Waller v. Comm'r of Internal Revenue
| Decision Date | 16 January 1963 |
| Docket Number | 90677.,Docket Nos. 66319 |
| Citation | 39 T.C. 665 |
| Parties | WILLIAM WALLER AND MILBREY W. WALLER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WILLIAM WALLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
William Waller, Esq., and Lawrence Dortch, Esq., for the petitioners.
Robert B. Milsten, Esq., for the respondent.
1. The petitioners were the creators and trustees of the M. & W. Waller Fund and were its sole donors. They donated outright to the Fund securities which had enhanced in value in their hands over the cost basis thereof, and claimed charitable deductions in the amount of the fair market value of such securities. They also sold to the Fund at their cost basis other securities which had enhanced in value in their hands, receiving payment therefor after the Fund had sold the securities, and claimed deductions of the difference between the fair market value and the amounts received from the Fund. In other instances they transferred appreciated securities to the Fund and the Fund assumed indebtedness in amounts equal to the cost of the securities to the petitioners, and claimed deductions in the amount of the difference between the fair market value and the amounts of indebtedness assumed by the Fund. The Fund used its profits and income to make contributions to other organizations of an exclusively exempt character. Held, that the Fund was organized and operated exclusively for exempt purposes described in sections 170 and 501 of the Internal Revenue Code of 1954, and that the petitioners are entitled to deduct the amounts claimed under section 170.
2. Held, also, that section 72 of the Internal Revenue Code of 1954 is not unconstitutional and that the respondent properly taxed certain annuity payments in the manner provided by such section.
The respondent determined deficiencies in income tax of petitioners William and Milbrey W. Waller, for the calendar years 1954 and 1955, in the respective amounts of $6,125.59 and $16,256.52, and in income tax of petitioner William Waller for the calendar year 1958 in the amount of $1,942.28.
A number of concessions have been made by the parties. The remaining issues raised by the pleadings are whether the petitioners are entitled to deductions, under section 170(a) of the Internal Revenue Code of 1954, on account of property contributed by them in 1954, 1955, and 1958 to the M. & W. Waller Fund; whether the tax upon amounts received by the petitioner William Waller in 1954 and 1955 as his share of legal fees earned by a partnership should be computed in the manner provided in section 107 of the 1939 Code Nd section 1301 of the 1954 Code; and whether the amount of $200 received by petitioner William Waller in 1958 under an annuity policy is taxable to the extent of $140.82 under section 72 of the 1954 Code or is nontaxable as a return of capital.
Some of the facts have been stipulated and are incorporated herein by this reference.
The petitioners William Waller and Milbrey W. Waller are husband and wife residing in Nashville, Tenn. They filed their joint income tax returns for the calendar years 1954 and 1955, and William Waller (sometimes hereinafter referred to as the petitioner) filed his separate return for the calendar year 1958, with the district director of internal revenue at Nashville.
On October 4, 1954, the petitioners executed a declaration of trust creating the M. & W. Waller Fund, hereinafter referred to as the Fund, transferring to it at that time certain shares of stock. They named themselves as the trustees to take, hold, manage, invest, and reinvest the trust property, to collect any income therefrom, and to accumulate and distribute the net principal and net income as provided in the trust instrument.
Such declaration of trust provided, under the heading ‘Trust Purposes' in part as follows:
2.1 The purpose of the settlors in executing this instrument is to create and establish a trust fund or foundation to be operated exclusively for religious, charitable, scientific, literary and educational purposes, including, but not limited to the collection and/or preservation of property and documents relating to Middle Tennessee history, encouragement for the study and writing of such history, the promotion of public parks, and the encouragement of nature study, which purposes are hereinafter sometimes referred to collectively as ‘charitable purposes.’ The Trust Fund shall be invested, administered, increased and distributed by the Trustees solely for one or more of such charitable purposes, including financial assistance by way of scholarships or otherwise, to students in schools and colleges.
2.2 The Trustees are authorized and directed, in their uncontrolled discretion, to make such distributions from time to time from the Trust Fund as may be appropriate to accomplish any of the aforesaid objects and purposes, including but not limited to making contributions to any corporation, trust, community chest, fund, or foundation, organized and operated exclusively for one or more charitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.
2.3 The Trustees are further authorized, in their uncontrolled discretion, to make distributions from time to time from the Trust Fund to any individual who, because of age or mental or physical condition, is, in the judgment of the Trustees in need of financial aid, and to or for the benefit of any young person who needs financial aid to attend a school or college; provided, however, that in no event shall any distribution be made to or for the benefit of any donor to the Trust Fund, and Trustee of the Trust Fund, or any child of any such donor or Trustee, but relatives, former employees and children of employees of donors shall be given preference.
The declaration provided, under the hearings ‘Powers, etc. of the Trustees,’ in part as follows:
3.1 The Trustees shall have the following powers, rights and authority exercisable in each case in their uncontrolled discretion and without applying to any court for its approval:
(b) Investments— To invest and reinvest in any property, real or personal, of any kind or nature, including, without limitation, domestic and foreign stocks (whether common, preferred or other), bonds, secured or unsecured, common trust funds, obligations, mortgages, other securities, and interests in any of the foregoing, whether or not authorized by law for the investment of trust funds, and whether or not income-producing, of a wasting nature or in default, and without regard to the amount invested in any one investment or any one class or type of investment; and to hold moneys uninvested.
(f) Loans— To make any loans, either secured or unsecured, in such amounts, upon such terms, at such rates of interests, and to such persons (not including any Trustee or any child of a Trustee), firms or corporations, as they may determine.
(h) Nominees, etc.— To cause any securities or other property at any time held by them to be registered in their names or in the name of a nominee or nominees, with or without indicating their trust character, or to hold the same unregistered or in such form as will pass by delivery.
The trustees were authorized to appoint an additional trustee or trustees to act with them and could resign at any time by written notice to the other trustee or trustees. The trust was irrevocable and was to remain in effect until the entire trust fund was distributed for the purposes stated. It was further provided that no amendment should be effective except as to additions to the fund made after the date of amendment. It was also provided that upon the termination of the trust for any reason, the entire fund not theretofore distributed should be distributed equally to a designated church, university, and school.
On November 1, 1955, the petitioner filed with the Internal Revenue Service an application for exemption of the Fund from income tax. Such application was acknowledged on November 3, 1955, but was never ruled upon by the Internal Revenue Service.
On May 10, 1957, the petitioners appointed the Nashville Bank & Trust Co. of Nashville, Tenn., as an additional trustee to handle the investments of the Fund. On May 31, 1957, the petitioners, as settlors and trustees, and the bank as additional trustee, executed an instrument amending section 3.1(h) of the above declaration of trust by eliminating therefrom the words ‘in their names or,‘ and amending the proviso clause of section 2.3 to read as follows: provided, however, that in no event shall any distribution be made to or for the benefit of any donor to the Trust Fund, and Trustee of the Trust Fund, or any child of any such donor or Trustee, or any person to whom any such donor or Trustee owes, directly or indirectly, any obligation of support.
The above amendments were stated to be applicable with respect to all present or future trust property.
On February 4, 1958, section 3.1(h) of the declaration of trust was further amended by changing the period at the end of such paragraph (h) to a semicolon and adding the following: provided, however, that nothing herein shall be construed to permit the Trustees to register securities in their own names or in the name of any of them without disclosure of the fiduciary relationship, and provided further that the property of the Trust Fund shall at all times be maintained separately and dealt with by the Trustees on all occasions as property of such Trust Fund.
It was provided that this amendment, also, was applicable with respect to all present and future trust property. All of the above amendments were made as a result of criticism by representatives of the Internal Revenue Service of the existing provisions.
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