1940 BTA LEXIS 948">*948 Income of a trust created by petitioner for the benefit of his wife and children held taxable to petitioner by reason of his retention of direct and indirect benefits approximating ownership. Helvering v. Clifford,309 U.S. 331">309 U.S. 331.
42 B.T.A. 786">*787 This proceeding was brought for a redetermination of deficiencies of $21,763.57 and $21,453.73 in income tax for the years 1935 and 1936, respectively.
The questions presented are whether petitioner is taxable on the income of a trust created by him in 1924 for the benefit of his wife and whether petitioner is entitled to a deduction for amounts paid to investment counsel for advice during the taxable years in question. At the hearing petitioner abandoned a claim for a deduction in the year 1935 of $420 Federal transfer tax payment.
FINDINGS OF FACT.
All of the facts are stipulated and are hereby found accordingly. They are substantially as follows:
Petitioner is an individual and resides in North Canton, 1940 BTA LEXIS 948">*949 Ohio. During the taxable year petitioner was a man of considerable estate and substantial income and maintained a home for his wife and family.
On May 6, 1924, petitioner created a trust, naming his wife, Edna S. Hoover, as life beneficiary and The Geo. D. Harter Bank of Canton, Ohio, as trustee. The corpus of the trust consisted of 900 shares of the preferred stock and 700 shares of the common stock of The Hoover Co., and Ohio corporation.
The trustee was given broad powers of administration by the trust instrument. Among others, it was given the power "to determine whether money or property coming into its possession shall be treated as principal or income and to charge or apportion expenses or losses to principal or income according as it may deem just and equitable."
The trust provided that the entire net income of the trust corpus should be paid to the petitioner's wife quarterly or at such times as she might request payment. Upon the death of the wife the principal then remaining was to be paid over to certain trusts established by petitioner in his will for the benefit of his children.
The trust instrument contained the following provisions:
Being actively interested1940 BTA LEXIS 948">*950 in the corporation known as The Hoover Company, it is my wish that the property turned over under this Declaration of Trust, be retained as the principal investment, reserving unto myself so long as I live, the right to instruct the Trustee as to any change in such investment, both as to principal fund as well as the income thereof that may not be distributed, and after my death, provided this Trusteeship is in force and effect, such investments and the retention of the same or any reinvestments shall be made in the sound discretion of the Trustee. * * *
During my life I hereby reserve the right or proxy to vote or direct the voting of the stock covered by this Trusteeship at any and all meetings of the stockholders and whenever said stock shall be entitled to vote.
* * *
It is my wish that the Trustee shall receive reasonable compensation for the services rendered by it and in view of the fact that all of my investments are 42 B.T.A. 786">*788 substantially determined and the Trustor himself, during his lifetime more or less directing investments, the Trustee's compensation shall not exceed one per cent (1%) of the income during his life and thereafter not to exceed two per cent (2%) 1940 BTA LEXIS 948">*951 of said income.
The trust was irrevocable during 1924 and each succeeding year unless notice in writing should be given by petitioner in December of the year preceding the time when the revocation or modification was to take effect.
On December 27, 1929, petitioner amended the trust by removing all provisions for its amendment, alteration, or revocation, and added a clause making the trust irrevocable until January 1, 1933. But the terms of the amendment the trust was to terminate on January 1, 1933, if the petitioner were still living. Upon termination, the corpus was to revert to the grantor.
On May 24, 1932, petitioner notified the trustee that the trusts should not terminate on January 1, 1933, and reaffirmed the provisions and conditions of the original trust as modified by the notice dated December 27, 1929, and caused the trust to be irrevocable until January 1, 1936, at which time the trust would terminate, if petitioner were living.
On December 26, 1935, petitioner notified the trustee that the trust should not terminate on January 1, 1936, but continue irrevocably in force until January 1, 1938, at which time the trust would terminate and the entire principal1940 BTA LEXIS 948">*952 then in the hands of the trustee should be paid to petitioner or his estate.
The following provisions were added to the declaration of trust:
The Trustor shall have and hereby reserves to himself the right at any time and from time to time, by serving written notice upon the then Trustee, to designate a Trustee as successor to said The Geo. D. Harter Bank or any succeeding Trustee, and upon any such designation, the then acting Trustee shall pay or turn over in kind to said designated successor Trustee all of the property in this trust estate, and said Trustee so succeeded shall thereupon be discharged.
It is understood, however, that the legal title to the principal of the trust estate shall be and remain vested in the Trustee and successor Trustee without the necessity of any act of conveyance or transfer to, by or from any succeeding or retiring Trustee, and the Trustee and any successor Trustee shall have all the rights, powers and authorities discretionary or otherwise granted in said trust to the original trustee.
The Trustor reserves to himself the right to direct and approve the investment and reinvestment of the principal funds of this trust, and to delegate such1940 BTA LEXIS 948">*953 right to such investment counsel as he may choose.
The securities and property transferred to the trust created by the grantor were at all times carried in the name of the trustee of the trust.
During the calendar years 1924 to 1935, both inclusive, petitioner's wife did not withdraw from the trustee of the trust all of the income from the trust which was payable and distributable to 42 B.T.A. 786">*789 her but allowed the undrawn income to remain in the hands of The Geo. D. Harter Bank and permitted that income to be invested by The Geo. D. Harter Bank in stocks, bonds, and other income-producing property. On September 2, 1935, upon demand by petitioner's wife, The Geo. D. Harter Bank transferred, paid over and delivered to her all stocks, bonds, and other income-producing property which had been purchased by it from undrawn income. After September 2, 1935, petitioner's wife, under and by virtue of the terms of the trust and its extensions, withdrew and of the income of the trust as soon as received by the trust.
The amount of income produced in the years 1935 and 1936 by the assets originally transferred to the trust and the amount of income produced prior to September 2, 1935, by1940 BTA LEXIS 948">*954 securities purchased from undrawn income are as follows:
| TRUST #193, EDNA S. HOOVER. | |||
| Year | Income from original corpus | Income produced by securities purchased from undrawn income | Gains and losses from sales of assets purchased from undrawn income |
| 1935 | $21,806.95 | $16,931.25 | $7,062.35 |
| 1936 | 32,951.20 |
All of the income from the original corpus for the years 1935 and 1936 was paid over and distributed by the trustee to petitioner's wife, Edna S. Hoover.
Petitioner's wife returned upon her personal income tax return for the calendar year 1935 all income from the original corpus as well as all income arising from stocks, bonds, and other incomeproducing producing property purchased from undrawn income, and returned upon her personal income tax return for the calendar year 1936 all income paid over and distributed by the trustee to her and paid all income taxes due from her on all such income for both calendar years.
On April 26, 1929, in connection with a recapitalization of The Hoover Co., each share of outstanding common stock was exchanged for 20 shares of newly authorized class A common stock.
The assets held on January 1, 1934, by the trustee1940 BTA LEXIS 948">*955 were as follows:
| Book value | |
| 1,200 shares Hoover Co. 6% cum. pfd | $120,000.00 |
| 20,000 shares Hoover Co. class A com | 1,000,000.00 |
| Other stocks | 184,763.10 |
| Bonds | 345,448.12 |
| Land trust certificates | 22,900.00 |
| Miscellaneous | 43,129.77 |
| Total | 1,716,240.99 |
42 B.T.A. 786">*790 No loans were made at any time from the trust or from the undrawn income of the trust either to petitioner or to any other person.
The established policy of The Geo. D. Harter Bank, acting as trustee, was to diversity trust investments unless instructed to the contrary.
On December 28, 1937, petitioner further continued the trust until January 1, 1940, except as the 3,000 shares of class A common stock of The Hoover Co. which were to be transferred and delivered to petitioner on January 1, 1938. The trust was to terminate as to the above mentioned 3,000 shares of class A common stock of the Hoover Co. but was reaffirmed in all other respects.
The trust, as modified by the notice of extension dated December 28, 1937, was reaffirmed and continued without alteration until January 1, 1942, by an instrument dated December 22, 1939, signed by petitioner and entitled "Notice of trustor's intention1940 BTA LEXIS 948">*956 to continue in full effect until January 1, 1942, the Edna S. Hoover trust."
During the years 1935 and 1936 petitioner paid to Sheridan, Farwell &3 Morrison, Chicago, Illinois, investment counselors, the sums of $2,524.63 and $3,107.50 for advice and counsel in connection with property and securities owned by petitioner.
OPINION.
OPPER: The correctness of respondent's inclusion in petitioner's income for the years 1935 and 1936 of the income of a trust created by him is the first contested issue. Originally respondent's action was predicated only upon sections 166 and 167, Revenue Act of 1934. The additional question of the applicability of section 22, as adjudicated in , has, however, been properly put in issue as the result of subsequent proceedings and is also open for consideration. .
For convenience, the taxability to petitioner of the trust income for the year 1936 will be considered first. In that year the grantor had every power and every economic interest which incured to the petitioners in 1940 BTA LEXIS 948">*957 , and . The circumstances are indistinguishable. On the authority of those cases the determination as to that year must be in favor of respondent.
Turning to the year 1935 we find one distinction in the facts. On the significance of that distinction may depend whether the petitioner is also taxable on the 1935 income. The provision of the trust indenture owhich permited the petitioner to substitute trustees was apparently inserted by him by means of an addition dated December 26, 42 B.T.A. 786">*791 1935. Prior to that time this authority was not the subject of any express provision of the trust indenture. Hence it may be argued that as to the year 1935 the doctrine of Helvering v. Clifford, on the authority of which the Hoover and Deuble cases were decided, is inapplicable.
Omitting the power to substitute trustees, petitioner had still contrived to retain in himself "so long as I live the right to instruct the trustee as to any change in such investment both as to principal fund as well as the income thereof that may not be distributed * * *."; "to vote or direct the voting1940 BTA LEXIS 948">*958 of the stock covered by this trusteeship"; "the trustor himself during his lifetime more or less directing investments"; to obtain the reversion of the corpus on January 1, 1936, unless otherwise directed by him; and, in the meantime, to have the income remain in the family and be paid to petitioner's wife, or if the wife had died to be paid over to trusts established by petitioner for the benefit of his children in will. The "principal investment" of the trust was stock of the company in which petitioner was "actively interested."
We must compare these aspects of the present controversy with the substance of the Supreme Court's conclusion in , to determine whether this proceeding comes within the principle of that case. The Clifford opinion had this to say of the grantor's relationship to the trust, the emphasis being ours:
* * * So far as his dominion and control were concerned it seems clear that the trust did not affect any substantial change. In substance his control over the corpus was in all essential respects the same after the trust was created as before. The wide powers which he retained included for all practical1940 BTA LEXIS 948">*959 purposes most of the control which he as an individual would have. There were, we may assume, exceptions such as his disability to make a gift of the corpus to others during the term of the trust and to make loans to himself. But this dilution in his control would seem to be insignificant and immaterial, since control over investment remained. If it be said that such control is the type of dominion exercised by any trustee, the answer is simple. We have at best a temporary reallocation of income within an intimate family group. Since the income remains in the family and since the husband retains control over the investment he has rather complete assurance that the trust will not effect any substantial change in his economic position * * *. That might not be true if only strictly legal rights were considered. But when the benefits flowing to him indirectly through the wife are added to the legal rights he retained, the aggregate may be said to be a fair equivalent of what he previously had. * * * For where the head of the household has income in excess of normal needs it may well make but little difference to him (except income tax-wise) where portions of that income1940 BTA LEXIS 948">*960 are routed - so long as it stays in the family group. In those circumstances the all important factor might be retention by him of control over the principal. * * *
The bundle of rights which he retained was so substantial that respondent can not be heard to complain that he is the "victim of despotic power when for the purpose of taxation he is treated as owner altogether."
42 B.T.A. 786">*792 Applying this language to the facts now before us, we must ask which of the attributes of ownership included in the bundle of rights which petitioner retained are absent here which were present in Petitioner could not alienate the trust corpus. Neither could he in the Clifford case. He perhaps was foreclosed from requiring the trustee to invest in loans to himself, although that is by no means clear. But so he was in the Clifford case. He is not entitled to receive the income from the trust in person, but obtains its economic benefits only indirectly through his wife. But that was also true in the Clifford case. He does control the form and manner of the investment of both principal and undistributed income. And he does remain1940 BTA LEXIS 948">*961 in a position to participate in the affairs of the business in which he is actively interested, a prerogative which proceeds from the retained equivalent of ownership of his interest in that enterprise. This is an attribute of proprietorship frequently of greater significance than the right to receive income. When we combine it with the power to force the retention of that investment and the "benefits flowing to him indirectly through the wife" we can not avoid the conclusion that "With that control in his hands he would keep direct command over all that he needed to remain in substantially the same financial situation as before." True, petitioner was not himself the trustee, as Clifford was. But what significant powers of enjoyment or control were vested in Clifford as trustee which the grantor here did not have as an individual? We think that petitioner's liability to tax on the trust income for the year 1935 follows directly from the principle of
What we have said, however, applies only to the income from the principal of the trust which petitioner established. As to the income from the fund which represented accumulated1940 BTA LEXIS 948">*962 income, the fund which was in fact withdrawn by the beneficiary on September 2, 1935, the situation is indistinguishable from that aspect of , which involved income from investments properly withdrawn during the tax year by the beneficiaries. On the authority of that decision respondent's determination with respect to the income from the withdrawn property is disapproved.
The facts stipulated with respect to the second issue merely show that petitioner paid certain amounts to investment counsel during the years in question. There is no showing that petitioner was engaged in any trade or business or that the claimed expenses were incurred in connection therewith. In the absence of such evidence this issue must be decided in favor of respondent. See .
Reviewed by the Board.
Decision will be entered under Rule 50.
42 B.T.A. 786">*793 VAN FOSSAN, dissenting: I am unable to agree with the majority that as to the year 1935 the present case is governed by 1940 BTA LEXIS 948">*963 . There is a basic difference in the facts. Clifford was both grantor and trustee of the trust with all the powers that flowed from the merger of the two personalities. In the instant case in 1935, Hoover was not and could not become trustee. The only powers specifically reserved by him as grantor were to vote the stock and to control any change in the investment of the principal and undistributed income of the trust. In my judgment the reservation of these powers was not such a retention of control as to require us to disregard the trust. .
MELLOTT agrees with this dissent.