Holdeen v. Ratterree

• Decision Date: 16 September 1958
• Docket Number: Civ. No. 6801.
• Citation: 166 F. Supp. 694
• Parties: Jonathan HOLDEEN, Plaintiff v. Riley J. RATTERREE, as Late District Director of Internal Revenue, Fulton D. Fields, as Late Acting District Director of Internal Revenue, Defendants.
• Court: U.S. District Court — Northern District of New York

166 F. Supp. 694

Jonathan HOLDEEN, Plaintiff v. Riley J. RATTERREE, as Late District Director of Internal Revenue, Fulton D. Fields, as Late Acting District Director of Internal Revenue, Defendants.

Civ. No. 6801.

United States District Court N. D. New York.

September 16, 1958.

Jonathan Holdeen, Pine Plains, N. Y., in pro. per., Lester E. Palmer, Jr., Poughkeepsie, N. Y., Robert P. Brisson, Pleasantville, N. Y., of counsel.

Theodore F. Bowes, U. S. Atty., Syracuse, N. Y., David R. Frazer, Robert W. Kernan, Attys., Dept. of Justice, Washington, D. C., of counsel.

BRENNAN, Chief Judge.

The taxability to the settlor of the income of certain trusts is the ultimate problem in this litigation. The year involved is 1945. The statutory basis of taxation is found in Sec. 22(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 22(a). The immediate question for decision arises by reason of motions made by both litigants to set aside the verdict of the jury as to special questions submitted to it and to direct the entry of a judgment accordingly. A history of this litigation and the factual background disclosed therein are essential to the disposition of the pending motions and an understanding of this decision.

The action itself is typical. The complaint seeks to recover an amount in excess of $100,000 alleged to have been erroneously assessed against the petitioner on account of income tax for the year 1945. The alleged over-assessment results, according to the complaint, from the inclusion in plaintiff's taxable income for that year of the proceeds of five trust instruments not specifically described therein. The amount of said assessment was eventually paid. The necessary preliminary steps to afford jurisdiction in this court are unchallenged. In effect, the claim of error by the Commissioner in making the assessment is put in issue by the answer.

In making the assessment, the Commissioner relied upon two bases. (1) That the trusts in question are void ab initio since the periods of accumulation therein extended from five hundred to one thousand years. (2) That the income of the trusts is taxable to the plaintiff by reason of the ownership and control of the trust corpus retained by him.

The litigation as conducted involved only the second basis of assessment. Ownership and control were and are the questions involved. Ordinarily the validity of trusts is subject to attack only by parties directly interested therein. Although the defendants have submitted a brief on the question of validity, it would seem more proper to refrain from passing thereon if the problem may be disposed of on other grounds.

Upon the close of the evidence, which was practically undisputed, the question of the plaintiff's ownership and control of the trust properties was submitted to the jury. The question, as submitted to and answered by the jury, is set out below.

"Did Jonathan Holdeen possess such control over the property of the trusts mentioned below so that he be considered as substantially the owner of the trust properties for income tax purposes?

                                   Exhibit C      Yes      (Yes or No)
                                   Exhibit 4      Yes      (Yes or No)
                                   Exhibit N      Yes      (Yes or No)
                                   Exhibit 7      Yes      (Yes or No)
                                   Exhibit 8      Yes      (Yes or No)
                                   Exhibit 5      Yes      (Yes or No)
                                   Exhibit 6      No      (Yes or No)"
                

The plaintiff moves to set aside the verdict of the jury as to the answers made which in effect found that he exercised such control over six of the trust properties as to amount to substantial ownership. The defendant likewise moves as to the jury's verdict finding absence of such control over the trust property embraced in Exhibit 6. An understanding of the documents involved is a necessary preliminary to a consideration of the evidence relating thereto.

The manner in which the trust instruments were offered in evidence, their correlation to the allegations of the complaint and to assessments as they appear in the ninety day letter are confusing. It should be noted that the instruments were submitted for the jury's consideration according to exhibit numbers presented in the chronological order beginning with the earliest date thereof. The next required explanation refers to the fact that although but five trust instruments appear to be the bases of the assessment and of the complaint, seven instruments were submitted to the jury. This is accounted for in the case of Exhibit C by the fact that the trustee, Janet Holden Adams, "merged" the corpus of that trust with Exhibit N. The authority for such action does not appear. In the matter of Exhibits 5 and 6, they seemed to have been considered as one fund since Exhibit 6 purported to consolidate Exhibit 5 therein. Actually the five trusts, referred to by the Commissioner in his assessment and by the plaintiff in the complaint, were intended to embrace the seven documents submitted to the jury. It appears that Exhibit C and Exhibit 5 had some measure of life which should be considered in this litigation.

The Trust Instruments

The two oldest trusts, Exhibit C and Exhibit 4, are substantially alike. They both bear the date of October 18, 1936, although the signature of the witness on Exhibit 4 seems to bear date 10/5/38. Janet Holden is the named trustee. One of the documents is signed "Janet Holden" and the other "Janet Adams". The income beneficiaries are the settlor's wife and the great grandchildren of the settlor's father during lives of two of the settlor's daughters. Upon the death of the two daughters, the corpus is transferred to a Pennsylvania bank as successor trustee which shall pay annually to Hartwick College one-tenth of one percent of the income multiplied by the number of elapsed years since 1936. The remainder of the income is to be accumulated until the year 2936 when the entire estate is to be paid to the State of Pennsylvania. In both instruments, the trustee has the right to appoint a substitute trustee but the settlor retains the paramount right to make such appointment. In Exhibit C, the settlor reserves the right to alter the proportions in which the great grandchildren shall share in the benefits, or to exclude a great grandchild therefrom or include any descendant of such great grandchild and to substitute any educational or philanthropic corporation or governmental entity as residuary beneficiary.

Exhibit N is a trust instrument, dated Nov. 20, 1936. Janet Holden is the named trustee. The income beneficiaries are the settlor's daughter during her minority and thereafter the settlor's wife and the great grandchildren of settlor's father during the lives of two of settlor's daughters. Upon the death of the two daughters, the corpus is transferred, held and distributed as in Exhibits C and 4. The paramount right to appoint a substitute trustee is reserved to the settlor as in the last above named exhibits.

Exhibits 7 and 8 are somewhat similar. They are both dated Nov. 23, 1940. The acknowledgment on Exhibit 7 is deficient as to date and Exhibit 8 seems to have been acknowledged in July and August 1952. These instruments are referred to in the evidence as the Sanford Trusts. The trustee named in Exhibit 7 was a son-in-law of the donor. He was succeeded as trustee by donor's daughter, Sherley MacPherson. The named trustee in Exhibit 8 was another daughter of the settlor, Audrey Naylor. The income beneficiaries are the descendants of the donor, other than his sons and daughters, during their minority to continue during the lives of two of donor's children. Upon the death of the two children and of any unborn grandchild in being on the date of the instruments, the corpus is to be transferred to a Pennsylvania bank to be administered under the laws of that state. When no person is entitled to receive the income under the provisions of the instrument, then one one-thousandth part of the income multiplied by the number of years which have elapsed since 1940 is to be paid to named colleges annually until the year 2340 as "expendable income". The remaining income is to be accumulated until the year 2940 when the corpus and accumulations are to be paid over to the State of Pennsylvania for educational endowment. In these instruments, the donor reserved the right to accumulate income for the benefit of a minor beneficiary descendant and apply same to his maintenance and education. The donor also reserved the right "to modify and substitute provisions for income beneficiaries during said lives provided no such beneficiary be donor or his wife or a dependent of donor and to substitute any new trustees named by him for the Trustee named herein". Another reservation of rights is reserved to the donor in each of the exhibits as follows—"Donor reserves the right by written declaration, to modify the provisions hereof with respect to beneficiaries, after said deaths, provided such modification be for the benefit of philanthropic, charitable or educational corporations or public purposes". Another provision of the instruments which may have some bearing upon donor's retained control is to the effect that if the principal of the trust funds be reduced by capital losses, the entire income is to be accumulated until the lost capital shall have been restored.

The next instrument in the order of date is Exhibit 5, referred to in the evidence as 44-10. It is dated July 5, 1944. The plaintiff is denominated as the trustor therein and Janet Adams, Randal Holden and plaintiff, Jonathan Holdeen, are referred to as trustees. The document is signed by plaintiff and Janet Adams only. It provides that the assets, transferred to the trustees, shall be held in the State of...