Ewald v. Commissioner of Internal Revenue, 9682.

• Decision Date: 03 April 1944
• Docket Number: No. 9682.,9682.
• Citation: 141 F.2d 750
• Parties: EWALD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

141 F.2d 750 (1944)

EWALD v. COMMISSIONER OF INTERNAL REVENUE.

No. 9682.

Circuit Court of Appeals, Sixth Circuit.

April 3, 1944.

Henry S. Slyfield and Garland D. Tait, both of Detroit, Mich. (Henry S. Slyfield, Edgar M. Reitz, and Garland D. Tait, all of Detroit, Mich., on the brief), for petitioner.

Robert Koerner, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Helen R. Carloss, and Robert Koerner, all of Washington, D. C., on the brief), for respondent.

Before HICKS, HAMILTON, and McALLISTER, Circuit Judges.

HAMILTON, Circuit Judge.

Petitioner asks for a review of the decision of the Tax Court of the United States upholding the determination by the respondent of income tax deficiencies against the petitioner for the years 1936, 1937, 1939 and 1940.

Petitioner on June 27, 1929, created in writing an irrevocable trust in favor of herself and her children and their descendants. She named her husband, Henry T. Ewald, trustee and empowered him to distribute to petitioner during her lifetime such portions of the net income from the trust as he might deem proper and upon her death the trustee was likewise empowered to pay the income of the trust to her surviving children or their descendants. In case of the death of her husband trustee, successor trustees were named by the settlor and detailed provisions were made in the trust instrument for disposition of the income and also the corpus of the trust under the successor trustees. The trust instrument made no provision for the disposition of the trust corpus and accumulated income if the settlor predeceased her husband.

Petitioner for each of the years in question reported in her taxable net income the sums paid to her out of the income of the trust. The trustee reported and paid taxes on the remainder for each of the years. The Commissioner of Internal Revenue held that the total annual net income of the trust was taxable to the petitioner under the provisions of Section 167(a) (2) of the Revenue Act of 1936, Title 26 U. S.C.A. Int.Rev.Code, § 167. The Tax Court sustained the Commissioner.

The statute in question provides:

"(a) Where any part of the income of a trust —

"(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or

"(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor;

* * * * *

then such part of the income of the trust shall be included in computing the net income of the grantor."

Petitioner insists that her husband trustee has a substantially adverse interest to her in the disposition of the income of the trust because (a) the undistributed income and corpus of the trust will revert to her estate in the event she predeceases her husband and that in that event her husband will take an interest in her estate under the statutes of descent and distribution of Michigan (Act 314 of Michigan Public Acts of 1915, Ch. LVII, sec. 7); (b) that she, on October 4, 1934, with the knowledge and consent of her husband, executed her last will and testament in which she made her husband her principal beneficiary.

Viewing the trust here in question from the standpoint of petitioner's husband, his interest therein is at most the mere expectation that the settlor will predecease him, or that he will take under her will at her pleasure. In view of the relationship of the parties, the husband may properly hope that he will share in his wife's estate if she predeceases him. This possibility in legal contemplation is no right at all because the settlor has done nothing to create an obligation in any event, and the husband has neither a present nor a contingent interest in either the income or corpus of the trust.

The corpus of the trust consisted of 4,000 shares of the capital stock of the Campbell-Ewald Company which was given petitioner by her husband. The corporation was organized under the laws of the state of Delaware and engaged in business as a national advertising agency. Petitioner's husband, Henry T. Ewald, owned the remaining 4,845 shares of the stock and was its president at the time petitioner created the trust and has been since that time.

The phrase "substantial adverse interest" was substituted in the 1932 Revenue Act, 26 U.S.C.A. Int.Rev.Code, § 167, for the phrase "any person not a beneficiary of the trust." Revenue Act 1928, § 167, 26 U. S.C.A. Int.Rev.Acts, page 407. A tax reduction practice had grown up under the earlier acts by grantors reserving power to revest title to the trust corpus in conjunction with a beneficiary having a very minor interest or of conferring the power to revest upon a person other than a beneficiary who would act at the behest of the grantor. Because of these practices, Congress in the Revenue Act of 1932 adopted the phrase with which we are here concerned. The declared purpose of the statute was to prevent the evasion of taxes by means of the use of trusts. Finance Committee Report No. 665, 72nd Cong. 1st Sess., p. 34.

The case at bar is a fair illustration of the reduction of taxes by the division of income among an intimate family group by the use of a trust.

The husband transferred to his wife almost one-half of the shares of the stock of his personal service corporation reducing his taxable income and relieving him of a heavy surtax burden. His wife, in turn, attempted to create another taxable entity in the form of a trust. If petitioner's contention is sustained, the income from a single family source is divided first into...