Palmer v. Commissioner , 40 B.T.A. 1002 ( 1939 )

CARLETON H. PALMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Palmer v. Commissioner

Docket No. 89854.

United States Board of Tax Appeals

40 B.T.A. 1002; 1939 BTA LEXIS 765;

December 5, 1939, Promulgated

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1. Held, that by the execution of a trust agreement the petitioner, as grantor, irrevocably conveyed in praesenti his legal title to certain stock to the trust thereby created and irrevocably conveyed in praesenti the beneficial interest to his wife for life, with remainder interests to his children and their issue.

2. Held, that the execution of the trust agreement effectively passed title to petitioner, as trustee, without manual delivery and despite the fact that the stock transferred in trust remained registered in the petitioner's name and pledged as collateral security for certain loans.

3. Held, that the broad powers given to petitioner alone, as trustee, related to the management of the trust corpus and did not invest in him individually any economic benefits or enjoyment of the trust property and did not affect the validity of the trust.

4. Held, that the petitioner's reservation of an option to purchase certain stock from the trust at a fair price did not affect the validity of the trust.

5. Held, that sections 166 and 167 of the Revenue Act of 1932 are not applicable.

6. Held, that the income of the trust for 1932 is not taxable to petitioner.

M. T. Moore, Esq., and George G. Tyler, Esq., for the petitioner.

George R. Sherriff, Esq., for the respondent.

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TYSON

The respondent has determined a deficiency in income tax for the year 1932 in the amount of $11,489.93, all of which is not in controversy in this proceeding.

The only error assigned is the respondent's inclusion, in the petitioner's gross income for the taxable year, of dividends amounting to $25,503 paid in 1932 on certain shares of stock after the petitioner's execution of a trust agreement relating to such shares.

The proceeding has been submitted upon a stipulation of facts, which, together with the exhibits attached thereto, is adopted as our findings of fact and included herein by reference. Only such of those facts as are deemed necessary to a consideration of the issue presented will be set forth herein.

FINDINGS OF FACT.

The petitioner, an individual, is a resident of Fairfield, Connecticut, and his business address is in New York, New York. In May 1932 he was, and at all times since has been, president of E. R. Squibb & Sons, a New York corporation. Also, during that time, Winthrop B. Palmer was the wife of petitioner, and he had three minor children.

On May 26, 1932, the petitioner, as grantor, and the petitioner and his wife, as trustees, executed, in New York, a written trust agreement which provided that the trust is "irrevocable" and "may not be amended, modified or changed" as to the beneficiaries thereunder, or any payment of the principal and/or income thereof except by written agreement of all the adult beneficiaries and the trustees. Such agreement further provides that "the Grantor has granted, assigned, set over and delivered, and by these presents does grant, assign and set over unto the Trustees, and their successors in the trust," all of the grantor's "estate, right, title and interest" in 3,501 shares of $6 first preferred stock and 30,000 shares of no par common stock of E. R. Squibb & Sons, "but subject to the provisions of Article ELEVENTH hereof." The trustees were authorized to receive, hold, manage, invest, and reinvest the trust estate and pay over quarterly the entire net income therefrom to petitioner's wife during her life and upon her death to divide the then existing principal of the trust estate into equal shares, to be held in trust a specified period of time for the benefit of petitioner's then surviving children or their then surviving issue and distributed to such persons in a specified manner upon their attaining certain ages.

The trust agreement authorizes the trustees, in administering the trust estate, "to exercise freely and in their uncontrolled discretion all the rights, powers and privileges appertaining to full and complete ownership thereof", without liability except for willful misconduct; to invest, reinvest, sell, or exchange the trust property; to borrow or lend money; to apportion charges and expenses against principal or income; to vote stocks and exercise any stock rights; to participate in any merger, consolidation, or reorganization, etc.; and at any time to register any securities of the trust estate in their names as trustees, or in the name of either of them or their nominees "with or without indicating the trust character of the securities so registered."

The trust agreement contains the grantor's covenant to execute and deliver such further assignments, conveyances, or instruments as the trustees may deem necessary to effectuate the purposes of the agreement. It further provides that if Winthrop B. Palmer shall resign or die during the life of the grantor, he shall have the power to appoint her successor trustee, and that, upon the death of the grantor or his resignation as trustee, the Chase National Bank of the City of New York shall succeed him as trustee. That bank accepted such contingent appointment as trustee.

Article eleventh of the trust agreement provides, inter alia, that the 3,501 shares of preferred and 30,000 shares of common stock of E. R. Squibb & Sons conveyed by the grantor to the trustees under that agreement are registered in the name of the grantor, but the certificates therefor are pledged with and held by certain banks as collateral security for various loans to the petitioner and his wife in the respective total amounts of $390,000 and $79,920, plus interest; that "For the purpose of securing to the Trust Estate the full and complete ownership of said shares of stock * * * the Grantor expressly covenants with the Trustees to indemnify and hold harmless the Trust Estate against the collection of any of said loans, or any part thereof, out of said shares of stock, or any part thereof"; and that the grantor "reserves the option to purchase" for either cash or securities taken at their then market value, at any time up to May 1, 1947, any or all of the 30,000 shares of Squibb & Sons" common stock (including any shares the trust estate may receive in any splitup thereof or in any exchange thereof upon a recapitalization or reorganization of Squibb & Sons). Article eleventh also provides that the price per share so purchased is to be determined, at the time of such purchase, pursuant to a specified formula which embraces the Squibb & Sons' average annual net earnings over the preceding three-year period and the book value of such shares.

The trust agreement further provides that "So long as the Grantor shall be one of the Trustees hereunder, the Grantor as such Trustee (and without the concurrence of the other Trustee), may exercise all or any of the powers vested in the Trustees in connection with any matter or thing whatsoever, * * * except, however, the matter of adjusting the option price or of the formula for determining the same, provided for in Article ELEVENTH hereof"; that the trustees "signify their acceptance of the Trust hereby created"; and that "The validity and construction of this instrument and the duties and obligations of the Trustees in the administration of the trusts hereby created shall be determined in accordance with the laws of the State of New York."

The trust agreement was drafted by the petitioner's attorneys at his request and pursuant to his instructions; was executed by the parties thereto under seal before a notary public; and attached thereto are canceled Federal and New York stock transfer stamps aggregating $670.02 and $1,340.04, respectively.

The 3,501 shares of Squibb & Sons preferred stock referred to in the trust agreement were the only shares of such preferred stock owned by petitioner on May 26, 1932. Throughout the remainder of the year 1932, the certificates for such preferred shares and also the certificate for the 30,000 shares of Squibb & Sons common stock referred to in the trust agreement remained registered in the petitioner's name and deposited as part of the collateral held for the total loans to petitioner and his wife, mentioned in article eleventh of the trust agreement. In addition to the above mentioned shares of preferred and common stock the petitioner owned 31,006 shares of Squibb & Sons common stock during 1932, which were also held as part of the collateral for those same loans, and throughout 1932 the value of such 31,006 common shares was in excess of the total of such loans plus interest. After the execution of the trust to December 31, 1932, the petitioner's net worth, after deducting all liabilities, was over $150,000.

No bank account was maintained for the trust until in January 1935, when a bank account in the name of "Carleton H. Palmer, Trustee under Trust Agreement dated May 26, 1932" was opened with the Chase National Bank of the City of New York. Checks on such account could be drawn by "Carleton H. Palmer, Trustee."

During 1935 and 1936 a total of 600 of the 3,501 shares of Squibb preferred stock referred to in the trust agreement were withdrawn from the banks at which they were held as collateral. Of such 600 shares, 515 were sold and the net proceeds therefrom were paid to Carleton H. Palmer, who deposited the same in the above mentioned bank account for the trust. The remaining 85 of the 600 shares were kept in the petitioner's safe at E. R. Squibb & Sons.

During 1935 and 1936 the trust opened securities accounts with three brokerage firms. The proceeds from the above mentioned sales of 515 shares of Squibb preferred stock were reinvested in other stocks and bonds, which were kept in those securities accounts until withdrawn in 1938 and registered in the name of "Carleton H. Palmer and Winthrop B. Palmer, as Trustees under Trust Agreement dated May 26, 1932" and kept in petitioner's safe at E. R. Squibb & Sons. All of the orders given to those brokerage firms were given by petitioner.

During August and September 1937 the remaining 2,901 shares of Squibb prefered and the 30,000 shares of Squibb common (referred to in the trust agreement) then held as collateral security were released by the banks to petitioner, free of every lien thereon and without cost to the trust. On December 14, 1937, the certificates for such 2,901 Squibb preferred shares plus the unsold 85 Squibb preferred shares withdrawn from the banks in 1935 and 1936 and also the certificate for the released 30,000 shares of Squibb common were transferred to the names of "Carleton H. Palmer and Winthrop B. Palmer, as Trustees under Trust Agreement dated May 26, 1932" and still remain in such names.

During the period May 26, 1932, until December 14, 1937, the 3,501 shares of Squibb preferred and the 30,000 shares of Squibb common referred to in the trust agreement and remaining unsold during that time were registered in the name of petitioner and all the dividend checks on such shares during that period were made payable to and were received by petitioner. During the period May 26, 1932, to August 1, 1936, the petitioner, upon receipt thereof by him, immediately endorsed and delivered such dividend checks to his wife, Winthrop B. Palmer, who deposited them in her personal bank account. From August 1, 1936, to December 14, 1937, the petitioner, upon receipt thereof by him, endorsed and deposited such dividend checks in the bank account in the name of the trust. Since December 14, 1937, all such dividend checks have been drawn in the name of "Carleton H. Palmer and Winthrop B. Palmer, as Trustees under Trust Agreement dated May 26, 1932" and have been deposited in the bank account in the name of the trust. Since August 1, 1936, checks in the amounts of all such dividends have been immediately drawn on the bank account in the name of the trust and delivered to Winthrop B. Palmer, who deposited them in her personal bank account.

The dividends and interest on all stocks and bonds and other securities purchased by the trust (in 1935 and subsequently, as above mentioned) have been deposited in the bank account in the name of the trust and checks on that account for the amounts of such dividends and interest have been immediately drawn on that bank account and delivered to Winthrop B. Palmer, who has deposited them in her personal bank account.

As to the taxable year in question and for the period of May 26 to December 31, 1932, both dates inclusive, E. R. Squibb & Sons declared and paid dividends in the respective amounts of $10,503 and $15,000 on the 3,501 shares of Squibb preferred and the 30,000 shares of Squibb common stock referred to in the trust agreement of May 26, 1932. As above stated, such dividends were in the first instance received by petitioner, who immediately paid them over to his wife, Winthrop B. Palmer.

The petitioner filed a fiduciary return for the Winthrop B. Palmer trust for the year 1932, on which he reported the dividends in the total amount of $25,503 mentioned in the next preceding paragraph. The petitioner's wife, Winthrop B. Palmer, reported, inter alia, such dividends in her individual separate income tax return for the year 1932. Such dividends, in the amount of $25,503, have been added by the respondent to the gross income as reported by petitioner on his individual income tax return for the year 1932.

OPINION.

TYSON: The issue presented is whether the petitioner is taxable upon the $25,503 dividends declared and paid during the period May 26 to December 31, 1932, upon the shares of E. R. Squibb & Sons stock which were the subject matter of the trust agreement of May 26, 1932, as set forth in our findings of fact.

The respondent determined, and now contends, that the execution of the trust agreement of May 26, 1932, was ineffectual; that there was no complete, irrevocable conveyance of the stock to the trust in praesenti; that the petitioner retained and continued to exercise throughout 1932 the unfettered dominion and control over the stock; that the petitioner was the owner of the stock during the taxable year; and that, therefore, the dividends in question, which were paid direct to petitioner by E. R. Squibb & Sons and immediately thereafter by petitioner to his wife, are taxable to him under the provisions of section 22(a) of the Revenue Act of 1932. ^{in praesenti, to the trust his legal title to the stock in question, and, also, to irrevocably convey, in praesenti, the beneficial interest in such stock including the income arising therefrom to his wife during her lifetime, with remainder interests to his children and their issue. Further, in our opinion, the trust agreement effectuated such irrevocable conveyance.}

The fact that the stock referred to in the trust agreement of May 26, 1932, was at that time pledged by petitioner as collateral security for certain loans did not prevent the petitioner's conveyance of such stock to a valid trust, subject to the existing lien, for the petitioner, as the pledgor, retained the title to and the proprietary interest in that stock, while the pledgee had only a lien on the stock for the amount of the loan, the right to possession of the stock until the loan was repaid, and the right to sell same in case of default in payment of the loan. ; ; ; ; . "Every kind of vested right which the law recognizes as valuable may be transferred in trust." . Furthermore, the petitioner expressly covenanted with the trustees "to indemnify and hold harmless the Trust Estate against the collection of any of said loans, or any part thereof, out of said shares of stock, or any part thereof", and he was in a financial position to carry out that covenant.

The fact that the petitioner was unable to make a manual delivery of the stock in question to the trustees because it was pledged as security, and the further fact that during the taxable year the stock remained registered in the petitioner's name, did not preclude a sufficient delivery and a completed transfer of said stock in trust on May 26, 1932, as contended by respondent, for the execution of the trust agreement, of itself, effectively passed title to the stock in question from the petitioner individually to himself and his wife as trustees, and the beneficial interest in the stock became vested in the cestuis que trust, who could enforce their rights thereto. ; ; cf. ; ; ; ; ; ; .

The broad powers and control which the petitioner could exercise over the stock in question after the execution of the trust agreement are not indicia of individual ownership of the stock by petitioner, as contended by respondent. Under the trust agreement the petitioner, alone, but acting solely in his capacity as one of the trustees, was given authority to exercise such powers and by that instrument the legal title to and control over the stock passed from the petitioner individually, as grantor, to himself and his wife as trustees, just as effectively as if some other persons had received the conveyance as trustees. Those powers which petitioner as grantor reserved to himself as one of the trustees relate to the management of the trust corpus and do not vest in the grantor any control as an individual over the economic benefits or enjoyment of the trust property. , and ; petition for review dismissed, ; cf. ; certiorari denied, (affirming ). The petitioner's reservation of an option to reacquire the common stock from the trust by purchase at a fair price to be fixed by a specified formula prescribed in the trust instrument and over which he had no control after the execution of that instrument did not affect the validity of the trust and did not constitute a reservation by him of a power of revocation in whole or in part. Cf. . It is obvious that under such restrictions a sale by the trust of its Squibb common shares to petitioner would have no effect upon the continued existence of the trust, but would result merely in a change in character of the trust corpus by substitution of a fair purchase price paid for the stock in place of the stock itself.

While the respondent makes no contention for the application of either section 166 or section 167 of the Revenue Act of 1932 *782 case, we deem it proper, because of the nature of the issue involved, to hold that neither section is applicable. Here the trust, by its terms, was "irrevocable" and could be amended, modified, or changed only by the written consent of all of the adult beneficiaries and the trustee or trustees in office at the time and, further, no part of the trust income was or could be distributed to or held for future distribution to the grantor under any circumstances. See ; ; affirmed, per curiam,.

Under the express terms of the trust agreement the entire net income of the trust was distributable quarterly to Winthrop B. Palmer during her lifetime for her unrestricted use and during the taxable year in question such income was so distributed. We hold that the respondent erred in including in the petitioner's gross income for the year 1932 the dividends in the amount of $25,503 here in question.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 22. GROSS INCOME.

  (a) GENERAL DEFINITION. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * ↩

• 2. SEC. 166. REVOCABLE TRUSTS.

  Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested -

  (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or

  (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,

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

  SEC. 167. INCOME FOR BENEFIT OF GRANTOR.

  (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 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 specifled 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 income in question." ↩