Review of Decision of the United States Board of Tax Appeals.
Before SPARKS and MINTON, Circuit Judges, and LINDLEY, District Judge.
Petitioner questions a decision of the Board of Tax Appeals absolving respondent taxpayer from any deficiency in income tax for the years 1935, 1936 and 1937.
Respondent has for many years been extensively engaged in the securities brokerage business, being, at the time of the hearing, Chairman of the Board of Governs of the Chicago Stock Exchange. On February 5, 1932, he created a trust, depositing with the trustee certain securities. The original indenture and amendments thereto made in October, 1933, provided that during the settlor's life-time, the income collected each year should be paid, 75 per cent to respondent's mother, and 25 per cent to his wife, and, in case either of them should die, 100 per cent to the survivor, and, if both should die during his lifetime, then, during the balance of his lifetime, be added to the principal. Upon the deaths of the settlor, his mother and his wife, the trust estate was to be divided equally among the respondent's children or their lawful descendants. If his wife or mother should survive respondent and leave surviving no descendants of his, or if he should survive both his mother and wife but leave no descendants, in either instance, the trust estate was to be conveyed to his heirs.
The trustee was authorized to manage the estate and to buy, sell or exchange property and securities. But all purchases and sales, during the lifetime of respondent, were to be as he might direct. Interests of the beneficiaries were not assignable or liable for debts. Respondent waived all power to revoke or later the trust agreement without consent of one of these: his mother, his wife, his sister, Agnes McCulloch, and his brother, Curtis Betts. But after the death of all these four, respondent, if alive, was to have the right to alter or revoke the trust. The taxpayer is fifty-one years of age, his wife forty-six. They have two sons, twenty and sixteen years of age. The mother is a widow, at the time of the hearing, eighty-four years of age.
Respondent's wife the mother have received their share of the income. Prior to the creation of the trust, respondent had furnished his mother funds for her support and maintenance. During the years involved, her sole means consisted of her share of the trust income and such additional moneys as respondent gave her. During the three years in question, respondent's brother had an income of approximately $3300, $3900, and $5900 respectively; his sister $7500, $5000 and $7000. The income received by the wife was invested by her in various securities; none of it was used for her support or maintenance.
In 1935, net trust income was $24,273.13 of which $20,893.65 was capital gain. During 1936 the income was $34,299.79 of which $30,115.36 was capital gain. In 1937 the net income was $9,541.41 and of this, $2,336.70 capital gain. The trustee retained all capital gains and accounted for them in its income tax returns.The remainder was distributed to the wife and mother.
The commissioner levied an assessment for all income, including capital gain, for each of the three years. This action the Board held erroneous. Petitioner now contends that the entire income for each of the years was taxable against respondent under Sections 22(a) and 166 of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int. Rev. Acts, pages 669, 727, 825, 895; as an alternative, that the capital gains were taxable against him under Section 167, and, as a further alternative, that the income distributed to respondent's mother was taxable to him because paid in satisfaction of his legal obligation to support her.
Under Helvering v. Clifford, 309 U.S. 331, 60 S. Ct. 554, 84 L. Ed. 788, liability of respondent under Section 22(a), a general statute covering all income, depends upon whether, after creating the trust, he retained such attributes and incidents of ownership as to continue in him economic enjoyment of the property placed in trust. Obviously, we must find the answer to that question in the facts and circumstances. These include the family relationship and all circumstances which bear upon the creation and operation of the trust as well as the terms and provisions of the instrument itself.
We think the facts here are not within the ruling of the Clifford case. There the trust was for a short term. It could have been terminated immediately after it was created, and upon its termination, the corpus was to revert to the grantor, who was himself the trustee. Here respondent is not the trustee and can not name himself as such. He may not alter, amend or modify the trust agreement without the consent of adversely interested parties. The trust is of long, uncertain duration. The income is distributable to persons other than the grantor and over it he has no dominion. He has reserved no right to hold any of the trust property, though he has retained the right to designated what should be bought and sold. Reason for this reservation evidently lay in his experience in the security business, which furnished justification for belief, upon his part, at least, or desirability of exercise of his judgment for the benefit of his beneficiaries.
The case is not unlike Commissioner v. Branch, 1 Cir., 114 F.2d 985, 987, 132 A.L.R. 839, where the trust was for a comparatively long duration and the corpus was to revest in the grantor only in the event that he should outlive his wife. Even this possibility of reverter was subject to be extinguished if the wife exercised her power to appoint the trust estate. The court there said: "Where the grantor has stripped himself of all command over the income for an indefinite period, and in all probability, under the terms of the trust instrument, will never regain beneficial ownership of the corpus, there seems to be no statutory basis for treating the income as that of the grantor under Section 22(a) merely because he has made himself trustee with broad power in that capacity to manage the trut estate." It is said that this court has questioned this authority in Graff v. Commissioner, 7 Cir., 117 F.2d 247. What we said was that Commissioner v. Branch was not in point upon the facts of that case.
In the Clifford case the court has given us the rationale, the standard to be applied, and, when the facts come within the rule there stated, that standard must control. But we do not believe the language applicable to a trust which is not a short term one, in which the grantor has divested himself of the economic enjoyment of the property and his power of revocation is an exceedingly remote and contingent onw. Thus in Corning v. Commissioner, 6 Cir., 104 F.2d 329, 332, the court said: "The term 'power' as used in corresponding sections of earlier acts has not been thought to extend to the reservation of a right conditioned upon a contingency that may never occur. Commissioner v. Stokes, 3 Cir., 79 F.2d 256; Higgings v. White, 1 Cir., 93 F.2d 357." But, says the petitioner, the Corning case must fall, in view of Helvering v. Hallock, 309 U.S. 106, 60 S. Ct. 444, 84 L. Ed. 604, 125 A.L.R. 1368, dealing with sections of the Revenue Act covering federal estate taxes. The United States Circuit Court of Appeals for the Fourth Circuit did not believe so, for in Helvering v. Dunning, 4 Cir., 118 F.2d 341, 344, after Helvering v. Hallock had been decided, it said, "We believe * * * that the Corning case was correctly decided." See, also, Jones v. Norris, 10 Cir., 122 F.2d 6; Helvering v. Palmer, 2 Cir., 115 F.2d 368; Commissioner v. Jonas, 2 Cir., 122 F.2d 169; Helvering v. Elias, 2 Cir., 122 F.2d 171.
In the cases cited by petitioner the facts clearly indicate a retention of the fruits of ownership. Thus in Hormel v. Helvering, 312 U.S. 552, 61 S. Ct. 719, 85 L. Ed. 1037, the corpus was to be returned to the grantor at the end of three years. In First National Bank v. Commissioner, 7 Cir., 110 F.2d 448, after the definite period of three years, the grantor had the absolute power of revocation. In Commissioner v. Buck, 2 Cir., 120 F.2d 775; White v. Higgins, 1 Cir., 116 F.2d 312; Cox v. Commissioner, 10 Cir., 110 F.2d 934, the grantors had retained such broad discretionary powers that they had what was substantially the power to revest in themselves, title to or enjoyment of the trust property. Reuter v. Commissioner, 5 Cir., 118 F.2d 698, involved a revocable trust. In Commissioner v. Barbour, 2 Cir., 122 F.2d 165; Helvering v. Elias, 2 Cir., 122 F.2d 171; and Commissioner v. Woolley, 2 Cir., 122 F.2d 167, the settlor ...