Estelle Morris Trusts Nos. 401 Through 410 v. Comm'r of Internal Revenue, Docket Nos. 3324-66
| Decision Date | 09 October 1968 |
| Docket Number | Docket Nos. 3324-66,6623-66.,6624-66,3325-66 |
| Citation | 51 T.C. 20 |
| Parties | ESTELLE MORRIS TRUSTS NOS. 401 THROUGH 410, NATHAN SCHWARTZ, TRUSTEE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTB. R. MORRIS TRUSTS NOS. 401 THROUGH 410, NATHAN SCHWARTZ, TRUSTEE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Alan N. Halkett, for the petitioner.
James A. Thomas, for the respondent.
1. In 1953, grantors executed 10 irrevocable declarations of trust, each of which directed the trustee, subject to certain discretionary distributions, to accumulate the income for the life of each of two primary beneficiaries and, upon the death of both of them, to distribute the principal and accumulated income to trusts to be created for their surviving issue. The 10 instruments were similar in form except for differing periods for income accumulation and distribution, and differing termination dates. The trust property under each declaration was combined or pooled for administrative convenience. Each trust declaration was administered separately and acquired separate investments. Held, that each trust declaration created two separate trusts under sec. 641, I.R.C. 1954.
2. Held, further, that grantors created 20 rather than 2 trusts principally for tax-avoidance reasons.
3. Held, further, that each of the 20 trusts qualified in the years 1961 through 1965 as a taxable entity under sec. 641, I.R.C. 1954.
Respondent determined deficiencies against petitioner in the following amounts:
+--------------------------------------------------------------------------+
¦Petitioner ¦Docket ¦FYE ¦Amount ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦No. ¦Aug. 31--¦ ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦ ¦ ¦ ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦( 3324-66¦1961 ¦$23,111.89¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦( 3324-66¦1962 ¦21,475.95 ¦
+-------------------------------------------+---------+---------+----------¦
¦Estelle Morris Trusts Nos. 401 through 410,¦( 6624-66¦1963 ¦33,645.60 ¦
+-------------------------------------------+---------+---------+----------¦
¦Nathan Schwartz, trustee ¦( 6624-66¦1964 ¦34,889.33 ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦( 6624-66¦1965 ¦27,455.23 ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦ ¦ ¦ ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦( 3325-66¦1961 ¦23,111.89 ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦( 3325-66¦1962 ¦21,475.95 ¦
+-------------------------------------------+---------+---------+----------¦
¦B. R. Morris Trusts Nos. 401 through 410, ¦( 6623-66¦1963 ¦33,645.61 ¦
+-------------------------------------------+---------+---------+----------¦
¦Nathan Schwartz, trustee ¦( 6623-66¦1964 ¦34,888.57 ¦
+-------------------------------------------+---------+---------+----------¦
¦ ¦( 6623-66¦1965 ¦27,454.62 ¦
+--------------------------------------------------------------------------+
These deficiencies arise out of respondent's determination that certain trusts created by 10 trust instruments executed by E. S. Morris and Etty Morris on September 11, 1953, constituted two trusts for Federal income tax purposes, rather than 20 trusts as reported. Each notice of deficiency contained the following statement explaining the determination: ‘It is determined that you constitute a single trust for federal income tax purposes under the provisions of sections 61, 642, 643, 6012 and other applicable provisions of the Internal Revenue Code.’ After the petitions and answers were filed, respondent filed amended answers alleging that the Estelle Morris Trusts Nos. 401 through 410 and the B. R. Morris Trusts Nos. 401 through 410 together constituted a single trust for Federal income tax purposes for all the years in question and praying that this Court sustain the resulting deficiencies.
The issues presented for decision are: (1) Whether each of the 10 declarations of trust executed by E. S. Morris and Etty Morris on September 11, 1953, created 1 trust or 2 trusts for Federal income tax purposes; and (2) whether, depending on the resolution of issue (1), the trusts created by the 10 declarations of trust are taxable as 1 or 2 trusts as respondent contends, or as 10 or 20 trusts, as petitioner contends, or as some other intermediate number.
Some of the facts have been stipulated and the stipulations and exhibits 1 thereto are incorporated herein by reference.
Nathan Schwartz (hereinafter referred to as petitioner) is the trustee of the Estelle Morris Trusts Nos. 401 through 410 and of the B. R. Morris Trusts Nos. 401 through 410. He was a legal resident of Beverly Hills, Calif., at the time the petitions in these cases were filed. Federal income tax returns for each of the 20 trusts were filed with the district director of internal revenue at Los Angeles, Calif., for each of the years here involved.
E. S. Morris was a successful corporate executive engaged primarily in the furniture-manufacturing business. He also engaged in some real estate investment activities over a period of about 25 years. For a number of years prior to his death in December 1956, E. S. Morris made gifts to his children and grandchildren. Some of these gifts took the form of trusts, established by him and his wife, Etty Morris, for each of their 11 grandchildren. E. S. Morris left an estate valued in excess of $500,000.
Barney R. (B. R.) Morris is the son of E. S. and Etty Morris. B. R. Morris and Estelle Morris are husband and wife and in September 1953 had two children: Karen, then age 11, and Richard, then age 8. B. R., Estelle, Karen, and Richard Morris are now living, and B. R. and Estelle have no other children.
On September 11, 1953, E. S. and Etty Morris executed, as trustors (grantors), 10 written instruments, each designated ‘Declaration of Trust.’ Each declaration of trust was identical in form, except as to the period for accumulation of income, and the date the trust was to terminate.
There are no number designations, as such, in the trust instruments, but after they were executed they were given number designations, namely, 401 through 410. The trusts were also sometimes further designated Estelle Morris Trusts Nos. 401 through 410 and B. R. Morris Trusts Nos. 401 through 410. These trusts are sometimes herein collectively referred to as Morris Trusts.
The declarations of trust provide that the trustee is to accumulate the income from the trust estate for the life of the primary beneficiaries, Barney R. Morris and Estelle Morris. The trustee is required to distribute income and principal to the primary beneficiaries upon written request of the primary beneficiaries and a showing by the primary beneficiary that he is unable to maintain his accustomed standard of living. The trustee is given the discretionary power to distribute current or accumulated income and principal, in case of emergency, to any beneficiary or issue of any beneficiary.
Each declaration of trust contains the following provisions concerning the construction and administration of the trust estate:
(A) DESIGNATION OF PROPERTY
The Trustee shall apportion the Trust Estate into two (2) equal shares, each of which shall be a separate Trust; one of which shares shall be held, managed and distributed for the benefit of BARNEY R. MORRIS, and the other of which shares shall be held, managed and distributed by the Trustee for the benefit of ESTELLE MORRIS, both of whom are hereinafter referred to as the ‘Primary Beneficiaries.’
(E) POWERS OF THE TRUSTEE
(25) Though it is the intention of the Trustors that the two shares created by the Trustors for the benefit of the Primary Beneficiaries, and all of the shares created for the benefit of the lawful issue of the Primary Beneficiaries, shall each constitute a separate Trust, nevertheless, for the sake of convenience in acquiring, holding, and managing such shares, the Trustee shall not be required to partition any property of this Trust received by him, but may hold or sell the same jointly for all shares according to their respective interests therein, and similarly, the Trustee may pool or combine the principal of all shares in making investments or re-investments, and the Trustee may hold or sell the same jointly for all shares according to their respective interest therein, assigning or apportioning to each share its interest therein, all as the Trustee, in his discretion, may determine.
Upon the death of a ‘primary beneficiary’ prior to termination of the trust, his or her share is to be added to the share of the surviving primary beneficiary. After the death of both ‘primary beneficiaries,‘ the trustee is to apportion the share or shares then existing equally among the surviving issue of the ‘primary beneficiaries,‘ each share thereby created, to constitute a separate trust.
Paragraphs (B)(6)(a), (b), (d), and (e) of each declaration of trust contain provisions concerning the period of accumulation of income and the time for termination of the trust, and provide as follows:
(B) DISTRIBUTION OF INCOME AND PRINCIPAL
(6) Upon the death of both of the Primary...
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