Williamson v. Commissioner of Internal Revenue

• Decision Date: 01 February 1943
• Docket Number: No. 8000.,8000.
• Parties: WILLIAMSON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

132 F.2d 489 (1942)

WILLIAMSON v. COMMISSIONER OF INTERNAL REVENUE.

No. 8000.

Circuit Court of Appeals, Seventh Circuit.

December 29, 1942.

Rehearing Denied February 1, 1943.

E. H. McDermott, Wm. M. Emery, and Richard S. Oldberg, all of Chicago, Ill. (Daniel R. LaBar, of Chicago, Ill., of counsel), for petitioner.

J. P. Wenchel and John W. Smith, Bureau of Internal Revenue, both of Washington, D. C., Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Morton K. Rothschild, and J. Louis Monarch, Sp.Assts. to Atty. Gen., for respondent.

Before EVANS, MAJOR, and KERNER, Circuit Judges.

MAJOR, Circuit Judge.

This is a petition to review a decision of the United States Board of Tax Appeals, entered November 18, 1941, adjudicating deficiencies in petitioner's income tax for the years 1935 and 1936. Before the Board, respondent contended that petitioner was taxable under Sections 166, 167 and 22(a) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Acts, pages 727, 669, 895, 825. The Board sustained liability under Section 22(a) but made no decision as to the applicability of Sections 166 and 167. Before this Court, respondent makes no contention as to the applicability of Section 166, and we assume his contention in this respect has been abandoned. Respondent does urge that petitioner is liable under Section 22 (a), as found by the Board, and also under Section 167.

The trust which supplies the subject matter of this controversy was created by petitioner on November 26, 1935 and was irrevocable. It was designated as Trust No. 2.¹ The corpus was 5,000 shares of Class A common stock of General Candy Corporation. The trustees were petitioner, his wife, May J. Williamson, and their attorney, Lewis Edward Sauter, who drafted the instrument. The First National Bank of Chicago was named to succeed petitioner as a co-trustee. Stock certificates for the 5000 shares have been outstanding since November 26, 1935, in the name of the three trustees. A certificate for additional stock, representing a stock dividend in May, 1936, was also issued in the name of the three trustees.

The trustees were directed to administer the trust property for the benefit of petitioner's wife and their daughter, Ann Williamson² as long as either were living, and were authorized "in their uncontrolled discretion" to expend and apply the net income and so much of the corpus as they deemed necessary "for the maintenance, support, protection, welfare and financial benefit or security" of these two beneficiaries. Undistributed income could be held for subsequent distribution or added to the corpus. The trustees, also in their "uncontrolled discretion," were authorized to draw upon the corpus of the estate for the maintenance and support of the two beneficiaries. The trusted stock was to be voted as a unit at all meetings of the corporation, and, as long as petitioner lived, it was to be voted "in his sole and uncontrolled discretion as he may deem best." In all other matters, any two of the three trustees were given the power and authority to speak for the trustees. Petitioner was given the right during his lifetime "to direct the sale, exchange, investment and reinvestment of the principal of the trust estate without being limited to investments authorized by law or any rule of Court as legal for trust funds." The trustees were directed to sell, purchase or exchange securities or other property "in accordance with the directions of the Donor or his agent," and no sale or exchange of the trust estate was permitted except on written direction from petitioner.

The First National Bank of Chicago was appointed successor-trustee upon the death of the petitioner, with the same rights, powers, duties and obligations as were conferred or imposed upon petitioner. Petitioner was authorized at any time to relinquish investment control to the trustees, and also authorized at any time to resume such control. The trustees were authorized to sell the trust property upon consent of two of such trustees, provided that petitioner be one of the trustees assenting thereto. Petitioner was given the power at any time "by an instrument in writing delivered to the Trustees to remove any Trustee, corporate or individual, and appoint and constitute successor-Trustees." Upon the resignation or removal of any trustee, petitioner was given the power and authority to examine the accounts of the trust estate, to investigate the acts of the retiring trustee, to approve his accounts, and to give a full release and discharge to such retiring trustee for all liability arising out of or in connection with such trust estate, and it was provided that such release or discharge should be effective and binding upon all beneficiaries.

The above is a brief synopsis of the trust agreement. Petitioner introduced oral testimony before the Board which, in the main, concerned the manner in which the trustees, including petitioner, had discharged their duties and obligations under the trust. We think, however, it is unnecessary to relate such testimony in detail. It is sufficient to state that there is no dispute but that the trustees (including petitioner) discharged their duties and obligations in good faith. It may be pertinent to mention, as found by the Board, that, as of January 1, 1935, there were 106,925 shares of Class A stock outstanding, of which petitioner owned 39,555 shares or 37%, his wife owned 11,165 shares or 10.4%, and his father owned 7,692 shares or 7.2%. Of the shares owned by the father, petitioner held 7,200 shares as trustee. The remainder of the stock was held by the public, two of whom, together with petitioner, served as directors of the corporation. Petitioner was also its president and general manager.

Petitioner in 1935 filed a gift tax return, reporting the 5,000 shares transferred to Trust No. 2 as gifts to his wife and daughter, and paid the gift tax thereon. The trustees also paid an income tax on the 1936 trust income. Because of some controversy as to the construction which an auditor for the Revenue Department placed upon the trust instrument, an agreement was executed December 18, 1937, by petitioner, his wife and Mr. Sauter. This agreement provided, in substance, that petitioner would continue to support his wife and daughter from his own personal resources and would not look to the income from the trust to relieve him in whole or in part; that the powers conferred upon petitioner by the trust instrument were intended to be exercised only in a fiduciary capacity, and petitioner's entire reversionary interest in the trust was transferred to his daughter and her heirs.

Before the Board, as here, respondent contended for the application of Section 22(a) under the rule of Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788. It is urged that petitioner retained such a substantial measure of control over the trust that he must be treated for tax purposes as the owner thereof. The Board concluded: "In a case involving a long term trust (such as trust No. 2) the doctrine of the Clifford case may be applicable if the grantor has retained a very substantial measure of control over the trust."

Among the numerous circumstances which the Board considered in support of its application of the Clifford rule was petitioner's power to remove the other two trustees, to appoint successor-trustees, to relieve a retiring trustee of liability so as to bind the beneficiaries; the power to vote the trusted stock, thus retaining for himself the right to participate in the affairs of the corporation of which he was president; the power to direct sales of trust property without limitation as to the legal investments; and the power to preclude sales and investments by the trustees except upon direction of petitioner.

Petitioner seeks to distinguish the Clifford case largely upon two grounds: (1) The long term trust in the instant case in contrast with the short term trust in Clifford, and (2) petitioner in the instant case was one of three trustees while in Clifford the donor was sole trustee.

Petitioner in his brief before this Court, as well as in oral argument, stressed the recent decision of this Court in Stuart v. Commissioner, 7 Cir., 124 F. 2d 772. Special reliance was placed upon the effect of our holding as to the restraint imposed upon a trustee as a fiduciary by the law of Illinois. At the time of oral argument in the instant case, the Stuart case was pending in the Supreme Court, and, desiring all the light possible, we have waited for the Supreme Court's decision. The case was decided November 16, 1942. (The case involves two trusts, and is entitled Commissioner v. Douglas Stuart No. 49 and Commissioner v. John Stuart No. 48.) Rehearing was denied (with some amendments to the opinion not here material) on December 14, 1942. 317 U.S. ___, 63 S.Ct. 140, 87 L. Ed. ___.

With all due respect to the Supreme Court, the light which we so eagerly anticipated, especially as to the applicability of Section 22(a) is not as illuminating as we had hoped for. So we suggested to counsel for the respective parties that they submit a memorandum of their views as to the effect which the Stuart decision has upon the instant case. This has been done, and the light which we thought we perceived has been almost extinguished.

As we interpret the decision of the Supreme Court, it is an affirmance of the decision of this Court that the income from the John Stuart trust was not taxable to the donor under Section 166. Our reasoning, that under Illinois law a restraint was imposed upon the trustees which would not permit the revesting of the trust property in the donor (grantor), was accepted. Our conclusion, however, that by the same token there was no liability under Sections 22(a) or 167 appears to have been overruled. In other words, the restraining effect imposed by state law upon the trustees was such as to preclude liability under Section 166, but not...