*825 Where the grantor creates a trust in personalty, providing in the indenture thereof that upon his death the trust shall terminate and in such event the corpus shall be transferred to such persons or corporations as designated in his last will and testament and in default of such appointment to his "next of kin" under the laws of the State of New York, per stirpes, not per capita, such trust is irrevocable without the written consent, under section 23 of the New York Personal Property Law, of such next of kin who are "beneficially interested" under said section of the law, and, being so irrevocable, the grantor is incapable of directing the distribution to him of any part of the income of the trust during the taxable years involved.
*1261 The respondent having determined deficiencies in income tax of $53,166.72 and $3,841.42 for the taxable years 1927 and 1928, the petitioners bring this proceeding for the redetermination thereof, alleging the commission of the following errors; (a) the inclusion of fiduciary income of $884.63 in taxable income*826 for 1927; (b) the improper computation of net dividends received in 1927; (c) in considering the capital net income - alleged by the respondent to be $411,327.14 - as taxable income to petitioner Armstrong, settlor, instead of to the trust in 1927, and in assessing a tax against him on the basis that the trust is revocable; (d) fixing the cost of special shares of stock sold by the trust in 1927; (e) including profit from the sale of securities, $22,041.08, as taxable income in 1928; and (f) disallowing legal and accounting fees in the amount of $8,800 as a deduction for 1928.
Allegations of errors (a) and (b) have been withdrawn and (f) is settled by stipulation of the parties.
FINDINGS OF FACT.
Petitioner Lawyers County Trust Co. is the duly appointed and acting committee of petitioner William B. Armstrong, incompetent, an individual, residing at New Rochelle, New York.
At various times prior and subsequent to March 1, 1913, Armstrong acquired 7,462 shares of the old stock of the American Piano *1262 Co., hereinafter referred to, the basis for the determination of gain or loss being $586,388.93. In 1927 he was the owner of 7,962 shares of the common stock of that*827 company.
Prior to May 31, 1927, a group of common stockholders of the American Piano Co. negotiated a sale of their stock to the Bankers Trust Co., of New York City, at a price of $196.25 a share. Upon conclusion of these negotiations Armstrong was offered the same proposition by the Bankers Trust Co. to purchase his common stock at that same figure.
The American Piano Co. had theretofore changed its capitalization so that its common stockholders, including Amstrong, were entitled to receive five shares of its new common stock for each share of old common stock held. The Bankers Trust Co.'s offer was to pay $196.25 per share for the old stock, or $39.25 per share for the new stock. Armstrong decided to sell 7,462 shares of the old stock to the Bankers Trust Co. under its proposition.
After Armstrong's decision to sell his said stock to the Bankers Trust Co., he and the Central Mercantile Bank & Trust Co. entered into a trust agreement on May 31, 1927, by which he, as "donor", conveyed, in trust, to the Central Mercantile Bank & Trust Co., as "trustee", 12,500 shares of common stock of the American Piano Co. and $9,375 cash, to "hold, manage, sell, invest and reinvest * *828 * * and to collect, recover and receive the rents, issues, interest and income" and to pay the same to him in quarterly installments during his lifetime. Said indenture provided that:
Upon the death of the Donor, said trust shall wholly and completely terminate and come to an end, and the Trustee is directed to assign, transfer and pay over the principal of said trust fund to the person or persons, or corporation or corporations designated in the Last Will and Testament of the Donor to receive the same. In default of such appointment, the Trustee is directed to pay over such principal in equal shares to the next of kin of said William B. Armstrong, under the laws of the State of New York, per stirpes and not per capita.
Armstrong then delivered to the Central Mercantile Bank & Trust Co. an original of said agreement, together with 12,500 shares of the new stock (having converted the old stock under the aforesaid terms) and $9,375 cash. On June 1, 1927, the Central Mercantile Bank & Trust Co., in accordance with paragraph second (authorization for such transaction) of the agreement, delivered all of said 12,500 shares to the Bankers Trust Co. and received full payment of $490,625*829 therefor from the Bankers Trust Co.
Armstrong reserved to himself the final approval in the case of all sales or exchanges and changes in investments affecting the trust corpus, and the right to discharge the trustee and the appointment of a successor thereto.
*1263 The remaining 4,962 shares of Armstrong's old stock to be sold to the Bankers Trust Co. were at the same time converted into 24,810 new shares under the aforesaid arrangement and sold by Armstrong to the Bankers Trust Co. Armstrong received therefor the sum of $973,792.50 and in his 1927 return showed a profit on these shares sold personally by him of $492,025.75, based upon cost or March 1, 1913, value of said 4,962 old shares, of $481,766.75. He reported no profit from the sale of the 12,500 new shares transferred to the Central Mercantile Bank & Trust Co., nor did the Central Mercantile Bank & Trust Co. report any profit from said sale.
The parties agree that the basis for computing gain or loss for all 7,462 shares of the old stock (37,310 shares of new stock), amounting to $586,388.93, is allocable as follows:
| To 2,500 old shares (12,500 new shares) transferred | |
| to Central Mercantile Bank and Trust Company | $104,622.18 |
| To 4,962 old shares (24,810 new shares) sold directly | |
| by petitioner | 481,766.75 |
| Total basis for computing gain or loss | 586,388.93 |
*830 Armstrong executed his last will and testament on June 22, 1927, and by a codicil thereto dated April 27, 1928, he provided for the disposition of the aforesaid trust fund as follows:
AND, WHEREAS, by virtue of said deed of trust, I reserve the right to dispose of said fund by Will;
Now, I do hereby direct that upon my death said trust fund be divided into five equal parts, and I do give and bequeath two of said one-fifth equal parts or shares unto my sister-in-law, FLORENCE N. ARMSTRONG. I give and bequeath one of said one-fifth equal parts or shares to my brother, A. BURT ARMSTRONG. I give and bequeath unto my brother, HOWARD T. ARMSTRONG, two of said one-fifth equal parts or shares. Should any of the foregoing persons predecease me, I give and bequeath the share of the one so dying to the children of said person share and share alike.
Orders handed down at special terms of the Supreme Court of New York, dated March 31, 1932, and April 13, 1933, substituting trustees under the said trust indenture, referred to the "irrevocable nature of the trust."
The Central Mercantile Bank & Trust Co., during the year 1928, sold certain securities held under said agreement dated*831 May 31, 1927, at a profit stipulated to amount to $22,041.08. Armstrong demanded that the profit be remitted to him as representing income under the agreement of May 31, 1927, but the Central Mercantile Bank & Trust Co. refused the demand in the following letter, addressed to Armstrong:
We enclose herewith a statement of the William B. Armstrong Trust at the close of business February 29th, 1928, Principal and Income Accounts.
You will note that we have not included in the Income Account the profit on sales of stock realized by the Trust. After carefully examining the Trust *1264 Indenture and under advice of our Counsel there does not appear to be anything in the Trust Indenture that provides that profit on the sale of Securities out of the Trust shall be treated as Income and credited the Income Account to be paid to the beneficiary under the Trust. It would appear that by so doing, we would be depleting the corpus of the Trust and would be deducting from the body of the Trust whatever amounts accrued to the Trust as profits on sales. In the absence of any specific provisions to this effect, it is necessary to treat any profit accruing on the principal of the Trust*832 as principal and not as income.
You will see from the enclosed statement that we have transferred the balance in the Income Account to your regular checking account on March 1st, 1928.
On May 18, 1928, the Central Mercantile Bank & Trust Co. was merged with the Bank of United States, which succeeded to the rights and liabilities of the Central Mercantile Bank & Trust Co. under the agreement of May 31, 1927. The Bank of United States filed a return for the year 1928 in the name of "Wm. B. Armstrong Trust" and reported therein said profit of $22,041.08, paying a tax thereon.
The parties agree that $8,300 for legal expenses was properly disallowed by respondent, but $500 should be allowed as a deduction from petitioner's 1928 income.
The respondent has added $411,317.14 to Armstrong's income as originally reported for 1927 as "Capital Net Gain", with the following explanation:
It is held by this office that the profit realized from the sale of American Piano Company common stock by the William B. Armstrong Trust is taxable to you as a Donor since the trust is revocable. * * *
The respondent has also added $22,041.08 to Armstrong's taxable income for 1928, with substantially*833 the same explanation therefor.
OPINION.
MORRIS: The petitioner abandoned and expressly waived the matters complained of in (a) and (b), and (f) having been settled by stipulation of the parties, the remaining issues, (c), (d), and (e), present one major question for our determination, probably the sole question if we decide that question in favor of the petitioner, and that is whether or not the trust created by Armstrong under the indenture of May 31, 1927, is revocable, as the respondent contends, and hence the grantor of the trust may at any time cause the distribution of the income thereof in the manner provided in section 219 of the Revenue Act of 1926 and similar sections (166 and 167) of the Revenue Act of 1928, or irrevocable, as the petitioner alleges and contends. Subsections (g) and (h) of section 219 of the Revenue Act of 1926 are as follows:
*1265 (g) Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included*834 in computing the net income of the grantor.
(h) Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is on may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.
Both parties base their arguments upon section 23 of the New York Personal Property Law (McKinney, vol. 40 - Cahill, ch. 42), which provides as follows:
Upon the written consent of all the persons beneficially interested in a trust in personal property or any part thereof heretofore or hereafter created, the creator of such trust may revoke the same as to the whole or such part thereof, and thereupon the estate of the trustee shall cease in the whole or such part thereof.
The respondent's*835 argument is that the grantor is the only person "beneficially interested" within the meaning of section 23, supra, as interpreted by the courts of New York. He says:
* * * only those who take, under the trust agreement, a present vested interest which is descendible, devisable and alienable, as opposed to a mere expectancy or hope, and that while contingent beneficiaries may be persons "beneficially interested" under Section 23, the contingency must relate to time and not to person or class of persons who take.
Therefore, it is argued, the grantor had the sole power of revocation and termination of the trust estate in 1927 and 1928. Thus, he says, "the real question for determination is whether there was, during the years 1927 and 1928, any person other than petitioner who was beneficially interested, and whose consent to a revocation was therefore necessary." He does not contend, as we grasp the significance of his argument, that there was "any person not a beneficiary" in conjunction with whom the grantor could have revested in himself the title to the trust corpus or the income therefrom. His contention strikes deeper at the very conception of the trust itself, *836 it being, in effect, that the trust was declared for his benefit and subject to his sole domination and control.
While not essential to our conclusion, it should be said, at the outset, that the word "beneficiary" as used in section 219, supra, is all-inclusive and is not confined to "vested" interests, as distinguished from those that are "contingent." Bessie R. Jones,27 B.T.A. 171">27 B.T.A. 171; *1266 Iola Wise Stetson,27 B.T.A. 173">27 B.T.A. 173, and Smith v. Commissioner, 59 Fed.(2d) 56. In the latter case, the court, construing the word "beneficiary" as used in section 219, said:
Undoubtedly Congress could have drawn a line between beneficiaries holding vested and contingent interests, or between those having contingent interests based on their respective degrees of remoteness, but it has done neither of these things. It is, therefore, far more reasonable to conclude that by the word "beneficiary" Congress intended to include persons or classes of persons designated, in the particular trust under consideration, entitled to take present or contingent interests thereunder.
*837 A case strikingly similar, upon the facts, to the instant case - this the respondent concedes, but which he contends is contrary to the weight of authority in the State of New York - is Hammond v. Chemung Canal Trust Co.,252 N.Y.S. 259">252 N.Y.S. 259, decided by the Supreme Court of New York July 23, 1931. In that case the plaintiff, Hammond, placed certain personalty with the defendant trust company, under a trust agreement providing for the payment of the income therefrom to him for life and of the principal upon his death "to such persons as he should name in his will, and, if he should die intestate, to his next of kin." Action having been brought to revoke the trust so created under the provisions of section 23, supra, it was alleged and contended, as here, that there were no persons beneficially interested and therefore no written consent was necessary for the revocation of such trust. The court there alludes to the lack of harmony in the decisions handed down by the courts of New York since the enactment of section 23 in 1909, and refers, at the same time, to three groups of cases, most of which have been cited pro and con by the parties in this proceeding, *838 (1) those where the grantor has reserved to himself the power to direct the disposition of the principal by his will with the remainder over to his next of kin - in which revocability without the consent of such next of kin was found - Stella v. New York Trust Co.,229 N.Y.S. 166">229 N.Y.S. 166; Cruger v. Union Trust Co. of New York,160 N.Y.S. 480">160 N.Y.S. 480; Sperry v. Farmers' Loan & Trust Co.,139 N.Y.S. 192">139 N.Y.S. 192; and Goodwin v. Broadway Trust Co.,149 N.Y.S. 1033">149 N.Y.S. 1033, though, the court pointed out, a contrary decision was reached in Crackanthorpe v. Sickles,141 N.Y.S. 370">141 N.Y.S. 370; (2) where the grantor reserved no power to so will but provided that the remainder should go to his children or next of kin - in which irrevocability was found - Williams v. Sage,167 N.Y.S. 179">167 N.Y.S. 179, Gage v. Irving Bank & Trust Co.,225 N.Y.S. 476">225 N.Y.S. 476; and (3) where the grantor reserved the right to use the principal if necessary with remainder, if any, to next of kin - in which revocability was found - *839 Whittemore v. Equitable Trust Co.,147 N.Y.S. 1058">147 N.Y.S. 1058, but, the latter of which was questioned in McKnight v. Bank of New York & Trust Co.,254 N.Y. 417">254 N.Y. 417; 173 N.E. 568">173 N.E. 568. It then said:
*1267 Whatever uncertainty existed seems to have been clarified by the Court of Appeals in Henry Whittemore v. Equitable Trust Co. of New York, supra. The test there established is the intent of the settlor, the court saying: "This is all a matter of intention * * *. To determine, therefore, whether the settlor of the trust * * * simply created a life interest and nothing more, reserving to himself the balance of the interest in the property, we looked to his intention, as expressed in the instrument." In that case, three settlors established a trust fund with two life beneficiaries. Each settlor provided: (1) That in the event of his death before the life beneficiaries, the trustee should pay his share of the principal as directed by his will; (2), that if he left no will, the trustee should pay it to the persons who would take under the statute of distributions, that is, to his next of kin; (3) he made no provision for paying the principal*840 to his grantee or assignee; (4) he made full and formal disposition of the principal of the trust estate; (5) he reserved power of disposition "only by will." The settlors and the sole surviving life beneficiary consented to the revocation, but some of the settlors had children who were infants and could not consent. In the event of the death of a settlor before the life beneficiary, these children would take that settlor's share in the principal, subject to the disposition of such share by such deceased settlor's will. The interest of these children, in the words of the court, could not be "conveyed away" by the settlor in his lifetime, but "could only be divested or cut off by a last will and testament. * * * That such an uncertain or variable interest of the next of kin is alienable. * * *" The trust was held irrevocable.
In the present case, the settlor (plaintiff) provided for the payment of the income to himself as life beneficiary, and that upon his death the trustee should pay the principal (1) as directed by his will, and (2) if he left no will, the trustee should pay the principal to his next of kin, that is, those who would take under the statute of distributions*841 (Decedent Estate Law, art. 3, § 80 et seq.). (3) No provision was made for paying the principal to any grantee or assignee of the settlor, in fact he expressly provided (though this provision is not controlling) that the trust was irrevocable, and expressly surrendered "all right and power to amend, modify or revoke" the trust during his lifetime. He not only expressed an intent that the agreement should be irrevocable, but he did that which was necessary in law to make it irrevocable, viz., he created beneficial interests in remainder which could be cut off only by his will. (4) He made a full and formal disposition of the principal; he provided for every contingency, and in no event can there be any uncertainty upon his death as to who will take the principal. His daughter will take, if living, otherwise his other next of kin. (5) He reserved only the power of disposition by will.
We think that his intention as expressed by the trust agreement was to entirely divest himself of any power or control over the principal except by his will, and that his next of kin are beneficially interested in the trust, and their consents, therefore, necessary to its revocation.
The *842 Whittemore Case is distinguishable from the present case in only two respects; in that case, if any settlor survived the life beneficiaries, the principal reverted to the settlor. In this respect, the settlors in the Whittemore Case reserved more power and control than in the present case. In the present case, the settlor is himself the life beneficiary, while in the Whittemore Case, parties other than the settlors were the life beneficiaries. We do not see that this is material. In the cases cited in the Whittemore Case the settlor was himself the life beneficiary. Crackanthorpe v. Sickles, supra, and Court v. Bankers' Trust Co., supra.
*1268 The Henry Whittemore decision referred to in the foregoing quotation is Whittemore v. Equitable Trust Co. of New York,250 N.Y. 298">250 N.Y. 298; 165 N.E. 454">165 N.E. 454, handed down by the Court of Appeals of New York February 13, 1929, reversing the decision of the Appellate Division of the Supreme Court, 229, N.Y.S. 440. That case is relied upon by the petitioner and is designated by the parties as the "Second Whittemore Case."
*843 It is the so-called "First Whittemore Case", Whittemore v. Equitable Trust Co.,147 N.Y.S. 1058">147 N.Y.S. 1058, handed down by the Appellate Division of the Supreme Court May 29, 1914, to which previous reference has been made, that the respondent relies upon. In that case the plaintiff, Whittemore, party of the first part, and the Van Norden Trust Co., second party, executed a trust indenture by which the plaintiff transferred to that company certain securities, in trust, to pay the net income to the plaintiff, or for her use, for her lifetime, and to pay over to her, or for her use, such portion of the principal as in the opinion of the Trust Co. might be necessary for her support, in addition to the income and profits, and upon her death to distribute the principal of said found among her next of kin. The deed of trust contained no express reservation of power of revocation. The defendant was the successor, by merger, of the Van Norden Trust Co. The plaintiff attempted to revoke the trust, pursuant to section 23 of the Personal Property Laws of New York, by serving upon the defendant a formal notice in writing. The defendant declined to comply with the notice, resulting*844 in this action. The submission was agreed upon, in which it was recited that "'the present next of kin of the plaintiff are'" a brother and sister therein named. It was not contended there that the trust was "irrevocable" for the reason that it could not be determined until the death of the plaintiff who would be "her next of kin", but it was contended that the consent of the brother and sister to the revocation was necessary, the theory being that the brother and sister "now have a beneficial interest in the deed of trust" and accordingly "have a contingent interest in the remainder." In giving judgment for the plaintiff, revoking the deed of trust and directing the delivery of the corpus, etc., the court said:
The determination of the question as to who are beneficially interested in a trust necessarily requires a construction of the deed of trust, and where the settlor of the trust and the trustee are the only parties thereto, the construction depends upon the intention of the settlor. It is quite evident, I think, that the plaintiff did not intend by this deed of trust to give those who will be her next of kin at the time of her death a present beneficial interest in the property. *845 She merely intended to turn over the management of her securities to the trust company for her own benefit, and to relieve her of the responsibility of looking after them, collecting the income, selling when advisable, and reinvesting. She reserved to herself, with the consent of the trustee, the right to use the entire *1269 property if necessary. It is therefore manifest that her sole object in creating the trust was to provide for her own necessities and comfort during life. It is true the deed of trust contains the provision that the trustee shall upon her death distribute the principal of the trust fund then remaining among her next of kin; but I think no particular significance is to be attached to that provision. It may have been thought that without some provision of the kind the trust company would take the remainder; and the provision, I think, was inserted merely as a direction to the trust company with respect to disposing of the property after her death, and she directed that it be distributed as the law provides for the distribution of the property of an intestate. Nor do I think any significance is to be attached to the fact that she did not direct that*846 the trustee deliver it to her administrator. She probably had no intention of leaving debts, and supposed that her property could be distributed in this manner without other administration. There could be no purpose in directing the trustee to distribute it among her next of kin, rather than deliver it to her administrator, for if she left debts, property held under such a trust to the extent of her interest would be subject thereto (Personal Property Law, § 34 see, also, Schenck v. Barnes,156 N.Y. 316">156 N.Y. 316, 50 N.E. 967">50 N.E. 967, 41 L.R.A. 395">41 L.R.A. 395), and I think she intended to retain an interest and had an interest in all of it.
[3] Moreover, a living person has no next of kin; and a possible interest as an heir or one of the next of kin of a living person is not descendible, devisable or assignable, and therefore there is no one who has even a contingent interest in the property as the next of kin of the settlor of the trust. Robinson v. N.Y. Life Ins. & Trust Co. et al.,75 Misc.Rep. 361, 133, N.Y. Supp. 257; *847 National Park Bank v. Billings,144 App.Div. 536, at page 540, 129 N.Y.Supp. 846, affirmed 203 N.Y. 556">203 N.Y. 556, 96 N.E. 1122">96 N.E. 1122. See, also, Sperry v. Farmers' Loan & Trust Co.,154 App.Div. 447, 139 N.Y.Supp. 192, and Hoskin v. L. I. Loan & Trust Co.,139 App.Div. 258, 123 N.Y.Supp. 994, affirmed 203 N.Y. 588">203 N.Y. 588, 96 N.E. 1116">96 N.E. 1116.
Hammond v. Chemung Canal Trust Co., supra, sets forth all of the material considerations and facts of the "Second Whittemore Case", to obviate repetition here.
Our examination of all of the cases to which our attention has been directed, but which we need not discuss in detail, convinces us that the so-called "Second Whittemore Case" upon which the petitioner relies correctly interprets section 23 of the Personal Property Law of New York, and that the conclusion that the trust under consideration there was irrevocable should be adopted here. We believe there was a clear intention upon the part of the grantor to make an absolute disposition of his property in trust, he to receive its net income during his natural life and upon his death the corpus thereof to be*848 paid to such person or persons as designated by his last will and testament, and in the default of the exercise of such appointment to pay such corpus in equal shares to his next of kin, being, of course, those who would take according to the statute of distributions of the State of New York. He reserved no power of revocation, expressly or otherwise. Therefore, the heirs at law were so "beneficially interested" in this trust as to require their written consent thereunder before such trust, under section 23 of the Personal Property *1270 Law of New York, could be revoked. It follows, therefore, that the grantor did not have the absolute power of revocation as the respondent contends. See Corbett v. Bank of New York & Trust Co.,242 N.Y.S. 638">242 N.Y.S. 638; Cagliardi v. Bank of New York & Trust Co.,243 N.Y.S. 573">243 N.Y.S. 573; Meyer v. Bank of Manhattan Trust Co.,249 N.Y.S. 640">249 N.Y.S. 640; Berlenbach v. Chemical Bank & Trust Co.,256 N.Y.S. 563">256 N.Y.S. 563, in which "intent" was found lacking, thus distinguished from the "Second Whittemore Case." In re *849 Brunswick's Estate,256 N.Y.S. 879">256 N.Y.S. 879 and others.
We are of the opinion that the trust in controversy was irrevocable and that the settlor could not "alone or in conjunction with any person not a beneficiary of the trust" effect a distribution of its corpus or any part of the income therefrom, other than as provided for in the indenture.
Judgment will be entered under Rule 50.