Buhl v. Kavanagh

• Decision Date: 14 March 1941
• Docket Number: No. 8800.,8800.
• Citation: 118 F.2d 315
• Parties: BUHL v. KAVANAGH, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Sixth Circuit

118 F.2d 315 (1941)

BUHL v. KAVANAGH, Collector of Internal Revenue.

No. 8800.

Circuit Court of Appeals, Sixth Circuit.

March 14, 1941.

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Rollin Browne, of New York City, and John M. Hudson, of Detroit, Mich. (William D. Mitchell and Mitchell, Taylor, Capron & Marsh, all of New York City, and Bulkley, Ledyard, Dickinson & Wright, of Detroit, Mich., on the brief), for appellant.

Harry Marselli, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Edward First, Sp. Assts. to Atty. Gen., and John C. Lehr, of Detroit, Mich., on the brief), for appellee.

Before HICKS, HAMILTON, and MARTIN, Circuit Judges.

HAMILTON, Circuit Judge.

Appellant, Lydia Mendelssohn Buhl, appeals from a judgment dismissing her petition against appellee, Giles Kavanagh, Collector of Internal Revenue, for refund of income taxes which she claims to have overpaid for the calendar years 1931 to and including 1935, in the aggregate sum of $78,673.93.

The applicable statutes are Revenue Act of 1928, ch. 852, 45 Stat. 791, Sec. 166, 26 U.S.C.A. Int.Rev.Acts, page 407, which provides that where the grantor of a trust has at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to reinvest in himself title to any part of the corpus of the trust, then the income arising from the trust estate is taxable to the grantor; and Section 167, 26 U.S.C.A. Int.Rev.Acts., page 407, which provides where any part of the income of a trust may in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or to be held to be accumulated for future distribution to him, the income of the trust shall be included in computing the net income of the grantor. The Revenue Act of 1932, ch. 209, 47 Stat. 169, Sec. 166, 26 U.S.C.A. Int.Rev.Acts, page 543, is also applicable and provides that where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or income therefrom or, (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or income therefrom, the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor; and Section 167, 26 U.S.C.A. Int.Rev. Acts, page 543, which provides (a) where any part of the income of a trust (1) is or in the discretion of the grantor, or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may in the discretion of the grantor, or any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, then the income of the trust shall be included in computing the net income of the grantor.

The Revenue Act of 1934 is also involved, ch. 277, 48 Stat. 680, Sections 166 and 167, 26 U.S.C.A. Int.Rev.Code, §§ 166, 167, which statutes for the purposes of this case are substantially the same as in the Revenue Act of 1932.

On March 24, 1921, the settlor, Louis Mendelssohn, appellant's father (she being an infant at that time), established a written trust for her benefit with his wife, Evelyn Mendelssohn, and Security Trust Company of Detroit, trustees. He transferred to the trust various stocks, securities, cash and choses in action. In the trust instrument, the trustees were compelled to distribute to appellant a minimum of $300 per month of the income of the trust and had the discretionary power to distribute any part of the remainder to her. The accumulated income was to be paid to her when she reached the age of thirty-five and the corpus when she reached the age of fifty. In the event of her death before reaching the age of fifty years, the corpus and its accumulations were to be held for the benefit of and paid to her issue, and if she had none, to the settlor and her mother, or if one was dead, to the other. During his life, the settlor had the sole power to direct the sale, investment and reinvestment of the securities in the corpus of the trust, also the power to terminate the trust on written notice to the trustee, and also the power at any time to name himself or any other person, firm or corporation as successor trustee.

The settlor reserved the right to alter or amend the trust in any way including his last will and testament, with the sole exception that no such alteration should deprive appellant of the contingent right to have the trust estate conveyed to her, if and when she reached the age of fifty years.

The right to terminate the trust was reserved in paragraph 4(c) and also in paragraph 8 of the trust instrument, in the former without qualifying language, but in the latter it could be terminated either (a) at the option of the settlor by giving written notice thereof to the trustee in which event all of the trust estate was to be conveyed to the beneficiary if of age and if an infant, to her guardian, or at the settlor's option to be conveyed to him as trustee of the beneficiary; or (b) by the death of the beneficiary, in which event, the corpus of the trust and its accumulations should be held by the trustee until the youngest of her surviving children should reach the age of thirty years and in the meantime, the income of the trust was to be paid to her surviving children, in convenient installments. In the event the beneficiary died without issue, the accumulated unexpended income of the trust estate was to be paid to her legal heirs and the corpus of the trust to revert to the settlor, if living. If deceased, one-third was to be paid to Evelyn Mendelssohn, the settlor's wife and the other two-thirds to his heirs. In the event of the predecease of Evelyn Mendelssohn, the corpus of the trust was to be distributed to her lawful heirs.

On November 10, 1921, the settlor, by a letter to the trustee, in conformity with paragraph IV(c) of the trust instrument (which gave him the power to terminate) added Section "E" to said paragraph, which added section provided that the settlor should have the power from time to time to withdraw such moneys as he may have expended or should thereafter expend for the education or support of Lydia Mendelssohn, and should not be obliged to account for such amounts and that his directions regarding such withdrawals should be final and binding upon the depository trustee, the trustees, and the beneficiary of the trust. In this letter he stated he was terminating the trust.

On April 12, 1923, in another letter in which he referred to the above letter of November 10, 1921, he again stated he was terminating the trust and re-creating it in all respects except that sub-division (c) of paragraph IV was changed to provide that he (the settlor) should have the power to terminate the trust in whole or in part at any time upon giving written notice to the trustee.

On April 20, 1923, the settlor again wrote the trustee that he terminated the trust insofar as it related to 1,650 shares of new common stock of Fisher Body Corporation, which shares were in the trust. He withdrew these securities.

Appellant was married on January 5, 1929, and on January 10, 1929, in the suite of her father in a New York hotel she signed a letter which her father had caused to be prepared, addressed to him, Evelyn Mendelssohn, co-trustee, and Guardian Trust Company, successor trustee to the Security Trust Company. The letter stated that the appellant had been advised by her father, her mother and Leo M. Butzel, co-trustee, that the principal in the trust created for her was represented by 16,002 shares of General Motors stock, $668,826.53 par amount in bonds and $58,994.63 in cash, and that under the terms of the trust, no portion of the principal would come into her possession until she reached the age of fifty years unless her father, the settlor, chose voluntarily to terminate the trust in which event the principal would immediately become hers.

The letter also stated that her father had explained to her that he did not think it to her best interest to have so much money in her legal control for which reason he was unwilling to terminate the trust and that there were certain conditions in the trust unsatisfactory to him and which, as she understood them, were also objectionable to her. The letter stated that her father had proposed that he would terminate the trust provided she agreed freely and voluntarily, immediately upon the assets becoming vested in her, to execute a fresh and independent trust which, to a large extent, would embody the restrictions and limitations in the existing one. The letter stated the new trust had been prepared in advance of the termination of the old and explained to appellant by Leo M. Butzel, attorney and co-trustee, in the presence of her mother and that she (appellant) was sure she understood its full import and the consequences to her and her children, if any, and that she was writing the letter in order to induce her father to terminate the trust and momentarily vest title in the assets in her and that she had freely and voluntarily agreed to immediately execute a trust instrument attached to the letter marked "Exhibit A." The letter then stated that appellant regarded this as for her best interest and to carry out the wishes of her father from whom the wealth had been derived. The letter stated appellant had seen and had explained to her the original assets of the trust, the income accruing from time to time and the various credits and debits to the trust estate and income, all of which was satisfactory to and approved by her and that it was her explicit purpose...