Whayne v. Glenn

• Decision Date: 06 March 1945
• Docket Number: No. 551.,551.
• Parties: WHAYNE v. GLENN, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Kentucky

59 F. Supp. 517

WHAYNE v. GLENN, Collector of Internal Revenue.

No. 551.

District Court, W. D. Kentucky, Louisville Division.

March 6, 1945.

Thos. J. Wood and Nelson Helm, both of Louisville, Ky., for plaintiff.

Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and Mills Kitchin, Sp. Assts. to Atty. Gen., and Eli H. Brown, III, U. S. Atty., of Louisville, Ky., for defendant.

MILLER, District Judge.

The plaintiff, R. C. Whayne, brought this action to recover from the defendant, as Collector of Internal Revenue for Kentucky, the sum of $25,174.98 with interest which he alleges he was illegally required to pay as income tax for the years 1938, 1939 and 1940 and as a gift tax for the years 1938 and 1940. The taxes in question depend upon the nature and effect of three gifts (two of which were gifts in trust) which the plaintiff made in 1936, 1938 and 1940 to his wife and three children. The income tax question is whether the income subsequently accruing from the corpus of the gifts is taxable to the plaintiff as grantor or to the respective donees. The gift tax question is whether these gifts were such completed gifts as to be subject to the gift tax, and, if so, whether certain of them are taxable as present gifts or as gifts of future interest.

There is no real controversy between the parties as to the material facts. The allegations of the complaint, which are at length, are for the most part not denied by the answer. The pleadings are supplemented by a stipulation of facts and the uncontradicted testimony of the witnesses who handled the transactions involved. The pleadings, stipulation and transcript of evidence accordingly state the facts in detail. For purposes of convenience, the following reduced and consolidated statement is made by the trial court. Reference is made to the findings for further details.

Preliminary Statement.

For many years prior to 1936 the plaintiff Roy C. Whayne and his brother, Harry T. Whayne, were partners doing business under the name of Roy C. Whayne Supply Company which engaged in the business of selling, renting and servicing tractors, scrapers, graders, shovels, air compressers and other construction equipment. The interest of Roy C. Whayne in the partnership was 80% and the interest of Harry T. Whayne was 20%. The partnership carried on its business on the premises owned by it and located on the southwest corner of Eighth and Main Streets, Louisville, Kentucky.

Building Trust.

On December 1, 1936, Roy C. Whayne and Harry T. Whayne and their respective wives executed and delivered their deed by which they conveyed to Katherine Pfeiffer as Trustee the partnership real estate at Eighth and Main Streets to be held by the Trustee for the benefit of Bessie C. Whayne, wife of Roy C. Whayne, and Harry T. Whayne in the following proportions, namely, four-fifths to Bessie C. Whayne and one-fifth to Harry T. Whayne. Under the deed of trust the trustee was to hold and manage the property and keep it in repair and to pay the taxes and insurance premiums out of the income therefrom. The trustee was authorized to sell, lease, mortgage and give options on said real estate provided such acts were done with the consent of Roy C. Whayne and Harry T. Whayne, and to reinvest the proceeds in any manner agreeable to the beneficiaries holding a majority of interest in the trust estate. The trust was to continue for 21 years, at the end of which time the trustee was to convey to each beneficiary his or her beneficial interest. At any time during the existence of the trust the trustee should upon the demand of any beneficiary convey to such beneficiary his or her beneficial interest in the trust and upon the happening of such event the trust was to terminate with regard to such beneficiary. Any beneficiary had the power to sell, assign, or transfer all or any part of the beneficial interest. Before conveying the legal title to any beneficiary or accepting the transfer of any beneficial interest the trustee was to give to Roy C. Whayne and the beneficiaries not less than 10 days notice of such proposed conveyance or transfer. Roy C. Whayne and Harry T. Whayne had the right at any time to change the trustee. The trustee had no right to compensation for services rendered and was not to be personally liable for the doing or omission of any act in connection with the trust in the absence of fraud, gross negligence or willful wrongdoing. The deed of trust stated: "Roy C. Whayne agrees that his legal obligations in respect to Bessie C. Whayne shall not be diminished or in any way affected by reason of this conveyance."

Immediately thereafter Katherine Pfeiffer as trustee leased the property to Roy C. Whayne Supply Company for a period of five years from December 1, 1936, at a rental equal to one per cent (1%) of the annual gross receipts of the lessees business, with a minimum rental of $400 per month. The lease gave an option to the lessees to purchase the property at its fair and reasonable cash value as determined by the majority of three appraisers. In June 1940 the lease was modified by an oral agreement extending its term to an additional five years and fixing the rent for the remainder of the period at the sum of $550 per month plus taxes and maintenance.

The trustee, Katherine Pfeiffer, was an employee of Roy C. Whayne Supply Company, was experienced in keeping books and was financially responsible to the extent that she had a personal estate of not less than $20,000 in value. She prepared accounts covering the transactions of the trust from the date of its creation. The net income of the trust was unconditionally credited upon the books of the trust to the beneficiaries in accordance with their pro rata interests and held subject to the demands of the respective beneficiaries. On or about July 1, 1942, the beneficiaries requested termination of the trust and in compliance with this request the trust was terminated by the trustees executing, delivering and recording a deed transferring the property pro rata to the beneficiaries thereof. On July 29, 1942, the beneficiaries received the balance of distributable income previously credited to their accounts and not withdrawn by them.

Equipment Trust.

On December 31, 1938, Roy C. Whayne executed his deed of trust to himself as trustee for Harry T. Whayne, his wife Bessie C. Whayne, and his children Elizabeth Whayne Helm, Roy C. Whayne, Jr., and Suzanne J. Whayne, by which he conveyed to himself as such trustee certain personal property valued therein at $22,796.50. The property included two Caterpillar Deisels and various notes executed to the Roy C. Whayne Supply Company by purchasers of various pieces of equipment previously sold by the Supply Company to such purchasers in the regular course of its business. On the same day the instrument was delivered to Bessie C. Whayne as beneficiary and as mother of the three children, and was received by her on their behalf and on her own behalf. A signed copy of the instrument was on the next day delivered to Nelson Helm, husband of one of the beneficiaries, and on January 18, 1939, Nelson Helm was appointed sole trustee of the trust and the assets thereof were turned over to him as such successor trustee. By the deed of trust the grantor reserved no power to revoke any of the transfers therein made, nor to vest in himself any benefit therefrom, and agreed that his reserved powers with regard to the assets and administration of the trust should not be used to diminish the value of the trust estate or to benefit the grantor, directly or indirectly, at the expense of any beneficiary. The deed provided that the transfer was not to supersede or in any way affect any obligation the grantor may have to support or maintain any of the beneficiaries. The grantor reserved the right to appoint one or more suitable parties as successor trustees and to discharge such successor trustees as often as he deemed expedient. The beneficial interests in the trust were as follows:

1. One-fifth for the sole benefit of Harry T. Whayne with full right vested in him to terminate the trust of his share at any time by withdrawing all income and principal held for his account, and to assign the same in any manner in his sole discretion.

2. One-fifth for Bessie C. Whayne, the income therefrom to be accumulated and added to principal for a period of 15 years, provided she lived that long. During this period the grantor reserved the right to release from accumulation for immediate distribution to the beneficiary any part of the accumulated income, or of the principal, or both, in his sole discretion.

3. One-fifth for the benefit of Elizabeth Whayne Helm to be held upon the same terms as the share of Bessie C. Whayne, excepting that any part undisposed of at her death should pass to her issue.

4. One-fifth for the benefit of Roy C. Whayne, Jr., to be held upon similar terms as the share of Elizabeth Whayne Helm.

5. One-fifth for the benefit of Suzanne J. Whayne to be held upon similar terms as the share of Elizabeth Whayne Helm.

The trustee was granted the power to control, manage, sell and dispose of any trust estate in his hands for the purpose of reinvestment, and to reinvest the proceeds thereof, and with the approval of the grantor to engage in business and to mortgage, pledge, or borrow upon any asset of the trust estate. The grantor's approval of any transaction participated in by the trustee discharged the trustee of liability in respect thereto in the absence of fraud or wrongful misconduct. Nelson Helm continued to act as sole trustee until June 30, 1939, at which time Roy C. Whayne appointed himself as co-trustee thereof. The co-trustees continued to act until June 3, 1940, at which time Nelson Helm resigned and Buell E. Henry was appointed in his place. Henry continued to serve through the end of the year 1940.

The trust from its inception employed Roy C. Whayne Supply Company to act as its agent in...