*1317 Trust created when grantor of four prior trusts, in order to reconstitute them, exercised his reserved power to change beneficiaries and made one of the beneficiaries trustee for all, held, on the evidence one trust rather than four, to which trust income is taxable, beneficiaries not being entitled as grantors to have income taxed to them under section 22(a), 166, or 167, Revenue Act of 1934.
*508 Respondent determined a deficiency in petitioner's income tax in the sum of $1,303.63 for the year 1935.
The contested issue is whether the income of a trust is taxable to the trust or to its beneficiaries; or, in the alternative, whether there are in reality four trusts rather than one.
FINDINGS OF FACT.
The facts were presented by stipulation, exhibits, and oral testimony. The stipulated facts are hereby found accordingly. The facts hereinafter appearing, which are not from the stipulation, are facts otherwise found from the record.
On July 18, 1923, Theodore F. MacManus created six identical (mutatis mutandis*1318 ) revocable trusts, one for each of his children, namely, John R., Theodora, Alice Mary, Hugo, Hubert and Edwin Benedict. The Detroit Trust Co. was trustee in each of these trusts. The income was to be expended in such amount "as in the opinion and judgment of said trustee and in its sole discretion may seem best for the maintenance, education and support" of the named child. Unless previously revoked, the trusts were to terminate on the grantor's death, when principal and accumulations were to be paid over to the beneficiary. The following year, by amendment to each of the trusts, they were made irrevocable, the grantor:
* * * reserving to himself the power from time to time, and as often as he may think proper, to designate as beneficiaries, along with or in the *509 place of the said [e.g.] John R. MacManus, any person bearing any of the following relationships to said John, that is to say, spouse, child, brother, sister, or spouse, or child of a brother or sister; * * *
The grantor released and surrendered all right ever to receive back all or any of the trust property.
Hugo and Hubert died on September 6, 1930, and December 9, 1932, respectively, and all of*1319 the assets of their trusts were distributed under the terms of the trusts to their distributees or heirs at law, being the grantor and his wife, their mother and father.
Not being satisfied with the handling or condition of the trusts, the grantor, early in 1934, became desirous of terminating the trusts.
Subsequently and concurrently, between May 9 and May 11, 1934, three additional instruments were executed with relation to the trusts. Their execution was preceded by family conferences and the arrangement contemplated by them was an effort to rehabilitate the assets of the trusts.
On April 20, 1934, the grantor wrote his son John as follows:
As you are aware, we have had several discussions during the past year with the Trust Co. concerning the arrangement with them. They have probably done their best - as they see it - but Messrs. Hammel and Sloan and myself are agreed that your interests and those of your brother and sisters will be best served, if we take the whole matter in hand ourselves. If the Trust Co. is eliminated there is a good chance that the four trusts can be rehabilitated which is, of course, my dearest wish. I am advised that the simplest way of relieving*1320 the Trust Co. of the four trusts is to change the beneficiary provision from Theodora, Alice, and Teddy to you. You would then act as sole trustee and all clerical and other signature provisions would be executed through you. If these are the mechanics to be followed it is agreeable to me. I want to impress upon you most earnestly, however, that the original spirit behind the creation of the trust is not changed. Our distinct and definite understanding is that the four trusts are to remain intact and that your own, Theodora's, Alice's, and Teddy's positions will be exactly the same. The details and mechanics of the matter I leave to you in consultation with Mr. Hammel and Mr. Sloan.
Thereupon John executed a declaration of trust in which he recited that his father, under the powers reserved to him in the trust instruments, indicated that he was going to make him the sole beneficiary in each of the four trusts; that:
The purpose of so changing the beneficiaries in said Trusts is to facilitate a termination thereof by unanimous consent of all the parties in interest so that said Trusts may be continued in a broader form to the end that if possible said Trusts may be rehabilitated, *1321 I * * * supplanting the Detroit Trust Company as Trustee.
that pursuant to the common understanding of all the parties in interest he would hold the corpus and income of the trusts as trustee for Theodora, Alice, Edwin Benedict, and himself, share and share alike; that it was understood that the assets might be converted *510 and carried in his own name individually or as trustee, but in any event that it was
* * * understood that all of said assets and all the emoluments and dividends and profits thereof are and shall be the property of the four (4) persons hereinbefore named in the proportions hereinbefore indicated.
that it was understood that he might on the request of their mother pay to her any part of the corpus and income of the trust, all such payments being deemed equal contributions of the beneficiaries; that he could, with the consent of his mother and in his sole discretion, advance to the beneficiaries a part of the corpus or income of the trusts, the amounts so advanced being charged against the recipients' interest; and that distributions of income from the trust assets would be in his sole discretion. It was further understood that:
* * * this trust*1322 shall remain in full force and effect until the death of the survivor of Theodore F. MacManus and Alice Holdridge MacManus, his wife. On termination, the entire assets of said trust estate shall pass to and be paid over to the beneficiaries thereof, share and share alike, and in the event of the death of any such beneficiary prior to termination of trust such share shall be held in trust till termination, then pass to his or her distributees; that is to say, the persons who, by the statute of distributions, shall be entitled to share his or her intestate personal estate and in the proportions in such statute provided.
Concurrently there were filed amendments providing a change of beneficiary in three of the four trusts (Theodora, Alice, and Edwin Benedict to John). In the amendments it was stated:
All of the beneficial right, title and interest of the said [e.g.] Theodora MacManus into and under said indenture of July 18, 1923 and the modification and amendment thereof dated December 30, 1924 to be and become the property of John R. MacManus by virtue hereof.
There was also concurrently executed a release and consent to transfer all the assets of the four trusts to John. *1323 This instrument was signed by John as "beneficiary", the father as "maker", the mother, and the Detroit Trust Co. as "trustee." John, his father and mother were recited in the instrument as "being all of the parties having a present interest in said agreement and supplements, and in the corpus of said trust estate * * *." It was agreed that the trustee should be discharged and released from all obligations and:
* * * that all of the rights, powers, benefits and interests in and to said agreement and supplements, and in and to the Trust Estate covered thereby, shall be and hereby are transferred and assigned to JOHN R. MACMANUS, and in all respects, insofar as the DETROIT TRUST COMPANY, as TRUSTEE, is concerned, said agreements and/or supplements, and/or all right, title, interest, obligation, responsibility and liability with respect thereto and/or the corpus of the Trust Estate covered thereby, including all accumulations thereto, shall hereby cease and terminate, and the said THEODORE F. MACMANUS, ALICE HOLDRIDGE MACMANUS and JOHN R. MACMANUS agree, and do hereby indemnify the said DETROIT TRUST COMPANY, as TRUSTEE, from any and all liability in connection therewith.
*511 *1324 In a "Journal" under date of May 31, 1934, entries were made setting up a "John R. MacManus, Trustee," account showing the respective amounts of cash, bonds, and stock opposite the names of the four beneficiaries. The general ledger "Capital Accounts" had noted "See Drawing Accounts." Separate drawing accounts were set up for each beneficiary.
The books were in complete charge of Godfrey Hammel, a certified public accountant, who used the entries described to simplify the accounting procedure.
During 1935 there were net profits of $16,965.24 credited on the books.
One fiduciary return (Form 1041) was filed for 1935. It was executed by "John R. MacManus Trustee" and by Hammel as the party preparing it, was entitled "John R. MacManus Trustee", and listed as beneficiaries the four children each with a 25 percent share. And it indicated that a return of income for the prior year was "filed on behalf of the estate or trust named above."
The return was prepared "from books" by Hammel and reported all the income, showing gross income of $21,462.10, deductions of $1,020.29 and net income of $20,441.81. The four children in their separate returns for 1935 each reported one-fourth*1325 of this amount as their income. Assuming the tax is due from the fiduciary rather than the beneficiaries, petitioner's counsel concedes that "If * * * the four separate trusts continued * * * a deficiency in the principal amount of $11.14 for each trust or a total of $44.56 is proper against this Petitioner Trustee."
Respondent, in his notice of deficiency, takes the position that the income of the trust is "taxable to the trustee instead of the beneficiaries"; the records indicating "that there was neither payment nor credit during the taxable year to any of the four beneficiaries * * *."
OPINION.
OPPER: The single petitioner contends that the income of the trust may properly be divided into four parts and taxed accordingly on one of two alternative theories. It does not contend that this result should be reached under sections 161 and 162, Revenue Act of 1934, or that the four respective beneficiaries should pay the tax as upon income either distributed or currently distributable to them within the provisions of those sections. Apparently conceding that such a theory is not applicable because the income was accumulated pursuant to a discretion of the trustee, petitioner*1326 contends either that the beneficiaries were the grantors and that under sections 166, 167, or 22(a) the trust income was taxable to them in the proportion that each of them created the trust; or, in the alternative, that petitioner, instead of being a single trust, is four trusts each of which should have filed *512 a separate return, although they did not, and have paid a portion of the tax.
The first alternative urged refreshingly illustrates the impossibility of exhausting the novelty and variety of the law. That a taxpayer should invoke for his purposes the provisions of section 166 and 167, safeguards created by Congress exclusively for the respondent's comfort, see e.g. report of (1924) Senate Finance Committee, 68th Cong., 1st sess., S. Rept. No. 398, p. 25; C.B. 1939-1 (Part 2), p. 283; or of section 22(a) on a theory similarly applied judicially to protect the revenue, see , affords merely another illustration of the wisdom of such proverbs as refer to the "ill wind" or "one man's meat."
However, ingenious and arresting as may be the concept, we can not agree that petitioner has here discovered the instrument*1327 for its application. What the theory requires at least is identity between beneficiaries and grantors. But the beneficiaries at no time obtained, with respect to corpus or income, any vestige of that legal title which would have enabled them to act as grantors in the sense that they had freedom of choice to create the trust or withhold it. 1 What appears unmistakably is that the beneficiaries were as helpless to deal with their father's property, after the original trust was created, as they had been before; and that the transaction which took place in 1934, by which the father was enabled to accomplish alterations in the terms of the trust which were not permitted by any of its provisions, was merely an illustration of the extent to which a grantor can remain the true owner of property by the selection of sufficiently pliable recipients of the trust benefits. Cf. (C.C.A., 8th Cir.); certiorari denied, . The father, who created the original trust in 1923, was as clearly the grantor of the trust which arose in 1934 as if he had remained the legal and beneficial owner in the interval. Since no attempt*1328 is being made to tax to him the trust income on any comparable theory, the point involved in the Rollins case requires no further consideration. It merely renders sufficiently apparent the fallacy of any contention that the children ever became owners of such rights in the original trust that they can be regarded as grantors of the new one. Without deciding, then, whether petitioner could otherwise succeed in the effort to apply in its favor such authorities as , and sections 166 and 167, cf. , we take the view that here the effort must fail because the premise that the beneficiaries were the grantors is untenable.
*513 Petitioner contends, secondly, that it is not one trust but four. It claims - apparently conceding in this connection that the father was actually the grantor of the second trust - that his intention, the decisive test, was that*1329 the trust set up in 1934 should be quadruplex. We find no adequate support for petitioner's contention that the record discloses convincing evidence of an intent to establish more than one trust. "Whether at various places in the instruments the singular 'trust' is used or the plural 'trusts'" is a factor which may have little significance, as petitioner asserts in its reply brief. But it succeeds, as do other aspects of the relevant documents, in leaving the question of intent unanswered. If either father or son intended to create more than one trust they failed to give this intention adequate expression. What the father said was: "The details and mechanics of the matter I leave to you"; meaning the son who became the new trustee. What the evidence shows is that the son, assisted by the father's consultant, set up one trust and not four. The books of account were so constituted by the consultant. A single fiduciary tax return for "the estate or trust" was filed, signed by the son, and stated to be prepared from the books with the assistance of the consultant. And the allegations of the petition in this proceeding are in accord. There is no assertion that four trusts were*1330 created. It alleges, for example, that the declaration of trust "clearly states that the four beneficiaries are the owners of the corpus income or employments of this trust"2 and "that the four beneficiaries individually included their share (1/4) of the profits in their personal income tax returns." Were we to accept petitioner's present contention it would necessitate the preliminary assumption that the father's confidential adviser and his son and fiduciary proceeded with the administration of the trust in a manner inconsistent with the purpose and intention of the original grantor; and this in spite of abundant opportunity to acquaint themselves with his true intent, since it appears that both had discussed the transaction in advance with the elder MacManus. We are not prepared, as we should be forced to on petitioner's premise, to infer that the son and the adviser were aware of the father's intention to erect four trusts and deliberately accomplished the reverse. On the contrary, we are satisfied that the evidence of practical construction, which is all we have to follow in the absence of an adequate showing of intent, would justify no conclusion other than that this*1331 was a single trust.
We find no error in respondent's treatment.
Reviewed by the Board.
Decision will be entered for the respondent.