Hall v. Commissioner of Internal Revenue

• Decision Date: 02 July 1945
• Docket Number: No. 3126.,3126.
• Citation: 166 ALR 1302,150 F.2d 304
• Parties: HALL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

166 ALR 1302, 150 F.2d 304 (1945)

HALL v. COMMISSIONER OF INTERNAL REVENUE.

No. 3126.

Circuit Court of Appeals, Tenth Circuit.

July 2, 1945.

Angus M. Woodford, of Holdenville, Okl., for petitioner.

John F. Costelloe, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Robert N. Anderson, and Newton K. Fox, all of Washington, D. C., on the brief), for respondent.

Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

Applying the rule in Dobson v. Commissioner of Internal Revenue, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248, the precise question presented here is whether there is "warrant in the record and a reasonable basis in the law" for the judgment of the Tax Court holding income from a family trust, created by the taxpayer for the benefit of his four daughters, taxable to him as donor under Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 22(a), as construed and applied by Helvering v. Clifford, 309 U.S. 331, 60 S. Ct. 554, 84 L.Ed. 788, and subsequent decisions of this and other courts. There is no dispute concerning the facts as found by the Tax Court, and they may be summarized as follows:

On December 28, 1940, the petitioner, Joel E. Hall, an Oklahoma oil man, who estimated the value of his estate in 1941 at $350,000, and of his wife at $100,000, created an irrevocable trust, naming his four daughters beneficiaries. At that time, the ages of the beneficiaries were 20, 19, 17 and 14 respectively. The trust was created by the petitioner transferring to himself as trustee certain oil and gas producing properties having an aggregate value of $35,000, and subsequently other producing properties valued at $25,000. The trust provided that the petitioner as trustee should hold and manage the properties involved and collect the proceeds therefrom. After deducting the necessary and ordinary expenses of the trust, the trustee was specifically authorized to distribute all of the income from the trust to the beneficiaries "in equal shares at any time in the discretion of the trustee," and in addition to the income the trustee was empowered at any time during the continuance of the trust to expend from the principal or income any sums reasonably necessary for the education and maintenance of the beneficiaries, and for the "purpose of defraying the expense of illness, emergency or other extreme misfortune."

The trust further provided that in the event of the demise of any of the named beneficiaries prior to the full distribution of the trust estate, the share of such beneficiary should be held for the use and benefit of her issue in equal parts under the same conditions, to be expended in their behalf in the sole discretion of the trustee until the termination of the trust. In the event, and only in the event, of the death of all beneficiaries without issue, the trust estate was to descend to the trustor, or his wife if she survived. The trustor's wife was designated as successor trustee if he died prior to the termination of the trust, and in the event of the death of both, other successor trustees were named. The trustee, or his wife as immediate successor, was granted "unlimited powers of investment, contract, compromise, sale, lease and otherwise. It being the intent of the trustor to grant the trustee the same power to deal with the property as trustee as the trustor has heretofore had with one limitation only." But all other successor trustees were limited in their powers of investment of trust funds to government bonds and real estate mortgages on city property in amounts not to exceed 40% of the actual value at the time of investment. Neither the trustee nor his wife as successor trustee was to receive any compensation for their services, and all other successor trustees were to receive 10% of the net income from the trust property. At the expiration of fifteen years, the trust terminated, and the trustee was directed to pay over and distribute to the beneficiaries all the undistributed trust assets.

The approximate annual income from the trust for the years 1940, 1941 and 1942 was $10,000 to $12,000. The petitioner kept separate books for each of the beneficiaries; he never used or borrowed any of the trust funds for himself, and did not expend any of it for the maintenance and education of the beneficiaries. The only withdrawals against the trust during 1941 were two checks issued by the trustee for the purchase of Series E Government Bonds in the amount of $750 for each of his two eldest daughters. The bonds were purchased in their names and kept in the petitioner's lockbox.

For the taxable year 1941, petitioner filed his individual income tax return and separate returns for each of the beneficiaries. The Commissioner determined that the income from the trust was taxable to the petitioner individually and assessed a deficiency accordingly. On petition for review to the Tax Court, the petitioner apparently conceded that the portion of the trust income attributable in equal shares to his two minor children was taxable to him individually, but contended that the portion of the trust income allocable in equal shares to his two adult children was taxable to them as separate income.

Applying the test "whether the rights of the petitioner in and to the trust corpus and the income therefrom are such as to constitute the income his income within the meaning of Section 22(a)," the Tax Court held that taking into account the family relationship, the only practical result of the trust was to effect a division of the income of petitioner for income tax purposes. The Court reasoned that although the possibility of reverter was "rather remote," yet petitioner did have discretionary power to distribute or withhold the income; to invade the principal for the purpose of educating and maintaining the children, or for defraying the expenses of illness or other extreme misfortune, and also retained for himself and his wife as successor trustee the power to use the trust property in his oil well drilling ventures, or in any venture in which he or any one else might be engaged, while denying that power to all other successor trustees. In view of these controls the Court, quoting from the Clifford case, observed that it is "`hard to imagine that * * * (petitioner) felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact.'"

As we have said, the pertinent facts in our case are not in dispute, nor is the abstract principle of law in doubt — we have only the application of stated facts to a settled and accepted rule of law. Whether that process is judicial in the sense that it is open to review on appeal from the Tax Court, or merely a factual finding binding here, is open to some doubt. See Dobson v. Commissioner, supra.¹ Following the admonitions in the Dobson case, we said in Armstrong v. Commissioner, 10 Cir., 143 F.2d 700, 701, that "the finding by the tax court that petitioner in substance was the owner of the trust property is in our view not a finding of fact but a conclusion of law, and the decision in the case turns upon the correctness of that conclusion" — this for the obvious reason that taxability turns directly upon the answer to that question. It would seem therefore that whether there is "warrant in the record and a reasonable basis in the law" for the legal conclusion of the Tax Court, based upon undisputed facts, is a judicial question committed to this court for review. Bingham's Trust v. Commissioner, 65 S.Ct. 1232. At least if we have any real function or province in connection with the statutory review of this class of cases, it must relate to the process of applying known and accepted facts to legal concepts. Cf. Commissioner of Internal Revenue v. Heininger, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171. Of course we accord great weight to the expertness of the Tax Court in a specialized field, but the strong dissent in this case clearly demonstrates the contrariety of views among judges of that Court concerning the application of varying facts to the recognized principle of law. See also Scherer v. Commissioner of Internal Revenue, 3 T.C. 776.

The sweep of Section 22(a), as construed by the courts, is based upon the legislative purpose to tax "* * * gains or profits and income derived from any source whatever." Few judges or courts longer deny the soundness or the salutary effect of the Clifford doctrine as the effectuation of that Congressional purpose, but as in all cases involving the drawing of lines based upon factual variations, the difficulty arises when we come to apply the facts to the law in arriving at our legal conclusion. Our conclusion in each case must rest upon the thesis that "economic gain realized or realizable by the taxpayer is necessary to produce a taxable income under our statutory scheme." Helvering v. Stuart, 317 U.S. 154, 168, 63 S. Ct. 140, 148, 87 L.Ed. 154. And that the power to command the trust income is equivalent to the taxable enjoyment thereof. Harrison v. Schaffner, 312 U.S. 579, 61 S.Ct. 759, 85 L.Ed. 1055. See also Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81; Mertens, Law of Federal Income Taxation, Sec. 18.02.

While we may ignore the technical niceties of the law of trusts in the determination of what constitutes the realization of taxable gain under Section 22(a), Helvering v. Clifford, supra; Losh v. Commissioner of Internal Revenue, 10 Cir., 145 F.2d 456, we may not ignore that which Congress has recognized unless fully justified by the realities of the particular case. By Sections 161, 162, 166, and 167 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, §§ 161, 162, 166, 167, Congress has distinctly recognized a trust as a separate taxable entity, and has provided for the imposition of a tax on the trust income as such. The statute in...