Suhr v. Commissioner of Internal Revenue

• Decision Date: 05 March 1942
• Docket Number: No. 8785,8786.,8785
• Citation: 126 F.2d 283
• Parties: SUHR v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

126 F.2d 283 (1942)

SUHR v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 8785, 8786.

Circuit Court of Appeals, Sixth Circuit.

March 5, 1942.

W. H. Annat, of Cleveland, Ohio (William H. Annat, Robert E. Sipes, and Spieth, Taggart, Spring & Annat, all of Cleveland, Ohio, on the brief), for petitioner.

F. E. Youngman, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and L. W. Post, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before SIMONS, ALLEN, and MARTIN, Circuit Judges.

SIMONS, Circuit Judge.

The petitions assail decisions of the Board of Tax Appeals sustaining determinations of the respondent, that the income of an irrevocable trust created for the benefit of the petitioner's wife and stepsons, is taxable to the grantor. While other grounds in support of the assessment were urged, the Board's decision, two members dissenting, was based solely upon the doctrine of Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3, 101 A. L.R. 391, the Board holding that because the trust instrument gave to the trustee a conditional right to invade the corpus of the trust for the support and maintenance of the beneficiaries, the trust income was taxable to the grantor. The facts were stipulated.

The taxpayer married on June 8, 1935, and since then has maintained a residence for his family in Lakewood, Ohio. He had no living children of his own, but in 1938 adopted his wife's two minor sons by a former marriage. In December, 1935, he created a trust, with the Cleveland Trust Company as trustee, for the benefit of his wife and her sons, transferring to the trustee certain shares of the City Ice and Fuel Company. The trust agreement provided that the entire net income of the trust should be paid to the wife as long as she should live, but that if the petitioner survived her, the trust should terminate and principal and undistributed income be returned to him. If the wife survived him the entire net income, after her death, was to be paid to the sons (or, if deceased, to their lawful issue), until the older reached the age of 30 years, if living, or would have attained that age, at which time the trust was to terminate and the principal and undistributed income to go to the sons or their lawful issue.

The instrument also provided that the trustee might, in its sole discretion, pay to the wife during her lifetime, in addition to the income from the trust estate, "such part of the principal of the trust estate as second party (the trustee) shall deem necessary to properly care for and support her, taking into consideration such other means of support and sources of income as she shall then have." A similar provision was made for the benefit of the sons, or other beneficiaries, after the death of the wife. A clause in the instrument also provided that no income or principal payable to any beneficiary should be alienated, disposed of, or in any manner encumbered while in the possession of the trustee, otherwise than by its authority, and that if any beneficiary attempted to so dispose of income or principal, or if by reason of a beneficiary's bankruptcy or insolvency, or because of attachment or garnishment, his interest might vest in or be enjoyed by some person otherwise than as provided in the trust agreement, then the trust was to terminate as to such beneficiary and the income or principal thereafter during his life was to be held by the trustee in its absolute discretion, but with power to provide for maintenance, support and education of such beneficiary, his spouse, or child.

The trust agreement was in force during 1935 and 1936, the taxable years here in question. The trustee received dividends in each year, all of which, after deducting its fees, it credited to the wife who filed her individual income tax return for the year 1936, and paid the tax shown thereon to be due. No income tax return was made by her for 1935 because she had no taxable income in that year. The petitioner, in 1935, filed with the Collector a gift tax return in which he listed the securities constituting the corpus of the trust, and paid the required gift tax. At all times since his marriage in 1935, the petitioner maintained a home for his wife and family; paid for its maintenance and upkeep, and for the support and maintenance of his wife and her two children. None of the income of the trust was used for that purpose. The Commissioner increased the taxpayer's gross income for 1935 and 1936 by the amounts of the net trust income for those years, after deducting the fees paid to the trustee, and in this was sustained by the Board of Tax Appeals.

The Commissioner supports the Board's decisions upon four grounds. He says (1) that the income was paid by the grantor to his wife in satisfaction of his legal obligation to support her, and so is taxable to him under § 22(a) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev. Code, § 22(a), in response to the holding in Douglas v. Willcuts, supra; (2) that the trust income is also taxable to the grantor under § 167 of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Code, § 167; (3) that § 166 is likewise applicable, 26 U. S.C.A. Int.Rev.Code, § 166; and (4) that the trust income is taxable to the grantor under § 22(a) because he remained substantially the owner of the trust properties under the doctrine of Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788. While the decision of the Board is based only upon the first of these grounds, we examine them all because they are here urged, Hormel v. Helvering, 312 U.S. 552, 61 S.Ct. 719, 85 L.Ed. 1037, and the facts being complete for determination there is no necessity for remand to the Board.

The decision in Douglas v. Willcuts is not applicable to sustain the present tax. There is nothing in the trust instrument to support an inference that the trust was in discharge of the grantor's legal obligation to support his wife. There was no agreement by her that the benefits of the trust were to relieve him of such obligation, nor was any of the income of the trust used for maintenance or support. The fact that the grantor, in the exercise of caution, envisioning perhaps the possibility of a change in his fortunes, lodged in his trustee a discretion to invade the corpus of the trust for this purpose, is not enough to warrant a holding that the trust was executed in discharge of the grantor's common law, statutory, or moral obligation to support his wife. Moreover, the terms of the trust instrument negative the implication urged upon us, for the discretion lodged with the trustee is circumscribed by a direction that consideration be given to other means of support and sources of income "as she shall then have." There is no similarity between the present trust and the alimony trusts adjudicated in Douglas v. Willcuts, and other cases, wherein the payments provided are expressly or by clear implication, with the assent of the parties or by command of the court, established for support, maintenance or in release of dower. The present taxpayer continued to perform his statutory and moral duty apart from the trust distributions. Shanley v. Bowers, 2 Cir., 81 F.2d 13; Com'r v. Branch, 1 Cir., 114 F.2d 985, 132 A.L.R. 839; Whiteley v. Com'r, 3 Cir., 120 F.2d 782.

Section 167 of the Revenue Acts of 1934 and 1936 provides that where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest may be held or accumulated for future distribution to the grantor; or (2) may in the discretion of the grantor or of any person not having a substantial adverse interest, be distributed to the grantor; then such part of the income of the trust shall be included in computing the net income of the grantor. From this it is argued that under the present agreement, if the grantor should not pay the family expenses, then the wife would be required to use the trust income for her support and maintenance. This overlooks the fact that the income becomes the sole property of the wife. There is no obligation upon her to support the family if her husband can, and he is not relieved of his legal obligation to do so. It is, of course, true that if he failed, the wife might use her own funds for that purpose, but that would be by her own volition and not through any obligation imposed upon her by the trust. It is further suggested that the trustee might invade the principal, if necessary, for the wife's maintenance, or if she attempted to alienate or encumber her interest the trust would terminate with respect to her, in the event of which the trustee might apply the income or the principal, or both, to her support. Being possessed of that power, its exercise would be equivalent to a distribution to the grantor, because in discharge of his obligation. It is perhaps, sufficient answer to say that the grantor had no such distribution in contemplation, save as decline in his own fortunes might make the exercise of the power appropriate. The direction to the trustee to take into consideration her other means of support, must refer to her own independent means, or the expected contributions of the grantor.

It must also be noted that a change in the grantor's fortunes which might materially lower his standard of living, would lower the standard of living of his family, with a corresponding reduction of the measure of his obligation to support and maintain. If, in such circumstances the desire of the wife to maintain a higher standard would persuade the trustee to exercise the power to invade the corpus of the trust, this would not be in discharge of the grantor's legal or moral obligation. Moreover, the spendthrift clauses of the trust instrument do not come into play except through some act or fault of the beneficiaries who, unlike the trustee, have an adverse interest. In other words, it is not the purpose of the trust instrument to discharge...