1948 U.S. Tax Ct. LEXIS 170">*170
Petitioner made outright gifts of stock to his wife and children prior to 1941. During January 1941 he caused the donated stock and additional stock to be transferred to himself purportedly as trustee under parol trusts. In December 1941 he executed in writing irrevocable trust under which he held all of the stock. He retained discretionary power to use the income for the support and maintenance of his daughter for life and of his son during minority. The principal of the trust for the son was payable to him upon reaching majority. Assets received in liquidation of the stock during 1942 were transferred during January 1943 to a single family trust.
10 T.C. 1053">*1053 These proceedings, consolidated for hearing, involve the following deficiencies:
Docket No. | Year | Tax | Deficiency |
7049 | 1941 | Gift tax | $ 5,077.22 |
11149 | 1941 | Income tax | 6,892.06 |
11149 | 1943 | Income and victory tax | 25,634.42 |
10 T.C. 1053">*1054 The deficiency for 1943 was computed on the basis of 1942 and 1943 income under the Current Tax Payment Act of 1943.
The parties have filed a stipulation of facts in each proceeding. The stipulations settle some of the issues raised by the pleadings. The sole remaining gift tax issue has been abandoned by the1948 U.S. Tax Ct. LEXIS 170">*174 petitioner in his briefs. The remaining income tax issues are whether the petitioner is taxable on the dividend income received and the capital gains realized during 1941 and 1942 by certain trusts purportedly created by him for the benefit of his children, under
FINDINGS OF FACT.
The stipulation of facts is incorporated herein by reference.
The petitioner resides in Newport Beach, California. He filed all of the returns involved herein with the collector of internal revenue for the sixth district of California.
The petitioner was born August 1, 1886. He was about a year old when his father died, leaving a wife and seven children. His father was supposed to have had considerable means, 1948 U.S. Tax Ct. LEXIS 170">*175 but he left a small net estate. As a result the petitioner had to sell newspapers as a young boy, went to work in a factory at the age of 11, and never had much formal education. In later years he established a successful business.
The petitioner and his wife Gladys had two children. Their daughter Evelyn was born July 9, 1914, and died March 29, 1943. She was mentally ill and incapable of managing her own affairs during a period which began in 1936 and ended with her death. Their son Curtis, Jr., was born January 24, 1927, and was a minor at all times material hereto. He was married on February 22, 1946, while still a minor. He served in the Navy from January 20, 1945, to August 12, 1946. He and his wife lived with the petitioner for a short time until they acquired their own house in October 1946.
The petitioner was the president of the Herberts Machinery Co. (hereinafter referred to as the Herberts Co.), which he had organized in 1915 under the laws of California. The petitioner, or the petitioner and members of his immediate family, held most of the outstanding stock at all times. The board of directors was composed of the petitioner, his wife, a brother-in-law, and 1948 U.S. Tax Ct. LEXIS 170">*176 others who held qualifying shares. The Herberts Co. was dissolved on October 17, 1942, and its assets were distributed as more fully described hereinafter.
10 T.C. 1053">*1055 At various times prior to 1942 the petitioner made outright gifts of the Herberts Co. stock to his wife and children. He caused certificates for stock registered in his name to be issued in the names of the children and in the amounts shown as follows:
Date | Evelyn | Curtis, Jr. |
Shares | Shares | |
Dec. 28, 1935 | 800 | 800 |
Dec. 16, 1937 | 500 | 500 |
Dec. 28, 1938 | * 1,200 | 600 |
The foregoing stock was transferred for the Herberts Co. by its fiscal agents. Subsequently, the Herberts Co. became its own transfer agent and new certificates were issued in the same names on January 2, 1939. All but the jointly held certificates (1,200 shares) were consolidated at that time into single certificates for Evelyn (1,300 shares) and Curtis, Jr. (1,900 shares).
On January 20, 1941, all of the stock represented by the foregoing certificates, including those jointly held by Evelyn and her mother, was transferred on the1948 U.S. Tax Ct. LEXIS 170">*177 books of the company to petitioner, purportedly as trustee, and new certificates were issued in the name of the petitioner as "trustee" for Evelyn (2,500 shares) and as "trustee" for Curtis, Jr. (1,900 shares), respectively. On the same date additional stock of the Herberts Co. was transferred from the name of the petitioner to himself as "trustee" for Evelyn (2,100 shares) and as "trustee" for Curtis, Jr. (2,700 shares), respectively. The petitioner believed that he had thereby created an "oral trust," the purpose of which was to protect his children during the incompetency of one and the minority of the other.
All of the foregoing stock certificates were kept by the petitioner in his home or office safe, or in a safe deposit box. Some of the certificates issued in the names of the children had been previously exhibited on Christmas trees and had been then described to the children as Christmas presents to them. It is not known whether any of the certificates issued in the names of his children and his wife were endorsed for cancellation, or otherwise, by anyone. Some were not so endorsed and some were not canceled.
All dividends paid thereon prior to 1941 were received by petitioner1948 U.S. Tax Ct. LEXIS 170">*178 and were deposited in separate savings accounts which the petitioner's wife maintained in her name as "trustee" for each child, respectively.
On December 5, 1941, the Herberts Co. declared a dividend payable in stock of United Aircraft Products, Inc. (hereinafter referred to as United), and Aerco, Inc. (hereinafter referred to as Aerco). The petitioner received 230 shares of United and 3,067 shares of Aerco on 10 T.C. 1053">*1056 each of the two blocks of 4,600 shares of the Herberts Co. stock which he held as "trustee" for his children.
On or about December 9, 1941, the petitioner consulted his tax advisor about his tax liability incident to this dividend. His advisor recommended that written trust instruments be executed for the benefit of the children in order to avoid any question concerning the existence or terms of the so-called "oral" or parol trusts. Accordingly, his advisor introduced him to Russell H. Reay, an attorney, who prepared two instruments (hereinafter referred to, separately, as the Evelyn trust No. 1 and the Curtis trust; also referred to, collectively, as the Reay trusts). Both instruments were executed by the petitioner on or about December 9, 1941; the acknowledgments1948 U.S. Tax Ct. LEXIS 170">*179 were dated December 10, 1941. The petitioner was trustee under each trust and the receipts attached to the trust instruments recited that, as such trustee, he received for each trust 4,600 shares of Herberts Co. stock and 230 shares of United stock. In addition, the Curtis trust received 3,067 shares of Aerco stock.
The Evelyn trust No. 1 provided that "such portion of the income from the trust estate as in the sole discretion of the Trustee is reasonably necessary for the care, maintenance and support" of Evelyn was to be distributed quarterly, or at other intervals, for her use and benefit during her lifetime. If in his discretion the net income was insufficient he was authorized to use such portion of the principal as "he in his sole discretion may deem adequate" for that purpose. Upon her death the trust was to terminate and the estate was to be distributed in equal shares to the petitioner and his wife, or the survivor; if neither survived, it was to be distributed to those entitled to inherit from Evelyn. The trustee had broad powers of management as well as the power to distribute moneys to or for the benefit of a minor, or an incompetent person, without the intervention1948 U.S. Tax Ct. LEXIS 170">*180 of any guardian or court. The trust contained a spendthrift clause and also the following provision: "This trust shall be irrevocable."
The Curtis trust provided that "such portion of the net income from the trust estate as in the sole discretion of the Trustee is reasonably necessary for the care, maintenance, support and education" of Curtis, Jr., was to be distributed quarterly, or at other intervals, for his use and benefit during his minority. If in his sole discretion the income was insufficient he was authorized to use "such portion of the principal of the trust estate as he in his sole discretion may deem adequate" for that purpose. Upon Curtis, Jr., arriving at the age of 21 the trust was to terminate and the estate was to be distributed to him. In all other respects the provisions of this trust were the same as those provided in Evelyn trust No. 1, including the provision: "This trust shall be irrevocable." Both trusts also contained the following provision:
10 T.C. 1053">*1057 Article II.
Said Trustee may either maintain, continue or operate, at the risk of the trust estate, and not at the risk of said Trustee, any business enterprise which he may receive from the trust estate, 1948 U.S. Tax Ct. LEXIS 170">*181 or he may sell, exchange or otherwise dispose of the whole or any part thereof, on such terms and for such property as he may deem best; or he may retain, hold, maintain or continue any securities, properties or investments which he may receive from the trust estate, whether or not the same be of the character permitted by law for investment of trust funds; or in his sole, absolute and uncontrolled discretion he may grant, bargain, sell, convey, exchange, convert, lease for terms within or extending beyond the duration of this trust, grant for like terms the right to mine or drill for and remove therefrom gas, oil, and/or other minerals, assign, partition, divide, sub-divide or improve any of the trust estate, invest, re-invest, loan or reloan the trust estate in securities, properties or investments either of the character permitted by law for the investment of trust funds or otherwise, effect insurance, including public liability insurance, at the expense of the trust estate, of such nature and in such form and amount as the Trustee deems advisable, borrow money for any trust purpose, hypothecate the trust estate, or any part thereof, and/or replace, renew and/or extend any encumbrance1948 U.S. Tax Ct. LEXIS 170">*182 thereof, upon such terms and conditions and by such means of security as may be determined upon by the Trustee; and generally in all respects he may handle, manage and operate the trust estate in such manner, and upon such terms and conditions as to said trustee, in his absolute and uncontrolled discretion, may seem best, and may do all of such other things and exercise and execute each and every right, power and privilege in connection with and with relation to the trust estate, as could be done, exercised and/or executed by an individual holding and owning said property in absolute and unconditional ownership, including, without limiting the foregoing, the rights as respects stocks and bonds of holding said securities in his own name or otherwise, voting, giving of proxies, payment of calls for assessments, exchanging securities, selling or exercising stock subscription or conversion rights, participating in foreclosures, reorganizations, consolidations, mergers, liquidations, pooling agreements, voting trusts and assenting to corporate sales or other acts.
For reasons which have not been explained 3,067 shares of the Aerco stock were not included under Evelyn trust No. 1. These1948 U.S. Tax Ct. LEXIS 170">*183 shares were received under a separate trust agreement (hereinafter referred to as Evelyn trust No. 2), which was executed by the petitioner's wife on an unknown date in 1942. The agreement and the acknowledgment thereto were predated to December 9, 1941. The provisions of both trusts, Nos. 1 and 2, were substantially similar except that the latter trust, of which the petitioner's wife was trustee, was not made irrevocable.
The petitioner filed a Federal gift tax return for 1941 in which he reported gifts of Herberts Co. stock, including 2,100 shares to Evelyn and 2,700 shares to Curtis, Jr., and in which he claimed exclusions of $ 4,000 for each gift to the children. On May 15, 1942, the petitioner furnished copies of the Reay trusts to the collector of internal revenue in connection with this return.
On an unknown date subsequent to December 9, 1941, the petitioner 10 T.C. 1053">*1058 consulted his personal attorney, Harry W. Elliott, who was then working on a plan to provide security for the petitioner's family. Elliott was shown copies of the Reay trusts, but he did not know that they had been executed. He recommended that such instruments should include a provision to permit the ultimate1948 U.S. Tax Ct. LEXIS 170">*184 merger or consolidation of the trusts in a family trust which had been discussed as early as 1927. With the petitioner's acquiescence, the Reay trusts were redrafted to include such provision in both instruments (hereinafter referred to as the Elliott trusts). The Elliott trusts were executed by the petitioner on an unknown date subsequent to the execution of the Reay trusts. The agreements were predated to December 9, 1941; the acknowledgments thereto were predated to December 10, 1941. The petitioner as trustee executed receipts to himself as trustor for the same stocks which he had received previously as trustee for each of the Reay trusts. The provisions of the Reay and the Elliott trusts were identical, except that the latter trusts each contained the following new provision:
Article III.
There is specifically reserved to the Trustor hereunder, during the term of this trust, the exclusive right, power and authority to merge and/or consolidate this trust, and all of its assets in a trust or trusts which might be hereafter established by the Trustor hereunder, after giving notice to the Trustee in writing of such fact at least five (5) days before such merger and/or transfer1948 U.S. Tax Ct. LEXIS 170">*185 and/or consolidation is to take effect. And, provided further, that the rights of the Beneficiary under this trust shall not in any manner be impaired, nor the value of this trust be decreased, and provided further, that the Beneficiary hereunder shall participate proportionately as a Beneficiary in such trust as might be hereafter established as the amount of the value of her trust estate hereunder at the time of merger bears to the total value of the trust estate created by said new trust; and, provided further, that the trust hereafter to be formed shall be an irrevocable trust. Should any new or other trust be established into which this trust might be merged, transferred or consolidated, upon the delivery to the new Trustee of all cash, stocks, bonds, securities or other property by the Trustee hereunder, said Trustee shall be immediately and forever released, exonerated and discharged from any further liability or responsibility in the future administration of the trust estate as created by this instrument.
The complete provisions of these trusts, together with all other written trust agreements mentioned herein, are hereby incorporated by reference.
In June 1942 the petitioner1948 U.S. Tax Ct. LEXIS 170">*186 opened various brokerage accounts, including accounts for himself as "trustee" for Evelyn and Curtis, Jr., and for his wife as "trustee" for Evelyn. At that time he furnished copies of the Reay trusts to his brokers. On June 18, 1942, each block of the United stock hereinbefore mentioned was sold and the respective proceeds were deposited in each of the separate savings accounts which the petitioner's wife maintained as "trustee" for Evelyn and Curtis, Jr. On or before October 26, 1942, each block of the Aerco 10 T.C. 1053">*1059 stock hereinbefore mentioned was exchanged for 170 shares of the stock of Bank of America, National Trust & Savings Association (hereinafter referred to as Bank of America), plus a small amount of cash; 70 shares from each block of Bank of America stock were sold on November 27, 1942, and the 100 shares remaining in each block were sold subsequent to January 1, 1943. The respective proceeds from the exchange of Aerco stock and the sales of Bank of America stock were deposited in each of the separate savings accounts which the petitioner's wife maintained as "trustee" for Evelyn and Curtis, Jr.
When the Herberts Co. was dissolved on October 17, 1942, its outstanding1948 U.S. Tax Ct. LEXIS 170">*187 stock was registered on its books as follows:
Stockholder | Shares | Percentage |
Petitioner | 16,363 | 46.0113 |
Petitioner's wife | 10,000 | 28.1191 |
Petitioner, as "trustee" for Evelyn | 4,600 | 12.9348 |
Petitioner, as "trustee" for Curtis, Jr | 4,600 | 12.9348 |
Total | 35,563 | 100. |
In January 1943 a trust agreement was executed for the benefit of the petitioner's family (hereinafter referred to as the Herberts trust). The agreement and the acknowledgments thereto were predated to January 1, 1943. The trustors were the petitioner, his wife, and the petitioner as "trustee" for Evelyn and Curtis, Jr. The trustees were the petitioner, his wife, and his attorney Elliott. The trustors transferred to the trustees all of the assets which they received from the liquidation of the Herberts Co. During the period between the dissolution of the company and the establishment of the trust the petitioner acted as agent for the purpose of accounting for the assets to the stockholders. In addition to those assets, the trustors each contributed other assets. On January 19, 1943, the petitioner's wife withdrew $ 14,805.55 and $ 15,003.61, respectively, from the separate savings accounts1948 U.S. Tax Ct. LEXIS 170">*188 which she maintained as "trustee" for Evelyn and Curtis, Jr. Those amounts were deposited on January 21, 1943, to the account of the Herberts trust.
The Herberts trust provided that the net income therefrom was to be paid to the following beneficiaries in percentages which were based upon the respective contributions to the trust:
Beneficiary | Percentage |
Petitioner | 38.5 |
Petitioner's wife | 28.5 |
Petitioner as "trustee" for Evelyn | 16.5 |
Petitioner as "trustee" for Curtis, Jr | 16.5 |
When Curtis, Jr., arrived at the age of 23 his share of the net income was to be paid directly to him. The trust was to continue until the death of the survivor of the named beneficiaries. The petitioner and 10 T.C. 1053">*1060 his wife each reserved the power to dispose of their respective shares of the net income, and the same percentage of the principal, by appointment to any other beneficiary or beneficiaries of the trust; upon the death of either parent without exercising the power to dispose of his or her share of the net income, such share was to be paid to the remaining beneficiaries in equal shares. Upon the death of Evelyn or Curtis, Jr., leaving issue surviving, their respective shares of 1948 U.S. Tax Ct. LEXIS 170">*189 the net income were to be paid to their respective issue
The Herberts trust was expressly stated to be "an irrevocable trust." The trustees were given broad powers of management, which were substantially similar to the powers which the petitioner had as trustee under the Reay trusts. They also had the power to determine what was to constitute principal, gross income, and the net income available for distribution; they had the right to use principal for administration expenses if the income was insufficient. The petitioner and his wife, or the survivor, were given the power to appoint their successors; if either failed to do so, the survivor was to have a double vote in the event of disagreement with the third trustee. The petitioner and his wife, or the survivor, also had the power to remove the third trustee upon 30 days' written notice and to appoint his successor.
The interests of the beneficiaries under the Herberts trust were protected by a spendthrift clause. It was also provided that if the net income was insufficient, in the sole and uncontrolled discretion of the trustees, the principal of the trust estate was to be used to meet unforeseen contingencies, not to "exceed an equal proportionate1948 U.S. Tax Ct. LEXIS 170">*191 part of the trust estate as there may be beneficiaries thereof." It was declared that:
10 T.C. 1053">*1061 This trust instrument in its entirety, and all of the terms, provisions and conditions herein contained, are established for the purpose of conserving the property and estate, both separate and community, of Curtis A. Herberts and Gladys E. Herberts for the benefit of their children herein named, and it is the intention and desire of the Trustors to eliminate hazards and speculations, so far as possible, in the provisions of the trust. It is also the desire of the Trustors that such children, beneficiaries of this trust, shall be fully protected because of their inability or disability, inexperience and need of care and protection.
Returns of income for the years 1941, 1942, and 1943 (including net capital gains for 1942 and 1943), and amended returns for 1941 and 1942, were filed as shown in the following table:
Income | ||||
Year | Form | Name given on return | ||
Original | Amended | |||
return | return | |||
1941 | 1040 | Petitioner, "Trustee for Evelyn J. Herberts" | $ 5,661.24 | $ 6,660.94 |
1941 | 1040 | Petitioner, "Trustee for Curtis Arthur | 6,721.44 | 6,723.44 |
Herberts, Jr." | ||||
1942 | 1041 | "Evelyn J. Herberts Trust" by petitioner, | 13,716.48 | 16,657.47 |
"Trustee". | ||||
1942 | 1041 | "Evelyn J. Herberts Trust" by petitioner's | 1,258.54 | 1,258.54 |
wife,"Trustee". | ||||
1942 | 1041 | "Curtis A. Herberts, Jr. Trust" by petitioner, | 14,975.01 | 17,916.00 |
"Trustee". | ||||
1942 | 1040 | Petitioner, "Trustee for Evelyn J. Herberts" | None | |
1942 | 1040 | Petitioner, "Trustee for Curtis A. Herberts, | 527.97 | |
Jr." | ||||
1943 | 1041 | "The Herberts Trust" by petitioner, "Trustee" | 3,640.53 | |
* 1,182.60 | ||||
1943 | 1040 | "Evelyn J. Herberts (deceased 3-29-43)" by | 693.55 | |
petitioner's wife, "Trustee". | ||||
1943 | 1040 | "Curtis A. Herberts" (individually) | 4,304.10 | |
The Commissioner determined in part for the years 1941 and 1942 that income equal to the amounts later reported in the amended returns, with corrections not herein material, is taxable to the petitioner under
The amended returns and checks for additional taxes were received by the Commissioner on June 17, 1947, together with consents, executed in duplicate, to the retroactive application of
All of the income involved herein, except income from the Herberts1948 U.S. Tax Ct. LEXIS 170">*193 10 T.C. 1053">*1062 trust, was deposited in the separate savings accounts which the petitioner's wife maintained as "trustee" for Evelyn and Curtis, Jr., respectively. These accounts were maintained exclusively for the benefit of the children. In all matters in which petitioner's wife acted as "trustee" for either of the children, she was acting as agent for petitioner in his capacity as trustee. Income taxes were paid, directly or indirectly, from these accounts for each child, or for the "trustee" of each child. The petitioner's wife also made withdrawals for Curtis, Jr., including the following: $ 1,000 on December 17, 1943, for a car; $ 100 on January 15, 1945, for travel checks; about $ 400 on December 19, 1945, for an engagement ring; about $ 330 on January 14, 1946, for a wedding ring; $ 500 on March 6, 1946, for the purchase of stock by Curtis, Jr.; and $ 250 for incidental expenses after his marriage in 1946. A balance of $ 2,006.86 in his account was paid outright to him on October 3, 1946. A balance of $ 4,696.10 in Evelyn's account at the time of her death was withdrawn by the petitioner's wife on April 1, 1943, and deposited to her personal account. This balance was used1948 U.S. Tax Ct. LEXIS 170">*194 to pay doctors' bills, funeral expenses, and income taxes for Evelyn. During the seven years of Evelyn's illness the petitioner spent nearly $ 100,000 in medical and nursing care. None of the income involved herein was used for the support and maintenance of the children during the taxable years. The income from the Herberts trust was first distributed on April 8, 1946.
The petitioner did not intend to reserve for himself any economic benefit or gain either from the stock of the Herberts Co. which he gave to his wife and children prior to 1941, or from the income thereon.
OPINION.
While the respondent contends in the income tax proceeding that the petitioner is taxable under the provisions of both
It is necessary, therefore, to consider first the1948 U.S. Tax Ct. LEXIS 170">*195 effect of those transfers.
1948 U.S. Tax Ct. LEXIS 170">*197 On January 20, 1941, the petitioner caused the foregoing certificates of stock to be transferred to himself as "trustee" for his children. However, it was beyond the petitioner's authority to dispose of stock owned by and standing in the name of his children and wife. It was equally beyond his authority to transfer this stock to trusts which he created, or purported to create, in 1941 and subsequent years.
In the petition there is an allegation to the effect that respondent erred in taxing to petitioner the income reported by Curtis A. Herberts, Jr., in his individual return for the year 1942, and that this income was from stock given to Curtis, Jr., by petitioner and not from stock included in a trust for his benefit. The only evidence bearing upon this point is a schedule introduced by petitioner as an exhibit indicating that 1,000 shares of Aerco Corporation stock was a "Gift from C. 1948 U.S. Tax Ct. LEXIS 170">*198 A. Herberts," and acquired by Curtis, Jr., in 1940, and was "exchanged for 55 shares Bank of America stock" in October 1942. This is not sufficient evidence to warrant a conclusion that respondent 10 T.C. 1053">*1064 erred in his determination that the sums of $ 225 as dividends, and $ 367.40 as capital gains, less deductions of $ 64.43, were taxable to petitioner as "owner of the stock." A similar allegation was made as to income reported for 1942 by Evelyn J. Herberts in her individual return. No income was reported in this return; the statement attached to the deficiency notice does not show that respondent taxed any such income to petitioner; and no evidence was offered as to this allegation. Therefore, as to these items our decision is against petitioner.
On or about December 9, 1941, petitioner executed the written trust instruments, known as the Reay trusts, and, as trustee thereunder, acknowledged the receipt of the Herberts Co. stock held in his name as trustee since January 20, 1941. The Reay trusts were1948 U.S. Tax Ct. LEXIS 170">*205 irrevocable and there was no element of uncertainty in their terms which would warrant a question of their validity under
There were no further formal transfers of the Herberts Co. stock 10 T.C. 1053">*1067 after January 20, 1941. However, the petitioner purported to hold the certificates issued on that date under various trusts, successively, until the Herberts Co. was dissolved on October 17, 1942. First, he acted under the parol trusts, hereinbefore mentioned, which, if valid, were revocable. Then, on or about December 9, 1941, he held the certificates under the Reay trusts, consisting of the Evelyn trust No. 1 and the Curtis trust, both of which were irrevocable. Subsequently, on an unknown date, the petitioner executed the Elliott trusts, which were also irrevocable. The provisions of the Reay and the Elliott trusts are identical, except that the latter contain a provision for the ultimate merger or consolidation of the trusts in a trust which might1948 U.S. Tax Ct. LEXIS 170">*207 be established thereafter by the petitioner. He purported to hold the properties of the Reay trusts under the Elliott trusts during a period which can not be determined on the present record. In any event we regard the execution of the Elliott trusts as immaterial to the present question. It is significant, however, that the rights of the beneficiaries under the Elliott trusts (identical to the rights under the Reay trusts) were to be protected in the event of a merger or consolidation of the trusts.
The Evelyn trust No. 2 was a revocable trust. It was executed nominally by the petitioner's wife on an unknown date in 1942, for reasons unexplained by the present record. This trust consisted of property (the Aerco stock which the petitioner had received as trustee under the parol trust for Evelyn, and which, in some unknown way and for some unknown purpose, was given by him to his wife in order that she might establish this trust. Under these circumstances we regard this trust as what the petitioner on brief concedes it to be, i. e., an agency of the petitioner under the Reay or Evelyn trust No. 1, or as a trust of which petitioner was, in reality, the grantor. The taxability1948 U.S. Tax Ct. LEXIS 170">*208 of its income will be determined by the same considerations applicable to the Evelyn trust No. 1.
The Herberts trust was established in January 1943 as an irrevocable trust. The petitioner was a grantor of this trust in several capacities, including that of "trustee" for each of his children. The properties of the Reay or the Elliott trusts were transferred to the Herberts trust. The income in question for 1943 was distributable to the petitioner as "trustee" for each child. The provisions of the Herberts trust differ in many respects from those of the Reay and the Elliott trusts. There are minor differences in the rights of the beneficiaries and in the powers of the trustees. The differences are probably immaterial in this proceeding. To the extent that they may be material, however, we think that the provisions of the Reay trusts are controlling. Cf.
As a general rule, after a trust has been created and the rights of the beneficiaries have become vested, in the absence of a power of modification reserved, the trust may not be altered or modified to the prejudice of the beneficiaries without their consent. However, it is permissible to modify the trust where the interests of the beneficiaries are not prejudiced thereby. Cf.
The respondent treats the various trusts as a scheme for tax-saving purposes. He gives a prominent place in his argument to
The trust income and capital gains for 1942 are involved in this proceeding under the provisions of the Current Tax Payment Act of 1943. The trust income for that year was received by the petitioner as trustee under either the Reay or the Elliott trusts, which were identical in all material respects. The petitioner was the grantor and the trustee under those trusts for each of his children, respectively. He reserved broad powers of management. The properties of those trusts 10 T.C. 1053">*1069 consisted primarily of stock in the Herberts Co., which the petitioner controlled (at least prior to the execution of the trusts). Here the similarities end. The provisions for the distribution of the income and principal of the trusts were different in the case of each child.
The Evelyn trust No. 1 provided that the petitioner was to distribute such portion of the income as1948 U.S. Tax Ct. LEXIS 170">*212 in his sole discretion was reasonably necessary for the care, maintenance, and support of Evelyn during her lifetime. He also had discretionary authority to use the principal of the trust for that purpose. Upon Evelyn's death the trust estate was to be distributed in equal shares to the petitioner and his wife, or the survivor, with provisions over if neither survived. Under those provisions we think that the petitioner had the power to accumulate the income from the trust for the benefit of the remaindermen rather than for the benefit of Evelyn. The facts show that he did not distribute any of the income for the benefit of Evelyn during her lifetime. Thus, he could and did control the ultimate disposition of the income from the trust. When that power is combined with all the other powers and circumstances, we think that the petitioner retained the equivalent for tax purposes of an economic ownership of the property in question.
The Curtis trust presents a different problem for the year 1942. While the petitioner had the power to accumulate the income therefrom, he had no power or control over the final destination of that income. Curtis, Jr., was entitled to receive the principal and the undistributed income of the trust estate when he arrived at the age of 21. The difference between the trusts for Evelyn and Curtis, Jr., is aptly illustrated by the difference between the trusts involved in
The petitioner contends that the
The petitioner next relies upon
The trust income and capital gains in question for the year 1943 were received and realized initially by the petitioner and others as trustees under the Herberts trust. 1948 U.S. Tax Ct. LEXIS 170">*220 They were distributable to the petitioner as "trustee" for Evelyn and Curtis, Jr., respectively, under either the Reay or the Elliott trusts. We have already held that the rights of the beneficiaries under those trusts are controlling. We have already held that the income distributable to the petitioner as "trustee" for Evelyn until the date of her death during 1943 is taxable to him under
10 T.C. 1053">*1072 The income distributable to the petitioner as "trustee" for Curtis, Jr., during 1943 is not taxable under
In the gift tax proceeding there were originally three issues which involved (1) the value of the Herberts Co. stock at the date of the gifts, (2) the amount of the specific exemption available to the petitioner, and (3) the exclusions allowable under
*. Two certificates for 600 shares each were issued in the names of Evelyn and her mother as joint tenants.↩
*. Victory tax net income.↩
1.
"Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books."↩
2.
"Subject to the provisions of section eight hundred and fifty-two [relating to trusts of real property], a voluntary trust is created, as to the trustor and beneficiary, by any words or acts of the trustor, indicating with reasonable certainty:
"1. An intention on the part of the trustor to create a trust, and,
"2. The subject, purpose and beneficiary of the trust."↩
3.
"Unless expressly made irrevocable by the instrument creating the trust, every voluntary trust shall be revocable by the trustor."↩
4.
"The parent entitled to the custody of a child must give him support and education suitable to his circumstances. If the support and education which the father of a legitimate child is able to give are inadequate, the mother must assist him to the extent of her ability."↩
5.
* * * *
(c) Income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of this chapter merely because such income, in the discretion of another person, the trustee, or the grantor acting as trustee or cotrustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income for the taxable year, such amounts shall be considered paid out of income to the extent of the income of the trust for such taxable year which is not paid, credited, or to be distributed under
6.
"(2) Retroactive Effect. -- The amendments made by subsection (a) shall also be applicable with respect to all taxable years to which such amendments are not made applicable under paragraph (1), in the same manner as if such amendments had been a part of the revenue laws applicable to such taxable years, but only if there are filed with the Commissioner (in accordance with regulations prescribed by him with the approval of the Secretary) at such time and by such persons as may be prescribed under such regulations, signed consents that there shall be paid, at such time as the Commissioner may prescribe, all of the taxes under Chapter 1 of the Internal Revenue Code or under the corresponding provisions of prior revenue laws which would have been paid for the taxable years concerned if such amendments had been a part of the revenue laws applicable to such taxable years."↩