Sumner v. Commissioner , 40 B.T.A. 811 ( 1939 )

GRAHAM SUMNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sumner v. Commissioner

Docket No. 92988.

United States Board of Tax Appeals

40 B.T.A. 811; 1939 BTA LEXIS 803;

October 24, 1939, Promulgated

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The income of a trust for one year whereby the settlor names himself trustee of securities to pay the income to his wife, held taxable to the settlor.

Graham Sumner, Esq., pro se, and Charles F. McIsaac, Esq., for the petitioner.

Sidney U. Hiken, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined a deficiency of $2,917.31 in petitioner's income tax for 1934, by including in his income dividends and profits of a trust created by him for his wife.

FINDINGS OF FACT.

Petitioner is a New York lawyer, residing in Greenwich, Connecticut. On January 10, 1934, he executed the following instrument:

KNOW ALL MEN BY THESE PRESENTS, That I, GRAHAM SUMNER, of the Town of Greenwich, State of Connecticut, hereby admit and declare that I have and do hereby set over to myself and I now hold, as Trustee, the securities described in Exhibit A hereto attached, upon trust to collect and receive the income from said securities, or their proceeds, and, after deducting all proper charges incident to the administration of the trust, to pay over the net income so collected and received to my wife, LAURA SUMNER, until the 5th day of January, 1935, or until the death of my said wife, whichever shall first happen, it being intended that said trust shall not continue after the 5th day of January, 1935, or after the death of my said wife, and that upon the termination of the trust I shall become entitled to and repossessed of all the property held in trust hereunder as absolute owner free and clear of said trust.

In case of my death before the termination of said trust, I appoint the Executors named in my will as trustees hereunder.

The trustees hereunder, including myself, my Executors and any other trustee that may lawfully be appointed, shall have the following rights and powers:

To retain and continue or to change investments, to sell, pledge or otherwise dispose of all or any part of the property held in trust hereunder, at such times, for such prices and upon such terms as said Trustee may deem advisable, and to invest and reinvest any funds held in trust hereunder in such stocks, bonds, securities or obligations as said Trustee may deem advisable free of any and all restrictions or limitations imposed by law.

To advance money to any corporation, the stocks, bonds, securities or obligations of which said Trustee may hold, in order to aid it in its business, or with a view to maintaining or increasing the value of such stocks, bonds, securities or obligations, and for that or any other purpose connected with said trust, to borrow money and to pledge as security therefor all or any part of the property held in trust hereunder, upon such terms as said Trustee may deem advisable.

If at any time there shall be any refunding, readjustment of stocks, bonds, securities or obligations, enforcement of obligations or securities by foreclosure or otherwise, corporate reorganization or consolidation by merger or otherwise which shall affect any property held in trust hereunder, or if rights of conversion or exchange or rights to purchase or subscribe for stocks, bonds, securities or obligations shall be offered by reason or with respect to any property held in trust hereunder, said Trustee shall have the right and power, in his or its discretion, to participate in and become a party to any such refunding, readjustment, enforcement, reorganization or consolidation, or any plan, agreement or proceeding therefor or with respect thereto, or any plan or agreement for the protection of the holders of such stocks, bonds, securities or obligations; to exercise and enforce any such rights that may be so offered, and to make such contribution or payments in connection with any such matters as said Trustee may deem advisable.

On January 10, 1933, petitioner had executed a similar instrument, except that the trust therein created was to end on January 2, 1934, or on the death of petitioner's wife. On June 9, 1933, under a supplemental instrument, petitioner had added other securities to the trust.

The first instrument of this type executed by petitioner was executed in 1924. It covered a period of three years and was several times extended from year to year. Later instruments were made for periods of approximately a year.

During 1934 some of the trust securities stood in petitioner's name and were in his possession in his safe deposit box and others stood in the name of his brokers and were in their possession. Petitioner received in his own name notice of stockholders' meetings and other notices from the corporations whose securities he held. Petitioner owned other securities having substantially less value during the period from January 10, 1934, to January 5, 1935, but his brokers kept separate accounts for those securities, except for a short period of time in 1934.

Petitioner did not inform any of the corporations issuing the securities of the execution of the instrument dated January 10, 1934, but he informed his wife of each instrument. He did not request his brokers to inform the corporations. The checks for interest and dividends on the securities in the name and possession of petitioner came to him payable to his order as an individual, were endorsed by him for deposit in his wife's account, and were sent by him to his wife's bank for deposit. The checks for interest and dividends on the securities in the name and possession of petitioner's brokers came to them and the petitioner's brokers issued their checks to petitioner for such interest or dividends. These checks he also endorsed for deposit to his wife's account and sent to her bank for deposit. Petitioner's secretary kept a record of the securities, purchases and sales, and income. Petitioner did not, during the period January 10, 1934, to January 5, 1935, make an accounting to his wife under the instrument dated January 10, 1933, but he gave her in advance an income schedule to show what the income from the securities probably would be.

In 1934 petitioner made gifts to his wife totaling $3,694.50, exclusive of the dividend and interest income from the securities in the trusts. He had made such sporadic gifts in varying amounts since 1903. Many of the gifts were made by his sending checks to her bank to be deposited to her account. His wife had other securities of her own in 1934. She had other income of $2,882.22 in 1934, independent of that from the securities. Some of that other income came from a trust of which petitioner was the grantor. In 1934 petitioner paid all of the household expenses and supported his wife and his family independently of any gifts made by him to his wife.

OPINION.

STERNHAGEN: The Commissioner determined the deficiency by treating the income from the trust securities as taxable to the petitioner. He held that despite the declaration of trust the petitioner retained such attributes of ownership of the securities as to justify taxing him. If the deficiency is correct, it must be on this broad ground, because we find nothing in the terms of the instrument or the evidence to bring the case within either section 166 or 167. From the standpoint of legal form, the petitioner transferred property in trust, himself the trustee, to collect and distribute the income therefrom to another for a prescribed period until the trust was by its terms to end. He retained no power to revest any part of the trust property in himself during the trust period, and at the end thereof, although the property was revested in the settlor, the revesting was by virtue not of a power retained or vested in him but of the termination of the trust in accordance with its terms. . None of the income of the trust was retained or accumulated for the settlor at any time. It was all to be distributed to the beneficiary.

But the inapplicability of section 166 or 167 is not decisive, . The troublesome question is whether, after the creation of the trust, the petitioner's control and dominion over the res is so substantially the same as it had been while he was unqualified owner as to justify taxing him irrespective of the trust. Practically speaking, the only effect of the trust was to require him to transfer the year's income to his wife. In all other respects his relation to the trust property was the equivalent of ownership. If the duration of the trust were very much longer than a year, he might be relieved of the tax upon the income, ; (certiorari applied for); ; dismissed, ; (on review C.C.A., 8th Cir.), and he might also be free from tax if the corpus had consisted of real property with a more formal evidence of transfer in trust and the creation of a new estate. . But here we have the minimum indicia of a separation of individual and trustee ownership. We think it is insufficient to support any distinction from the decision in . That case went up on two grounds, the second ground expressing the unanimous view of the Court, as follows:

The provisions of these deeds would require a determination in favor of the government, though Burnet v. Wells had been decided the other way. * * * Here the grantor did not divest himself of title in any permanent or definitive way, did not strip himself of every interest in the subject-matter of the trust estate. During a term of three years, the trustee was to apply the income to the preservation of the policies, and while thus applying the income was to hold the principal intact for return to the grantor unless instructed to retain it longer. The situation in its legal effect would not be greatly different if the trusts had been created for a month or from day to day. One who retains for himself so many of the attributes of ownership is not the victim of despotic power when for the purpose of taxation he is treated as owner altogether.

Certainly there are as slight a divestiture of title, as much command over the disposition of the trust, a retention of as many attributes of ownership, here as there were in that case. See . The Court, without referring to sections 166 and 167 or their prototypes in earlier statutes, held that the practical effect of the trust was so negligible as to leave the income taxable to the settlor even though the trust period was three years. We see no escape from the controlling effect of that decision upon the present case. See ; ; dismissed, ; (on review C.C.A., 7th Cir.).

The Commissioner correctly held the trust income taxable to the petitioner.

An attempt was made by petitioner to claim deductions if the trust income be held taxable to him. But they were not pleaded, the respondent properly objected to evidence about them because he was uninformed and not prepared on the subject, and they were not proven at the hearing but only referred to as a claim. They are therefore not judicable in this proceeding.

Decision will be entered under Rule 50.