Helvering v. Hormel

• Decision Date: 25 April 1940
• Docket Number: No. 11565.,11565.
• Citation: 111 F.2d 1
• Parties: HELVERING, Commissioner of Internal Revenue, v. HORMEL.
• Court: U.S. Court of Appeals — Eighth Circuit

111 F.2d 1 (1940)

HELVERING, Commissioner of Internal Revenue, v. HORMEL.

No. 11565.

Circuit Court of Appeals, Eighth Circuit.

April 25, 1940.

L. W. Post, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

R. C. Alderson, of Austin, Minn. (S. D. Catherwood and Catherwood, Hughes & Alderson, all of Austin, Minn., on the brief), for respondent.

Before SANBORN, THOMAS, and VAN VALKENBURGH, Circuit Judges.

SANBORN, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals (39 B.T.A. 244) determining that there were no deficiencies in income taxes of the respondent for the years 1934 and 1935.

Respondent, a resident of Minnesota (hereinafter referred to as the taxpayer), on July 16, 1934, created three irrevocable short-term trusts for the benefit of his three minor sons. To himself and another, as trustees of each of the trusts, he conveyed shares of stock of Geo A. Hormel & Co., of which he was an officer. Each trust instrument recited that the trust was created for the benefit of the taxpayer and the benefit of the taxpayer's wife as guardian of the son named therein. The income of each trust up to $2,000 a year was to be paid to the wife as such guardian "for the use and benefit of" her ward, and the income, if any, in excess of $2,000 a year was to be paid to the taxpayer. Each trust was to terminate at the end of three years or upon the earlier death of either the taxpayer or the son named in the trust instrument. Upon the termination of the trusts, the corpus was to belong to the taxpayer or, in case of his death, to his heirs or the persons named in his will. The trustees had authority to appoint proxies to vote the stock held in trust. The trustees were not liable to the guardian, or to the sons, for loss except in case of wilful violation of duty. No title to the trust estates or to prospective dividends therefrom vested in the guardian, nor were the estates or such dividends subject to her debts or those of her wards. The guardian and her wards were prohibited from selling, encumbering or disposing of any interest in the trust estates or any dividends therefrom prior to the actual receipt of the trust income to which they were entitled from the trustees. In case of sale by the trustees of the stock held in trust and the substitution of other securities therefor, the income therefrom was to be trust income.

In each of the years 1934 and 1935 the taxpayer's personal income exceeded one hundred thousand dollars. In his returns for those years he took credit in his exemptions for his three dependent sons, the beneficiaries of the three trusts. He did not include in his gross income for those years the trust income of the three trusts which was paid to the guardian of the three sons under the terms of the trust instruments. Such income was reported in the returns of the beneficiaries. The Commissioner, however, included all of the income of these trusts in the taxpayer's gross income and assessed a deficiency accordingly. In his deficiency letter, the Commissioner based his action upon § 166 of the Revenue Act of 1934, 48 Stat. 680, 729, 26 U.S.C.A. Int.Rev.Code, § 166.¹

The taxpayer appealed to the Board of Tax Appeals. In the proceedings before the Board, the Commissioner relied upon § 166 and § 167 of the Revenue Act of 1934 26 U.S.C.A. Int.Rev.Code, §§ 166, 167.² The Board decided that neither of these sections was applicable. A minority of the Board members were of the opinion that under § 167 the trust income paid to the guardian of the taxpayer's sons was taxable to the taxpayer because it could have been used for relieving him of his obligation to support his children (Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L. Ed. 3, 101 A.L.R. 391) and because the wife had "no interest adverse to petitioner in the distribution of the income from the children's trusts." The Board entered its order on March 28, 1939, determining that there were no deficiencies in income taxes for the years in question.

In his petition for review of the decision of the Board, the Commissioner assigned as error: (1) the ruling of the Board that the entire income of the three trusts was not taxable to the taxpayer; (2) the failure of the Board to rule that such trust income was taxable to him under either § 166 or § 167. The record and briefs were filed in this Court prior to January 1, 1940. In his brief, the Commissioner, under "Specifications of Error to be Urged", stated:

"The Board of Tax Appeals erred:

"1. In holding that the trust income here involved was not includable in the taxpayer's gross income for the years 1934 and 1935.

"2. In not holding that this income was taxable under Sections 166 and/or 167 of the Revenue Act of 1934.

"3. In entering its order of no deficiencies in income tax for the years 1934 and 1935 and in not entering an order that there are deficiencies in the amounts of tax attributable to the trust income here involved."

Under "Points and Authorities", the Commissioner's brief states:

"1. The grantor did not give up sufficient interest in the trust income to avoid taxation under Sections 167 and/or 22(a) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 669.³

"2. The grantor did not give up sufficient interest in the trust corpus to avoid taxation on income therefrom under Sections 166 and/or 22(a) of the Revenue Act of 1934.

"3. The grantor retained sufficient interest in the income and corpus of the trusts to justify taxing him under Sections 167, 166 and 22(a), considered together and read as a whole."

The taxpayer, in his answering brief, under "Points and Authorities", stated:

"1. Grantor gave up sufficient interest in the trust income to avoid taxation under Sections 167 and/or 22(a) of the Revenue Act of 1934.

"2. The grantor gave up sufficient interest in the trust corpus to avoid taxation on income therefrom under Sections 166 and/or 22(a) of the Revenue Act of 1934.

"3. Grantor did not retain sufficient interest in the income and the corpus of the trust to justify taxing him under Sections 166, 167 and 22(a), considered together and read as a whole."

Under point 2 the taxpayer cites the case of Clifford v. Helvering, 8 Cir., 105 F.2d 586, which involved a short-term family trust similar to those here in suit. This Court held in that case that the income from the trust there considered was not taxable to the grantor. Certiorari was granted in that case by the Supreme Court of the United States, and the case was pending in that court at the time briefs in the case at bar were filed in this Court. On February 26, 1940, the Supreme Court filed its decision (Helvering v. Clifford, 60 S.Ct. 554, 84 L.Ed. ___) reversing this Court and holding that the income from the family trust created by Clifford was sufficiently his income to be taxable to him under § 22(a). On the same day the Supreme Court decided Helvering v. Wood, 60 S.Ct. 551, 84 L.Ed. ___, in which the Circuit Court of Appeals of the Second Circuit had held (104 F.2d 1013) that income from a short-term family trust was not taxable to the grantor. The Supreme Court affirmed on the ground that the Commissioner in the proceedings before the Board had relied solely on § 166 and § 167 and in the Court of Appeals had expressly waived reliance upon any section other than § 166.⁴

After these decisions of the Supreme Court, the taxpayer filed in this Court a supplemental brief, asserting that, since the Commissioner had not contended before the Board that under § 22(a) the trust income from the three trusts in suit was taxable to the taxpayer, and had not expressly mentioned that section in his assignments of error in petitioning for a review or expressly referred to it in his specifications of error in his brief in this Court, the question of the applicability of § 166 and § 167 was all that was before this Court for review. The Commissioner then filed an answering brief abandoning the contention that § 166 was applicable, and asserting that the income from the trusts was for purposes of taxation the income of the taxpayer under § 22(a) and § 167, and that this Court was not precluded from considering the applicability of § 22(a).

It is our opinion that the Board was right in deciding that § 167 was not applicable to these trusts. We have no reason to suppose that the laws of Minnesota governing these trusts and the guardianship of the Hormel children would have permitted the guardian to expend for their support trust funds received by her for their use and benefit, since their father was abundantly able to support them. There is no basis for believing that the trusts were created for the purpose of relieving the taxpayer of the obligation of supporting his children or that the trust income belonging to them was or could have been so used. There is no presumption that gifts in trust such as these are in discharge of any obligation for support. Shanley v. Bowers, 2 Cir., 81 F.2d 13, 15. Moreover, the wife of the taxpayer, as guardian of the minor children, would be strictly accountable to such children for their share of the trust income, and, for that reason, she as guardian had a substantial adverse interest to the taxpayer in the distribution thereof.

The decision of the Board, however, cannot be sustained, in view of Helvering v. Clifford, supra, if we are at liberty to consider § 22(a). There are, we think, no controlling distinctions between the short-term family trusts here in suit and the trust which was involved in that case. The question of the right of this Court to reverse the Board, which decided correctly the only questions expressly presented to it, is not free from doubt.

The general rule is that a question of law not presented or passed upon below cannot be raised on appeal. Virtue v. Creamery Package Mfg. Co., 227 U.S. 8, 38, 39, 33 S.Ct. 202, 57 L.Ed. 393; Duignan v. United...