Gaylord v. Commissioner of Internal Revenue

• Decision Date: 30 January 1946
• Docket Number: No. 10936.,10936.
• Citation: 153 F.2d 408
• Parties: GAYLORD v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Ninth Circuit

153 F.2d 408 (1946)

GAYLORD v. COMMISSIONER OF INTERNAL REVENUE (two cases).

No. 10936.

Circuit Court of Appeals, Ninth Circuit.

January 30, 1946.

COPYRIGHT MATERIAL OMITTED

Thomas A. J. Dockweiler, of Los Angeles, Cal., for petitioners.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, Helen Goodner, and Muriel S. Paul, Sp. Assts. to the Atty. Gen., for respondent.

Before STEPHENS, BONE, and ORR, Circuit Judges.

BONE, Circuit Judge.

These are proceedings for review of a decision of the Tax Court determining against petitioner, George S. Gaylord (hereafter called Mr. Gaylord), certain deficiencies in his income taxes for the taxable years 1936, 1937, 1938 and 1939 and against Gertrude H. Gaylord (hereafter called Mrs. Gaylord) certain deficiencies in her income taxes for the taxable years 1936, 1937 and 1939. Since prior to 1936 both petitioners have been residents of Pasadena, Cal. They are husband and wife and as such filed with the Collector of Internal Revenue at Los Angeles, Cal., their respective individual returns of the income taxes with respect to which such deficiencies were so determined. The Tax Court consolidated the two cases for hearing and they were heard together. After the decision by the Tax Court, and before filing his petition for review here, Mr. Gaylord paid certain sums on deficiencies so found against him for 1937, 1938 and 1939, and the original claimed amount of deficiencies is reduced for these years by the amounts so paid.

The Commissioner states the questions presented to us to be (a) whether, under Section 166 of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code § 166, trust income is taxable to the two taxpayers because the trust in question was revocable by them under California law; or (b) under Section 22(a) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 22(a), because they retained such powers over the trust corpus as to remain in substance the owner thereof and of the income; or (c) in the alternative, whether one-half of the trust income for 1936 and the first five months of 1937 is taxable to taxpayers under Section 167 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 895, because that part of the income could, under the trust instrument, have been used to discharge their legal obligations to support their minor daughter. Also, whether under the facts the Commissioner is estopped to assert deficiencies in income taxes for 1936-1939, inclusive, against these taxpayers. Also presented by the Commissioner is the question as to whether the findings of the Tax Court as to fair market value of Menasha stock upon acquisition in 1917, which value determines the basis for computing gain on the Marathon stock sold in the taxable years by taxpayers individually and as trustees for the Gaylord trust is supported by substantial evidence.

Taxpayers have two daughters, one born on November 10, 1905, and the other on May 31, 1916. Both daughters are married and have children of their own. Prior to September, 1935, taxpayers decided to create a trust for the benefit of these two daughters. On December 11, 1935, the taxpayers signed and acknowledged a declaration of trust (dated November 7, 1935) in which they were named jointly as trustee. There was no provision relating to whether the trust was revocable or irrevocable but when they signed the trust instrument they were advised by counsel that the trust was irrevocable, and the Tax Court so found respecting this advice. There can be no doubt that this was the intent of the trustors. The trust was declared with respect to 7,000 shares of the common capital stock of Marathon Paper Mills Company, 5,000 shares of which were contributed by Mr. Gaylord and 2,000 shares by Mrs. Gaylord.

On February 4, 1936, taxpayers filed gift tax returns, prepared by Mr. Gaylord, for the year 1935. In these returns, they reported the creation of an irrevocable trust and the transfer thereto of the Marathon stock. This stock was placed in a safe deposit box in California and remained there until it was sold, some in each of the years 1936 through 1939. The last of the stock was sold in 1939. The proceeds of all such sales were deposited in a Chicago bank in the name of taxpayers as trustees.

Taxpayers recorded the trust instrument in the office of the county recorder of Los Angeles County, Cal., on September 23, 1937. In 1938, the trustees purchased $90,000 of real estate situated in Texas and recorded the trust instrument in four counties in that State.

For each of the years 1936 through 1939, the trustees filed a fiduciary income tax return for the trust, in which each daughter was shown as a trust beneficiary, entitled to one-half of the income thereof. In each of these years the two daughters filed income tax returns in which they reported as taxable income received from the trust the amounts shown by the fiduciary returns as having been distributed to them during the respective years.

At the instance of their counsel, taxpayers, on March 27, 1940, signed and acknowledged an instrument dealing directly with the original declaration of trust.¹ This instrument, so executed on March 27, 1940, was clearly intended to relate back to the original instrument creating the trust, and, to the extent indicated, apparently to clarify it and make it reflect the claimed original intent and desire of the trustors with respect to irrevocability.

The Commissioner insists that the intention of the taxpayers at the time they created the trust in 1935 did not make it irrevocable since Section 2280 of the Civil Code of California provides otherwise.² He also further insists that "the mere fact that the trust instrument could have been reformed or amended to state that it was irrevocable does not suffice, since it was neither reformed nor amended in the taxable years." (Emphasis supplied.) His position is that the subsequent amendment in 1940, supra, did not cure the defect in the trust instrument in the earlier years, from which the power to revoke was derived; that statements in the taxpayers' gift tax returns for 1935 that the trust was irrevocable also fail to meet the requirements of Section 2280 that the statement as to irrevocability be contained in the trust instrument. Cf. on the effect of such a declaration intended to have a retroactive effect, Jurs v. Commissioner, 9 Cir., 147 F.2d 805.

Respondent Commissioner contended before the Tax Court and here contends that during the four-year period involved, the trust was revocable by Mr. and Mrs. Gaylord, or either of them, and, consequently, under the statutory provisions, supra, all income of the trust for those years (which had been distributed to the two beneficiaries, as indicated) constituted income for Mr. and Mrs. Gaylord in the relative proportion of their respective contributions to the original corpus of the trust. On the contrary, petitioners contend, now and through all of these proceedings, that the trust is and has always been irrevocable and that none of its income was ever taxable to either Mr. or Mrs. Gaylord.

It will simplify the issues here to restate them in the language of the briefs. Petitioners declare that the assignments of error and points on appeal present "only two principal questions for review. (A) Whether the trust referred to was revocable, and (B) What was the correct basis for computing gain on the sales of the Marathon Paper Mills Company common stock." In argument here, counsel for petitioners assured us that the most important question was the first one. The Commissioner's position is set forth in the second paragraph of this opinion.

According to its terms, the trust is to last as long as either of the two daughters is living and under 30 years of age, and during its existence all of the trust's net income is to be distributed, in any event annually to them, or, in case of the death of either of them leaving lawful issue, the latter. Upon termination of the trust its estate vests in the two daughters or, if either of them fail to survive such termination, her lawful issue who may then be living. (The maximum duration of this trust was for a period of about 10½ years but it could terminate earlier.) Although the declaration of trust contained no statement that it was irrevocable, no right to change or revoke the trust was reserved.

A reading of the record reveals that the trust here created was a family trust and the income was retained in the family group. See Com'r v. Wilson, 7 Cir., 125 F.2d 307, 310; Miller v. Com'r, 6 Cir., 147 F.2d 189; Com'r v. Berolzheimer, 2 Cir., 116 F.2d 628; Hall v. Com'r, 10 Cir., 150 F.2d 304. Nothing in the record forbids the conclusion that grantors had substantial income in each year aside from this trust property. Cf. Stockstrom v. Com'r, 8 Cir., 148 F.2d 491; Com'r v. Buck, 2 Cir., 120 F.2d 775; George v. Com'r, 8 Cir., 143 F.2d 837. Grantors named themselves as trustees and retained the power to name successor trustees. They retained powers of management and control over the trust corpus as though they were absolute owners. They could hold securities in their own names, invest and re-invest the corpus, lend it, sell it, exchange, lease or mortgage, all at prices and upon such terms as they deemed advisable. Their discretion was absolute and uncontrolled and its exercise conclusive on all persons. See Section 2269, Civil Code of California. See also Cox v. Com'r, 10 Cir., 110 F.2d 934, certiorari denied, 311 U.S. 667, 61 S.Ct. 26, 85 L.Ed. 428; Rollins v. Helvering, 8 Cir., 92 F.2d 390, certiorari denied 302 U.S. 763, 58 S.Ct. 409, 410, 82 L.Ed. 592, 593; White v. Higgins, 1 Cir., 116 F.2d 312. See also Stockstrom v. Com'r supra. The grantors here could vote the stocks forming the corpus of the trust and otherwise deal with them as an absolute owner. For comment on this sort of economic control see ...