*270 Decision will be entered for the respondent.
The petitioner set up a trust for benefit of his wife and children, reserving to himself the right to lease a building as well as control over sale, mortgage, or exchange of all property. On the same day he and the trustee, a trust company, executed a lease upon the building, for a stated rental of $ 500 a month for two years, and thereafter to be set by a county official as arbitrator, in case of disagreement. The taxable year falls within the two-year period. Held, that the petitioner may not deduct as rent paid the $ 500 a month paid to the trustee. Johnson v. Commissioner, 86 Fed. (2d) 710.
*415 This proceeding arises from the Commissioner's determination of a deficiency of $ 2,429.05 in petitioner's income tax for 1941. The only issue is whether the petitioner is entitled to deduct as rent the sum of $ 3,800 paid to the La Crosse Trust Co. under the terms of a trust agreement and a lease, both*271 instruments bearing the date of May 12, 1941.
A stipulation of facts was filed. We adopt same by reference and find the facts therein set forth. Such parts thereof as it is considered necessary to set forth are included with other facts found from evidence adduced in our findings of fact.
*416 FINDINGS OF FACT.
Petitioner is an individual, engaged in the profession of the practice of medicine, and is a resident of La Crosse County, Wisconsin. His income tax return for 1941 was filed with the collector of internal revenue for the Milwaukee district in the State of Wisconsin.
On May 12, 1941, petitioner created a trust for the benefit of his wife, Ellen Skemp, then 46 years of age, and his 8 children, whose ages then ranged from 9 to 21 years. By the terms of the trust petitioner, as settlor, transferred and assigned to the La Crosse Trust Co., as sole trustee, a 2-story brick building, the major portion of the lower floor of which is arranged for the operation of a medical clinic and the balance of which is arranged for general office purposes. The petitioner is not in any way connected with the La Crosse Trust Co., as stockholder, officer, or employee.
The trust agreement*272 (aside from formal parts and property description) provided as follows:
Whereas the Settlor is desirous of creating a trust for his wife Ellen Skemp and his children, the income of which is to be used for the purposes of their care, support and education, and in furtherance of said purposes has deeded to the Trustee in trust for the uses and purposes hereinafter prescribed the following described real estate * * *
* * * *
Article I
Said trustee is to hold said real estate and any other property hereinafter assigned or made payable to it by the Settlor in trust subject to the terms hereof.
Article II
The trustee shall hold and manage the real estate herein granted, together with such other property including life insurance policies as hereinafter assigned by the Settlor during the existence of this trust upon the following terms and conditions and for the uses and purposes and with the duties and powers as follows:
A. To lease and demise and let any portion or portions of the said real estate of such trust, at such times, on such conditions and for such terms as it may deem expedient.
B. To sell, assign, transfer and convey or mortgage said real estate, except that no sale shall be*273 made while settlor is living without his consent in writing, nor shall said real estate be mortgaged during the lifetime of the settlor without his consent in writing.
C. To expend moneys of the trust estate for repairs, maintenance, taxes and assessments and improvements or for the payment of premiums on life insurance.D. In the event of sale of said real estate, the said trustee has full power and authority to invest and re-invest all or any part of said trust estate which may come into its hands and in making such investments the said trustee is given full discretion in the management and control of the character of said investment and in selling, realizing upon, or otherwise converting the assets of the trust estate, may itself purchase the same with impeachment only for abuse of discretion or bad faith.
*417 Article III
The net income from said trust estate shall be distributed, used and applied as follows:
A. To Ellen Skemp, wife of the Settlor, during her life in as nearly equal monthly installments as shall be practicable.
B. After the death of Ellen Skemp said income shall be distributed and applied by the trustee for the care and support of the children of the Settlor*274 and for the education of such children who desire an education. In the event any of said children are minors, the trustee shall first use the net income from said estate for the support and education of said minors and any residue after providing for the care and support and education of such minors as may be used by the trustee for the care and support and education of such children as have reached their majority and desire to continue their education, provided however, that when their education is completed the trustee shall have full discretion as to the further distribution of income until such time as all of the Settlor's children have been educated.
Article IV
Termination of Trust. This trust shall terminate 20 years from the date of this agreement excepting however in the event of the death of both the Settlor and his wife, Ellen prior to the time the youngest child of the Settlor reaches the age of 25 years, then such trust shall terminate on the 25th birthday of the youngest child of the Settlor.
At the termination of the trust said real estate and any other property hereinafter conveyed to the trustee shall be distributed to the Settlor's then living children in equal *275 shares and in the event any of such children are deceased and shall have issue, then the issue of said deceased child or children shall take by right of representation.
Article V
The Trustee, in its sole discretion, may also advance to the wife of the Settlor, from time to time, such protions [sic] of the principal of said trust property as in its judgment may be necessary for her proper care and support or for the proper maintenance and education of the children of the Settlor, however, there shall be no advance of principal during the lifetime of the settlor except that his written consent be first obtained.
Article VI
The trustee shall have the power or authority to mortgage or encumber the corups [sic] of said trust estate for any reason whatsoever excepting only that during the life of the Settlor such right is given by the written consent of such Settlor. The Settlor reserves the right at his option during his lifetime to direct the trustee to retain any investment at any time held by its [sic] hereunder or to direct the sale or exchange of any such investment and to designate the stocks, bonds, or other property, real or personal, in which the trust fund or any *276 reinvestment thereof shall be invested, or to direct the execution in voting proxies under any stock held hereunder, provided, however, that the trustee shall be under no liability for any loss arising from any action taken or omitted to be taken by the trustee at the direction of the Settlor.
Article VII
The interest of any beneficiary hereunder whether principal or income, shall not be anticipated, alienated or in any other manner assigned by such beneficiary and shall not be subject to any legal proceedings, bankruptcy proceedings or interference or control of creditors or others.
*418 Article VIII
The Trustee is authorized and empowered to retain, subject to the provisions hereof, any and all of the property and securities turned over to it by the Settlor hereinbefore described, in their present form, together with such additional property or securities as the Settlor may from time to time add to the said Trust Estate, without liability for decrease in the value of such property or securities.
The Trustee in its sole discretion shall also pay any and all taxes of whatsoever kind or description, together with interest and penalties thereon, which may be assessed by any taxing*277 jurisdiction whatever, upon the property held by the Trustee at any time under this Trust Agreement.
Article IX
The Trustee shall render periodical statements (not less frequently than annually) of the receipts and disbursements of the income and principal to the Settlor during his lifetime and after his death to the beneficiaries of the Trust.
Article X
The Settlor shall have the option of renting all or any part of the real estate in this trust at a rental to be determined by the trustee.
* * * *
Article XII
The Trustee may resign as Trustee from the trust hereby created at any time by giving thirty days' written notice of its intention to resign, delivered personally or by registered mail to the Settlor, or, if the Settlor has deceased, to the beneficiaries then entitled to the income. Succeeding Trustees shall be appointed by the Settlor, or if he be deceased or shall not appoint a successor at least ten days before the day set by the written resignation as the effective date thereof, then by a majority of the persons of full age entitled to income hereunder at the time of said resignation and shall have all of the powers and immunities conferred herein upon original trustee.
*278 Article XIII
This trust has been accepted by the Trustee in the State of Wisconsin and all questions pertaining to its validity construction and administration shall be determined in accordance with the laws of that State and it is expressly understood and agreed that this trust is irrevocable.
* * * *
Under the same date of the above trust agreement, May 12, 1941, the La Crosse Trust Co. entered into a lease with petitioner by which it leased the premises granted to it under the trust to petitioner for a term of 10 years, at an agreed rental of $ 500 per month for the first 2 years from the date of the lease, and, thereafter, to be subject to review, and in event of disagreement, the amount of rental to be fixed by the county judge of La Crosse County, Wisconsin, acting as an arbitrator, whose decision was to bind both parties. The lessee had the privilege of renewing the lease for an additional term of 10 years, and in event of his death there was an option on the part of his executor or administrator to cancel.
The lease by its terms provided that the lessor should make all necessary repairs on the building and maintain the exterior, but that the *419 lessee should provide*279 janitor service, heat, light, and water for the building, and pay for the insurance and taxes, with the privilege of subletting any or all of the premises on such terms and conditions as he deemed advisable.
Petitioner has not exercised any dominion or control over the trust property, except to occupy the property described in the lease.
The La Crosse Trust Co. received the sum of $ 3,800 as alleged rentals in 1941. The depreciation on the real estate for the balance of the year 1941 after May 12 amounted to $ 689.94. The Commissioner has disallowed the rental of $ 3,800 to petitioner and has allowed him the depreciation of $ 689.94.
The Federal income tax returns filed by petitioner reported the following: For 1941, total income $ 59,919.61, net income $ 29,508.90; for 1942, net income $ 39,330.92; for 1943, net income $ 42,088.88.
On April 10, 1946, petitioner's securities, including stocks and bonds, were appraised at $ 558,432, and he considers his holdings in May 1941 to have been worth about $ 400,000, including insurance.
During the year 1941 the trustee paid $ 2,850 from the income of the trust, by monthly payments, to Ellen Skemp, the wife of the settlor (petitioner). *280 These payments were made by depositing them to her checking account and checks were then drawn on this account by the beneficiary.
The trustee did not at any time receive any instructions from the grantor (petitioner) as to giving instructions to the beneficiaries as to how any of the money should be used by the beneficiaries under the trust agreement.
The beneficiary Ellen Skemp was never given any instructions as to how the money was to be used either by the grantor (petitioner) or by the trustee. At the time of the hearing of this case Ellen Skemp had never seen the trust agreement and did not know and had never been advised of its terms.
The health of Ellen Skemp was very poor. She had undergone a great deal of nervous tension in her lifetime, causing her to become nervous and requiring her to travel and do other things to recuperate. She had always been privileged to write checks on petitioner's bank account and had continued this practice without restraint after the creation of the trust.
OPINION.
The petitioner's briefs, in substance, contend that the situation here presented does not fall within the principles enunciated in ,*281 or , but that , applies, so that the trust income is not taxable to him. The respondent argues that the deduction for rent was properly denied, first, because *420 on May 12, 1941, when the trust instrument and lease were executed, the petitioner did not part with a present interest in the building involved, so that no gift in trust was made; second, because, primarily under , and , the petitioner retained such dominion and control over the trust property that the income remained in a family group, leaving him the owner of the property; and, third, because the income from the property was to be used and was used for the support and maintenance of his wife, it is includible in his income as in discharge of his legal obligations.
In our opinion, the respondent's position should be sustained upon the first ground, and we need not consider the application either of ,*282 as to general taxability of trust income to the petitioner, or cases such as the Stuart case, supra, as to income used to discharge legal obligations. We have here a narrower question, to wit, whether or not petitioner is to be allowed deduction of $ 3,800 as rent paid upon the lease upon the building. In our view, despite the transfer of the title to the building, there was a clear reservation of a lease thereon and the case falls within the ambit of the principles announced in . See also . In the Johnson case the petitioner borrowed $ 400,000 from a bank and gave his wife a check in that amount. She delivered the check in trust to a trust company, her trust instrument requiring in part that the trustee should make a loan to the petitioner upon his request. He so requested five days later, and the $ 400,000 was loaned to him upon his agreement to pay to the trust 6 per cent interest. The question was as to the deductibility of the interest by him. The court held, in short, that the petitioner had in fact made no gift to *283 his wife of the $ 400,000; that it was agreed that the money was to be used in a certain way, that is, placed in trust to be loaned to him; that everything was a part of the same transaction; that he never lost control of the "gift"; and that neither his wife nor the trustee had possession of it free from a duty to return it to him. Therefore, the court said, the gift failed and amounted only to a gratuitous promise to make a gift in the future, so that the interest payments were really gratuities and the deduction thereof was properly disallowed.
The facts in this case disclose that the petitioner placed in trust for his wife and children, irrevocably and never to return to him, the title to the building involved here, but considering the trust instrument and the lease executed the same day as part and parcel of the same contract and conveyance, as we must and do, under well settled rules, it appears equally plain that in substance and fact he reserved from such transfer of the title a lease to himself, but was to pay $ 500 per month to the trustee, for benefit of his wife, for two years, and *421 thereafter up to 20 years to pay an amount set by an arbitrator in case of disagreement*284 between petitioner and the trustee.
Assuming, without deciding, that the title to the property passed to the trust, for the wife and children, we can not see in the circumstances before us a passing to the trust of that degree of dominion and control, in praesenti, as to the leasehold estate which is requisite to passage of a gift. , and citations therein. The petitioner had complete control, for at least the first two years, of the leasehold. He "never lost control." . We decline to view the facts before us as indicating a transfer of title to the trust, and then a lease by the trust to the petitioner. By the trust instrument he reserved right to a lease; and it was executed the same day. We should not close our eyes to reality; and the reality is that the $ 500 rental for two years was a part of the transaction between petitioner and the trust on May 12, 1941. The $ 500 rental can not realistically be viewed as set by anyone but the petitioner, while setting up the trust. Thus there emerges the same mere promise to make a gift of $ 500*285 a month for two years as was the promise to pay "interest" in the Johnson case. The petitioner is seen to have reserved from the transfer in trust a leasehold estate, carved out of the fee, promising to pay the trust for his wife or children $ 500 a month. The leasehold estate in truth will pass to the trust only at the end of the lease, and the rentals appear as mere payments to the trust, promised for the future. We need not in this case, involving the first year, consider the situation after the two-year period -- though there again it is obvious that the petitioner was largely in control, for if the rent was not satisfactory to him, an arbitrator, and not the trustee, could set it, and, since the rental money was to go to petitioner's wife or children, the petitioner was not greatly interested in the amount. He would not feel himself materially poorer by paying a higher rent. In addition, the elements of control over sale, mortgage, or exchange of the property, retained to the petitioner by the trust instrument, emphasize the lack of the necessary elements of gift of the leasehold so as to justify deductions for rent. The petitioner, as owner of the property and settlor, *286 could have reserved to himself the lease, with no rent payable. The arrangement to pay $ 500 a month to the trustee, for benefit of his family, thus appears as "gratuitous payments," as the interest is called in the Johnson case, and not a real payment of deductible rent. The principle of the Johnson case applies and we hold that the $ 3,800 was not a deductible expense. This conclusion renders discussion of other arguments unnecessary.
Decision will be entered for the respondent.
*422 Black, J., dissenting: I do not think the Second Circuit's decision in Johnson v. Commissioner, 86 Fed. (2d) 710, is controlling in this proceeding. The facts in the Johnson case were very different from those which are present in the instant case. In the Johnson case the court, in the very first part of its opinion, drew attention to the controlling facts in the following language:
* * * The facts reveal an ingenious attempt to reduce taxes by means of a plan which was intended to give the character of interest payments to money used to pay insurance premiums on policies upon the life of the petitioner. There were 15 such policies, *287 all of them payable to his wife. The total annual premiums amounted to about $ 21,000, and prior to the year 1931 Mr. Johnson had paid them. In that year money for the premiums was provided pursuant to the transactions which are now to be described.
The court then went on to describe in detail the facts upon which it held that the alleged gift was not a gift at all, but a mere gesture.
We have no such facts in the instant case. The taxpayer did not set up a trust under which the trustee was to use the net income to discharge some debt or obligation of the settlor, as was the case in Here the taxpayer set up what seems to me a perfectly legal trust for the benefit of his wife and eight children. Notwithstanding the multitude of decisions under , some of them contradictory and confusing, a husband and father can still set up a trust for the benefit of his wife and children and not be taxable on the income therefrom. The La Crosse Trust Co., with which petitioner was not connected as a stockholder, officer, or employee, was made trustee of the*288 trust. The net income of the trust in each year was to be paid to Ellen Skemp, wife of the settlor, during her life in as nearly equal monthly installments as shall be practicable. Remainder was to go to the settlor's children. During the taxable year the trustee paid $ 2,850 from the income of the trust to Ellen Skemp, the life beneficiary of the trust, and she was privileged to use the income in any way she pleased.
I know of no reason why petitioner should be denied the deduction for rent which he claims. The majority opinion makes no holding that this is a Helvering v.Clifford case and I certainly do not think that it is. The holding of the majority is that the facts bring it within the ambit of the Johnson case and that this is so because the petitioner-settlor reserved an option to rent the property from the trustee at a "rental to be determined by the trustee." As I have already pointed out, the trustee was a corporation in which petitioner was not a stockholder, officer, or employee. What reason is there to suspect that the trustee would rent to petitioner for any less amount than could be obtained in an arm's length transaction? None that I know of, and*289 the findings of fact do not apprise me of any. The $ 500 per month which petitioner paid as rental for these premises was fair, so *423 far as the record shows. If it was not a fair rental it would doubtless have been very easy for the Commissioner to show that fact to bolster up his case. He made no effort to do so. Therefore, we may safely assume, and I do assume, that the $ 500 per month represented a fair rental for the premises. The petitioner had made a complete conveyance of the two-story building in question to the trustee. It was beyond his recall. I think that without doubt he would be taxable on the value of the property as a taxable gift. Therefore, I see no reason whatever why petitioner should not be allowed a deduction in the taxable year for the $ 3,800 rent which he paid to the trustee for the rental of the building, title to which was vested in the trustee and in which petitioner's wife and eight children owned the beneficial interest.
Because of the foregoing reasons, I respectfully dissent.