Dillon v. Commissioner , 32 B.T.A. 1254 ( 1935 )

HERBERT L. DILLON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dillon v. Commissioner

Docket Nos. 58025, 59280.

United States Board of Tax Appeals

32 B.T.A. 1254; 1935 BTA LEXIS 828;

August 23, 1935, Promulgated

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Petitioner opened brokerage accounts with a firm of which he was a member in the names of his three minor children. The initial deposits were made by petitioner from his own funds and he made subsequent contributions to the accounts. The accounts were managed by petitioner as margin accounts and he directed the purchase and sales of securities. They were opened and operated for the declared purpose of establishing separate funds for the children. Held that the deposit of the funds in the names of the children constituted the creation of trusts for them and the income realized from using the funds in trading in stocks was not income of the petitioner.

W. C. Magathan, Esq., Thomas G. Haight, Esq., and J. O. Wynn, Esq., for the petitioner.

DeWitt M. Evans, Esq., and John Morawski, Esq., for the respondent.

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ARUNDELL

The respondent determined deficiencies in income tax for the years 1927 and 1928 in the respective amounts of $9,012.06 and $41,205.51. By amended answer in Docket No. 58025, respondent alleges that he erred in failing to include in petitioner's income for 1927 the income realized from brokerage accounts carried in the names of petitioner's minor children, and asks for an increased deficiency. Whether or not income realized on brokerage accounts opened by petitioner in the names of his minor children is taxable to petitioner is the only issue submitted for decision for both 1927 and 1928. Other issues raised by the pleadings, concerning income from distributions by the Parkhill Co. and profit on the sale of Amoskeag Manufacturing Co. stock, have been settled by stipulation.

FINDINGS OF FACT.

Since 1908 petitioner has been a member of the firm of Eastman, Dillon & Co., which is engaged in the investment banking and brokerage business, the principal office of the firm being in New York City, with branches in several other cities. Petitioner had a 51.608 percent interest in the firm in 1926 and 1927; at the end of 1928 his interest was 54.05 percent. The interests of the other partners, six or seven in number, ranged from 3.314 to 17.753 percent each.

Petitioner has three children, Joan, born in 1924; Herbert L., Jr., born in 1925; and Hope, born in November 1927. On June 12, 1925, petitioner opened accounts on the books of Eastman, Dillon & Co. in the names of the two children then in being, Joan and Herbert L., Jr., and deposited in each account the sum of $7,500. On December 12, 1927, shortly after the birth of the third child, Hope, petitioner opened an account in her name on the books of the firm and deposited in the account the sum of $25,000. These initial deposits in the three accounts came from petitioner's personal funds.

Prior to the opening of the first accounts in 1925, petitioner told his wife that he was going to put some money in the names of the children for the purpose of providing them with independent means in case anything happened to him or to his business. When Hope was born petitioner told his wife that he intended to do the same thing for her that he had done for the other children.

When petitioner opened the accounts he told the office manager of the firm, who was also a partner, that the accounts were trust accounts for his children; that they were to be treated as any other customer's accounts; that he, the petitioner, intended to make them active and buy and sell securities in the hope of realizing a profit for the children.

From the time the accounts were opened until in January 1931 they were carried on the firm's books in the same manner as margin accounts of other customers. Petitioner directed the purchase on margin and the sale for each account of numerous securities. Interest was charged and credited and brokers' commissions were charged to each account. In 1927 petitioner contributed $10,425 to each of the accounts of Joan and Herbert L., Jr., and in 1928 he contributed $17,000 additional to each of those two accounts and $135,000 to the account of Hope. These sums were deposited as additional margins. Petitioner has never withdrawn any money or securities from the accounts either for his own use or for the use of the children.

Petitioner's management of the accounts was profitable and materially increased the funds in each account. The taxable net income of each account in the years 1927 and 1928 was as follows:

Year	Joan	Herbert L., Jr.	Hope
1927	$49,508.59	$48,856.96	None
1928	74,093.27	74,264.84	$21,277.30

Each year after opening the accounts petitioner filed income tax returns reporting the income realized by each account. Those returns were filed under the caption "Herbert L. Dillon, Trustee for [naming the child]." The tax in each case was paid from the funds in the respective accounts.

No portion of the net income of the accounts was reported by the petitioner in his income tax returns. The income of the accounts for 1927 was not added to petitioner's income by the respondent in his audit of the return for that year, but by amended answer to the petition filed counsel for the respondent alleges error in the failure to treat the income of the Joan and Herbert L., Jr., accounts as petitioner's income. The income of all three of the children's accounts for 1928 was added by the respondent to petitioner's income for that year.

When petitioner opened the accounts in the names of his children he intended at some time to create formal trusts for them. At the outset he was not certain just what terms he wished to include in the trust instruments. In January 1931 he executed formal trust indentures naming the children as beneficiaries and a trust company and himself as trustees. At that time the brokerage accounts were closed out and the proceeds delivered to the trustees.

OPINION.

ARUNDELL: Petitioner claims that by opening brokerage accounts in the names of his minor children he created valid and irrevocable trusts for them, or, in the alternative, made valid gifts to them, and in either event the income attributable to those accounts was not his income and not taxable to him. The respondent argues against both propositions. He contends that the alleged trusts were too indefinite to be valid, and the margin accounts are not a proper subject of trusts; further, that there was no gift because petitioner made no delivery and did not divest himself of dominion and control.

There appears to be some confusion of thought on the part of counsel for the respondent as to what petitioner claims was given to the children. He argues that margin accounts may not be the subject of trusts. We do not understand this to be involved in the question submitted. Petitioner made contributions of money to accounts for his children, and if such contributions were gifts absolute or in trust the proceeds would belong to the beneficiaries and be taxable either to them or the trustee. We do not understand that petitioner contributed a "margin account" as such. He paid in money and then directed the use of that money to operate a margin account. If local law disapproved of use of trust funds in that way, it would not affect the validity of the trust or tax liability, but would simply be a matter for the petitioner to settle with the beneficiaries if and when called to account.

Counsel for the respondent calls our attention to the so-called "pass book" cases, of which there are many in the New York reports. The gift of a bank account is said in , to be somewhat analogous to the opening of a brokerage account in the name of another. The rule in the pass book cases, at least since the decision in ; , is that the deposit by one person of his own money either in his own name as trustee for another, as in ; , or in the name of another, , without more, "does not establish an irrevocable trust during the lifetime of the depositor. It is a tentative trust merely, revocable at will, until the depositor dies or completes the gift in his lifetime by some unequivocal act or declaration, such as delivery of the pass book or notice to the beneficiary. In case the depositor dies before the beneficiary without revocation, or some decisive act or declaration of disaffirmance, the presumption arises that an absolute trust was creasted as to the balance on hand at the death of the depositor." See ; , for a collection and discussion of the cases on this subject. The rule of the cases is that a deposit in the name of another will constitute the creation of a trust if accompanied by an "unequivocal act or declaration" of the depositor that he holds the amount of the account on a present trust for a named beneficiary.

In the present case the evidence is that petitioner declared to all who might be interested that the accounts were established for the benefit of his children. It is his testimony that that was the purpose of the accounts and in this he is corroborated by his wife, the office manager of the firm, and the accountant of the firm. True, he did not notify the beneficiaries, but, as they were minors and of very tender years, that would have been useless. . The statements made by petitioner to all who had any connection with the accounts, his scrupulous maintenance of them as separate accounts in the names of the beneficiaries, and his representations of trusteeship in Federal tax returns, in our opinion, amount to the "unequivocal acts or declarations" which under the decisions above cited will convert what would otherwise be a tentative trust into a present trust.

These trusts were irrevocable under the rule that there may be no revocation without the consent of the beneficiary in the absence of express reservation of power to revoke. Perry on Trusts (6th Ed.), sec. 104; .

There is little, if any, distinction between these cases and that of . In that case the taxpayer in 1925 opened trading accounts with a broker for his three minor daughters. At the time the accounts were opened the taxpayer explained to the brokers that his plan was to create a separate estate for each of the girls and that the accounts belonged to them. The taxpayer managed the accounts, buying and selling stocks, until 1929, when the securities in the trading accounts were transferred to an investment trust. In that case we concluded that the brokerage accounts "belonged in fact to the daughters" and that the respondent erred in taxing the income to the father. About the only distinction between the Frank case and this is that there the children were somewhat older, 8, 14, and 16 years of age, when the accounts were opened, and the father discussed the handling of the accounts with them and from time to time took delivery of purchased securities issued in their names. These differences do not affect the result. The essential facts are the same. It is our opinion that here, as in the Frank case, the accounts belonged to the children and the income from them was not the income of the petitioner.

Decision will be entered under Rule 50.