Stuart v. Commissioner of Internal Revenue
| Decision Date | 19 December 1941 |
| Docket Number | 7696.,No. 7695,7695 |
| Citation | 124 F.2d 772 |
| Parties | STUART v. COMMISSIONER OF INTERNAL REVENUE. STUART v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Seventh Circuit |
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Herbert Pope, W. D. McKenzie, Benjamin M. Price, and Geo. I. Haight, all of Chicago, Ill., for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., J. P. Wenchel, Bureau of Internal Revenue, of Washington, D. C., Bernard Chertcoff, and Gerald L. Wallace, Sp. Assts. to Atty. Gen., for respondent.
Before SPARKS, MAJOR, and MINTON, Circuit Judges.
These petitions seek to review decisions of the United States Board of Tax Appeals. We shall treat them in the order of their numbers.
In the case of John Stuart, the Commissioner determined income tax deficiencies against him for the years 1934 and 1935. The Board confirmed that ruling and held that under Section 166(2) of the Revenue Act of 1934, 26 U.S.C.A.Int.Rev.Code, § 166(2), petitioner was taxable on the net income of three trusts which he had created in 1930 for the benefit of his three children.
The evidence comprised a stipulation of facts and petitioner's testimony, which substantially is as follows:
On March 31, 1930, petitioner executed three trust agreements, one for his daughter Joan, who had just been married; one for another daughter, Ellen, who was about to be and is now married; and one for his son, John. In 1934 all three children were over twenty-one years of age.
Petitioner created the trusts because he felt that the daughters ought to be made independent so that they could conduct their homes in a reasonable manner. He had been giving his children allowances, a plan which he did not approve, particularly after marriage. He appointed his wife, Ellen Shumway Stuart, his brother Robert Douglas Stuart, and himself as trustees of each trust. His reason for appointing his wife and brother was that he knew that they shared his point of view in regard to the children, their needs, and how he wanted them to live, and that they would be just as strict in dealing with the children as he would be. He thought the children's interests would be better served and protected by having them as trustees than by having a corporate trustee. They knew that the trusts were created entirely for the benefit of the children, and the petitioner felt sure that as trustees they would resist any attempt by anyone to change that objective.
Petitioner's net worth, at the time the trusts were created, exceeded $4,000,000 exclusive of the trust property which was worth about $575,000. Each trust made the same provision for each child and each comprised 700 shares of common stock of the Quaker Oats Company, of which petitioner was president.
For the first fifteen years the trustees were to pay to the child designated as the beneficiary of the particular trust so much of the net income as in the discretion of the trustees they should deem advisable, and they were directed to add any undistributed income to the principal of the trust. After fifteen years the trustees were to pay the entire net income to such child. Upon the death of a child the trustees were to pay the principal of the trust to that child's issue then living, or, if there were no such issue, then to the issue of the petitioner then living, or, if there were no such issue then living, then in equal shares to Princeton University and the University of Chicago. The trustees were given the usual broad powers of management and administration. There was a spendthrift clause, a clause exonerating the trustees from liability except for fraud or willful mismanagement, a provision appointing a trust company as a co-trustee if two of the trustees should resign, and a provision that the trust should be governed by the laws of the State of Illinois.
The eighth and ninth articles of each indenture provided as follows:
On August 3, 1935, taxpayer's wife and brother, above named, executed an amendment to each of the three trust indentures cancelling the eighth article and changing the ninth to read as follows:
The total net income of the three trusts for 1934 was $22,560.02. Of this, Joan and Ellen each received the full shares of $7,496.74. There was distributed to John for that year $1,863.33, and there remained in his trust an undistributed amount of $5,703.21. For 1935 there was a total net income of the trusts of $25,725. Of this, the trusts of Joan and Ellen were each entitled to $8,295, and John's trust was entitled to $9,135. There was a partial distribution which left undistributed balances of income for this year due the trusts in the order named, the respective sums of $619.64; $821.20; and $6,394.50.
The Commissioner determined that the net income from each of the three trusts for 1934, and from January 1, 1935, to August 3, 1935, the date of the amendment, was taxable to the taxpayer, and upon that basis determined the deficiency. The Board sustained the Commissioner.
The Commissioner, in support of the Board's ruling, relies upon Section 166 of the Revenue Act of 1934, the material part of which reads as follows:
"Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested —
* * * * * * *
Under this section the Commissioner contends that the terms of each indenture require the conclusion that there were no fiduciary restrictions upon the power of the taxpayer's wife and brother to revest the corpus of each trust in the taxpayer. Furthermore, he contends that the taxpayer's wife and brother had no interests in the property which were substantially adverse to those of the taxpayer, and this he asserts to be true in view of family and business relationships, and the existence of an identical power in the taxpayer and his brother's wife with respect to trusts executed by his brother for the benefit of his own children.
The Commissioner bases his argument upon the premise that "if there is any possibility that the grantor (John Stuart) might become revested with the corpus of the trust the income is taxable to him." He asserts that this premise is contained in Treasury Regulations 86 under section 167 (), and that this regulation should be applied to section 166 which complements section 167. He further states that the test contained in his premise has been unanimously applied to section 167 by all the Circuit Courts of Appeal to which the question has been presented, including this court. See Graff v. Commissioner, 7 Cir., 117 F.2d 247. All the cases cited support the treasury regulation. However, none of them support the Commissioner's premise, because it is not supported either by the regulation or the Statute. The key thought of the Commissioner's premise is merely the possibility of reinvestiture. The "single test" of the regulation for section 166, is "whether the grantor has failed to divest himself * * * of every right which might by any possibility enable him once more to possess and enjoy in title the trust corpus." (Our emphasis.) It is only in case the grantor has retained any such interest that he is taxable with respect to the income of the trust. His reinvestiture must be based on some right which he has retained ab initio.
In the instrument before us, the grantor neither reserved nor retained any right which might by any possibility enable him to repossess or enjoy in title the trust property. True, in article eight he reserved the right at any time and from time to time to withdraw and take over to himself the whole or any part of the trust fund, but before doing so he must transfer and deliver to the trustees other property satisfactory to them, of a market value at least equal to that of the property so withdrawn. It is not denied that this provision was inserted to preserve to the trust the benefit of the grantor's vast knowledge and experience, and yet any such shifting or trading of investments must first be approved by the other trustees, and in no other respect was their power to invest or reinvest disturbed. This of course was a retention of a right, although not an exclusive one, yet it was not such a right as could by any possibility enable the grantor to possess and enjoy in title the trust corpus. It was merely the right to make an offer to exchange securities which could not be enforced by the grantor without the...
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Helvering v. Stuart
...the trustees were without substantial adverse interests. The Circuit Court of Appeals reversed this determination, Stuart v. Commissioner, 7 Cir., 124 F.2d 772, 777, on its conclusion that under the law of Illinois 'the wife and brother as trustees had no authority * * * to revest the prope......
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Suhr v. Commissioner of Internal Revenue
...305, 80 L.Ed. 390. Where income is not used to discharge the grantor's obligation, such income is not taxable to him. Stuart v. Commissioner, 7 Cir., 124 F.2d 772. In the Grosvenor case it was assumed that the income there in question was so used, in the absence of evidence to the contrary.......
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Williamson v. Commissioner of Internal Revenue
...Petitioner in his brief before this Court, as well as in oral argument, stressed the recent decision of this Court in Stuart v. Commissioner, 7 Cir., 124 F. 2d 772. Special reliance was placed upon the effect of our holding as to the restraint imposed upon a trustee as a fiduciary by the la......
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Loeb v. COMMISSIONER OF INTERNAL REVENUE, 9082
...there was no need for the trustees to fortify the trust corpus by making payments in reduction of the debt. The case of Stuart v. Commissioner, 7 Cir., 124 F.2d 772, Helvering v. Stuart, reversed 317 U.S. 154, 164, 63 S.Ct. 140, 87 L.Ed. 154, relied on by taxpayer, does not hold to the cont......