Mallinckrodt v. Nunan

• Decision Date: 29 January 1945
• Docket Number: No. 12915.,12915.
• Parties: MALLINCKRODT v. NUNAN, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

146 F.2d 1 (1945)

MALLINCKRODT v. NUNAN, Commissioner of Internal Revenue.

No. 12915.

Circuit Court of Appeals, Eighth Circuit.

January 10, 1945.

Rehearing Denied January 29, 1945.

Charles P. Williams, of St. Louis, Mo. (Daniel N. Kirby and Harry W. Kroeger, both of St. Louis, Mo., on the brief), for petitioner.

Bernard Chertcoff, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Hilbert P. Zarky, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before STONE, SANBORN, and THOMAS, Circuit Judges.

SANBORN, Circuit Judge.

The Tax Court of the United States determined deficiencies in the income taxes due from petitioner for the calendar years 1934 to 1937, inclusive. 2 T.C. 1128. The deficiencies resulted from including in the petitioner's income for each of the years the undistributed income of an irrevocable trust created by his father in 1918. By the terms of the instrument creating the trust, this undistributed income was payable to petitioner annually upon his request, but, if not paid to him at his request, it was to be added to the corpus of the trust estate at the end of each year.

The question presented is whether the undistributed income of the trust in the years in question was taxable to petitioner or taxable to the trust.

The contention of petitioner is that by the plain language of sections 161 and 162 of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Code, §§ 161, 162,¹ the undistributed trust income was taxable to the trust. The respondent contends that this income was taxable to petitioner under section 162(b) of the applicable Revenue Acts as income "to be distributed currently" by the fiduciaries to him as a beneficiary. Respondent also contends that the income was taxable to petitioner, under section 22(a) of these Acts,² as the owner of the income.

The factual situation out of which this controversy arises is, in substance, as follows: Edward Mallinckrodt, Sr. (who died in 1928), on April 17, 1918, executed a trust instrument, by which he transferred to St. Louis Union Trust Company and the petitioner, as trustees, property and securities under the terms and conditions stated in the instrument. At the time this trust was created, the grantor's family consisted of petitioner, petitioner's wife, and their three sons. The grantor's intention in creating the trust was primarily to provide for petitioner's children and grand-children. Petitioner had already received a large amount of property from his father. By the terms of the trust instrument, the net income of the trust was to be devoted first to paying certain debts, obligations, and burdens growing out of a building enterprise, and, after those obligations had been paid and satisfied in full, the trustees were directed: to pay to petitioner's wife out of the annual net income of the trust $10,000 each year during her life and that of petitioner; to pay the residue of such annual trust income to petitioner during his life, upon his request; to accumulate the undistributed annual net income and, at the end of each year, to add it to the principal of the trust estate. The trust instrument conferred upon petitioner a testamentary power of appointment over the corpus of the trust estate, but provided that if he did not exercise the power, the trust should continue after his death for the benefit of his widow, his children, and the descendants of his children, and, upon certain contingencies, for the benefit of others. The trustees were empowered, upon the written request of petitioner, during his lifetime, but subject to the approval of both trustees, to "convey or pay to" him "such portions of the principal of the trust estate as it may seem wise to the Trustees to distribute to him for his benefit or that of his family; * * *." The trust was subject to termination during the lifetime of petitioner "at the discretion of the then Trustees, in case they shall decide that such earlier termination is advisable or desirable in the interest of said `Arcade Building Enterprise', or for any other reason in the interest of the estate then held in trust or of the beneficiaries thereof." If the trust were terminated during the lifetime of petitioner, he was, by the terms of the trust instrument, to have all of the assets of the trust estate. Petitioner was authorized to appoint, by will or by written instrument, his successor as trustee, and, if no successor was named by him, the St. Louis Union Trust Company was to be the sole trustee.

The debts, obligations, and burdens of the building enterprise referred to in the trust instrument were fully paid and satisfied out of the income of the trust estate by 1933. In 1934 and thereafter, the trustees paid to petitioner's wife $10,000 each year out of the annual income of the trust. The petitioner did not request that any of the income of the trust be paid to him in 1934 and 1935. In 1936 the trustees distributed, upon petitioner's request, out of the trust income, $15,000, which was disbursed to certain educational and charitable organizations, and $4,075.82, which was transferred to a trust which petitioner had created for the benefit of his wife. Petitioner reported in his income tax return for 1936 so much of the $15,000 distribution as was taxable. He did not report in his return the taxable portion of the $4,075.82 distribution. In 1937, the trustees distributed out of trust income, upon petitioner's request, $3,109.14 by transferring that amount to the trust which he had created for his wife's benefit. The taxable portion of this distribution was not included in petitioner's income tax return for 1937. During each of the taxable years, petitioner's wife reported and paid the tax upon the $10,000 of trust income which was distributable to her and which she received from the trustees. All of the undistributed net annual income of the trust for each of the years in question was reported by the trustees as income taxable to the trust, and they paid the tax due upon it. At the end of each of the years, the trustees, as directed by the trust instrument, added the undistributed net income for that year to the corpus of the trust.

The respondent determined that the undistributed trust income for each of the years was taxable to petitioner. Petitioner had a very large taxable income. The Tax Court sustained the respondent's determination.

It seems apparent from the grantor's purpose in creating the trust, from the elaborate provisions of the trust instrument relative to the continuance of the trust beyond the lifetime of the petitioner for the benefit of others, and from other circumstances, that the powers conferred upon the petitioner and upon the trustees over the disposition of the income and corpus of the trust were not granted with the thought that they would be exercised for the sole use or benefit of petitioner. The grantor evidently conferred the powers in the belief that the petitioner and the trustees, during petitioner's lifetime, should have discretion to alter the provisions of the trust instrument relative to the disposition of the trust estate or to terminate the trust if deemed necessary or wise in the interests of the beneficiaries of the trust. It is apparent that the grantor intended that the wife and descendants of petitioner were to have a real and subsisting interest in the income and the corpus of the trust estate. It is a fair assumption that the grantor contemplated that petitioner would not, during his lifetime, seek to withdraw either income or principal from the trust estate unless he needed it or unless he believed that it could be used advantageously by him for the benefit of the family.

A majority of the judges of the Tax Court were of the opinion that, because of the powers granted to petitioner by the trust instrument, the undistributed income of the trust in each of the years in question was his income, for purposes of taxation, by virtue of the provisions of section 22(a). The basis for their opinion is indicated by the following excerpt (at pages 1136-1137 of 2 T.C.):

"Certainly with such powers and rights in and to the trust corpus, and particularly to the income produced, there can be no question that if petitioner were the grantor he would be taxable on the income under section 22(a), Helvering v. Clifford, supra 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, and petitioner makes no claim to the contrary. The fact that the powers and rights are not the retained powers and rights of a grantor but were received by petitioner as beneficiary of the trust and by grant from his father makes them no less substantial. As in the Clifford case, the rights and powers of the petitioner in and to the trust corpus and the income therefrom did not include all of the incidents of ownership, but we think it may definitely be said that the benefits held by and belonging to petitioner, directly or indirectly, were such as to require the conclusion that he was the owner of the income here in question, within the meaning of section 22(a), supra. In Corliss v. Bowers, 281 U.S. 376 50 S.Ct. 336, 74 L.Ed. 916, the Supreme Court said:

"`But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid. * * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent. The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not. * * * (Italics supplied.)'

"While in Corliss v. Bowers the Court was considering and there determined the validity of subsections (g) and (h) of section...