Wells v. Commissioner of Internal Revenue
| Decision Date | 28 May 1930 |
| Docket Number | 40915.,Docket No. 29159,36459 |
| Parties | FREDERICK B. WELLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
J. B. Templeton, Esq., for the petitioner.
A. H. Fast, Esq., and H. D. Thomas, Esq., for the respondent.
These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes of $4,809.37 for 1924, $3,057.16 for 1925, and $5,470.30 for 1926. The petition in Docket No. 29159, involving the deficiency for 1924, alleges the following errors:
(1) The Commissioner, in determining the net income of the taxpayer for the said calendar year 1924, included the net income of five irrevocable trusts which the taxpayer had created prior to the enactment of said act, the income of which was or might be applied to the payment of premiums upon policies of insurance on the life of the grantor (taxpayer) who had divested himself of all rights, interests and benefits under said policies, the said action of the Commissioner being contrary to the intent of section 219 (h) and other provisions of the Revenue Act of 1924.
(2) In the event that it is held that the taxpayer is subject to tax on any part of the income of said trusts in accordance with section 219(h) of the Revenue Act of 1924, then the taxpayer further avers that said section is unconstitutional so far as it relates to the inclusion in the taxable net income of the grantor of any part of the income of a trust which is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor.
The petitions in Dockets Nos. 36459 and 40915, involving the deficiencies for 1925 and 1926, respectively, allege error on the part of the respondent as hereinabove set forth in allegation one of Docket No. 29159.
The petitioner submitted the case upon the pleadings, an agreed statement of facts, certain documentary evidence and brief.
FINDINGS OF FACT.
On December 30, 1922, the petitioner created by three separate trust indentures certain trusts, hereinafter referred to as trusts Nos. 1, 2, and 3. On August 6, 1923, by separate trust indentures, he created two additional trusts, hereinafter referred to as trusts Nos. 4 and 5.
By the provisions of trust No. 1 petitioner assigned, transferred, and conveyed unto the Minneapolis Trust Co., Trustee, "Certificate No. 8 for 1000 shares of the six per cent cumulative preferred stock of The Wells Securities Company, a Delaware corporation, said stock being of the par value of $100.00 per share; not for its own use and benefit, however, but upon the trusts hereinafter defined * * *."
The trustee was empowered to take possession of, manage, and control the trust estate, demand, receive, and collect income and dividends therefrom, invest and reinvest the trust estate, or sell and convey the same as it deemed best. In case of sale the proceeds were to be invested and reinvested only in such securities as are now authorized by the laws of the State of Minnesota for the investment of funds of trust companies. The income of the trust estate was to pay the net annual premiums upon a certain life insurance policy upon the petitioner's life, hereinafter more fully considered. The trustee was given full power and authority to deal with the insurance in any manner that it deemed best for the interest of the said Minneapolis Trust Co., trustee, and the trustee was authorized to borrow money thereon or avail itself of any of the conditions, privileges, or benefits under said policy. The trustee was to accumulate the income in excess of the net annual premiums until an amount sufficient to pay one additional net annual premium had been accumulated, any income in excess thereof was, in the discretion of the trustee, to be paid over to petitioner's daughter, Mary Wright Peavey Wells, at the end of each year. Upon petitioner's death the trustee was to collect the face amount of the policy and purchase from petitioner's estate securities amounting to $100,000, and the trustee was empowered to manage and control, sell and reinvest the trust corpus and/or the proceeds from any sale, in accordance with the laws of Minnesota relating to the investment of trust funds. After the petitioner's death the income from the trust estate was to be paid over to his daughter during her lifetime in quarterly installments. Upon the death of petitioner's daughter the trust was to cease and determine, and the trustee was to pay over the corpus to such person or persons as were appointed by the daughter's will or in default thereof, to her issue, and in default of disposition by will or issue of the daughter, then in equal parts to petitioner's sons when the youngest thereof, or the youngest of the survivors, attained the age of twenty-five years.
The insurance policy under trust No. 1 was taken out by petitioner on his life on the same day the trust was created, naming the Minneapolis Trust Co., trustee, as his beneficiary. Petitioner's application for said policy stated that the right to change the beneficiary was waived.
By the provisions of trust No. 2, the petitioner assigned, transferred, and conveyed unto the Minneapolis Trust Co. and Leontine Lindstrom, trustees, $450 in cash, 75 shares of 6 per cent cumulative preferred stock of the Wells Securities Co., and a certain life insurance policy, not for their own use and benefits, however, but on the trust hereinafter defined. The duties of the trustees were substantially the same as the duties of the trustee in trust No. 1. The income from the trust estate was to be applied to the payment of the net annual premiums due upon the life insurance policy, assigned and conveyed to the trustees, and the trustees were given the same powers with respect to said policy as were given the trustee in trust No. 1. Upon petitioner's death the trustees were to pay over to the Minneapolis Foundation, the said 75 shares of preferred corporate stock, or such securities as were held in lieu thereof, and the trustees were to collect the proceeds of the life insurance policy and invest and reinvest the same in their discretion. The annual income resulting from the trust estate remaining in the hands of the trustee and so much of the principal as in the discretion of the trustees was necessary, was to be paid over for the support, maintenance, and education of Shirley Irene Lindstrom until she attained the age of twenty-five, at which time the entire trust estate remaining in the hands of the trustee was to be paid over to the said Shirley Irene Lindstrom. In the event that Shirley Irene Lindstrom predeceased the petitioner, the trust in her favor was to cease and determine and the trustees were to surrender the life insurance policy, collect the cash surrender value and pay over the same to the Minneapolis Foundation. If petitioner survived until Shirley Irene Lindstrom attained the age of twenty-one, to wit, March 12, 1938, the trust in her favor was to cease and determine and the trustees were to surrender the policy of life insurance for cancellation, collect the cash surrender value, and pay the same over to Shirley Irene Lindstrom. Also, by trust No. 2, petitioner gave, granted, and conveyed in perpetuity to the Minneapolis Foundation the 75 shares of preferred stock, or the securities held in lieu thereof at the date of his death, upon the following trusts: To manage and control the trust estate, invest and reinvest the same and sell or convey securities as it deemed best; to pay the net annual income to the rector and wardens and vestrymen of St. Marks Church for the sole purpose of carrying on the work of the Wells Memorial, a definite charity conducted by the said church corporation. If the Wells Memorial ceased to be conducted as a definite charity, then the net income was given to the Minneapolis Foundation for its own uses and purposes. With respect to both trusts created by trust No. 2, it was provided that if the accumulation of income in the living trust be declared void for any reason, such accumulation was to be paid over to the Minneapolis Foundation for its own uses and purposes, but should either the living trust or the perpetual trust, herein defined, be declared void as a trust, then the trust shall revert to petitioner if living, otherwise to his heirs, executors, administrators, or assigns.
The life insurance policy assigned, transferred and conveyed as a part of trust No. 2 was taken out by petitioner on November 27, 1922, with his executors, administrators, or assigns as beneficiary thereof. On January 16, 1923, the policy was made payable at the death of the insured to the Minneapolis Trust Co. and Leontine Lindstrom, as trustees, and "the right to make future changes of any beneficiary herein, without the consent of the beneficiary or beneficiaries herein, has been revoked and canceled; a legal request therefor having been received."
By the provisions of trust No. 3 the petitioner assigned, transferred, and conveyed unto Minneapolis Trust Co. $3,550 in cash, and certificate No. 2 for 625 shares of 6 per cent cumulative preferred stock of the Wells Securities Co., not for its own use and benefits, however, but upon the trusts hereinafter defined. The trustee's powers were substantially the same as those set forth in trust No. 1, and the net income from the trust estate was to be applied to the payment of net annual premiums of four life insurance policies written upon petitioner's life for the benefit of persons therein named, three of the four beneficiaries being relatives of the petitioner, and one a valued employee. As in the preceding trusts, the trustee was empowered to deal with the insurance policies in any manner that it deemed for the best interests of the beneficiaries, to borrow money thereon, or to avail itself of the conditions, privileges, or benefits of said policies. The income from the trust estate in excess of the...
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