Jonas v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 91010.
| Decision Date | 28 November 1939 |
| Docket Number | Docket No. 91010. |
| Parties | LOUISE B. JONAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Ferdinand Tannenbaum, Esq., for the petitioner.
Benjamin M. Brodsky, Esq., for the respondent.
This proceeding is for the redetermination of a deficiency in income tax in the amount of $2,624.24 for the calendar year 1935. The question presented is whether the income in the taxable year of two trusts created by petitioner for the benefit of her two sons should be included in petitioner's income for tax purposes.
FINDINGS OF FACT.
The petitioner is an individual, residing at the Ritz Towers Hotel, Park Avenue and Fifty-Seventh Street, New York City. She filed her income tax return for the calendar year 1935 with the collector of internal revenue for the second district of New York.
On December 30, 1918, petitioner created two trusts, one for the benefit of her son, George E. Jonas, and the other for the benefit of her son, James A. Jonas. The two trusts were identical in terms except as to corpus and beneficiary. The trustees named in each trust were Abraham L. Jacobs and Samuel F. Jacobs. To the trustees in each trust petitioner conveyed certain securities. The trust instrument authorized and directed the trustees of the George E. Jonas trust:
To take possession of and to collect the rents, issues profits, interest and income thereof, and to keep the principal invested and reinvested from time to time, paying all necessary or proper disbursements in and about said trust estate, and to pay and apply the net interest and income thereof to the support and maintenance of GEORGE E. JONAS, the son of the party of the first part, for and during the period from the date hereof to the 2nd day of January, 1921, not longer, in any event however, than during the lifetime of the said George E. Jonas in the event that he should die prior to January 2nd 1921. Upon the 2nd day of January, 1921, or upon the death of the said George E. Jonas in the event that he shall die prior to said date, then the parties of the second part shall pay, deliver and return the principal of such trust fund, including all property and securities in which at that time it shall then be invested to the party of the first part to be held and received by her for her own use and benefit absolutely and forever, and at such time and upon such event, this agreement shall come to an end and the principal of such trust fund and all accumulated interest and income thereof shall revert to and be paid to the party of the first part, or if she then be dead, the same shall belong to and be paid over by the parties of the second part to the executors, administrators and personal representatives of the party of the first part.
The trustees were given as full power relative to the selling, encumbering, and reinvesting of the trust property for trust purposes as if they were the owners thereof. They were authorized to invest the trust funds in "any securities or investments whatsoever without restriction or limitation, and notwithstanding that the same are not permitted to trustees under the laws of New York or other jurisdictions." In neither trust was reserved the right to any one to change, modify, or revoke the trust or revest title to any of the trust property in the petitioner. No power of control or management of the trust property or of the disposition of the income thereof was reserved to petitioner. The only power reserved to petitioner was the right to appoint a trustee or trustees if a vacancy should occur in such position or if an existing trustee should fail to act as such.
On December 29, 1920, by an instrument in writing the term of the trust was extended to December 31, 1927. Similarly, on November 17, 1927, the term of the trust was extended to December 31, 1932. Under that and the subsequent extension Samuel F. Jacobs was designated as sole trustee, Abraham L. Jacobs having died in 1921. On April 26, 1932, by an instrument in writing, the term of the trust was extended to December 31, 1942. In no other respects were the provisions of the trust changed. Identical extensions and designation of sole trustee were made in respect of the James A. Jonas trust, without other change in the provisions thereof. During the taxable year Samuel F. Jacobs was the sole trustee of each trust.
George E. Jonas was born on December 22, 1898, and James A. Jonas was born February 5, 1894. In the year 1935 neither of them was the recipient of public relief or liable to become in need of public relief. All of the income of the trusts in the year 1935 was currently distributed to the respective beneficiaries. No part of such income was included by petitioner in her income tax return for the taxable year.
Respondent added to petitioner's gross income as reported by her for the taxable year $4,881.05 and $650 representing, respectively, interest and dividends received in that year by the George E. Jonas trust, and $3,610.41 and $3,800 representing, respectively, interest and dividends received in that year by the James A. Jonas trust. Other adjustments, not here in controversy, of petitioner's income as reported for the taxable year were made by respondent. On the basis of adjustments so made respondent determined the deficiency herein.
The issue here is whether the income of the trusts for the taxable year is includable in petitioner's income for tax purposes under section 166 or 167 of the Revenue Act of 1934, or upon the ground that petitioner retained such command and control of the trust properties that she did not divest herself of title and every interest therein in any permanent or definitive way. Section 166 relates exclusively to revocable trusts. The trusts here were not revocable; hence, section 166 does not apply. Section 167 is in material part as follows:
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust —
(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be held or accumulated for future distribution to the grantor; or
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
* * * * * * *
then such part of the income of the trust shall be included in computing the net income of the grantor.
For convenience of discussion we shall refer to the trust for the benefit of George E. Jonas, with the understanding that what we say relative thereto is applicable also to the trust for the benefit of James A. Jonas.
The trust instrument directed the trustees "to pay and apply the net interest and income thereof to the support and maintenance of George E. Jonas", during the term of the trust. The trust instrument also directed that upon the termination of the trust "the principal of such trust fund and all interest and income thereof shall revert to and be paid to the party of the first part, or if she then be dead, the same shall belong to and be paid over * * * to the executors, administrators and personal representatives of the party of the first part."
We think the correct construction of the trust instrument as indicated by the language set forth in the two quoted excerpts from such instrument is that the amount of the income of the trust which the trustee was authorized and directed to pay to the beneficiary was limited to the reasonable need of the beneficiary for support and maintenance and that if there was an excess of such income over such need it must be accumulated for distribution to the petitioner or her personal representatives upon the termination of the trust. In order to determine the amount to be distributed to the beneficiary for support and maintenance it was encumbent upon the trustee to determine as a fact the amount necessary to meet the reasonable need of the beneficiary for support and maintenance. The duty to determine such amount was mandatory. It was not a duty to be performed or not in the discretion of the trustee. Nor did the trustee have any discretion to determine that he would pay for maintenance and support an amount other than that found to be reasonably necessary, in fact, for such purpose. When the amount necessary to meet such need was so ascertained there was no discretion in the trustee to apply either a less or greater amount of the trust income to such purpose. If there should be an excess of the net income of the trust over the amount determined by the trustee to be necessary for the maintenance and support of the beneficiary, such excess was automatically accumulated under the terms of the trust. The trustee had no discretion relative to such accumulation. Under the terms of the trust the petitioner (grantor) had no control over the trust income or over its distribution or accumulation. During the taxable year all of the income of the trust was distributed to the beneficiary. Such distribution could have been made properly only upon the fact found by the trustee that the full amount of such income was reasonably necessary for the support and maintenance of the beneficiary. In fact, the respondent does not contend that the deficiency is justified on the ground that no part of the trust income was necessary for the support and maintenance of the beneficiary, or that a greater amount of such income than was necessary for such purpose was distributed to the beneficiary. There is no evidence in the record as to the amount necessary for such support and maintenance and the question is not raised or touched upon by either of the parties on brief. Since the point was not raised, we assume that the trustee acted within his mandatory power in making such distribution and that hence, in the taxable year, no part of trust income was, or in the discretion of any one...
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