*1484 TRUST INCOME - TAXABLE TO GRANTOR. - Income of a trust established by the petitioner payable to his wife for her life or for a period of ten years, whichever should be shorter, was taxable to the petitioner since he retained substantial control over the trust property. Helvering v. Clifford,309 U.S. 331">309 U.S. 331, followed.
*569 The Commissioner determined deficiencies in the income tax of the petitioner of $9,178.47 and $10,507.08 for the years 1934 and 1935. The only issue for decision is whether or not the income of a trust which the petitioner established for the benefit of his wife should be included in his income under section 22(a) of the Revenue Act of 1934.
FINDINGS OF FACT.
The petitioner is an individual who filed his income tax returns for the taxable years with the collector of internal revenue for the district of Rhode Island. He resided during those years at Newport, Rhode Island. His wife, Helen M. Fahnestock, and their two daughters aged about six and seven, resided with him at the beginning of 1934. His*1485 wife separated from him on October 1, 1934, and took the two children with her. The two children returned to the petitioner on January 1, 1935, and thereafter resided with him except for a few weeks. His wife was in a hospital suffering from a mental disorder from early in 1935 until her death on November 29, 1935. She was incapable of handling her own affairs during that time. The petitioner obtained an interlocutory decree of divorce in August 1935.
The petitioner created a trust on December 28, 1931, in order to provide his wife with an independent income. He was then residing in Rhode Island. He acknowledged in the deed that he held the trust estate, consisting of 400 shares of stock of the First National Bank of the City of New York, in trust to pay over the net income to "Helen M. Fahnestock for a period up to and including the 31st day of December 1941 or until the earlier death of the said Helen M. Fahnestock whichever shall first occur." All of the property comprising the principal of the trust estate was to revert to the petitioner or his legal representatives upon the termination of the trust. The provisions of the trust could be altered or modified in any respect*1486 by a deed executed by the petitioner and consented to by his wife. The corpus could be increased by additions. Other provisions of the trust were as follows:
SECOND: In his sole discretion the said Snowden A. Fahnestock may continue to hold the Trust Estate or any part thereof in its original form or may at any time *570 sell, invest or reinvest the same. He shall not be liable or responsible for depreciation or loss incurred by reason of sales, investments or reinvestments or the failure to sell or the failure to change investments.
* * *
FOURTH: Said Snowden A. Fahnestock may cause any or all of the securities which from time to time comprise the Trust Estate to be registered in his own name or in the name of his nominee, or he may in his sole discretion take and keep the same unregistered and retain them in such condition that they pass by delivery.
FIFTH: All stock dividends and extraordinary cash dividends which shall be received by the said Snowden A. Fahnestock hereunder shall be considered by him as wholly principal and added to the Trust Estate accordingly.
The petitioner, on or about December 28, 1931, took four 100-share certificates of stock of the*1487 First National Bank of the City of New York from other similar certificates owned by him, clipped them together, identified them with a memorandum, put them in an envelope marked "Helen M. Fahnestock Trust" and put the envelope in a safety deposit box. The certificate numbers were also noted on the envelope. Those certificates of First National Bank stock had printed on the back certificates of the First Security Co. The First Security Co. was dissolved and a liquidating dividend of approximately $8,000 was paid on the shares in trust. The petitioner used the proceeds of the liquidating dividend to purchase 5 additional shares of stock of the First National Bank of the City of New York and 40 shares of Premier Gold Mining stock which he included in the corpus of the trust on March 5, 1934. All of the certificates mentioned in this paragraph were in the name of the petitioner and were endorsed by him in blank. They remained in that form during the period of the trust.
The petitioner had regular and complete records kept of the income and principal of the trust and of the disposition that was made of the income. He collected the income of the trust during the years 1934 and*1488 1935. He deposited the income of the trust for 1934 in his wife's separate bank account. All of the income of the trust for 1935 was placed by him, at the request of attorneys for his wife, in a special bank account in his own name. All of that incme was used by him to pay bills contracted by or on behalf of his wife for her support and for the support of the children while she was separated from the petitioner.
The petitioner had no agreement of any kind with his wife in regard to her use of the income of the trust and he did not control her use of that income. His wife had no substantial income of her own aside from the income of the trust. The petitioner maintained the house at Newport. His wife paid all of her own ordinary living expenses. Both the petitioner and his wife contributed toward the support of their two children. The petitioner and his wife each paid one-half of the taxes on the Newport house for 1934. The Newport property was acquired with funds supplied solely by the petitioner but title was in the name of *571 the petitioner and his wife jointly. The wife on her return for 1934 claimed a deduction of $800 on the ground that the two children were*1489 dependent upon her for support.
The petitioner filed diduciary returns for 1934 and 1935 showing that the trust had net income of $39,878.47 for 1934 and net income of $40,504.94 for 1935. All of the income was from dividends and was shown to be distributable to Helen M. Fahnestock. That income was reported on the returns of Helen M. Fahnestock for those two years.
The Commissioner, in determining the deficiencies, include the income of the trust for each year in the income of the petitioner. Claims for refund were filed on behalf of Helen M. Fahnestock at the suggestion of the Commissioner.
OPINION.
MURDOCK: The Commissioner relies entirely upon section 22(a) of the Revenue Act of 1934 and cites , and . There is some uncertainty as to the extent of the applicability of section 22(a) under the decision in the Clifford case. ; . Cf. *1490 ; . However, the Court in the Clifford case said that Congress intended to exercise its taxing powers to the limit in section 22(a). The Circuit Court of Appeals for the Second Circuit in the Berolzheimer case interprets the Clifford case as holding "that a grantor of a short term trust, under which he is to be the trustee and to have such broad powers over the disposal of the principal as to approximate those of a owner and under which the income is to remain in his family and the reversion in himself, will be subjected to income taxes as owner." The terms of the particular trust and all the circumstances attendant upon its creation and operation must be analyzed in order to determine whether the grantor has retained such substantial control over the trust property that he may be treated for tax purposes as the owner of the corpus taxable with the income under section 22(a).
The present trust is similar to the trust in the Clifford case in many respects. The petitioner has pointed out some of the differences between the two trusts in an effort*1491 to distinguish this case from the Clifford case. The maximum limit of the present trust was ten years whereas that of the Clifford trust was five years. This does not distinguish the Berolzheimer case, however, where the maximum limit of the trust was also ten years. Furthermore, the trusts in the Higgins case and in the Stein case were for life at least. The present trust might have lasted beyond the life of the grantor, but the same was true in the Higgins trusts. The petitioner, as trustee, was required *572 to pay over all of the net income of the trust to his wife. Berolzheimer was likewise required to pay all of the income to his wife. The powers which the petitioner had as trustee in regard to voting and managing the trust property are substantially the same as those retained by the grantor in the Clifford case. He argues that he had no power to reinvest the trust property except in investments approved by law for trusts. He cites in support of this contention a number of New York cases, which seem to be inapplicable in view of the fact that the laws of Rhode Island govern. Furthermore, he not only retained the trust property invested in*1492 bank stock, which was probably not a legal investment for trust property, but he invested the $8,000 realized from the liquidation of the First Security Co. in bank stock and gold mining stock. We are unable to distinguish this case from the Clifford case in the light of the Berolzheimer and Higgins decisions. The trust in the Branch case was for the life of the wife of the grantor and might continue longer and the corpus might never revest in the grantor.
Reviewed by the Board.
Decision will be entered for the respondent.