Jergens v. Commissioner of Internal Revenue , 136 F.2d 497 ( 1943 )

HOLMES, Circuit Judge.

“The Tax Court sustained deficiencies assessed by the Commissioner with respect to 1936, 1937, and 1938 income tax returns of Andrew Jergens, and the taxpayer has petitioned for review. The correctness of the decision depends upon whether or not the entire income of a trust created by petitioner’s wife was taxable to petitioner.

Prior to December 31, 1934, Mrs. Jergens had received 923 shares of common stock in the Andrew Jergens Company by gift from the taxpayer, and she had purchased two insurance policies on the life of her husband aggregating $255,000. On that date she created a trust, naming as co-trustees the First National Bank of Cincinnati and the taxpayer, and conveyed to the trustees 685 shares of the stock and the two policies of insurance. The trust instrument provided that the income from the stock should be used to pay the expenses of the trust, the premiums on the insurance policies, and an annuity of $1,700 to a third person. The balance was to be paid to the trustor during her life. The trust was for the life of Mrs. Jergens, unless revoked earlier by the act of the taxpayer after five days notice to the co-trustee.

The trustees were given unlimited power to hold, manage, and control the trust properties, except that the bank was required to abide by all written instructions respecting the trust property given to it by the taxpayer, who alone had the further power to vote the stock and to appoint investment counsel for the guidance of the trustees. The taxayer alone had power to withdraw all or any part of the corpus of the trust, except that this power was limited with respect to the insurance in that the consent of the trustor was a prerequisite to withdrawal. He also had power to alter, amend, or modify the trust as he saw fit, or to revoke it in whole or in part, with the single exception that he did not have power to make the proceeds of the insurance payable to his estate.

During the tax years here involved, the trust income was disbursed in accordance with the original provisions of the instrument, and the income taxes thereon were paid in part by the trustees and in part by the beneficiaries. The Commissioner determined that the whole of the trust income was taxable to the petitioner by reason of his unfettered dominion and control over the income-producing properties and his unlimited power to take, or to control the disposition of, the income produced thereby.

136 F.2d — 32

With respect to the shares of stock, which were the only income-producing properties in the trust estate, and the income thereof, the taxpayer was given control so absolute as to be consonant with full ownership. The trust instrument gave him unlimited power to withraw the stock from the trust or to alter or amend the provisions of the trust relative to the income thereof in any way. After consideration of these provisions of the instrument, the Commissioner, the Tax Court, a majority of this court, and petitioner himself agree that the taxpayer had complete command over the stock and its income during the tax years involved, and that he might have taken the stock or its income for himself or disposed of it otherwise at his pleasure.

In Section 22(a) of the respective Revenue Acts, 26 U.S.C.A. Int.Rev.Code § 22(a), here applicable, Congress intended to use the full measure of its taxing power.¹ It is the long-settled course of tax jurisprudence that such control over income warrants the imposition of the tax incidence of that income upon the person who commands its disposition whether he takes it for himself or not.² This principle is not to be limited in trust cases to situations where the grantor has retained controlling powers; the determinative consideration is the existence of actual dominion over the property whether it is retained or acquired.³

Affirmed.

1 Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391; Helvering v. Midland Life Ins. Co., 300 U.S. 216, 57 S.Ct. 423, 81 L.Ed. 612, 108 A.L.R. 436; Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788; Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L.Ed. —; Reuter v. Commissioner, 5 Cir., 118 F.2d 698.

2 Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S.Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397; Corliss v. Bowers, 281 U. S. 376, 50 S.Ct. 336, 74 L.Ed. 916; Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731; Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 544, 84 L.Ed. 788; Helvering v. Horst, 311 U.S. 112, 61 S. Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Harrison v. Schaffner, 312 U.S. 579, 61 S.Ct. 759, 85 L.Ed. 1055.

3 Richardson v. Commissioner, 2 Cir., 121 F.2d 1. Cf. Commissioner v. Betts, 7 Cir., 123 F.2d 534; Jones v. Norris, 10 Cir., 122 F.2d 6.