Apicella v. Comm'r of Internal Revenue

• Decision Date: 09 August 1957
• Docket Number: 56364.,Dockets Nos. 56362,56363
• Citation: 28 T.C. 979
• Parties: SALVATORE APICELLA, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

28 T.C. 979

SALVATORE APICELLA, ET AL.,1 PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dockets Nos. 56362

56363

56364.

Tax Court of the United States.

Filed August 9, 1957.

Vincent B. Lewin, Esq., for the petitioners.

Theodore E. Davis, Esq., for the respondent.

For several years prior to 1933, petitioner Salvatore Apicella engaged in the sale and manufacture of furniture as a sole proprietor, during which time his wife, Rachel, contributed some capital and services. In 1933 the business was incorporated. All the stock of the corporation, consisting of 200 shares, was issued to Salvatore who, in 1936, transferred 100 of the shares to Rachel. On December 23, 1936, Salvatore created a trust for the benefit of petitioners' three children aged 14, 11, and 7. He transferred 60 shares of the 100 held by him to the trust. In 1937 Rachel transferred 34 of the 100 shares held by her to the trust. The trust was irrevocable and was to continue until the death of Salvatore or until the youngest child attained the age of 25, whichever event occurred later. Salvatore was designated as the sole trustee until his death and as such sole trustee retained broad powers to control, manage, and invest the trust corpus as he should see fit. On December 31, 1943, the corporation was liquidated and petitioners, their two sons, then aged 21 and 18, and Salvatore, as trustee, entered into a purported partnership agreement with the entire liquidating distribution of the corporation as capital. The taxable years involved are 1943 to 1950, inclusive. Held:

1. The trust should not be recognized for income tax purposes under the doctrine of Helvering v. Clifford, 309 U.S. 331.

2. Respondent did not err in determining that the long-term capital gain from the liquidation of the corporation was taxable to petitioners.

3. During the years involved, neither the trust nor the two sons were bona fide partners in the business conducted as the Arrow Upholstery Company.

ARUNDELL, Judge:

These consolidated proceedings involve deficiencies in income tax for the taxable years ended December 31, 1943 through 1950, as follows:

+-------------------------------------+
                ¦    ¦Deficiency                      ¦
                +----+--------------------------------¦
                ¦Year¦Docket No.¦Docket No.¦Docket No.¦
                +----+----------+----------+----------¦
                ¦    ¦56362     ¦56363     ¦56364     ¦
                +----+----------+----------+----------¦
                ¦1943¦$1,316.09 ¦$425.85   ¦          ¦
                +----+----------+----------+----------¦
                ¦1944¦16,354.94 ¦13,829.04 ¦          ¦
                +----+----------+----------+----------¦
                ¦1945¦23,039.42 ¦18,686.92 ¦          ¦
                +----+----------+----------+----------¦
                ¦1946¦35,455.11 ¦29,533.16 ¦          ¦
                +----+----------+----------+----------¦
                ¦1947¦13,856.60 ¦9,573.96  ¦          ¦
                +----+----------+----------+----------¦
                ¦1948¦          ¦          ¦$27,734.75¦
                +----+----------+----------+----------¦
                ¦1949¦          ¦          ¦35,826.73 ¦
                +----+----------+----------+----------¦
                ¦1950¦          ¦          ¦23,656.88 ¦
                +-------------------------------------+
                

The issues are: (1) Whether petitioner Salvatore Apicella, on December 23, 1936, created a valid trust for income tax purposes in favor of petitioners' three minor children; (2) whether petitioners are taxable on the entire liquidating dividend of a corporation which was liquidated on December 31, 1943, and (3) whether petitioners are taxable on the entire income from the operation of a furniture upholstery business carried on under the name of the Arrow Upholstery Company during the years 1944 through 1950, or whether petitioners' two sons and petitioner Salvatore Apicella, as trustee for his daughter, Marie, were also partners in the conduct of the business. All other issues raised by petitioners were abandoned at the hearing.

FINDINGS OF FACT.

Petitioners are husband and wife. They filed separate returns for the years 1943 through 1947 and joint returns for the years 1948 through 1950. The returns were filed with the then collector of internal revenue for the third district of New York. Petitioners reside at Stamford, Connecticut.

Petitioner Salvatore Apicella (hereafter sometimes referred to as Salvatore) engaged in the sale and manufacture of upholstered furniture as a sole proprietor from approximately the year 1922 until the year 1934. Petitioner Rachel Apicella, the wife of Salvatore, contributed some capital and services to the sole proprietorship during the said years. In November 1933, Salvatore organized a corporation, Arrow Upholstery Co., Inc., under the laws of the State of New York, and as of January 1, 1934, the assets of the sole proprietorship were transferred to this newly formed corporation. In consideration for those assets, Arrow Upholstery Co., Inc., issued all of its capital stock in the amount of 200 shares of common stock, having a fair market value of $500 per share, to Salvatore. During the year 1936, Salvatore transferred 100 of the aforesaid shares of common stock to his wife, Rachel Apicella.

Petitioners had three children whose names and dates of birth are as follows:

+-------------------------------------------------------+
                ¦Francis S. (also known as Frank) Apicella¦Aug.¦25, 1922¦
                +-----------------------------------------+----+--------¦
                ¦Salvatore Apicella, Jr                   ¦Aug.¦25, 1925¦
                +-----------------------------------------+----+--------¦
                ¦Marie Apicella                           ¦July¦4, 1929 ¦
                +-------------------------------------------------------+
                

On December 23, 1936, Salvatore created a trust which was to be governed by the laws of the State of New York. The trust was for the benefit of the above-mentioned three children of petitioners and was to continue until the death of Salvatore or until the youngest child attained the age of 25 years, whichever event occurred later. Salvatore was still living at the time of the hearing of these proceedings.

Salvatore designated himself as the sole trustee of the trust during his lifetime. Upon his death there were to be successor trustees. A part of the corpus of the trust consisted of 60 shares of the common stock of Arrow Upholstery Co., Inc., then owned by Salvatore. The trust indenture provided that additional property could be conveyed to the trust at any time. On November 15, 1937, petitioner Rachel Apicella transferred to the trust 34 shares of the common stock of Arrow Upholstery Co., Inc., then owned by Rachel. Of the 60 shares transferred by Salvatore, 20 shares were to be held in trust for each child. Of the 34 shares transferred by Rachel, 12 were to be held in trust for Frank and 11 shares were to be held in trust for each of the other two children. Salvatore filed a gift tax return for the calendar year 1936 and petitioner Rachel Apicella filed a gift tax return for the calendar year 1937, in which returns the above gifts were reported.

The trust indenture provided in part:

That SALVATORE * * * has sold, assigned, transferred, granted, conveyed and set over and by these presents does hereby sell, assign, transfer, grant, convey and set over unto himself, as trustee, all of the right, title and interest owned, seized or possessed by him, individually, in and to the property described in Schedule ‘A’ hereto annexed and made a part of this instrument, receipt whereof is hereby acknowledged, and does declare that he stands seized and possessed of the said property as trustee, upon the following terms, trusts and conditions, which are hereby imposed and impressed upon the said property, to wit:

FIRST: During the lifetime of the said SALVATORE APICELLA, the said property shall be held, managed, invested and reinvested by him as trustee and the income, rents, issues and profits thereof shall be collected by him and the net income, after payment of all proper charges and expenses shall be disposed of as follows:

(a) One-third (1/3) of said net income shall be applied, in the discretion of the trustee, for the support, education and maintenance of his son, FRANK APICELLA, until the said Frank Apicella shall attain the age of twenty-one (21) years, and any surplus income not so applied shall be accumulated by the trustee until such time. Upon the said Frank Apicella attaining the age of twenty-one (21) years the trustee shall pay over to him any accumulated income then in his hands, and thereafter the trustee shall pay over the entire net income of said fund to the said Frank Apicella until his death or until the death of the said SALVATORE APICELLA, whichever shall first occur.

Subparagraphs (b) and (c) of paragraph First were identical with (a) above except for the substitution of the names of the other two children, respectively. Subparagraph (d) of paragraph ‘First’ provided:

(d) In the event that any of said three (3) children of the said Salvatore Apicella shall die during his lifetime, then the income which would otherwise have been paid to or applied to the use of such child so dying shall be paid over one-third (1/3) to the widow, if any, of said child (if such child be a male) and the balance of said income or the entire income in the event that said child shall not be a male, or shall not have left a widow him surviving, or if he shall have left a widow him surviving but such widow shall thereafter die during the lifetime of said Salvatore Apicella, shall be paid over and distributed among the then living issue of such child, per stirpes, or in default of such issue to and among the other children or issue of the said Salvatore Apicella then living, per stirpes.

Paragraph Second of the trust indenture provided that on the death of Salvatore, all right, title, interest, and ownership in and to the trust property shall pass to and be vested in the successor trustees, who were to hold, manage, invest, and reinvest the trust property upon substantially the same terms as provided in paragraph ‘First’ except that the trust fund was then to be divided into three equal shares and, as each child...