*127 Decision will be entered under Rule 50.
1. Petitioner created three irrevocable trusts for the benefit of his three minor children, naming his brother as trustee. Trusts were to continue until his two sons reached age of thirty, and until his daughter reached age of thirty-five. Income, after expenses, was to be paid to beneficiaries, and upon termination of trusts they were to receive the corpus. Petitioner reserved the power to direct the accumulation of trust income during minority of beneficiaries; to remove the trustee and appoint a successor; to control trust investments; and as parent of beneficiaries to receive, on their behalf, the net income from trusts. Income received by petitioner for use of beneficiaries during taxable years was deposited in separate bank accounts for each child, and was not used for their maintenance, care, or support. Held, income of the trusts is not taxable to petitioner under the provisions of either
2. Amounts paid to two accounting firms for services in preparing income tax returns, keeping books, and taking care of petitioner's office during his absence from country held deductible*128 under provisions of
3. That portion of income received by petitioner in 1939 for services rendered to corporation prior to becoming a resident of Californiaheld to be taxable as separate income, and the remainder to be taxable as community income.
*363 The respondent determined deficiencies in income tax for the years 1938, 1939, and 1940 in the respective amounts of $ 1,415.49, $ 9,416.11 and $ 12,249.94. In an amended answer the respondent also asks for an increased deficiency for the year 1939, alleging that the correct deficiency due for the year 1939 is $ 10,269.69.
*364 The questions for solution in this case are:
(1) Whether the income of three trusts created by the petitioner on August 5, 1935, for the benefit of his three children is taxable to the settlor in the years 1938, 1939, and 1940.
(2) *130 Are certain sums paid by the petitioner for accounting services and other sums paid for preparation of income tax returns deductible?
(3) Is the sum of $ 1,500 received by the petitioner during the year 1939 for services rendered by him during the years 1935, 1936, and 1937 taxable income in 1939 and, if so, is any portion thereof community income?
FINDINGS OF FACT.
The petitioner is an individual residing in Beverly Hills, California. He filed his income tax returns for 1938, 1939, and 1940 with the collector of internal revenue for the sixth district of California.
On or about August 5, 1935, petitioner created three trusts with his brother Arthur M. Loew, as trustee, and the beneficiaries were his three children, David Loew, Jr., born February 7, 1920, Marcus Loew, II, born May 27, 1923, and Virginia Carolyn Loew, born April 6, 1933. The three trust instruments are identical except for the fact that the dates of the respective births of the beneficiaries differ in each case and the trustee in the two trusts pertaining to the boys is directed to discontinue the trust and pay over the principal, with accumulated earnings, to the beneficiary when the beneficiary arrives at thirty*131 years of age, while in the case of the girl the age for the discontinuation of the trust is thirty-five years.
The trust instrument in each case provides that the trustee is to take possession and custody of the trust property and receive the income therefrom and, after paying the reasonable and proper expenses of the trust, to pay the income to the beneficiaries unless and until the settlor provides different instructions as to distribution in writing as set forth in paragraph 2 of said trust agreement. At the termination of the trust the trustee is directed to pay the corpus of the trust, with its accumulated income as it shall then exist, to the beneficiaries. In the event of the death of the beneficiary before attaining the age of thirty years in the case of the boys or thirty-five years in the case of the girl, the principal and accumulated income shall be paid to the beneficiaries' lineal descendants or, if none be then living, to the lineal descendants of the settlor; or in default of such lineal descendants, the property is to be distributed as if the settlor had died intestate immediately after the death of such beneficiary.
Paragraph 2 of the agreement provides that at*132 any time during the infancy of the beneficiary, and while the settlor is living, the settlor, by notice in writing, may direct the trustee to discontinue the payment of the net income to the beneficiary and to invest and reinvest the net *365 income in such manner as the settlor from time to time shall direct and to accumulate the income for the benefit of the beneficiary, and that application of income to the use of beneficiary during minority may be made either directly or by payment to the guardian, father, or mother of such minor.
The settlor reserves the right to direct in writing the trustee to sell or exchange any of the trust property, regardless of the existing laws of New York pertaining to the investment of the trust funds.
It is specifically provided that the trust agreement in its entirety shall be irrevocable and shall be controlled in all respects by the laws of New York.
Upon the death or resignation of Arthur M. Loew as trustee the settlor reserves the right to name his successor trustee.
It is provided that all trustees may be removed by the settlor, if living, or, if not, by a majority of the beneficiaries of full age, who shall give written notice to that *133 effect.
The trust property originally consisted of stock in the Empire Corporation, a personal holding corporation, in which petitioner was a minority stockholder and petitioner's brother and mother constituted the other stockholders. This corporation, however, was liquidated in 1936.
During each of the years involved in this case the settlor, on many occasions, gave the trustee instructions to buy and sell specified securities, and the trustee acted on those instructions. The settlor was a man of extensive experience in the buying and selling of securities.
The petitioner, during the period of the trusts, did receive from the trustee income for the use of the minor beneficiaries, which income he deposited in separate bank accounts for each child. None of the income from any of the three trusts was used for the care, support, maintenance, or education of the beneficiaries during their minorities. None of the income from any of the trusts for the years 1938, 1939, or 1940 was included in the returns of the petitioner for those years, but all of such income was included in fiduciary returns for the respective years filed by Arthur M. Loew as trustee.
No consents as provided for in*134
During the years 1938, 1939, and 1940 the petitioner paid the respective sums of $ 1,150, $ 1,545, and $ 1,100 to the accounting firms of Haskin & Sells and Webster & Atz. Of these sums, Haskin & Sells received $ 700 in 1938 and $ 195 in 1939, and Webster & Atz received the remainder, viz., $ 450 in 1938, $ 1,350 in 1939, and $ 1,100 in 1940. The amounts paid to Haskin & Sells were for preparing tax returns for petitioner. Webster & Atz kept the books of petitioner. He had a large amount of personal investments during the taxable years and *366 owned stock and securities in a number of corporations. Matters which ordinarily arise in connection with such investments, such as recording the receipt of dividends and depositing them in petitioner's bank account, were handled for petitioner by Webster & Atz. In the latter part of 1938 petitioner left the country for a period of four months. During this period Webster & Atz took care of his office, wrote checks, supervised the closing out of a corporation petitioner*135 was discontinuing, and employed a secretary for petitioner. Webster & Atz also prepared returns for petitioner in 1939 and 1940. In determining the deficiencies, the respondent disallowed as deductions the amounts paid to these two accounting firms.
The petitioner became a resident of the State of California on November 1, 1935. Prior to that time he was a resident of the State of New York.
During the year 1939 petitioner received the sum of $ 1,500 from Brooks-Rose Corporation of New York, New York, as compensation for services rendered to that corporation by petitioner during the years 1935, 1936, and 1937. Petitioner, whose income tax returns were made on the cash basis, did not include the sum of $ 1,500 in his income tax return for 1939. In the determination of the deficiency of $ 9,416.11 for the year 1939, respondent did not include in taxable income the said sum of $ 1,500. In an amended answer filed pursuant to permission granted by the Court, the respondent asserts a claim for increased deficiency resulting from the addition of the sum of $ 1,500 to the petitioner's net income.
OPINION.
On the question of the taxability of the settlor of the three trusts herein involved*136 for the income of those trusts, the respondent submits that the petitioner did not effect a substantial change in his economic status or ownership of the property transferred in trust by the declarations of trust dated August 5, 1935. Respondent contends further that under the terms of the trust instruments the petitioner retains such broad powers of control over both the trust corpus and the income thereof that the income is taxable to the petitioner under
The petitioner, on the other hand, contends that under the trust agreements he, as settlor, could derive no economic gain from the trusts; that there was no possibility of reverter either to him or to his estate; that the powers in the settlor to direct the accumulation of the trust income during the minority of the beneficiaries was solely for the benefit *367 of the trust; that even if the settlor, in exercising his power to select a new trustee, were to select himself as such, *137 he would then be under the control of the law of New York and could not profit personally thereby; that the power of the settlor to direct the purchase and sale of the trust property was a power in trust not for the benefit of the settlor; and, finally, that the settlor, as the parent of the beneficiaries, could not, under the trust agreements apply any of the trust income to the support, maintenance, care, and education of settlor's minor children.
We shall first make a brief analysis of the principal authorities relied upon by the respondent.
In
The short duration of the trust, the fact that the wife was the beneficiary and the retention of control over the corpus by the respondent all lead irresistibly to the conclusion that the respondent continued to be the owner for the purpose of
In
The dominant factor in the family group cases [of trusts] is the extent of the donor's actual control. We conclude that the control factor is sufficiently present when the trust is of short duration as in the Clifford*139 case * * * even if there is no expressed reservation of control; while if the trust is of long duration then the donor is to be regarded as the "owner" if he expressly reserves, as here, a very substantial measure of the control of the disposition of the income.
In
Although economic gain "realized or realizable by the taxpayer is necessary to produce a taxable income", power to command trust income is equivalent to taxable enjoyment thereof and power to shift income from one beneficiary to another constitutes control and amounts to a realization of econmic gain.
In
In order to bring the pending case within the purview of the cases cited by respondent, it would be necessary to show that the settlor herein would derive some benefit from the four powers retained by him over the trust corpus, i. e., the power to direct the accumulation of the trust income during the*141 minority of the beneficiaries; the power to remove the trustee and appoint a successor; the power to control the trust investments; and the power, as the parent of the beneficiaries, to receive, on behalf of the beneficiaries and to receipt for, the income arising from the trust estate.
The power to direct the accumulation of the trust income during the minority of the beneficiary could not operate either to divest the beneficiary ultimately of the income or to divert the income to some other beneficiary, because the period of accumulation is short and it is provided that at the beneficiary's majority all the accumulated income shall be paid over. Such a power does not invest the settlor with any such control over the property as to be tantamount to a taxable interest. See
The power to remove the trustee, even when extended to the point of permitting the settlor to appoint himself as trustee, certainly does not inure to the economic benefit of the settlor unless, as in the Stockstrom case, supra, that power would vest in the settlor as trustee the right to distribute the trust funds indiscriminately among various*142 beneficiaries or accumulate the trust fund for an indefinite period.
*369 The power to direct the investment of the trust fund could, of course, be abused by the settlor if he were to violate that provision of the trust agreement which provides that the trust shall be in all respects under the control of the laws of New York State. However, in the case at bar we have a settlor who is a man of considerable wealth and extensive experience in the investment of money. His qualifications to direct the investment of the trust funds could hardly be questioned. If he were to use these powers in trust for his own financial profit he would be in violation of the trust and in violation of the laws of New York, as was said by the court in
The fourth power retained by the settlor to receive, as the parent of the beneficiaries, the income from the corpus could only be of benefit to the settlor if he should illegally convert the same to his own*143 benefit.
The inevitable conclusion from the above is that none of the provisions of the trust agreement involved herein bring this trust within the provisions of the law as set forth in the Clifford case above or the later cases which have followed the Clifford doctrine.
The respondent also contends that this money so received by the petitioner might be used for the education, care, maintenance, and support of the beneficiaries and thus might inure to the benefit of the settlor. This same contention was raised in the case of
The rule in that state [New York] appears clearly to be that the primary duty to support and educate minor children rests upon the father * * *. And as long as the father is able financially to carry on this burden the child's separate estate and income may not be used for its support.
In California, the state of residence of the settlor and the beneficiaries during the taxable years, a similar decision is found in
Parents are primarily liable for the support of their children (Civil Code, section 196) and the assets of the children may not be reserved to or for that purpose so long as the parents are able adequately to perform this duty (Code of Civil Procedure, section 1757).
Section 1757 of the Code of Civil Procedure, referred to in the above quotation, was repealed by
The evidence herein is clear, furthermore, that petitioner is a man *370 of considerable means and, under the California law as declared in
The law is well settled that the primary duty to support a minor rests upon his parents and that the estate of the minor can only be resorted to*145 where the parents are unable to fulfill the obligation.
Respondent cites the case of
*146 It is therefore held that the income of the trust is not taxable to the petitioner under the doctrine of the Clifford case or under the provisions of
The second issue involves the disallowance of amounts paid to Haskin & Sells and Webster & Atz. The amounts paid to Haskin & Sells were for services rendered to petitioner in connection with the preparation of his income tax returns. The amounts paid to Webster & Atz were for keeping petitioner's books and recording therein the income from approximately $ 1,000,000 in stocks and securities owned by him, depositing dividends received in petitioner's bank account, and, during the latter part of 1938, when petitioner left the country for a period of four months, taking care of his office and his tax returns. In support of his determination that the amounts paid to these two firms do not constitute allowable deductions, the respondent cites and relies upon
*148 Since the decision in the Bingham case was rendered this Court has held to be deductible expenditures for legal fees incurred in connection with securing a refund of income taxes,
Our best judgment is that the rationale of the Bingham decision is equally applicable to the services rendered by Haskin & Sells and Webster & Atz. The preparation of income tax returns and other services*149 rendered by these two firms were "directly connected with or proximately result from the enterprise -- the management of property held for production of income."
It may not be amiss to point out in this connection that prior to May 14, 1946, the respondent's Regulations 103, as amended (see par. 11,
Expenses paid or incurred by an individual in the determination of liability for taxes upon his income are deductible. If property is held by an individual for the production of income, amounts expended in determining a property tax imposed with respect to such property during the period when so held*150 are deductible. * * *
We conclude that the amounts paid by petitioner to the two accounting firms during the taxable years are allowable deductions under
The remaining issue relates to the failure of petitioner to include in his income tax return for 1939 any part of the $ 1,500 received by him in that year from the Brooks-Rose Corporation for services rendered during the years 1935, 1936, and 1937. An examination of the briefs filed by the respective parties discloses that they are in agreement that that portion of the $ 1,500 which petitioner was paid for services rendered prior to November 1, 1935, when petitioner was a resident of the State of New York, is taxable to him as his separate income, and that portion paid for services rendered after that date, when he was a resident of the State of California, is taxable as community income. Whether we follow the respondent's method of computation, that ten-twelfths of $ 500, the compensation for 1935, represents separate income and the balance community income, or the petitioner's method, that ten thirty-sixths of $ 1,500, the compensation for all three years, represents separate income and the balance*151 twenty-six thirty-sixths community income, the result is the same. We therefore hold that $ 416.66 of the $ 1,500 received in 1939 is taxable as separate income, and the remainder, $ 1,083.34, as community income.
Decision will be entered under Rule 50.
Footnotes
1. This case was decided prior to the 1943 amendment to
section 167, I. R. C.↩ 2.
SEC. 23 . DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:
(a) Expenses. -- * * *
* * * *
(2) Non-trade or non-business expenses. -- In the case of an individual all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.
[This section was made retroactive by the provisions of section 121 (e) of the Revenue Act of 1942.]↩