Ward v. Commissioner , 40 B.T.A. 225 ( 1939 )

CHRISTOPHER L. WARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Ward v. Commissioner

Docket No. 92240.

United States Board of Tax Appeals

40 B.T.A. 225; 1939 BTA LEXIS 879;

July 12, 1939, Promulgated

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1. TRUST INCOME - SECTIONS 166 AND 167, REVENUE ACT OF 1934. - Two trusts were created by petitioner, with income payable to his wife and four children. One was to terminate 10 years after creation, but could be terminated at any time by the beneficiaries of two-thirds of the income. The other was to continue until the grantor's youngest grandchild reached age 21, or 21 years after the death of the last survivor of the grantor's children, but could be terminated during the life of the grantor by the beneficiaries of three-fifths of the income. Held, that the trust income is not taxable to the grantor under section 166 of the Revenue Act of 1934. Meredith Wood,37 B.T.A. 1065">37 B.T.A. 1065, affd., 104 Fed.(2d) 1013.

2. Under the second trust 10 percent of the income was to be retained by the trustee and added to corpus. Held, that such income is not accumulated for future distribution to the grantor and is not taxable to the grantor under section 167 of the Revenue Act of 1934. William E. Boeing,37 B.T.A. 178">37 B.T.A. 178.

Paul E. Shorb, Esq., and Joel Barlow, Esq., for the petitioner.

D. D. Smith, Esq., for the respondent.

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HILL

The respondent has determined deficiencies in the petitioner's income tax for the years 1934 and 1935 in the amounts, respectively, of $2,157.03 and $2,911.42. The petitioner contests the full amounts and claims an overpayment of $37.79 for 1935.

The deficiencies result from the respondent's action in treating income of two trusts as subject to section 166 of the Revenue Act of 1934 and adding such income to the income reported by the petitioner.

FINDINGS OF FACT.

The petitioner is an individual. For the years 1934 and 1935 he filed his income tax returns with the collector for the district of Delaware.

The 1928 Trust.

On February 28, 1928, the petitioner created a trust for the benefit of his wife and four children. A Delaware trust company was named trustee, and pursuant to the terms of the trust instrument, the petitioner conveyed certain corporate stock to the trustee.

The trust was to endure until April 1, 1933, which date was extended by a 1932 amendment to April 1, 1938, or until the prior death of the petitioner. It could be terminated at any time by notice in writing signed by the persons representing two-thirds in interest in the income. On termination either by lapse of time or upon notice by the income beneficiaries, corpus and any accumulated income were to revert to the grantor. In the event of termination by the death of the grantor corpus was to go to the trustee named in the grantor's will.

During the existence of the trust all income was to be paid monthly to the beneficiaries in the proportions of six-tenths to the petitioner's wife and one-tenth to each of the four children. In the event of the wife's death during the term of the trust, her share of the income was to be paid to the grantor. The share of any child dying during the term of the trust was to be added to corpus. All of the trust income was distributed by the trustee as follows:

	1934	1935
Caroline B. Ward (wife)	$7,199.29	$5,400
Christopher L. Ward, Jr. (child)	1,199.89	900
Esther Ward Kimball (child)	1,199.88	900
Rodman Ward (child)	1,199.88	900
Alison Ward (child)	1,199.88	900
Total	11,998.82	9,000

The trust instrument contained the following provisions:

* * * that so long as the said Donor shall live, the power of investment and reinvestment hereby given to the said Trustee shall be exercised only by and with his written consent and approval and after the death of the Donor shall be exercised only by and with the written consent of a majority of the said beneficiaries; and further provided, that the said Trustee shall, during the life of the Donor, as and when directed by the Donor in writing, sell and assign any or all of the securities or other investments representing the corpus or principal of said estate and any additions or accretions thereto at such price as may be directed by the Donor and shall if so directed, exchange said securities and investments for others as may be directed by the said Donor.

The 1928 trust was terminated on November 25, 1935, by a notice in writing to the trustee signed by all of the beneficiaries.

The 1935 Trust.

By agreement with a trust company dated November 29, 1935, the petitioner placed in trust a group of securities for the benefit of his wife and four children. Ten percent of the income was to be retained by the trustee and added to corpus. During the joint lives of the petitioner and his wife the trustee was to pay out of the net income of the trust $600 to the petitioner's wife monthly and to each of the children $100 monthly. Any excess income was to be added to corpus. In the event of the death of the wife with the petitioner surviving, the wife's share of income was to be paid to the petitioner. On the petitioner's death, with the wife surviving, the trust income was to be paid in the proportions of two-fifths to the wife and three-fifths to the children, share and share alike. Other provisions directed distribution to the issue or surviving spouse of any deceased child during the existence of the trust.

The trust was to terminate upon the happening of either of these two events, whichever occurred later: (a) When the youngest then living grandchild of the settlor should reach the age of 21 years, or (b) 21 years after the death of the last surviving child of the settlor. In any event it was to terminate 21 years after the death of the last survivor of the beneficiaries living when the trust was created. Upon termination in these ways, corpus and accumulated income were to be distributed among the issue of the settlor or the then income beneficiaries according to formulae not presently important. There were also alternative provisions for distribution in the event of failure of issue.

The trust instrument provided that the "trust shall be irrevocable and unalterable by the settlor," but during the life of the settlor the trust could be "disestablished, terminated, amended and altered * * * by three-fifths (3/5) in interest of the adult beneficiaries at the time, exclusive of the settlor (being also a majority in number of said adult beneficiaries, exclusive of settlor) by writing signed by them and presented to the trustees." Upon termination under this provision corpus and undistributed income were to revert to the petitioner.

The income of this trust in 1935 was $2,250, of which the trustee distributed $2,025, as follows:

Caroline B. Ward	$1,215.00
Christopher L. Ward, Jr	202.50
Esther Ward Kimball	202.50
Rodman Ward	202.50
Alison Ward	202.50
Total	2,025.00

OPINION.

ARUNDELL: The respondent's determination of deficiencies was based on his conclusion that the trust income was reached by section 166 of the Revenue Act of 1934, hence was taxable to the grantor. On brief his counsel does not attempt to support that view, and we think it is untenable. The cases of ; ; affd., ; and , are clear authority for the petitioner in his contention that section 166 is not applicable, and we so hold.

In the brief of counsel for the respondent the income of the 1928 trust is sought to be attributed to petitioner on the theory that the powers in the petitioner to direct investments and sales by the trustee are the equivalent of powers to revoke and to control the income of the trust. To support this view, we are cited to the cases of ; , and others, where we found that alleged trusts were without substance. Clearly these cases are not in point. We shall not attempt a minute distinction, but point out only that in this case the grantor parted with physical possession of the trust corpus, that the corpus was actually conveyed to the trustee, a trust company, and that the trustee collected and distributed the income to the beneficiaries in accordance with its written agreement. The power of the petitioner to direct investments and sales of trust corpus was not a power to nullify a trust otherwise valid. Any exercise of such power to the detriment of the beneficiaries would be subject to restraint by a court of equity. A similar power in , was held not to require a disregard of the completed transfer to the trust and to tax the grantor on the trust income. We reach the same conclusion here.

Finally, the respondent contends that the 10 percent of the income of the 1935 trust that the trustee was required to retain and add to the corpus, is taxable under section 167Citing . Section 167, in so far as it may possibly relate to the facts here, taxes trust income to the grantor where such income "is * * * held or accumulated for future distribution to the grantor." The income so added to corpus could be distributed to petitioner in one of two ways. First, by termination of the trust with the consent of three-fifths of the beneficiaries; second, by the possibility that the petitioner's wife and his children, without issue, would predecease him. Under the first possibility the income would not be reached by section 167 as the beneficiaries have substantial adverse interests. The second possibility is conceded by the respondent to be remote, and we think it is too remote to be given serious consideration. At most it was a possibility of reverter and not a present accumulation "for future distribution to the grantor." .

Decision will be entered under Rule 50.