DocketNumber： Docket Nos. 98592, 100086, 103779, 108444
Judges： Mellott,Disney
Filed Date： 5/9/1944
Status： Precedential
Modified Date： 11/14/2024
*128
1. Petitioner created a separate trust for each of his five children, two of whom were minors, assigning to the trustee as the corpus of each trust (a) a one-fifth interest in a royalty contract with a corporation of which he was president and a large stockholder; (b) a one-fifth interest in another agreement under which he contracted to purchase and sell a certain number of shares of stock of the corporation at fixed prices; and (c) a number of shares of stock of the corporation then held as collateral security for petitioner's loans, which the trusts assumed. Petitioner retained the power, among others, to direct the investment of all trust funds; to control the distribution of trust income to the beneficiaries; to direct the voting of all securities held by the trustee; and to terminate the trusts at will.
2. A trust was created in the name of petitioner's two daughters with funds furnished by petitioner for that purpose to provide income for paying the*129 premiums on policies of insurance on petitioner's life.
*756 These proceedings, consolidated for hearing, involve income tax deficiencies for the years 1934 to 1939 as follows:
| Docket No. | Year | Deficiency |
| 98592 | 1935 | $ 25,112.50 |
| 100086 | 1934 | 373,583.23 |
| 103779 | 1936 | 1,153,348.64 |
| 1937 | 1,116,242.02 | |
| 108444 | 1938 | 914,727.97 |
| 1939 | 518,302.68 |
By an amended answer filed in Docket No. 98592 respondent asks that the deficiency for 1935 be increased to $ 902,997.26.
The questions for our determination are whether the petitioner is taxable on the income of five separate trusts which he created for the benefit of his five*130 children and on the income of another trust, purportedly created by his two daughters, the income of which was to be used for the payment of premiums on policies of insurance taken out by the petitioner on his life.
Several minor issues have been settled by stipulation.
*757 The facts are shown by the pleadings, lengthy stipulations of the parties, and the testimony of a number of witnesses. The stipulations of fact, together with numerous exhibits, are made a part of our findings of fact by reference.
FINDINGS OF FACT.
Petitioner is a resident of Pittsburgh, Pennsylvania. He filed his income tax returns for all of the years involved with the collector of internal revenue at Pittsburgh.
Petitioner was born in Denmark in 1876. He came to this country in 1902 and was naturalized in 1907. He has been employed by the Mesta Machine Co. continuously since 1902, starting as a draftsman and later serving as chief engineer, vice president and general manager, and president. He has served as president of the company since 1930. The Mesta Machine Co. is a corporation engaged principally in the manufacture of rolling mill machinery. At the present time it is manufacturing ordnance*131 supplies, particularly for heavy artillery, under contracts with the United States Government.
Petitioner was married in 1905 and has five children by his first wife, Gertrude Adelsberger. His children are all married and have children as follows:
Mary Helen (Helen I. Dixon) born June 27, 1906, married June 8, 1926. John I., born December 18, 1926. Frank A., born October 18, 1928. Antoinette, born 1928. Lorenz, born June 27, 1936. John Lorenz, born June 27, 1936. Joan, born May 23, 1939.
Petitioner's first wife died in May 1934, and in October 1935, he married Fleda Faust.
On April 15, 1932, petitioner as donor established five separate trusts by agreements in writing wherein the Fidelity Trust Co. of Pittsburgh was named trustee and the five children of petitioner were made the respective sole beneficiaries.
The trust indenture in which Mary Helen Dixon was named as a beneficiary reads as follows:
*132 Made April 15, 1932, between Lorenz Iversen, of the City of Pittsburgh, County of Allegheny and Commonwealth of Pennsylvania, hereinafter called the "Donor", and Fidelity Trust Company, as Trustee, a corporation organized under the laws of the Commonwealth of Pennsylvania having its office in the City of Pittsburgh, hereinafter called the "Trustee";
*758 WITNESSETH
That the Donor has assigned, transferred and set over to the Trustee, and by these presents does assign, transfer and set over to the Trustee, its successors and assigns, the following:
(a) An undivided one-fifth interest in and to all his right, title and interest under that certain agreement made by Donor with Mesta Machine Company, dated June 14, 1926, a photostat copy of which is attached hereto, made part hereof and marked "Exhibit A", and hereinafter referred to as the "Mesta Agreement."
(b) An undivided one-fifth interest in and to all his right, title and interest under that certain agreement made by Donor with Wildon Limited, Bartholomew Investment Corporation and William H. Donner, dated October 1, 1929, a photostat copy of which is attached hereto, made part hereof and marked "Exhibit B", and hereinafter*133 referred to as the "Donner Agreement", and subject, however, to the covenants, conditions and terms of that certain agreement made by Donor with George R. Fink et al., dated October 21, 1929, a photostat copy of which is attached hereto, made part hereof and marked "Exhibit C", and hereinafter referred to as the "Fink Agreement."
(c) Eight thousand (8,000) shares of common capital stock of Mesta Machine Company presently pledged with the Commonwealth Trust Company of Pittsburgh on that certain note, made, executed and delivered by Donor on April 1, 1932, in the sum of Two Hundred Fifty Thousand ($ 250,000.00) Dollars, payable to Commonwealth Trust Company of Pittsburgh, and subject to which this transfer is made. This transfer is also made subject to the liability of Donor on that certain note, made, executed and delivered by Donor on March 22, 1932, in the sum of One Hundred Thousand ($ 100,000.00) Dollars payable to Fidelity Trust Company. The Trustee, as such, agrees to assume one-fifth of the liability on each of the aforesaid notes, and simultaneously with the execution of this agreement will make, execute and deliver its note in the sum of Fifty Thousand ($ 50,000.00) Dollars*134 payable to the Commonwealth Trust Company of Pittsburgh, and its note in the sum of Twenty Thousand ($ 20,000.00) Dollars payable to Fidelity Trust Company.
To Have and To Hold the same, In Trust Nevertheless, for the uses and purposes and upon the terms, trusts and conditions and with the powers and authority hereinafter mentioned and expressed.
ARTICLE ONE
The Trustee shall demand, collect and receive all the income, rents, issues and profits of the trust estate and pay the income therefrom, after all proper charges and expenses, including reasonable compensation to the Trustee, have been deducted, as follows:
(1) So much of the income and/or principal as in the opinion of the Trustee may be advisable shall be used to pay the interest on and to reduce the principal of the two notes, hereinbefore referred to, payable to the Commonwealth Trust Company of Pittsburgh and the Fidelity Trust Company, respectively, as the same become due and payable.
(2) The Trustee shall at the request of the Donor use and apply any portion of the trust estate, either principal or income, to satisfy one-fifth of the liability, if any, under the aforesaid Donner Agreement.
(3) The balance of the income*135 may be paid by the Trustee to Mary Helen Dixon, daughter of the Donor, born June 27, 1906, at its discretion, but during the lifetime of the Donor only by and with the advice, consent and approval of *759 the Donor, and such part of said income as is not distributed shall be accumulated and may be distributed in any subsequent year at the discretion of the Trustee, but during the lifetime of the Donor only by and with the advice, consent and approval of the Donor.
(4) Upon the death of the Donor, any undistributed income shall become part of the principal of this trust.
ARTICLE TWO
This trust shall not terminate and no distribution of principal shall be made, as hereinafter provided at the several ages of the beneficiary, until after the death of the Donor unless the termination be accelerated, as hereinafter provided.
After the death of the Donor, the Trustee shall pay to the beneficiary one-third of the principal if and when she shall have attained the age of thirty-three years, one-half of the balance upon her attaining the age of thirty-eight years, and the residue upon her attaining the age of forty-five years.
Donor reserves the right from time to time to accelerate the*136 termination of this trust agreement as to all or any part of the trust estate and to direct the Trustee to make distribution of all or any part thereof to the beneficiary.
ARTICLE THREE
The beneficiary hereunder shall have no right to pledge, assign, transfer or sell in any way whatsoever, nor to anticipate, charge or encumber any sums of money payable to her at any time by the Trustee under this trust, nor shall her interests be in any sense liable for her debts, contracts or engagements, nor to execution, attachment sequestration or other process issued against her.
ARTICLE FOUR
The Trustee shall have full power and authority to hold, possess, manage, control, sell, convey, pledge, exchange, invest or reinvest all or any part of the trust property in such manner as it may deem for the best interests of the beneficiary hereunder without being limited to investments authorized by the laws of the Commonwealth of Pennsylvania for fiduciaries, except during the lifetime of the Donor as hereinafter specifically restricted.
During the lifetime of the Donor --
(a) the Trustee shall not sell, purchase or exchange any securities at any time in the trust estate, without the written consent*137 of the Donor;
(b) the Trustee shall make sales, purchases or exchanges upon the written request of the Donor;
(c) the Trustee shall vote the securities in the trust estate on any corporate matter as directed by the Donor.
The Donor covenants that he will perform each and every obligation in the aforesaid Mesta Agreement which is purely personal to him. The Donor reserves the right to do and perform, either in the name of the Trustee or in his own name, any act, matter or thing necessary or advisable to determine the rights of the parties or their assigns under the aforesaid Mesta, Donner and Fink Agreements. It is agreed that in the event of any dispute under any of said agreements, Donor shall have the right either in the name of the Trustee or in his own name to conduct the necessary arbitration or other legal proceedings and to enforce the obligations of the other contracting parties or to compromise or settle the same, and the Trustee and the beneficiary shall be bound thereby. The Trustee hereunder shall pay Donor's expenses in such events or proceedings.
*760 ARTICLE FIVE
The Donor, or any other person, may at any time in the future transfer and set over to the Trustee*138 additional property, the principal and income of which shall be held, administered and distributed under and pursuant to the terms of this trust.
ARTICLE SIX
The Donor, having had explained to him the difference between a revocable and irrevocable trust, hereby declares this instrument to be irrevocable.
ARTICLE SEVEN
The Trustee shall not be liable for loss by reason of depreciation in value of any securities now or hereafter in the trust estate, nor upon investments made by it, nor by reason of voting any of such securities.
ARTICLE EIGHT
The Trustee hereby accepts the said trust and covenants that it will execute the same in all due fidelity.
Witness the due execution hereof the day and year first above written.
The trust agreement naming the daughter, Elonora, a beneficiary reads the same. The agreement for the son, Andreas, reads the same except that the ages designated in article two were 35, 45, and 60, respectively. The agreement as to the minor son, John, reads the same, except that paragraph (3) of article one reads:
(3) The balance of the income shall be used by the Trustee to the extent necessary for the comfortable maintenance, education and support of John D. Iversen, *139 minor son of the Donor, born January 21, 1913, and for the protection, conservation or maintenance of his property, or of any property in which he has an interest, during his minority. Any and all of such payments shall be made at the discretion of the Trustee, but during the lifetime of the Donor only by and with the advice, consent and approval of the Donor, and such part of said income as is not distributed shall be accumulated and may be distributed in any subsequent year at the discretion of the Trustee, but during the lifetime of the Donor only by and with the advice, consent and approval of the Donor.
The agreement for the minor son, Robert, reads the same as for John.
By the Mesta agreement dated June 14, 1926, the petitioner assigned to Mesta Machine Co. his entire right, title, and interest in and to an invention relating to rotary shears and method of shearing for a consideration of one-half of all profits in excess of 15 percent on all machinery supplied, furnished, or sold by contract, the receipt or obtaining of which was contingent upon the furnishing of a shear or shears embodying the assigned invention. The agreement contained a formula for the computation of profit. *140 It provided that Mesta Machine Co. render statements to petitioner or his assignees *761 semiannually. All improvements made by petitioner belonged to Mesta. The agreement contained the usual provisions in the event of an infringement suit and ended as follows:
13. The benefits and obligations of this agreement shall accrue and be binding upon the respective parties hereto, their successors and assigns, legal representatives, heirs, administrators or executors, except as herein provided.
Notice of assignment of the Mesta agreement was given by the trustee to the Mesta Machine Co. in writing dated April 15, 1932, and the notice was accepted by the company on the same date. The Mesta Machine Co. thereafter sent the statements required by the agreement to the Fidelity Trust Co. and paid the royalty due under the agreement directly to the trustee.
The original notes of petitioner referred to in paragraph (c) of each trust instrument were canceled and marked "Paid" by both Commonwealth Trust Co. and the Fidelity Trust Co. and the trustee of each trust gave its new notes in one-fifth the amount thereof as evidence of the indebtedness. The new notes were guaranteed by the petitioner.
*141 Under the Donner agreement petitioner obligated himself to purchase 5,565 shares of Mesta Machine Co. stock from Wildon, Ltd., and 2,892 shares from Bartholomew Investment Corporation at $ 300 per share. Donner was the principal stockholder of both of the companies and was a party to the agreement. The purchase price of the shares was to be paid, $ 634,200 in cash and the balance in promissory notes due $ 634,200 on or before December 31, 1930, the same amount on December 31, 1931, and $ 634,500 on December 31, 1932. The shares so purchased were all to be transferred to petitioner's name and 2,114 shares were to be delivered to him immediately. The remaining shares were to be held by the vendors as collateral on petitioner's notes and released pro rata as payments on the purchase price were made. As a part of the agreement petitioner assumed the obligation of Donner, under a prior contract, to sell 1,691 shares of the stock to a third party. All dividends on the shares held as collateral, after October 1, 1929, were to belong to petitioner and the cash dividends were to be applied first to interest and then to principal on his promissory notes. The contract was binding upon*142 the assigns of petitioner.
In the Fink agreement, under which petitioner contracted to sell, and Fink and others agreed to purchase, 5,263 shares of Mesta Machine Co. stock which petitioner was to purchase under the Donner agreement at an aggregate price of $ 1,607,050, Fink and his associates agreed to make payments to petitioner as he was required to make payments under the Donner agreement and were to receive a proportionate part of the released collateral shares.
*762 At the close of 1931 there was a balance due on petitioner's obligations under the Donner agreement of $ 634,500, for which 21,150 shares of Mesta Machine Co. stock were held as security. A note covering that obligation fell due on December 31, 1932. The note was outstanding and unpaid on April 15, 1932, at the date the five children's trusts were executed. The market value of the Mesta Machine Co. shares on that date was $ 8.75, the stock having been split ten for one on January 10, 1930. By reason of that split-up of the shares the petitioner was obligated under the Donner agreement to pay $ 30 per share instead of $ 300 per share.
The petitioner defaulted on the payment of his note of $ 634,500 due on*143 December 31, 1932. On January 3, 1933, petitioner called upon the trustee to make a payment thereon of $ 75,000 of principal and $ 4,139.85 of interest and thereby lift 2,500 shares of the Mesta Machine Co. stock from the escrow agent. The trustee advised petitioner that it did not have sufficient funds with which to make the payments, whereupon petitioner made the payments himself with the understanding that the trusts would reimburse him when they could do so conveniently. Upon this payment by petitioner 2,500 shares of Mesta Machine Co. stock were released to him by the escrow agent.
In June 1933 petitioner sold 1,500 of the Mesta Machine Co. shares for $ 25,500 and credited the trusts with the proceeds. Petitioner also credited the trusts with dividends on the shares and charged them interest on the amount due him.
Petitioner made additional payments under the Donner agreement of $ 30,000 on July 20, 1934, $ 150,000 on October 3, 1934, $ 160,000 on October 22, 1934, and $ 15,050 on October 26, 1934. A substantial part of the funds which petitioner used to make those payments was obtained from sales of the Mesta Machine Co. stock owned by him at about the time the payments*144 were made.
The balance due under the Donner agreement at January 1, 1935, was $ 139,913.53. That amount was liquidated in 1935 by the payment by Fink of $ 139,913.53, upon which payment there were released to him by the escrow agent 4,650 shares of Mesta Machine Co. stock still held by it.
The trustee repaid the petitioner $ 30,000 on June 16, 1934, and charged each trust with $ 5,000 (so stipulated). That left a balance due petitioner upon his advances in behalf of the trustee of $ 23,639.85, which, with accrued interest, the trustee paid in October 1934, charging each trust with a proportionate part of that amount. Petitioner then turned over 1,000 Mesta Machine Co. shares to the trusts.
The excess of petitioner's obligations under the Donner agreement over the market value of shares of Mesta Machine Co. stock purchased under that agreement in 1934 amounted to $ 37,850.
*763 On April 30, 1932, the five trusts were without funds to pay the interest due on the notes which the trustee had issued to Commonwealth Trust Co. and Fidelity Trust Co. and petitioner advanced $ 2,500 to the trusts for that purpose. The trustee repaid the amount to petitioner out of trust funds on January*145 3, 1933.
On January 1, 1934, the Mesta Machine Co. had 600,000 shares of stock outstanding. On January 1 of each of the years 1935 to 1939, inclusive, the number of shares outstanding was 1,000,000. The percentage of the total shares outstanding owned by the petitioner, his wife, the five children's trusts and the Mayer Dixon trust, hereinafter described, ranged from 19.783 percent in 1934 to 17.403 percent in 1939. The number of shares held by the petitioner, the children's trusts, and the Mayer Dixon trust for the taxable years was as follows:
| Children's | Mayer-Dixon | ||
| Year | Petitioner | trusts | trust |
| 1934 | 66,700 | 40,000 | 12,000 |
| 1935 | 102,466 | 70,000 | 20,000 |
| 1936 | 50,833 | 68,550 | 20,000 |
| 1937 | 50,733 | 68,550 | 20,000 |
| 1938 | 50,667 | 68,550 | 20,000 |
| 1939 | 50,000 | 68,550 | 20,000 |
The net income of the five children's trusts for the years 1932 to 1939, inclusive, the amounts thereof reported by the beneficiaries as distributed to them, and the amounts of income reported as undistributed and taxable to the trusts were as follows:
| Year | Net income | Distributed | Undistributed |
| 1932 | $ 264,711.75 | $ 110,000.00 | $ 154,711.75 |
| 1933 | 211,347.38 | 91,544.03 | 119,803.35 |
| 1934 | 601,658.28 | 257,577.72 | 344,080.56 |
| 1935 | 1,429,640.36 | 748,477.43 | 681,162.93 |
| 1936 | 1,423,995.00 | 806,392.83 | 617,602.17 |
| 1937 | 1,364,679.74 | 1,038,222.46 | 326,457.28 |
| 1938 | 1,172,472.30 | 630,775.76 | 541,696.54 |
| 1939 | 682,420.34 | 347,299.84 | 335,120.50 |
| Total | 7,150,925.15 | 3,120,635.08 |
The income taxes of the children paid by the trustee and included in the distributed income for the years 1933 to 1939, inclusive, were as follows:
| 1933 | $ 9,094.03 |
| 1934 | 6,165.77 |
| 1935 | 47,834.86 |
| 1936 | 293,622.56 |
| 1937 | 403,355.05 |
| 1938 | $ 538,129.58 |
| 1939 | 265,666.01 |
| Total | 1,563,867.86 |
*764 Most of the trust income was derived from royalties under the Mesta agreement. The following table shows the income derived from royalties, from dividends, and from other sources:
| Other | |||
| Year | Royalties | Dividends | sources |
| 1932 | $ 258,982.12 | (Mesta) $ 20,000.00 | |
| 1933 | 185,643.02 | "32,000.00 | $ 291.39 |
| 1934 | 561,217.02 | "50,000.00 | |
| 1935 | 1,302,008.54 | (All) 121,340.81 | 20,652.04 |
| 1936 | 1,109,287.96 | "331,485.64 | |
| 1937 | 1,061,123.46 | "323,179.12 | |
| 1938 | 942,769.15 | "244,350.00 | |
| 1939 | 522,637.18 | "161,375.00 | 9,244.94 |
| Total | 5,943,668.45 | 1,283,730.57 | 30,188.37 |
All distributions of trust funds and all purchases of securities by the trustee were made at petitioner's direction. During the years 1934 to 1939, inclusive, the trustee purchased securities*147 in the aggregate amount of approximately $ 2,415,000. Approximately $ 430,800 of such securities were distributed to the beneficiaries at cost in 1936.
Each of the petitioner's children maintained two checking accounts at the Fidelity Trust Co., one of which was designated "regular" and one "special." One of the special accounts was established in 1933, two in 1934, and two in 1935. The material cash distributions, with minor exceptions, from the five trusts were either cashed by the beneficiaries or credited to their regular or special checking accounts as follows:
| Regular | Special | ||||
| Year | Cashed | account | account | ||
| 1934 | $ 27,000 | $ 106,411.95 | $ 96,000 | ||
| 1935 | 7,042.57 | 693,600 | |||
| 1936 | 81,926.44 | ||||
| 1937 | 9,867.41 | 625,000 | |||
| 1938 | 82,646.18 | 1939 | 81,633.83 | ||
| Total | 27,000 | 369,528.38 | 1,424,600 |
Most of the withdrawals of funds from the special accounts were made by "debit memos" signed or approved by one of the officers of the trust company. Some of these were for the purpose of transferring funds from the special to the regular accounts. At different times the children all purchased homes with funds withdrawn from*148 the special accounts.
During some of the years under consideration large amounts of income from the children's trusts were used for petitioner's benefit. Some of those amounts were paid directly to the petitioner or on his obligations by the trustee, some were withdrawn for petitioner's use *765 from the children's accounts, and some were transferred by the children directly to petitioner. In 1932 $ 50,000 of the $ 110,000 of the trust income reported distributed to the beneficiaries in that year was paid to the Fidelity Trust Co. on petitioner's indebtedness which had been assumed by the trusts, and $ 24,000 was transferred to the Mayer-Dixon trust (described below) for the payment of premiums on policies of insurance on petitioner's life. Of the $ 154,711.75 of income reported as taxable income of the trusts in that year $ 150,000 was paid on petitioner's indebtedness to the Commonwealth Trust Co. which the trusts had assumed.
In 1933 $ 32,000 of the $ 91,544.03 reported as distributed to the beneficiaries was paid over to the Mayer-Dixon trust and $ 16,000 was paid to petitioner to compensate him for the support and maintenance of his two minor children, whom he had declared*149 "emancipated" in 1932.
In 1934, out of the $ 257,577.72 of income reported as distributed to the beneficiaries, $ 50,000 was paid to Fidelity Trust Co. on petitioner's indebtedness, $ 22,000 was transferred to the Mayer-Dixon trust, and $ 15,000 was paid to petitioner for support of his minor sons. Also $ 57,881.31 was paid to petitioner out of the income reported as undistributed by the trusts to reimburse him for amounts which he had paid out under the Donner agreement, together with interest thereon.
In December 1934 petitioner's children each made him a gift of $ 5,000. In January 1935 they each made him an additional gift of $ 5,000. The gifts were intended as Christmas presents. They were a part of the distributed income of the trusts reported for taxation by the children in the years 1934 and 1935. The gifts were made part in 1934 and part in 1935 upon the advice of one of the officers of the Fidelity Trust Co. so as to avoid gift tax liability.
During 1937 petitioner began negotiations with certain interests in Great Britain for the organization of a new company and the construction of a plant in Great Britain. Petitioner agreed to post a fund of $ 1,500,000 to show *150 his good faith in the negotiations. On April 7, 1937, at petitioner's direction, the trustee of the five children's trusts deposited $ 125,000 in the special account of each child. On April 8 petitioner caused $ 150,000 to be withdrawn from each of the accounts, which amounts were deposited to his credit in a new account opened on that date at the Union Trust Co., of Pittsburgh, together with his own check for $ 260,000 drawn on the Commonwealth Trust Co. On April 9, 1937, petitioner purchased with those funds $ 1,000,000 face value of United States Treasury bills, which, together with $ 500,000 of petitioner's wife's funds which were likewise converted into United States Treasury bills, he transmitted to Great *766 Britain and deposited in a London bank. Petitioner sent each of his children a receipt dated April 7, 1937, stating:
Received of
[Signed] Lorenz Iversen.
The negotiations for the new plant did not materialize. In 1939*151 on petitioner's instructions 151,329-18 of the funds held by the London bank were invested in gold bullion (11 bars). Title to the gold was taken in the names of the children. In 1939 the gold was sold and the proceeds transmitted to this country and redeposited in the children's special accounts. The amounts returned to the special accounts differed as to each child and were several thousand dollars less than the amounts originally withdrawn from the accounts.
The funds in the children's special accounts were always handled as belonging to them individually. However, none of the children ever drew checks on those accounts in any substantial amounts without the advice and approval of petitioner or one of the officers of the Fidelity Trust Co. In some of the years large amounts of the funds accumulated in the accounts were invested in securities selected by officials of the Fidelity Trust Co. Stocks costing approximately $ 450,000 were purchased in 1935 and were reflected in the balances shown in the trustee's statements sent to the children.
All three of the petitioner's sons are presently employed by the Mesta Machine Co.
For all of the years involved in this proceeding the*152 trustee filed income tax returns on Form 1040 for each of the trusts, and fiduciary returns on Form 1041 for each of the beneficiaries. The children each filed individual income tax returns. The taxes shown to be due on all of those returns were paid and no refunds have ever been made to the trustee or the children.
On September 3, 1931, petitioner created an unfunded insurance trust, naming the Fidelity Trust Co. trustee. The corpus of the trust consisted of policies of insurance on petitioner's life in the aggregate face amount of $ 1,000,000. Petitioner assigned to the trustee all of his rights in the policies except his right to disability benefits. The trustee was not required to pay the premiums on the policies except when, and to the extent that, funds were furnished to it for that purpose.
The income of the trust after petitioner's death was to be distributed to or used for the benefit of petitioner's wife and children. The trust as created was revocable, but was made irrevocable by an amendment made by petitioner in 1932.
*767 The Mayer-Dixon trust referred to above was created on November 9, 1931. Petitioner's daughters, Mary Helen Dixon and Elonora Pauline Mayer, *153 were the nominal grantors of the trust. The original trust corpus consisted of $ 282,000 which petitioner paid over to his daughters for that purpose by checks dated November 10, 1931. Later petitioner gave his daughters additional checks for $ 204,000, dated November 20, 1931, which they turned over to the trustee as additional corpus of the trust. On December 21, 1931, petitioner paid $ 30,000 additional to the trustee.
The trustee was directed to apply the net income of the Mayer-Dixon trust to the payment of premiums on the policies of insurance on petitioner's life which were held under the insurance trust referred to above. Any excess income was to be added to corpus. If necessary the trustee could use the corpus for the payment of the premiums. After petitioner's death the funds in the trust were to be consolidated with those of the insurance trust.
The trust agreement also provided that the trustee should follow the instructions of petitioner's daughters in making investments and voting stocks. The daughters were to have no right to amend or revoke the trust without petitioner's consent. If petitioner survived the daughters the trust was to terminate and its funds *154 were to be transferred to him.
The net income of the Mayer-Dixon trust, the amounts of income transferred to the insurance trust, and the premiums paid by the insurance trust on policies of insurance on petitioner's life during the years 1931 to 1939, inclusive, were as follows:
| Transferred to | Premiums | ||
| Year | Net income | insurance trust | paid |
| 1931 | $ 4,900.00 | None | None |
| 1932 | 25,632.45 | $ 22,181.34 | $ 45,952.39 |
| 1933 | 15,345.21 | 13,896.22 | 46,127.64 |
| 1934 | 24,601.25 | 25,636.54 | 47,193.17 |
| 1935 | 46,540.50 | 39,952.82 | 46,895.81 |
| 1936 | 104,125.00 | 43,095.60 | 46,554.01 |
| 1937 | 107,800.00 | 46,595.00 | 46,514.25 |
| 1938 | 68,600.00 | 46,133.00 | 46,245.75 |
| 1939 | 46,416.99 | 3,857.00 | 4,348.70 |
In his deficiency notices for all of the years involved, except 1935, the respondent has included in petitioner's income all of the income of the five children's trusts, all of the income of the Mayer-Dixon trust, and lesser amounts of miscellaneous income which are not involved in the issues under consideration. For 1935 the income of the Mayer-Dixon trust only was included in petitioner's income in the deficiency notice, but in an amended answer filed in the proceeding for that year, Docket No. *155 98592, respondent alleges affirmatively that petitioner is also taxable on all of the income of the five children's trusts.
*768 The following tabulation shows, for each of the taxable years, the income reported by the five children's trusts, the trust income reported by the beneficiaries, the income reported by the petitioner, and petitioner's adjusted income as computed in the deficiency notices, and, as to 1935, in the respondent's amended answer:
| Trust income | ||||
| Income reported | reported by | Income reported | Petitioner's | |
| Year | by 5 trusts | beneficiaries | by petitioner | adjusted income |
| 1934 | $ 344,080.56 | $ 257,577.72 | $ 95,848.15 | $ 731,107.86 |
| 1935 | 681,122.93 | 748,477.43 | 184,127.27 | 1,660,616.47 |
| 1936 | 617,602.17 | 806,392.83 | 235,451.33 | 1,770,558.63 |
| 1937 | 326,457.28 | 1,038,222.46 | 235,025.65 | 1,721,602.53 |
| 1938 | 541,696.54 | 630,775.76 | 131,194.23 | 1,375,445.64 |
| 1939 | 335,120.50 | 347,299.84 | 209,350.46 | 945,200.96 |
OPINION.
Respondent's first and principal contention is that petitioner is taxable on all of the income of the five children's trusts for all of the years involved under
As to the Mayer-Dixon trust, respondent contends that petitioner is taxable on all the income for all of the taxable *157 years involved under sections 166 or 167, or both.
We think that the respondent must be sustained in his contention that petitioner is taxable on all of the income of the five children's trusts under
First, petitioner had the right to direct the trustee to use either principal or income of the trusts without limitation to satisfy his liability under the Donner agreement (see article one, paragraph (2) above). That liability amounted to $ 559,500 at January 1, 1934, and $ 139,913.53 at January 1, 1935. It was fully paid during 1935.
*769 Petitioner had absolute and exclusive control over all distributions of trust income. None of the beneficiaries could receive any distribution from the trusts during his lifetime except as he directed. He had the right to terminate the trusts at any time and to have any or all of the principal distributed to the beneficiaries. He had the right to control all investments of trust funds. He could not only veto any purchase or sale of the securities proposed by the trustee, but he could require the trustee to purchase, sell, or exchange*158 any securities which he himself might suggest. He had the right to direct the trustee in voting all stock held in the trusts. Finally, he retained the power to perform any act necessary to the determination of, or to make settlement of, any controversy involving the rights of any of the parties or their assigns under the Mesta, Donner, and Fink agreements.
All of those interests, rights, and powers were expressly reserved to the petitioner under the trust agreements. While no one of them might be deemed sufficient in itself to bring this case under
The Supreme Court said in
* * * Economic gain realized or realizable by the taxpayer is necessary to produce a taxable income under our statutory scheme. * * *
That economic*159 gain for the taxable year, as distinguished from the nonmaterial satisfactions, may be obtained through a control of a trust so complete that it must be said the taxpayer is the owner of its income. * * * [Citing
Petitioner's economic gain was definite enough as to the trust income or principal that might have been used to satisfy his financial obligations, either at his direction (as to the obligations under the Donner agreement) or in the discretion of the trustee (as to his obligations as guarantor of the notes held by the Commonwealth Trust Co. and the Fidelity Trust Co.). (See article, one, paragraphs (1) and (2), set out above.)
Against the conclusion which might be urged, from a technical construction of the trust agreements, that petitioner stood to realize no economic benefit from the trust income that was to be either distributed to the beneficiaries (pursuant to his direction) or added to principal, stand the facts that actually large amounts of such income did find their way into petitioner's hands through the channels of close family relationship. *160 First, there were the "Christmas gifts" *770 of $ 50,000 which the beneficiaries made to petitioner out of trust income in December 1934 and January 1935. Later, in 1937, there were the withdrawals from the children's special accounts of $ 750,000 of trust income for petitioner's use in his negotiations for the construction of a new plant in Great Britain. While the evidence is that these gifts were entirely voluntary and that the withdrawals from the special accounts were made with the consent of each of the children, the inference is that all of the available trust income may have remained "in substance at the disposal of the settlor."
The difficulty of applying the*161 doctrine of the
In the recent case of
The fact that the grantors in the
Petitioner had important control over the trust income in his right either to distribute it to or withhold it from any one of the beneficiaries. Thus, during the lifetime of the petitioner the beneficiaries were as completely dependent upon his bounty as if no trusts had ever been created. Their incomes from the trusts were entirely "subject to his whims."
What is perhaps a more important ground for petitioner's claiming a distinction between this and the
Donor reserves the right from time to time to accelerate the termination of this trust agreement as to
The plain meaning of these provisions is that the petitioner could have terminated the trusts at any time. It is uncertain whether in case of such termination of the trust in whole or in part the trustee would have been required to pay over to the beneficiary all or any part of the corpus of the trust which was thus terminated. It is plain, we think, that *165 a power to terminate a trust at will adds materially to the "bundle of rights" under which a grantor's liability under
*772 Even if we construed the trust agreements as prohibiting the reversion of any of the corpus to petitioner during his lifetime, the situation here would be no less receptive to the doctrine of the
In their briefs both petitioner and the respondent seem to accept the trusts under consideration as long term trusts, the petitioner claiming that that fact argues against the application of the
Arguments are made by both parties as to petitioner's motives in creating the trusts. The respondent contends that it was tax avoidance and the petitioner contends that it was to create independent estates for his children, and particularly for his son Andreas, who had suffered a permanent physical disability in early childhood.
We are not so much concerned here with petitioner's motives *167 as with the consequences of his acts. As was said in
It is appropriate to observe, too, that petitioner created the trusts not out of accumulated wealth or
It was unusual, at least, for petitioner, in the prime of life (he was only 56 years of age at the time the trusts were created) and at the peak of his business career, and facing, as he was, a crucial period in his financial affairs, to assign over to his children the very means by which he might have expected to achieve ultimate financial success.
We think that all of the circumstances of the creation and operation of the trusts fully justify the respondent's determination that petitioner is taxable on the income under
Holding as we do that petitioner is taxable on all the income of the five children's trusts under
The remaining issue relates to petitioner's liability for tax on the income of the Mayer-Dixon trust. As to this issue it seems to us that the facts speak too plainly to call for much discussion. In short, petitioner furnished his two daughters large amounts of money for the purpose of establishing a trust whose income was to be used to pay the premiums upon policies of insurance on his life. If petitioner himself had posed as grantor of the trust he would have been taxable on the income under the explicit provisions of
The net income of the Mayer-Dixon trust for some of the years 1934 to 1939, inclusive, was in excess of the premiums paid upon the policies. The respondent argues that the petitioner is taxable upon the entire net income of the trust, since the excess income for any year not used to pay premiums could have been so used during the following year and since additional policies could have been transferred to the insurance trust. We do not think that this is a proper construction of the statute.
Petitioner's tax liability for the years 1934 to 1939, inclusive, will be recomputed in accordance with this opinion and the stipulations of the parties.
Black,
The plain meaning of these provisions is that the petitioner could have terminated the trusts at any time. It is uncertain whether in case of such *775 termination of the trust in whole or in part the trustee would have been required to pay over to the beneficiary all or any part of the corpus of the trust which was thus terminated. * * *
If the settlor had exercised his right to terminate the trusts and thus accelerate the time of enjoyment by the beneficiaries, I do not think there is any doubt but the trustee would have had to turn over the net proceeds of the trusts to the beneficiaries after the debts and obligations of the trust estates were satisfied. I do not agree with the majority opinion wherein it says that there was uncertainty about this. *173 Also I do not agree that the retention by the grantor of an irrevocable trust of the right to accelerate the time of enjoyment by the beneficiary of the rights granted him under the trust is the retention of any such control by the settlor as would justify the taxability of the income of the trust to him.
In the recent case of
For substantially the same reasons as expressed by us in the
During the lifetime of the Donor --
(a) the Trustee shall not sell, purchase or exchange any securities at any time in the trust estate, without the written consent of the Donor;
(b) the Trustee shall make sales, purchases or exchanges upon the written request of the Donor;
(c) the Trustee shall vote the securities in the trust estate on any corporate matter as directed by the Donor.
These were very broad powers of control which the settlor reserved unto himself and justify, I think, the taxation of the income of the trust estates to the settlor under
*. Includes children's income taxes paid by trustee in the aggregate amount of $ 1,563,867.86.↩
*. For Elonora Pauline Mayer only.↩
1.
(a) Where any part of the income of a trust -- * * * * (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called "charitable contribution" deduction);↩