Green v. Commissioner , 7 T.C. 263 ( 1946 )

Leslie H. Green, Petitioner, v. Commissioner of Internal Revenue, Respondent

Green v. Commissioner

Docket Nos. 1780, 2570

United States Tax Court

7 T.C. 263; 1946 U.S. Tax Ct. LEXIS 134;

June 28, 1946, Promulgated

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Decisions will be entered under Rule 50.

1. Petitioner created two trusts for the benefit of his wife and minor son, respectively. As settlor-trustee, petitioner retained broad managerial powers over the trusts, including the right to deal with himself as an individual with respect to the trust properties. Held, the petitioner is taxable as an individual on the income of the trusts under section 22 (a), Revenue Acts of 1936 and 1938 and the Internal Revenue Code. Ellis H. Warren, 45 B. T. A. 379; affd., 133 Fed. (2d) 312, followed.

2. Held, section 275 (c) of the Revenue Act of 1936 is applicable and deficiencies determined for 1937 are not barred by the statute of limitations, where evidence shows that petitioner omitted from his gross income amounts properly includible therein which exceeded 25 per cent of the amount stated by him on his return; held, further, deficiencies for 1938 are barred by statute of limitations where amount omitted from his return by petitioner did not exceed 25 per cent of the amount of gross income stated in the return.

3. Held, petitioner not entitled to offset against his individual tax liability for 1937 taxes paid by him for that year as trustee.

R. M. O'Hara, Esq., and Benjamin E. Jaffe, Esq., for the petitioner.

Philip M. Clark, Esq., and William F. Robinson, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

The respondent determined the following deficiencies in income tax against Leslie H. Green for the years 1937, 1938, 1939, 1940, and 1941:

Docket No.	Year	Deficiency
1780	1937	$ 49,298.63
1780	1938	24,566.59
2570	1939	40,840.01
2570	1940	61,653.41
2570	1941	41,729.49

Pursuant to stipulation, the respondent confesses error with respect to assignment of error set out as subparagraph (a) of paragraph 4 appearing on page 2 of the petition in Docket No. 2570, which assignment of error reads as follows:

(a) Respondent erred in issuing a deficiency notice with respect to the year 1939 in that on July 22, 1941, the respondent mailed to the petitioner a deficiency notice for the calendar year 1939. Within ninety days after the mailing of said deficiency notice, the petitioner filed with theBoard of Tax Appeals (now The Tax Court of the United States), Docket No. 108,825, a petition appealing from said proposed deficiency, and thereafter on November 7, 1942, The Tax Court of the United States, under written stipulation signed by counsel for the petitioner and respondent, and filed with the Court on November 4, 1942, entered its decision that there was a deficiency in income tax for the year 1939 in the amount of $ 4,495.00, which this petitioner thereafter paid, together with interest. The notice of deficiency, dated May 10, 1943, insofar as it relates to the year 1939, is void and of no force or effect since by virtue of Section 272 (f) of the Internal Revenue Code, the Commissioner has no right to determine any additional deficiency with respect to the calendar year 1939.

The parties stipulate and agree that an order may be entered dismissing the proceedings for lack of jurisdiction in so far as they relate to the year 1939, and finding and determining that there is no deficiency in taxes due from the petitioner for the calendar year 1939. It is accordingly hereby so ordered.

Several other issues raised by the pleadings are no longer in controversy.

The remaining issues are: (1) Whether or not the petitioner is taxable for the years 1937, 1938, 1940, and 1941 upon the income of two trusts created by him in 1935 for the benefit of his wife and minor son; (2) if (1) is answered in the affirmative, whether or not the respondent is barred by the statute of limitations from determining any deficiencies for the years 1937 and 1938; and (3) if (1) is answered in the affirmative and (2) in the negative, whether or not the petitioner is entitled to offset against any deficiencies determined against him for 1937 and 1938 the amount of taxes paid by the two trusts respectively, on returns filed by them for the years 1937 and 1938.

FINDINGS OF FACT.

The facts were stipulated in part and we incorporate the stipulations by this reference. The following is a summary of the stipulated facts, together with other facts found from the record:

The petitioner is an individual with his principal place of business in Detroit, Michigan. The returns for the years in controversy were filed with the collector of internal revenue at Detroit, Michigan.

Standard Cotton Products Co., a corporation, hereinafter called Standard, was organized in 1931. Its capital stock, which consisted of 2,400 shares of common stock with a par value of $ 100 per share, was held from the date of organization to August 18, 1935, by the petitioner, Ellis H. Warren, and O. M. Banfield, each owning 800 shares. The petitioner was president and a director of Standard from its organization until 1939. Since 1939 he has been a director. Standard was engaged in the manufacture of upholstering material used in the manufacture of automobile cushions and backs. The majority of its sales was to the automobile industry. The balance was sold for house insulation.

The petitioner devoted most of his time to the management of Automotive Materials Corporation, hereinafter called Automotive, of which he was sole owner. Automotive was engaged in the business of furnishing upholstering materials, including textiles and leathers of all kinds, to the automobile industry. Automotive acted as selling agent for Standard.

The petitioner's family consisted of his wife, Edith C. Green, and his son, Robert N. Green.

On August 19, 1935, the petitioner, under trust indentures executed on that date, established two trusts, one naming his wife, Edith C. Green, as the primary beneficiary, and the other naming his son, Robert N. Green, as the primary beneficiary. The corpus of each trust consisted of 400 shares of stock of Standard, representing the petitioner's entire holdings therein.

The trust indentures were identical in their terms except as to those provisions relating to distribution or accumulation of income and of the corpus. Each trust was declared to be irrevocable and in each the petitioner was named as trustee and the National Bank of Detroit as successor trustee.

By paragraph 2 of each trust the trustee was given, among others, the following powers:

(a) To take possession of said corpus of the trust and collect and receive the moneys, interests, profits and income arising therefrom, with full power in the Trustee to manage the same as in the judgment and discretion of the Trustee may seem most advantageous to such trust estate and the beneficiaries thereof. Included in such power of management shall be the power to vote, in person or by proxy, any and all stocks in any and all corporations, at any and all meetings of stockholders, for any and all purposes, without any limitations whatsoever.

(b) To retain all property in the form in which the same shall be received by the Trustee, or at any time, to sell, exchange, mortgage, pledge or partition the same or any part or parts thereof and invest and reinvest the proceeds from time to time, and keep the same invested in securities or other personal property.

(c) To borrow money and contract indebtedness upon the security, mortgage or pledge of the corpus of the trust or any portion thereof, and to make loans to persons, firms or corporations upon security, mortgage or pledge.

* * * *

(g) To distribute in kind at the termination of any of the trusts hereof, or at such times as may be required by the terms hereof, any cash, stocks, bonds or other securities at any time belonging to the estate, to or among the persons entitled to participate in any distribution thereof; the selection of the securities for distribution, the determination of the respective proportions of cash and securities and the respective proportions of specific securities distributed to the respective beneficiaries, and the determination of the prices of securities so distributed, shall rest in the sole judgment and discretion of the Trustee, and his determination shall be final and conclusive upon all persons concerned therewith.

* * * *

(h) To carry on sale, purchase, exchange, loan, pledge, mortgage and other transactions with the Settlor, and without limiting the generality of the foregoing, to use property of the trust estate to purchase assets from the Settlor, to make sales of property in the trust estate to Settlor, and to make loans upon ample security to Settlor.

* * * *

The trusts further provided:

5. The Trustee is hereby vested with full and complete title to all of the securities, property and estate hereby transferred to said Trustee, until the termination of said trust and until such trust property shall be actually paid over, transferred and delivered to the persons entitled as beneficiaries hereunder; and no person entitled as beneficiaries hereunder -- either to the corpus of said trust upon the termination, or to the income therefrom during the continuance thereof -- shall take or have any title to or interest in such corpus or income until the same shall be actually received in possession by such person. No disposition, charge or encumbrance by way of anticipation of such trust corpus or the income therefrom, or any part thereof, by any person who may be designated as beneficiary hereunder, shall be of any validity or legal effect, or be in anywise regarded by said Trustee, nor shall the interests of any beneficiary be in any way liable for any claim of any creditor or of any other person to whom such beneficiary may be in any way obligated.

* * * *

7. The Settlor, and any beneficiary or beneficiaries of the trusts herein provided for, if any of them so desire, may contribute real or personal property to the corpus of this trust, by making appropriate conveyance, grant or transfer to the Trustee, and after such conveyance, grant or transfer the property so transferred shall be deemed a portion of the corpus of this trust, subject to the terms and conditions hereof.

8. The Trustee shall distribute the income to the beneficiaries or expend same for the benefit of the beneficiaries in such installments as he may deem proper.

9. If, after the death of the Settlor, in the opinion of the Trustee, the income herein provided, shall not be sufficient to suitably support, educate and maintain the beneficiary or beneficiaries, or in the case of any emergency befalling any beneficiary hereunder, such as illness, accident or other extraordinary distress, the Trustee is authorized to use and expend such part of the corpus of the trust as the Trustee may deem necessary to make up such deficiency or meet such emergency.

10. The Trustee accepts the property and trusts herein created on the terms and conditions stated, and agrees to care for, manage and control the same in accordance with the directions herein specified; to furnish to each beneficiary hereof (annually and oftener is requested so to do in writing), statements showing the condition of said trust, the character of the investments, and receipts, expenses and disbursements since the last previous statement. The books of account of the Trustee, in connection with the investments, shall at all times be open to the reasonable inspection of the beneficiaries hereof.

Each trust provided that during the lifetime of the settlor the trustee might distribute to the primary beneficiary all or any portion of the trust income in the sole discretion of the trustee. In the Edith C. Green trust, following the death of the settlor, the entire trust income was distributable to the beneficiary during her lifetime. Upon her death, the income, with limits as to maximum distributions, was distributable to Robert N. Green, the primary beneficiary under the other trust, and the corpus was distributable to him upon attaining the age of 45. In the event Robert N. Green died prior to reaching the age of 45, there were gifts over of income and corpus in favor of his issue and their descendants. If Robert N. Green died prior to reaching the age of 45 leaving a wife but no issue, the income of the trust was to be paid to his wife and upon her death, to the settlor's heirs at law ascertained as at the time of his death according to the statutes of Michigan of descent and distribution.

In the Robert N. Green trust the income following the death of the settlor was to be distributed to the beneficiary in amounts not exceeding $ 10,000 per annum until he reached the age of 30; $ 20,000 per annum thereafter until he reached 35, and $ 25,000 per annum thereafter until he reached 45, at which time the corpus was distributable to him. In the event of his death prior to the time he was entitled to receive the corpus of the trust, there were gifts over of income and corpus in favor of his issue and their descendants. In the event that he died without issue prior to reaching the age of 45, the income was to be paid in equal shares to his wife and mother and the entire income to their survivor. Following the death of such survivor the corpus of the trust was to be distributed to the heirs at law of the settlor ascertained as of the time of his death according to the statutes of Michigan of descent and distribution.

The petitioner duly filed gift tax returns representing the gifts of stock to the two trusts and in said returns the gift to each trust was valued at $ 30,000. The respondent thereafter redetermined the petitioner's gift tax liability based upon an increase to $ 90,000 of the value of the gift to each trust. The petitioner accepted such redetermination by the respondent and paid the additional gift taxes resulting from the respondent's determination.

The petitioner has continued to act as trustee since the establishment of the trusts and has received no compensation for his services as such. All the income of both trusts has been accumulated since their establishment.

In establishing the trusts the petitioner was motivated by a desire to provide his wife and son with independent and separate incomes of their own.

In 1940 the petitioner transferred insurance policies on his life of the face value of about $ 186,000 to each trust and paid the gift tax due thereon. Pursuant to agreement, the primary beneficiaries have paid all the premiums on the policies transferred to their respective trusts.

The petitioner was one of the original incorporators in 1936 of a company known as Rex-Air, Inc. He and one Fisher each subscribed for 37,500 shares of stock of the company at a cost of $ 1 per share. At the time, the petitioner intended that one-third of his subscription should go to each trust. About a month later one-third of the stock subscribed to by the petitioner was delivered to each trust and the petitioner, as trustee, reimbursed himself for such certificates in the amount of $ 24,000.

At various times the petitioner, in his individual capacity, borrowed money from the trusts. Loans received by him from the Edith C. Green trust aggregated $ 42,500 during 1937 and $ 30,000 during 1939. Loans from the Robert N. Green trust aggregated $ 34,000 in 1937 and $ 30,000 in 1939. All such loans were evidenced by negotiable promissory notes bearing interest at the current rate, payable on demand and secured by sufficient collateral. All such notes, except the one in the case of each trust representing the last loan to the petitioner, were renewed from time to time. Interest on all the loans was paid by the petitioner to the trusts currently as it accrued and the loans were all paid in full in April 1945.

The petitioner sold to the Robert N. Green trust a note executed in favor of the petitioner by his brother. The note, which was in the face amount of $ 14,750 and bore interest, was sold to the trust by the petitioner for $ 10,000. Interest on the note was paid to the trust currently as it accrued and the note was later paid in its full face amount.

In 1935 the petitioner's wife and son acquired stock in Automotive. This stock was aside and apart from the trusts in question and the interest acquired by each was valued at approximately $ 300,000.

At the time the trusts were created in August 1935 Robert N. Green was 17 years of age. He had graduated from high school the previous June. About May of that year he told the petitioner that he did not desire to continue school, but that he intended to enter business. He started to work for Automotive under the petitioner's direction in September 1935. Starting at the bottom, he eventually became vice president of that company and assistant to the petitioner. In July 1939 Robert N. Green became president of Standard, a position he has held since, with the exception of a period spent in the military service.

Books of account were opened for each trust in which all transactions relating to trust funds and assets were recorded. Monthly statements were prepared showing the condition of each trust. Each of the beneficiaries had access to the books of account of the two trusts and were shown the monthly statements showing the condition of the trusts. A bank account was opened for each trust with the Commercial National Bank & Trust Co. of New York. Such accounts have been maintained for the trusts continuously since they were opened in March 1936 and all sums belonging to each trust have been deposited in its respective account.

All securities acquired for each trust, when in registered form, have been registered in the name of the petitioner as trustee for the benefit of Edith C. Green or Robert N. Green, as the case might be. All securities belonging to the trusts have been kept in a vault in the Wabeek Bank inDetroit. The petitioner's personal assets are kept in the same vault. The trust assets have been kept in separate envelopes or folders, with each one identified.

On August 31, 1945, the value of the corpora of the two trusts, determined by valuing unlisted securities at book value and listed securities at market value, was, Edith C. Green trust, $ 548,969.02, and Robert N. Green trust, $ 555,408.45.

On March 28, 1945, after the filing of the petitions herein, the petitioner, as trustee under each trust, instituted proceedings in the Circuit Court, County of Oakland, State of Michigan, for the purpose of obtaining a decree construing the trust instruments here in question. The beneficiaries of the trusts were named defendants. Notice of the filing of these actions and copies of the bills of complaint were served upon the Commissioner of Internal Revenue and the Chief Counsel of the Bureau of Internal Revenue.

The bill of complaint in each case recited the creation of the trusts and contained allegations as to their management by the petitioner as trustee. The following pertinent allegations were also contained therein:

By notices dated February 12, 1943, the Treasury Department of the United States informed Settlor that it deemed the income accruing to the trust during the years 1937 to 1941 inclusive taxable to Settlor in his individual capacity, under Section 22 (a) and/or Section 167 of the Internal Revenue Code.

* * * *

While not expressly stated in the Notices of Deficiency referred to above, Plaintiff has reason to believe that the Treasury Department construes the Trust Indenture creating said trust to permit Settlor to deal with respect to the assets and property belonging to said trust in substantially the same manner as if Settlor were the absolute owner thereof; that Settlor may buy property belonging to said trust at such price as he in his sole unlimited discretion may determine, even though the price fixed for such property is below the true value thereof; that Settlor may sell property to said trust at such prices as he in his sole unlimited discretion may determine, even though the prices so fixed are in excess of the true value of such property; that it is within the power of Settlor to borrow moneys from said trust upon such terms as he, in his sole discretion, might dictate, even though such terms were disadvantageous to the trust and the beneficiaries thereof. Proceeding upon such construction and assumption as to the legal effect of the Trust Indenture in question, the Treasury Department asserts that Settlor is in substantial respects the owner of the property included in said trust and that therefore Settlor in his individual capacity is chargeable with the income accruing to said trust. Plaintiff believes that it will be the position of the Treasury Department that the alleged power of Settlor to purchase trust assets from said trust at prices below the true value thereof is tantamount to or the equivalent of a power to revoke the trust. That such is the position of the Treasury Department is indicated by recitals in the opinion of the United States Board of Tax Appeals in the proceeding entitled Ellis H. Warren v. Commissioner of Internal Revenue, 45 B. T. A. 379. In that proceeding there were involved trusts evidenced and created by Trust Indentures substantially identical with the terms of the Trust Indenture involved in this proceeding. The Board of Tax Appeals, in concluding that the income accruing to the trust there involved was taxable to Ellis H. Warren, the Settlor and Trustee of the trusts there involved, said in part:

* * * *

Plaintiff further shows that he is doubtful that the construction and interpretation placed upon said trust indenture by the Treasury Department in the deficiency proceedings initiated against settlor and by the United States Board of Tax Appeals in the Warren decision with regard to a similar document, correctly applied the law of the State of Michigan to the trusts in question. * * *

The defendant beneficiaries were joined in the action by their pleadings and there was no controversy in issue other than the purpose of obtaining the state court's interpretation of the instruments.

On September 10, 1945, the court entered its decree in each action. Such decrees provided, inter alia, the following:

3. The trust created by the Trust Indenture dated August 19, 1935, is not revokable at the instance of plaintiff or the Settlor, either by document of amendment or modification or otherwise.

4. The corpus of said trust estate and all revenues and income therefrom, belong solely to the beneficiaries under said Trust Indenture.

* * * *

9. That plaintiff may not loan trust funds to Settlor except upon fair and proper terms, ample security, and at prevailing rates of interest.

10. Plaintiff may not, under the terms and conditions of said Trust Indenture, sell any of the trust property to the Settlor, or purchase property from Settlor, except for the true value thereof.

* * * *

12. That Leslie H. Green, neither as Settlor nor as Trustee under the Trust Indenture, retained or had any power thereunder which would relieve him at any time from his responsibilities as Trustee under the laws of the State of Michigan, and he was and is therefore at all times required to operate and manage the trusts for the interest and benefit of the beneficiaries, and could not and can not at any time lawfully use any part of the assets thereof for his own personal gain.

In March 1938 the petitioner filed an individual income tax return for the year 1937, disclosing total income of $ 272,355.14. Included in the computation of such amount was a long term capital loss of $ 2,000. On March 15, 1939, the petitioner filed his individual income tax return for the year 1938. In such return, under the heading "Income," the petitioner reported the following items:

1. Salaries and other compensation for personal services		$ 89,401.12
2. Dividends		83,739.32
3. Interest on bank deposits, notes, mortgages, etc		3,483.55
4. Interest on corporation bonds		875.00
	* * * *
10.	(a) * * *
	(b) Net long-term gain (or loss) from sale or exchange of
	capital assets	(Loss) 130,142.36
	* * * *
12. Total income in items 1 to 11		$ 47,356.63

In March 1938 the petitioner, as trustee for Robert N. Green, filed a return for 1937, which disclosed gross income of $ 38,315 and tax due of $ 6,248.20. Also in March 1938, the petitioner, as trustee for Edith C. Green, filed a return for 1937 disclosing gross income of $ 37,871.25 and tax due of $ 6,127.81. The taxes shown to be due on the returns have been paid and no part thereof has been refunded by the respondent nor have any claims for refund covering such taxes been filed with the respondent by said trusts.

On March 15, 1939, the petitioner, as trustee for Robert N. Green, filed a return for the year 1938, reporting gross income of $ 19,715 and tax due of $ 1,994.55. As trustee for Edith C. Green, the petitioner on the same date filed a return for 1938, reporting gross income of $ 19,517.50 and tax due of $ 1,960.97. The taxes shown to be due on such returns have been paid and no part thereof has been refunded by the respondent, nor have any claims for refund covering such taxes been filed with the respondent by said trusts.

The notice of deficiency in Docket No. 1780 covering the years 1937 and 1938 was mailed to the petitioner on February 26, 1943, which was more than three years, but less than five years, after the petitioner filed his returns for such years.

OPINION.

The first question for our decision is whether the petitioner is taxable individually upon the income of the trusts created by him in 1935. In the notice of deficiency the respondent determined that the petitioner was taxable under section 22 (a) "and/or section 167" of the Revenue Acts of 1936 and 1938 and of the Internal Revenue Code. In his brief, however, he argues the applicability only of section 22 (a) and, in view of our decision, we shall confine our discussion to that section.

The respondent contends that the issue in the instant proceedings is identical with that presented in Ellis H. Warren, 45 B. T. A. 379; affd., 133 Fed. (2d) 312, and that the decision in that case is dispositive of the cases before us. (Ellis H. Warren is petitioner's business associate mentioned in the findings of fact). The petitioner contends that the cases at bar are distinguishable from the Warren case and that, in any event, our decision must be controlled by the decree of the Circuit Court of Oakland County, Michigan, rendered in the proceedings instituted by the petitioner for a construction of the trust instruments.

In the Warren case, supra, the grantor created three trusts, one each for the benefit of his wife, daughter, and son. Each trust was declared to be irrevocable and in each the grantor was named as trustee. The powers retained by the settlor-trustee under paragraph 2 of each of the Warren trusts were, in all respects, identical to those retained by the petitioner herein, except that in the Warren trusts, under subparagraph (h) of paragraph 2, loans to the grantor were required to be made at the market rate of interest.

Paragraph 5 of the Warren trusts was identical to paragraph 5 of the trusts herein.

The income of all three trusts in the Warren case was to be accumulated or distributed during their existence, in the discretion of the trustee. The trust for the benefit of Warren's wife terminated and the corpus was distributable to her as her absolute property upon the death of the grantor. As to the trusts for each child, the corpus was distributable to the beneficiary as his or her absolute property when each should attain the age of 35 years, except that if the grantor was still living the trusts were to continue until his death, at which time the beneficiary was to receive the corpus as his or her absolute property.

The Board of Tax Appeals held that Warren was taxable, as grantor, upon the income of the trusts. In its opinion the Board said, in part:

We do not think that it is material that there is no provision of the trust instruments by which either the income or the corpora of the trusts would ever revest in the petitioner. See Commissioner v. Buck, supra. The petitioner did have the right to buy and sell to the trusts property at prices to be determined by himself. In David M. Heyman, 44 B. T. A. 1009, such a right was held to be equal to a power of revocation. In our opinion in that case we relied upon Chandler v. Commissioner (C. C. A. 3d Cir.), 119 Fed. (2d) 623.

The simple facts here are that these trusts were created by the petitioner for the benefit of his wife and children, his heirs at law. No one outside of the family had any rights in or any control over the trusts. The mere fact that they were declared to be irrevocable is of little importance. The petitioner does not claim that he did not have the right to modify the trusts and the evidence shows that on December 9, 1940, he did modify them, although he claims that the modification was only for the protection of the beneficiaries of the trust.

In Helvering v. Elias (C. C. A., 2d Cir.), 122 Fed. (2d) 171, the court said:

* * * the court must look to the whole nexus of relations between the settlor, the trustee and the beneficiary, and if it concludes that in spite of their changed legal relations the three continue in fact to act and feel toward each other as they did before, the income remains the settlor's; * * *

We think that the facts that obtain in the instant case are such as those stated by the court that would make the income of the trust taxable to the settlor.

After the creation of the trusts the petitioner and he alone had absolute control of the trust assets. He was not required to distribute any part of the income to any of the beneficiaries during his lifetime. He had absolute voting rights of any shares of stock which became a part of the trust estates. He had as much or greater control over the trust assets than did the taxpayer in the case of Frank G. Hoover, 42 B. T. A. 786, in which we said:

* * * He does control the form and manner of the investment of both principal and undistributed income. And he does remain in a position to participate in the affairs of the business in which he is actively interested, a prerogative which proceeds from the retained equivalent of ownership of his interest in that enterprise. This is an attribute of proprietorship frequently of greater significance than the right to receive income. * * *

The petitioner admits that the powers reserved to him in the instant cases are substantially identical to those reserved in the Warren case. He contends, however, that differences in the two cases with respect to the distribution of income and corpus make them distinguishable. He asserts that in the trusts in the cited case the income could be accumulated or distributed by the trustee within his discretion during the lifetime of the settlor and corpus was distributable to the beneficiary upon his attaining the age of 35 or the death of the settlor, whichever last occurred; whereas here, in the Robert N. Green trust, the corpus was required to be distributed to the beneficiary upon his attaining the age of 45, whether or not the settlor was then living, and in the Edith C. Green trust, upon her death the income was payable in stated amounts to Robert N. Green until he reached the age of 45, at which time the corpus was to be distributed to him, regardless of whether or not the settlor was then living. These differences, the petitioner contends, distinguish the present cases from the Warren case and bring them within the rule of Alma M. Myer, 6 T. C. 77, and W. L. Taylor, 6 T.C. 201">6 T. C. 201.

We do not agree. The decision in the Warren case did not rest upon any single factor, but fastened upon "the whole nexus of relations between the settlor, the trustee and the beneficiary" ( Helvering v. Elias, 122 Fed. (2d) 171). We do not think the provisions in the respective trusts differ so substantially as to call for opposite conclusions respecting the taxability of the income thereof.

After the creation of the trust estates and during their existence, "the petitioner and he alone had absolute control of the trust assets." He had discretionary power to accumulate or distribute the income, and if his wife or son died before the time fixed for the termination of the trusts he could deprive them of both income and corpus, although each was stated to be the primary beneficiary of the respective trusts. Cf. Lillian R. Chertoff, 6 T.C. 266">6 T. C. 266.

In the Myer and Taylor cases, supra, relied upon by the petitioner, the powers retained by the settlor-trustee were substantially less than those retained in the proceedings before us. For example, in neither of those cases was the settlor-trustee specifically given the power to deal with himself as an individual with respect to the trust properties. Such differences, we think, serve to distinguish those cases from the present cases.

The power retained by the petitioner to deal with himself as an individual with respect to the trust properties added materially to the "bundle of rights" which he possessed as trustee. Furthermore, the evidence shows that this power was freely exercised by the petitioner. At various times he borrowed money from the trusts for personal purposes and on one occasion he sold to one of the trusts a note which had been executed in his favor by his brother. Such a power, and the other broad powers retained by him as settlor-trustee, are, in our opinion, sufficient to render the petitioner taxable on the income of the trust under section 22 (a).

The petitioner contends, however, that the decree of the Michigan court requires a holding by us that he did not retain powers sufficient to warrant taxing to him the income of the trusts under section 22 (a). He relies upon Blair v. Commissioner, 300 U.S. 5">300 U.S. 5; Freuler v. Helvering, 291 U.S. 35">291 U.S. 35; Eisenmenger v. Commissioner, 145 Fed. (2d) 103; Estate of Frederick R. Shepherd, 39 B. T. A. 38; and Florence H. Thornton, 5 T. C. 1177. The cited cases hold that decisions of a state court settling property rights must be given full effect by a Federal court. Such rule, however, applies only to a decision rendered in a proceeding presenting a real controversy and one which settles issues regularly presented. It must not be in any sense a consent decree or a decree which is "collusive in the sense that all the parties joined in a submission of the issues and sought a decision which would adversely affect the Government's right to additional income tax." ( Freuler v. Helvering, supra). See Tatem Wofford, 5 T. C. 1152; Francis Doll, 276">2 T. C. 276; affd., 149 Fed. (2d) 239.

An examination of the pleadings and decree in the proceedings instituted by the petitioner leads us to the conclusion that such proceedings were of the type last described. They were commenced after the filing of the petitions herein. The pleadings filed therein presented no real controversy between the parties thereto. It is apparent from the allegations in the bills of complaint quoted in our findings that the proceedings were brought solely as a result of the respondent's determination. It was an attempt to litigate in the state court the precise quesion here at issue. Although the answer purported to put plaintiff on proof of many allegations basic in the action, there is no evidence of any proof being introduced. The decree of the court is almost a verbatim copy of the prayers for relief contained in the answer. Such a proceeding is collusive in the sense in which that term is used in the Freuler and Francis Doll cases, supra, and the decree entered therein is not binding on us.

On the first issue, therefore, the respondent's determination is sustained.

The next question is whether or not assessment and collection of deficiencies for the years 1937 and 1938 are barred by the statute of limitations. The applicable statutes, sections 275 (a) and 275 (c) of the Revenue Acts of 1936 and 1938, are set forth in the margin. ^{*166 The notice of deficiency covering the years 1937 and 1938 was mailed more than three years but less than five years after the petitioner had filed his returns for those years. In his petition the petitioner pleaded in bar the three-year period of limitations found in section 275 (a) of the applicable revenue acts. In his answer the respondent pleaded affirmatively that the controlling period of limitations is that provided for in section 275 (c).}

As far as the year 1937 is concerned, we think it is clear that the respondent must be sustained. The evidence shows that the petitioner filed an individual return for that year in which he reported gross income of $ 272,355.14. For the same year he filed returns as trustee reporting gross income of the trusts aggregating $ 76,186.25, which amount was properly taxable to him as an individual and which exceeded 25 per cent of the gross income stated by him on his individual return.

The petitioner contends that section 275 (c) should not be applied because of the fact that agents of the Bureau of Internal Revenue examined his individual returns and those of the trusts for the years 1935, 1936, 1937, and 1938; that the Bureau did not propose to tax to the petitioner any portion of the trust incomes as the result of such examinations; and that the first notice received by him indicating an intention by the respondent to tax to him the income of the two trusts was contained in letters addressed to him under date of February 11, 1943.

Such an argument is unavailing in deciding the question of whether or not section 275 (c) is to be applied. As was said in Estate of C. P. Hale, 1 T.C. 121">1 T. C. 121:

* * * [Section 275 (c)] was not intended to relieve the taxpayer whose understatement of gross income in excess of 25 percent of the amount stated in the return was due to "honest mistake" and not fraud from the payment of taxes justly due if asserted by the Commissioner within the 5-year period. The words "If the taxpayer omits from gross income" are so clear and unambiguous that no construction of them is required.

In the instant case the amount omitted by the petitioner exceeded 25 per cent of the amount included by him on his return for 1937 as gross income. Consequently the respondent was not barred from asserting a deficiency for that year. See also Katherine C. Ketcham, 2 T. C. 159; affd., 142 Fed. (2d) 996; Oleta Ewald, 2 T. C. 384; affd., 141 Fed. (2d) 750.

With respect to 1938, the petitioner contends that, even though the income of the trusts for that year is taxable to him as an individual, he did not omit an amount in excess of 25 per cent of the gross income stated on his return and that, therefore, the provisions of section 275 (c) are not applicable and assessment and collection of the deficiency are barred under section 275 (a).

In his return for 1938, under the heading "Income," the petitioner reported the following items:

1. Salaries and other compensation for personal services		$ 89,401.12
2. Dividends		83,739.32
3. Interest on bank deposits, notes, mortgages, etc.		3,483.55
4. Interest on corporation bonds		875.00
	* * * *
10.	(a) * * *
	(b) Net long-term gain (or loss) from sale or exchange
	of capital assets	(Loss) 130,142.36
	* * * *
12. Total income in items 1 to 11		$ 47,356.63

The petitioner filed returns as trustee for the trusts for 1938 in which he reported as income from the two trusts the aggregate amount of $ 39,232.50.

It is the petitioner's contention that his gross income must be computed without any deduction for the long term capital loss; that when so computed his gross income was $ 177,498.99; that the amount omitted from his return was not in excess of 25 per cent of this sum; and that the provisions of section 275 (c) consequently can not be invoked.

The respondent contends that the petitioner's gross income as referred to in section 275 (c) was the amount shown on line 12 of the return as "Total income" and that, since the amount omitted by the petitioner was in excess of 25 per cent of this sum, the five-year period of limitations is applicable hereto. He offers nothing in support of this contention except the statement in his brief that "Item 12 of the return showing 'Total income' is the amount Congress had in mind in the compilation of section 275 (c)."

We think the petitioner's position is correct. Section 21 of the Revenue Act of 1938 defines "net income" to mean "the gross income computed under section 22, less the deductions allowed by section 23." Under section 22 (a) "gross income" is defined generally to include gains, profits and income from various specified sources, including sales or dealings in property, whether real or personal, or derived "from any source whatever." Nothing is contained in any of the provisions of section 22 requiring an adjustment to be made in the computation of gross income on account of capital losses. Provision for deduction of such losses is found in subsection (g) of section 23, entitled "Deductions from Gross Income."

It seems clear from these provisions that capital losses form no part of the gross income, but are to be deducted from gross income in arriving at net income.

We are unimpressed by the respondent's contention that for the purposes of section 275 (c) "gross income" means the "total income" shown on line 12 of the return. "Gross income" has a well established meaning in the revenue laws, denoting statutory gross income as defined by section 22. See Minn. 2915, I-1 -- C. B. 233, relating to a comparable provision under the Revenue Act of 1921.

The respondent had the burden of proof with regard to this issue and, in our opinion, it has not been discharged by him. We hold, therefore, that section 275 (c) is inapplicable to 1938 and that assessment and collection of a deficiency for that year are barred by the limitation provided for in section 275 (a).

The last issue is whether or not the petitioner is entitled to offset against any deficiency determined against him for 1937 the tax paid by him as trustee on trust income for that year. The issue is raised with respect to both 1937 and 1938, but, since we have decided that assessment and collection of a deficiency against the petitioner for 1938 is barred by the statute of limitations, we shall limit our discussion to the year 1937.

It is stipulated that the returns for the trusts covering the year 1937 were filed in March 1938 and that the taxes shown to be due thereon were paid by the trusts. It is further stipulated that no portion of the taxes paid by the trusts for the year 1937 has been refunded by the respondent, nor have any claims for refund covering such taxes been filed with the respondent by the said trusts.

In Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418, the Supreme Court held that this Court is without jurisdiction to apply any overpayment of taxes for one year against a deficiency for another year. The petitioner contends that this rule is inapplicable to the instant cases, since only one year is involved and that this Court has jurisdiction to grant the relief he seeks.

Whether or not we have jurisdiction to allow such an offset we need not decide since, for other reasons, the petitioner can not prevail. The taxes in question were paid by the petitioner as trustee of the trusts and were paid out of trust funds. Here, however, the petitioner is before us as an individual. Thus he is seeking to have taxes which he paid in one capacity offset against taxes due from him in another capacity. The rule of equitable recoupment, however, applies only to the relief of the identical taxpayer. Huntington National Bank v. Commissioner, 90 Fed. (2d) 876. In that case the taxpayer, as trustee of one trust, sought to offset taxes paid by it as trustee of another trust. The court held that it was not entitled to such relief, for the reason just stated. See also Edmonds v. Commissioner, 90 Fed. (2d) 14, where the taxpayer, who was administrator of the estates of a husband and wife, sought unsuccessfully to offset taxes paid as administrator of the husband's estate upon income later determined to be that of his wife.

It follows that the petitioner may not offset against his individual tax liability amounts paid by him as trustee of the trusts.

Decisions will be entered under Rule 50.

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Footnotes

• 1. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.

  Except as provided in section 276 --

  (a) General Rule. -- The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

  * * * *

  (c) Omission from Gross Income. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed. or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.↩