Miller v. Commissioner of Internal Revenue

• Decision Date: 13 February 1945
• Docket Number: No. 9838.,9838.
• Citation: 147 F.2d 189
• Parties: MILLER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

147 F.2d 189 (1945)

MILLER v. COMMISSIONER OF INTERNAL REVENUE.

No. 9838.

Circuit Court of Appeals, Sixth Circuit.

February 13, 1945.

Walter M. Shohl, of Cincinnati, Ohio (Dinsmore, Shohl, Sawyer & Dinsmore, of Cincinnati, Ohio, on the brief), for petitioner.

Helen Goodner, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Helen R. Carloss, and Hilbert P. Zarky, all of Washington, D. C., on the brief), for respondent.

Before HICKS, HAMILTON, and McALLISTER, Circuit Judges.

HICKS, Circuit Judge.

Petition by Benjamin F. Miller to review a decision of the Tax Court affirming the action of the Commissioner of Internal Revenue in assessing on redetermination a deficiency in income taxes of $652.02, $5,184.57, $4,638.61 and $9487.44 for the years 1937, 1938, 1939 and 1940, respectively.

The Commissioner contended, and the Tax Court held, that petitioner was taxable under Section 22(a)¹ of the Revenue Acts of 1936 and 1938, on the net income of three separate trusts created by him in 1937 for the benefit of his three sons. In the alternative the Commissioner contended that the income of the three trusts was includable in petitioner's income under Section 167(a) (1) of those Acts but the Tax Court did not pass upon that question. The petitioner contends that the income of the trusts was taxable thereto under Sections 161, 162 and 163 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, §§ 161-163.

When the trusts were created Sept. 28, 1937, the beneficiaries were 21, 17 and 15 years of age, respectively. The trust indentures were identical except that a different son was named beneficiary in each. We consider therefore the terms of the trust for the benefit of Benjamin F. Miller, the oldest of the three.

Petitioner, called the "Donor" in the trust instrument, designated himself "Trustee," with certain alternatives, immaterial here, in the event he should cease to act by reason of death or otherwise. The Donor was not required to execute bond as Trustee but successor trustees were so required to protect the trust estate. The income was to accumulate during the life of the beneficiary, or until he reached his fortieth birthday, unless "within the sole discretion of the trustee" it was considered expedient and advisable to distribute a part or all of it prior thereto. When the beneficiary reached his fortieth birthday, the entire principal of the trust was to be distributed to him, unless the Donor be alive, "in which event the trust shall continue at the discretion of the Donor." If the cestui died with lawful issue before his fortieth birthday, the trustee in his sole discretion was empowered to accumulate or pay out or credit to such issue the remaining income of the trust until the issue reached thirty years of age. If the cestui died without issue, there were clauses providing for the transfer of the principal and accumulations to the other two cestuis. If all three brothers died before the trusts terminated, leaving no lawful issue, "then such trust estate shall revert to the estate of the Donor." Each trust estate originally consisted of 150 shares of the common stock of the Equity Investment Company, worth approximately $16,500, and their aggregate value equalled ten to fifteen percent of the Donor's net worth.

The Trustee was given power to determine all questions, such as whether any moneys, securities, properties, stock dividends, rights or other things, were to be treated as capital or income, and how the expenses of administration should be borne as between capital and income.

The Trustee was given full voting power with respect to any securities held under the trust and the power to consent to the reorganization or consolidation of any corporation, or to the sale to any corporation or person of the property of any corporation, any of the stocks, bonds, notes, evidences or other property which might be held by the trust, and to do any act with reference to such assets necessary or proper to enable the trust to obtain the benefit of any such reorganization, consolidation or sale. Moreover, the Trustee was empowered to exercise any option contained in such securities and make such conversions and subscriptions and necessary payments to convert them into other securities, and thereafter to hold, manage and dispose of such stocks, bonds and other securities so acquired as a whole or part of the trust fund. He was also given broad powers to meet any tax assessment against the trust fund or trustee out of the principal or income of the trust. It was also provided, "the Trustee shall have full power to manage and control the property of said trust, with full power to retain, sell, assign, transfer, exchange or otherwise dispose of or deal with all or any part of said property as though the absolute owner thereof, without obligation to any one dealing with the Trustee as to the application of the proceeds therefrom * * * with full power to invest and reinvest said trust property without restriction as to the character of the investment, to convert personalty into real estate and real estate into personalty, with power to convey, lease, mortgage, improve or otherwise deal with any real estate as though the absolute owner thereof; with power to compromise, adjust and settle all claims with respect to the trust property; to borrow money for said trust as the Trustee may deem it advisable; to use such means and methods as the Trustee may choose to collect, receive and recover any part or all of the trust property and the rents, issues, income and profits therefrom."

The Trustee had discretionary power at all times to determine as to each beneficiary the time or times and amount of income to be paid or distributed to each from the income from the trust property of each beneficiary, and in case of an emergency with respect to a beneficiary the Trustee shall be empowered "to make such distribution of principal as he may determine advisable."

Section 3 of the trust provided that the trust was terminable at any time during the life of the Donor by mutual agreement of the Trustee and the beneficiary and the undistributed portion of the property of the trust estate should be then distributed to the beneficiary.

Section 4 provided that if the beneficiary be a minor at the time of any distribution the Trustee had the power without the appointment of any guardian for said minor to distribute income or property to the minor or to use the same for his benefit without the intervention of any guardian or court or other person but the Trustee might in his discretion require the appointment of a guardian.

There was a "spendthrift" clause against the alienation of the principal or income of the trust by the beneficiary and if such alienation was made, the trust was to cease, although the Trustee might in his discretion continue to use the income of the trust for the benefit of the beneficiary or his dependents.

The Donor reserved the right to add to the list of securities and other property in the trust fund and such additional property was subject to the terms and conditions of the trust.

The Donor, the only witness, was a lawyer 58 years old, residing and practicing at Columbus, Ohio. He testified that his wife had property and a substantial income of her own and that he executed the trusts because he wanted to give his boys an object lesson of the value of accumulation and that he wanted them to have some initiative and ambition of their own. He further testified that during the life of the trusts the Equity Investment Company, stock of which originally made up the corpora of the trusts, was consolidated with the Capital Loan & Savings Company into a corporation called Capital Finance Corporation, with the result that each trust then possessed 3,109.5 shares of the Capital Finance Corporation. After the consolidation the new corporation had 805 stockholders and 335,000 shares, of which the Donor owned 9,100 shares individually and the three trusts a total of some 9,300 shares.

In 1937, Donor's father gave each trust 80 shares of common and 40 shares of preferred stock of the Capital Finance Corporation. Between 1937 and 1940 earnings of the trust were invested in preferred stock of that corporation and in notes and stocks of other companies.

Donor testified that he had been attorney for the Equity Investment Corporation since 1924 and became attorney and secretary for the Capital Investment Corporation upon its organization. He received a salary for his services as attorney but was uncompensated for his work as secretary. No stock ownership was required for his employment in either capacity.

He testified that in the years 1937 to 1940 the value of these trusts increased approximately $22,000 and that the only distributions were for the benefit of his oldest son's education in the approximate amount of $1,800. He further testified that he constituted himself Trustee because he thought he was better fitted for the execution of the trusts.

The Tax Court was not confronted with conflicts in the evidence. It was confined to the consideration of the testimony of petitioner and the provisions of the trust instruments. From this factual basis it drew the inference that petitioner remained in control of the trust property, was in substance the owner thereof, retained the possibility of direct and indirect benefits from the income and concluded that "all petitioner surrendered was the right to personally use the trust corpora" and decided that he was taxable under Section 22(a) upon the income derived therefrom.

Our duty is to determine whether the decision of the Tax Court was in accordance with law. Internal Revenue Code, § 1141(c) (1), 26 U.S.C.A.Int.Rev. Code, § 1141(c) (1). To be more specific, our duty is to determine whether the inferences drawn by the Tax Court have a substantial basis. In Walker v. Commissioner of Internal Revenue, 6 Cir., 145 F.2d 602, 605, we said: "We are not authorized to...