MT Straight's Trust v. Commissioner of Internal Rev., 15458.

• Citation: 245 F.2d 327
• Decision Date: 07 June 1957
• Docket Number: No. 15458.,15458.
• Parties: M. T. STRAIGHT'S TRUST, Francis L. McCrea, Trustee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

245 F.2d 327 (1957)

M. T. STRAIGHT'S TRUST, Francis L. McCrea, Trustee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15458.

United States Court of Appeals Eighth Circuit.

June 7, 1957.

Richard E. Williams, Des Moines, Iowa, for petitioner.

Melva M. Graney, Atty., Dept of Justice, Washington, D. C. (Charles K. Rice, Acting Asst. Atty. Gen., and Lee A. Jackson, Hilbert P. Zarky and Louise Foster, Attys., Dept. of Justice, Washington, D. C., were with her on the brief), for respondent.

Before STONE (retired), WOODROUGH and VAN OOSTERHOUT, Circuit Judges.

STONE, Circuit Judge.

Merton T. Straight was one-half owner of a partnership — the Adel Clay Products Company. December 31, 1945, he executed an instrument conveying irrevocably "Three-fourths of his half interest in the partnership" to trustees in trust for the benefit of his wife, a daughter and a son (with two sisters as ultimate contingent beneficiaries), one-third of the annual income therefrom to be paid to each of the three primary beneficiaries with provisions for payments to either of the two children in the discretion of the trustees. In view of the issues presented here, it is unnecessary to detail the provisions of this trust instrument in full. It declared the fullest control of the corpus as to investment, changing and treatment thereof in the trustees. The payments were to the wife, one-third of the income from the trust annually; and to each of the two children annually such part of the income, "but not exceeding one-third", as the trustees may determine "is necessary for his her education, comfort and support".

In 1946-1948, the trustees filed separate annual income tax returns for each of the three beneficiaries. The revenue officials challenged this method and insisted that there should be but one annual return to cover all of the three beneficiaries, thus treating the annual earnings of the trust as a unit for taxation purposes. We need not detail the various proceedings in connection with this controversy between the trustees and the tax officers as to whether this trust deed created three separate units or only one unit for national income tax purposes. It suffices to state that the trustees finally paid the claimed deficiencies on August 15, 1952, and, on August 15, 1952, filed a petition for refund in the Tax Court claiming that the trust deed created three separate trust estates for income tax purposes.¹

On August 13, 1953, in an Iowa State Court, Merton T. Straight filed a petition in equity for reformation of this trust deed to carry out his intention to establish separate trust estates — one each for his wife, for his daughter and for his son respectively. Neither the Commissioner nor any governmental officer or agency was made a party to this action; nor did such participate therein. On September 18, 1953, after trial, the Iowa Court entered a decree declaring that Straight had always thought and intended to create three separate trusts by the trust deed of December 31, 1945; that the trustees had always thought and administered that deed as creating three separate trusts; had set up and maintained a separate set of accounts for each of the three trusts; had distributed to the three beneficiaries on that basis; and that the original trust deed was ambiguous.

To rectify this situation, the chancellor entered a decree approving three separate trust deeds — one for each of the primary beneficiaries; declared them to express the true intent of the grantor (Straight); and declared such substitution to relate back "nunc pro tunc" to the execution of the original trust deed.

September 20, 1954, petitioner filed an amended petition before the Tax Court. The amended petition set forth a resume' of the reformation proceedings and prayed the Tax Court to determine that the original trust deed created three "separate and distinct taxable entities"; that the liabilities and deficiencies set forth in the Notice of Deficiency against the M. T. Straight Trust² be eliminated; and that the reformation decree "is binding on the Commissioner of Internal Revenue, Respondent herein, in connection with the determination of the tax liability of the Petitioner for the calendar years 1947 and 1948".

In the "Stipulation of Facts", filed in the Tax Court (September 20, 1954) is the following: "The petitioner is not contesting the proposed deficiencies shown in the Notice of Deficiency on any ground other than that arising from respondent's Commissioner of Internal Revenue determination that the trust conveyance of December 31, 1945, Exhibit 1-A, created an entity taxable for the years 1947 and 1948 as a single trust, despite the reformation proceedings in the Iowa courts referred to above in paragraphs 12 to 16, inclusive."

June 14, 1955, the Tax Court...