Hyman v. Commissioner

Florence S. Hyman, Petitioner, v. Commissioner of Internal Revenue, Respondent

Hyman v. Commissioner

Docket Nos. 106972, 108215

United States Tax Court

1 T.C. 911; 1943 U.S. Tax Ct. LEXIS 189;

April 13, 1943, Promulgated

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Decisions will be entered for the respondent.

1. Where petitioner, a person of means, transferred in 1939 certain property to herself and husband as trustees, the income to be accumulated for about three years until their only child reached the age of 21, at which time the accumulations were to be paid to him and thereafter the net income until he reached the age of 30 years, at which time the trust was to cease and the corpus and all accumulated and unexpended income therefrom were to be paid to petitioner, and petitioner, in addition to other reserved powers, reserved "the right to designate any beneficiary or beneficiaries, other than herself, to receive the income and/or principal in place and stead of the beneficiaries" named in the trust instrument, held, the income from the trust is taxable to petitioner under section 22(a) of the Internal Revenue Code. Commissioner v. Buck, 120 Fed. (2d) 775.

2. Where during the taxable year petitioner executed an assignment to her husband of any dividends that might be declared on certain stock between the date of the assignment and the close of the taxable year, and thereafter and during the taxable year dividends were declared on the stock and were paid to the assignee, and petitioner at all times here material remained the owner of the stock upon which the dividends were declared, held, petitioner is taxable on such dividends as her own income. Helvering v. Horst, 311 U.S. 112">311 U.S. 112.

3. For the purposes of the gift tax, held, the value of the gift was the amount of the dividends that were declared and paid to the assignee during the effective period of the assignment.

C. H. Lieb, Esq., for the petitioner.

Harold D. Thomas, Esq., for the respondent.

Black, Judge.

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BLACK

These consolidated proceedings are for the redetermination in Docket No. 106972 of a deficiency in income tax for the calendar year 1939 determined by the respondent against petitioner in the amount of $ 5,146.39, and for the redetermination in Docket No. 108215 of a deficiency in gift tax for the calendar year 1939 determined by the respondent against petitioner in the amount of $ 270.

In a statement attached to the income tax deficiency notice the respondent made adjustments to the net income as disclosed by petitioner's return and explained them as follows:

Net income as disclosed by return			$ 40,474.09
Unallowable deductions and additional income:
	(a) Dividends from Climax Molybdenum Company	$ 13,000.00
	(b) Dividends from Chrysler Corporation	115.00
	(c) Income from Trust for John Arthur Hyman	2,300.00
	(d) Net short-term gain	1,851.50
	(e) Taxes	100.00
			17,366.50
Net income adjusted			$ 57,840.59

Explanation of Adjustments

(a) In view of the principles set forth in the decision of the United States Supreme Court in Helvering v. Horst, 61 S. Ct. 144">61 S. Ct. 144, dividends of $ 13,000.00 payable in December, 1939, by Climax Molybdenum Company on 10,000 shares of stock of Climax Molybdenum Company owned by you are held to constitute taxable income to you. The purported assignment of the aforesaid dividends to your husband is ineffectual for the shifting of the tax liability since you did not relinquish control and ownership of the property producing the income.

* * * *

(c) It is held that the income from the trust created by you on November 9, 1939 for the benefit of your son, John Arthur Hyman, is taxable to you under the provisions of section 22 (a), as amended, of the Internal Revenue Code. Accordingly, the net income of the trust for the year 1939, in the amount of $ 2,300.00, is included in your gross income.

* * * *

(e) Deduction of $ 2,767.65 for taxes paid is reduced to $ 2,667.65. The difference of $ 100.00, representing unsubstantiated miscellaneous taxes claimed, is disallowed.

Petitioner by appropriate assignments of error contests only adjustments (a), (c) and (e). Petitioner offered no evidence as to adjustment (e) and has apparently abandoned that assignment of error.

In a statement attached to the gift tax deficiency notice the respondent increased the amount of net gifts by petitioner for the calendar year 1939 by the "amount of dividends paid" of $ 13,000, which he explained as follows:

It is held that the assignment of the right to dividends to the husband is a taxable gift under the provisions of section 501 (b) of the Revenue Act of 1932.

Petitioner by an appropriate assignment of error contests this adjustment.

FINDINGS OF FACT.

Petitioner is married and lives with her husband, Arthur B. Hyman, in New York City. She filed her income and gift tax returns for the calendar year 1939 with the collector of internal revenue for the third district of New York. Petitioner and her husband have one child, John Arthur Hyman, born December 2, 1921.

On November 9, 1939, petitioner created a trust for the benefit of her son, John Arthur Hyman, who was slightly under 18 years of age on the date of the creation of the trust. Article I of the trust instrument provided in part as follows:

The Settlor does hereby sell, assign, transfer and set over to the Trustees one thousand (1,000) shares * * * of the capital stock of Climax Molybdenum Company, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and all dividends now accrued, declared and unpaid thereon, which, together with any and all other funds and property which may hereafter be added thereto or exchanged therefor, as hereinafter provided, are hereinafter referred to as the "trust estate", to be had and held by the Trustees upon the following express trust and conditions, and with the powers and limitations herein expressly set forth that is to say, To Have, Hold and Manage the said trust estate, and to invest and, from time to time, to sell, exchange and otherwise dispose of and reinvest the same, or the proceeds thereof, and to collect the rents, issues, income or revenues therefrom (hereinafter without distinction referred to as "income"), as well as the profits therefrom arising, until John Arthur Hyman, son of the Settlor, arrives at the age of thirty (30) years, or sooner dies, and, after deducting all proper taxes, charges and expenses of the administration and management of the said trust estate, to accumulate said net income therefrom until said John Arthur Hyman arrives at the age of twenty-one (21) years, at which time the Trustees shall pay over to him all such accumulations, and, thereafter, shall pay said net income to him or expend the same for his maintenance, education and support, or both, in such manner as to them may seem proper.

Upon the arrival of said John Arthur Hyman at the age of thirty years, or upon his death prior to arrival at such age, the trust hereby created shall cease, determine and come to an end, and the principal of the trust and all accumulated and unexpended income therefrom shall be paid over to the Settlor, to her own use absolutely and forever, or, if she be dead, to Arthur B. Hyman, husband of the Settlor, if he survives her.

The Settlor reserves the right to designate any beneficiary or beneficiaries, other than herself, to receive the income and/or principal in place and stead of the beneficiaries named herein.

The trustees designated in the trust instrument were petitioner and her husband. On August 27, 1940, petitioner resigned as a trustee, and requested her husband, her cotrustee, to act as sole trustee under the trust instrument.

At the time of the creation of the trust John Arthur Hyman had no assets or income of any consequence, whereas petitioner's separate estate was something above a half million dollars. Petitioner and her husband expected to see that the son had the benefits of schooling and college that would be necessary and they estimated that he would be twenty-six or twenty-seven years of age by the time he had gone through preparatory school and college and had taken a professional course.

By article II of the trust instrument the beneficiary was precluded from assigning any part of the income or principal of the trust and it was further provided that the income and principal were exempt from attachment, trustee process, garnishment or other legal proceedings or process while in the hands of the trustees.

Article III of the trust instrument reads as follows:

The Trustees are authorized and empowered, in their discretion, to invest, keep invested and reinvest the trust estate, or any part thereof, including any accumulations of income or the proceeds of any sale or other disposition of any property at any time constituting a part of the trust herein created, in such investments, securities or other property as they may deem proper, without being restricted or limited to investments, securities or property authorized by the laws of the State of New York for the investment of trust funds.

The next four articles of the trust instrument gave the trustees broad powers in the management of the trust property, including the right to vote stock, to sell or exchange the trust property, to acquire other securities or property of every nature, to borrow money with or without collateral security, and in general to exercise all the powers that might be lawfully exercised by an individual owning such securities or obligations and acting in his own right and interest.

Under the remaining articles the trust instrument provides that the settlor may make additions to the corpus, but none have been made. The settlor has the power to add to the number of trustees, to appoint such additional or substituted trustees as she may desire, and to require the resignation of the trustees or any of them. In the event that a trustee should die, resign, or become incapacitated, she is to have the right to fill the vacancy if then living; otherwise, such vacancy is to be filled by the remaining trustee or trustees. The trustees are under no liability in connection with the management of the trust estate, except for their own willful default or misconduct.

During the year 1939 dividends upon the stock of the Climax Molybdenum Co. in the amount of $ 2,300 were received by the trust estate, which filed an income tax return reporting the dividends so received and paid the tax thereon shown to be due, amounting to $ 88. The dividends of $ 2,300 consisted of a special dividend of $ 1 per share declared on October 23, 1939, and payable to stockholders of record as of a date prior to November 9, 1939, but actually paid on November 10, 1939; another special dividend of $ 1 per share declared on December 8, 1939, and payable on December 22, 1939; and the regular 30 cents per share quarterly dividend declared on December 8, 1939, and payable on December 22, 1939.

The respondent in determining the income tax deficiency involved herein determined that such dividends in the amount of $ 2,300 constituted a part of petitioner's income for the calendar year 1939.

On December 6, 1939, petitioner duly executed an instrument the body of which is as follows:

Know All Men by These Presents:

That I, Florence S. Hyman, of the Borough of Manhattan, City, County and State of New York, have assigned, transferred and set over, and do hereby assign, transfer and set over, to Arthur B. Hyman, of the same place, the right to receive all dividends which may be declared and paid between the date hereof and December 31, 1939 on ten thousand (10,000) shares of the capital stock of Climax Molybdenum Company, a Delaware Corporation, standing in my name on the books of the said company.

In Witness Whereof, I have hereunto set my hand and seal this 6th day of December, 1939.

Florence S. Hyman (L. S.)

The directors of the Climax Molybdenum Co., at a meeting held on December 8, 1939, after the execution of the above instrument, declared the regular quarterly dividend of 30 cents per share and an extra dividend of $ 1 per share, making a total of $ 13,000 on the 10,000 shares of stock which were the subject matter of the assignment.

The capital stock of the Climax Molybdenum Co. outstanding for the years 1936 to 1939, inclusive, was 2,520,000 shares. The net earnings per share and the dividends per share for those years were as follows:

		Quarterly dividends
Year	Earnings per share
		1st	2d	3d	4th
1936	$ 2.065	$ 0.20	$ 0.20	$ 0.20	$ 0.40
1937	2.85	.30	30	30	.30
1937	Special dividend			.50
1938	$ 3.12	.30	.30	.30	.30
1938	Special dividend			1.00
1939	$ 4.09	.30	.30	30	.30

A special dividend of $ 1 was declared on October 23, 1939, payable to stockholders of record as of a date prior to November 9, 1939, but actually paid on November 10, 1939. Another special dividend of $ 1 was declared on December 8, 1939, payable December 22, 1939.

The assignment of December 6, 1939, was duly filed with the Irving Trust Co., through which the dividends of the Climax Molybdenum Co. were paid, and the said dividends of $ 13,000 were thereafter paid to said Arthur B Hyman, who reported them in his income tax return for the year 1939 and paid the tax thereon. The respondent in determining the income tax deficiency involved herein included the said dividends of $ 13,000 in the income of petitioner for the year 1939 and he included them in the amount of net gifts by petitioner for that year in determining the gift tax deficiency involved herein.

For the purposes of section 506 of the Revenue Act of 1932 the value of the right to receive all dividends which may be declared and paid between December 6 and December 31, 1939, on 10,000 shares of the capital stock of the Climax Molybdenum Co. was $ 13,000.

For the purposes of section 22 (a) of the Internal Revenue Code petitioner did not cease to be the owner of the above mentioned 1,000 shares of the capital stock of the Climax Molybdenum Co. after the John Arthur Hyman trust was created.

OPINION.

We shall first consider the question of whether the respondent erred in determining that the income of the John Arthur Hyman trust in the amount of $ 2,300 is taxable to petitioner under section 22 (a) of the Internal Revenue Code. ^{*201 upon whether the situation here presented falls within or without the ambit of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. At the hearing counsel for the respondent made the statement that the $ 2,300 of income in question under this issue "may also be taxable to the petitioner" under section 166 or 167 of the Code, but in his brief he discussed only the taxability under section 22 (a) and stated "that any further possibilities under section 166 or 167 need not be discussed." In any event the respondent contends that $ 1,000 of the $ 2,300 income representing the special dividend of $ 1 per share declared prior to the creation of the John Arthur Hyman trust but payable thereafter is taxable to petitioner under Helvering v. Horst, 311 U.S. 112">311 U.S. 112.}

Petitioner, in contending that the situation here presented falls outside the ambit of the Clifford case, relies strongly upon Commissioner v. Jonas, 122 Fed. (2d) 169, saying in her brief that this case "is almost on all fours with the case at bar."

We think the respondent's determination must be sustained upon the authorities of Helvering v. Clifford, supra, and Commissioner v. Buck, 120 Fed. (2d) 775. In the latter case the settlor conveyed certain shares of stock to a bank, as trustee, to pay the income to his wife for life, and on her death, to pay the income and ultimately the principal to his children or their descendants. He retained a power "to alter or amend in any respect whatsoever" the provisions relating to the distribution of the income or principal, except that this power could not be exercised for his own benefit. In the event that a beneficiary predeceased him, the share held for that beneficiary was to return to Buck, the settlor. Buck also retained the power to remove the trustee and reserved the right to vote any stock or to direct the trustee how to vote it. In holding that the settlor was taxable on the income of the trust under section 22 (a) of the Revenue Acts of 1932 and 1934 (identical with the material provisions of the same section of the Code set out in footnote 1) the Court enumerated the significant factors to be considered as follows:

That the donees are members of the donor's family, of which he is the head; that he has "income in excess of normal needs"; that, during his life, he is unrestricted as to the disposition of any part of the corpus or income, excepting that he may not divert any portion for his personal use; that, while he lives, he has entire control of the management of the corpus, and, at his pleasure, may remove the trustee and appoint another.

In the instant proceeding the named income beneficiary was the settlor's only child and the trustees were the settlor and her husband, thus presenting the "intimate family group" referred to in the Clifford case. At the time of the creation of the trust, petitioner's separate estate was something above a half million dollars. The maximum life of the trust was a little over twelve years. Upon its termination "the principal of the trust and all accumulated and unexpended income therefrom shall be paid over to the Settlor, to her own use absolutely and forever * * *." And in the meantime, according to article I of the trust instrument:

The Settlor reserves the right to designate any beneficiary or beneficiaries, other than herself, to receive the income and/or principal in place and stead of the beneficiaries named herein.

Broad powers of management are given by the trust instrument, the trustee or trustees being permitted to exercise practically all of the powers that might lawfully be exercised by an individual owning such securities or obligations and acting in her own right or interest. Furthermore, the settlor reserved the power to remove any trustee and appoint another. We think the summation of these factors left petitioner as the virtual owner of the corpus of the trust for the purposes of section 22 (a), supra, and we have so found as an ultimate finding of fact.

Petitioner's husband testified that the purpose of the trust was to provide the son with sufficient funds to complete his college and professional education and to make him financially independent until he was capable of earning his own living, but petitioner did not make that purpose secure. She reserved the power to cut her son off at any time she pleased and to designate any other beneficiary or beneficiaries, other than herself, "to receive the income and/or principal" of the trust estate. As stated by the court in Brown v. Commissioner, 131 Fed. (2d) 640 (certiorari denied, 318 U.S. 767">318 U.S. 767, affirming 46 B. T. A. 782:

* * * We think that a settlor who is a person of means and who can control the spending of a fund, which she has set up, in every respect except spending it for herself is sufficiently the "owner" of the fund to make its income taxable to her under section 22 (a). The case, upon its facts, is not unlike that of Commissioner of Internal Revenue v. Buck, supra, which we believe to have been correctly decided.

We do not agree with the petitioner that Commissioner v. Jonas, supra, is almost on all fours with the case at bar. There the settlor had no power of control or management of the trust property or of the disposition of the income and the trustees were not members of the Jonas family. Neither did the settlor reserve any right to change, modify, or revoke the trusts there involved. The only power that the settlor did reserve was the right to appoint a trustee or trustees if a vacancy should occur in such position or if an existing trustee should fail to act as such. Such factors are entirely different from the factors present in the instant proceeding, and we do not regard the Jonas case as at all controlling.

Another case upon which petitioner relies in her brief in support of her contention that Helvering v. Clifford, supra, and section 22 (a) are not applicable, is Stuart v. Commissioner, 124 Fed. (2d) 772, in which the court said in reversing the Board:

We think the Board erred in holding that the petitioner John Stuart was liable under Section 166 (2) of the Act, and from what we have said we are of the opinion that he was not liable under Section 167 (a) which deals with revocable trusts, or under Section 22, which deals with gross income.

Since the filing of petitioner's brief the Supreme Court has decided Helvering v. Stuart, 317 U.S. 154">317 U.S. 154, and it held as to the John Stuart trust that the Seventh Circuit was right in holding that sections 166 and 167 were not applicable. However, the Supreme Court remanded the John Stuart case to the Board to determine whether or not the grantor is taxable under section 22 (a). Thus it will be seen that the decision of the Seventh Circuit in the John Stuart case that section 22 (a) was not applicable is no longer authority on that point. In the instant case we are basing our decision squarely under section 22 (a), and we find nothing in the Supreme Court's decision in the Stuart case which would throw doubt upon the Second Circuit's decision in Commissioner v. Buck, supra, which we have already cited, and upon which we rely in support of our decision.

We sustain the respondent's determination upon this issue. It thus becomes unnecessary to decide whether in any event $ 1,000 of the $ 2,300 income is taxable to petitioner. We hold the entire $ 2,300 taxable to petitioner.

We consider next the question whether the respondent erred in determining that the dividends in the amount of $ 13,000 declared and paid after petitioner had assigned to her husband the right to receive all dividends which may be declared and paid between the date of the assignment and December 31, 1939, on 10,000 shares of the capital stock of Climax Molybdenum Co. is taxable income to petitioner. The dividends in question were paid to petitioner's husband in accordance with the assignment executed on December 6, 1939.

The respondent as authority for his determination cited and relies upon Helvering v. Horst, 311 U.S. 112">311 U.S. 112. Petitioner contends that Blair v. Commissioner, 300 U.S. 5">300 U.S. 5, is controlling.

In the Horst case, the owner of negotiable bonds detached from them negotiable interest coupons shortly before their due date and delivered them as a gift to his son, who in the same year collected them at maturity. The Supreme Court held that the interest when collected by the son was taxable income to the father, who was the owner of the bonds. In the Blair case, the beneficiary of a trust had assigned a share of the income to another for life without retaining any form of control over the interest assigned. The Supreme Court construed the assignment as a transferin praesenti to the donee of a life interest in the corpus of the trust property and held in consequence that the income thereafter paid to the donee was taxable to him and not the donor.

We agree with the respondent that the principles enunciated in the Horst case are controlling, since petitioner continued to own the income-producing property. The Supreme Court in the Horst case distinguished the Blair case upon that ground. In this connection the Supreme Court said:

* * * In the circumstances of that case [the Blair case] the right to income from the trust property was thought to be so identified with the equitable ownership of the property from which alone the beneficiary derived his right to receive the income and his power to command disposition of it that a gift of the income by the beneficiary became effective only as a gift of his ownership of the property producing it. Since the gift was deemed to be a gift of the property the income from it was held to be the income of the owner of the property, who was the donee, not the donor * * *.

Petitioner, in contending that the principles laid down in the Horst case have no application here, stresses the difference between a bond carrying a definite commitment for the payment of interest and a share of stock upon which there is no commitment or obligation to pay a dividend until one is declared, and emphasizes the fact that in the instant proceeding the assignment was made before the dividend was declared. We do not think these differences are important where the income-producing property itself was not assigned. In Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, the Supreme Court again applied the principles of the Horst case and held that where a life beneficiary of a testamentary trust in December 1929 assigned to certain of her children specified amounts in dollars from income of the trust for the year following the assignment, and made a like assignment to her children and a son-in-law in November 1930, the assigned income, which was paid by the trustees to the several assignees, was taxable as such to the life beneficiary. In the course of its opinion the Supreme Court said:

Taxation is a practical matter and those practical considerations which support the treatment of the disposition of one's income by way of gift as a realization of the income to the donor are the same whether the income be from a trust or from shares of stock or bonds which he owns. [Italics supplied.]

Under the first issue we held petitioner taxable on the dividends from the 1,000 shares of Climax Molybdenum Co. stock on the ground that although she had transferred such shares to the John Arthur Hyman trust she retained sufficient powers to leave her the virtual owner of the shares. Under the present issue petitioner at all times here materially remained the owner of the tree which produced the fruit.

We hold that the $ 13,000 in question is taxable to petitioner. Helvering v. Horst, supra; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122; Harrison v. Schaffner, supra. Cf. Commissioner v. Lamont, 127 Fed. (2d) 875; Rhodes Estate v. Commissioner, 131 Fed. (2d) 50; B. O. Mahaffey, 1 T.C. 176">1 T. C. 176.

Regarding the gift tax deficiency, petitioner assigns that the respondent erred in determining that the value on December 6, 1939, of "the right to receive dividends that might be declared between that date and December 31, 1939 on 10,000 shares of the common capital stock of Climax Molybdenum Company was $ 13,000." Petitioner contends that as a practical matter we should find as a fact that the value of this "right" on December 6, 1939, did not exceed 15 or 20 cents per share. She bases this contention upon the past performance of the Climax Molybdenum Co. in that in 1936 the company paid out in dividends 48.43 percent of its earnings; in 1937, 59.65 percent; in 1938, 70.51 percent; and, up to December 6, 1939, the company had already paid out in dividends approximately 49.87 percent of its 1939 earnings. She contends that based upon this past performance one could not reasonably anticipate that between December 6, 1939, and the close of the year the company would do any more than declare and pay the fourth quarterly dividend of 30 cents per share, whereas on December 8 it actually declared a special dividend of $ 1 per share in addition to the fourth quarterly dividend, making both payable on December 22, 1939.

The respondent contends that his determination is presumptively correct and that "Petitioner has introduced no evidence whatsoever to show that the value of the right on December 6, 1939, was less than $ 13,000." In her reply brief petitioner says she has introduced sufficient evidence to show that the respondent's determination was arbitrary, and cites Helvering v. Taylor, 293 U.S. 507">293 U.S. 507

The parties appear to be in agreement that on December 6, 1939, petitioner made a completed gift to her husband of the "right to receive all dividends which may be declared and paid" between December 6 and December 31, 1939 on 10,000 shares of the capital stock of the Climax Molybdenum Co. We think petitioner did make such a gift, cf. 24 American Jurisprudence, Gifts, sec. 35; Crawfordsville Trust Co. v. Elston Bank & Trust Co., 25 N. E. (2d) 626, 637; Pace v. Pace, 73 N. C. 119; and that the gift tax applies. Section 501 (b) of the Revenue Act of 1932 provides that "The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible," and the Supreme Court has said that this language "is broad enough to include property, however conceptual or contingent." Smith v. Shaughnessy, 318 U.S. 176">318 U.S. 176. Cf. Federal Estate and Gift Taxation by Randolph E. Paul, vol. 2, sec. 16.12.

Section 506 of the Revenue Act of 1932 provides that "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift." The respondent has determined that the value of the gift at the date of the gift was $ 13,000. We do not agree with the petitioner that this determination was arbitrary or that Helvering v. Taylor, supra, is applicable. We think the best evidence of the value of the gift is the amount of dividends that were actually declared and paid during the effective period recited in the assignment. This was the value determined by the respondent. The gift tax deficiency determined by the respondent is sustained.

Decisions will be entered for the respondent.

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Footnotes

• 1. SEC. 22. GROSS INCOME.

  (a) General Definition. -- "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *↩