*1434 1. TRUST INCOME TAXABLE TO GRANTOR. - Income of short term trust taxable to grantor, following Helvering v. Clifford,309 U.S. 331">309 U.S. 331.
2. GIFT TAX - INCOMPLETE GIFT. - Gift was incomplete until termination of trust where dependent upon beneficiary-donee being alive at termination of trust.
3. Id. - Gift was incomplete until termination of trust where dependent upon whether or not grantor trustee, with power to use any or all income for support, maintenance, and well-being of children beneficiaries, would permit any income to remain accumulated at termination of trust.
*924 The Commissioner determined a deficiency of $18,806.73 in income taxes for the year 1934 and a deficiency of $15,830.91 in gift taxes for the year 1936. The questions for decision are (1) whether *925 or not the income for 1934 of two trusts created by the petitioner for his two children may be included in the petitioner's gross income for that year under either section 22(a) or section 167(a) of the Revenue Act of 1934, and (2) whether the*1435 petitioner made completed gifts of the accumulated income of those trusts at the time the trusts terminated in 1936.
FINDINGS OF FACT.
The petitioner, an individual, resides at New York, New York. He has two children, Julia Irene McCormack, born in 1920, and William J. McCormack, II, born in 1924.
The petitioner executed two trust instruments on November 30, 1931, one for the benefit of each of his children. Each instrument provided for the conveyance to the petitioner, as trustee, of 327 1/2 shares of stock of McCormack Securities Corporation. Certificates for those shares were issued in the name of the petitioner, as trustee for the children, on the same date. The pertinent provisions of the two trust instruments, which were identical except for the names of the beneficiaries, are as follows:
1. The TRUSTEE shall receive, hold, manage, sell, invest and reinvest the same, and the proceeds of the disposition of any property at any time constituting the principal of this trust, or any part thereof, with the right from time to time to change the investment thereof. He shall collect and receive the income and profits thereof and therefrom, and after the payment of all*1436 charges and expenses, the TRUSTEE shall apply to the use of his said daughter, JULIA IRENE MCCORMACK, at such times, in such amounts and in such manner as said TRUSTEE may, in his uncontrolled discretion, decide, so much of the net income from this trust fund as in the sole and absolute discretion of the TRUSTEE may be necessary and proper for the maintenance, education and well-being of said JULIA IRENE MCCORMACK, and shall accumulate the balance of such net income, if any, for the benefit of said JULIA IRENE MCCORMACK.
The discretion herein given to the TRUSTEE with regard to the manner of application of income, and the net amount thereof which is to be used for said purpose, shall be subject to no other control than that of the judgment of the TRUSTEE, and neither said JULIA IRENE MCCORMACK, nor any other person on her behalf, or otherwise, shall have any right or power to control the exercise of said TRUSTEE'S discretion, or to compel him to make any application of the income from this trust in any manner other than that which said TRUSTEE may decide upon.
In addition to the foregoing, whenever, and from time to time, in the TRUSTEE'S absolute discretion, if the net income*1437 and accumulations thereof are insufficient for the needs of said JULIA IRENE MCCORMACK, said TRUSTEE may apply to the use of said JULIA IRENE MCCORMACK, so much of the principal hereof as he may determine, and upon any such application, the principal of this trust shall thereupon be and become diminished by the amount so used by the said TRUSTEE for such purpose.
[Here there are provisions authorizing payment of income or principle to the mother of the beneficiary for the use of the beneficiary if the trustee so desired.]
*926 II. This trust shall terminate five years from the date hereof, or upon the death of the GRANTOR, or upon the death of said JULIA IRENE MCCORMACK, whichever earliest happens.
Upon the termination of this trust, if the same does not terminate by reason of the death of said JULIA IRENE MCCORMACK, all accumulations, if any, shall be held by her surviving parents or parent, for, and when she reaches the age of twenty-one years, be paid over to, said JULIA IRENE MCCORMACK. Upon said termination of this trust, the principal thereof, as then constituted, shall be assigned, paid over and delivered, absolutely, to the GRANTOR, individually, if he is*1438 then living, or if said GRANTOR is not then living, then to the estate of the GRANTOR, to be distributed as part thereof.
III. [Provision is here made for the substitution as trustee of his executors in case the grantor should die.]
IV. [The trustee is authorized to retain the securities in their present form and to make additions and retain those.]
V. [The trustee is given power to sell, exchange, and keep the funds invested in any property that he sees fit without regard to whether or not it is legal trust property. He is also given the right to keep any part of the funds uninvested and to borrow money.]
VI. [The trustee is authorized in his sole discretion to make distributions in kind or in money.]
VII. [The trustee is authorized to have the securities registered in his own name or in any other way that suits his convenience.]
VIII. [The trustee is empowered to employ counsel and agents.]
IX. [The trustee is authorized to pay taxes.]
X. [All stock dividends, extraordinary dividends, and gains of capital nature are to be considered a part of the corpus.]
XI. [The trustee is not required to set aside a sinking fund for securities purchased*1439 at a premium.]
XII. [The trustee is empowered to vote the stock and participate in reorganizations just as an individual owner would.]
XIII. [This trust is irrevocable.]
XIV. [The trustee shall not be held liable except for willful wrongdoing.]
XV. [The trustee shall not be required to furnish bond.]
The petitioner, on January 5, 1932, added 360 shares of stock of the Alpha Holding Corporation to the principal of each trust and certificates for the shares were transferred to his name, as trustee, on the same day.
One of the petitioner's purposes in creating the trusts for his children was to build up a fund to be made available to each of them when they reached twenty-one years of age. Another purpose was to provide for their "maintenance, education and well-being" in the event that for any reason he should not be able to provide for them out of his personal funds. He believed that the income from the trusts would be more than enough to support the children and expected the accumulated income of the trusts not used for that purpose would provide a fund for each child of about $100,000.
Special bank accounts were poened for each trust in the petitioner's*1440 name as trustee, and the income of the trusts was deposited in those accounts. Some of the income was invested from time to time in *927 securities, including stock of the Comprehensive Omnibus Corporation and the East Side Omnibus Corporation, companies in which the petitioner was an officer, director, and stockholder. None of the trust income was ever commingled with the petitioner's personal funds.
The petitioner distributed to his wife, on December 19, 1932, $35,000 of the income of each trust to be applied to the maintenance, education, and well-being of his children. He did not intend that all of that amount should be used for that purpose in the year 1932, but expected that it would be sufficient to take care of the needs of each child for an indefinite period. The wife deposited each of those amounts in separate bank accounts opened in her name for each child. Some of the $70,000 so distributed was used by the wife for the support and maintenance of the children, but the record does not show what part of the distribution was used for that purpose or in what way the balance has been expended. The wife withdrew $17,775 in May 1933 from each of the special bank*1441 accounts created by her for the children. The record does not show the purpose for which those withdrawals were made. There was no distribution of the income of the trusts other than the $70,000 above mentioned. Most of the expenditures incurred for the maintenance and education of the children during the term of the trusts were paid by the petitioner from his personal funds.
The annual income and accumulated net income of each trust are shown by the following tables.
| Julia Irene McCormack | ||||
| Year | Income | Taxes | Distributions | Accumulations |
| 1931 | $30,000.00 | $30,000.00 | ||
| 1932 | 72,456.08 | $1,780.02 | $35,000 | 35,676.06 |
| 1933 | 8,943.43 | 5,386.45 | 3,556.98 | |
| 1934 | 25,813.72 | 238.50 | 25,575.22 | |
| 1935 | 3,821.84 | 3,021.28 | 800.56 | |
| 1936 | 2,652.80 | 92.68 | 2,560.12 | |
| Total | 143,687.87 | 10,518.93 | 35,000 | 98,168.94 |
| Less: | ||
| Liberty bond interest included in income but not received due to prior redemption | 63.75 | |
| Loss on sale of income investments | 300.50 | 364.25 |
| Total | 97,804.69 |
| William J. McCormack, II | ||||
| Year | Income | Taxes | Distributions | Accumulations |
| 1931 | $30,000.00 | $30,000.00 | ||
| 1932 | 72,921.29 | $1,780.66 | $35,000.00 | 36,141.23 |
| 1933 | 9,937.50 | 5,378.77 | 4,558.73 | |
| 1934 | 26,101.83 | 238.26 | 25,863.57 | |
| 1935 | 3,718.99 | 2,936.56 | 782.43 | |
| 1936 | 2,920.00 | 58,76 | 2,861.24 | |
| Total | $145,599.61 | 10,392.41 | 35,000.00 | 100,207.20 |
*1442 *928 The trusts terminated on November 30, 1936, and the securities and other property forming the principal of the trusts were transferred back to the name of the petitioner, individually. The cash and securities representing the accumulated income of the trusts were retained in the name of the petitioner, as trustee, and were held by him solely for the benefit of his children, neither of whom at that time had reached the age of twenty-one years.
The income of the trusts for 1934 was reported on income tax returns filed for each trust for that year with the collector of internal revenue for the third district of New York. The petitioner filed a personal gift tax return for the year 1936 with the same collector. The Commissioner held in his notice of deficiency that the income of each trust for 1934 was taxable to the petitioner in that year, citing article 166-1 of Regulations 86, as amended by Treasury Decision 4629, published in Cumulative Bulletin XV-1, p. 141, and explained: "Since it is apparent that you have not made a permanent and definite disposition of your property, the income from the trusts created for your minor children is held to be properly taxable*1443 to you." He held in his notice of deficiency for the year 1936 that the petitioner made gifts of the accumulated income of each trust when it terminated in that year and included $217,693.45 in the petitioner's gross gifts, from which he allowed two $5,000 exclusions and a specific exemption of $40,000. His explanation is as follows:
Careful consideration has been given to your protest. However, as at any time during the life of the trusts the accumulated income could be used for your benefit, it is determined that the gifts were made when the trusts terminated during the calendar year 1936.
OPINION.
MURDOCK: The income of these trusts for the year 1934 is taxable to the petitioner upon authority of Helvering v. Clifford,309 U.S. 331">309 U.S. 331. The slight differences between this case and the Clifford case are immaterial and do not serve to distinguish the two cases. Commissioner v. Berolzheimer, 116 Fed.(2d) 628; Helvering v. Hormel, 111 Fed.(2d) 1; Penn v. Commissioner, 109 Fed.(2d) 954. Thus, it is unnecessary to decide whether or not the income would be taxable to the petitioner under section*1444 167(a) of the Revenue Act of 1934.
The only other issue for decision relates to gift taxes for 1936. The income actually distributed under the trusts is not involved in this issue. The question is, Were there for the first time in 1936 completed gifts of the amounts accumulated in these trusts, which accumulated amounts were to be held for and turned over to the beneficiaries when they became twenty-one years of age? The parties have agreed upon the amount of the accumulated income in each trust. The parties agree that the petitioner made gifts through the *929 medium of these trusts. The fact that the income is taxable to the grantor is, of course, no reason for holding that the accumulations could not be the subject of a taxable gift in 1936. The petitioner contends, however, that the gifts were completed prior to 1936 and nothing happened in 1936 which would be subject to tax as a gift in that year. We have come to the conclusion that the gifts of the accumulated income were complete for the first time in 1936. This conclusion can be supported on each of two grounds. The first is that there was to be no gift unless the beneficiaries survived the trusts and the*1445 second is that the petitioner retained the power during the continuance of the trusts to expend all of the income of the trusts and thus avoid the gift of any accumulations.
The only provision for a transfer by gift of the accumulations under either trust is in that part of paragraph II, which provides that the " accumulations, if any", are to be held for the beneficiary, "if" the trust does not terminate by the death of the beneficiary. There is no express provision disposing of the accumulated income of either trust in case of termination by the death of the beneficiary. Thus, following the principle of inclusio unius est exclusio alterius, there was to be no gift in either trust unless the beneficiary survived the trust. In case the trust was terminated by the death of the beneficiary, the accumulated income, like the corpus of the trust, was to go back to the petitioner. The gift tax applies only to consummated gifts, absolute transfers. Since it was not apparent prior to the termination of these trusts that the beneficiaries would be alive, and therefore entitled to take the accumulations, obviously, they, as donees, should not be personally liable for the gift tax*1446 under section 510 of the Revenue Act of 1932 until 1936, when the trusts terminated while they were still alive. There was not a completed gift of the accumulated income until the trusts terminated, but there was a completed gift of the accumulated income of each trust at that time. Carl J. Schmidlapp,43 B.T.A. 829">43 B.T.A. 829; Margaret White Marshall,43 B.T.A. 99">43 B.T.A. 99; Marrs McLean,41 B.T.A. 1266">41 B.T.A. 1266; Emily Trevor,40 B.T.A. 1241">40 B.T.A. 1241; William T. Walker,40 B.T.A. 762">40 B.T.A. 762; Lorraine Manville Gould Dresselhuys,40 B.T.A. 30">40 B.T.A. 30. Cf. Helvering v. Hallock,309 U.S. 106">309 U.S. 106; Klein v. United States,283 U.S. 231">283 U.S. 231; Sanford v. Commissioner,308 U.S. 39">308 U.S. 39; Hughes v. Commissioner, 104 Fed.(2d) 144; Hesslein v. Hoey, 91 Fed.(2d) 954; certiorari denied, 302 U.S. 756">302 U.S. 756; Van Vranken v. Helvering, 115 Fed.(2d) 709.
The second reason why the gifts of the accumulated income were not complete until 1936 is based upon the retained power of the petitioner to determine whether or not there would be any*1447 accumulations at the termination of the trusts. There was no way of determining, prior to the termination of the trusts, how much of the *930 income the petitioner would see fit to expend or distribute and how much he would permit to accumulate. The decision to use or accumulate the income of these trusts was not required to be made annually. Thus, even though at the end of any particular year some income remained undistributed, nevertheless, there was no assurance that it would not be expended or distributed later. Although the petitioner anticipated that a substantial amount of the income would be accumulated and although his expectations may have been reasonable ones, still, there was no certainty that there would be accumulations and there was no way of determining how much the accumulations might amount to in dollars at the end of the trusts. The petitioner had extremely broad powers to decide whether or not he would expend or distribute the income; that is, he could use the income in any way that he deemed "necessary and proper for the maintenance, education and well-being" of the beneficiaries. The Commissioner argues that this gave him the power to use all of the*1448 income up to the very last moment of the life of the trusts to discharge his own obligation to support and maintain his minor children and, consequently, there was no completed gift of any accumulated income from the petitioner to the children until the termination of his power to use that income. Clearly, he could have used much more of the income than he did use. An indication of his power in this connection is found in the fact that the amount which he actually distributed to the mother of the children in 1932 was more than he deemed necessary for their needs during the remaining life of the trusts. Furthermore, there was always the possibility that the income of the trusts might be completely exhausted by some unforeseen need, as for example an expensive illness.
A transfer in trust by a father merely for the purpose of using such of the income as might be necessary for the support of his minor child during infancy would not be a taxable gift, since the father would part with nothing. Martin Beck,43 B.T.A. 147">43 B.T.A. 147. 1 He would simply have provided that a part of his income was to be used to discharge his own obligation. But if a father directed that the income*1449 of a trust should be accumulated during the minority of his child and paid over to the child at maturity, there would be at the creation of the trust a completed gift of an estate for years in the trust property. See cases above cited. The present trusts have some of the characteristics of each of the hypothetical trusts just mentioned. But since it was impossible to say in 1931, when these trusts were created, whether or not there would be any accumulated income upon termination of the trusts, there was no taxable gift of the accumulations at that time. There was at that *931 time no absolute transfer of the donor's dominion and control over the subject matter. Emily Trevor, supra.There is, however, some analogy between this case and those cases holding that the termination of the power of a grantor over trust property gives rise to a completed gift. Cf. Hesslein v. Hoey, supra;Burnet v. Guggenheim,288 U.S. 280">288 U.S. 280; Sanford v. Commissioner, supra.The gifts of the accumulations were not complete until 1936, when the powers of the petitioner over those accumulations ceased.
*1450 We have assumed for the purposes of this decision that the trusts were valid and enforceable under the laws of New York and that the beneficiaries had vested interests in whatever income might be produced during the terms of the trusts. Yet, for the reasons already given, it does not follow that there was any completed gift in 1931 of the accumulated income, as that income was actually disclosed at the termination of the trust. Cf. Marrs McLean, supra.The cases of Estate of Giles W. Mead,41 B.T.A. 424">41 B.T.A. 424, and Jack L. Warner,42 B.T.A. 954">42 B.T.A. 954, are not in point. The Board held in those cases that annual payments of income to beneficiaries of trusts subject to change were not taxable gifts in the year of payment. The trust deeds in those cases provided for annual payments of income to beneficiaries and it was upon that point that our decisions rested. Here the trustee was not required to make distributions annually or to do anything else upon an annual basis, but could accumulate or distribute at any time and in any amount as he saw fit.
Decision will be entered under Rule 50.
Footnotes
1. This point was not decided in Commissioner v. Krebs, 90 Fed.(2d) 880, mentioned in the Beck↩ case.