Corning v. Comm'r of Internal Revenue

• Decision Date: 18 August 1955
• Docket Number: 47415.,Docket Nos. 47414
• Citation: 24 T.C. 907
• Parties: WARREN H. CORNING AND MAUD E. CORNING, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WARREN H. CORNING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 907

WARREN H. CORNING AND MAUD E. CORNING, HUSBAND AND WIFE, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WARREN H. CORNING, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 47414

47415.

Tax Court of the United States.

Filed August 18, 1955.

1. Petitioner Warren H. Corning established a long-term trust in 1929 for the benefit of members of his intimate family group. Petitioner reserved the power to substitute trustees without cause, but has not exercised such power. The present trustee is a corporate trustee which was appointed in 1930 by the previous corporate trustee. The trust instrument, as amended, gave the trustee during the years here in issue the power to amend or revoke the trust, including the right to change any of the beneficial interests thereunder. Held, petitioner's power to substitute trustees without cause requires that the powers of the trustee be attributed to him. The income of the trust is, therefore, taxable to petitioner under the Clifford doctrine because of his power to allocate income or corpus among the beneficiaries.

2. In 1946, the trustee amended the trust to provide that all income was to be accumulated until 1962 and, also, to relinquish the power to pay over income until 1962 or the prior death of petitioner. Held, these amendments did not limit petitioner's power to designate the ultimate beneficiaries of this accumulated income and such income is, therefore, taxable to him. Barring Coughlin, Esq., and David A. Gaskill, Esq., for the petitioners.

Alvin J. Ivers, Esq., for the respondent.

OPINION.

RICE, Judge:

These consolidated proceedings involve deficiencies in income tax determined against the petitioners as follows:

+------------------------------------------------------------------+
                ¦Petitioners                          ¦Docket No.¦ ¦Year¦Deficiency¦
                +-------------------------------------+----------+-+----+----------¦
                ¦                                     ¦          ¦(¦1946¦$26,639.49¦
                +-------------------------------------+----------+-+----+----------¦
                ¦Warren H. Corning                    ¦47415     ¦(¦1947¦38,462.60 ¦
                +-------------------------------------+----------+-+----+----------¦
                ¦                                     ¦          ¦(¦1948¦$34,495.60¦
                +-------------------------------------+----------+-+----+----------¦
                ¦Warren H. Corning and Maud E. Corning¦47414     ¦(¦1949¦35,966.38 ¦
                +-------------------------------------+----------+-+----+----------¦
                ¦                                     ¦          ¦(¦1950¦49,461.87 ¦
                +------------------------------------------------------------------+
                

The sole issue to be decided is whether petitioner Warren H. Corning retained such a degree of dominion and control over a trust of which he was the grantor that its income is taxable to him under the provisions of section 22(a) of the 1939 Code.

All of the facts were stipulated, are so found, and are incorporated herein by this reference.

Warren H. Corning (hereinafter referred to as petitioner) and Maud E. Corning are husband and wife, residing in Mentor, Ohio. Petitioner filed separate returns for 1946 and 1947, and he and his wife filed joint returns for 1948, 1949, and 1950. All such returns were filed with the collector of internal revenue for the eighteenth district of Ohio. The net income reported by these returns, not including any income from the trust here in issue, was as follows:

+----------------+
                ¦1946¦$71,643.19 ¦
                +----+-----------¦
                ¦1947¦89,766.64  ¦
                +----+-----------¦
                ¦1948¦121,311.02 ¦
                +----+-----------¦
                ¦1949¦127,858.78 ¦
                +----+-----------¦
                ¦1950¦155,437.57 ¦
                +----------------+
                

On June 24, 1929, petitioner established a trust which was to terminate 21 years after the death of himself, his wife, and his parents, unless sooner revoked. At that time, petitioner was 27 years of age, married, but he and his wife had no children. Subsequently, during the years 1930 through 1943, five children were born to them. The trust instrument originally provided for the payment of the income to petitioner, in the discretion of the trustee, and designated various members of his intimate family group as beneficiaries of income and corpus after his death.

The original trustee was one S. Roswell Shepherd, a resident of New Jersey, but it was the intention of the parties that he should resign and be succeeded as trustee by the National City Bank of New York. This procedure was then frequently followed by such bank in instances where prospective grantors, who were not residents of New York State, wished to establish trusts not subject to the Rule Against Perpetuities in effect in New York. Pursuant to authority granted him in the trust instrument, Shepherd appointed the National City Bank as co-trustee on July 3, 1929; and, in the event of the subsequent resignation of the National City Bank, he designated the Farmers' Loan and Trust Company as successor trustee. Shepherd resigned as trustee on August 5, 1929. On January 20, 1930, the National City Bank of New York resigned as trustee and, pursuant to Shepherd's designation, was succeeded by the City Bank Farmers Trust Company (formerly the Farmers' Loan and Trust Company.)

The following provision in the trust instrument authorized the grantor to remove the trustee and appoint a successor at his discretion:

I reserve the right to substitute at any time another and different Trustee for the one named in this instrument or appointed as herein provided and upon notification of such change, as evidenced by a written instrument signed by me and delivered to the person or institution then acting as Trustee hereunder, such Trustee shall transfer and deliver the property then held hereunder to such substituted Trustee, provided that such Trustee has received compensation to which he or it may be entitled and has been indemnified for any obligations he or it may have undertaken hereunder. The appointment of any trustee pursuant to the terms of this paragraph shall be effective upon its executing a written acceptance of such appointment and it shall thereafter have the same duties and powers as if originally appointed as trustee hereunder. Any Trustee hereunder may resign at any time and any remaining trustee or successor trustee shall thereupon become sole trustee hereunder.

The trust instrument originally provided the following powers of amendment and revocation:

I hereby authorize and empower my father, Henry W. Corning, during his life to amend or terminate this agreement in whole or in part and to change any beneficial interests hereunder by delivering to the Trustee an instrument in writing executed by him. In the event of the termination of this trust by my father the Trustee shall pay over the principal to me if I am then living or if I am not then living to my father or to such person or persons as he may designate in writing to the Trustee.

I reserve the right from time to time after the death of my father by an instrument in writing delivered to the Trustee to amend or revoke this agreement, in whole or in part, and to change any beneficial interest hereunder; provided, however, that I shall not have the power at any time during any taxable year within the meaning of the revenue laws of the United States to revest in myself title to any part of the corpus of the trust, except upon written notice delivered to the Trustee during the preceding taxable year.

Prior to his death on January 31, 1946, petitioner's father exercised his power to amend the trust several times. On January 17, 1933, he amended the dispositive provisions of the trust to provide that no current income was to be paid to petitioner prior to January 1, 1938, and that, thereafter, the current year's income was to be paid to petitioner only if the trustee had been notified in December of the preceding year that petitioner's father was to have the power to direct payment of some income. This amendment further provided that after the death of petitioner's father, petitioner was to have the power to direct that current income be paid to himself.

Petitioner's father amended the trust instrument once again on September 21, 1936, to provide that the power to amend or revoke was to pass, upon his death, to the trustee rather than to petitioner. This amendment also prohibited the payment of income or corpus of the trust to petitioner. It states, in part, as follows:

I (grantor) hereby authorize and empower my father, Henry W. Corning, during his life, and, after his death, the Trustee, in the discretion of my said father or of such Trustee (but subject to the limitations hereinafter imposed) to change, modify, alter, or amend any of the provisions of this Agreement, or to change any beneficial interest hereunder, or to revoke this trust either in whole or in part, and upon any such revocation to designate the person or persons who shall receive the property so revoked and the amount of property to be received by such person or persons. No such revocation shall be effective unless the person or persons to receive the property are specifically designated in the instrument of revocation. Neither my father nor the Trustee, in the exercise of any powers granted hereunder, shall have any power or authority to make or effect any change, modification, alteration, amendment, or revocation which shall vest or revest in me or in my estate any part of the corpus, principal, or accumulated income of the trust or any title thereto or interest therein, or which shall direct or permit any part of the income of the trust, whether accumulated or thereafter accruing, to be distributed to me or to my estate or to be held or accumulated for future distribution to me or my estate or to be applied to the payment of premiums upon policies of insurance on my life. Neither my said father nor the Trustee shall have any power or authority in the exercise of the powers granted hereunder, to direct or permit the payment or distribution of...