Richardson v. Commissioner of Internal Revenue

• Decision Date: 09 July 1941
• Docket Number: No. 239.,239.
• Citation: 121 F.2d 1
• Parties: RICHARDSON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

121 F.2d 1 (1941)

RICHARDSON v. COMMISSIONER OF INTERNAL REVENUE.

No. 239.

Circuit Court of Appeals, Second Circuit.

July 9, 1941.

White & Case, of New York City (Charles E. Hughes, Jr., Joseph M. Hartfield, Josiah Willard, and Holt S. McKinney, all of New York City, of counsel), for H. S. Richardson, petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen., for Commissioner of Internal Revenue, respondent.

Before L. HAND, AUGUSTUS N. HAND and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is an appeal by H. S. Richardson from a decision of the Board of Tax Appeals adjudging an income tax deficiency against him of $199,920.36 for the year 1933. Two questions are involved. The first is whether the income for the year 1933 from five trusts created by the taxpayer's wife in May, 1932, is taxable against him. The second is whether certain profits which he realized from short sales of stock resulted in income taxable to him for the year 1933.

The Trusts.

In July, 1931, the taxpayer decided to divide his large estate with his wife and to that end assigned to her 57,500 shares of a holding corporation known as Piedmont Financial Company, the value of which was about $4,000,000. He notified her of the gift on July 4, 1931. At that time there was no understanding that he was to have any control over the 57,500 shares of stock.

In March or April, 1932, while the gift tax legislation was pending in Congress, the taxpayer and his wife, who were then domiciled in Connecticut, discussed the desirability of her creating trusts for the benefit of their five children prior to the imposition of gift taxes. They were advised by counsel that if Mrs. Richardson, as grantor of the proposed trusts, retained a power of revocation she would be taxable upon the income, but that if Mr. Richardson should be given such a power neither he nor she would be taxable upon the income. Accordingly five trust instruments were drawn by counsel and executed by Mrs. Richardson, setting up trusts for the five children. The corpus of the trusts for the three sons consisted of 12,500 shares of the Piedmont Financial Company for each and for the two daughters of 2500 for each. The remaining 15,000 of the 57,500 shares which had been given to Mrs. Richardson in 1931 were retained by her. The trusts created were alike except as to the names of the beneficiaries and the number of shares of the stock. Mrs. Richardson was designated as the grantor in each and her husband, H. S. Richardson, was named as the trustee.

The trustee was directed to hold, invest and reinvest the principal, collect the income and, in his discretion, to apply so much income as he deemed advisable to the maintenance, education and benefit of the particular beneficiary until the latter should become 21 years of age and thereafter to pay over so much of the income as he deemed advisable until the beneficiary should become 35 and thereafter to pay the income of the trust to the beneficiary for life.

Each trust was to terminate upon the death of the beneficiary whereupon the principal with any accumulations was to pass to the beneficiary's descendants or, in the event there should be none, to the surviving brothers and sisters and the descendants per stirpes of any of them who should have died without issue.

The trustee was empowered in his absolute discretion to hold and retain any property received by him although not of the character of investments permitted by law to trustees; also to sell or exchange the trust corpus and reinvest the proceeds in any property though not of such character; to expend trust income and proceeds "in payment of premiums for life insurance" upon the lives of the grantor or the taxpayer; to purchase real or personal property from the grantor or the taxpayer and to make secured or unsecured loans to them without liability "in any way for any loss resulting to the trust estate by reason of such purchase or loan." The trust instruments, in addition to other powers of management and investment, likewise provided as follows:

"Eleventh: During his lifetime, H. Smith Richardson, husband of the Grantor, may cancel and terminate this agreement by an instrument in writing duly executed and acknowledged and filed with the Trustee or Trustees then acting, and upon such termination and cancellation the said H. Smith Richardson shall be entitled to receive the corpus of the trust fund absolutely and free from all trusts."

During the year 1933 the taxpayer, as trustee, received $2.85 per share as dividends upon the stock of the Piedmont Financial Company which formed the corpus of the trusts. These dividends were paid in notes of the company aggregating for the five trusts $121,125. No other income was received by the several trusts during that year and the amount that was applicable to each trust was included in income tax returns for 1933 filed by the taxpayer as trustee.

All five trusts have remained unrevoked. The taxpayer never used any of the income for his own benefit but accumulated and invested it, except for certain small distributions made to his two daughters.

The Board of Tax Appeals held that the corpus of each trust was so far subject to the taxpayer's unfettered dominion that it in substance was his and, even though he did not see fit to use it or the income for his personal benefit, the income was taxable to him under the broad provisions of Section 22(a) of the Revenue Act of 1932, 26 U.S. C.A. Int.Rev.Acts, page 487.

The taxpayer insists that the power of revocation, which he never exercised, was not an asset of the taxpayer's estate and gave him no interest in the corpus of the trusts under the law of Connecticut. State ex rel. Beardsley v. London & Lancashire Indemnity Co., 124 Conn. 416, 200 A. 567; McMurtry v. State, 111 Conn. 594, 151 A. 252; cf. United States v. Field, 255 U.S. 257, 41 S.Ct. 256, 65 L.Ed. 617, 18 A.L.R. 1461, and Restatement of Property, § 327. Though we may assume that this is so, the question remains whether an unfettered control over the corpus of a trust either in the grantor or in the donee of a power of revocation, who may appropriate it to his personal use, is not the equivalent of ownership of the property for tax purposes.

The Commissioner relies on Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, where the grantor was taxed on the income of a trust payable to his wife because he was entitled to the reversion after the expiration of a short term trust and, pending its duration, possessed...