Mallinckrodt v. Comm'r of Internal Revenue

• Decision Date: 16 December 1943
• Docket Number: Docket No. 104513.
• Citation: 2 T.C. 1128
• Parties: EDWARD MALLINCKRODT, JR., PETITIONER, v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

2 T.C. 1128

EDWARD MALLINCKRODT, JR., PETITIONER,

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT.

Docket No. 104513.

Tax Court of the United States.

Promulgated December 16, 1943.

1. The petitioner, who was cotrustee of a trust created by his father, was upon his request entitled to all of the income of the trust, except $10,000 payable annually to his wife. In addition, he had broad powers of management as cotrustee, and with the consent of his cotrustee had the right to terminate the trust by taking the entire corpus. In addition, he could dispose of the trust corpus by will to anyone and in any manner he desired. No request was made by petitioner for payment of the trust income here in question, and, pursuant to the terms of the trust instrument, said income was at the end of each year in which it was earned added to corpus. Held, that respondent did not err in determining that said income was taxable to petitioner.

2. In 1921 the petitioner created a charitable trust but did not retain power of revocation or modification. Desiring to transfer the corpus of the trust to another state, the petitioner in 1935 entered into an agreement with the only specifically named beneficiary whereby the latter renounced its claims under the trust. Thereupon the petitioner and the trustee executed an instrument of ‘revocation and annulment,‘ after which the trustee transferred the property of the trust to the petitioner but at the latter's direction carried it in an agency account. Later in 1935 the petitioner transferred a portion of the trust property outright to the said specifically named beneficiary and a portion to a trust company in Boston to be held under a trust agreement similar in terms to that originally entered into in 1921. Held, that the petitioner did not acquire ownership of the trust property in 1935 and did not therefore realize any taxable income in that year by reason of his dealings with the trust property.

3. During the taxable years the petitioner was a large investor in stocks and bonds and derived his income principally from such investments. In managing and conserving his investments and in collecting the income therefrom, he incurred certain expenses for investment advice, custodian and collection services, and services of a financial secretary and bookkeeper and auditor. Held, that said expenses, together with fees and commissions of trustees of certain revocable trusts, constituted allowable deductions to petitioner in the respective years to the extent not allocable to nontaxable income. Held, further, that said expenses and trustees fees and commissions are to be allocated to the taxable income and nontaxable income of such years in the proportion that each bears to the total of the taxable and nontaxable income of the petitioner for such years. Charles P. Williams, Esq., and Harry W. Kroeger, Esq., for the petitioner.

W. Frank Gibbs, Esq., for the respondent.

TURNER, Judge:

The respondent determined deficiencies in the petitioner's income tax for the years 1934, 1935, 1936, and 1937 in the respective amounts of $32,056.96, $204,351.05, $63,200.73, and $82,548.93. The issues are (1) whether certain undistributed income received in 1934, 1935, 1936, and 1937 by a trust created by petitioner's father and known as Trust No. 3660 was taxable to petitioner in the respective years; (2) whether certain acts of the petitioner in 1935 resulted in the revocation in that year of a charitable trust created by him in 1921 and in the realization of taxable gain by reason thereof; and (3) whether the petitioner is entitled to deduct certain trustees' fees and commissions paid by trusts revocable by petitioner, the income of which was taxable to him, and was further entitled to deduct certain expenditures made during 1934, 1935, 1936, and 1937 for investment advice, custodian and collection services, and the services of a financial secretary and bookkeeper and auditor. In addition, there are certain alternative issues relating to allowances for contributions. For convenience, the discussion of each issue will follow immediately after the findings of fact relating thereto, and the issues will be considered in the order previously noted.

GENERAL FINDINGS OF FACT.

The petitioner is a resident of St. Louis, Missouri, and filed his income tax returns for the years 1934, 1935, 1936, and 1937 with the collector of internal revenue for the first district of Missouri. At all times throughout the years 1934 through 1937 the petitioner kept his books on the cash receipts and disbursements basis. His income tax returns for said years were filed on that basis.

Issue 1.— Taxability of Income of Trust No. 3660.FINDINGS OF FACT.

By an absolute and irrevocable indenture of trust executed April 17, 1918, Edward Mallinckrodt, Sr., petitioner's father, transferred to petitioner and the St. Louis Union Trust Co., as trustees, various properties. This trust was known as, and was carried on the records of St. Louis Union Trust Co., sometimes hereinafter referred to as trust company, as Trust No. 3660. The petitioner's father died in 1928, but petitioner and his wife, Elizabeth E. Mallinckrodt, are living. The trust is still in existence, and at all times during 1934 through 1937 was and now is being actively administered by petitioner and the trust company.

At the time of the creation of the trust the petitioner's father was interested in the completion of a building enterprise called the Arcade Building Enterprise. The plans for the enterprise contemplated the erection of several buildings which upon completion would constitute parts of a single building known as the Arcade Building and would be managed and operated as a single building. Jane Holding Corporation, in which he was a stockholder, was engaged in the erection of one building, and Finance & Mortgage Corporation, of which he was a bondholder, was engaged in the erection of another building.

By article first of the trust instrument the grantor transferred to petitioner and the trust company shares of stock in Jane Holding Corporation, bonds of Finance & Mortgage Corporation, and all rights and interests he had in and under any agreement for the purchase of bonds of Finance & Mortgage Corporation and in and under any agreement relating to the Arcade Building Enterprise.

Article second of the trust instrument provided as follows:

* * * the Trustees, acting either as Trustees of the trust estate created hereby, or, independently of said trust estate as the agents and attorneys in fact (appointed hereby) of said Edward Mallinckrodt, and in his name,— or acting in both such capacities,— are hereby expressly authorized and empowered, in and according to their absolute discretion, and not only in respect of said Arcade Building Enterprise and of the securities above described as constituting the initial trust estate created hereby, but also in respect of all other or additional trust assets which may at any time come into their charge as Trustees under this indenture, to exercise as full and complete powers of control, management, and disposal in all respects, as the Trustees might have exercised had they been themselves the absolute owners of the trust estate; * * *

By the terms of article third of the trust instrument, the trustees were directed to apply the income of the trust first to the payment of taxes and administration expenses and, second, to the payment of subscriptions for bonds of Finance & Mortgage Corporation and on debts secured by any property of the Jane Holding Corporation or incurred by petitioner's father, the trustees or the Jane Holding Corporation, in connection with the acquisition, construction, and completion of the Arcade Building. Article fourth of the instrument directed the trustees, after the debts, obligations, and burdens described in article third had been fully paid and satisfied, to pay to petitioner's wife out of the net annual income of the trust the sum of $10,000 per annum until the death of the petitioner, or during her life if she should predecease him, and upon his request to pay to him the remainder of the net income for and during his life. The article further provided that all of the net income not so paid to the petitioner at his request during any one calendar year should accumulated during the period of such current year and at the end thereof should become a part of the principal of the trust estate, subject to such further disposition as was therein provided for the principal of the trust estate. The article also contained directions for the disposition of the principal of the trust in favor of petitioner's wife, the children, and other descendants of petitioner in the event the trust should not terminate during petitioner's lifetime, or in the event he failed to exercise the testamentary power of appointment hereinafter referred to.

Article fifth of the trust instrument provided that, subject to the provisions of article third, the trustees might, upon the written request of petitioner during his lifetime, but subject to the approval of both trustees, convey or pay to petitioner from time to time such portions of the principal of the trust estate as might seem wise to the trustees to distribute to petitioner for his benefit or that of his family. This article contained similar provisions for partial distribution for the support, maintenance, or other welfare of beneficiaries after the death of the petitioner.

Under article eighth the petitioner was given a general power of appointment by will over the property comprising the trust estate. Article ninth gave petitioner power by written instrument executed and delivered to his cotrustee during his life or by will to appoint his successor trustee in case he should cease to act as trustee by reason of death, resignation, or other cause.

Article twelfth provided for termination of the trust during the life of petitioner at the discretion of the trustees...