Armstrong v. Commissioner of Internal Revenue

• Decision Date: 06 July 1944
• Docket Number: 2801.,No. 2800,2800
• Citation: 143 F.2d 700
• Parties: ARMSTRONG v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Tenth Circuit

143 F.2d 700 (1944)

ARMSTRONG v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 2800, 2801.

Circuit Court of Appeals, Tenth Circuit.

July 6, 1944.

Stephen H. Hart, of Denver, Colo. (James B. Grant and Lewis & Grant, all of Denver, Colo., and Simms, Modrall & Seymour, of Albuquerque, N. M., on the brief), for petitioners.

L. W. Post, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, of Washington, D. C., on the brief), for respondent.

Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.

HUXMAN, Circuit Judge.

These appeals come to us from the United States Tax Court, and involve income taxes for the year 1939. The two cases involve identical questions. They were consolidated before the tax court and also on appeal to this court. The discussion of the facts will be confined to No. 2801, Gayle Geard Armstrong v. Commissioner. The sole question presented is whether income from certain trusts is chargeable to the petitioners as their income.

The decisions of the Tax Court are entitled to great weight and consideration. As to all questions of fact, its findings are conclusive and binding if supported by substantial evidence. On all questions of accounting and methods of procedure for the establishment of a uniform system in the administration of the income tax law, its decisions should control and be respected by courts of law. It is only when a question of law is involved that courts of law should substitute their judgment for that of the tax court when differences of opinion arise. Nor should we restrict and whittle away the field of operation of the tax court by deciding socalled mixed questions of fact and law.

We are of the view that we should substitute our judgment for that of the Tax Court only where the findings of fact clearly are not supported by evidence or where a conclusion of law based thereon is obviously erroneous. This, we think, is the admonition of the Supreme Court in Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239.

Here we have no disputes in the evidence, and no contradictory conclusions of fact that can be drawn from the evidence. We accordingly adopt the findings of fact of the tax court in toto. The finding by the tax court that petitioner in substance was the owner of the trust property is in our view not a finding of fact but a conclusion of law, and the decision in the case turns upon the correctness of that conclusion. For it is obvious that if petitioner remained the substantial owner of this property, or retained any economic interest therein, he is chargeable with the income therefrom.

For many years petitioner¹ and his father had been equal partners under the firm name of Armstrong and Armstrong, and were engaged in road construction and cattle ranching. Petitioner's father died testate June 5, 1937. In his will he directed his executor to carry on the partnership business for one year, and expressed a desire that if the partnership be continued longer than one year, that the business should be incorporated. The original partnership was dissolved on the death of the father. On July 27, 1937, the wife of the deceased and petitioner, the executor of the will, agreed in writing to carry on the business in the same manner as before. In that agreement the interests of the parties in the partnership assets were stated to be as follows: Petitioner, fifty per cent; Clara H. Armstrong, the widow, twenty-five per cent; and petitioner, as executor of the will, twenty-five per cent.

On June 5, 1938, after a discussion of the matter of carrying on the partnership business after the closing of the estate, a new partnership agreement was prepared. It was not executed until October 17, 1938. The new partners were the widow and the four children. Their interests in the new partnership were declared to be as follows: Clara Armstrong, thirty per cent; petitioner, fifty-five per cent; and the three other children, five per cent each.

The five per cent interest which petitioner inherited from his father was separate and apart from his one-half interest in the partnership and he wanted to keep it separate and distinct from the community property interest of himself and his wife in the partnership property. He therefore decided to give the five per cent interest in the partnership property which he inherited from his father to his children, Billie Bert Armstrong, a son, and Gayle Armstrong, a daughter. He discussed the matter with the attorneys for the estate, as well as with the attorneys for the partnership. To effectuate this gift, he established the trust which is involved in this case, June 5, 1938. He set the five per cent interest he received from his father's estate over into the trust for the benefit of his two children, in equal proportions. The creation of the trust was discussed with all of the partners. Most of them saw the trust instrument, and all consented to the trust becoming a member of the partnership. The trust agreement and the new partnership agreement were drawn by the same attorneys at approximately the same time. Petitioner made himself the trustee. The trust instrument gave him absolute power in the management of the trust estate. As trustee he could borrow, mortgage, pledge, transfer in trust, or otherwise encumber the trust estate. He could invest the principal or income of the estate as he saw fit. He could exercise all the powers and privileges of an owner with reference to the trust estate; he could hold the trust estate in his own name or in the name of his nominee or appointee. He could make advances of his own funds to the trust estate for any purpose and have a lien on the trust estate for such advances and be reimbursed out of the trust estate for any money so advanced. All his decisions in all matters concerning the trust estate were final and binding.

It was provided that the entire net income was to accumulate and become a part of the corpus; that the trust was irrevocable and was to terminate when the daughter reached the age of twenty-five years,² at which time the estate was to vest equally in the two children, or in the case of the death of one of them, the entire estate was to vest in the survivor upon becoming twenty-five years of age. If both beneficiaries died before the termination of the trust, then the entire estate was to vest in the children's mother. The beneficiaries were restrained from encumbering the estate and it was not subject to their debts and liabilities. The trust instrument was not recorded. Petitioner filed a federal gift tax return.

Petitioner signed the new partnership agreement only in his individual capacity. He did not sign as trustee for the trust. On April 18, 1941, Billie Bert became of age. Petitioner in accordance with a prior decision to terminate the trust as to him, gave him the choice of selling his interest for cash or of becoming a member of the partnership. He...