1941 BTA LEXIS 1242">*1242 1. Trust provisions reserving to the grantor broad powers of operation and control, including the right to sell to and buy from himself trust property at his own price, to speculate without accountability, and to invest with no restrictions whatever and with no liability for loss, constitute the substantial equivalent of a power to revest. Income from such trust property is taxable to the grantor under section 166 of the Revenue Acts of 1934 and 1936.
2. The above powers augmented by other broad powers, together with the grantor's exercise of the sole personal control and direction of the trust activities, bring the case within the ambit of section 22(a) of those acts. Helvering v. Clifford,309 U.S. 331">309 U.S. 331.
3. Similar reservations of power in trust for the benefit of petitioner's children bring the trust income under the scope of section 22(a), notwithstanding the fact that petitioner did not elect to use such powers for his own benefit.
44 B.T.A. 1009">*1009 The respondent determined deficiencies of $14,047.19, $51,491.97, and $55,605.571941 BTA LEXIS 1242">*1243 in the petitioner's income taxes for the years 1934, 1935, and 1936, respectively. By amended pleadings he proposes to increase the deficiency for the year 1935.
The sole issue as originally drawn is the inclusion in the petitioner's income of the income from a trust established by him on March 14, 1931, for the benefit of his wife. By his amended answer the respondent seeks to include in the petitioner's income the income from three trusts created by him on July 21, 1933, naming as beneficiaries in each a minor son of the petitioner.
44 B.T.A. 1009">*1010 FINDINGS OF FACT.
The facts were stipulated and we adopt the stipulation as our findings of fact. In so far as they are material to the issues they are substantially as follows:
The petitioner and his wife, Ruth S. Heyman (hereinafter referred to as Mrs. Heyman) are residents of New York, New York. They were married on July 3, 1921, and they have three children, whose names and birth dates are as follows: David John Heyman (formerly David M. Heyman, Jr.), born September 4, 1922; Thomas M. Heyman, born July 11, 1928; and Kenneth L. Heyman, born October 6, 1930. These three children are the only children of the petitioner and1941 BTA LEXIS 1242">*1244 his wife. On March 14, 1931, the petitioner was thirty-nine years of age and Mrs. Heyman was thirty-one years of age.
The petitioner is an experienced investment banker and was president and active manager of Union American Investing Corporation, an investment trust. On March 14, 1931, and for some time prior thereto, he was a member of the brokerage firm of Halle & Stieglitz (located in New York City), members of the New York Stock Exchange. His net worth on that date was approximately $2,000,000, consisting of cash and securities. The chief source of his income has always been from investment and reinvestment in securities and compensation for services connected with brokerage and investment business. At that time the net worth of Mrs. Heyman, consisting of cash and securities, was approximately $560,000, substantially all of which amount represented gifts made to her from time to time by the petitioner. The balance consisted of the unexpended accumulations on such gifts, and a relatively small amount which Mrs. Heyman had received by gift from her uncle. The petitioner has alone and at his sole discretion at all times invested and reinvested the said cash and securities, 1941 BTA LEXIS 1242">*1245 both prior and subsequent to the creation of the trust of March 14, 1931.
In view of his business occupation the petitioner desired to insure the future needs of his family. To accomplish that end he had discussed with his attorney the creation of a trust with a corpus of $500,000. The possible separation of the petitioner and his wife was a factor in the discussion. The petitioner's attorney advised him that if he should leave his wife the trust fund might not be protected from creditors, but that such protection would be effective if the separation resulted from her fault. He and his wife then executed a trust instrument dated March 14, 1931, to himself as trustee and delivered $500,000 in cash to himself as such trustee. The petitioner and Mrs. Heyman have continued to live together as husband and wife since that date.
44 B.T.A. 1009">*1011 The trust instrument named the petitioner as trustee and his wife as successor trustee. These material provisions then followed:
1. The Trustee shall hold, manage, invest and reinvest the principal of the Trust Estate and shall collect the income therefrom and after paying all charges and expenses of the trust shall pay the said income1941 BTA LEXIS 1242">*1246 to Ruth S. Heyman, the wife of the Donor, for and during the term of her natural life unless prior to the death of the Donor, the Donor and the said Ruth S. Heyman shall for any reason whatsoever cease to live together as husband and wife or unless after the death of the Donor the said Ruth S. Heyman shall remarry, each of which two last named events being hereinafter sometimes referred to as "an event terminating the life interest of the said Ruth S. Heyman."
2. Upon the death of Ruth S. Heyman or upon the happening of an event terminating the life interest of the said Ruth S. Heyman, the principal of the said Trust Estate shall be divided into as many parts as there are children of the Donor then surviving and as to these -
(A) The parts representing children of the Donor then surviving shall continue to be held in trust by the Trustees, one part for each such child, the income of each such part to be paid to the child for whom said part was set aside, so long as he shall live, subject, however, to the following:
(a) During the minority of any such child there shall be applied to his benefit out of such income only so much as shall be required for his reasonable needs, including1941 BTA LEXIS 1242">*1247 the fair pro rata share of the maintenance of the children's common household, taking into consideration the other sources of income of such child, any balance of income from his part of the Trust Estate to be accumulated for the benefit of such child, the accumulations to be paid over to him upon his attaining the age of twenty-one years.
(b) When each such child shall sttain the age of thirty years, the principal of said part set aside for his benefit, as to one-fourth thereof as it then exists, shall be paid over to such child and thereupon the principal of such part shall be diminished accordingly.
(c) When each such child shall attain the age of thirty-five years, one-third of the principal set apart for his benefit as it then exists shall be paid over to him and thereupon the principal of said part shall be diminished accordingly.
(B) Upon the death of any child, the part held in trust for him shall be divided equally, per stirpes and not per capita, among his then living lawful lineal descendants, and in default of such lawful lineal descendants shall be paid over as may be lawfully directed in his Last Will and Testament and in default of such lawful direction shall1941 BTA LEXIS 1242">*1248 be divided among the living lawful lineal descendants of the Donor (which may include descendants of the Donor who are not "children" or descendants of "children") equally, per stirpes and not per capita.
3. So long as David M. Heyman shall be acting as sole Trustee he shall be under no restrictions whatsoever with respect to the investment and reinvestment of the Trust Estate and shall have power without accountability for what might otherwise be considered negligence to make speculations in any form for the Trust Estate, including the power to maintain margin accounts for the Trust Estate and the power otherwise to borrow money to carry investments or reinvestments for the Trust Estate. * * *
The Trustees may, in their sole discretion, cause any of the securities which may from time to time be held by them or any part thereof to be registered in their names as Trustees hereunder or in the name of any one of them as Trustee hereunder or in the name of any one of them or in the name of their nominee, or they may take and keep the same unregistered, and may retain them 44 B.T.A. 1009">*1012 or any part thereof in such condition that they will pass by delivery.
The vote upon all shares1941 BTA LEXIS 1242">*1249 of stock held by the Trustees may be given in person by a majority of the Trustees or by proxy signed by a majority of the Trustees.
4. All stock dividends and all other dividends declared or paid on condition that the same must be invested in stock or other securities of the corporation declaring the dividend or of any other corporation, which may at any time be received by the Trustees hereunder, on any of the securities held by them under this agreement, shall be considered by them wholly as principal.
* * *
8. The Trustees shall be fully protected in making any sales, investments and reinvestments which, by the terms of this agreement they are authorized to make, and shall not be liable or responsible in any way for depreciation or loss incurred by reason of any sales, investments or reinvestments so made.
10. In the event of the death of the Donor, Ruth S. Heyman and Louis Strauss (now a partner of the Donor) shall immediately and without further act be substituted as Trustees under this Deed of Trust. During the lifetime of the Donor, the Donor may appoint any person (including the said Ruth S. Heyman) or corporation duly qualified to act as such, as a Co-Trustee1941 BTA LEXIS 1242">*1250 by an instrument duly acknowledged as deeds of real estate are required at the time to be acknowledged for recording under the laws of the State of New York. * * *
* * *
12. This Deed of Trust and all the trusts hereby created may be revoked by the Donor as to the whole or any portion of the Trust Estate at any time and/or from time to time but, so long as the said Ruth S. Heyman shall be living and so long as the Donor and the said Ruth S. Heyman shall be living together as man and wife, such revocation may be made only with the consent of the said Ruth S. Heyman. Said revocation and consent shall be in writing duly acknowledged by the Donor and the said Ruth S. Heyman as aforesaid and upon the execution and acknowledgment of such revocation and consent, this Deed of Trust shall cease to have any further effect with respect to the whole of the Trust Estate or such portion thereof as shall be affected by such revocation, as the case may be, and the principal and undistributed income of the trusts hereby created shall become vested in the Donor with respect to the whole of the Trust Estate or such portion thereof as shall be affected by such revocation, as the case may be. After1941 BTA LEXIS 1242">*1251 the death of the said Ruth S. Heyman and also in the event that the Donor and the said Ruth S. Heyman shall cease to live together as man and wife, said power of revocation shall be vested solely in the Donor without requiring the consent of the said Ruth S. Heyman or of any other person and upon his execution and acknowledgment of such revocation, this Deed of Trust shall cease to have any further effect with respect to the whole of the Trust Estate or such portion thereof as shall be affected by such revocation, as the case may be, and the principal and undistributed income of the trusts hereby created shall become vested in the Donor with respect to the whole of the Trust Estate or such portion thereof as shall be affected by such revocation, as the case may be. The power of revocation hereby vested in the Donor may, however, be renounced or from time to time modified by him by an instrument in writing duly executed and acknowledged by him as aforesaid and filed with the Trustees.
13. For all the purposes of this Deed of Trust so long as the said Ruth S. Heyman and the Donor shall be living, they shall conclusively be deemed to be living together as man and wife unless they1941 BTA LEXIS 1242">*1252 shall either have entered into a 44 B.T.A. 1009">*1013 written agreement of separation with one another or unless the said Ruth S. Heyman shall have in fact ceased to live with the Donor or shall have instituted or purported to institute in any court wheresoever situated an action for divorce, separation, alimony, support or a similar action against the Donor or unless the said Ruth S. Heyman shall in any such court have entered or purported to enter a counterclaim or cross-suit for any such relief or unless the Donor upon valid brounds shall have instituted an action for divorce or separation against the said Ruth S. Heyman in any court of competent jurisdiction or unless the Donor upon valid grounds shall have ceased to live with the said Ruth S. Heyman.
14. * * * So long as the Donor shall be a Trustee hereunder, the Trustees (or the party of the second part while he shall be acting as sole , trustee hereunder) may purchase investments for the Trust Estate from the Donor or from any firm or corporation in which the Donor may be interested and may sell securities belonging to the Trust Estate to the Donor or to any firm or corporation in which the Donor may be interested. Any firm in1941 BTA LEXIS 1242">*1253 which the Donor may be interested may also act at any time as brokers in connection with investments or reinvestments or sales made for account of the Trust Estate and such firm shall be entitled to receive customary commissions to be paid out of the Trust Estate. So long as the Donor shall be a Trustee hereunder the Trustees may in their discretion keep any part of the Trust Estate uninvested and on deposit with any bank, trust company or banking firm at such rate of interest as they may in their discretion determine or without interest if and to the extent that the same may be advisable.
* * *
From March 14 until June 29, 1931, the petitioner, in his capacity as trustee, kept the moneys of the trust in a separate account, uninvested, with the firm of Halle & Stieglitz, which paid interest thereon to him as trustee. On June 29, 1931, the petitioner decided to invest a substantial portion of the moneys of the trust in securities of his selection, and gave orders for the purchase of those securities, and on that date he, as trustee, designated Chemical Bank & Trust Co. of New York City (hereinafter referred to as Chemical), as the custodian of the moneys and securities of the1941 BTA LEXIS 1242">*1254 trust, and Chemical has continued to act as such custodian to the present time. The securities for which orders for purchases were given on June 29, 1931, were delivered directly to Chemical as such custodian.
In January 1933 the petitioner became a partner of the brokerage firm of Adolph Lewisohn & Sons (hereinafter referred to as Lewisohn), located in New York City, members of the New York Stock Exchange, and has continued to be a partner thereof.
The corpus of the trust has at all times consisted of securities and cash. Since June 29, 1931, all purchases and sales of securities of the trust have been handled in the following manner:
The petitioner as trustee gave the purchase order to the brokerage firm with which he was associated. When he learned that the order had been executed he notified Chemical in writing to accept delivery and to pay the purchase price for the principal of the trust. The 44 B.T.A. 1009">*1014 firm delivered the securities to Chemical, which placed them in its custodian department for the account of the trust fund. A similar procedure was followed when making sales.
All such purchases and sales have at all times been directed by the petitioner alone, 1941 BTA LEXIS 1242">*1255 in his capacity as the person designated as "trustee", and at his sole discretion. In each case of purchase or sale the usual brokerage charge has been paid to such firms.
The petitioner did not at any time buy securities for the trust on margin, maintain a margin account for the trust, or borrow money to carry investments or reinvestments for the trust estate.
At no time since the creation of the trust have the securities or the funds constituting the corpus of the trust been commingled with securities and funds owned by the petitioner individually or in any other capacity, or owned by any other person. At no time has the petitioner borrowed funds from the corpus of the trust or caused the loan of such funds to any person, firm, or corporation in which he had a financial interest.
At all times prior and subsequent to 1931, the petitioner has paid the living expenses of himself and Mrs. Heyman and their children, averaging about $100,000 a year, from his personal funds. All of the dividend and interest income (i.e., "ordinary" income) of the trust has been paid by Chemical into a general bank account standing in Mrs. Heyman's name in Chemical's banking department, which1941 BTA LEXIS 1242">*1256 account also contains the cash funds acquired as gifts and derived from reinvestments, except for such cash funds kept in a special account in her name at Chemical for particular purposes. The moneys (derived from the trust and from nontrust sources) in the general account and the moneys (derived from nontrust sources) in the special account are invested from time to time by the petitioner, in the selection of which investments he acts in his sole discretion. Purchases and sales of securities for such accounts are made in the same manner as stated heretofore. On or about January 3, 1936, Mrs. Heyman executed a power of attorney to the petitioner with respect to certain accounts therein referred to, which was filed with Chemical.
Securities which are the subject of such investment and reinvestment have been kept in such accounts in the name of Mrs. Heyman with Chemical separate and apart from the securities of the petitioner or of the aforesaid trust or of any other person or trust. At no time has Mrs. Heyman given or lent any of such securities or the income therefrom to the petitioner. At no time has Mrs. Heyman paid to the petitioner any trust income for use by him (except1941 BTA LEXIS 1242">*1257 for reimbursement for taxes paid by him with respect to her income or property), nor has such income been used to pay his personal 44 B.T.A. 1009">*1015 obligations or premiums on insurance policies taken out or caused to be taken out by him on his life.
The net taxable income of the trust for each of the years 1934, 1935, and 1936 was as follows:
| 1934 | 1935 | 1936 | |
| Ordinary income: | |||
| Interest | $2,253.67 | $4,447.61 | $5,725.82 |
| Dividends | 14,370.40 | 18,887.05 | 36,524.17 |
| Total ordinary income | 16,624.07 | 23,334.66 | 42,249.99 |
| Capital gains (in accordance with the limitations of section 117(a), Revenue Acts of 1934 and 1936) | 12,697.92 | 64,217.40 | 34,490.05 |
| Total net taxable income | 29,321.99 | 87,552.06 | 76,740.04 |
The gains on the sales of trust securities, including the gains set out above in this paragraph, have at all times been accumulated.
Mrs. Heyman's net income for each of such years, apart from the aforesaid "ordinary" income from such trust, was as follows:
| 1934, approximately | $15,000 |
| 1935, approximately | 28,000 |
| 1936, approximately | 63,000 |
Since the creation of the trust, the petitioner has from time to time made gifts of property, 1941 BTA LEXIS 1242">*1258 including money and securities, to Mrs. Heyman. He also has been the sole trustee. The trust instrument has never been amended or modified in any respect.
On July 21, 1933, the petitioner was the legally appointed guardian of each of his three children, having been so appointed by decree of the Surrogate's Court of Westchester County, New York. Some time during 1932 the two older of the three children, David John Heyman and Thomas M. Heyman, each received by inheritance the sum of $25,000 under the will of an uncle of the petitioner who had died in 1929. That sum was held for each of the children by the petitioner as guardian.
On July 21, 1933, the petitioner executed three separate instruments, each of which designated one of his three children as beneficiary. Those instruments are identical except for the name of the child designated as beneficiary. They have never been amended or modified in any respect.
The petitioner's primary purpose in establishing the trusts was to provide for the accumulation of money to be paid to the beneficiaries at specified ages, free from the claims of the petitioner's creditors, and abailable for the children's use in supporting, maintaining, 1941 BTA LEXIS 1242">*1259 and educating them if the petitioner should be financially unable to do so.
The trust instruments of July 21, 1933, named the petitioner and Mrs. Heyman as trustees. The original corpus consisted of option 44 B.T.A. 1009">*1016 warrants for 5,000 shares of common stock of the Union American Investing Corporation. The provisions of the trust were set forth as follows:
(a) To collect the interest, income, dividends and profits arising from the said Trust Estate;
(b) To use the said Trust Estate or any part thereof as margin or otherwise in any trading or speculative transactions which the Trustees may undertake on behalf of the Trust;
(c) Upon the credit of the Trust Estate, to enter into any trading or speculative or other transaction for account of the trust, whether or not any part of the Trust Estate is pledged as margin, the Trust Estate being liable therefor;
(d) From time to time at their election to exercise or not to exercise the aforesaid option warrants and to borrow upon the credit of the Trust Estate such moneys as may be required or may be deemed advisable by the Trustees for the exercise of such warrants.
The purposes of the trust indicated in paragraphs (b) and1941 BTA LEXIS 1242">*1260 (c) shall exist and continue only so long as David M. Heyman or Ruth S. Heyman remain a Trustee of this trust.
Then followed this direction:
SECOND: (a) During the minority of the Donor's son, Kenneth L. Heyman, the Trustees shall apply to the use of the Donor's said son so much of the interest, income, dividends and profits (not resulting from capital profits) arising from the Trust Estate and the management thereof as, in their discretion, they deem advisable, accumulating all the remainder of such interest, income, dividends and profits (after payment of the proper commissions, charges and disbursements of the Trustees and taxes) until the said Kenneth L. Heyman shall attain the age of twenty-one (21) years.
(b) When the said Kenneth L. Heyman shall attain the age of twenty-one (21) years, the Trustees shall pay to the said Kenneth L. Heyman the accumulations resulting from interest, income, dividends and profits and not resulting from capital profits, and the Trustees shall thereafter pay to the said Kenneth L. Heyman (after payment of the proper commissions, charges and disbursements of the Trustees and taxes) all the interest, income and dividends from the said Trust1941 BTA LEXIS 1242">*1261 Estate (including in the words "Trust Estate" not only the original principal thereof but all accumulations thereto resulting from capital profits) until the said Kenneth L. Heyman shall attain the age of thirty (30) years, when the Trustees shall pay over to the said Kenneth L. Heyman the whole of the Trust Estate; and the Trustees are hereby granted power in their unrestricted discretion after the said Kenneth L. Heyman shall have attained the age of twenty-one (21) years, and from time to time, to pay over to the said Kenneth L. Heyman the whole or any part of the said Trust Estate.
(c) In the event that the said Kenneth L. Heyman shall die, prior to the termination of the trust pursuant to any of the provisions hereinabove made, then, upon his death, the Trust Estate shall be distributed among his lawful lineal descendants him surviving, and in the event that he shall leave no lawful lineal descendants him surviving, then the Trust Estate shall be divided among his brothers then surviving, provided that:
(1) If with respect to any of such brothers there shall then be in effect a trust similar to this one, the share which would otherwise be payable to such brother shall be1941 BTA LEXIS 1242">*1262 payable to said trust created for his benefit; and
44 B.T.A. 1009">*1017 (2) If this trust, when it terminates, shall already have had added to it any share or shares resulting from the distribution of the principal of any such other trust, then to that extent, the foregoing proviso (1) shall not be applicable and to that extent the principal of this trust shall be paid directly to his surviving brother.
The following provisions were then recited:
THIRD: The Trustees are authorized to retain any and all securities at any time transferred to or held by them, and to sell the same and reinvest the proceeds as herein set forth. So long as David M. Heyman and Ruth S. Heyman are Trustees of this trust, the Trustees shall have power to enter into all sorts of speculative transactions for account of the trust and make speculative contracts for account of the trust, the Trustees being given the widest possible power and discretion in respect of all investments, transactions and contracts into which they may enter for account of the trust. So long as David M. Heyman is one of the Trustees, his decisions as to transactions to be entered into for account of the trust shall be binding upon all1941 BTA LEXIS 1242">*1263 the Trustees and he shall have power on their behalf to enter into any and all such transactions. Any Successor Trustee shall have power to retain any investments then in the Trust Estate and shall not be responsible in any respect for the retention of such investments, but all reinvestments made by any Trustee other than David M. Heyman and Ruth S Heyman shall be in such securities or other property as shall at the time of making the reinvestment be interest or dividend bearing or otherwise yielding a net return on the money invested but shall not be limited to those declared by law to be available for investment by trustees.
FOURTH: So long as David M. Heyman shall be a Trustee of this trust, such Trustee, and any firm or corporation in which such Trustee shall be a partner or officer or in any way interested, may contract with or be interested with the Trustees touching the purchase or sale of any part of the Trust Estate or securities for the Trust Estate or for speculation, whether such contract be made directly with the Trustees or with any such firm or corporation, or with any other persons, firms or corporations, and said Trustee and any such firms or corporations may take, 1941 BTA LEXIS 1242">*1264 have and enjoy the compensation, remuneration, profits and emoluments arising out of any such transaction without accountability to any beneficiary hereunder, provided such transaction was not characterized by bad faith, such Trustee and any such firm or corporation of which he is a member or officer or in which he is interested in this respect occupying the same position as though such Trustee were not a Trustee hereunder. So long as David M. Heyman is a broker or banker or engaged in any professional business, he shall be entitled to be paid the usual charges for business transacted and acts done by him or by any partner in connection with the trusts herein.
* * *
SIXTH: At all times during the continuance of the Trust Estate, the Trustees shall have the following additional and unrestricted powers:
(a) In the event of and upon the reorganization of any corporation or property, or in the event of any foreclosure of any mortgages of any corporation or upon any property in which the Trust Estate shall be in any way interested, the Trustees, in their unrestricted discretion, may become parties to any reorganization, readjustment or consolidation plan which the Trustees, in good1941 BTA LEXIS 1242">*1265 faith, may believe to be beneficial to the Trust Estate, and may accept new securities of the reorganized, new or successor company in exchange for the securities held by the Trust Estate, and may do all such other things as 44 B.T.A. 1009">*1018 the Trustees may deem lawful and proper in the premises, including the paying of any assessment, for all which things, if done in good faith, the Trustees shall not in any way be responsible.
(b) So long as David M. Heyman or Ruth S. Heyman shall be a Trustee of this trust, the Trustees shall have power at all times and from time to time to avail themselves of rights to purchase or subscribe for or towards other issues of securities (including bonds, notes, certificates of indebtedness, stock, warrants and certificates of beneficial interest), of whatever nature, incident to the ownership at any time by the Trust Estate of the securities of any corporation or association.
(c) So long as David M. Heyman or Ruth S. Heyman shall be a Trustee of this trust, the Trustees shall have full power to settle and determine all questions which may arise relating to any property of the Trust Estate, and the Trustees shall not be held in any way responsible1941 BTA LEXIS 1242">*1266 for any error of judgment or for any act done or suffered by them in good faith hereunder.
(d) The Trustees are empowered to compromise and settle all claims in favor of or against the Trust Estate, and they shall be in all respects indemnified out of the Trust Estate, and they may employ such agents and servants as they shall deem necessary.
(e) The Trustees are empowered to distribute in kind to and among the persons from time to time entitled to receive a portion of the Trust Estate, any property, including any stocks, bonds or other securities forming a part of the Trust Estate, either in equal or unequal proportions, at such prices as the Trustees in their absolute discretion shall deem fair and equitable.
SEVENTH: By writing duly acknowledged, the said David M. Heyman and Ruth S. Heyman or the survivor of them, as Trustees, may associate with themselves or himself or herself as Co-Trustee or Co-Trustees from time to time any one or more persons or corporations; but so long as David M. Heyman shall be a Trustee of this trust no part of the Trust Estate shall be sold or reinvested nor shall any trading or speculation be undertaken on behalf of the trust except by the said1941 BTA LEXIS 1242">*1267 David M. Heyman as Trustee or in accordance with his written direction unless he be physically or otherwise unable to give such direction, the said David M. Heyman being hereby given during his lifetime uncontrolled discretion in respect thereof, and for the exercise of such discretion he shall be in no wise accountable to anyone; and for acting in accordance therewith no Trustee shall be accountable to anyone. In the event that both the said David M. Heyman and Ruth S. Heyman should die without having so associated with himself or herself any person or persons, corporation or corporations as Co-Trustee or Co-Trustees, then Chemical Bank and Trust Company shall become Successor Trustee hereunder.
* * *
The indenture also permitted the beneficiary to have access to the books and accounts of the trustees.
In paragraph SECOND (a), the petitioner used and intended the words "apply to the use of" to include support, maintenance, and education as well as other expenses comprehended by such language.
Chemical was designated by the petitioner as the custodian of the assets of each of the trusts, and has continued to act as such custodian to the present time. The option warrants1941 BTA LEXIS 1242">*1268 referred to in each of the instruments as constituting the corpus of each trust were the individual property of the petitioner, having been acquired 44 B.T.A. 1009">*1019 by him from the Union American Investing Corporation on its organization in 1928, and were transferred by him to the three respective accounts standing in the names of the trusts at Chemical. On July 21, 1933, the quoted market value for shares of common stock of the Union American Investing Corporation was less than the option price, but, because of the chance of future appreciation, the market value of such option warrants on that date was 25 cents a share covered by the option warrants. During the years 1934 and 1935, the petitioner transferred certain other securities to each of the trusts as additional corpus thereof.
The corpus of each of the trusts has at all times consisted of securities and cash. Since the date of the creation of the trusts, all purchases and sales of securities of the trusts have been made in the same manner as under the trust of March 14, 1931. All of such purchases and sales with respect to the three trusts have at all times been directed by the petitioner alone, in his capacity as the person1941 BTA LEXIS 1242">*1269 designated in each of the instruments as "trustee", at his sole discretion. In each case of purchase or sale the usual brokerage charge has been paid to Lewisohn.
Neither the petitioner nor Mrs. Heyman has at any time used any part of the corpus of the three trusts to maintain margin accounts for the trusts.
The manner of registration of the securities of each of the three trusts has been the same as under the March 14, 1931, trust. Neither the petitioner nor Mrs. Heyman has made loans to any person, firm, or corporation of the funds of the three trusts, nor has either borrowed funds from the trusts.
In August 1936 the petitioner, in his capacity as "trustee" in each of the three trusts, instructed Chemical to exercise the option warrants heretofore referred to and acquire 5,000 shares of Union American Investing Corporation common stock for each of the trusts on payment of $140,000, or $28 per share for 5,000 shares. On petitioner's request, the $140,000 was lent by Chemical to each of the trusts for the purpose of exercising the options, and the petitioner, in his capacity as "trustee", pledged with Chemical as collateral for each of the three loans of $140,000 the securities1941 BTA LEXIS 1242">*1270 then held in the respective account standing in the name of each of the three trusts. Each of the three loans was repaid with interest to Chemical by the petitioner, in his capacity as "trustee", in September 1936, by application of the required portion of a partial distribution on account of the liquidation of each block of 5,000 shares of Union American Investing Corporation common stock, such partial distribution amounting to $185,000 in the case of each of the trusts.
The three trusts did not produce any income prior to 1935. Subsequently, as the trusts received income, Chemical deposited it to 44 B.T.A. 1009">*1020 the respective account maintained at Chemical in the name of each trust.
The petitioner, in his capacity as "trustee", has at all times invested and reinvested all of the income of the three trusts, including interest and dividends (i.e., "ordinary" income) and gain on the sale of trust securities, in securities of his own selection. On January 10, 1936, the petitioner instructed Chemical in writing not to carry separate capital and income accounts in the name of each trust, but to combine the two balances and carry one account in the name of each trust. Since that1941 BTA LEXIS 1242">*1271 date, as before, the petitioner has continued to invest and reinvest all of the income, and the principal and accumulations thereon, of each of the three trusts, in securities of his own selection, such investments and reinvestments at all times being paid for out of all moneys of each trust without distinction as to whether the moneys represented "ordinary" income or the proceeds of the sales of trust securities. All of the income of each of the three trusts has been accumulated as just stated and no part thereof has been paid out for the education, maintenance, or support of the respective beneficiaries, or for any purpose other than routine expenses of administration and taxes.
The net taxable income of each trust for each of the years 1935 and 1936 was as follows:
| 1935 | 1936 | |
| David M. Heyman, Jr., trust: | ||
| Ordinary income: | ||
| Dividends | $912.11 | $4,853.34 |
| Capital gains (in accordance with the limitations of section 117(a), Revenue Acts of 1934 and 1936) | 16,409.39 | 52,723.22 |
| Total net taxable income | 17,321.50 | 57,576.56 |
| Thomas M. Heyman trust: | ||
| Ordinary income: | ||
| Dividends | 912.11 | 4,853.33 |
| Capital gains (in accordance with the limitations of section 117(a), Revenue Acts of 1934 and 1936) | 16,391.89 | 52,709.97 |
| Total net taxable income | 17,304.00 | 57,563.30 |
| Kenneth L. Heyman trust: | ||
| Ordinary income: | ||
| Dividends | 987.11 | 4,983.33 |
| Capital gains (in accordance with the limitations of section 117(a), Revenue Acts of 1934 and 1936) | 16,349.39 | 52,707.46 |
| Total net taxable income | 17,336.50 | 57,690.79 |
1941 BTA LEXIS 1242">*1272 Income tax returns were filed on March 13, 1936, and March 15, 1937, by each of the three trusts for the years 1935 and 1936, respectively, showing the net taxable income set out above. The taxes shown to be due on the returns were paid and no part thereof has been refunded, nor have claims for refund been filed with respect to the taxes so paid. The amended answer of the respondent in the instant proceeding was filed with the Board of Tax Appeals on August 13, 1940.
44 B.T.A. 1009">*1021 In actual practice, the petitioner, in his capacity as the person designated as "trustee", carried out or directed the carrying out of all transactions of the three trusts, and provided whatever authorizations and directions that were necessary. Thus, in July 1935, the petitioner signed "Approved, David M. Heyman" on a communication from Lewisohn which confirmed a purchase for the account standing in the name of each of the three trusts of certain securities and stated that it is understood that in agreeing to purchase such securities the purchaser has relied solely on an enclosed prospectus and on no other oral or written statements.
All proxies to vote stocks of the trust of March 14, 1931, and1941 BTA LEXIS 1242">*1273 the three trusts of July 21, 1933, have at all times been transmitted to the petitioner who has always determined the disposition to be made of such proxies.
Prior to and since the creation of the three trusts, the petitioner has from time to time made gifts of cash and securities to each of his three children and the children have received occasional gifts from others. The petitioner has at all times invested and reinvested such cash and securities in his sole discretion.
In 1935 with respect to Kenneth, and 1936 with respect to David John and Thomas, the petitioner designated Chemical as custodian of such gifts to the children and Chemical at his direction has since held such gifts in a respective guardianship account in the name of each child, the petitioner being designated as guardian in each account. The petitioner as such guardian has at all times invested and reinvested the funds and securities held in the accounts, and purchases and sales for the accounts are made in the same manner as under the trust of March 14, 1931. Such investments and reinvestments have always been made at the sole discretion of the petitioner. None of the moneys in their accounts has ever1941 BTA LEXIS 1242">*1274 been distributed to any of the children, nor has any of such moneys ever been used for the support, education, or maintenance of any of the three children and all such moneys have at all times remained in their respective accounts.
In the years in which such accounts have produced income, the petitioner as guardian has filed Federal income tax returns on behalf of the child whose account has so produced income.
The net income of each of the foregoing guardianship accounts for the following years was as follows:
| 1935 | 1936 | |
| Kenneth L. Heyman | $2,616.40 | $3,941.93 |
| David M. Heyman, Jr | None | 4,006.87 |
| Thomas M. Heyman | None | 4,006.87 |
44 B.T.A. 1009">*1022 There have not been any purchases or sales by or to (i.e., "cross" sales or purchases between) any of the accounts hereinabove referred to nor has the petitioner or Mrs. Heyman ever purchased or sold securities from or to each other or any of such accounts, with the exception that on one occasion 100 rights with respect to Montgomery Ward & Co. stock were sold by each of the three aforesaid guardian accounts to Mrs. Heyman, for the sum in each case of $243.75, for the purpose of rounding out fractional holdings.
1941 BTA LEXIS 1242">*1275 In making purchases or sales of securities for accounts maintained by him in his own name individually, the petitioner followed a frequent practice, when funds were available, of purchasing simultaneously the same kind of security for each of the accounts hereinabove referred to and of selling simultaneously the same kind of security out of each of the accounts which held such security. The foregoing practice was consistent with his general practice of making the best kind of investment and reinvestment for himself, these accounts, and those of his clients.
For the year 1934 the petitioner claimed, and the Commissioner disallowed in the notice of deficiency, alleged expense deductions of $8,390. It is agreed that of such amount $6,361.40 is allowable as a deduction and $2,028.60 is not so allowable. For the year 1935 the amount so claimed and disallowed was $8,573.75, and it is agreed that of such amount $5,788.20 is so allowable and $2,785.55 is not allowable. For the year 1936 the amount so claimed and disallowed was $9,950, and it is agreed that of such amount $7,265.33 is so allowable and $2,684.67 is not allowable.
OPINION.
VAN FOSSAN: The respondent held the trust1941 BTA LEXIS 1242">*1276 of March 14, 1931, in favor of Ruth S. Heyman (hereinafter called the wife's trust) to be revocable and the income therefrom taxable to the grantor under the provisions of section 166 of the Revenue Acts of 1934 and 1936. Under appropriate pleadings, he now asserts that such income is also taxable under the provisions of sections 167 and 22 (a) of those acts. He further contends that the income from the three trusts, created July 21, 1933, for the benefit of his sons (hereinafter called the children's trusts), is likewise taxable under sections 22(a) and 167 of those acts. The petitioner denies the taxability of the income from all trusts under any statutory provision.
Addressing ourselves to the wife's trust, we are at once impressed by the breadth of control by the donor trustee and the absence of the limitations usually found in trust instruments. The situation 44 B.T.A. 1009">*1023 is quite similar to that present in . There the court said:
The first question which arises is whether the income from the trust securities is taxable to Chandler. The Board held that it was. Its decision was grounded upon the second paragraph1941 BTA LEXIS 1242">*1277 of article seventh of the trust agreement, which is as follows:
"During the lifetime of Grantor, Trustee shall make such sale, exchange or other disposition either to Grantor or to a third party or third parties designated by him of all or any part of the Trust Fund and for such considerations and upon such terms as to credit or otherwise as Grantor shall at any one time or from time to time direct. Trustee shall also acquire by purchase, exchange or otherwise such real or personal property for such considerations and either from Grantor or from such third party or third parties as Grantor may at any one time or from time to time direct. Grantor may be personally interested in the sale, exchange or other disposition of any part of the Trust Fund and/or in the purchase, exchange or other acquisition of real and/or of personal property for the Trust Fund. Trustee shall at all times and forever be freed from any and all liability and responsibility for acting in accordance with such directions of Grantor."
The Board found that, Chandler could so exercise the power reserved (by the provisions just quoted) to himself as grantor as to direct a sale of trust securities to himself at1941 BTA LEXIS 1242">*1278 less than their real value and to that extent revest title in the trust corpus in himself.
Commenting upon article seventh of the trust instrument, the court further said:
In the present case there can be no doubt that the power to control reserved by Chandler was for his own benefit. In addition to broad powers of directing investments by the trustee, such as were present in the trust instrument in Carrier v. Carrier, supra, Chandler reserved to himself the right to sell to or buy from the trust estate at his own price and to direct the disposition to himself (other than by way of sale or exchange) of all or any part of the trust fund for such consideration and upon such terms as he might direct. We think that the reservation by the settlor of the power to deal with the trust assets for his own benefit is irreconcilable with the fundamental principle underlying all fiduciary relationships that the fiduciary must act solely in the interest of the cestui que trust and, therefore, may not have personal dealings with the trust property. Restatement, Trusts, ยง 170 and comments thereto. As owner of the assets Chandler, of course, had the right to reserve such a power. 1941 BTA LEXIS 1242">*1279 His doing so clearly indicates that he did not intend to impose upon himself fiduciary restraints enforcible by the trust beneficiaries. We think that the Board was entirely justified in construing the power as a reservation by the settlor of the right to revoke the trust.
In the wife's trust instrument we find that paragraphs 3, 8, and 14 contain similar, if not broader, powers of control over the trust corpus as compared with those in the Chandler case. In paragraph 3 the grantor was under "no restrictions whatever" with respect to the investment and reinvestment of the trust estate. He was granted "power without accountability" for what might "otherwise be considered 44 B.T.A. 1009">*1024 negligence" and permitted to make "speculations in any form" for the trust estate. In paragraph 8 the trustees were protected in carrying on transactions authorized by the trust agreement and were not liable for depreciation or loss "by reason of any sales, investments or reinvestments so made." Under paragraph 14 the donor may purchase investments from the trust estate for himself or his firm and sell them to himself and his firm. All transactions with his firm are subject to commissions.
1941 BTA LEXIS 1242">*1280 These reservations and grants are couched in the broadest language and permit the petitioner to set any price he sees fit on any part or all of the trust corpus. As in the Chandler case, he might fix the amount of the sale at a nominal figure, upon terms amounting substantially to a gift or sell at a bargain price without restriction or accountability. Likewise, an excessive purchase price for assets bought from himself for the trust would result, in effect, in an immediate cash distribution from the trust corpus, measured by the difference between the amount received and the fair market value of the purchased asset. Thus the power to revest in the grantor any part of the corpus is clearly vested in him by the terms of the trust instrument.
It is sufficient to decide that the income from the wife's trust during the years before us was taxable to the donor under the provisions of section 166, but we are constrained to add that under the circumstances set forth in our findings of fact the income is also taxable to him under section 22(a). The principles announced in 1941 BTA LEXIS 1242">*1281 , apply here. In that case the trust was created for a term of years, but the absence of a specific term is immaterial. ; ; ; and . No single factor need be pointed out as determinative of taxability under section 22(a), , but the entire situation must be viewed in order to evaluate the purpose and use of the trust as a means of retaining or alienating the donor's incidents of ownership over the corpus or his constitutent rights to and privileges in its dominion.
In the case at bar we find a marked similarity of fact to the Clifford case. In both cases the grantor was the trustee, the wife was the beneficiary (here the children were possible beneficiaries upon the happening of certain events), and income was to be paid primarily to the wife. In neither case was there specific power of revocation, but here the grantor may revoke with the consent1941 BTA LEXIS 1242">*1282 of his wife while they live together as man and wife, and alone thereafter, and the grantor may renounce or modify his power of revocation. There is no definition or amplification of the word "modify" and, 44 B.T.A. 1009">*1025 consequently, we can not say what effect a modification might have on such power. Upon the termination of the Clifford trust the undistributed and accrued income would belong to the wife. Upon the revocation of the Heyman trust the undistributed income would go to the grantor.
Further powers reserved to the grantor tightened his control over the trust estate. The grantor has exercised personal direction and control over the activities of the trust fund. He has been the sole trustee of the trust. He has invested the funds in his wife's general account (which included the income from the trust) and has used that account in the purchase of additional investments selected by him in his sole discretion. He has paid out of his own funds the living expenses of his family and himself, averaging about $100,000 a year.
In the face of this brief resume of the salient facts it can not be said that the wife's trust was not the usual "family trust", the income from which1941 BTA LEXIS 1242">*1283 is taxable to the grantor under section 22(a).
As to the children's trusts, the respondent argues that the trusts were created as an integral part of the grantor's plan to retain control over the property transferred in trust for the benefit of his wife and children and to deal with it as if it were still his own. He cites the grantor's broad powers to control the corpus as equivalent to ownership. He contends that the grantor is permitted to deal with the trusts in any way he chooses and may profit therefrom personally as he sees fit. He says "the powers are broad enough to enable the petitioner to milk the trust dry or apply them to any undertaking in which he himself would stand to benefit through the use of trust funds" and thus he may violate the fundamental concept of a trust.
We see no escape from the conclusion respondent asks when we apply to the children's trusts the same line of reasoning as has been applied to the wife's trust. The facts that petitioner has not availed himself of the right to lend to or borrow from the trust; that he has not maintained margin accounts with the funds; that he has accumulated all gains and profits for the children's use and benefit1941 BTA LEXIS 1242">*1284 and otherwise provided for their education, maintenance, and support, are not determinative. Petitioner reserved the power to use the funds of the children's trusts in much the same fashion as the wife's trust. The possession of the power is determinative, not the fortuitous manner of its use. Petitioner retained such control over the trust corpus as to bring the trust income within the broad scope of section 22(a). ;
Reviewed by the Board.
Decision will be entered under Rule 50.