Brainard v. Commissioner of Internal Revenue

• Decision Date: 15 September 1937
• Docket Number: No. 6098.,6098.
• Citation: 91 F.2d 880
• Parties: BRAINARD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

91 F.2d 880 (1937)

BRAINARD v. COMMISSIONER OF INTERNAL REVENUE.

No. 6098.

Circuit Court of Appeals, Seventh Circuit.

June 29, 1937.

Rehearing Denied September 15, 1937.

John E. Hughes, of Chicago, Ill., for petitioner.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to the Atty. Gen., all of Washington, D. C., for respondent.

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

This petition for review involves income taxes for the year 1928. The question presented is whether under the circumstances set forth in the findings of the Board of Tax Appeals, the taxpayer created a valid trust, the income of which was taxable to the beneficiaries under section 162 of the Revenue Act of 1928.¹

The facts as found by the Board of Tax Appeals are substantially as follows: In December, 1927, the taxpayer, having decided that conditions were favorable, contemplated trading in the stock market during 1928. He consulted a lawyer and was advised that it was possible for him to trade in trust for his children and other members of his family. Taxpayer thereupon discussed the matter with his wife and mother, and stated to them that he declared a trust of his stock trading during 1928 for the benefit of his family upon certain terms and conditions. Taxpayer agreed to assume personally any losses resulting from the venture, and to distribute the profits, if any, in equal shares to his wife, mother, and two minor children after deducting a reasonable compensation for his services. During 1928 taxpayer carried on the trading operations contemplated and at the end of the year determined his compensation at slightly less than $10,000, which he reported in his income tax return for that year. The profits remaining were then divided in approximately equal shares among the members of his family, and the amounts were reported in their respective tax returns for 1928. The amounts allocated to the beneficiaries were credited to them on taxpayer's books, but they did not receive the cash, except taxpayer's mother, to a small extent.

In addition to these findings the record discloses that taxpayer's two children were one and three years of age. Upon these facts the Board held that the income in controversy was taxable to the petitioner as a part of his gross income for 1928, and decided that there was a deficiency. It is here sought to review that decision.

In the determination of the questions here raised it is necessary to consider the nature of the trust, if any, that is said to have been created by the circumstances hereinbefore recited. It is clear that the taxpayer, at the time of his declaration, had no property interest in "profits in stock trading in 1928, if any," because there were none in existence at that time. Indeed it is not disclosed that the declarer at that time owned any stock. It is obvious, therefore, that the taxpayer based his declaration of trust upon an interest which at that time had not come into existence and in which no one had a present interest. In the Restatement of the Law of Trusts, vol. 1, § 75, it is said that an interest which has not come into existence or which has ceased to exist can not be held in trust. It is there further said: "A person can, it is true, make a contract binding himself to create a trust of an interest if he should thereafter acquire it; but such an agreement is not binding as a contract unless the requirements of the law of Contracts are complied with * * *

"Thus, if a person gratuitously declares himself trustee of such shares as he may thereafter acquire in a corporation not yet organized, no trust is created. The result is the same where instead of declaring himself trustee, he purports to transfer to another as trustee such shares as he may thereafter acquire in a corporation not yet organized. In such a case there is at most a gratuitous undertaking to create a trust in the future, and such an undertaking is not binding as a contract for lack of consideration * * *

"* * * If a person purports to declare himself trustee of an interest not in existence, or if he purports to transfer such an interest to another in trust, he is liable as upon a contract to create a trust if, but only if, the requirements of the law of Contracts are complied with." See, also, Restatement, § 30b; Bogert, Trusts and Trustees, vol. 1, § 112. In 42 Harvard Law Review 561, it is said: "With logical consistency, the courts have uniformly held that an expectancy cannot be the subject matter of a trust and that an attempted creation, being merely a promise to transfer property in the future, is invalid unless supported by consideration." Citing Lehigh Valley R. R. Co. v. Woodring, 116 Pa. 513, 9 A. 58. Hence, it is obvious under the facts here presented that taxpayer's declaration amounted to nothing more than a promise to create a trust in the future, and its binding force must be determined by the requirements of the law of contracts.

It is elementary that an executory contract, in order to be enforceable, must be based upon a valuable consideration. Here there was none. The declaration was gratuitous. If we assume that it was based on love and affection that would add nothing to its enforceability, for love and affection, though a sufficient consideration for an executed conveyance, is not a sufficient consideration for a promise. Sullivan v. Sullivan, 122 Ky. 707, 92 S.W. 966, 7 L.R.A.(N.S.) 156, 13 Ann.Cas. 163; Fischer v. Union Trust Co., 138 Mich. 612, 101 N.W. 852, 68 L.R.A. 987, 110 Am.St. Rep. 329; Fink v. Cox, 18 Johns.(N.Y.) 145, 9 Am.Dec. 191; Kennedy v. Ware, 1 Pa. 445, 44 Am.Dec. 145.

What has been said, however, does not mean that the taxpayer had no right to carry out his declaration after the subject matter had come into existence, even though there were no consideration. This he did and the trust thereby became effective, after which it was enforceable by the beneficiaries.

The questions with which we are concerned are at what times did the respective earnings which constitute the trust fund come into existence, and at what times did the trust attach to them. It is obvious that the respective profits came into existence when and if such stocks were sold at a profit in 1928. Did they come into existence impressed with the trust, or was there any period of time intervening between the time they came into existence and the time the trust attached? If there were such intervening time, then during that time the taxpayer must be considered as the sole owner of the profits and they were properly taxed to him as a part of his income.

It is said in the Restatement of the Law of Trusts, § 75c: "If a person purports to declare himself trustee of an interest not in existence or if he purports to transfer such an interest to another in trust, no trust arises even when the interest comes into existence in the absence of a manifestation of intention at that time." This we think is especially applicable where, as here, there was no consideration for the declaration. It is further stated, however, in the Restatement, § 26k: "If a person manifests an intention to become trustee at a subsequent time, his conduct at that subsequent time considered in connection with his original manifestation may be a sufficient manifestation of intention at that subsequent time to create a trust. * * * the act of acquiring the property coupled with the earlier declaration of trust may be a...