Makransky v. Comm'r of Internal Revenue
| Decision Date | 29 May 1961 |
| Docket Number | Docket Nos. 83212,86008,83356,86490.,86381,86007,83357,83463,83464 |
| Citation | 36 T.C. 446 |
| Parties | HARRY MAKRANSKY AND HELEN MAKRANSKY, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Bernard Wolfman, Esq., for the petitioners in Docket No. 83212.
Albert B. Zink, Esq., for the petitioners in Docket Nos. 83463, 83464, 86381, and 86490.
Herman H. Krekstein, Esq., for the petitioners in Docket Nos. 83356, 83357, 86007, and 86008.William J. Hagan, Esq., for the respondent.
The settlor of a trust transferred all the capital stock of a wholly owned corporation to the trust for the benefit of his four daughters. The settlor, the four daughters, and three others were trustees. The transfer rendered the settlor insolvent because of a substantial obligation arising from a judgment in favor of the Commonwealth of Pennsylvania. The Commonwealth threatened the trust assets under the Pennsylvania Fraudulent Conveyance Act. The trust, with the approval of a State court, caused the corporation to make distributions to the settlor, and after his demise, to his estate. The distributions were forthwith transferred to the Commonwealth in settlement of the obligation. Held, the trust is liable for tax on the amounts so distributed. Held, further, the beneficiaries are not liable for tax on said amounts because not distributed or distributable to them.
The respondent determined deficiencies in petitioners' income tax and additions to tax for the years 1952 through 1956, as follows:
A trust had as its corpus all of the capital stock of a corporation. The settlor of the trust (who was also president of the corporation and a trustee) was insolvent and had a substantial outstanding obligation to the Commonwealth of Pennsylvania. The beneficiaries of the trust were the four daughters of the settlor. The trust caused the corporation to make distributions to the settlor and to his estate after his demise. These distributions were used by the settlor and the estate in discharge of the settlor's obligation to the Commonwealth of Pennsylvania. The main issues are:
(1) Whether the petitioner trust is liable for tax on the said distributions, and
(2) Whether the petitioner beneficiaries of the trust are liable for tax on the said distributions.
All of the facts have been stipulated. They are found accordingly.
Petitioners Harry Makransky and Helen B. Makransky, Emanuel Moss and Sylvia Moss, Allen C. Jacobs and Theodora B. Jacobs, are husband and wife as they appear. All filed joint income tax returns for the years 1952 through 1956 with the district director of internal revenue at Philadelphia, Pennsylvania.
Petitioner Hilda B. Schneider (formerly Raines) filed individual income tax returns for the calendar years 1952 and 1953 with the said district director of internal revenue. She did not file income tax returns for the calendar years 1954, 1955, or 1956.
Petitioner Trust Under Deed of Joseph Binenstock (Deceased) was established by indenture of trust dated August 29, 1947. Fiduciary income tax returns were filed for its taxable years ended September 30, 1952, 1953, 1954, 1955, and 19562 with the said district director of internal revenue. This petitioner will hereafter be referred to as the trust.
Petitioners Helen Makransky, Sylvia Moss, Theodora Jacobs, and Hilda Schneider are all daughters of Joseph Binenstock, the settlor of the trust, and life beneficiaries under the trust instrument. Their husbands are joined where joint returns have been filed.
The trust was created by indenture in 1947 between Joseph Binenstock, hereafter sometimes called Binenstock, as settlor and Binenstock, John Tait, Albert Barnes Zink, the beneficiaries, and the Girard Trust Company,3 as trustees. Under the terms of the indenture, Binenstock transferred to the trust 325 shares constituting all of the issued and outstanding stock of J. A. Dougherty & Sons, Inc., Distillers, hereinafter sometimes referred to as the corporation. Said shares constituted the entire trust corpus during the years here in question.
The trust instrument by its terms was irrevocable. It directed the trustees to divide the principal into 4 equal shares, to hold 1 such share for each of the daughters, and to pay each daughter the net income from her share in monthly or quarterly installments for life, and thence to her children, if any, with further provisions for distribution of income and corpus to settlor's grandchildren, if any, and, if not, to a designated charity.
Between April 1948 and November 1951, dividends totaling $113,028.50 were declared and paid by the corporation to the trustees. During the same period a total of $105,671.08 was distributed to the beneficiaries. No other distributions were made by the trustees to the beneficiaries.
In April 1950 a judgment was entered against Binenstock in favor of the Commonwealth of Pennsylvania in the Court of Common Pleas No. 1 of Philadelphia County and affirmed by the Supreme Court of Pennsylvania in March 1951,4 in the amount of $864,924.21 as a result of an escheat proceeding. This case had been initiated in about 1943.
Binenstock was insolvent and unable to pay this liability. He had rendered himself insolvent by the transfer to the trust under the 1947 trust agreement, and had remained insolvent since that time. The liability to the Commonwealth of Pennsylvania described above arose prior to the transfer to the trustees. The transfer to the trust was made without any consideration being given for it.
Immediately after the affirmance by the Supreme Court of Pennsylvania of the foregoing judgment, the Commonwealth of Pennsylvania threatened to institute an action to set aside the trust under the Pennsylvania Uniform Fraudulent Conveyance Act.5 Binenstock and the Commonwealth proposed to enter an agreement to settle the said judgment for $756,000 payable over about 3 years. This settlement agreement was conditioned upon the execution and delivery by the trustees of a security agreement under which they would, in effect, agree to preserve the assets of the trust pending performance of Binenstock's obligations under the compromise agreement, and provided the beneficiaries and Binenstock, in their individual capacities, would further agree not to resist whatever attempt the Commonwealth might make to set aside the trust in case Binenstock should fail to fulfill his obligations.
Binenstock did not have sufficient funds to meet the payments required under the contemplated compromise agreement and he applied to the corporation for a loan with which to meet the obligation to the Commonwealth, offering to secure payment by pledging such real estate, mortgages, and stock as he then owned.
Three of the trustees under the trust agreement petitioned the Orphans' Court of Philadelphia County for authority to compromise Binenstock's liability.
In September 1951 the Orphans' Court appointed a master to take testimony and report his conclusions of law in connection with the trustees' petition. The other trustees, i.e., the beneficiaries and Binenstock, filed a waiver of objection to this petition in said Court. The master, after notice to all immediate parties in interest, to the parents of minor remaindermen in being and to the charitable contingent remainderman, held a hearing at which testimony was taken and evidence received. The master found the following conclusions of law:
Unless the settlement agreement between the Commonwealth and Binenstock is entered into there is a strong...
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