Commissioner of Internal Revenue v. Branch

• Decision Date: 23 October 1940
• Docket Number: No. 3592.,3592.
• Citation: 114 F.2d 985
• Parties: COMMISSIONER OF INTERNAL REVENUE v. BRANCH.
• Court: U.S. Court of Appeals — First Circuit

114 F.2d 985 (1940)

COMMISSIONER OF INTERNAL REVENUE v. BRANCH.

No. 3592.

Circuit Court of Appeals, First Circuit.

October 23, 1940.

L. W. Post, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for Commissioner.

Richard Wait, of Boston, Mass. (John Dane, Jr. of Boston, Mass., on the brief), for Claude R. Branch.

Before MAGRUDER, and MAHONEY, Circuit Judges, and PETERS, District Judge.

MAGRUDER, Circuit Judge.

In this case the Board of Tax Appeals has held that the 1934 income of a certain trust is not taxable to the grantor. On petition for review the Commissioner's argument has centered on Section 22(a) of the Revenue Act of 1934, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Acts, page 669; we are asked to press on beyond Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, and to apply the rationale of that striking case to a much weaker set of facts.

Claude R. Branch, the taxpayer herein, created the trust in 1928, shortly after his marriage. He transferred certain securities to himself and two other individuals as trustees. The entire net income as it accrued was payable quarterly to Hope S. Branch, the wife of the grantor, during her lifetime and for her separate use, "free whenever she shall be covert from all control and engagements of her husband." The trust was to continue during the life of Mrs. Branch, and upon her death was to revert to the grantor if he survived her; otherwise, the trust property was to be held for the benefit of such persons as Mrs. Branch might appoint by a general testamentary power, and in default of appointment there were elaborate remainders to the grantor's descendants.

The trust was expressly declared to be irrevocable by the grantor. On the other hand, it was provided that Mrs. Branch might by formal instrument, at any time during the joint lives of herself and the grantor, revoke the foregoing uses and trusts as to all or any part or parts of the trust estate, and appoint the same to other uses in whole or in part, and vest the same in the old trustees or new trustees upon other trusts, powers, discretions and limitations "or in herself, or in any other person or persons, freed and discharged of all trusts, as she may see fit."

At the time the trust was created, the securities in question were under pledge to a trust company, together with other securities, as collateral for certain promissory notes in the sum of $400,000 theretofore executed by the grantor. The trust agreement empowered the grantor to repledge these securities to the trust company to secure the payment of his individual renewal notes. However, the grantor covenanted to reimburse the trust estate for losses resulting from resort to the trust property for payment of his individual notes, and the trustees were authorized to determine finally any liability of the grantor on account of this covenant. The record is barren of any suggestion that the pledge to the bank and the creation of the trust were parts of a single scheme or transaction devised for purposes of tax evasion.

Broad powers were given the trustees to invest and reinvest without regard to the normal restrictions on investment of trust funds. So long as the grantor should remain a trustee he was empowered alone and without the concurrence of his co-trustees to exercise these powers of investment and rights of conversion, exchange or subscription in connection with any of the securities in the trust. The other trustees were absolved from liability for any losses resulting from such acts of the grantor alone.

The trustees had discretionary powers of sale, lease, partition and exchange of trust property; to give options to purchase or lease; to sell for cash or on credit; to purchase from or sell to the grantor; to borrow money for the purpose of purchasing any investments which they might deem advisable and to pledge or mortgage the trust estate to secure such loans. These powers were exercisable by the grantor alone so long as he should remain a trustee, without the concurrence of his co-trustees, who were absolved from liability for losses in connection therewith. Also, the trustees had power to vote any stock held in trust; to deposit stocks in voting trusts; and to assent or otherwise act with respect to reorganization of companies in which stocks were held. However, the last-mentioned powers could not be exercised by Mr. Branch alone, unless the other trustees delegated their powers to him, as they were authorized to do.

Power was reserved in the grantor to fill vacancies in the trustees and to appoint additional trustees. There was a general provision absolving each trustee from liability for any losses which should occur "except by his own wilful act, neglect or default."

Since the creation of the trust the grantor has at no time received any part of the income. He has continued throughout to pay for the maintenance and support of his wife. Mrs. Branch, during 1934 and all other years prior thereto, has used the income from the trust estate for whatever purposes she desired and has applied no part of it to the payment of premiums upon policies of insurance on the life of the grantor. The trustees, the grantor and his wife, have at all times consistently treated the income from the trust estate as taxable to the wife alone. In 1934, for the first time, the Commissioner asserted that the income was taxable to the grantor.

The sole ground for the Commissioner's claim, as set forth in the deficiency letter, was that the trust was a revocable trust under Section 166...