NEVIN, District Judge (Sitting by Designation).
In this action plaintiff seeks to recover the sum of $80,435.46,1 with interest, alleged to have been overpaid as federal income taxes for the taxable years 1939, 1940 and 1941. Taxes in the principal amount of $72,661.13 were paid by plaintiff on March 4, 1943. On the following day plaintiff paid interest in the sum of $7,774.33.
On April 30, 1943, plaintiff duly filed claims for refund of the foregoing taxes and interest. More than six months having elapsed prior thereto without any action having been taken upon the refund claims by the Commissioner of Internal Revenue, this suit was commenced on November 9, 1943.
The taxes were assessed under § 22(a) of the Revenue Act of 1939, 53 Stat. 4 et seq, § 22(a) 26 U.S.C.A. Int.Rev.Code, by reason of a trust deed made by plaintiff in 1928.
Two issues are involved. The first is whether the Commissioner of Internal Revenue erred in including in plaintiff's income for the years in question the income derived from an inter vivos trust created by the plaintiff on April 23, 1928, as amended. The second is whether the Commissioner erred in including in such income the amounts of income earned upon the income of the trust, which income was distributed to the plaintiff's wife for the "education, support, maintenance and welfare" of the plaintiff's three children during their minority.
The cause came on for hearing before the Court, without a jury, on September 15, 1944. While by agreement, some additional evidence was adduced, the pertinent facts are all set forth in a Stipulation of Facts signed by counsel for the respective parties and filed on September 15, 1944.
The Court has adopted the facts as recited in this Stipulation as its Findings of Fact. Inasmuch as its Findings are hereinafter set forth, it is unnecessary to make a further statement of the facts as disclosed by the record.
The Stipulation was introduced in evidence and (except as to paragraph 26, thereof) is now plaintiff's exhibit 1. While, as stated, the Stipulation is signed by counsel for the respective parties, the record shows that nevertheless counsel for plaintiff reserved the right to and did object to the introduction in evidence of paragraph 26 thereof, and that paragraph is not part of plaintiff's case.
The record further shows (P. 46) that at the close of plaintiff's case, defendant then offered in evidence paragraph 26 of the Stipulation — which incidentally was the only evidence offered on behalf of defendant in addition to that contained in the Stipulation. Paragraph 26 is now defendant's exhibit A-1 herein.
At the time paragraph 26 was offered in evidence, the record shows the following: "The Court: I will do this: at this time I will admit paragraph 26 which appears on page 8 of the stipulation which is now marked Plaintiff's Exhibit 1, and we will let that paragraph be marked as Defendant's Exhibit A-1, and it is admitted subject, however, to plaintiff's objection and plaintiff's motion to strike, and that will be considered and passed on by the court. If I sustain the objection that paragraph will not be considered, and if I do not sustain it, it will be considered."
Upon full consideration, the Court is of opinion and so finds that plaintiff's objection and motion to strike above referred to are each and both not well taken and that they should be and hereby, they are, overruled. Paragraph 26 is admitted in evidence and has been considered by the Court along with all of the other evidence in arriving at its ultimate conclusion. To this finding and ruling of the Court, plaintiff's exception is here noted.
The claims of the respective parties cannot be better set forth than in the language of their counsel. Counsel for plaintiff stated in the record that "it is plaintiff's contention that he is not to be taxed either on the direct income or on the indirect income; clearly not on the indirect income because the securities from which that income was derived belonged not to him but to his children; not on the direct income because this was a trust irrevocable concerning which the plaintiff had no right whatever to receive any of the income or principal, or to determine who should receive that income or principal. All those provisions were fixed in the trust indenture. It is true that the plaintiff reserved in that indenture certain rights to control investments and vote stock, and one or two minor things, but * * * the courts have not held that the reservation of those rights permit the taxation of the income to the settlor where he has not the power to determine who shall get the money and can himself never get any of it. * * * Now the commissioner, in assessing this tax, proceeded originally on two theories, first, as to the entire income of the trust that it was taxable to plaintiff under Section 22(a) of the Revenue Code, because of his alleged control over the trust, and then as to the portions of the income applicable to the then minor children, on the ground that the income might have been used for their support, and under the Stuart case (Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L. Ed. 154), interpreting Section 167(a) 26 U.S.C.A. Int.Rev.Acts, page 727 is therefore taxable to the grantor. After the Stuart case was decided and after this assessment was made * * * Congress in the 1943 Revenue Act * * * changed the law as to the future so that now income from a trust is not taxable to the settlor merely because it might be used for the support of minor children, but only if it actually is used for their support, and the evidence here shows that none of the income was used for the support of the minor children but all of it was accumulated and invested for them."
Defendant's position was stated by his counsel as follows: "preliminarily I might say this: there are indeed two different bundles of securities, if you will, the income of which is being taxed in this case, and the taxation on which the Government now defends. The first is the income from this trust indenture which was set up in 1928, which, at that time, provided that the settlor, the present plaintiff, might revoke it. Since then, and prior to the years involved in this case, the plaintiff gave up the right to revoke or change the disposition of the funds insofar as naming new beneficiaries or substituting beneficiaries is concerned, prior to the commencement of this action. In addition to the income from the trust there is the income which the children receive independently. Now when I say independently, I mean independently of the trust. * * * Taking up the trust first, it was the usual type of trust. It was for the benefit of the plaintiff's wife and his three children. As far as the wife was concerned, she was to get the income for life and then to the two children if they survived and a certain other way which is not important here. So far as the children were concerned, it also was for the duration of the plaintiff's life. In the event of his death prior to the child reaching 25, he was to get a certain amount of the corpus, another third I believe on the child attaining the age of 30, and the balance, if he wanted it, at the age of 35. There was a queer twist in the manner of distributing the income for the children in this trust. The indenture said that it was to be distributed to the wife for the education, support, maintenance and welfare of the children. Actually the income was distributed to the wife. * * * There is nothing in either the stipulation or the trust indenture or the complaint * * * or any other place * * * that indicates in what capacity the wife received those funds. * * * Whether she received it as agent for the children or as agent for the settlor does not appear. I think she received it for the settlor as the stipulation shows she never spent a penny except after consultation with the plaintiff and pursuant to his directions; in other words, he told her what to do with the money and she did it. During the three years in question she accumulated the funds, except that she paid some taxes. * * * I would like to point out now that the theory of the Government in this case is based upon the Clifford case (Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788). * * * The theory of the case is dependent upon what the court in the Clifford case calls the `family solidarity' doctrine; in other words, where a man sets up a trust and he has control over the trust, and the trust income is to be distributed among his immediate family, he has just done nothing. It was true in the Clifford case as in this case that he could not get the money himself, but the court points out that is not important, * * * and I would like to point out now that the Government is not relying on Helvering v. Stuart."
It is a well recognized principle that the Government is not required to tax trusts as separate entities where the terms of the trust indenture, the manner of its creation, and the method of its operation indicate that the corpus of the trust is not to be distinguished from the grantor's other property for tax purposes. In Helvering v. Clifford, 309 U.S. 331, at pages 334, 335, 60 S.Ct. 554, at page 556, 84 L.Ed. 788, the Court say: "Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue. That issue is whether the grantor after the trust has been established may still be treated, under this statutory scheme, as the owner of the corpus. See Blair v....
