*2014 1. INCOME. - On April 9, 1920, each of the petitioners executed a trust deed transferring 37 1/2 shares of certain stock to themselves as trustees for certain named donees. The old stock was canceled and a new certificate issued to petitioners as trustees. The trust deed was recorded in the probate court of their county and State. On April 13, 1920, petitioners entered into a contract for the sale of 25 shares of the stock as individuals and of 75 shares of the stock as trustees. Held that the gifts were valid, bona fide and completed on April 9, and that petitioners realized no taxable profit upon the sale of the said 75 shares on April 13, 1920.
2. FRAUD. - Held that petitioners did not file false and fraudulent returns with the intent to evade taxes.
*572 The respondent made a jeopardy assessment on March 13, 1926, and the petitioner, J. M. Walsh, executed and filed a bond in the amount of $35,000 with corporate surety, which was accepted. On February 15, 1926, respondent mailed*2015 to said petitioner a 60-day deficiency notice asserting a deficiency of $32,184.20 in Walsh's income taxes for the calendar year 1920, and the appeal therefrom has been docketed No. 13150. On December 23, 1927, respondent mailed to Walsh a 60-day deficiency letter asserting a fraud penalty in the amount of $16,092.10. Walsh alleges that he was not the owner of certain stock on the date of the sale thereof and did not realize taxable profits therefrom, nor file false and fraudulent returns for the year 1920 as determined by the respondent. Petitioner withdrew two of the assignments of error at the hearing.
George L. Kilmer has instituted the proceeding, Docket No. 23937, from respondent's determination of deficiencies in the amounts of $27,328.61 and $150.11 for the calendar years 1920 and 1922, respectively, and also from his determination of fraud penalties in the amounts of $13,664.31 and $75.06 for those respective years. Kilmer alleges that he was not the owner of certain stock on the date of the sale thereof; that he did not realize taxable profits therefrom; that he did not receive as his individual income $4,958.52 interest collected by him in 1922 as trustee of a portion*2016 of the proceeds of the sale of the said stock, and that he did not file false and fraudulent returns for 1920 and 1922, as determined by the respondent.
These procedings have been consolidated for hearing and decision.
FINDINGS OF FACT.
Joseph M. Walsh is a resident and citizen of Mobile, Ala. George L. Kilmer is now a resident and citizen of Larchmont, N.Y., but during 1920 and prior thereto he was a resident of Mobile.
Prior to and on the ninth day of April, 1920, Walsh and Kilmer each owned 50 shares of the capital stock of the Mobile-Gulfport Lumber Co., a corporation having a total capital stock of 100 shares. *573 Walsh and Kilmer paid $5,000 each for one-half of the said stock. The corporation had prospered over a period of years and in the early part of 1920 several offers were made for the purchase of the assets of the corporation.
The petitioners consulted an accountant, admitted to practice before the Bureau of Internal Revenue, as to the tax upon the profits derived if the sale of the property were consummated. The tax was considered prohibitive and Walsh and Kilmer declared they would not sell. However, during their discussion of the matter with*2017 the accountant he advised them that if they saw fit to make a bona fide gift of a portion of their stock and then negotiated a sale of the stock, the profits for the purpose of taxation on that portion of the stock given away would only be the difference between the value on the date of the gift and the sale price. Walsh then consulted his attorney to make certain that he and Kilmer had the legal right to make such gifts and thus avoid the payment of what they considered a prohibitive tax. Walsh was advised by his attorney that they had a legal right to make such gifts and that the accountant's advice was sound.
Walsh had three minor grandchildren who were orphans and entirely dependent upon him for maintenance, support and education and, inasmuch as he intended to provide for them in his will, he decided to provide for their future welfare by giving them three-fourths of his 50 shares of the said stock. Kilmer decided to give three-fourths of his 50 shares of the said stock to his wife and two minor children. Walsh's attorney prepared the following instrument, which was executed by the petitioners on the 9th day of April, 1920:
I, Joseph M. Walsh, for and in consideration*2018 of the natural love and affection that I bear for my three grandchildren, hereinafter named, have given and granted, and to hereby give, grant, transfer and assign to George L. Kilmer and myself, as Trustees, an undivided three-fourths interest in the capital stock standing in my name in the Mobile-Gulfport Lumber Company, a corporation organized under the laws of Mississippi, said three-fourths interest in said stock to be held in trust for the equal benefit of William Sneeringer, Francis Sneeringer and Margaret Sneeringer, and I hereby expressly authorize said Trustees to vote said stock as they may think proper in the conduct of the business of said corporation, and for the sale of all of its property, and for the dissolution of said corporation, or for any one or more of said purposes, during the existence of this trust, and to sell said stock at such times and upon such terms as they may think proper.
And in case of said sale or sales, to pay over to me, Joseph M. Walsh, the proceeds thereof, to be invested, managed and controlled by me as Trustee for said minors during their joint minorities; and from time to time apply the rents, incomes, and profits thereof to their maintenance*2019 and support, and to pay to each of said minors, as he or she reaches the age of twenty-one years, his or her undivided interest in said stock, or in the proceeds thereof, or in the property in which such proceeds shall have been invested.
*574 And I, George L. Kilmer, for and in consideration of the natural love and affection that I bear for my wife and two minor children, hereinafter named, have given and granted, and do hereby give, grant, transfer and assign to Joseph M. Walsh and myself, as Trustees, an undivided three-fourths interest in the capital stock standing in my name in the Mobile-Gulfport Lumber Company, a corporation organized under the laws of Mississippi, said three-fourths interest in said stock, to be held in trust for the equal benefit of Edith V. Kilmer, Hugh Kilmer, & Georgette Kilmer, and I hereby expressly authorize said Trustees to vote said stock as they may think proper, in the conduct of the business of said corporation, and for the sale of all of its property, and for the dissolution of said corporation, or for any one or more of said purposes, during the existence of this trust, and to sell said stock at such times and upon such terms as they*2020 may think proper.
And in case of said sale or sales, to pay over to me, George L. Kilmer, the proceeds thereof. The share of said Edith V. Kilmer shall be by me at once paid to her, and the shares of said minors shall be invested, managed and controlled by me, as Trustee for said minors, during their joint minorities; and I shall, from time to time, apply the rents, incomes and profits thereof to their maintenance and support, and pay to each of said minors, as he or she reaches the age of twenty-one years, his or her undivided interest in said stock, or in the proceeds thereof, or in the property in which such proceeds shall have been invested.
IN WITNESS WHEREOF, we, the said Joseph M. Walsh, and George L. Kilmer, have hereunto set out hands and seals, this 9th day of April, A.D., 1920.
JOSEPH M. WALSH [SEAL]
GEORGE L. KILMER [SEAL]
The above-quoted instrument was filed on April 20, 1920, in the probate court, Mobile County, State of Alabama, and duly recorded.
On April 9, 1920, petitioners' attorney caused each of them to transfer 37 1/2 shares of his stock to Walsh and Kilmer, trustees, and on the same date all of the outstanding stock of the Mobile-Gulfport*2021 Lumber Co. was surrendered and canceled and new certificates of stock issued as follows: one certificate to Walsh for 12 1/2 shares, one certificate to Kilmer for 12 1/2 shares, and one certificate to Walsh and Kilmer, trustees, for 75 shares.
The prospective purchasers desired to buy the corporation's assets and not the stock, but after further negotiations they entered into an agreement on April 13, 1920, for the purchase of all of the outstanding capital stock of the Mobile-Gulfport Lumber Co. The written agreement of sale is lengthy and contains many provisions immaterial to this proceeding, but as to the parties thereto it states that the sellers are "Joseph M. Walsh and George L. Kilmer, individually, and as trustees for William Sneeringer, Francis Sneeringer, Margaret Sneeringer, Hugh Kilmer and Georgette Kilmer, minors, and Edith V. Kilmer, wife of George L. Kilmer," and that the purchasers are Charles Green, W. B. Rogers and I. R. Anderson.
The sum of $100,000 representing the initial payment for the stock was paid by the personal check of I. R. Anderson, dated *575 April 13, 1920, and deposited in an account opened at the Merchants Bank of Mobile, Ala., under*2022 the names of "J. M. Walsh, Trustee and George L. Kilmer, Trustee." Thereafter, Green, Anderson and Rogers sold the assets of the Mobile-Gulfport Lumber Co. to a corporation styled "Green Lumber Company," which assumed their obligations under the contract of April 13, 1920. During 1921 and 1922 the Green Lumber Co. issued its checks totaling about $239,112.25 in payment of the stock sold by Walsh and Kilmer as individuals and as trustees. All of that amount was deposited in the said trustees' account, except for $33,965.20 which was paid by check on December 28, 1922, and deposited in Walsh's personal account. The amounts deposited in the trustees' account were almost immediately withdrawn and commingled with the personal funds of Walsh and Kilmer.
J. M. Walsh, in his return for 1920, reported the entire profits on the 12 1/2 shares of stock which stood in his name. George L. Kilmer in his return for 1920 reported that portion of the profits collected in 1920 on his 12 1/2 shares of stock and in 1922 he reported the balance thereof, which was collected in that year.
Neither Walsh nor Kilmer filed false and fraudulent returns with intent to defraud the Government.
In 1920*2023 the eldest of Walsh's grandchildren was 11 years of age and thereafter Walsh continued to support them.
Walsh was ignorant of the fact that he was required to file fiduciary returns as to the income from the proceeds he held as trustee. Upon the advice of his attorney, in 1926 he filed the necessary returns and paid the taxes due and also penalties for failure to make the returns at the proper time. At some time subsequent to 1920 Walsh, as trustee for his grandchildren, purchased a mortgage and stocks, the value of which aggregated $70,000. Walsh's present net worth is about $300,000.
George L. Kilmer, at the request of his wife, used her portion of the proceeds of the sale of the stock for the purchase of a home and furniture in her name. He advanced a portion of Hugh Kilmer's interest to him prior to his 21st birthday and turned over to him stocks of a value equal to the balance of his interest upon his attaining 21 years of age. Kilmer invested $27,800 in stocks for his other minor child, Georgette.
The parties hereto, through their counsel, have stipulated that the Commissioner has computed a net profit of $193,413.61 upon the said sale of stock and has treated one-half*2024 of said amount, or $96,706.80, as the profit derived by each of the petitioners. It has been further stipulated that if the Board finds that Walsh and Kilmer each owned in his own right one-half of the stock of the *576 Mobile-Gulfport Lumber Co. at the time of the sale, the Commissioner's computation as set forth in his amended answer is correct. It has been further stipulated that if Walsh and Kilmer each owned in his own right only 12 1/2 shares of the said stock at the time of the sale thereof, then, each derived a net profit of $24,176.70 on the said sale in the year 1920.
OPINION.
TRUSSELL: In these proceedings we have before use the question of the tax liability of J. M. Walsh, as an individual, for the year 1920, and the tax liability of G. L. Kilmer, as an individual, for the years 1920 and 1922. The issues are whether they each owned 12 1/2 shares or 50 shares of stock of the Mobile-Gulfport Lumber Co. on the date of the sale thereof in 1920, and whether they filed false and fraudulent returns.
Early in 1920 petitioners received an offer to purchase the assets of the lumber company, all of the stock of which they owned. After seeking and receiving the*2025 advice of an accountants as to the amount of tax which would be exacted upon the large profits derived from such a sale, the offer was definitely refused, for petitioners considered the tax prohibitive. Petitioners did not seek a method to evade taxation upon their individual incomes, but were advised that they had a legal right to make a gift of their stock or part of it and that in the event of the sale thereof the donees' taxable profit would only be the difference between the value on the date of the gift and the sale price. Relying upon the advice of an attorney, and for the admitted purpose of avoiding the payment of a large tax and with the intent to make absolute and irrevocable gifts, petitioners executed on April 29, 1920, the trust instrument set forth in the findings of fact. To complete the transaction to divest themselves of the ownership of three-fourths of their Mobile-Gulfport Lumber Co. stock, they transferred that amount of their stocks to themselves as trustees; surrendered the old certificates of stock which were canceled and had new certificates issued by the corporation, one to Walsh for 12 1/2 shares, one to Kilmer for 12 1/2 shares and one to Walsh and Kilmer, *2026 trustees, for 75 shares. Walsh and Kilmer, as trustees, exercised their powers under the trust in selling the property which they held in trust and they received payments from the purchasers, as trustees. Also, they had the trust instrument recorded in the probate court of Mobile County, Alabama.
In the case of , the taxpayers negotiated for the sale of the assets of a corporation whose stock they owned, but discovered that the tax would be substantial if the corporation carried out the transaction, so they consulted an attorney as to a legal method to avoid the large corporation tax. Upon *577 advice of counsel each of the taxpayers gave one-half of his stock to his wife, the corporation's assets were distributed, and it was dissolved. The individuals sold the said assets and received the purchase price as individuals. The Board held that the gifts to the wives were bona fide, and that the profits from the sale of the said assets inured to the several individuals and were not taxable to the corporation, nor entirely to the taxpayer. In its opinion, the Board said:
These transactions were either fraudulent*2027 or they were what the taxpayers claim them to have been. The parties either accomplished what they set out to accomplish, namely, the registration of the profit in the names and on the part of the individuals, or they failed to do so. If they succeeded they owe a tax upon the transaction as individuals, and if they knowingly and willfully failed to report that profit as taxable gain they were guilty of fraud. If the corporation made the profit and its officers willfully and knowingly failed to return that profit they and the corporation were guilty of fraud. If the tax was successfully avoided there was neither a fraud nor a tax. The two are inseparable. If the device succeeded it avoided the tax; if it failed the transaction was fraudulent; and there is no concealment on the part of the parties that they intended to do exactly what they did. If what they did was unlawful they were guilty of fraud, whether or not they specifically intended to violate the law. .
The courts have also held that a device to avoid or minimize the burden of the revenue acts may be resorted to if effectuated by legal means. *2028 ; ; .
There can be no doubt that petitioners had the legal right to make a gift of a portion of the Mobile-Gulfport Lumber Co. stock which they owned outright on April 9, 1920, and the main issue at bar is whether they succeeded in making a valid and completed gift of such stock prior to April 13, 1920, the date of the sale thereof.
In the case of , the court said:
The essential elements of a gift are an intention to deliver, gratuitously and without legal consideration, and a delivery, either actual or constructive, of the thing given. There must be both the purpose and the execution of the purpose. The expression of the purpose may be either oral or in writing and it must be carried into effect by delivery of the thing itself and by acceptance of it by the donee. When those essentials obtain the gift is complete.
Also, see *2029 ; .
To create a trust the settlor or donor must use language which clearly indicates the intention to stamp such character upon a gift and the declaration must be unequivocal. ; 26 R.C.L., p. 1180, § 18.
The trust deed executed by petitioners on April 9, 1920, clearly and unequivocally establishes their intention to make the gifts in question and to stamp such gifts with the character of a trust with no power *578 of revocation reserved. On the same date the stock was transferred on the records of the corporation, the old shares were canceled and new ones issued - one certificate to each of the petitioners, as individuals, for 12 1/2 shares and one certificate for 75 shares to petitioners as trustees for the various donees, thus vesting the beneficial and equitable title in the donees. When petitioners received and accepted the said 75 shares of stock as trustees on April 9, 1920, sufficient delivery had been made and the gifts were completed. *2030 ; ; 12 R.C.L., p. 943, Gifts, § 11; ; ; ; . It is well settled that the donor may constitute himself trustee without affecting the validity of the trust; 26 R.C.L., p. 1191, § 27; ;; .
It was not necessary to the validity of the gifts for the donees to formally signify their acceptance of the gifts nor even to have knowledge of the same, for the trust was for their benefit and acceptance is presumed unless there be actual dissent of the donees. ; ; ;. Furthermore, when a gift has been completed it vests in the donee and remains so vested until he repudiates it. *2031 .
Where a trust is perfectly created, though voluntary, without the power of revocation, it is irrevocable and may not be repudiated or affected by the subsequent acts of the settlor or donor. ; ; ; In the Conlon v. Turley case, John Rudden sold certain property and directed a bank to purchase certain bonds with the proceeds. When the bonds had been purchased and were ready for delivery, Rudden directed the bank to hold them in the name of his niece, Margaret Turley, whom he called his adopted daughter. The bonds were placed in the bank's vault in an envelope marked "Margaret V. Turley" and the bank gave Rudden a receipt stating that the bonds had been received from Margaret V. Turley. The receipt was shown to Margaret, but was kept in Rudden's office safe. Rudden instructed the bank to clip the coupons when they became payable and credit them to his account, which was done. After Rudden's death the aforementioned*2032 receipt was found in his office safe. The issue was whether Rudden had made a valid gift or whether the bonds were a part of his estate. The court held that delivery was sufficient and that a valid and completed gift had been made. The court further held that where a valid completed gift has been made, no subsequent action of the donor alone can rescind it.
*579 In view of the facts of record and the decisions hereinbefore cited, we are of the opinion that on April 9, 1920, each of the petitioners divested himself of the ownership of 37 1/2 shares of stock of the Mobile-Gulfport Lumber Co. by making valid, bona fide and completed gifts of the same on that date. While it is true that prior to such gifts negotiations had been entered into for the sale of the lumber company's assets, the actual sale of the stock was made on April 13, 1920, subsequent to the date of the gifts, and there is no evidence establishing the contrary as contended by respondent, nor is there any evidence establishing a lack of genuineness in the acts of the petitioners. Respondent lays stress upon the fact that the petitioners commingled the trust funds with their personal funds for a period of*2033 time, but that fact is more or less immaterial, for as pointed out hereinbefore the subsequent acts of the donors alone can not rescind the gifts. The petitioners' liability as trustees remained.
The Board has heretofore considered cases involving similar issues. In the case of , the taxpayer negotiated with an oil company for the sale of his interest in an oil lease, he then assigned that interest to his wife as a gift, after which he and his wife and the oil company entered into a written contract whereby the oil company agreed to purchase the said interest in the lease from the wife. The Board held the transfer of the interest in the lease to be a bona fide gift and that the taxpayer realized no taxable income upon the sale thereof.
In the case of , the taxpayer surrendered certain shares of his stock in a corporation and had them reissued in the name of his wife to whom he delivered them. Several months later, with the consent of his wife, the taxpayer contracted in his own name for the sale of stock standing in his wife's name and also some of the same stock standing in his name. *2034 The proceeds from the sale were deposited in their respective bank accounts, but the wife checked hers out and loaned it to the taxpayer for oil operations. The taxpayer gave no notes or security for the loans, but paid back certain amounts in subsequent years. The board held the gift of stock to his wife to have been bona fide and complete prior to the sale thereof. Also, compare ; ; ; ; ; ; ; ; and .
The respondent erred in determining that each of the petitioners owned 50 shares instead of 12 1/2 shares of the said stock on the date *580 of the sale thereof; that they each derived profits therefrom in excess of $24,176.70; and that they filed false and fraudulent returns with the intent to evade*2035 income taxes.
The respondent further erred in determining that Kilmer received $4,958.52 as interest in 1922 as his individual income instead of as trustee.
Reviewed by the Board.
Judgment will be entered pursuant to Rule 50.
LANSDON, STERNHAGEN, MURDOCK, and BLACK dissent.