Griswold v. Comm'r of Internal Revenue, Docket Nos. 74135

• Decision Date: 31 December 1962
• Docket Number: 74136.,Docket Nos. 74135
• Citation: 39 T.C. 620
• Parties: DONALD G. GRISWOLD AND LILLIAN S. GRISWOLD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CLA-VAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

39 T.C. 620

DONALD G. GRISWOLD AND LILLIAN S. GRISWOLD, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CLA-VAL CO., PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 74135

74136.

Tax Court of the United States.

Filed December 31, 1962.

[39 T.C. 621]

John E. Scheifly, Esq., and Irving M. Grant, Esq., for the petitioners.

Karl M. Samuelian, Esq., for the respondent.

1. Foundation's loans to its substantial donors during the taxable years held, on the facts, not to constitute operation for a substantial nonexempt purpose.

2. Respondent did not notify Foundation that it had engaged in prohibited transactions. Held, even if Foundation's loans to its substantial donors constituted prohibited transactions, nevertheless, they were not entered into for the purpose of diverting Foundation's corpus or income from its exempt purposes.

3. Cla-Val's contribution made during its taxable year 1955 to Foundation held deductible in Cla-Val's taxable year 1955.

TRAIN, Judge:

Respondent determined deficiencies in petitioners' income tax as follows:

+---------------------------------------------------------------------------+
                ¦ ¦Year 1 ¦Deficiency ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦ ¦ ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦( 1952 ¦$112,141.78 ¦
                +---------------------------------------------------+----------+------------¦
                ¦Donald G. and Lillian S. Griswold, Docket No. 74135¦( 1953 ¦2 1,013.50¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦ ¦ ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦( 3 1953¦11,374.99 ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦( 3 1954¦7,770.96 ¦
                +---------------------------------------------------+----------+------------¦
                ¦Cla—Val Co., Docket No. 74136 ¦( 1955 ¦7,116.94 ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦( 1956 ¦23,027.71 ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦( 1957 ¦2,035.20 ¦
                +---------------------------------------------------+----------+------------¦
                ¦ ¦ ¦ ¦
                +---------------------------------------------------------------------------+
                

Many of the issues raised in the pleadings, including all those relating to the corporate petitioner's taxable years 1956 and 1957, have been resolved by stipulation. The excess profits tax issue relating to the corporate petitioner's taxable year 1954 has not been pursued either at trial or on brief and we assume it has been abandoned. The issues remaining to be decided all relate to the deductibility as charitable contributions of donations to the Sherry Griswold Foundation. These issues are:

(1) Was the Sherry Griswold Foundation organized and, for the years 1952 through 1955, operated exclusively for the exempt purposes specified in sections 23(o)(2) and 23(q)(2) of the 1939 Code and section 170(c)(2)(B) of the 1954 Code;

(2) If the first issue is answered in the affirmative, then are contributions to the Sherry Griswold Foundation nevertheless not deductible because the Foundation engaged in prohibited transactions with the purpose of diverting its corpus or income from its exempt purposes and the prohibited transactions involved a substantial part of the Foundation's corpus or income;

(3) If the first issue is answered in the negative, then are contributions to the Sherry Griswold Foundation nevertheless deductible because made for the use of organizations organized and operated exclusively for the exempt purposes specified in the Code sections referred to above; and

(4) If the contributions are deductible, then is the contribution made by Cla-Val Co. in its 1955 taxable year deductible in that year?

FINDINGS OF FACT.

The facts stipulated to by the parties are incorporated herein by reference and hereby found as stipulated.

[39 T.C. 622]

Petitioners Donald G. Griswold (hereinafter sometimes referred to as Griswold) and Lillian S. Griswold (hereinafter sometimes referred to as Lillian), husband and wife, reside at 2231 Pacific Drive, Corona del Mar, Calif. Their Federal income tax returns for the years 1952 and 1953 were filed with the district director of internal revenue at Los Angeles, Calif.

Petitioner Cla-Val Co. (hereinafter sometimes referred to as Cla-Val) is a California corporation organized December 8, 1947, with its principal office at 17th and Placentia, Newport Beach, Calif. It reports its income on an accrual basis and upon a fiscal year ending March 31 for Federal income tax purposes. Cla-Val's Federal income tax returns for the taxable years 1953 through 1955 were filed with the district director of internal revenue at Los Angeles, Calif. At all times here pertinent Griswold was Cla-Val's president and sole stockholder.

For some time prior to March 31, 1952, Griswold was the owner of Cla-Val Co. (hereinafter sometimes referred to as Company), a sole proprietorship, which operated a foundry and manufactured and sold hydraulic valves. On April 1, 1952, Griswold transferred Company's hydraulic valve business assets, subject to liabilities, to Cla-Val in exchange for 1,000 shares of Cla-Val's no-par common stock. On April 1, 1952, Griswold transferred Company's land and buildings to Corelco, Inc. (hereinafter sometimes referred to as Corelco), a California corporation. At all times here pertinent Griswold was the sole stockholder of Corelco. Thereafter Griswold transferred Company's foundry business to Soundcast Co. (hereinafter sometimes referred to as Soundcast), a California corporation. At all times here pertinent Griswold was the sole stockholder of Soundcast.

On or about December 30, 1952, Griswold and Lillian executed an instrument creating the Sherry Griswold Foundation (hereinafter sometimes referred to as Foundation), named after their son who was killed in action during World War II. At all times here pertinent Griswold and Lillian have been the sole trustees of Foundation. Foundation filed with the district director of internal revenue at Los Angeles, Calif., fiduciary income tax returns each April during 1954 through 1956 for the immediately preceding calendar year, except that the return for 1952 was filed April 30, 1954.

Pertinent provisions of the trust instrument creating the Sherry Griswold Foundation are as follows:

DECLARATION OF TRUST, Made this 30th day of December, 1952, by DONALD G. GRISWOLD and LILLIAN S. GRISWOLD. * * *

WITNESSETH:

1. Certain facts and certain circumstances and/or events which occurred or exist are now recited as a part hereof, along with certain of the denominations which will be hereinafter used, all as follows, to wit:

[39 T.C. 623]

(a) the initial Trustees of this Trust are DONALD G. GRISWOLD and LILLIAN S. GRISWOLD. * * *

The singular term ‘Original Trustee’ as used herein shall designate the individuals who may from time to time be acting as Trustees hereunder.

(g) The Trust created by this instrument shall be known as the ‘SHERRY GRISWOLD FOUNDATION,‘ in memory of the deceased son of DONALD G. GRISWOLD and LILLIAN S. GRISWOLD.

2. The present Original Trustee declares that it holds title to the Trust Estate as Trustee for the charitable uses and purposes and upon the terms and conditions set forth herein. The Successor Trustee, and any person becoming one of those comprising the Original Trustee, by accepting the office of Trustee upon the contingency provided herein, shall adopt the Declaration of Trust in this paragraph contained.

* * *10 *

5. The Trust created by this instrument and all transfers, gifts, conveyances, and assignments thereto shall be irrevocable. All instruments whereby property, rights, or privileges are transferred, given, conveyed, or assigned to the Trustee, wherein the fiduciary character of the transferee is revealed, shall state that the said transfer is absolute and irrevocable. Every instrument of receipt executed by the Trustee wherein it acknowledges that it holds property, rights, or privileges transferred to it as a part of the Trust Estate, shall state that the transfer in trust evidenced by the said instrument of receipt is absolute and irrevocable.

7. Upon termination of this Trust, whether by virtue of the exercise of the power to terminate described above, or by force of law, or by judicial decree, or for any cause or reason whatsoever, all legal and equitable right and title to the Trust Estate at the time of such termination shall vest in The First Church of Christ, Scientist, at Boston, Massachusetts. If the gift over to said organization shall fall for any reason, then all right, title, and interest in and to the Trust Estate shall be distributed to recognized and established Christian Science Branch Churches in a manner and in proportions to be decided upon by five (5) registered Christian Science Practitioners who are to be appointed by the Successor Trustee. If the two above gifts over shall fail for any reason, then all right, title, and interest in and to the Trust Estate shall vest in the United States of America, in fee simple absolute. It is the intention of the Trustors, acting for themselves and for their heirs, executors, administrators, and assigns, to transfer and relinquish all beneficial interest in the Trust Estate, and they desire that any court construing this instrument, whether in exercise of its cy pres power, or otherwise, give effect to the said intention.

8. The Trustee is expressly authorized to hold and retain any securities, properties, or investments received by it by transfer from the Trustors as long as in its absolute and uncontrolled discretion it elects to do so, and neither Section 2261 of the Civil Code of California, nor any other statutory provision, shall constitute a limitation upon the exercise by the Trustee of its discretion in continuing to hold securities, properties, or investments received hereunder. The...