DocketNumber： Docket No. 104858.
Citation Numbers： 45 B.T.A. 32, 1941 BTA LEXIS 1184
Judges： Murdock
Filed Date： 9/5/1941
Status： Precedential
Modified Date： 1/12/2023
*1184 INCOME - TRUST - TAXABLE TO GRANTOR. - Where the petitioner placed property in trust, to be divided equally and the income from one-half to be paid to her mother for life, but retained the power to appoint by will the remainder after the life estate and the right to withdraw up to a certain amount with the consent of the mother, the income from the one-half set up for the benefit of the mother is not taxable to the petitioner. Sections 166, 167, and 22(a) of the Revenue Act of 1936 have no application.
*32 The Commissioner determined a deficiency of $40,146.68 in income tax for 1936 and one of $36,110.06 for 1937. The principal issue for decision is whether income of a trust payable to the mother of the petitioner for life is taxable to the petitioner, who created the trust. Another question is whether capital gains are taxable to the petitioner. There are also two issues relating to deductions claimed by the trust.
FINDINGS OF FACT.
The petitioner is an individual who filed her returns for the taxable years in Massachusetts. She became twenty-one*1185 years of age on April 3, 1922. She was unmarried and living with her mother at that time. She had much more wealth and income than her mother and desired to share some of her income with her mother. The mother had annual income of about $100,000 from other sources. The petitioner also desired to be spared the duties, responsibilities, and temptations incident to having so much property to hold and handle personally. She created a trust on April 4, 1922, and transferred valuable real estate and securities to the trust. Two individuals, not related to her, were named trustees for life.
The trust indenture provided that the trustees should divide the trust property into two equal shares and pay the income from one share to the petitioner for her life, with provisions for the disposition of the remainder. The petitioner reported the distributable income from that share and it is not in dispute here. The net income from the other one-half of the trust property was payable to Hannah P. Weld, mother of the petitioner, for life. Thereafter, this one-half of the trust was to become a part of the trust for the petitioner, but, in case she had predeceased her mother, it was to go*1186 as she might appoint by will or to her heirs if she made no appointment by will. *33 The petitioner retained the right to withdraw in equal parts from the two halves up to $1,000,000 of the corpus, with the written approval of one trustee and, during the life of Hannah P. Weld, of the latter.
The petitioner never took any corpus from the trust. She had a husband and three minor children during the taxable years. Her mother was born in 1858 and was still living in February 1941. The mother had always reported the income from one-half of the trust property and the Commissioner never sought to tax that income to the petitioner for years prior to 1936. The value of the trust property in 1936 was in excess of $4,000,000 and was never much less than $3,000,000.
The Commissioner, in determining the deficiencies, included in the income of the petitioner all of the taxable income from the trust and explained:
Inasmuch as you have reserved to yourself the power of appointment as to the total corpus of the said "Mary Weld Trust", thus retaining ownership of the entire corpus, the entire net income of such trust is taxable to you regardless of the fact that you have irrevocably*1187 made an assignment of one half of such income as and when earned.
In the event that the conclusion offered in the preceding paragraph should be reversed, and because of the said reserved power of appointment, that portion of the net income of the said trust as finally determined which has been added to the corpus will be taxable to you under Section 167 of the Revenue Act of 1936.
A little less than one-third of the corpus in value was in real estate. The trust was engaged in business during the taxable years to the extent of its real estate activities. The total commissions and expenses paid to the trustees are allocable to these activities, as the gross income from real estate is related to the total gross income of the trust.
The trustees watched trends, shifted investments in securities, employed investment counsel, made many purchases and sales of stocks and bonds, reinvested funds, and collected income from securities. They never distributed capital gains.
One of the trustees was in close touch with the affairs of the Houghton & Dutton Building Trust. The trustees, after investigation and with full knowledge of the facts, came to the conclusion in 1936 that bonds*1188 of that trust held by them were worthless and they charged off their books the investment in those bonds in 1936.
The facts as stipulated by the parties are included herein by this reference.
OPINION.
MURDOCK: The principal issue is whether that portion of the trust income from one-half of the corpus payable to the mother during her life is taxable to the petitioner. The petitioner has reported the income from the other one-half of the corpus which was payable to her. *34 When the death of the mother terminates her life estate, the petitioner, if living, will receive and be taxable with the income from the entire corpus. The contention of the petitioner on this point is merely that the income payable to her mother during 1936 and 1937 is not taxable to the petitioner. The situation is not materially different from the simple case of a trust for the life of the mother. Indeed, the division of the corpus into two separate parts, the one to benefit the mother for life, may have resulted in two separate trusts. Cf. *1189 ; affd., ; ; ; certiorari denied, . Income of a trust currently distributable is ordinarily taxable to the life beneficiary, regardless of how the corpus may be used or distributed after the termination of the life estate. Sec. 162(b), Revenue Act of 1936.
The Commissioner has shifted from one ground to another without ever advancing any sound basis for taxing to the petitioner the income from the trust payable to her mother for life. He cites no authority for the tentative position taken in the notice of deficiency that the income from the life trust fof the mother is taxable to the petitioner because she retained the power to appoint by will the persons to whom the trust corpus would go after the life estate in the mother had terminated with her death. Decision of this part of the case is not dependent upon what may happen to the corpus after the death of the mother terminates her life estate. *1190 The question is, Why should the income payable to the mother during her life be taxable to the petitioner? Had the petitioner created a simple separate trust for her mother for life, the income would not have been taxable to the petitioner even though she had thus retained full power to deal with the corpus after it had served the purpose of the trust. Cf. ; , and cases cited therein. Here, where she retained less control over the corpus, there is certainly no greater reason to tax her on the income of the trust payable to her mother. . Cf. .
The Commissioner, in his brief, no longer relies directly upon the ground advanced in the notice of deficiency. He makes several arguments, one of which is that the retained power to withdraw $1,000,000 from the trust corpus was a power of revocation within the meaning of section 166. This trust was irrevocable except as to the $1,000,000, which was less than one-fourth of the total corpus. Income taxable to a grantor under section 166*1191 is limited to "the income from such part of the trust" as the grantor can revest in himself without the consent of any person having an adverse interest in that part of the corpus "or the income therefrom." The interest *35 of the mother was clearly adverse and her consent was required for the withdrawal of any funds. Thus, not even the income from the $500,000 subject to withdrawal from this one-half of the trust could be taxed to the petitioner under section 166. The possibility that the death of the mother would permit the petitioner to freely withdraw the $1,000,000 is immaterial, since the mother's life estate would also terminate with her death. Furthermore, see ; affd., ; ; reversed, , and cases there cited. Since the 1936 and 1937 income was distributable to the mother, it was not distributable to or held for the petitioner and section 167 could have no possible application. The cases of *1192 , and , cited by the Commissioner, dealing with accumulated income, are not in point.
The respondent, apparently, now places his chief reliance upon section 22(a), claiming that the trust was for a short term, was controlled by the petitioner, was a mere assignment of income from property which the petitioner continued to own. The trustees were appointed for life and were in full control. The petitioner was not a trustee. The trust effected a very substantial disposition of the trust property and was not a mere assignment of income. The cases of , and , involving the assignment of income, are not in point. The respondent points to the advanced age of the life beneficiary in 1941 to show that the trust was like a short term trust. All trusts would eventually become short term trusts upon such a theory. The trust, as it benefited the mother, was created in 1922, was still in effect in 1941, and was to remain in effect so long as she should live. Although*1193 she was 78 in 1936 and 83 in 1941, she was but 64 in 1922, when the trust was created to benefit her for life. This case is unlike , relied upon by the respondent. The income distributable to the mother was not taxable to the petitioner.
The Commissioner mentioned as an alternative, in the notice of deficiency, that capital gains realized by the trust and accumulated would be taxable to the petitioner under section 167 because of her reserved power of appointment. The position has been abandoned, apparently, since it is not urged in the respondent's briefs. Amounts thus accumulated were never to be distributed to the petitioner and, consequently, section 167 has no application. The respondent in his brief makes the new argument that the accumulations are taxable to the petitioner under section 167 because of her power to withdraw them as a part of the $1,000,000, and, also, that the income from $500,000 is taxable to her under section 166 because of her right to withdraw that amount from the corpus of the mother's life trust. *36 He cites no authority supporting these contentions. The facts show that there is*1194 no merit in them. They are made upon the theory that the mother had no interest adverse to the withdrawal of the $1,000,000. The interest of the mother was adverse to the withdrawal of any part of the $1,000,000, since one-half of it would have to come from the corpus supplying her income. Thus, as has been stated, section 166 has no application to the income from $500,000. The accumulations were never to be distributed to the petitioner except as she might withdraw them as a part of the $1,000,000. Since the mother had an interest adverse to such withdrawal and her consent was necessary to any withdrawal, the capital gains were not taxable to the petitioner under this theory.
The Commissioner makes in his brief another argument never theretofore advanced. He says that one-half of the capital gains are taxable to the petitioner under section 167(a)(2) because it was within the discretion of the trustee to treat those gains as income and distribute them. He assumes that one-half of the gains were from that part of the corpus set aside for the petitioner and thus could have been distributed to her. The trust deed gives the trustees power to decide what is income and what is*1195 principal. They determined that the capital gains were principal and not distributable as income, which was in accordance with the law of Massachusetts. ; affd., . The Board has held that the local law is not controlling and section 167(a)(2) applies where capital gains are subject to such a discretion in trustees. ; ; . But the Circuit Court of Appeals for the first Circuit, to which this case could go on appeal, has gone both ways on this point. It affirmed the
The petitioner was not taxable on any income of the trust, so far as this record shows, except that which was actually distributed to her and about which there is no dispute. The petitioner states that the other issues need not be decided once the above decision is reached. That seems to be correct. The respondent expresses no disagreement. *37 The other issues are whether the trust is entitled to deduct as expenses of a business under section 23(a) trustees' commissions and other expenses which in fact were paid. Allowance or disallowance of these items would not change the amount distributable and taxable to the petitioner if the trust is not to be disregarded.