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Morton v. Commissioner of Internal Revenue.

January 9, 1940

MORTON
v.
COMMISSIONER OF INTERNAL REVENUE.



Petition for Review of Decision of United States Borad of Tax Appeals.

Author: Evans

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

Petitioner did not include in his 1933 income tax return the income derived from certain trusts which he then and now contends was not taxable to him. The Commissioner included such income and assessed a tax against him therefor. On appeal to the Board of Tax Appeals the ruling of the Commissioner on these items was affirmed, and a deficiency tax liability of $17,728.21 was adjudged against him. Petitioner seeks a reversal of this adjudication.

EVANS, Circuit Judge.

The facts are fortunately not in serious dispute. They deal with three trusts created by the petitioner, and one executed by his father to which interest and dividendbearing securities of large value were transferred. The controversy before us is over who has the obligation of paying the tax on the income received in 1933 from the income of these trust funds - the petitioner or petitioner's father, his daughter, or his wife.

As will be later seen, the provisions of the trust agreements and the action of the grantors, and in one case where the petitioner was beneficiary, his action as beneficiary, are determinative of our decision.

The parties stipulated to all the facts as to certain issues, and the Board of Tax Appeals accepted such stipulated facts as part of its findings. Additional evidence was offered and considered by the Board which made findings appropriately covering the other issues.

On January 3, 1933, petitioner executed a trust agreement known as No. 30,121. The Chicago Title & Trust Co. was named trustee therein. This trust was endowed with securities, the income from which was to be accumulated during the continuance of the trust. Grantor reserved the right to terminate the trust by giving a memorandum to the trustee of his intention so to do in one year and another memorandum in the second year in which latter year the trust would terminate. Trustee was given the right to terminate the trust at any time. The trust also provided for its termination upon the death of the grantor. Upon termination of the trust the accumulated income and all investments of such income were to be transferred by trustee to grantor's daughter, Suzette Morton. All the remainder of said trust, consisting of original endowments, was to be returned to the grantor or, if he were not then alive, to certain persons named in the trust instrument.

On December 31, 1929, petitioner executed a trust agreement known as No. 24,299, wherein Chicago Title & Trust Co. was named the trustee. He transferred to said trustee certain securities. The provisions material to the questions before us, were similar to those found in trust No. 30,121.

On December 31, 1928, joy Morton, father of petitioner, executed a trust agreement known as No. 22,146, wherein Chicago Title & Trust Co. was trustee. The agreement provided that the net income of the trust was to be accumulated until the termination date. When the trust was terminated, trustee was to convey the principal and undisposed of income of the trust to the administrator or executor of the Joy Morton estate. These provisions, however, were made subject to sections 2 and 3 of Article 5 of the trust agreement, which provided as follows:

"2. The Donor may, at any time, by a memorandum in writing signed by the Donor and delivered to the Trustee during the lifetime of the Donor, modify and amend this Trust Agreement so that: (a) all or any part of the net income of the trust herein created shall be paid to Jean Morton Cudahy, a daughter of the Donor and/or Sterling Morton, son of the Donor, and/or Margaret Morton, wife of the Donor, and/or their heirs and/or testamentary appointees and/or any one or more of the foregoing persons; or (b) all or any part of the net income of the trust herein created shall be accumulated for the benefit of any one or more of the persons above in clause (a) of this paragraph referred to; or (c) all or any part of the principal and undistributed income of the trust herein created shall be distributed by the Trustee on the termination, as herein provided, of the trust herein created, to any one or more of the persons above in clause (a) of this paragraph named or referred to; or (d) the trust herein created and/or as modified and amended in accordance with the terms of this paragraph shall continue for a period of twenty-one (21) years after the death of the Donor or for any period less than twenty-one (21) years.

"3. Except as above in this Article V hereof provided, the trust herein created shall be irrevocable."

On January 26, 1931, Joy Morton, under the powers reserved in the trust agreement No. 22,146, modified the same to provide that one-third of the income of the trust should be paid to petitioner, one-third to his daughter, and one-third to his wife. It was further modified so as to provide that the trust should not terminate until twenty-one years after the death of the donor.

On January 3, 1933, petitioner and Chicago Title & Trust Co. executed another agreement whereby petitioner created a trust No. 30,122 similar to that appearing in trust No. 30,121. By this agreement petitioner transferred to Chicago Title & Trust Co. all his ...


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