Danz v. Comm'r of Internal Revenue
| Decision Date | 04 June 1952 |
| Docket Number | Docket Nos. 26402-26408,33429. |
| Citation | 18 T.C. 454 |
| Parties | JOHN DANZ, PETITIONER, ET AL.,* v. COMMISSIONER OF INTERNAL REVENUE RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. EXEMPTION— SECTION 101(6)— TRUST OPERATING REGULAR BUSINESS.— Congress, in section 101(6), did not intend to include in the exempt class, as a fund or foundation organized and operated exclusively for charitable purposes, a trust not engaged in charitable work but earning the larger part of its income by the operation of regular substantial businesses, unrelated to the operation of any charity, even though its property must eventually go to corporations of the type described in section 23(o)(2).
2. INCOME— TAXABLE TO GRANTOR— CHARITABLE TRUST— SECTION 22(a)— Clifford CASE.— The income of an irrevocable trust created for the purpose of receiving and earning funds ultimately to benefit charities is not taxable to the grantors.
3. ASSOCIATION TAXABLE AS A CORPORATION— SECTION 3797 (3).— An irrevocable trust created for the purpose of receiving and earning funds ultimately to benefit charities is not an association taxable as a corporation.
4. TRUSTS— DEDUCTION— CHARITABLE CONTRIBUTIONS— SECTION 162(a).— A trust is not entitled to a deduction under section 162(a) for that part of the gross income which is not paid or permanently set aside for the purposes and in the manner specified in section 23(o) pursuant to the terms of the deed creating the trust.
5. INCOME— DEDUCTIONS— CHRISTMAS BONUSES.— Deductions allowed for Christmas bonuses.
6. INCOME— DEDUCTIONS— CONTRIBUTIONS— ‘FOR THE USE OF‘— SECTION 23(o)(2).— Contributions to an irrevocable trust, the funds of which must ultimately go to charities of the kind described in section (o)(2) are for the use of such organizations and are deductible under section 23(o)(2).
7. STATUTE OF LIMITATIONS— RETURNS UNDER SECTION 54(f)— 275(a).— Forms filed under section 54(f) by a trust which supposed itself exempt from tax were not sufficient to start the running of the period fixed by section 275(a) for the assessment and collection of taxes due from such trust.
8. FAILURE TO FILE TIMELY RETURN— SECTION 291(a).— A trust was notified on July 3, 1947, that it was not exempt from tax and must file returns. It failed to file a return for 1947 until May 6, 1948, and failed to show that the delay was due to reasonable cause and not to willful neglect. The Commissioner properly added 10 per cent to the tax under section 291(a). F. A. LeSourd, Esq., for the petitioners.
Wilford H. Payne, Esq., and Douglas L. Barnes, Esq., for the respondent.
The Commissioner determined deficiencies in income tax as follows:
+------------------------------------------+
¦Docket¦ ¦ ¦ ¦
+------+------------------+-----+----------¦
¦No. ¦Petitioner ¦Year ¦Deficiency¦
+------+------------------+-----+----------¦
¦ ¦ ¦(1943¦$16,441.84¦
+------+------------------+-----+----------¦
¦26402 ¦John Danz ¦(1944¦46,624.14 ¦
+------+------------------+-----+----------¦
¦ ¦ ¦(1945¦45,042.33 ¦
+------+------------------+-----+----------¦
¦ ¦ ¦(1943¦16,441.84 ¦
+------+------------------+-----+----------¦
¦26403 ¦Jessie Danz ¦(1944¦46,624.14 ¦
+------+------------------+-----+----------¦
¦ ¦ ¦(1945¦45,042.33 ¦
+------+------------------+-----+----------¦
¦26405 ¦William Frank Danz¦1944 ¦595.25 ¦
+------+------------------+-----+----------¦
¦26406 ¦Selma Jane Danz ¦1944 ¦615.00 ¦
+------+------------------+-----+----------¦
¦26407 ¦Fredric Danz ¦1944 ¦587.30 ¦
+------+------------------+-----+----------¦
¦26408 ¦Selma Danz ¦1944 ¦587.30 ¦
+------------------------------------------+
The Commissioner determined the following deficiencies against the John Danz Charitable Trust, in Docket Nos. 26404 and 33429:
+-------------------------------------------------+
¦Year¦Kind of tax ¦Deficiency¦
+----+---------------------------------+----------¦
¦1943¦Income tax ¦$2,321.50 ¦
+----+---------------------------------+----------¦
¦ ¦Declared value excess-profits tax¦3,240.60 ¦
+----+---------------------------------+----------¦
¦ ¦Excess profits tax ¦11,106.82 ¦
+----+---------------------------------+----------¦
¦1944¦Income tax ¦4,563.93 ¦
+----+---------------------------------+----------¦
¦ ¦Declared value excess-profits tax¦10,315.19 ¦
+----+---------------------------------+----------¦
¦ ¦Excess profits tax ¦43,225.69 ¦
+----+---------------------------------+----------¦
¦1945¦Income tax ¦6,218.81 ¦
+----+---------------------------------+----------¦
¦ ¦Declared value excess-profits tax¦10,922.65 ¦
+----+---------------------------------+----------¦
¦ ¦Excess profits tax ¦45,029.26 ¦
+----+---------------------------------+----------¦
¦1946¦Income tax ¦33,219.02 ¦
+----+---------------------------------+----------¦
¦1947¦Income tax ¦19,679.63 ¦
+-------------------------------------------------+
For 1947 there is an addition to the tax under section 291(a) in the amount of $1,967.96.
The issues for decision are:
(1) Is the trust exempt from tax under section 101(6) and, if not, is its income taxable (a) to the community of John and Jessie Danz, (b) as income of an association taxable as a corporation, or (c) as income of a trust under Supplement E, and, as a part of (c), was it entitled to deduct its entire net income under section 162(a);
(2) If the trust income is taxable, did the Commissioner err in disallowing the amounts paid as Christmas bonuses to employees for 1943, 1944, 1945, and 1946;
(3) Are the individuals entitled to deductions under section 23(o)(2) for contributions made to the trust;
(4) Had the statutory period for assessing and collecting the tax expired before the mailing of the deficiency notice to the trust for the years 1943, 1944, and 1945; and
(5) Had the trust reasonable grounds for believing that no return was due for 1947 so that no addition to the tax is due under section 291(a) for failure to file a return?
John and Jessie Danz are husband and wife. William Frank and Selma Jane Danz are husband and wife. Fredric and Selma Danz are husband and wife. They all reside in Seattle, Washington. John and Jessie are the parents of William and Fredric. All returns for the petitioners herein were filed with the collector of internal revenue for the district of Washington.
John Danz has been engaged in the business of operating motion picture theatres in Seattle for about forty years. He concluded during the latter part of World War II that different ideologies were causing a great deal of trouble and even had a tendency to create wars; the country was about ready for some philosophy with some common ground acceptable to everyone based upon science, pragmatism, experience, and research that would eliminate all differences of opinion; but to get such an organization started in a large number of communities would require money. He and his wife created a trust on December 31, 1942, for the purpose of making and supplying money for that purpose. They called it ‘The John Danz Charitable Trust.‘ John hoped to find some organization in the United States with a number of branches which could be helped with the trust funds to grow and educate the people. He did not know of any such organization at the time he created the trust and for that reason reserved in the trust the right to designate the charitable beneficiaries of the trust.
John and Jessie, as grantors, transferred to the trustees by the trust instrument 900 shares of Sterling Theatres, Inc., common stock. John, William, and Fredric Danz were named as trustees in the trust instrument. The trustees were given broad powers over the trust property, including the power to engage in business under various forms, to loan funds of the trust with or without security, to join in enterprises in which the trustees were personally interested provided that they exercised good faith in the interests of the trust estate, and, in investing or speculating, to combine funds of any trusts created by the grantors. The trustees were entitled to receive reasonable compensation for their services but received non during the taxable years. They were not to be personally liable, in the absence of bad faith, for any losses from proper use of the trust funds. The grantors were not to derive and they have not derived, directly or indirectly, any benefit from the trust property. John Danz was to have the right during his lifetime and by his will to designate the beneficiary or beneficiaries of the trust and to change, add, or withdraw beneficiaries which were to receive corpus or income of the trust at times and in amounts specified by him. Designations were to be in writing delivered to the trustees. Only a corporation or organization ‘of a type which is within the exemption from Federal Income Tax now granted by Paragraph 101 of the Internal Revenue Code and in the event such exemption is hereafter restricted, then also within such restrictions‘ could be designated and the beneficiary also had to be of the type then specified in sections 23(o), 812(d), and 1004(a)(2) of the Internal Revenue Code so that the contribution, bequest or gift to such beneficiary would be deductible from income and exempt from estate and gift tax and in the event those classes were further restricted, then the beneficiary had to be within such restrictions. Named adult grandchildren or the trustees were to make similar designations covering any amount remaining in the trust after John's death and not covered by his will. The trust was irrevocable but could be amended in certain respects by the joint action of William Danz, Fredric...
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