Falk v. Commissioner of Internal Revenue, No. 10380.

• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
• Writing for the Court: McLAUGHLIN, STALEY, and HASTIE, Circuit
• Citation: 189 F.2d 806
• Parties: FALK v. COMMISSIONER OF INTERNAL REVENUE.
• Docket Number: No. 10380.
• Decision Date: 05 June 1951

189 F.2d 806 (1951)

FALK
v.
COMMISSIONER OF INTERNAL REVENUE.

No. 10380.

United States Court of Appeals Third Circuit.

Argued April 16, 1951.

Decided June 5, 1951.

Louis Caplan, Pittsburgh, Pa. (Charles C. MacLean, Jr., Ray I. Hardin, New York City, on the brief), for petitioner.

Carlton Fox, Washington, D. C. (Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott, Special Assts. to the Atty. Gen., on the brief), for respondent.

Before McLAUGHLIN, STALEY, and HASTIE, Circuit Judges.

McLAUGHLIN, Circuit Judge.

The only issue before us is whether the income of a trust (created by the petitioner's father in 1927) over and above the amounts payable thereunder to petitioner's

189 F.2d 807

sister, is includible in the taxpayer's gross income for the taxable year 1943. The Tax Court held that it was. The taxable year 1942 is involved by reason of the Current Tax Payment Act of 1943, 26 U.S.C.A. Int.Rev.Acts, page 385, which provides that the income and victory tax for the tax year of 1943 depends on the income of the calendar years 1942 and 1943

Most of the facts are stipulated and the balance are established by the evidence at the Tax Court hearing. Petitioner is forty-eight years old. He was born in Pittsburgh, Pennsylvania. For the last fifteen years he has been active there in philanthropic and community affairs. On November 11, 1927, his father, Leon Falk, executed a deed of trust with himself as donor and his brother, Maurice, as trustee. Leon Falk died October 20, 1928 without having terminated the trust. Maurice Falk served as trustee until his death March 18, 1946. Since that time his successor trustee, Fidelity Trust Company of Pittsburgh, has so served. During the period from the creation of the trust until his death, Leon Falk, as empowered by the deed of trust, directed his brother as trustee to pay from the income of the trust estate a total of $23,250 to certain charitable, benevolent and educational institutions. Those monies were duly paid. From the date of the death of his father to the date of the death of Maurice Falk, it appears that the petitioner, as authorized by the trust, directed certain charitable and philanthropic payments to be made from the trust estate. Those payments were made and, exclusive of certain payments to the University of Pittsburgh, totalled $318,004.31. They were deducted by the trust estate from its gross income during the respective years in which the contributions were made. In 1943 the trust estate paid out a total of $51,318.75 to various charitable, benevolent and educational institutions. All of those payments were at the written direction of petitioner. The amount of the payments was deducted by the trust estate from its 1943 gross income. The Tax Court upheld the Commissioner in determining that the net income of the trust (which excluded certain sums paid petitioner's sister) was to be included in petitioner's income and that the above mentioned disbursements constitute gifts to charity by the petitioner under his voluntary designations.

The governing language of the November 11, 1927 deed of trust is Article Second which provides:

"Second: The Trustee shall pay over the dividends, interest and income from the trust estate, remaining after payment there-out of the expenses of maintenance, taxes or other proper disbursements, as follows:

"1. To Marjorie Falk, the daughter of the Donor, there shall be paid annually in quarterly instalments, as near as may be, such portion of said income as the Donor in his lifetime and Leon Falk, Jr., the son of the Donor, after the death of the Donor, shall from time to time in writing direct; provided, however, that after the death of the Donor the amount so paid shall not be less than Five Thousand Dollars per year. The payments so to be made to said Marjorie Falk shall be made each year until the trust is terminated.

"2. To such charities and benevolences, charitable, benevolent and educational institutions as the Donor in his lifetime, and as Leon Falk, Jr., after the death of the Donor shall, from time to time in writing, designate, there shall be paid such portion of said income as the Donor in his lifetime and Leon Falk, Jr., after the Donor's death shall direct, each year until the trust is terminated.

"3. To Leon Falk, Jr., the son of the Donor, there shall be paid annually all of said income which shall not be paid to said Marjorie Falk and to Charitable, benevolent and educational purposes as aforesaid. The payments so to be made shall be made each year until the termination of the trust."

By Paragraph 3 of the Second Article of the trust, the taxpayer was to receive its annual income less payments of at least $5,000 a year to his sister and less any payments directed by him to be paid to charities and benevolences, charitable, benevolent and educational institutions designated by him in writing in accordance with Paragraph 2 of the Second Article.

189 F.2d 808

There is no language in the article or in the agreement making it mandatory on the taxpayer to give anything to charity, etc. or even to make specific designations of a particular charity. There is not the slightest ambiguity about Article Second. It is impossible to construe Paragraphs 2 and 3 with a reasonable regard for their rational meaning and to arrive at the conclusion that they obligated the taxpayer to designate the type of charity and benevolence as mentioned in Paragraph 2 and to then direct that sums certain be paid them under the trust

The taxpayer does not possess all of the incidents of ownership but within the exception provided for of disbursements to his sister, he does have practical control of the trust income. As Judge L. Hand said in Stix v. Commissioner, 2 Cir., 152 F.2d 562, 564, "All else he might withhold, and whatever more he chose to give, he gave out of his own." See also Mallinckrodt v. Nunan, 8 Cir., 146 F.2d 1, certiorari denied 324 U.S. 871, 65 S.Ct. 1017, 89 L.Ed. 1426. Under the wording of the trust deed we are unable to find that the petitioner had a duty to designate "charities, benevolences, charitable, benevolent and educational institutions" in writing and to direct specific payments to them of trust income. Such designation and direction was left to the absolute discretion of the petitioner. With the exception of mandatory payments to his sister, he was unfettered in his control...