Grant v. Comm'r of Internal Revenue

• Decision Date: 17 August 1948
• Docket Number: Docket No. 12522.
• Parties: ANNIE INMAN GRANT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

11 T.C. 178

ANNIE INMAN GRANT, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12522.

Tax Court of the United States.

Promulgated August 17, 1948.

Petitioner possessed the right to elect to take any part or all of the net income of a testamentary trust. Any portion of the annual trust income not withdrawn by her was to be added to corpus. She and her son were the trustees. In 1945 she filed a renunciation and release of her rights under the trust provisions. Held, respondent did not err in taxing to petitioner under section 22(a), Internal Revenue Code, the income of the trust prior to the renunciation of her right thereto. A. W. Clapp, Esq., and Alex P. Gaines, Esq., for the petitioner.

Homer F. Benson, Esq., for the respondent.

OPINION

ARNOLD, Judge:

This case involved deficiencies in income and victory taxes for the calendar year 1943, and income tax for the years 1944 and 1945, in the respective amounts of $4,999.94, $6,369.66, and $1,468.59. The issue is whether petitioner is taxable on the income of a testamentary trust created by her deceased husband.

The facts are stipulated and the stipulated facts are adopted as our findings of fact.

Petitioner is the widow of John W. Grant, deceased.

John W. Grant died March 8, 1938. Letters testamentary were issued by the Court of Ordinary of Fulton County, Georgia, qualifying petitioner and John W. Grant, Jr., as executors of the decedent's will. The letters testamentary were issued on May 2, 1938.

By the terms of his will, which is incorporated herein by reference, John W. Grant created a trust of his residuary estate for the use and benefit of his wife ‘for and during her natural life and after her death in trust for the purposes hereinafter stated until all my children * * * (naming them) * * * and my grandson * * * are dead whereupon the trust shall end.‘ Decedent provided that the trust estate should ‘be subject to the following charges, conditions and limitations: At the end of each calendar year my trustees shall pay to my wife all or any part of the net income of said trust estate that my wife may elect and any portion of said net income not drawn by my wife shall be added to the corpus of the trust estate. * * * ‘

Petitioner and decedent's son, John W. Grant, Jr., were named trustees of the testamentary trust and given the following powers:

* * * They shall have power to bargain, sell, exchange or otherwise dispose of any property of said trust estate at public sale or by private contract at such times and in such manner and upon such terms as they may see fit and shall not be required to obtain the order of any court or chancellor for that purpose. They shall have power to invest any money belonging to said trust estate in any property, real or personal that they may see fit, without the order of any court or chancellor and they shall not be limited to the legal investments required by the Code of Georgia. Said trustees shall not be liable for interest on money in their hands except such as they may actually earn thereon.

Petitioner and John W. Grant, Jr., administered the estate of John W. Grant. On July 31, 1943, they completed the administration of the estate and transferred and delivered all assets of the residuary estate of John W. Grant deceased, to themselves as trustees, as directed in item 15 of the will.

Subsequent to July 31, 1943, and during the remaining months of the calendar year 1943, the income from the trust amounted to $6,583.30.

Petitioner never elected to take any part of the trust income and never in fact drew any part of the trust income, either during the calendar year 1943 or thereafter.

During 1944 the income from the trust amounted to $8,462.23. Petitioner never elected to take any part of the trust income and did not draw any part thereof, either during 1944 or thereafter.

On June 20, 1945, petitioner executed a renunciation and release, which stated, in part, as follows:

WHEREAS, first party desires to renounce the said conditional bequest and to release said power of appointment,

NOW, THEREFORE, said Annie Inman Grant has renounced and by these presents does renounce the conditional bequest of any income from the said trust and has released and does by these presents release the said power of appointment completely and without reservation.

The renunciation and release was forthwith delivered to the trustees and was filed for record in the office of the clerk of the Superior Court of Fulton County, Georgia, on June 28, 1945, and recorded in volume 2010, page 194, of the records of the Superior Court of Fulton County.

During the period in 1945 prior to the filing of the renunciation and release the income from the trust amounted to $2,084.16. Petitioner never elected to take any part of this income and did not draw any part thereof during 1945 or thereafter.

At the close of each of the years 1943, 1944, and 1945 the income of the trust was added to the corpus of the trust by the trustees.

The question we are asked to decide is whether the income of the testamentary trust created by John W. Grant is income of the beneficiary under section 22(a) of the Internal Revenue Code, or is trust income under section 161 of the code. The pertinent provisions of the two sections are set forth in the margin.¹ We need not consider section 162(b), as petitioner denies that this section applies, and respondent does not seek to invoke it.

Respondent contends that the income of the trust, which is distributable to petitioner on request as sole life beneficiary, is taxable to her under section 22(a), notwithstanding her failure to elect to receive the same. He contends that her unfettered right to elect and require distribution to herself of the trust income makes that income hers for income tax purposes. He relies primarily upon Mallinckrodt v. Nunan (CCA-8), 146 Fed.(2d) 1, affirming 2 T.D. 1128; certiorari denied, 325 U.S. 892, and the cases cited in the margin,² some of which are discussed by the Circuit Court in its Mallinckrodt opinion. The language in the Mallinckrodt case which respondent deems controlling is set forth in italics in the following quotation from the Circuit Court's opinion:

We agree with the majority of the Tax Court that implications which fairly may be drawn from the opinions of the Supreme Court in Corliss v. Bowers, 281 U.S. 376, 378, * * * Helvering v. Clifford, 309 U.S. 331, * * * and other cases relative to the taxability of trust income to one having command over it, justify, if they do not compel, the conclusion that the undistributed net income of the trust in suit, during the years in question, was taxable to petitioner under section 22(a). This, because the power of petitioner to receive this trust income each year, upon request, can be regarded as the equivalent of ownership of the income for purposes of taxation. In Harrison v. Schaffner, 312 U.S. 579, 580, * * * the Supreme Court approved ‘the principle that the power to dispose of income is the equivalent of ownership of it and that the exercise of the power to procure its payment to another, whether to pay a debt or to make a gift, is within the reach of the statute taxing income 'derived from any source whatever.’‘ It seems to us, as it did to the majority of the Tax Court, that it is the possession of power over the disposition of trust income which is of significance in determining whether, under section 22(a), the income is taxable to the possessor of such power, and that logically it makes no difference whether the possessor is a grantor, who retained the power or a beneficiary who acquired it from another. See Jergens v. Commissioner, supra, at page 498 of 136 Fed.(2d). Since the trust income in suit was available to petitioner upon request in each of the years involved, he had in each of those the years the ‘realizable‘ economic gain necessary to make the income taxable to him. See Helvering v. Stuart, 317 U.S. 154, 168, 169 * * * ; Helvering v. Clifford, supra, at pages 336, 337, of 309 U.S. * * * ; Helvering v. Gordon, 8 Cir., 87 Fed.(2d) 663, 667.

We can see no escape for the taxpayer here from the controlling effect of the Mallinckrodt and related cases. The trust income was available to her each year upon request until she renounced her right thereto. She had the ‘realizable‘ economic gain necessary to make the income taxable to her. The trust provision ‘at the end of each calendar year‘ relates to the time when the trustees should pay the beneficiary the trust income, and not to the time of election as contended by petitioner. We find no prohibition in the will against an election at any time within the taxable year. It is payment that the will requires the trustees to make at the end of each calendar year.

The decision of the Circuit Court of Appeals for the Third Circuit in Hallowell v. Commissioner, 160 Fed.(2d) 536 (reversing 5 T.C. 1239), upon which petitioner largely rests her case, is distinguishable from the Mallinckrodt case. The court distinguished the two cases by stating (p. 538) ‘that Mallinckrodt was entitled to receive the income within the taxable year of the trust.‘ This case is distinguishable for the same reason, for petitioner, like Mallinckrodt, was entitled to receive the income within the taxable year of the trust.

We have carefully considered the numerous authorities cited by petit...