McCutchin v. COMMISSIONER OF INTERNAL REVENUE

• Citation: 159 F.2d 472
• Decision Date: 07 February 1947
• Docket Number: No. 11665.,11665.
• Parties: McCUTCHIN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

159 F.2d 472 (1947)

McCUTCHIN v. COMMISSIONER OF INTERNAL REVENUE.

No. 11665.

Circuit Court of Appeals, Fifth Circuit.

February 7, 1947.

R. B. Cannon, of Fort Worth, Tex., for petitioners.

Melva M. Graney, Sewall Key, and J. Louis Monarch, Sp. Assts. to Atty. Gen., Douglas W. McGregor, Asst. Atty. Gen., J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John W. Smith, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent contra.

Before McCORD, WALLER, and LEE, Circuit Judges.

McCORD, Circuit Judge.

The Commissioner determined income tax deficiencies for 1940 against Alex McCutchin and Alma McCutchin, husband and wife, by including in their community gross income the income from four trusts jointly established by taxpayers with community property in 1939. The Tax Court redetermined the deficiencies, holding that taxpayers were not taxable on income from two of the trusts in favor of their minor children, but that under Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 22(a), and the Clifford Doctrine¹ they were taxable on the income of two trusts which named as beneficiaries Alex McCutchin's father and mother, J. A. and Carrie McCutchin.²

The Commissioner has not appealed from that portion of the Tax Court's decision which determined that taxpayers were not taxable on income from the trusts in favor of the children; and the only issue before us is that raised by taxpayers' petition attacking the holding that they were taxable on the income from the J. A. and Carrie McCutchin trusts.

McCutchin Investment Company, a Texas corporation, was the trustee designated in each of the four trust instruments. It was organized for the purpose of receiving and managing the four trusts and was chartered just three days prior to the creation of the trusts. Incorporators were Alex McCutchin and his wife and brother. The authorized capital stock of $25,000 was fully paid in cash, and Alex McCutchin owned all stock other than qualifying shares and was president of the corporation. The corporation had no employees or offices of its own.

Through his alter ego, McCutchin Investment Company, Alex McCutchin was for all practical purposes the active manager and trustee of each of the four trusts. Phipps v. Commissioner, 2 Cir., 137 F.2d 141. Moreover, each of the trust instruments contained provisions providing that the settlors could at any time designate a substitute trustee or trustees and that the settlor, Alex McCutchin, "may be and be come one of the trustees."

The trusts were expressly irrevocable. The settlors divested themselves of all interest in the trust property, and only in the event of death of both their children without issue did they have a reversionary interest. By terms of each of the trust instruments, the trustee took possession of the trust property with "full and complete power in the management, control, and disposition of the trust property as * * * if it were the sole and absolute owner in fee simple * * *." The trustee was empowered to borrow money, execute mortgages and deeds, and lend money with or without security. The trustee was given the power to invest and reinvest funds,³ and could hold and manage, exchange or sell the trust property without disclosing the trusteeship.

The trust instruments naming the father and mother of Alex McCutchin as beneficiaries contain benefit provisions materially different from the provisions of the trusts in favor of the two minor children. The trusts in favor of the children provide specifically for the accumulation, reinvestment, and ultimate distribution of income and corpus to the children, but the trusts in favor of J. A. and Carrie McCutchin provide for them to receive only such portions of trust income or corpus as "in its uncontrolled discretion, the Trustee deems appropriate for the needs and welfare of the said primary beneficiary." During the taxable year the father and mother of Alex McCutchin received nothing from the trusts, although net income, before depletion, attributable to their trusts approximated $28,000. No payment was made until the year 1942 when Mrs. Carrie McCutchin began drawing $50 per month, apparently for her "needs and welfare."

The trust instruments further provided that upon the death of the primary beneficiary (J. A. McCutchin in one trust, and Carrie McCutchin in the other), the property and funds remaining in the respective trusts was to pass to the trusts for the minor children, if such trusts were still in existence, or to the children if their trusts had terminated. J. A. McCutchin died in 1940, and property in his trust vested one-half in each of the trusts for the minor children of Alex and Alma McCutchin.

We find no merit in taxpayers' contention that our decision in Hawkins v. Commissioner, 152 F.2d 221, 222, 163 A.L.R. 745, demands reversal of the decision of the Tax Court in this case. In the Hawkins Case the taxpayer was not, as he is here, the trustee. The Hawkins Case, in applying Sections 161, 166, and 167 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, §§ 161, 166, 167, recognized that facts other than those there presented might give rise to taxability under Section 22(a) and the Clifford Doctrine. "We recognize that a trust for relatives can be so contrived, especially when the settlor makes himself the trustee, as to be a mere family arrangement to divide the income in order to reduce surtaxes, the settlor retaining such control and benefits as to leave him still the substantial owner." Cf. Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L.Ed. 154.

We agree with the Tax Court that under the facts and circumstances of this case the McCutchin Investment Company must be considered the alter ego of Alex McCutchin, and that he must be considered the actual trustee of the trusts. Through his corporation, of which he was president, Alex McCutchin had full management of the trusts. Indeed, Alex McCutchin's relation with the trusts was so intimate, his powers so broad, that in the taxable year he was able to borrow personally and without security $23,500 from his corporation. Moreover, the record discloses that in the taxable year he personally joined with his corporation in a joint purchase of certain oil properties — a transaction in which he, personally, and his corporation, as trustee, derived profits in fair proportions.

Acting as trustee through his corporation, Alex McCutchin exercised broad managerial powers which he had provided for as a settlor of the trusts. In addition to these powers, he could exercise broad discretionary powers under the "needs and welfare" provisions of the trusts to withhold or distribute trust income or corpus to his father and mother, the named beneficiaries. These broad powers of the settlor-trustee, considered in the light of the intimate family relationship, make it apparent that settlors' economic position was not materially changed by the creation of the trusts. All the facts and circumstances authorized a finding of tax liability on the part of petitioners for the income of the two questioned trusts under Section 22(a) and the Clifford Doctrine. Stockstrom v. Commissioner, 8 Cir., 148 F.2d 491, certiorari denied 326 U.S. 719, 66 S.Ct. 23; Stockstrom v. Commissioner, 8 Cir., 151 F.2d 353; Edison v. Commissioner, 8 Cir., 148 F.2d 810, certiorari denied 326 U.S. 721, 66 S.Ct. 25.

In a case of this kind, the Tax Court has full power to appraise all the facts and circumstances and make such final findings and conclusions as are warranted by the record. When such findings and conclusions are supported by the record evidence and are in accordance with law, they are binding on this court. Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248; Trust of Bingham v. Commissioner, 325 U.S. 365, 65 S.Ct. 1232, 89 L.Ed. 1670. Certainly, in this case it cannot be said as a matter of law that the Tax Court erred in its appraisal of the facts and circumstances, or that a "clear-cut mistake of law" is apparent. Cf. Stockstrom v. Commissioner, supra.

The decision of the Tax Court is affirmed.

WALLER, Circuit Judge (dissenting).

There was no evidence taken in this case. No fact was in dispute. No factual issue is involved, but only the construction of the trust instruments in the light of the statutes passed by Congress and in the shadow of certain judicial off-shoots from the Helvering v. Clifford stalk.¹ It is necessary to determine only whether or not the Tax Court's construction of the J. A. and Carrie McCutchin trust agreements was in accordance with law.

The Tax Court concluded as a matter of law that the settlors were not taxable with the income derived from the trusts set up by them for their children, Jerry and Gene, wherein broader powers were conferred upon the trustee than in the trusts set up for J. A. and Carrie McCutchin, the father and mother respectively of Alex McCutchin, one of the grantors, concerning which the Tax Court found as a matter of law:

1. That the trusts were irrevocable.

2. That they were established for the benefit of the minor sons and aged parents of the grantors.

3. That the powers of management and control over the trusts if used for the advantage of the grantor to the disadvantage of the trusts "would have been subject to strict judicial control."

4. That the possession of the "fiduciary powers as here vested in the trustee does not in and of itself serve to subject the grantor to tax on the income of the trusts."

5. That the petitioner "has not dealt unfairly with the trusts in his capacity."

6. That the petitioner "has not utilized the trust properties to his own advantage."

7. That the power to alter or amend the trusts was not reserved in the settlors.

8. The father and mother were designated as "primary beneficiaries", and the sons as "secondary beneficiaries", and upon the death of a primary beneficiary his or her trust would terminate and all...