal and all accumulated income, for the maintenance, upkeep, education, travel, and general welfare, of said beneficiary, until she shall have attained the age of 21 years.
The remainder of paragraph fourth provides that when the beneficiaryPage 1278shall have attained the age of 21 years the trustee shall deliver to her 10 percent of the trust estate, but not to exceed in value the sum of $10,000; that when the beneficiary shall have attained the age of 25 years, the trustee may in his discretion deliver to her 25 percent of the then value of the trust estate, but not to exceed in value the sum of $25,000; that when the beneficiary shall have attained the age of 30 years, the trustee shall deliver to her 25 percent of the then value of the trust estate, and may in his discretion deliver the entire trust estate to her and terminate the trust; and that "in any event, when said beneficiary, Mary Leonard, shall have attained the age of 50 years, all said trust property shall pass to and vest in her free from all trust provided for herein, and said trust shall terminate when all property shall have been delivered hereunder."
Paragraph fifth dealt with the disposition of the trust estate in case of the death of Mary Leonard (daughter) prior to the termination of the trust. Provision was made for the passage of the trust property to her descendants, if any, or partly to her husband, or to the two trusts created on the same day for her two sisters, and if all of these should fail "then all such property shall pass to and vest absolutely in those persons who at the time of her death constitute her heirs at law according to the present laws of descent and distribution of the State of Texas, such heirs to take the shares provided for by such laws, and this trust, upon the death of Mary Leonard, as aforesaid, shall expire and terminate."
Paragraph sixth provides for the termination of the trust in any event "at the expiration of 20 years and 10 months after the death of the last one to die of our three now living children; namely, Mary Leonard, Miranda Leonard, and Martha Leonard * * *."
Paragraph seventh provides as follows:
Any sum of money used for the benefit of any beneficiary hereunder may be expended directly by the Trustee, or may be paid over to any other person in control of and taking care of such beneficiary, and in no event shall it be necessary that a guardian be appointed to receive and spend any of the funds called for herein. The use of the funds so made by the Trustee shall be binding on the beneficiaries and all other parties. No person dealing with the Trustee shall be bound to see to the application of any moneys paid to said Trustee, or to inquire into the validity, authority, and expediency of any of the acts of said Trustee.
Paragraph eighth contains the usual spendthrift clause. Paragraph ninth provides that regular annual audits of the affairs of the trust must be made; that full and complete records shall be kept reflecting all dealings of the trustees concerning the trust estate; and that an executed copy of all audits shall be promptly furnished to the then beneficiary or beneficiaries of the trust.
To each of the three trusts as set out in schedule A of each trust, J. M. Leonard and Mary Leonard transferred by gift on December 24,Page 12791938, certain shares of capital stock of the Virginia Oil Refining Co., a Delaware corporation then in liquidation, and of the Virginia Investment Co., a Texas corporation, all of which were community property of the grantors under the laws of the State of Texas and had an aggregate value of $122,082.14. J. M. Leonard and Mary Leonard each reported one-half of the above mentioned value of $122,082.14, or $61,041.07, as a gift on gift tax returns hereinafter mentioned.
On December 30, 1940, J. M. Leonard transferred from his sole and separate estate to each of the trusts created on December 24, 1938, 3,333 shares of the capital stock of Leonard Bros., having a fair market value as of the date of transfer of $27.50 per share or a total value of $91,657.50 for each transfer. Each transfer was by way of sale for a consideration of $32,222.11, which represented cost to the transferor of the shares transferred. The difference between the fair market value of the shares and the consideration, or $59,435.39, in the case of each transfer was reported as a gift on the gift tax returns hereinafter mentioned.
On December 30, 1940, J. M. Leonard and his wife created additional separate irrevocable trusts for the benefit of each of their three children. These trusts were designated in the respective instruments as Mary Leonard Trust No. 2, Miranda Leonard Trust No. 2 and Martha Leonard Trust No. 2. In all essential matters the three trusts were identical except for the name of the beneficiary and, except as hereinafter noted, were substantially in the same form as the 1938 trusts. In the granting part of each of the 1940 trusts, J. M. Leonard and his wife "do give, grant, confirm and convey unto the said J. M. Leonard, as Trustee * * * [$33,333.33] in cash, together with the appurtenances and all the estates and rights of the grantors thereto." Paragraph first of the 1940 trusts contained a new subparagraph which provided as follows:
(g) The Trustee is hereby empowered to purchase for the trust estate any property, real or personal, which he may in his discretion think for the best interest of said trust, paying therefore cash, or exchanging therefore any property of the estate, or executing the obligation of the estate upon such terms, conditions, understandings, and agreements as said Trustee may in his discretion elect.
Subparagraphs (h) and (i) of paragraph first of the 1940 trusts were identical with subparagraphs (g) and (h) of paragraph first of the 1938 trusts.
Paragraph fourth of the 1940 trusts differed from paragraph fourth of the 1938 trusts. Paragraph fourth of the Mary Leonard Trust No. 2 provides as follows:
This trust is created for the benefit of our minor child, Mary Leonard, born January 12, 1932, and her successors in interest, if any, to be distributed as hereinafter provided:
(a) The Trustee shall not make any distribution to the beneficiary, MaryPage 1280Leonard, of the estate, either corpus or income, before said beneficiary shall have attained the age of 21 years, retaining during such period of time the corpus as well as all accumulated income and investing and reinvesting the same under the directions hereinbefore given.
(b) After the beneficiary, Mary Leonard, shall have attained the age of 21 years, the Trustee may and is hereby empowered and authorized to pay over to such beneficiary, from the corpus of the trust or the income, either or both, from time to time or at any time any part or all of said trust estate as said Trustee may in his discretion deem to the best interest of said beneficiary, and sole, full, and complete discretion as to what is to the best interest of said beneficiary, and as to the amount, time, and method of payment, is hereby vested in said Trustee; and if during the lifetime of said beneficiary, all of said trust estate, corpus and accumulated income, shall have been paid over and delivered unto the said beneficiary, then this trust shall thereupon terminate, provided that in any event, if when said beneficiary Mary Leonard shall have attained the age of 50 years said Trustee shall in all events pay over and deliver to her all of said trust property, corpus and income and said trust shall terminate.
Paragraph fifth of the 1940 trusts added to the possible takers in the case of the death of the named beneficiary "our nephews, Obie Paul Leonard and Robert Wooldridge Leonard, share and share alike, if living, or all to the survivor; otherwise in those persons who would inherit as heirs of J. M. Leonard were he to have died at the same time as our daughter Mary Leonard, taking as prescribed by the present laws of Texas for heirs, in either of which contingencies, this trust shall terminate." (Quoted matter from Mary Leonard Trust No. 2.)
On December 30, 1940, J. M. Leonard and his wife transferred by gift to each of the three above mentioned trusts created on that day cash in the sum of $33,333.33 from their community property. This money was used by J. M. Leonard, trustee, as part of the consideration in acquiring at cost to donor, J. M. Leonard, the shares of stock of Leonard Bros. referred to in the paragraph immediately following.
On December 30, 1940, J. M. Leonard transferred from his sole and separate estate 3,117 shares of stock of Leonard Bros. to each of the three above mentioned trusts created on that day. The fair market value of these shares of stock was $27.50 a share, or a total value of $85,717.50 for each of the transfers. Each transfer was by way of sale for a consideration of $30,133.91, which represented cost to the transferor of the shares transferred. The difference between the fair market value of the shares and the consideration, or $55,583.59, in the case of each transfer was reported as a gift on the gift tax returns hereinafter mentioned.
Federal gift tax returns for the years 1938 and 1940 were filed by each of the donors of the gifts to each of the above mentioned trusts created in those years, and Federal gift taxes were paid thereon. For the year 1938 J. M. Leonard and his wife each reported total gifts of $61,041.07 and, after making allowance for exclusions and the specific exemption, each paid a gift tax of $90.62 for 1938. For the year 1940 Mary Leonard reported total gifts of $50,000 and paid a gift tax ofPage 1281$2,973.38 for 1940. For the year 1940 J. M Leonard reported total gifts of $395,056.94 and paid a gift tax of $55,053.67 for 1940. The total gifts of $395,056.94 consisted of the following:
1/2 of the cash transferred to the three 1940 trusts .......................... $50,000.00 Three above mentioned transfers of $59,435.39 each ............................ 178,306.17 Three above mentioned transfers of $55,583.59 each ............................ 166,750.77 ----------- Total ....................................... 395,056.94
The Commissioner, upon audit of all of the above mentioned Federal gift tax returns, determined deficiencies, which deficiencies, together with interest, have also been paid.
For the years 1938, 1939, and 1940 fiduciary income tax returns on Form 1041 were filed by J. M. Leonard as trustee for the 1938 trusts, and net income was reported thereon as follows:
Net income reported
1938 1939 1940
Mary Leonard Trust #1 ............ $9,677.91 $10,233.48 $32,022.21 Miranda Leonard Trust #1 ......... 9,677.92 10,233.50 32,022.97 Martha Leonard Trust #1 .......... 9,677.91 10,233.46 32,018.95 --------- ---------- ---------- Total ........................ 29,033.74 30,700.44 96,064.13
For the year 1940 income taxes were paid on the above reported net income for that year as follows:
1938 1939 1940
Mary Leonard Trust #1 ............ $9,677.91 $10,233.48 $32,022.21 Miranda Leonard Trust #1 ......... 9,677.92 10,233.50 32,022.97 Martha Leonard Trust #1 .......... 9,677.91 10,233.46 32,018.95 --------- ---------- ---------- Total ........................ 29,033.74 30,700.44 96,064.13
Mary Leonard Trust #1 ......................... $6,854.65 Miranda Leonard Trust #1 ...................... 6,854.88 Martha Leonard Trust #1 ....................... 6,853.63
For the year 1940 fiduciary income tax returns on Form 1041 were filed by J. M. Leonard as trustee for the 1940 trusts, and net income was reported thereon as follows:
Mary Leonard Trust No. 2 ...................... $9,351 Miranda Leonard Trust No. 2 ................... 9,351 Martha Leonard Trust No. 2 .................... 9,351 ------ Total ....................................... 28,053
The $140,112.56 added to the net community income of petitioners in Docket Nos. 555 and 556 for 1940 is made up of the $96,064.13 reported by the 1938 trusts, the $28,053 reported by the 1940 trusts, and the three "short-term capital gain" adjustments of the 1938 trusts in the total amount of $15,995.43.
During the respective years here involved J. M. Leonard served as trustee for all of the six above mentioned trusts. He and his wife at all times provided for the education, maintenance, and support of their minor children from their own personal funds and were amply able to do so.Page 1282
At no time could petitioners J. M. and Mary Leonard, as grantors or otherwise, alter, amend, revoke, or terminate any of the six trusts prior to the time fixed therein, nor could either of them vest title to the corpus thereof in themselves, or either of them. Either or both of them could not and did not use the income or corpus of any trust for the payment of any legal obligation of either petitioner. They reserved no power or right to direct that the income or funds of the trusts shall go to beneficiaries other than those named in the trusts. Each trust was, from the date of its creation, administered by the trustee strictly as provided by each of the declarations of trust.
All net income of the six trusts has been accumulated by the trustee and no distributions of income or corpus have been made, all of said beneficiaries still being under 21 years of age. Neither grantor has received any part thereof as an individual, and no part of the property of any trust has been applied to the payment of premiums upon policies of insurance upon the lives of the grantors. Upon the creation of the trusts and the delivery of all gifts thereto, the grantors as individuals parted with all right, title, and interest in and to such gifts and to the income and corpus of each of the trusts.
Title to all assets of each trust was taken and held in the name of the trustee; all assets of each trust were maintained separate and distinct from those of the grantors; and separate books and records were kept by the trustee for each trust and these were annually audited by a certified public accountant.
Petitioners J. M. and Mary Leonard, as grantors, created the six trusts to secure the economic independence of the three beneficiaries; so that funds of the trust might be more conservatively invested than petitioners were accustomed to invest their own; and so that the trust funds might be devoted to the use and benefit of their three children at a time when petitioners were able to provide cash with which to pay gift taxes incident to transfers to the trusts, in lieu of possible estate and inheritance taxes in the event of their demise. Petitioners created the three 1940 trusts to provide additional funds for the protection of their three children, all of whom were daughters, and in order that the trustee or trustees might have more discretion upon their becoming 21 years of age to distribute more than the maximum of $10,000 distributable at age 21 under the terms of the 1938 trusts. Petitioners believed that in the event of marriage of any of the daughters the trustee or trustees of the trusts last created should be given broad discretion in making distributions in order that the daughter and her husband might become established in life. All property transferred by gift to said trusts, and the income therefrom, vested in the named beneficiaries of the trusts when received by the trustee.
Protective claims for refund of the Federal income taxes paid byPage 1283the trustee for each of the six trusts have been filed solely to protect his rights as such trustee in the event that the income of these trusts be ultimately held to be taxable to petitioners-grantors individually. Agreements have been signed and filed with the Commissioner to the effect that if it be held that the income of these trusts is not taxable to petitioners-grantors, then the said claims for refund will be withdrawn. Petitioners-grantors have agreed to indemnify the Commissioner with respect to the said claims for refund and to execute any further consents or agreements of indemnity or otherwise required by section 134 (b) (2) of the Revenue Act of 1943, or by the lawful regulations promulgated pursuant to that section.
OPINION.
We shall consider first whether the income of the six trusts is taxable to the grantors thereof under section 22 (a). That section is so familiar that it need not here be quoted. The respondent contends that the income of the six trusts is taxable to the grantors thereof under section 22 (a) and relies principally uponHelveringv.Clifford,309 U.S. 331, and similar cases following that decision which are in the margin.1
Petitioners contend that the income of the six trusts is not taxable to the grantors thereof under the doctrine of theCliffordcase. The cases principally relied upon by petitioners are listed below.2
We find it unnecessary to discuss in detail all of the cited cases on this question, and it would be futile to do so. As was said inMillerv.Commissioner,147 F.2d 189, affirming a memorandum opinion of this Court, "we have cited these few cases pro and con in support of the proposition that there are no precise standards or guides, either inPage 1284the Act, regulations or decisions of the courts, by which our inquiry may be conducted. The cases cited do not complete the catalogue. Each case must rest upon its own peculiar facts and circumstances." To the same effect seeHerbert T. Cherry,supra. The Supreme Court in theCliffordcase said that the "issue is whether the grantor after the trust has been established may still be treated, under this statutory scheme as the owner of the corpus," and that, "In absence of more precise standards or guides supplied by statute or appropriate regulations, the answer to that question must depend on an analysis of the terms of the trust and all the circumstances attendant on its creation and operation."
We do not think the grantors of the six trusts here involved may still be considered as the owners of the corpora of these trusts after the trusts were established. The trusts were irrevocable. They were for the benefit of the grantors' three minor daughters. As each child attained the age of 30 years the entire trust estate in the 1938 trusts could be delivered to the respective beneficiary and the trust terminated. If not terminated at that time, termination was mandatory in the case of all six trusts upon the beneficiary reaching the age of 50, and in any event the six trusts were to terminate at the expiration of 20 years and 10 months after the death of the last to die of the three children beneficiaries living at the time the trusts were created. Upon the death of any original beneficiary before the termination of her trust, provision was made for the passage of the trust property to persons other than the grantors. The interests of the beneficiaries were vested. The grantors retained no power to alter or amend the trusts in any way. They reserved no power or right to direct that the income or principal of the trusts be paid to beneficiaries other than those named in the trusts. The trusts were administered strictly in accordance with their terms. Upon a careful analysis of the terms and circumstances attendant upon the creation and operation of the six trusts in question, it is our opinion that the cases relied upon by petitioners support their contention and are controlling, and that the income of the trusts is not taxable to the grantors under section 22 (a) and the doctrine of theCliffordcase.
The respondent places considerable emphasis upon the circumstance that one of the grantors was the sole trustee during the taxable years in question. He argues that this factor brings the instant proceedings within the doctrine ofLouis Stockstrom, supra. We think the instant case is distinguishable on its facts from theStockstromcase. In theStockstromcase the three trusts which were made for the settlor's three adult children contained powers which enabled the settlor-trustee to shift income beneficiaries somewhat similar to the powers reserved toPage 1285the grantor inCommissionerv.Buck, supra. There are no such powers granted to the settlor-trustees in the instant case. In theStockstromcase the seven trusts which were set up for the benefit of Stockstrom's seven grandchildren, while not granting to the settlor-trustee powers which were as extensive as those contained in the trusts for his three adult children, did grant to the settlor-trustee the discretion to either accumulate the income or distribute it to the beneficiary. These trusts were for the lifetime of the beneficiaries. We construed this power as being broad enough to enable the settlor-trustee to completely withhold the income of the trust from the grandchild primary beneficiary throughout his lifetime and thereby give it to the remaindermen. To quote from the opinion itself in theStockstromcase, the settlor-trustee "was not required to distribute any part of the income to any of the beneficiaries during his lifetime." We held that this power over the income, when coupled with the broad administrative powers granted the settlor-trustee over the corpus in these several trusts, caused the income to be taxable to the settlor, Stockstrom. This view was affirmed by the Eighth Circuit Court of Appeals. See that court's opinion inStockstromv.Commissioner,148 F.2d 491.
In the instant proceedings Leonard had no powers to cause the shifting of income from one beneficiary to another such as were present in theStockstromorBuckcases. We think the trusts in the instant proceedings are similar in character to those which were present in such cases asFrederick Ayer, supra,andDavidSmall, supra,in which we held that the income of the trusts was not taxable to the settlor in those cases under section 22 (a). In theAyercase we quoted fromCommissionerv.Branch, supra,as follows:
* * * 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. SeeHelveringv.Achelis,112 F.2d 929. We do not read the dictum inHelveringv.Fuller,310 U.S. 69,76, as implying the contrary.
In cases like the present one Congress has provided for the taxation of the income of the trusts to the trustee under section 161. The trusts here involved have complied with those provisions of the law and have returned the income in question for taxation and have paid the tax thereon. We do not see where the law requires more. We hold, therefore, that petitioners in Docket Nos. 555 and 556 are not taxable on the income of the six trusts under section 22 (a).
Is the income of the six trusts taxable to the grantors thereof under section 166? The provisions of this section are identical in both thePage 1286Revenue Act of 1938 and the Internal Revenue Code, and are in the margin.3
The respondent concedes that the trust instruments contain no specific provision for alteration, amendment, or revocation by grantors. He contends, however, that the trust provisions reserved to J. M. Leonard, trustee, an unqualified right to direct sales of trust property to himself or others at his own price and on his own terms and that such rights and powers in and to the corpora are sufficiently broad to support a finding that they are equivalent to a power to revest and that, therefore, the income is taxable to the grantors under section 166, citingChandlerv.Commissioner,119 F.2d 623, affirming41 B. T. A. 165. We find no such provisions in any of the trust instruments as respondent contends above. There is no language in any of the trust indentures which would justify the interpretation which respondent seeks to impose. The facts in the instant proceedings are entirely unlike those present in theChandlercase. In that case Chandler as settlor transferred property to a trust company as trustee for his wife as beneficiary. Among other things the trust agreement provided:
During the lifetime of Grantor, Trustee shall make such sale, exchange or other disposition either to Grantor or to a third party or third parties designated by him of all or any part of the Trust Fund and for such considerations and upon such terms as to credit or otherwise as Grantor shall at any one time or from time to time direct. Trustee shall also acquire by purchase, exchange or otherwise such real or personal property for such considerations and either from Grantor or from such third party or third parties as Grantor may at any one time or from time to time direct. Grantor may be personally interested in the sale, exchange or other disposition of any part of the Trust Fund and/or in the purchase, exchange or other acquisition of real and/or of personal property for the Trust Fund. Trustee shall at all times and forever be freed from any and all liability and responsibility for acting in accordance with such directions of Grantor.
The Third Circuit properly pointed out the important distinction between the power reserved by the settlor in that case and that in other cases where the power to control reserved by the settlor did not include the power to direct the trustee to buy from and sell to the settlor at prices fixed by the latter. In such latter cases, the court said the power was reserved for the benefit of the beneficiary of the trust, whereas in cases likeChandler,the power was reserved solely for the benefit of the settlor rather than for the beneficiary. An examinationPage 1287of the six trust instruments involved in the instant proceedings reveals, as we have already stated, no provisions like those contained in theChandlercase. We hold, therefore, that petitioners in Docket Nos. 555 and 556 are not taxable on any part of the income of the six trusts under section 166. SeeCarleton H. Palmer, supra; Frederick Ayer, supra;andHerbertT. Cherry, supra.
Is the income of the six trusts taxable to the grantors thereof under section 167? Petitioners have alleged that the income is not so taxable and the respondent has apparently so conceded, as he has not argued or even mentioned the question in his brief. In any event, we agree with the petitioners on this point. The 1938 trusts permitted the trustee "only in the event the grantors as parents are unable to support the beneficiary" from other sources to make such advances from income or principal as in his sole discretion he deems proper at any time for the maintenance, upkeep, education, travel, and general welfare of the beneficiary until she shall have attained the age of 21 years. The 1940 trusts contained no such provisions. Instead, the trustee was prohibited from making any distribution to the beneficiary of either corpus or income until the beneficiary attained the age of 21 years. No distributions from any of the trusts have been made. The grantors at all times provided for the education, maintenance, and support of their minor children from their own personal funds and were amply able to so provide. Under these circumstances we hold that, even without the benefit of section 134 of the Revenue Act of 1943, no part of the income of the six trusts is taxable to the grantors thereof under section 167.Robert P. Scherer,3 T.C. 776,797-798. The grantors, however, have filed with the Commissioner certain agreements in accordance with the requirements of I. T. 3609, Cumulative Bulletin 1943, p. 505, and have agreed to execute and file such other and further agreements and consents as may be required to comply with T. D. 5392, Internal Revenue Bulletin, August 11, 1944, p. 18. It is assumed that this Court will allow a reasonable time for petitioners to comply with these requirements if deemed necessary.Estate of O. M. Banfield,4 T.C. 29,34.
Since the grantors of the six trusts in question are not taxable on any part of the income of the trusts under section 22 (a), 166, or 167,supra,it follows that the income thereof is taxable to the trusts under the provisions of section 161 of the Revenue Act of 1938 and of the Internal Revenue Code.
Reviewed by the Court.In Docket Nos. 555 and 556 decisions will be entered underRule 50. In Docket Nos. 578, 577, and 579 decisions will beentered for the respondent.Page 1289
- Commissionerv.Buck,120 F.2d 775;Helveringv.Elias,122 F.2d 171; certiorari denied,314 U.S. 692;Ellis H.Warren,45 B. T. A. 379; affirmedper curiam,133 F.2d 312;Brownv.Commissioner,131 F.2d 640; certiorari denied,318 U.S. 767; andLouis Stockstrom,3 T.C. 255; affd.,148 F.2d 491. ↩
- Carleton H. Palmer,40 B. T. A. 1002; affirmedper curiam,115 F.2d 368;Commissionerv.Branch,114 F.2d 985;Jonesv.Norris,122 F.2d 6;Frederick Ayer,45 B. T. A. 146;Commissionerv.Katz,139 F.2d 107;W. C.Cartinhour,3 T.C. 482;Estate of Benjamin Lowenstein,3 T.C. 1133;David Small,3 T.C. 1142;Herbert T. Cherry,3 T.C. 1171; andArmstrongv.Commissioner,Page 1288143 F.2d 700. ↩
- SEC. 166. REVOCABLE TRUSTS.
Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested —(1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
when the income of such part of the trust shall be included in computing the net income of the grantor. ↩