Commissioner of Internal Revenue v. Berolzheimer

• Decision Date: 23 December 1940
• Docket Number: 64.,No. 63,63
• Citation: 116 F.2d 628
• Parties: COMMISSIONER OF INTERNAL REVENUE v. BEROLZHEIMER (two cases).
• Court: U.S. Court of Appeals — Second Circuit

116 F.2d 628 (1940)

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

Nos. 63, 64.

Circuit Court of Appeals, Second Circuit.

December 23, 1940.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and L. W. Post, Sp. Assts. to the Atty. Gen., for Commissioner of Internal Revenue.

Mark Eisner, of New York City (Mark Eisner and Walter F. Sloan, both of New York City, of counsel), for respondents.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

These proceedings concern income taxes for the year 1934. The Commissioner of Internal Revenue has filed petitions for review (1) of a decision of the Board of Tax Appeals adjudging an overpayment of $1,095.95 by Alfred C. Berolzheimer, and (2) an overpayment of $5,696.40 by Edwin M. Berolzheimer. The appeals were argued together.

Trust of Alfred C. Berolzheimer.

Alfred C. Berolzheimer executed a declaration of trust on May 2, 1932, in which he declared himself trustee of certain specified securities for the benefit of his son Kenneth who was born April 25, 1925. The trust was irrevocable but was to terminate on January 2, 1941, or upon the death of himself or the beneficiary, whichever should first occur. He was to apply to the use of Kenneth "at such times, in such amounts and in such manner as said Trustee may in his uncontrolled discretion decide, so much of the net income from this trust fund as in the sole and absolute discretion of the Trustee may be necessary and proper for the maintenance, education and well-being of said Kenneth * * * and shall accumulate the balance of such net income for said Kenneth * * *, if any." He was also empowered to use principal, if necessary, for the needs of the beneficiary. The accumulated income was to go to the beneficiary upon termination of the trust and the corpus was to go to the settlor, or his estate. Stock dividends, rights, extraordinary dividends equivalent to capital disbursements, and all proceeds of sale or other disposition of assets were to be a part of the corpus.

The trustee was empowered to manage, invest, retain, sell, exchange, vote and otherwise deal with the assets of the trust as he thought best. He was not limited to the investments fixed by the laws of New York for fiduciaries and he was not to be liable for loss resulting from the investment or retention of the trust funds.

The net income of the trust for the year 1934 was $13,919.17 of which $9,600 was distributed for the use of the beneficiary and reported by him while the remainder was retained by the trust as an accumulation and reported by it. The Commissioner assessed the entire $13,919.17, for income tax purposes, to the grantor. However, the Board, on review, held that the $9,600 only should be so assessed because that was the amount expended in fulfillment of an obligation of the settlor to support his infant son.

The taxpayer's personal income for the year 1934, other than any which might be attributed to him as arising from the trust, was $27,993.50.

Trust of Edwin M. Berolzheimer.

On February 23, 1931, Edwin M. Berolzheimer created three trusts in various securities and declared himself the trustee of each. One trust was for the benefit of his wife, one for the benefit of his daughter, and one for the benefit of his son. The trusts were similar to those created by Alfred C. Berolzheimer except that the one for the wife was not restricted as to use. They were all to terminate on January 2, 1941, at the latest. The son was over 21 years of age in 1934, and the father owed him no duty of support, education and maintenance. The daughter became 21 years of age on September 4, 1934. The Board held that the income of these two trusts for the wife and son was not taxable to the settlor. Only $3,425.47 of the trust for the daughter was used to support her and that amount was held taxable against him.

The taxpayer's personal income for the year 1934, other than any which might be attributed to him as arising from the trusts, was $27,908.70.

The Commissioner has appealed from the decisions of the Board on the ground that each of the trusts set up by either of the grantors was limited to a maximum duration of less than ten years, that each was subject to extensive powers of control on the part of the particular grantor, and that the principal of each trust would pass to the grantor or his estate at its termination. The Commissioner relies on Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 557, 84 L.Ed. 788, and argues that in the light of that decision, and because of the close family relation of each grantor and beneficiary, the grantor of each trust is to be regarded as the owner of the corpus and the income is to be held taxable to him under Section 22(a) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, p. 669, as "growing out of the ownership or use of or interest in such property."

There are only two differences of any substance between the present cases and Helvering v. Clifford: (1) The trust terms in the cases before us were all for a maximum period of less than ten years, while in Helvering v. Clifford the trust was for a maximum of only five years. (2) The Board made no finding here that the settlors remained the owners of the corpus, while in Helvering v. Clifford it found that the husband was the owner of the corpus for the purposes of § 22(a).

As we understand the decision in Helvering v. Clifford the court did not decide that the transaction was a sham but rather that the trust though valid under state law and involving the relation of trustee and cestue que trust between the parties was ineffective to save the grantor from taxation upon the income. It held that a grantor of a short term trust under which he is to be the trustee and to have such broad powers over the disposal of the principal as to approximate those of an owner and under which the income is to remain in his family and the reversion in himself will be subjected to income taxes as owner. As the court said: "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 complete assurance that the trust will not effect any substantial change in his economic position. It is hard to imagine that respondent felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact. For as a result of the terms of the trust and the intimacy of the familial relationship respondent retained the substance of full enjoyment of all the rights which previously he had in the property."

It is hard to say what is "a temporary reallocation of income", and nine or ten years is farther from the meaning of "temporary" than...