Commissioner of Internal Revenue v. Wilson

• Citation: 125 F.2d 307
• Decision Date: 31 January 1942
• Docket Number: No. 7745.,7745.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. WILSON.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

125 F.2d 307 (1942)

COMMISSIONER OF INTERNAL REVENUE v. WILSON.

No. 7745.

Circuit Court of Appeals, Seventh Circuit.

January 31, 1942.

Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Bureau of Internal Revenue, and Edward H. Hammond, both of Washington, D. C., for petitioner.

Calvin F. Selfridge, of Chicago, Ill., for respondent.

Before EVANS, SPARKS, and KERNER, Circuit Judges.

KERNER, Circuit Judge.

Petitioner asks this court to review a decision of the Board of Tax Appeals absolving respondent from a claimed deficiency in income tax for the years 1934 and 1935.

On December 21, 1933, respondent created a trust for the benefit of his son to continue for not more than two years. The son was married and at that time was 28 years of age and had shortly prior thereto entered the employ of his father's law firm. This trust was created for two years because respondent did not wish to set up a trust of a permanent character until the son had demonstrated to his father's satisfaction that the income would not impair his ambition or usefulness in his work. It provided that the trustees were to hold the corpus, collect the income and, after paying expenses, distribute the ordinary income to the son. The capital gains were to be accumulated and upon the termination of the trust, the entire principal was to be transferred to respondent as his own property, and if he was not then living, the corpus and capital gains were to be paid to the executors of his estate.

During 1934 the entire net income of the trust was paid to the son. During 1935 the trustees paid the net ordinary income to the son but retained the capital gains, which they reported as income of the trust and paid a tax thereon. December 21, 1935, upon termination of the trust, the corpus was transferred to respondent together with the capital gains.

On June 25, 1935, the respondent created a trust for the benefit of his daughter Cynthia, then 26 years of age, and Beverly Compton, whom she married on July 6, 1935. The trustees were members of the law firm of which the respondent was the senior member. Under this trust, the net income was to be paid to the beneficiaries during their lifetime. Cynthia was in a financially independent position to marry because her grandfather, during his lifetime, had given her stocks which provided an income of more than $5,000 a year, which respondent thought was adequate to take care of a young married couple "just starting out." Shortly after the creation of the trust, Cynthia issued written instructions to the trustees to pay the entire net income to her husband. The net income of the trust for 1935 amounted to $7,110.10, including $4,939.89 capital gains derived from the sale of certain bonds constituting the corpus. The trustees paid the ordinary income to Compton and retained the capital gains, which they reported as income of the trust.

The trust indenture provided that it should terminate on the death of Cynthia unless she should die leaving issue surviving her, in which case the trust should continue in force and terminate when her youngest child attained the age of twenty years. At the time of the hearing before the Board, Cynthia Compton had two children, one and three years old. The trust indenture also provided that the trust should in any and the latest event terminate upon the death of respondent, settlor, and upon the termination of the trust, under any of the conditions above named, the entire principal of the trust estate should be transferred to the respondent.

Respondent, in his income tax returns for 1934 and 1935, did not include therein either the ordinary income or capital gains of the two trusts. The petitioner, as Commissioner of Internal Revenue, determined that the income of these two trusts, both ordinary and capital, was taxable to the respondent and found a deficiency in taxes against the respondent. On petition to review the Commissioner's determination, the Board held that the capital gain of the trust for the benefit of respondent's son was taxable to respondent, but that the ordinary income of that trust was not taxable to respondent. It also held that neither the ordinary income nor the capital gain of the trust for the benefit of Cynthia Compton was taxable to respondent.

The petitioner contends that the ordinary income of the trust for the benefit of the son is taxable to the respondent under § 22(a) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Code, § 22(a), and that the capital gain of the trust for the benefit of the daughter and her husband is taxable to respondent under § 167(a) (1) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Code, § 167(a) (1).

Before proceeding to a discussion of the cases claimed by petitioner to be applicable and controlling, it is well that we discuss respondent's contention that the question of ownership of the corpus of the trusts is a question of fact to be determined by the Board and not subject to review, except on the question of law, whether there is evidence to sustain the finding.

Where the ultimate finding is a conclusion of law or at least a determination of a mixed question of law and fact, it is subject to judicial review. Bogardus v. Commissioner, 302 U.S. 34, 39, 58 S.Ct. 61, 82 L.Ed. 32. Commissioner v. Buck, 2 Cir., 120 F.2d 775, involved claimed deficiencies in Buck's income tax. The Commissioner argued that Buck was taxable on the income of the trust under either § 22(a) or §§ 166 and 167 of the Revenue Acts of 1932 and 1934. The Board of Tax Appeals found against the Commissioner. On review in the Circuit Court of Appeals, it was insisted that the court could not substitute its judgment for the finding of the Board. The court rejected the contention and said (120 F.2d at page 779): "* * * to a large extent the Board's decision involved merely `an interpretation of a written document, and this court is free to construe the writing for itself.'"

In our case, just as in the Buck case, the facts are not in dispute. The only evidence bearing upon the question of whether the respondent remained the owner of the corpus of the trusts was the trust indentures, and irrespective of whether the Board made a finding on the question of whether the respondent remained the owner of the corpus of the trusts, the ultimate question of ownership, in our opinion, is one of law and open for determination here. We observe that the court in Commissioner v. Goulder, 6 Cir., 123 F.2d 686, reached a contrary conclusion.

In support of his contention that the ordinary income of the trusts are taxable to the respondent, petitioner cites the case of Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, in which the court makes it clear that the settlor's liability under § 22(a) for taxes on the income of a trust which he has created depends upon whether the settlor has retained or derives sufficient economic benefits of ownership to be still treated as the owner, and holds that the head of a family cannot affect his tax liability by allocating part of his income to his wife through the medium of a short term trust over the corpus of which he retains control. The court said (309 U.S. at page 335, 60 S.Ct. at page 557, 84 L. Ed. 788): "We have at best a temporary reallocation of income within an intimate family group. Since the income remains in the family and since the husband retains control over the investment, he has rather...