Whiteley v. Commissioner of Internal Revenue

• Decision Date: 29 May 1941
• Docket Number: No. 7620.,7620.
• Citation: 120 F.2d 782
• Parties: WHITELEY v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

120 F.2d 782 (1941)

WHITELEY v. COMMISSIONER OF INTERNAL REVENUE.

No. 7620.

Circuit Court of Appeals, Third Circuit.

May 29, 1941.

Frederick H. Spotts, of Philadelphia, Pa. (Robert C. Fluhrer, of York, Pa., and Pepper, Bodine, Stokes & Schoch, of Philadelphia, Pa., on the brief), for petitioner.

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

Before CLARK, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

This appeal from the Board of Tax Appeals involves income taxes for the years 1933, 1934, and 1935. There are two issues presented which are dealt with separately in this opinion.

I.

The first issue involves income tax for the three years mentioned and turns upon facts and circumstances surrounding a trust which was set up by a trust deed executed May 31, 1932 by Purdon Smith Whiteley, wife of the taxpayer, with the husband as beneficiary. Respondent relies upon § 166 of the Revenue Acts of 1932 and 1934, 26 U.S.C.A. Int.Rev.Acts, pages 543, 727, adding for good measure § 22(a) and § 167(a) (3), 26 U.S.C.A. Int.Rev.Acts, pages 487, 543, 669, 727.

The taxpayer is a Pennsylvanian. Prior to and during the years with which we are concerned he maintained a marginal stock account in which the debit balances in 1931 and 1932 ran between $200,000 and $300,000. Mrs. Whiteley had loaned to her husband shares of preferred stock owned by her to protect his account and had, also, loaned him cash which he had used to pay bank loans secured to protect his brokerage account. December, 1931, and May, 1932 were critical periods in the taxpayer's financial affairs. In December Mrs. Whiteley, with the taxpayer's consent, consulted her father, Mr. C. Elmer Smith, a Director of the Western National Bank of York, Pennsylvania, concerning the problem. After conference with Mr. Smith and Mr. George T. Livingstone, the president of the bank, the taxpayer placed himself in their hands with regard to fiscal matters. After December, 1931 Messrs. Smith and Livingstone took care of the wife's financial transactions for the taxpayer and she followed their directions. The trust out of which this litigation arises was set up on May 31, 1932. Upon Mr. Livingstone's recommendation insurance policies to the amount of $200,000 were taken out on the taxpayer's life with the wife as beneficiary. A note for $200,000 was prepared by Messrs. Smith and Livingstone and, at their direction, the taxpayer's wife requested her husband to sign it. This note was payable to Mrs. Whiteley and her husband signed it as requested. The note was under seal. The findings of fact indicate a normal domestic situation where both husband and wife are each anxious to give all possible assistance to the other in a situation where the family welfare is involved. It is found that he (Mr. Whiteley) "would have signed a note for a larger amount if his wife had requested him to sign it. She (Mrs. Whiteley) would have given him everything she had to help him out of his financial difficulties."

The trust consists of (1) corporate bonds of a par value of $126,000 which were in the wife's hands on May 31, 1932 and which had been turned over to her by her husband upon receipt by him of them from his father's estate one week earlier; (2) the note of the taxpayer for $200,000; and (3) life insurance policies mentioned above to the amount of $200,000. The income of the trust, after payment of expenses including the premiums upon the policies of insurance, was payable to the taxpayer for life with the provision for advancement of amounts of the principal sum to the tax-payer upon the consent of the wife if living or, if deceased, the trustee.

The Commissioner has taxed to the taxpayer all the original income of the trust for the years 1933, 1934 and 1935 on the ground that the corpus of the trust was owned by him prior to its creation, that he received all the benefits from the control and distribution of the principal. The taxpayer contends that this trust was just what it had appeared upon its face to be, a trust set up by his wife out of property which she owned and that he is liable only for such part of the income from it as he actually received, upon which he has already paid his income tax.

The Board of Tax Appeals concluded that the real object of the trust was to carry insurance on the petitioner's life and upheld the respondent's contention that the taxpayer was taxable upon the entire income of the trust. Obviously, §§ 166 and 167 of the statute are not controlling if the taxpayer's wife is regarded as grantor of the trust. Equally obviously, if the property belonged to the taxpayer he must lose this case. It seems to us that the critical point in the case turns on questions of fact and that the rules of law are pretty clear. Examination of the record and consideration of the family situation disclosed by the circumstances which led up to the formation of this trust does not convince us that the Board's conclusion was not supported by substantial evidence. We do not, therefore, interfere with it.

II. Trusts for Minor Children.

The second issue between the taxpayer and the Commissioner relates to the income of four trusts set up by the taxpayer in 1935 for his minor children. The terms are identical in each, and the trusts are irrevocable. The trustee is the First National Bank of York, Pennsylvania. The terms of the trust instrument provide that the trustee is to pay the income to the donor, if and when so ordered by the donor, during the minority of the child to be used solely for the support, maintenance, education and enjoyment of the child. If not called for, the income is to be reinvested. During the calendar year 1935, the income of the trust funds was $5878.00. Of this only $450 was paid the donor and this, with some other funds belonging to the children, was invested in securities in their respective names. None of the income from the trusts was used in 1935 for maintenance of the beneficiaries. A divided Board of Tax Appeals upheld the contention of the Commissioner that this income was taxable to the donor of the trust. Section 167 of the applicable statute provides:

"(a) 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 in the disposition of such part of the income 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 in the disposition of such part of the income, be distributed to the grantor; or

"(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called `charitable contribution' deduction);

then such part of the income of the trust shall be included in computing the net income of the grantor.

"(b) As used in this section, the term `in the discretion of the grantor' means `in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the...