Newman v. Comm'r of Internal Revenue
| Decision Date | 20 August 1945 |
| Docket Number | Docket No. 3952. |
| Citation | 5 T.C. 603 |
| Parties | SYDNEY R. NEWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner's wife created two trusts, consisting of securities, each of which named petitioner as sole trustee. One trust was for the benefit of their daughter and the other for the benefit of their son. The trust income was payable to the beneficiary for life, and at the death of the beneficiary the trust was to be terminated and the residue paid over to petitioner. If petitioner predeceased the beneficiary, the remainder was to be paid over to such persons as petitioner might by will appoint, and in default thereof the remainder was payable to petitioner's distributees. In addition to broad powers of management and control over the trust estate vested in petitioner as trustee, petitioner had power to alter, amend, or revoke the trust at any time. Held, petitioner's power to alter or amend the trust and his control, dominion, and power of disposition over the trust income and trust estate are not sufficient to impute to him the substantive ownership thereof, and the income from the trust is not taxable to him under section 22(a) of the Internal Revenue Code. Frederick E. Winkler, Esq., for the petitioner.
Thomas R. Charshee, Esq., for the respondent.
This proceeding involves a deficiency in income tax for the calendar year 1940 in the sum of $493.02. In addition to other adjustments not in dispute, respondent determined that the income of two trusts, totaling $830, of which petitioner was sole trustee, was taxable to him individually under section 22(a) of the Internal Revenue Code.
Petitioner is an attorney practicing in New York City and resides at University Gardens, Great Neck, New York. His income tax return for 1940 was filed with the collector of internal revenue for the second district of New York. At all times hereinafter mentioned he was married to Lillian M. Newman, who resided with him. They are the parents of Janice and Robert Newman.
On or about June 28, 1940, Lillian M. Newman created two trusts, each of which named petitioner as sole trustee. One trust was for the benefit of her daughter, Janice R. Newman, and the other for the benefit of Robert W. Newman. At the time the children were minors. The terms of the trust instruments are identical and for convenience they will be referred to hereinafter in the singular. The corpus of the trust consisted of securities worth approximately $10,000, which for the purpose of convenience remained in the name of Lillian M. Newman on the corporation records. She received the dividends and paid them to petitioner, who deposited them in trust accounts. Under the terms of the trust instrument petitioner could keep the trust securities in his own name or in the name of a nominee. The securities which constituted the corpus of the trust were endorsed in blank by Lillian M. Newman, but they had not been transferred on the books of the companies, in order to facilitate their sale or other disposition. Under the trust instrument petitioner, as trustee, was given broad powers of management and control over the trust estate. In addition the trust included the following provisions:
THIRD: Subject to the power of the Trustee solely at his option from time to time to use all or any part of the income and principal of the trust fund to pay any taxes, assessments, costs, charges, or expenses incurred in the receipt, collection, care, administration, protection or distribution of the trust fund or income thereof, the Trustee shall hold, manage, invest and reinvest the said property with power to sell any investments, and to reinvest the proceeds thereof, and shall collect and receive the issues, interest and income thereof and pay over the net income and principal as follows:
(a) To pay the income annually to Robert W. Newman, son of the Grantor, during his lifetime. Upon the death of said Robert W. Newman all the rest, residue and remainder of said fund shall be paid over to Sydney R. Newman, husband of the Grantor. If the said Sydney R. Newman shall not then be living, the rest, residue and remainder of said fund shall be paid over to such person or persons as the said Sydney R. Newman by his last will and testament may direct and appoint; upon the death of said Sydney R. Newman without having exercised such power of appointment to pay the rest, residue and remainder of said fund to his distributees.
TENTH: Said Sydney R. Newman shall have the power at any time during his life, by an instrument in writing delivered to the Trustee, to revoke this agreement, in whole or in part, or to alter or amend the same or to free any of the property held in trust from the terms of this trust, and upon receipt of such instrument in writing, the Trustee shall turn over to the Grantor any funds or property held by the Trustee hereunder as required by said written notice, and the receipt of the Grantor for such property shall be a full acquittance to the Trustee.
Petitioner opened a separate bank account for each trust and the income was deposited therein. No withdrawals have been made except to adjust a dividend payment and to purchase additional property for one of the trusts. Household expenses and the support and education of the beneficiaries have been paid by petitioner from his own funds.
Respondent has determined a deficiency in petitioner's income tax by including in his income the income of certain trusts created for the benefit of his children. The only question is whether petitioner has such dominion over the income and the trust estate as to be deemed the real owner thereof, in which event the income would be taxable to him under the provisions of section 22(a) as construed by the United States Supreme Court in Helvering v. Clifford, 309 U.S. 331. Recently we had occasion to consider whether the income from this trust was taxable to petitioner's wife, the grantor. In Lillian M. Newman, 1 T.C. 921, we held that the present petitioner, as an individual, had a substantial interest in the trust estate, which interest was adverse to that of his wife, and that the income was not taxable to her under sections 166 and 167. We further held that petitioner's wife had parted with all rights of ownership and control of the trust property and that she was not the owner thereof for the purposes of section 22(a). We further held that the trust income was not taxable to her under the rule of Douglas v. Willcuts, 296 U.S. 1; Stuart v. Helvering, 317 U.S. 154. Respondent concluded that the trust income was taxable to petitioner and determined the deficiency before us.
Respondent relies largely upon Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed.(2d) 1; Jergens v. Commissioner, 136 Fed.(2d) 497, certiorari denied, 320 U.S. 784; and Richardson v. Commissioner, 121 Fed. (2d) 1, for the proposition that Helvering v. Clifford, supra, has not been limited in its application to cases where effort is made to tax settlors with trust income. Each of those cases involved the ownership for tax purposes of trust income by persons other than the grantors. In each case it was held that the taxpayer, because of his power and control over the trust property and the trust income, was taxable as the owner. However, in our opinion, the same conclusion is not justified here. In the Mallinckrodt case the petitioner had power to take all trust income except $10,000, and to take the trust corpus upon terminating the trust. In the Richardson case also the petitioner had power to take trust corpus upon termination by him of the trust. In the Jergens case the petitioner could withdraw all trust corpus, except that in case of certain insurance the trustor's consent was necessary.
Here, however, though the petitioner (not the settlor) could revoke the trust agreement in whole or in part and could alter or amend it, or free any property from its terms, he had, in our view, no power, as in the cases above mentioned, himself to receive the benefit of such action, either as to income or trust corpus. It is clear that the trust instrument contains no specific grant to him of such right, and we do not understand that it is so contended. Revocation alone would, of course, revest the trust corpus in the grantor; and upon any property being freed from the terms of the trust, by the petitioner, such property is required to be turned over to the grantor.
Does the general grant of power ...
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