Blakeslee v. Comm'r of Internal Revenue, Docket No. 5811.

• Decision Date: 19 November 1946
• Docket Number: Docket No. 5811.
• Citation: 7 T.C. 1171
• Parties: ARTHUR L. BLAKESLEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

7 T.C. 1171

ARTHUR L. BLAKESLEE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 5811.

Tax Court of the United States.

Promulgated November 19, 1946.

In 1934 and 1935 petitioner created trusts in which a bank was named trustee and petitioner's only daughter was the beneficiary. The corpus of the 1934 trust consisted of stock of the Kalamazoo Stove Co., of which petitioner was president but a minority stockholder, and other securities. The 1935 trust corpus was originally composed of other shares of the Stove Co. stock. The grantor reserved certain rights: (1) To vote the Stove Co. stock; (2) to veto the sale of the Stove Co. stock; (3) to consent to the investment of trust income; (4) to substitute trustees; and (5) to defer for a limited time the final distribution of the trust corpus to the beneficiary. All of these reservations were to meet potential emergencies or to conform to beneficiary's development in financial matters and were solely for her benefit. The trusts terminate when the beneficiary shall reach the ages specified therein. The trustee may expend from the income amounts necessary for the daughter's education (until she shall become 21 years of age). The unexpended income accrues until distribution. The trustee and its trust officer administered and managed both trusts. Petitioner never assisted or interfered therein. Petitioner never exercised his right to vote the Stove Co. stock, to veto its sale, or to veto investment of the trust income as made by the trustee. During the taxable year none of the trust income was expended by trustee for the beneficiary's education and hence all of it was accumulated. Held, that the trust income is not taxable to petitioner under either section 167 or section 22(a) of the Internal Revenue Code. Willis D. Nance, Esq., for the petitioner.

Cecil H. Haas, Esq., for the respondent.

The respondent determined a deficiency of $6,595.78 in the petitioner's income tax for the year 1941.

The major issue is whether or not the petitioner is taxable on the income from two trusts created by him on August 1, 1934, and July 10, 1935, under the provisions of section 22(a) or section 167 of the Internal Revenue Code.

A collateral issue is whether or not the increment in value of certain United States savings bonds, series B, C, and D, held by the trusts, in the absence of an election by the petitioner in the taxable year to have such increment taxed to him, should be taxed to the petitioner. This issue is to be decided only if the first issue goes against the petitioner.

FINDINGS OF FACT.

Certain facts were stipulated. The portions thereof material to the issue are as follows:

The petitioner is an individual, residing in Kalamazoo, Michigan. He filed his income tax return for the year 1941 on the basis of cash receipts and disbursements with the collector of internal revenue for the district of Michigan.

On August 1, 1934, the petitioner created a trust, sometimes called the 1934 trust, by transferring to the First National Bank & Trust Co. of Kalamazoo, Michigan, in trust, for the benefit of the daughter of the petitioner, Mary Elizabeth Blakeslee, hereinafter called Betty; the following securities:

1,000 shares Kalamazoo Stove Co. stock

10 shares Chase National Bank stock

1 share Amerex Holding Corporation stock

$1,500 Gull Lake Country Club first mortgage bond

$450 United States HOLC bond

$50 City of Muskegon Heights school district bond

$50 Fourth Liberty Loan bond

The pertinent paragraphs of the trust instrument are as follows:

b. The Trustee is authorized to collect the dividends and interest accruing thereon, and to invest and reinvest the income in such securities as the Donor shall first in writing agree to.

c. Donor is the father of MARY ELIZABETH BLAKESLEE (sometimes hereinafter referred to as the Beneficiary), who was born August 21, 1921, and the object of this instrument is to provide a fund for the education of said Mary Elizabeth Blakeslee.

d. Donor hereby directs that so much of the income derived from said Trust Estate as may be necessary to furnish his said daughter with her education, shall be used for that purpose only until the Beneficiary shall attain the age of twenty-one (21) years, and that said Trustee shall account to and pay directly to the Beneficiary all income accruing on said Trust Estate after the said Beneficiary shall become of the age of twenty-one years.

e. It is mutually agreed, that the said Trustee will surrender to the Beneficiary, on her attaining her twenty-fifth (25th) birthday, the said shares of stock and any and all other securities that may be then remaining in its hands, unless notice has been served upon the Trustee in the manner provided in the following subdivision f.

f. The Donor reserves the right to serve written notice upon the Trustee, extending the period of final delivery to the Beneficiary of said stock and securities, for the period of an additional ten (10) years, to-wit: until the Beneficiary shall attain the age of thirty-five years, and the Donor reserves the privilege, in the event of his death prior to the Beneficiary's attaining the age of twenty-five years, of permitting his wife, Guelda Blakeslee, the mother of the Beneficiary, to give written notice of the extension of time of distribution if she so desires.

g. If the Beneficiary should die prior to the period herein fixed for final distribution and delivery to her of the Trust Estate, and she shall leave issue her surviving, then the Donor directs that upon the death of the Beneficiary the Trustee shall immediately make delivery of said stock and other securities then constituting the Trust Estate, to the issue of the Beneficiary, and if more than one of said issue, then to said issue share and share alike.

h. If the Beneficiary shall die prior to the period herein fixed for final distribution and delivery to her of the securities, without issue surviving, the Donor directs the Trustee to make delivery of the stock and securities then in its hands to the Donor and his wife, the said Guelda B. Blakeslee, or to the survivor of them.

i. If the Beneficiary should die prior to the period herein fixed for final distribution and delivery to her of the securities, without issue surviving and neither the Donor or his wife should be living at the date of the death of the Beneficiary, the Trustee shall thereupon deliver to the personal representative of the estate of the deceased Beneficiary the stock and securities then constituting the Trust Estate in its hands, and under such circumstance the Beneficiary is given the power of alienation of said funds at any time after she become of lawful age to make a Last Will and Testament.

j. The Donor directs that no sale shall be made of any of the shares of the Kalamazoo Stove Company, excepting by and with his written consent, and that any stock dividends that may accrue on any of said stocks shall be treated as principal, and not as income, for the purpose of said distribution.

k. * * *

The Donor, during his lifetime, and prior to the time of distribution of said Trust Funds, reserves the right to vote the stock of said Kalamazoo Stove Company at all meetings of the stockholders of said Company, and the Trustee shall, on receipt of notice of such meetings, mail or deliver to Donor a proper proxy to vote said stock at all such meetings.

The Donor also reserves the right to substitute another Trustee in the place of the Trustee herein named, and the Trustee shall upon receipt of the written demand of the Donor forthwith account to and surrender the Trust Estate unto such succeeding Trustee as the Donor may in writing nominate.

The Donor also reserves the right to add other securities to said Trust Estate at any future time he may desire and if he does so, the Trustee shall administer such additional securities in the same manner as is herein provided for the administration of the securities enumerated in said Schedule A.

On July 10, 1935, the petitioner created a trust, sometimes called the 1935 trust, by transferring 2,000 shares of the capital stock of the Kalamazoo Stove Co. to the First National Bank & Trust Co. of Kalamazoo, Michigan, in trust, for the benefit of his daughter Betty. The 1935 trust was identical in language with the 1934 trust, except that in paragraph (F) the petitioner reserved the right to postpone the final distribution of the corpus to the beneficiary until she should reach the age of not more than 45 years and in paragraph (I) it was provided that if Betty should die prior to final distribution to her, without the survival of her issue, or of either the petitioner or his wife, the residue of the trust estate should go to Raymond D. Blakeslee and Tresa Blakeslee Anderson, brother and sister of the petitioner.

On October 30, 1936, the petitioner named his wife, Guelda B. Blakeslee, and C. H. Kleinstuck of Kalamazoo, Michigan, as additional trustees to serve with the First National Bank & Trust Co. of Kalamazoo in both the 1934 and 1935 trusts.

Under date of March 29, 1941, pursuant to paragraph (f) of the 1934 trust agreement, the petitioner served on the trustees in the 1934 trust a written notice relating to the time for distribution of the corpus of the 1934 trust to the beneficiary. By that notice the petitioner amended paragraph (e) of the trust instrument to provide that one-fourth of the trust corpus should be transferred to Betty when she should become 25 years of age, one-third of the remainder when she should become 30 years of age, and the residue thereof when she should become 35 years of age.

Under the same date, pursuant to paragraph (F) of the 1935 trust agreement, the petitioner served on the trustees in the 1935 trust a written notice relating to the time of distribution of the corpus of the 1935 trust to the beneficiary. The petitioner thereby amended paragraph (E) of the trust to provide that the final distribution of the corpus...