George v. Commissioner of Internal Revenue

• Decision Date: 17 July 1944
• Docket Number: No. 12783.,12783.
• Citation: 143 F.2d 837
• Parties: GEORGE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

143 F.2d 837 (1944)

GEORGE v. COMMISSIONER OF INTERNAL REVENUE.

No. 12783.

Circuit Court of Appeals, Eighth Circuit.

July 17, 1944.

Abraham Lowenhaupt, of St. Louis, Mo. (R. S. Doyle, of Washington, D. C., Norman Begeman and Lowenhaupt, Waite, Chasnoff & Stolar, all of St. Louis, Mo., and Blair & Korner, of Washington, D. C., on the brief), for petitioner.

Ray A. Brown, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, J. Louis Monarch, and L. W. Post, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before GARDNER, JOHNSEN, and RIDDICK, Circuit Judges.

GARDNER, Circuit Judge.

This is a petition to review a decision of the Tax Court of the United States determining a deficiency in petitioner's income tax for the calendar year 1939, in the sum of $39,383.64. The facts were stipulated and as stipulated embodied in findings entered by the Tax Court.

On December 23, 1939, petitioner created a trust under the terms of which he transferred to trustees 640 shares of the capital stock of the P. D. George Company, a corporation. He named himself and two other individuals as trustees. The trust instrument provided that the assets of the trust should be divided into seven parts. The income of the first of these parts was to be paid to one son, Pericles Francis George, in quarterly or other convenient installments for life, or in certain contingencies not here important to his wife and children, and on his death the corpus was to be distributed to his then living children and to the descendents of any child then dead. The entire net income of the remaining six parts was to be paid to the six other sons equally in quarterly or other convenient installments until five years after the death of the taxpayer, when the corpus of those parts then remaining was to be distributed to the six sons, or in the event of their death, to their descendents. In the event of the death of any of the grantor's seven sons leaving no descendent then living, the share held for such son should go to the others of the grantor's seven sons and to the descendents then living of any of them who may have died. If all of grantor's six sons and the said children of Pericles Francis George should die before their respective shares had been paid over to them free from trust, and no decedent of any of them should be living to take the trust estate, then upon the death of the last survivor of them and said Pericles Francis George, the trust estate should be paid over and distributed to the persons who might then be the heirs at law of the grantor according to the laws of the State of Missouri.

Article six of the trust instrument provides as follows:

"These trusts are created and the interests of the beneficiaries, hereinbefore set out, shall be vested, but subject however to divestiture as follows:

"1. The Grantor may at any time and from time to time modify or alter this indenture and the disposition of the trust property and the estates and interests therein created and the income arising therefrom, but in the following particulars only:

"(a) By disposing of the income derived after any such modification or alteration becomes effective otherwise than as originally provided in this indenture, or otherwise than as provided by any amendment, by altering the proportion or amount of such income to be paid to or applied to the use of any one or more of the beneficiaries, by cancelling the share of any one or more of the beneficiaries, by cancelling the share of any one or more of the beneficiaries in whole or in part, by substituting any beneficiary or beneficiaries in the place of any one or more of them, by adding to the number of beneficiaries, by providing for the proportion or amount of income to be paid or applied to the use of such additional or substituted beneficiaries; provided, however, that in no event shall any such modification or alteration (one or more) direct, permit or allow the said income to be accumulated for or paid or applied to or for the use or benefit of the Grantor.

"(b) By directing the distribution of the principal of any of the trust estates, as the same shall be constituted at any time, otherwise than as originally provided in this indenture, or otherwise than as provided by any amendment, by altering the proportion or the amount of the principal of any of the trust estates to be assigned, paid, and set over to any one or more of the beneficiaries, by cancelling the share of any one or more of the beneficiaries in whole or in part, by substituting any beneficiary or beneficiaries in the place of any one or more of them, by adding to the number of said beneficiaries, by providing for the proportion or amount of the principal of any of the trust estates to be assigned, paid, and set over to such additional or substituted beneficiary, or for the manner in which all or any part of said principal shall be divided or distributed upon the termination of the trusts; provided, however, that in no event shall any such modification or alteration direct, permit or allow any part of the principal of the trust estates to be paid or applied to or for the use or benefit of the Grantor or his estate.

"(c) Any modification or alteration of this indenture provided for in subdivisions (a) or (b) of this Article Six must be by instrument in writing duly executed by the Grantor and delivered to the Trustees and shall become effective thirty (30) days next following the delivery of such instrument.

"2. The Grantor may at any time and from time to time direct the Trustees to distribute, free from trust, any share of a beneficiary, in whole or in part, to the beneficiary who shall be then entitled to the income currently distributable therefrom; provided, however, that any such direction must be by instrument in writing duly executed by the Grantor and delivered to the Trustees, and shall become effective on the delivery of such instrument, and the Trustees shall immediately make distribution as in such instrument directed."

During the taxable year the youngest of petitioner's sons was twenty-nine years of age and the oldest was forty-three years of age, and for many years prior to the creation of the trust and continuously thereafter the seven sons had been married and lived apart from the petitioner. During 1939 and for a number of years prior thereto, each of the seven sons had an independent income in addition to his share in 1939 of the trust income, and each maintained himself and his family. The trustees adopted the calendar year as the accounting period of the trust. At and prior to the time of the creation of the trust, petitioner owned all of the 1,000 shares of the P. D. George Company, and the stock at that time had a value of $700 a share. During the taxable year 1939 petitioner received $15,000 as salary from the P. D. George Company; dividends in the amount of $38,519.38, which included dividends from the P. D. George Company of $36,000; interest in the amount of $647.23; and trustee's fees in the trust, $960. Between December 23, 1939, the date of the creation of the trust, and December 31, 1939, the gross income received by the trustees amounted to $76,800, which they distributed before December 31, 1939. Of this amount, $74,880 was distributed to the seven sons. The balance was distributed to the trustees for their services. Petitioner reported in his gross income the $960 fee received by him, but did not report in his return any other part of the $76,800 income received by the trustees from the trust estate. The Tax Court held that the $76,800 gross income received from the trust estate by the trustees, less the $960 fee received by the petitioner as trustee, which he had already included in his tax return; to-wit, $75,840, was properly included by the commissioner in petitioner's income for the taxable year, expressing the view that he retained such interest in and control over the corpus and income of the trust as to render him taxable therefor as owner under Section 22 (a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 22(a).

In seeking reversal petitioner contends that: (1) gain derived from capital is taxable only to the owner of the capital; (2) petitioner having retained no control over the trust property equivalent to ownership, and being...