McIlvaine v. Commissioner

WILLIAM B. MCILVAINE AND JOHN P. WILSON, JR., TRUSTEES UNDER THE DEED OF TRUST OF JOHN P. WILSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McIlvaine v. Commissioner

Docket Nos. 52931, 57226.

United States Board of Tax Appeals

29 B.T.A. 304; 1933 BTA LEXIS 961;

November 7, 1933, Promulgated

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An instrument, as amended, construed and held to create three separate and distinct trusts.

Clay Judson, Esq., and John P. Wilson, Esq., for the petitioners.

F. R. Shearer, Esq., and E. L. Updike, Esq., for the respondent.

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SEAWELL

In these proceedings, which were consolidated for hearing and report, the deficiencies relate to income taxes for 1924, 1925, 1926 and 1928 in the respective amounts of $20,949.69, $13,758.96, $11,045.29 and $7,149.52. By agreement the parties have limited the issues raised by the pleadings to the single question of whether the portion of the income derived from property placed in trust under a certain instrument, as amended, which was not distributed or distributable to the beneficiaries thereof, is subject to income tax on the basis of one or three trusts.

FINDINGS OF FACT.

On March 19, 1913, John P. Wilson of Chicago, Illinois, by a written instrument transferred certain described stocks, bonds, and notes to the petitioners, in trust, for the equal benefit of his three children, Martha Wilson, John P. Wilson, Jr., and Anna W. Dickinson. Article II of the instrument gave the trustees power to collect income earned by the property held in trust, sell and assign the assets subject to certain prescribed limitations, and vote the stock. Article III provided for adding income derived from the trust estate to the corpus for a period of 15 years, unless shortened by certain parties; that upon the termination of the period of accumulation of income, one third of the income should be paid to each beneficiary for life; that after the death of any beneficiary his or her one third should be distributed in accordance with his or her will, and in case of default, to surviving issue of such deceased beneficiary, and in default of such issue, to the surviving beneficiaries in equal shares. The first paragraph of Article IV reads as follows:

The trust hereby created shall in any and the latest event terminate at the death of the survivor of Martha Wilson, John P. Wilson, Jr. and Anna W. Dickinson, and said trust may be terminated in whole or in part at any time by an instrument in writing signed by the said three children of the first party, or the survivors or survivor of them, upon the delivery of such written instrument to the said Trustees, provided, however, that during the life of said first party such written instrument must have the written approval of said first party [grantor].

The same article further provided that upon the termination of the trust one third of the corpus should be distributed to each beneficiary, and if any of the beneficiaries should not be then living, his or her share should be paid out in accordance with the terms of his or her will, and in default of such disposition, to his or her surviving issue, per stirpes, and in default of such issue, to the then surviving issue of the grantor, per stirpes, Article V of the trust deed contains the acceptance of the trust by the trustees and other provisions relating to the liability of the trustees while acting in their fiduciary capacity, payment of expenses of the trust, compensation to the trustees, and the appointment of successors to the trustees. The same article also contains a provision reading as follows:

Any of the provisions of this indenture may be altered, changed or modified in any respect and to any extent at any time by an instrument in writing signed by the three beneficiaries hereinbefore named, or the survivors or survivor of them which shall be delivered to the said Trustees or one of them, provided, however, that such instrument must be approved in writing by the said party of the first part, if made during his life, and after the date of any such modification or alteration this indenture as so modified or altered shall be in force and govern the rights and powers of all parties concerned, the same in all respects as though said indenture had originally been executed in such modified or altered form. * * *

On June 19, 1919, the beneficiaries of the trust, with the written approval of the grantor, executed an instrument modifying the trust deed in certain respects. Material provisions of the amendment read as follows:

FIRST. The trust estate now held under said Trust Deed shall be divided into three separate and equal parts or shares (to which may be assigned undivided interests in the whole or any part of the said trust estate), which parts or shares shall severally be designated by our respective names, and each of us and our respective legal representatives shall have the same rights, interests and power in and over one of said three equal parts or shares and the income thereof which is given to us respectively by said Indenture over one third (1/3) of said trust estate and the income thereof, except as may be otherwise specifically provided herein.

SECOND. DISTRIBUTION OF INCOME.

Any and all additions to the trust estate held under said Indenture (other than additions from the accumulation of income from the separate trust estates held under said Indenture) shall be divided between said separate trust estates held under said Indenture in equal shares or parts, except and unless it shall be otherwise directed in the instrument of gift making an addition to the trust estate held under said Indenture,

THIRD. The net income of each of the three trust estates held under said Indenture shall be paid over in whole or in part to the beneficiary or beneficiaries from time to time entitled to share therein, as and when the Trustees acting under said Indenture shall be requested or directed to pay over the same by an instrument in writing, signed by any two of the original beneficiaries named in said Indenture, viz: MARTHA WILSON, JOHN P. WILSON, Jr., and ANNA W. DICKINSON, and the net income from each of said trusts not paid over to the beneficiaries as aforesaid, shall be added to the principal of the trust fund from which it is derived, as and when the same shall come into the hands of the said Trustees.

In the event of the death of JOHN P. WILSON, Jr. his wife, Alice B. Wilson, may sign any such request or direction for the distribution of said net income in his place, with like effect as though he were living and had signed the same; and in the event of the death of ANNA W. DICKINSON her husband, William R. Dickinson, may sign any such request or direction for the distribution of said net income in her place, with like effect as though she were living and had signed the same.

In the event of the death of any of said original beneficiaries named in said Indenture, the net income from the trust estate held under said Trust Indenture, which such deceased beneficiary would have been entitled to receive if living, shall be paid over and distributed to the issue of the said grantor, JOHN P. WILSON, in accordance with any directions given by such beneficiary in and by his or her last will and testament; and in default of any such direction or appointment, then to the issue surviving, from time to time, if any, of such deceased beneficiary per stirpes; and in default of such issue, then to the issue surviving, from time to time, of the said grantor, JOHN P. WILSON, per stirpes.

FOURTH. DISTRIBUTION OF THE PRINCIPAL OF THE TRUST ESTATE. Upon the termination of the trusts established by said Indenture, the several trust estates held thereunder shall be paid over and distributed as follows:

The several trust estates held in trust under said Indenture for the benefit respectively of said Martha Wilson, John P. Wilson, Jr., and Anna W. Dickinson, shall be paid over, conveyed and delivered to them respectively. But if any of said beneficiaries shall not then be living the trust estate which such deceased beneficiary would have been entitled to receive if living shall be paid over and distributed to the then surviving issue of said grantor, JOHN P. WILSON, in such shares and interests, and subject to such trusts, as may be directed in and by the last will and testament of such deceased beneficiary; and in default of any such direction or appointment, then to the surviving issue, if any, of such deceased beneficiary per stirpes; and in default of such surviving issue, then to the surviving issue of the said grantor, JOHN P. WILSON, per stirpes.

FIFTH: All the provisions of the said Trust Indenture (including the power to modify, alter and change the said Indenture as the same shall be in force after the delivery of this instrument to the said Trustees), except as the same are expressly or necessarily modified or altered by the terms of this instrument, shall remain and continue in full force and effect.

On December 1, 1920, an instrument was executed by the beneficiaries and the grantor canceling the first paragraph of the "Third" section of the amendment made June 19, 1919, and substituting therefor provisions reading the same as the first two paragraphs of Article III(2) of further amendments made December 6, 1920, as set forth below.

Articles II, III and IV of the indenture of March 19, 1913, were altered by an agreement executed by the beneficiaries on December 6, 1920, with the written approval of the grantor. The changes made in Article II were not material. Article III reads as follows:

(1) The trust funds and estate held under this Trust Indenture shall be kept divided by said Trustees into three (3) equal parts, each of which shall be held and administered as a separate trust for the benefit respectively of one of the three children of said party of the first part, hereinbefore named, subject, however, to the conditions, limitations and provisions hereinafter set forth.

A separate account shall be kept by the said Trustees of each of said trusts, and the investments in each of said separate trusts shall at all times be kept the same, both in kind and quantity, as near as may be, and to that end joint investments may be made by the Trustees on behalf of said separate trusts, each trust contributing an equal amount of the funds used in making such joint investments.

Any and all additions to the trust estate held under this Indenture (other than those from the accumulation of income from the separate trust estates) shall be divided between said separate trust estates held under this Indenture, in equal shares or parts, except and unless it shall be otherwise directed in the instrument of gift making an addition to the trust estate held under this Indenture.

Any property belonging to said trust estate may be taken and held for convenience in the name of a nominee of the said Trustees, or in the name of either of said Trustees, or in the name of said Trustees as joint tenants, without the addition of the word "Trustee" or "Trustees," or words indicating that such property is held in trust.

(2) The said Trustees shall in each year pay out as much of the net income from each of said separate trusts to the beneficiaries from time to time entitled to share therein as shall during such year be requested or directed by one or more instruments in writing, signed by a majority in interest of the beneficiaries then entitled to share or participate in any distributon made of the income of all of said trusts. But equal payments must be made out of the net income from each of said separate trusts, to the end that said several separate trusts may be maintained on a basis of equality in amount so far as practicable,

So much of the net income received in any year from each separate trust estate as shall not have been paid out during such year under the above clause, shall be added to and form a part of the principal of the separate trust estate from which it was derived; provided, however, that said Trustees shall in each year pay out for charitable uses and purposes so much of the net income of said trusts as shall be requested by an instrument in writing signed by the said Martha Wilson, John P. Wilson, Jr., and Anna W. Dickinson, or the survivors or survivor of them, which payments shall be made in equal amounts from each of said separate trusts, and the Trustees shall not be under any obligation to inquire as to the nature of the uses for which said payments are requested to be made, but shall be free from any liability by reason of any payment made in pursuance of a written request signed as aforesaid.

Any request in writing for the distribution of any part of the income of any of said trusts may be signed by the guardian of any beneficiary who may be a minor or under disability, with like effect as though such request had been signed by the beneficiary in person, free from disability.

(3) From and after the death of any one of the original beneficiaries under this Indenture, the net income which he or she would have been entitled to receive if living, shall be paid to the issue of said party of the first part, in accordance with any directions in regard thereto contained in the last will and testament of such deceased beneficiary, and in default of any such direction or appointment then to the issue surviving from time to time, if any, of such deceased beneficiary, per stirpes; and in default of such issue then to the issue surviving from time to time of the said party of the first part, per stirpes.

Article IV contains no material changes in the original agreement as amended June 19, 1919. Each of the instruments mentioned above was delivered to the petitioners, as trustees, a short time after its execution. The amendments to the trust indenture were made for the purpose of facilitating the administration of the trusteed property in the event of death of a beneficiary and to reduce liability for taxes on income earned by the assets held in trust.

Prior to the time the amendment of June 19, 1919, became effective the trustees administered the property as a single trust. On July 1, 1919, they closed out the capital account maintained for the assets and opened up an account for each beneficiary for each asset held in trust. To these accounts the trustees debited the undivided one-third interest of each of the beneficiaries in the property held in trust. Thereafter, including the taxable years, whenever income was received from any asset, one third thereof was credited to the account kept for the asset under the names of the beneficiaries. Disbursements made by the trustees were charged to the accounts in a like manner. Only one bank account was maintained by the trustees after July 1, 1919. All cash received from the property held in trust was deposited in, and all disbursements were made from, such account.

There was not at any time a physical division of any of the property held under the trust indenture of March 19, 1913. The stock held under the instruments was in the names of the petitioners, as trustees under the deed of trust of John P. Wilson, dated March 19, 1913, or as joint tenants. They held the real estate acquired prior to June 19, 1919, as joint tenants. Each time a piece of real property was conveyed to them, the trustees executed a declaration to the effect that the property was being held under the terms of the trust deed of March 19, 1913. The trustees did not execute new declarations of trust after June 19, 1919, reciting that the real estate was being held for the benefit of three new trusts. At some undisclosed time the petitioners, as joint tenants of the real estate, transferred the properties to themselves as trustees under the trust deed of March 19, 1913. Cash and property received by the trustees after June 19, 1919, were immediately posted to the accounts of the beneficiaries, an undivided one-third interest to each.

Martha Wilson died December 25, 1923, a single person without issue. She did not exercise the power of appointment granted her by the terms of the trust deed of March 19, 1913, as amended. The accounts kept by the trustees under her name were not changed after her death.

For the years 1924 to 1928, inclusive, the trustees filed separate fiduciary and income tax returns for each beneficiary. The same amounts of gross income, deductions, and tax liability were shown in each of the three sets of returns filed for each year. In his audit of the returns the respondent held that the alleged trusts were taxable on the basis of a single trust and return for each year.

OPINION.

SEAWELL: By stipulation of the parties our decision is limited to the sole question of whether the trust deed of March 19, 1913, as amended in 1919 and 1920, created one trust or three trusts. The petitioners contend that the amendments made thereto created three separate and distinct trusts, one for each beneficiary of the original trust, and that the income earned from the property held by them under the indenture, as amended, should be taxed on the basis of three trusts instead of one. The respondent adheres to the conclusion he reached when proposing the deficiencies, that but one trust was in existence throughout the taxable years.

The Supreme Court has said that "No general rule can be stated that will determine when a conveyance will carry with it the whole beneficial interest, and when it will be construed to create a trust; but the intention is to be gathered in each case from the general purpose and scope of the instrument." Colton v. Colton,127 U.S. 300">127 U.S. 300. Whether a trust has been created is largely a question of fact, McCartney v. Ridgway,160 Ill. 129">160 Ill. 129; 43 N.E. 826">43 N.E. 826, and one alleging the existence of a trust has the burden of proving it by clear and explicit proof in the light of all of the attending circumstances. Allen v. Withrow,110 U.S. 119">110 U.S. 119; Trubey v. Pease,240 Ill. 513">240 Ill. 513; 88 N.E. 1005">88 N.E. 1005; Hinton v. Pritchard,107 N.C. 128">107 N.C. 128; 12 S.E. 242">12 S.E. 242. This rule, however, is not so strict as to require that nothing be left to inference or implication. Orr v. Yates,209 Ill. 222">209 Ill. 222; 70 N.E. 731">70 N.E. 731; Osborn v. Rearick,325 Ill. 259">325 Ill. 259; 156 N.E. 802">156 N.E. 802. It has also been held that to establish a trust three elements must be present, namely, sufficient words to raise it, a definite subject, and an ascertained object. Mills v. Newberry,112 Ill. 123">112 Ill. 123; 1 N.E. 156">1 N.E. 156; Snyder v. Snyder,280 Ill. 467">280 Ill. 467; 117 N.E. 465">117 N.E. 465; Carter v. Gibson,29 Neb. 324">29 Neb. 324; 45 N.W. 634">45 N.W. 634.

The parties are agreed that the indenture of March 19, 1913, created only one trust. Whether more than one trust existed throughout the taxable years depends upon the intent of the amendments made thereto in 1919 and 1920.

The trust deed gave the beneficiaries broad powers respecting modifications to the instrument. The respondent does not question the right of the beneficiaries to alter the indenture in the manner they did, but claims, however, that the amendments are merely directory and to a limited extent operate to segregate the several beneficial interests for bookkeeping purposes.

John P. Wilson, Jr., one of the beneficiaries of the original trust, who signed all of the amendments as such, testified, without contradiction, that the purpose of the amendments was to establish three trusts in place of the one then in existence. There appears to be ample language in the several amendments to show intent of all the parties thereto to create three separate and distinct trusts. Section "First" of the first amendment provided for the division of the trust "into three separate and equal parts or shares," each to be designated by the respective names of the beneficiaries. Section "Second" required the division "between said separate trust estates" of additions to the trust estate. In section "Fourth" it was provided that "Upon the termination of the trusts established" the "several trust estates held in trust" under the indenture should be paid over in the manner prescribed. The second amendment, executed December 1, 1920, substituting new provisions for section "Third" of the first modification, provided for the payment of net income each year "from each of the said separate trusts" and that any net income from "each separate trust estate" not paid out within the year of its receipt should be added to the principal of the "separate trust estate" from which it was derived. The final amendment continues all of these provisions in effect, and contains other language evidencing intent to establish and continue the existence of three trusts. Article III(1) provides that the estate shall be kept divided into three equal parts "each of which shall be held and administered as a separate trust for the benefit respectively of one of the three children of said party of the first part" and that the trustees shall keep a separate account for "each of said trusts."

It is true that other provisions of the instrument, as amended, contain terms usually found in documents establishing a single trust. For instance, in the second paragraph of the first amendment (now the third paragraph of Article III(1)) the words "trust estate" are used in connection with provisions for the treatment of additions of property acquired by the trustees under the instrument. The same sentence, however, as already pointed out, provides for the division of any additional property acquired "between the said separate trust estates." A similar circumstance appears in Article IV(1) and (2). The terms "trust" and "trust estate" are used in Article V, which was not modified in any respect.

The language referred to, on which the respondent relies to some extent as supporting his view, is evidence of an intention to create a single trust. We may not, however, decide the issue from that alone. All of the provisions of the instrument, as amended, must be considered in the light of all of the attending circumstances. When this is done, the terms referred to as indicating intent to establish but one trust must give way to clearer and more certain language showing that the purpose and intent of the amendments was to create three trusts for the one then in existence. The intention is clear and we think sufficient words were used in the amendments to create three separate and distinct trusts.

The case of Johnson v. United States,65 Ct.Cls. 285; certiorari denied, 278 U.S. 611">278 U.S. 611, is cited by the respondent as being on all fours with this one. In that case no provision was made, as there was here, for holding and administering each part of the trust fund as a trust separate and distinct from the other shares. In the final analysis cases of this sort must stand or fall on the basis of their own peculiar facts. It has been said that "no will has a twin brother." In re King's Estate,200 N.Y. 189">200 N.Y. 189; 93 N.E. 484">93 N.E. 484. The same is equally true as regards instruments executed with respect to the creation of trusts.

We do not think that the failure of the trustees to make a physical division of the property controls the question. They had ample authority to assign an undivided one-third interest in the whole or any part of the property to the beneficiary of each trust (section "First", amendment June 19, 1919) and had broad powers in holding property belonging to the trusts. Article III(1). Neither do we think the parties in interest should be criticized for pursuing the course they did to create the three trusts. More than one trust may be established by a single instrument, DeVer H. Warner, Trustee,7 B.T.A. 1292">7 B.T.A. 1292; affd., 26 Fed.(2d) 1023, and we are not aware of any authority against the establishment of more than one trust by amendments to an instrument creating a single trust. The beneficiaries and grantor could have terminated the single trust and, with the same property, created three trusts. The device adopted accomplished the same result by a shorter method. Had the trustees acted as though there were but one trust, they could have by proper proceedings been forced to administer the assets under three separate trusts.

From all the facts we hold that the instrument, as amended, created three taxable trusts, and that for each taxable year the income from all the property held in trust, not distributed or distributable to the beneficiaries, should be taxed on the basis of three separate trusts and three separate returns.

The parties stipulated that in case we so found, orders could be entered finding that there are no deficiencies due from, nor overpayments due to, the petitioners respecting income tax liability as trustees under the indenture of March 19, 1913, as amended, for the taxable years. In accordance therewith, orders to that effect will be entered herein.