Newman v. Comm'r of Internal Revenue, Docket No. 109632.

• Decision Date: 13 April 1943
• Docket Number: Docket No. 109632.
• Citation: 1 T.C. 921
• Parties: LILLIAN M. NEWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

1 T.C. 921

LILLIAN M. NEWMAN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 109632.

Tax Court of the United States.

Promulgated April 13, 1943.

Petitioner's minor daughter and son were the respective life income beneficiaries of two trusts created by her during the tax year. Petitioner's husband, the trustee, was the remainderman and the donee of a power to appoint the remainders in the event he predeceased the life beneficiaries. He also possessed the power to alter, amend, or revoke. Held, the income of the trusts is not taxable to petitioner, under section 22(a), 166, or 167 of the Internal Revenue Code, with the exception of dividends that had been declared payable to stockholders of record on or before June 28, 1940, the date the trusts were created. Frederick E. Winkler, Esq., for the petitioner.

Arthur Groman, Esq., for the respondent.

The Commissioner determined a deficiency of $190.55 in income tax for the year 1940. The sole question is whether the income of two trusts is taxable to petitioner as grantor.

Petitioner, a married woman, filed her return for 1940 with the collector for the second district of New York.

Petitioner's husband is Sydney R. Newman. The relations between petitioner and her husband were cordial during the tax year and it was anticipated by them that they would remain so. The husband is a lawyer of some twenty-six years, experience. His firm has handled tax cases, and he is familiar to an extent with the Federal revenue laws.

On June 28, 1940, petitioner created two trusts, one for the benefit of her daughter Janice, who was then fifteen years of age, and the other for the benefit of her son Robert, who was then twelve years of age. Sydney R. Newman was named trustee in both instruments. Petitioner had discussed with her husband the establishment of the trusts. The corpus of each trust consisted of shares of stock having a value of approximately $10,000. The trust instruments were identical except that the income of one was payable to the daughter and of the other to the son.

The trustee was authorized to sell any investments, reinvest the proceeds thereof, collect the income, and pay over the income and principal as follows:

To pay the income annually to Janice R. (in the other instrument, Robert W.) Newman, daughter (son) of the Grantor, during her (his) lifetime. Upon the death of said Janice R. (Robert W.) Newman all the rest, residue and remainder of said fund shall be paid over to Sydney R. Newman, husband of the Grantor. If the said Sydney R. Newman shall not then be living, the rest, residue and remainder of said fund shall be paid over to such person or persons as the said Sydney R. Newman by his last will and testament may direct and appoint; upon the death of said Sydney R. Newman without having exercised such power of appointment to pay the rest, residue and remainder of said fund to his distributees.

The trustee was empowered to vote all stocks and securities held by him, and in his sole discretion to cause the securities making up the trust funds ‘to be registered in his own individual name, or in the name of his nominee, or may take and keep the same unregistered and retain them or any part thereof in such manner that they will pass by delivery * * * .‘

Each trust instrument contained the following paragraph:

TENTH: Said Sydney R. Newman shall have the power at any time during his life, by an instrument in writing delivered to the Trustee, to revoke this agreement, in whole or in part, or to alter or amend the same or to free any of the property held in trust from the terms of this trust, and upon receipt of such instrument in writing, the Trustee shall turn over to the Grantor any funds or property held by the Trustee hereunder as required by said written notice, and the receipt of the Grantor for such property shall be a full acquittance to the Trustee.

On the day the trusts were created petitioner delivered to the trustee the securities constituting the trust funds, duly endorsed by her in transferable form, with signature guaranteed. All of the securities had been purchased by petitioner with her own funds. The trustee acknowledged receipt of the securities in writing. The trustee has not caused the securities to be transferred on the books of the corporations out of petitioner's name. His reason for not doing so was that he desired to keep the securities in an easily marketable form, which in his opinion would not have been possible if he had had title to the securities transferred to his name as trustee; and, inasmuch as he was trustee, he did not care to have the securities listed in his own name as an individual. Since the stock remained in petitioner's name on the books of the corporations, she continued to receive the dividends thereon, but upon receipt thereof she immediately endorsed them over to the trustee. During 1940 the income of the trust for Janice was $700 and of the trust for Robert was $535.

Of the dividends received in 1940 by the trust for Janice, $150 in amount had been declared on June 4 payable on June 29 to holders of record on June 15. Of the dividends received in 1940 by the trust for Robert, $255 in amount had been declared prior to June 28, when the trust was created, and were payable to holders of record on or before June 28.

The trustee opened separate bank accounts, one for each trust, and the income of each trust was deposited therein. No withdrawals from those accounts have been made except to adjust an over-receipt of dividends and to purchase additional property for one of the trusts.

Petitioner's household expenses and the cost of support and education of the children beneficiaries since June 28, 1940, have been paid by petitioner's husband, who is well able from a financial standpoint to pay such expenses. Petitioner did not file a gift tax return for either trust.

OPINION.

ARUNDELL, Judge:

Respondent on brief has run the full gamut of provisions and theories under which trust income may be taxed to a grantor. Since we are of opinion that the income of the present trusts, with the exception hereinafter noted, is not taxable to petitioner, it is necessary to state briefly our reasons why we consider each provision inapplicable.

1. Section 166 of the Internal Revenue Code¹ is operative only if the power to revest corpus in the grantor is vested in the grantor or ‘in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom.‘ Paragraph then of the trust instruments placed such power in the grantor's husband. He, however, was remainderman of each trust, as well as the donee of a power to appoint the remainders in the event he predeceased the life beneficiaries. Such interests made him a person with a substantial interest adverse to revesting the corpus in the grantor. Notwithstanding this, the Commissioner argues that because of the doctrine of family solidarity, Helvering v. Clifford, 309 U.S. 331, the husband should not be regarded as having a substantial adverse interest. Altmaier v. Commissioner, 116 Fed.(2d) 162. We have heretofore rejected such an argument. Estate of Frederick S. Fish, 45 B.T.A. 120, 123; Estate of Edward Lathrop Ballard, 47 B.T.A. 784, 792; Stephen Hexter, 47 B.T.A. 483, 491; James G. Heaslet, 47 B.T.A. 1006, 1010; Meyer Katz, 46 B.T.A. 187, 194-195; Jane B. Shiverick, 37 B.T.A. 454. Our view was, and is, that the Clifford case does not mean that a person with an otherwise adverse interest will, solely by reason of marital relationship, act in accordance with the wishes of his or her spouse. This view is fortified in the case at bar by petitioner's statement in answer to a question on cross-examination as to whether her husband would pay and heed to petitioner's suggestions: ‘I think it would be the other way around. I might make the suggestion and then listen to him.‘

We conclude that by reason of the husband's adverse interest in the corpus section 166 is inapplicable.

2. The Commissioner contends, however, that section 167(a)(2)² may be invoked because the husband could have amended the trust by giving the income to petitioner. It is asserted that the husband has no interest in the income and consequently no interest adverse to directing that it be paid by petitioner.

We think it may indeed be questioned whether paragraph tenth may properly be construed to permit, while the trusts continue, the channeling of the income away from the minor beneficiaries, for whose benefit the trusts were primarily established. In Stuart v. Commissioner, 124 Fed.(2d) 772; affirmed on this issue, 317 U.S. 154, a power in trustees to alter, change, or amend in any respect was held not to authorize a gift of the corpus back to the grantors under Illinois law, the court quoting an Illinois case to the effect that ‘Their discretion as trustees of this fund is subject to the control of the courts of equity, and can not be arbitrarily exercised so as to deprive the beneficiaries of all benefit of the fund.‘ The Seventh Circuit stated:

* * * The same principle seems to prevail in all jurisdictions both state and federal. See Restatement of Law of Trusts, Sec. 170; Scott on Trusts, Vol. 2, Sec. 187; Lovett v. Farnham, 169 Mass. 1, 47 N.E. 246. Fleischman v. Commissioner, 40 B.T.A. 672 (acquiesced in by Commissioner); Downs v. Commissioner, 36 B.T.A. 1129.

This principle prevails in New York. See Scott on Trusts, vol. 2, sec. 185; Osborn v. Bankers Trust Co., 168 Misc.392; 5 N.Y.S.(2d) 211. Carrier v. Carrier, 226 N.Y. 114; 123 N.E. 135.

We need not, however, rest our decision upon a finding that under New York Law the husband could not by amendment of the trust give the income to petitioner. If paragraph tenth is broad enough to permit that, there is nothing in the paragraph that would preclude the husband from amending in his own favor. Respondent's argument tends to support such a conclusion, for he contends that...