United States v. Morss

• Decision Date: 14 January 1947
• Docket Number: No. 4195.,4195.
• Citation: 159 F.2d 142
• Parties: UNITED STATES v. MORSS.
• Court: U.S. Court of Appeals — First Circuit

159 F.2d 142 (1947)

UNITED STATES v. MORSS.

No. 4195.

Circuit Court of Appeals, First Circuit.

January 14, 1947.

Melva M. Graney, Sp. Asst. to Atty. Gen. (Douglas W. McGregor, Asst. Atty. Gen., Sewall Key and J. Louis Monarch, Sp. Assts. to Atty. Gen., and Edmund J. Brandon, U. S. Atty., and George F. Garrity, Asst. U. S. Atty., both of Boston, Mass., of counsel), for appellant.

Phillips Ketchum, of Boston, Mass. (Harold L. Clark, of Boston, Mass., of counsel), for appellee.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

MAGRUDER, Circuit Judge.

Everett Morss brought this complaint for recovery of income taxes alleged to have been illegally collected for the calendar years 1939, 1940 and 1941. The court below gave judgment for the taxpayer, having rejected a contention by the government that the income of certain trusts was taxable to the grantor under § 22(a) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 22(a), as applied in Helvering v. Clifford, 1940, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, 64 F.Supp. 996. The correctness of this ruling is the only question presented to us on appeal. It is not now claimed that the grantor was taxable either under § 166 or § 167 of the Code.

Since, in the application of the Clifford doctrine, "no one fact is normally decisive" (309 U.S. at page 336, 60 S.Ct. at page 557, 84 L.Ed. 788), it is not surprising that that case has given rise to a considerable volume of litigation. Courts have felt their way from case to case, drawing distinctions and invoking analogies, in an effort to give concreteness to the general proposition that a grantor of a trust remains taxable on the trust income under § 22(a) where the benefits directly or indirectly retained by him blend imperceptibly "with the normal concepts of full ownership." In this process of case-law development, courts are apt by insensible degrees to be led to conclusions incompatible with the statutory framework. The corrective of this, in the particular matter before us, is to get back to the provisions of the Internal Revenue Code itself, to see whether a proposed conclusion as to taxability of the grantor comports with the statutory scheme.

The Code has a group of sections (§§ 161-169) dealing quite comprehensively with the income taxation of trusts and estates. Generally, that is, "except as provided in section 166 * * * and section 167 * * *," trust income currently distributable to beneficiaries is taxable to the respective recipients, and the balance of the net income of the trust is taxable to the trustee in his fiduciary capacity. In this respect, the Code makes no different provision for the case where the grantor is trustee or one of the trustees; nor has anything been made to turn upon whether the fiduciary powers of the trustee have been conferred in broad or narrow terms. However, Congress has concerned itself with the imposition of specific limits upon the possibility of reducing surtaxes by the creation of trusts. In cases falling within § 166 (relating to revocable trusts) or § 167 (relating to income for benefit of the grantor), the trust income is taxable to the grantor. Both of these sections have been strengthened and expanded by successive amendments.

A significant indication of legislative intent may be derived from § 167(c), a subsection added to the Internal Revenue Code by § 134(a) of the Revenue Act of 1943, 58 Stat. 51, and applicable retroactively upon the filing with the Commissioner of the signed consents prescribed by § 134(b) (2), 26 U.S.C.A.Int.Rev.Acts, page 458 (which was done in the case at bar). Section 167(c) reads, in part, as follows:

"(c) Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this chapter merely because such income, in the discretion of another person, the trustee, or the grantor acting as trustee or cotrustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed."

From this, as well as from the other sections of the Code, it is evident that Congress has chosen not to make the family the taxable unit; that it has chosen to permit a taxpayer to minimize his surtaxes by making gifts of income-producing property to others, including members of his family; that such gifts need not be outright but, with stated qualifications, may take the form of a transfer in trust for the benefit of a member of the family circle, with "the grantor acting as trustee"; that even where the trust income may, in the discretion of the grantor-trustee, be applied to the support of a member of the family whom the grantor is legally obliged to support, this circumstance alone shall not render the income taxable to the grantor under § 167 "or any other provision" of the Code i.e., § 22(a), "except to the extent that such income is so applied." These are choices of policy within the legislative province.

As an original question it might have been supposed that, in the case of any trust recognizable and enforceable by a court of equity, the trust income would not be taxable to the grantor except to the extent as specifically provided in §§ 166 and 167. But Helvering v. Clifford, supra, makes clear that this proposition is subject to a qualification: Even where the case does not fall within the technical limits of § 166 or § 167, the broad sweep of § 22(a), defining gross income, renders the trust income taxable to the grantor where the benefits directly or indirectly retained by him coincide substantially "with the normal concepts of full ownership." However, in view of the statutory scheme as a whole, and of the careful language of the Supreme Court in Helvering v. Clifford, it would seem that the court meant to limit the application of the Clifford doctrine to rather exceptional and extreme cases.

With these introductory observations, we come to the facts of the instant case.

During the entire calendar years 1939, 1940 and 1941, the taxpayer was married and living with his wife and four minor children in Brookline, Massachusetts.

In December, 1936, the taxpayer had created three trusts, and in March, 1937, a fourth trust, one for each of the children, the oldest of whom at that time was seven and a half years of age. The four trust instruments were in identical terms, except as to the date of creation and the identity of the beneficiary. In each instrument Mr. Morss declared himself trustee of shares of stock of the Simplex Wire & Cable Company, reserving the right to appoint his wife as co-trustee and to name successor trustees. During the years now in question, Morss and his wife were the trustees. The trusts were declared to be "irrevocable."

The Simplex Wire & Cable Company is a Massachusetts corporation whose authorized and outstanding capital stock consists of 120,000 shares of common, each without par value. During the years in question, the taxpayer was president and treasurer and a stockholder and director of the corporation. The capital stock is held in approximately equal thirds by or for three branches of the Morss family, including spouses, the three branches stemming from three brothers, all of whom are now dead, and each of whom has left issue surviving. The father of the taxpayer was one of those three brothers. The taxpayer has a brother and a sister, each of whom, in his or her immediate family, has about the same interest as the taxpayer and his immediate family in the shares of the corporation. During the years now in question 13,334 shares of the company's stock (about one ninth of the total) were held by or for the benefit of the taxpayer, his wife, and his four children, including the shares conveyed by the taxpayer to the four trusts aforesaid. Control of the corporation thus did not vest in the immediate family group of the taxpayer during the taxable years involved herein, though the control thereof during such period did vest and is still vested in the Morss family as stated above.

In each trust instrument the trustees are directed to accumulate all the net income of the trust property, and add the same to the principal until the beneficiary shall be 21 years old. Thereafter, until the beneficiary shall be 25 years old, the trustees are directed to pay to the beneficiary or in their uncontrolled discretion to apply for his education, maintenance or benefit, all or such part of the net income as the trustees in their uncontrolled discretion may determine; the balance of the net income not so distributed to be added to the principal. When the beneficiary shall be 25 years old, the trustees are to distribute to him one third of the principal then held and shall thereafter pay to him all the net income of the remaining trust property until he shall be 30 years old. When the beneficiary reaches 30, the trustees are directed to distribute to him one half of the remaining principal and thereafter to pay to him all the net income until he shall be 35 years old, whereupon the trustees are directed to distribute to him all the property remaining in the trust. If the beneficiary shall die before reaching the age of 35, "then all the remaining trust property shall be distributed to his estate." Each trust contains a spendthrift clause.

In the fourth paragraph of each trust instrument it is provided that, notwithstanding anything thereinbefore contained, "the Trustees, other than myself, ...