Cushman v. Commissioner of Internal Revenue, No. 47.

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Writing for the Court: SWAN, CHASE, and FRANK, Circuit
• Citation: 153 F.2d 510
• Parties: CUSHMAN v. COMMISSIONER OF INTERNAL REVENUE.
• Docket Number: No. 47.
• Decision Date: 14 January 1946

153 F.2d 510 (1946)

CUSHMAN
v.
COMMISSIONER OF INTERNAL REVENUE.

No. 47.

Circuit Court of Appeals, Second Circuit.

January 14, 1946.

153 F.2d 511

Jacob Mertens, Jr., of New York City (Martin A. Schenck and Archibald A. Patterson, both of New York City, of counsel), for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and Muriel S. Paul, Sp. Assts. to Atty. Gen., for respondent.

Before SWAN, CHASE, and FRANK, Circuit Judges.

CHASE, Circuit Judge.

The petitioner is a resident of New York who in 1935 created an irrevocable trust which is to be construed according to the laws of that state. It was for the benefit of the children of himself and his

153 F.2d 512

wife, theretofore or thereafter born, and its term was for the duration of the lives of two named minor children, Elizabeth Ann Cushman and Lewis Arthur Cushman, Third, and that of the survivor of them. The petitioner and his wife were named as co-trustees with the Guaranty Trust Company of New York as successor trustee after the death of the surviving original trustee. The trustees were to hold, invest, reinvest, and manage the trust estate and pay the net income in equal shares to, or apply it for the benefit of, any living children of the petitioner and his wife, or the issue of any child who might then be dead. The net income could, however, in the discretion of the trustees be accumulated for the account of any of the grantor's children during their respective minorities and, if so accumulated, was to be paid over to such children, when they attained their respective majorities, "either in cash or in the form in which it may be invested at that time."

Upon the death of the survivor of the named children the trust estate was to be paid and transferred in equal shares per stirpes to the then living descendants of the grantor, and, in default of any descendants, to whomsoever should be appointed to receive it by the will of such survivor and in default of a valid appointment by will, in whole or in part, "to the persons who would be entitled to receive the personal estate of such survivor under the intestate laws of New York if such survivor had then been a resident thereof." The trust instrument also provided that the trust should forthwith cease whenever the grantor's wife during her life, "or after her death the then President of Guaranty Trust Company of New York, shall so direct in a writing signed and delivered to said Trustees or any surviving Trustee or successor Trustee, and the principal of said trust estate and all accumulated income therefrom shall be delivered and paid over forthwith in the manner hereinabove provided as upon the death of the survivor of said Elizabeth Ann Cushman and Lewis Arthur Cushman, Third."

The petitioner, who then held slightly less than 40,000 of a total of 90,000 outstanding Class B shares of the American Bakeries Corporation which, with an undisclosed number of Class A shares which had been issued out of 58,000 authorized, carried all the voting rights, transferred 20,000 of his Class B shares to the trustees as the sole corpus of the trust. He had organized American Bakeries Corporation in 1927, has been a director thereof continuously since then and is chairman of the corporation's Executive Committee. His purpose in creating the trust was not to secure income for the support of his children, and none of the income was ever so used, it all having been accumulated, but was the twofold purpose, first, of putting the property beyond the reach of himself, his friends, relatives, business associates and possible creditors, thus assuring an estate for his children; and, second, of preserving so much of his Bakeries stock intact so that his son, if competent and if he so desired, could at some time become associated with that corporation with the advantage of being a holder or beneficial owner of its stock. Until July of 1937, no dividend was ever declared on the Class B stock.

In order to carry out his second purpose and to prevent the sale of the Bakeries shares by a trustee desiring to achieve diversification and to attempt to better the prospect of obtaining income, petitioner named himself and his wife as trustees. He reserved to himself as grantor, and gave to his wife after his death the power to control retention or sale of trust property and to direct investment and reinvestment of trust funds. The trustees at any time, as fully as if they were the individual owners of the securities held in trust, were empowered, subject to the right of the petitioner or his wife to direct sales and investments, to participate in any capital readjustment of any corporations whose securities should be held in the trust.

The Commissioner determined that the trust income for 1938 was taxable to the petitioner under Internal Revenue Code §§ 22(a) and 167, 26 U.S.C.A. Int.Rev.Code, §§ 22(a), 167. The Tax Court found it unnecessary to decide whether there was any tax liability under § 167 since it sustained the Commissioner under § 22(a), relying upon Helvering v. Clifford, 309 U. S. 331, 60 S.Ct. 554, 84 L.Ed. 788. It went on the grounds that (1) it was a family trust; (2) that, though not a short term, its "indeterminate length" was a comparable factor; (3) that, in any event, the length of the term wasn't decisive; (4) that the lack of a reversion to the grantor was insignificant; (5) that powers exercisable only as trustee were the equivalent of powers reserved as grantor, and that inasmuch

153 F.2d 513

as the co-trustee was the petitioner's wife, the petitioner had really retained full powers to vote and control the trust investment in a corporation in which he was interested; and (6) that the income was usable to discharge an obligation of support. Six judges dissented on the ground that family trusts are ordinarily to be governed by Code §§ 161 to 172, that such trusts are taxable under § 22(a) and the Clifford case only where the grantor has retained what amounts to the economic control of that corpus, and that the criteria of the majority for determining that he did not cut himself off from such economic control were fallacious. This appeal followed

Although it may be that the presence of sufficient factors to bring taxation of a trust within the doctrine of the Clifford case, supra, is to treated as a question of fact, see Paul, Dobson v. Commissioner: The Strange Ways of Law and Fact (1944) 57 Harv.L.Rev. 753, 817 and n. 295, 833-34, 848, nevertheless, whether or not a particular characteristic in the relationship of the grantor to that trust may be treated as an element of "control" within the Clifford doctrine is a problem of "general applicability" reviewable under Dobson v. Com'r, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248. See Bingham's Trust v. Com'r, 325 U.S. 365, 65 S.Ct. 1232; Com'r v. Scottish American Investment Co., 323 U.S. 119, 65 S.Ct. 169; Com'r v. Buck, 2 Cir., 120 F.2d 775; Phipps v. Com'r, 2 Cir., 137 F.2d 141.

In the Clifford case, the Supreme Court found three broad grounds for the taxation of the income of the trust to the grantor: (1) The shortness of the life of the trust, there a term for five years or until the death of the beneficiary; (2) the fact that the beneficiary was the...