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Commissioner of Internal Revenue v. McIlvaine

July 19, 1935


Petition for Review of Decisions of the United States Board of Tax Appeals.

Author: Alschuler

Before EVANS, SPARKS, and ALSCHULER, Circuit Judges.

ALSCHULER, Circuit Judge.

Petitioner seeks review of decisions of the United States Board of Tax Appeals denying petitioner's contention that the taxable estate comprises a single instead of three trusts. As a single trust the income tax rate for the years in question would have been carried into the higher brackets sufficiently to make the taxes in controversy larger by about $30,000 than if taxed as three trusts; and it is for this difference that the Commissioner assessed deficiencies for the respective years. The board found there were three trusts, and no deficiencies.

March 19, 1913, John P. Wilson conveyed to his son, John P. Jr., and William B. McIlvaine, in trust, certain securities for the benefit of his three children, John, Martha, and Anna. The trustees were authorized to receive the entire income, and to sell the securities and reinvest the proceeds in accordance with the written directions of any two of the beneficiaries; and to accumulate the net income for fifteen years unless the period be shortened by the beneficiaries with the approval of the grantor if living; and after that time to distribute all net income in equal shares to the beneficiaries as provided. Provision was made that the instrument might be altered, changed, or modified to any extent by the three children with the approval of the grantor if living.

June 19, 1919, an amendment was made to the trust instrument providing that the trust property should be divided into three separate and equal trusts, each part to be separately held in trust by the trustees severally for one of the donor's said three children, and that the trustees should assign an undivided one-third interest in all the property they then held in trust for each of the children; and that all additions to the trust estate should be divided equally between the separate trust estates unless it be otherwise directed in the instrument of gift; and that the net income of the three trust estates should be paid to the beneficiaries entitled thereto upon the request of any two of the original beneficiaries, the income which was not paid out to be added to the principal of the trust fund from which it was derived.

December 1, 1920, a second amendment was made which canceled certain parts of the amendment of June 19, 1919, and substituted for it provisions which are the same as paragraphs 1 and 2 of article III of a third amendment which was duly made December 6, 1920. Article III of the third amendment is set forth in the margin.*fn*

It may be assumed that the trust instrument as originally drawn created a single trust. Concededly the trust, by its terms and with the consent of the beneficiaries and of the donor, if living, might be altered and amended in any of its provisions, so that there might be constituted any number of trusts; and it is unquestioned that the motive for setting up a larger numbere of trusts is not here material. So even though the sole purpose of the changes which were made was to bring about a reduction in the federal tax upon the income from the trust property, this would not transgress any right of the Government. The sole question is whether, under the amendments made, there were three trusts.

That it was the definite intent of the donor by these amendments to set up three separate trusts is too plain for controversy. In the amendments he repeatedly so states; and unquestionably the beneficiaries, in consenting to the amendments, did so with the intent and under the assumption that, whatever may have been the previous status, thereafter there were to be three separate trusts. While the intent of the parties is a prime factor in construing such an instrument and in case of doubt this is accorded high evidentiary value, yet the instrument itself, where it is sufficiently plain, must determine its character and scope. Colton v. Colton, 127 U.S. 300, 8 S. Ct. 1164, 32 L. Ed. 138; State Savings Loan & Trust Co. v. Commissioner, 63 F.2d 482 (C.C.A. 7); Hubbell v. Burnet, 46 F.2d 446 (C.C.A. 8).

True, there was here no provision for physical division of the trust property by segregating each portion of it. Under the terms of the amended instrument the corpus of each of the three trusts consisted of an undivided one-third interest. The physical property remained undivided in the possession of the trustees, who were the same for each of the three trusts. We perceive no valid reason why this may not be so, and it is well settled by authority that an undivided interest in real or personal property may properly be the subject-matter of a trust. Vanderpoel v. Loew, 112 N.Y. 167, 19 N.E. 481; Starbuck v. Farmers' Loan & Trust Co., 28 App. Div. 272, 51 N.Y.S. 58; Gurnett v. Mutual Life Ins. Co., 356 Ill. 612, 191 N.E. 250; Bogert Trusts and Trustees, Vol. 1, pp. 351 and 352; Tentative Draft No. 1 of the Restatement of the Law of Trusts, ยง 73.

It is well settled that separate and several trusts may be created by the same instrument, and be administered by the same trustees. DeVer H. Warner, Trustee v. Commissioner, 7 B.T.A. 1292 [affirmed (C.C.A.) 26 F.2d 1023]; Lynchburg Trust & Savings Bank v. Commissioner (C.C.A.) 68 F.2d 356; Carruth v. Carruth, 148 Mass. 431, 19 N.E. 369; Claflin v. Dewey, 177 Mass. 166, 58 N.E. 581.

Just what mode may or should be adopted for possessing and conserving the physical property which is thus subject to the separate trusts in undivided interests is not here of necessary significance. In this case, however, the trustees upon adoption of the amendments assumed to set up separate individual trust accounts for each of the three beneficiaries of the supposed separate trusts, and charged unto themselves as trustees severally for the separate beneficiaries an undivided one-third of the property and funds granted by the donor, and kept the accounts accordingly. What more they could have done to carry out the donor's intent that there should be three separate and distinct trusts is not readily manifest -- unless indeed they made physical division of the property, which was not essential to the separate trust estates.

In our judgment it was, after the amendments, as if in the very first instance the donor had, by separate instruments, conveyed to trustees, whoever they might have been -- the same or different persons -- an undivided one-third of the property in trust for the several separate beneficiaries. In such case we do not conceive that it would have made any difference that the three trusts thus created were in all respects equal in value and in treatment, and subject to identical conditions and stipulations, and were to be so kept, as was here the case.

If the conditions and terms of the several trusts so created had differed radically from one another, and there had been different trustees, there would have been no question but that the trusts were separate and several. But is this different if the terms of each of the trusts which the donor thus undertook to create are identical and the trustees the ...

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