Edison v. Commissioner of Internal Revenue

• Decision Date: 23 April 1945
• Docket Number: No. 13014.,13014.
• Citation: 148 F.2d 810
• Parties: EDISON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

148 F.2d 810 (1945)

EDISON v. COMMISSIONER OF INTERNAL REVENUE.

No. 13014.

Circuit Court of Appeals, Eighth Circuit.

April 23, 1945.

David Baron, of St. Louis, Mo., for petitioner.

Louise Foster, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, A. F. Prescott, and Robert Koerner, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before GARDNER, THOMAS, and JOHNSEN, Circuit Judges.

JOHNSEN, Circuit Judge.

This is another in the cycle of cases arising out of Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, with which we recently have been confronted, involving the taxability of a donor under section 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 22(a), on the income from some trusts created by him for members of his immediate family, and of which he has constituted himself trustee with broad powers of control. See George v. Commissioner of Internal Revenue, 8 Cir., 143 F.2d 837; Stockstrom v. Commissioner of Internal Revenue, 8 Cir., 148 F. 2d 491; Funsten v. Commissioner, 8 Cir., 148 F.2d 805.

The Tax Court upheld the Commissioner's determination of a deficiency in petitioner's income taxes for the years 1938 to 1941 inclusive, on the basis of the income of the trusts, and the case is here for review of that decision.

Two separate trusts are involved. They were created in 1938, and by their terms were irrevocable. One was for the benefit of petitioner's son and the other for the benefit of petitioner's daughter. The son was in his twenty-third year at the time, and the daughter in her eighteenth year. Petitioner was a resident of Missouri. The son had his residence in New York and was married in 1940. The daughter was unmarried during the period involved and had her home with her parents.

The trusteed property consisted almost wholly of shares of capital stock in Edison Brothers Stores, Inc., a Delaware corporation, which was engaged in the operation of retail shoe stores throughout the United States but had its principal offices in St. Louis, Missouri, and of which petitioner was the president, a director, and a large stockholder. Prior to the creation of the trusts, petitioner was the owner of 40,576 shares of the total 385,490 shares of common stock which the corporation had outstanding, and of 50 shares of the total of 60,000 shares of outstanding preferred stock. He originally put a total of 5,000 shares of the common stock into the two trusts and later added another 2,500 shares to the son's trust and 2,000 shares to the trust for the daughter. The Tax Court observed in its opinion that "we think it fair to assume from the fact that he petitioner held such a large block of the stock, which was listed on the New York Stock Exchange, and undoubtedly widely held, and that he was an officer and director of the corporation, that he was at least one of the principal single shareholders," and that "Control of the trust stock, together with that which he continued to hold individually, may well have been of supreme importance to his economic welfare."

Petitioner obviously had no need for the income from the trust property to satisfy his personal wants, for his other net income during the taxable years involved was, respectively, $76,368.27, $75,737.38, $80,654.43, and $116,430.44.

In both of the trusts, petitioner had constituted himself the sole trustee, so long as he desired to serve. He had named successor-trustees also, but had further provided that "The grantor reserves unto himself at any time and from time to time during his lifetime the right and power to designate a trustee or trustees to act in lieu of those appointed trustees hereinbefore."

Under the trust instruments, the trustee was given "full and plenary powers of investment such as he would possess if he were the absolute owner of the `trust estate' in his private individual capacity." He was not required to make statutory or conventional trust investments but could invest and reinvest in "bonds, stocks, notes, real estate mortgages or other securities or other property, personal or real." The plenary nature of his powers of control was repeatedly emphasized in the trust instruments, "it being intended hereby to give unto the said Trustee full and complete authority to hold, possess, manage, control, sell, convey, dispose of, encumber, lease, invest and reinvest the whole and every part of the said trust estate, according to his sole judgment and discretion." "The Trustee shall have full power without accountability for loss (whether through depreciation in value or otherwise), to retain at his discretion as investments of the trust estate any or all property, personal or real, that may come into his hands either at the beginning of this trust or at any time thereafter." It was further provided that "The Trustee shall have the power to determine whether any money or property coming into his hands shall be part of the capital or corpus of said trust estate or part of the income therefrom and to apportion between such capital and income any loss or expenditure in connection with such trust estate which in his opinion should be apportioned in such manner and division as to him may seem just and equitable."

From these sweeping powers of control and investment, it is evident that petitioner wanted to avoid the restraints of a conventional fiduciary-holding of property and to leave himself free to handle the property and to apply his personal skill and productive capacity, as an income and accumulation factor, in conjunction with the property, as he had been before the trusts were created. It is clear also that much of this power, such as his right to buy and sell stocks, notes, and any kind of real or personal property in general, though purporting similarly to be granted to successor-trustees, would and could practicably only serve a purpose in petitioner's pre-emptive position of dedicator of the property and the hold of the family relations, and was not power, as we observed in the Stockstrom case, which he could have believed or intended would have any real significance except in his own hands. This power to make the property subservient to his personal skill and earning capacity, and to enable him to continue his enjoyment of playing the commercial game with it, and to allow him to remain, far beyond the scope of traditional fiduciary concept and function, part of the tree itself for producing the fruit of income and accumulation, is, it seems to us, one of the material elements which may be considered in an economic weighing of the dedication which he has made against his previous ownership and title, and in the scrutiny of what he actually has parted with in the family situation and to what extent he has retained the substantial incidents and economic equivalent of what he formerly held and had enjoyed in relation to the property. And his optional right may passingly be re-noted, that "The Trustee shall have full power without accountability for loss (whether through depreciation in value or otherwise), to retain at his discretion as investments of the trust estate any or all property, personal or real, that may come into his hands either at the beginning of this trust or at any time thereafter", one of whose purposes manifestly was to enable him to hold the Edison Brothers Stores, Inc., stock, if for any reason it seemed of greater importance to him to do so than to undertake to traffic in other stocks or other property.

Passing to petitioner's power to control the disposition of income and of corpus, the trust for the son provided that "the trustee shall in quarterly or other convenient installments pay over to him all or such portion of the net income of the trust, as the trustee in his uncontrollable discretion shall think advisable or necessary for his comfort, support, education or ease," and "Any portion of the income not thus paid over * * * shall be added to the corpus of the trust fund." It was further provided that "If, in the uncontrollable discretion of the trustee, the trustee should deem it advisable or necessary for the greater ease or comfort of the son, or for his business training, or to help him start in business or some other vocation or profession, or for his education, maintenance or care, to encroach upon the corpus of the trust, the trustee is authorized in his uncontrollable discretion to pay over to the son all or such portion of the corpus of the trust as the trustee shall deem advisable or necessary."

The trust for the daughter provided that "Until said daughter * * * shall attain her majority, the trustee shall permit the net income of said trust to accumulate and as it accumulates it shall become part of the corpus of this trust." After the daughter attained her majority, there was a provision, similar to that in the trust for the son, covering the discretionary payment of income to her. But, as in the case of the son's trust, there...