Dunning v. Commissioner of Internal Revenue
| Decision Date | 31 December 1937 |
| Docket Number | Docket No. 83459. |
| Citation | 36 BTA 1222 |
| Parties | HENRY A. B. DUNNING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Vernon Cook, Esq., for the petitioner.
R. P. Hertzog, Esq., for the respondent.
This proceeding involves a deficiency of $70,090.66 in income taxes for the year 1933. The issue is whether petitioner is subject to tax on the income of five trusts created by him in 1932.
FINDINGS OF FACT.
Petitioner resides in Baltimore, Maryland, and has a wife and four children, of whom in 1933, three were adults and one a minor. Petitioner is a manufacturing chemist and owns 95 percent of the stock and is president and general manager of the corporation, Hynson, Westcott & Dunning, Inc.
On May 31, 1932, petitioner executed five deeds of trust to Maryland Trust Co. and Henry A. B. Dunning, trustees. Except for variation as to beneficiaries, the trusts are in material respects identical. The beneficiaries are the wife and four children of the petitioner. The trusts are irrevocable in all respects until January 10, 1937, and shall terminate on that date if the grantor gives written notice to his cotrustee on or before December 31, 1936, that he desires no extension. But if no such notice is given, the trusts are to be automatically extended for five years and for successive periods of five years. Upon the termination of any trust the corpus of the trust but not the accumulated income shall revert to the grantor absolutely. In the event of termination of any trust, the trust as to the accumulated income shall continue upon the terms set forth in the trusts, i. e., one-half the income is to be paid to the grantor's wife and one-half to the grantor's children, with provision for distribution to the survivors of the wife or any child. The trust is to continue for twenty-one years after the death of the last survivor of the wife and four children and ultimately the trust property is to be divided by the trustees among the then living issue of the children of Henry A. B. Dunning.
Each deed of trust conveys to the trust 7,250 shares of the capital stock of Hynson, Westcott & Dunning, Inc. Two thousand of the shares conveyed to each trust were conveyed subject to a pledge to the Maryland Trust Co. to secure indebtedness of the petitioner in the amount of $80,000, which indebtedness was later paid by the trusts, the trusts becoming the creditor of the petitioner, to which petitioner paid interest on the obligations. The petitioner, in 1932, owned 37,435 shares of the capital stock of Hynson, Westcott & Dunning. He conveyed to the trusts 36,250 of these shares and they were transferred into the names of the trustees, "Maryland Trust Company and Henry A. B. Dunning, Trustees under Deed of Trust No. ___, of May 31, 1932."
Each of the five trust deeds provided that the trustees shall pay first to Ethel Adams Dunning, wife of Henry A. B. Dunning, $10,000 per year out of the first income available in each calendar year beginning January 1, 1932. If the net income in any year is less than $10,000 she shall receive the whole net income for such year but the $10,000 allowances shall not be cumulative from year to year. The remainder of the income of each trust could be disposed of by paying a further portion to Ethel Adams Dunning, or to other named beneficiaries, petitioner's children, and any remaining income shall be added to the corpus of the trust and reinvested in securities to be selected by Henry A. B. Dunning, in his sole discretion and judgment. The payment of additional portions of the income of the trust and the investment of income, the nature and character of investments, was, by the terms of the trust, left to the sole judgment and discretion of Henry A. B. Dunning, one of the trustees who could exercise this right without joinder of the other trustee who does not participate in the exercise of the discretion.
The voting power of the stock in Hynson, Westcott & Dunning, Inc., conveyed to the trust, is, by the terms of the trusts, vested solely in Henry A. B. Dunning, one of the trustees, for and during his natural life. The trustees have full discretionary power and right at any time to sell any and all securities or other assets constituting the trust estate. During the life of Henry A. B. Dunning, this discretionary power shall be exercised solely according to the judgment and discretion of Henry A. B. Dunning, trustee, his cotrustee not participating therein.
On January 10, 1937, the trusts were revoked as to the corpus of each trust and the stock in Hynson, Westcott & Dunning, Inc., was returned to petitioner. None of the securities purchased by the trusts out of income or accumulated income during the period of their existence was returned to petitioner. Petitioner did not receive any of the income of the trusts during the period of their existence. The trusts continued in existence after January 10, 1937, holding securities purchased out of accumulated income for the benefit of petitioner's wife and children.
The notice of December 29, 1936, sent by petitioner to the trustees contains the following paragraph:
I will ask you therefore, in accordance with the terms of said deeds, to reassign to me all of the stock of Hynson, Westcott & Dunning, Incorporated, which constitutes the corpus of each of the five trust estates. Investments which you have made out of income and any current uninvested income will, of course, remain in trust, in accordance with the terms of the five deeds respectively.
A consolidated schedule of the receipts and disbursements of the five trusts for the taxable year 1933 is as follows:
Receipts
Balance on hand December 31, 1932 _______________________________ $12,608.75
Dividends _______________________________________________________ 160,406.25
Interest ________________________________________________________ 3,024.91
Redemptions and sales ___________________________________________ 110,550.00
__________
Total receipts _____________________________________________ 286,589.91
Disbursements
Paid Ethel Adams Dunning ________________________________________ 50,000.00
Amounts transferred to loan department, Maryland Trust Co _______ 144,250.00
Securities purchased ____________________________________________ 188,150.59
Taxes and administration expenses _______________________________ 3,732.90
Discount on sales of Baltimore city tax anticipation certificates 687.22
___________
Total disbursements _________________________________________ 286,820.71
Net overpayment as of Dec. 31, 1933 _________________________ 230.80
___________
286,589.91
1 Partial payment in purchase of $80,000 obligation of petitioner
During 1933 petitioner had outstanding life insurance policies of the face value of $656,079.20, all of which policies had been issued prior to creation of the five trusts. These policies had been assigned to Ethel Adams Dunning, absolutely, with no reserved power to change the beneficiaries. Mrs. Dunning is the beneficiary of all the insurance policies. On June 1, 1932, she executed a deed of trust, making the Safe Deposit & Trust Co. of Baltimore, trustee, transferring to the trustee all of the insurance policies in trust for the benefit of herself and children. This trust deed authorizes the trustee to collect the proceeds of the policies when they become payable and invest the proceeds in securities to be held in the trust estate and distribute income of this trust, one-half to Mrs. Dunning and the remaining half to her children. This trust is for a term not exceeding twenty-one years after the death of the last survivor of Mrs. Dunning and her children and on expiration of the trust, the principal is to be divided among the then living issue of Henry A. B. Dunning. This deed of trust is revocable during the life of Henry A. B. Dunning, but irrevocable after his death.
During 1933 Mrs. Dunning received $50,000 from the five trusts and deposited this income in her own bank account. At petitioner's suggestion, she paid all the premiums due in 1933 on the life insurance policies totaling $32,027.28. She did not enter into any formal agreement with her husband to pay the premiums. She also paid the premiums in 1934 and 1935 and the premium due January 1937. She could not have paid the premiums out of any of her separate income, excepting the income from the five trusts, as her other income was not sufficient. Mrs. Dunning also paid out of the $50,000 in 1933 $9,837.50 for household expenses; $1,780.25 to adult children; $353.04 to her minor child; $1,048 to charities; $837.68, taxes; and the balance for her own uses.
In his notice of deficiency the respondent added to the petitioner's income $158,610.41 under the caption "Trust income," with the explanation:
Since you are practically the sole owner of the stock of Hynson, Westcott & Dunning, Inc., Baltimore, Maryland, of which the corpus of the H. A. B. Dunning Trusts numbers 1 to 5, are principally composed, and you have the sole right to sell any or all of the corpus of the trusts without the consent of the co-trustee, it appears that the trust income is taxable to you since you control this income.
Respondent also added to petitioner's income $66.21, disallowance of part of the deduction claimed for taxes, and $6,500, disallowance of a claimed loss on bonds. These two items are not disputed by petitioner, who concedes that these additions to taxable income are proper.
Respondent contends that all of...
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