Petition for review of decision of the Tax Court of the United States.
Before MAJOR and KERNER, Circuit Judges, and LINDLEY, District Judge.
This is an appeal by the Commissioner of Internal Revenue from a decision of the Board of Tax Appeals (Tax Court of the United States), finding no deficiency in respondents' income taxes for the year 1937.*fn1
On April 5, 1937, Meyer Katz executed four separate written declarations of trust, one each for the benefit of his wife, Helen Katz, and their three children, all of whom were minors during the taxable year, except one who became of age during such year. The trust for the benefit of his wife is not involved in this litigation. The provisions of the trust instruments for each of the children are identical, except for the name of the child specifically designated as the primary beneficiary and the number of corporate shares transferred to each trust. We shall, therefore, as did the Board, consider the trust for the benefit of Stanley Michael Katz.Whatever is said with reference to the trust in his favor is equally applicable to those in favor of the other two children.
For many years prior to the execution of the trusts, Meyer Katz was president of Rival Packing Company and owned one-fourth of its outstanding capital stock. Also prior to the execution of such trusts, he entered into an employment contract with the Company for a term of years upon a fixed salary, plus a percentage of the Company's profits. His compensation under such employment contract amounted to more than $48,000 for 1937 and more than $65,000 for 1938.
The trust instrument expressly recited grantor's desire "to make suitable provision whereby sufficient property may be accumulated for the benefit of my son, Stanley MNichael Katz, so that he may, at a future date, be financially independent and capable of caring for himself." The grantor furt her stated that he would "continue to suport, care for and maintain my son out of my individual property and income without regard to, and entirely separate from, the property declared in the trust herein created." At no time since the creation of such trusts, including the taxable year in question, has any of the incom therefrom been received by the grantor, nor has any of such income been used for the support, care and maintenance of his children. In accordance with his express intention, grantor has at all times provided for the suport, care and maintenance of his children during their minority from his own property and ncome.
Under the terms of the trust, the grantor was precluded from receiving any portion of the income which was required to be distributed to each child during his or her lifetime. In the event of the death of a child prior to the termination of the trust, the income was to be distributed to the lawful issue of such child, but in case such child did without issue during the life of the trust, the income was to be distributed in equal shares to grantor's wife and children surviving. In this connection, it is provided; "The trustee may, in his discretion, at any time and from time to time, withhold and accumulate any of the net income payable to any of the foregoing beneficiaries and/or apply any or all of such income for the benefit of such beneficiaries." In the event the trust was terminated by a laps of time or otherwise, all acumulated net income was to be paid to the beneficiaries entitled to share in the distribution of the corpus.
By Par. 10, the trust could be terminated only by delivery to the trustee of a written instrument directing such termination, executed as follows;
"(a) Jointly by myself, and my wife, Helen Katz, until my son, Stanley Michael Katz, reaches the age of twenty-one (21) years;
"(b) Jointly by myself and my son, Stanley Michael Katz, after my son, Stanley Michael Katz, reaches the age of twenty-one (21) years, or after the death of my wife, Helen Katz, whichever should first occur."
Upon grantor's death, the corpus was to be distributed to the respective primary beneficiaries when he or she reached the age of twenty-five years. In the event any primary beneficiary predeceased grantor, the corpus was to be distributed in the same manner as was the income under a similar contingency. In the event that all of grantor's children predeceased him without leaving issue surviving grantor, then the entire corpus was to be distributed to grantor's wife, if she survived him; if not, then the corpus was to be distributed to grantor's heirs-at-law. the agrements, to avoid the rule against perpetuities, set for each of the trusts a maximum duration of twenty-one years after the death of the survivor of gr antor, his wife and children.
The agreements designated a successortrustee, with provision, in case of his inability to serve, for the appointment of such person by grantor's wife and, after her death, by a majority of his childen. The agreements concluded with the declaration on the part of the grantor that he held the trust stock "solely for the uses, purposes and trusts aforesaid and not for my own use or benefit."
The contested issue is whether the 1937 income from these thre trusts was taxable to the grantor. Petitioner contends that it was, under Secs. 22(a), 166 and 167 of the evenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, pages 825, 895.*fn2 The Commissioner, before the Board, relied solely on Secs. 22(a) and 166, ...