O'Neil v. Comm'r of Internal Revenue, Docket Nos. 662-78—-664-78.
| Decision Date | 15 September 1982 |
| Docket Number | Docket Nos. 662-78—-664-78. |
| Citation | 79 T.C. 470 |
| Parties | O'NEIL and MARTHANN BENNETT, et al.1, v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A is the father of B and C. A, B, and C were equal partners in a general partnership which engaged in farming and the construction and leasing of nursing homes. On Jan. 1, 1963, A, B, and C created a 13-year trust. The corpus of the trust consisted of the nursing homes which had been owned by the partnership. B's and C's children were the beneficiaries, and B and C were named trustees. According to the terms of the trust, all current income was to be distributed to the beneficiaries, at least annually. On the trust's termination, the corpus was to be distributed to the beneficiaries.
Contrary to the trust's terms, B and C only distributed amounts sufficient to allow the beneficiaries to pay their personal income taxes on their respective shares of the income of the trust. The remainder of the trust's income was loaned to the partnership and its successor corporation or invested in certificates of deposit and participation loans with a bank of which A, B, and C owned 511;2 percent of its outstanding stock. The loans were unsecured and bore 5-percent to 6-percent annual interest. Most of the loans were originally evidenced by 1-year notes but were not paid on their due dates. The loans were repaid in full with accrued interest on Dec. 31, 1975, the date the trust terminated. Held, on the authority of Buehner v. Commissioner, 65 T.C. 723 (1976), the loan by the trust to the successor corporation was not a loan to the grantors within the meaning of sec. 675(3), I.R.C. 1954. Held, further: The loans by the trust to the partnership were direct or indirect loans to the grantors. The portion in respect of which the grantors borrowed, determined. Held, further, B's and C's errors in administration of the trust did not constitute a power of disposition over the beneficial enjoyment of the trust under sec. 674(a). Lewis H. Mathis, Byron M. Eiseman, Jr., and William H. Sutton, for the petitioners.
Deborah A. Butler, for the respondent.
Respondent has determined deficiencies in petitioners' Federal income taxes as follows:
+----------------------------------------------------------+
¦Docket No. ¦Petitioners ¦1973 ¦1974 ¦
+------------+-----------------------------+-------+-------¦
¦662-78 ¦O'Neil and Marthann Bennett ¦$31,060¦$39,642¦
+------------+-----------------------------+-------+-------¦
¦663-78 ¦Jesse O. and Gertrude Bennett¦31,000 ¦38,319 ¦
+------------+-----------------------------+-------+-------¦
¦664-78 ¦Wayne and Betty Ann Bennett ¦31,060 ¦38,893 ¦
+----------------------------------------------------------+
Due to concessions by petitioners, the only issue for decision is whether the income of a trust created by petitioners is taxable to petitioners pursuant to section 674(a)2 or section 675(3).
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the attached exhibits are incorporated by this reference.
Petitioners O'Neil and Marthann Bennett, Jesse O. and Gertrude Bennett, and Wayne and Betty Ann Bennett were residents of Lonoke, Ark., when they filed their petitions herein. Petitioner Jesse O. Bennett (also known as J. O. Bennett) is the father of petitioners O'Neil Bennett (also known as Neil Bennett) and Wayne Bennett. Jesse O. Bennett, O'Neil Bennett, and Wayne Bennett will sometimes be referred to collectively as “the Bennetts.”
J. O. Bennett & Sons (Bennett & Sons or the partnership) was a general partnership organized and operated under the laws of the State of Arkansas. Bennett & Sons was engaged in farming and had constructed three nursing homes which were leased to unrelated parties. Jesse, Neil, and Wayne shared equally in the capital, profits, and losses of Bennett & Sons. The partnership was in existence prior to January 1, 1963, and terminated on or about January 8, 1974.
On or about January 1, 1963, petitioners, as grantors, created two separate trusts, which were designated the Wayne Bennett Family Trust and the Neil Bennett Family Trust. The primary beneficiaries of the Wayne Bennett Family Trust were the two children of Wayne and Betty Ann Bennett—-Wayne Bennett, Jr., and Edwin McHaney Bennett. The primary beneficiaries of the Neil Bennett Family Trust were the three children of Neil and Marthann Bennett—-Beverly Bennett, Daina Bennett, and Neil Bennett, Jr.3
The ages of the trust's primary beneficiaries on the date the trust was created (Jan. 1, 1963) and during the years in issue were as follows:
+-----------------------------------------------------+
¦ ¦Jan. 1, 1963 ¦1973 ¦1974 ¦
+------------------------+--------------+------+------¦
¦Beverly Bennett (Walker)¦13 ¦23 ¦24 ¦
+------------------------+--------------+------+------¦
¦Daina Bennett ¦9 ¦19 ¦20 ¦
+------------------------+--------------+------+------¦
¦Neil Bennett, Jr. ¦7 ¦17 ¦18 ¦
+------------------------+--------------+------+------¦
¦Wayne Bennett, Jr. ¦15 ¦25 ¦26 ¦
+------------------------+--------------+------+------¦
¦Edwin McHaney Bennett ¦7 ¦17 ¦18 ¦
+-----------------------------------------------------+
Wayne and Neil Bennett were appointed trustees.
The trust agreement provided in part as follows:
WHEREAS , despite the fact that the real property hereby committed to trust is owned by and is an asset of the aforesaid partnership and by express provision of the Uniform Partnership Act of Arkansas becomes personal property which may be transferred out of the partnership, as an entity, without the need of relinquishment of dower by the wives of the three partners, they are joining in execution of this trust indenture in an abundance of caution and to make it clear to any and all third parties that such interest, if any, which they own or may have acquired in the said trust property is by this instrument committed to and conveyed into trust as herein provided.
1. Trust Property. The Grantors, desiring to create trusts for the benefit of the children and grandchildren * * * hereby irrevocably assign to the Trustees [three properties on which Bennett and Sons had constructed nursing homes] * * *
2. Dispositive Provisions. * * *
(a) Income Payments. The Trustees shall pay the entire net income of each of the trusts at least annually to the primary beneficiaries of each such trust, the same to be subdivided between them equally; that is to say, the income of the Wayne Bennett Family Trust shall be divided equally between his two children above-named, and the income of the Neil Bennett Family Trust shall be divided one-third each between his children above-named.
(b) Term of Trust. These trusts shall terminate at the end of day December 31, 1975 * * *
(c) Other Beneficiaries. If a primary beneficiary * * * shall die before termination of this trust * * *, the interest of such deceased child herein, together with any undistributed income, shall devolve to the issue of such beneficiary then living, in equal shares, and as subdivided, continue to be held in trust; but if there be no such issue, then to the other primary beneficiary (equally, if two beneficiaries) of his or her family trust * * * if living, to be added to, held, administered, and distributed as part of the trust herein set apart for such other primary beneficiary; but if no other beneficiary or beneficiaries be then living, then, in trust, to the then living issue of such other beneficiary or beneficiaries in equal shares; and if there be no such issue, then to the primary beneficiaries of the other Bennett family trust hereby created * * * to be added to, held, administered, and distributed as part of the trust set apart for such beneficiaries; but if such beneficiaries be not then living, then in trust to the then living issue of such beneficiaries in equal shares.
If no child or issue survive the trust termination date above-provided, the date of death of the last Bennett descendant shall constitute the termination date of this trust, and the trust estate of each said trust shall be split equally between Wayne Bennett and Neil Bennett, if living, or, if not, their heirs at law * * * *ss
3. Trustees' Powers. In the administration of the trusts, the Trustees shall have the following powers, all of which shall be exercised in a fiduciary capacity, primarily in the interest of the beneficiaries: *ss
(b) To rent or lease any property of the trusts for such time and upon such terms and for such price or prices as in their discretion and judgment may seem just and proper and for the best interest of the trusts and the beneficiaries hereunder, irrespective of the provisions of any statute or of the termination of any trust. *ss
(l) To lend money to any person or persons upon such terms and in such ways and with such security as they may deem advisable for the best interest of the trusts and the beneficiaries hereunder.
(m) To engage in business with the property of the trusts as sole proprietor, or as a general or limited partner, with all the powers customarily exercised by an individual so engaged in business, and to hold an undivided interest in any property as tenant in common or as tenant in partnership. *ss
(p) The Trustees may freely act under all or any of the powers by this agreement given to them in all matters concerning the trusts herein created, after forming their judgment based upon all the circumstances of any particular situation as to the wisest and best course to pursue in the interest of the trusts and the beneficiaries hereunder, without the necessity of obtaining the consent or permission of any person interested therein, or the consent or approval of any court, and notwithstanding that the...
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