1950 U.S. Tax Ct. LEXIS 277">*277
Where the sole trustee of trusts had broad discretionary powers to distribute trust income annually to herself or her husband, the grantor of the trusts, which power was limited only by her sole judgment with respect to her husband's needs, the trustee, the petitioner in this proceeding, had the burden of proving what part of trust income she could have been compelled to pay her husband, and how much was not within her absolute control. Upon the evidence, comprising an original stipulation and further evidence admitted upon further consideration of the proceeding after remandment by the Circuit Court of Appeals for the Third Circuit,
14 T.C. 198">*199 The respondent has determined deficiencies in the petitioner's income tax liability as follows:
Docket | Year | Deficiency |
Docket No. 5243 | 1938 | $ 1,346.91 |
Docket No. 5243 | 1939 | 18,109.65 |
Docket No. 5243 | 1940 | 25,154.24 |
Docket No. 5244 | 1941 | 32,583.62 |
Total | 77,194.42 |
The deficiencies1950 U.S. Tax Ct. LEXIS 277">*279 in income tax result from the respondent's determination that Eleanor M. Funk is taxable on the aggregate net income of four trusts of which she is trustee and also a beneficiary. The trusts were created by Wilfred J. Funk, petitioner's husband, on December 29, 1936. The aggregate net income of the four trusts for the taxable years, which has been included in the taxable income of the petitioner, is as follows:
1938 | $ 13,600 |
1939 | 48,000 |
1940 | 49,600 |
1941 | 53,600 |
Total | $ 164,800 |
The notice of the deficiencies for the years 1938 and 1939 was mailed to the petitioner within five years after the returns for 1938 and 1939 were filed, but more that three years after the returns for 1938 and 1939 were filed. The petitioner agrees that if all of the net income of the four trusts in question for the years 1938 and 1939 is includible in her gross income for 1938 and 1939, then she understated her correct gross income in each of those years by more than 25 per cent, and, therefore, that the notice of deficiencies in those years was timely under
14 T.C. 198">*200 The only question presented is whether the petitioner is taxable on all 1950 U.S. Tax Ct. LEXIS 277">*280 of the net income of four trusts for the years 1938 to 1941, both years inclusive.
The petitioner filed her income tax returns with the collector for the fifth district of New Jersey.
This proceeding was originally submitted under a stipulation of agreed facts, with thirteen exhibits, and the question presented was decided under a findings of fact and opinion which was promulgated on September 27, 1946. See
FINDINGS OF FACT.
Certain facts have been stipulated, and those facts are found as facts.
The petitioner, Eleanor M. 1950 U.S. Tax Ct. LEXIS 277">*281 Funk, is the wife of Wilfred J. Funk, to whom she was married in 1915. Petitioner and her husband reside in Montclair, New Jersey. They are the parents of three children -- Joan, Wilfred, Jr., and Peter.
Since at least 1929, the chief business interest of Wilfred J. Funk has been the Funk & Wagnalls Co., of which he has been either president or vice president.
This proceeding relates to four trusts, known as trust A, trust B, trust C, and trust D, which Wilfred J. Funk created on December 29, 1936, under written trust indentures. Since their creation, Eleanor M. Funk has been trustee of these trusts, and the corpus of each trust has consisted solely of 125 shares of class C stock of a corporation known as Erwin Park, Inc., plus such accumulations of the annual trust income as the trustee let accumulate and become an addition to the trust corpus. Since their creation, the income of each trust has consisted solely of dividends paid on the class C stock of Erwin Park, Inc.
Wilfred J. Funk held in his own name at one time shares of stock of the corporation, Funk & Wagnalls Co. He made transfers of some of this stock at various times, as follows:
(1) On April 9, 1929, he transferred1950 U.S. Tax Ct. LEXIS 277">*282 10,345 shares of Funk & Wagnalls stock, in trust, to himself as trustee, for the benefit of Eleanor M. Funk, the income to be paid to her for life, and the corpus 14 T.C. 198">*201 to go, upon her death, to such persons as she should appoint by will or deed, the power of appointment being limited to the class of persons who would be entitled to share in her estate according to the New Jersey laws of descent and distribution in the event that she died intestate.
(2) At some time prior to April 16, 1929, Wilfred J. Funk gave 10,345 shares of Funk & Wagnalls stock to Eleanor M. Funk.
(3) On or about March 5, 1929, Wilfred J. Funk transferred 17,982 shares of Funk & Wagnalls stock to the corporation known as Erwin Park, Inc., which he had caused to be organized on March 1, 1929. The above block of Funk & Wagnalls stock was transferred to Erwin Park, Inc., in exchange for capital stock, and on the books of Erwin Park, Inc., the Funk & Wagnalls stock was carried at the value, as of March 5, 1929, of $ 250 per share, or a total value of $ 4,495,500.
When Erwin Park, Inc., was organized, Wilfred J. Funk subscribed for all of its capital stock, consisting of class A and class B stock, and 10,000 1950 U.S. Tax Ct. LEXIS 277">*283 shares of class A stock were issued to him in exchange for securities which he transferred to the corporation.
On April 5, 1929, Wilfred J. Funk created six trusts, known as trust No. 1, No. 2, No. 3, No. 4, No. 5, and No. 6.
The beneficiaries of trusts 1, 2, and 3 were the children, Wilfred, Jr., Peter, and Joan. Wilfred J. Funk named himself the trustee of these trusts. He transferred to these trusts a total of 4,998 shares of class A stock of Erwin Park, Inc., or 1,666 shares to each trust. These trusts continued in existence, with Wilfred J. Funk acting as the trustee, and having as their corpus class A stock of Erwin Park, Inc., until 1939, when they were revoked.
Wilfred J. Funk named Eleanor M. Funk the trustee of trusts 4, 5, and 6. He transferred, in April, 1929, 4,998 shares of class A stock of Erwin Park to these trusts -- 1,666 shares to each trust. The beneficiaries of these trusts, in numerical order, were Wilfred, Jr., Peter, and Joan. On December 29, 1936, after a recapitalization of Erwin Park, Wilfred J. Funk revoked trusts 4, 5, and 6, and Eleanor M. Funk transferred the trust property back to him.
On December 29, 1936, the same day that the aforesaid trusts1950 U.S. Tax Ct. LEXIS 277">*284 were revoked, Wilfred J. Funk created four new trusts -- trusts A, B, C, and D (the trusts in question), naming Eleanor M. Funk the trustee of each trust.
On April 16, 1929, Eleanor M. Funk created a trust to which she transferred the 10,345 shares of Funk & Wagnalls stock which she had received from Wilfred J. Funk. She named herself the trustee of this trust, and thereafter held the aforesaid stock as trustee. This trust was for the benefit of Wilfred J. Funk, with income payable to him for life, and corpus to go to his appointees under his will or deed, limited to the class of persons who would inherit from him if he died 14 T.C. 198">*202 intestate, according to the New Jersey laws of descent and distribution. The trusts of April 9, 1929 (referred to above), and April 16, 1929, created by Wilfred J. Funk and Eleanor M. Funk, respectively, were reciprocal trusts.
The facts relating to Erwin Park, Inc., are as follows: Erwin Park, Inc., a Delaware corporation, was organized on March 1, 1929. It became the personal holding company of Wilfred J. Funk. Its address is the address of the residence of Wilfred J. Funk. Under its original certificate of incorporation its total authorized 1950 U.S. Tax Ct. LEXIS 277">*285 capital stock was 20,000 shares, of no par value, equally divided between class A and class B stock, with voting power vested exclusively in the holders of class B stock. Wilfred J. Funk is the only person who has ever held any of the class B voting stock. Wilfred J. Funk, Eleanor M. Funk, and John D. Murphy of Murphy, Lanier & Quinn, accountants and tax consultants, have served, at all times, as the president, treasurer, and secretary, respectively, of Erwin Park, and also as its directors. Immediately after the incorporation of Erwin Park, Wilfred J. Funk transferred a substantial part of his property, including 17,982 shares of Funk & Wagnalls stock, and other securities, to Erwin Park, in exchange for all of its capital stock. The property transferred to and received by Erwin Park was set up on its books at a value of $ 6,603,439.32.
At special meetings of the directors and stockholders of Erwin Park on December 23, 1936, a resolution was adopted to amend the corporation's charter to effect a recapitalization so as to change the authorized capital stock to 500 shares of class A stock, 1,000 shares of class B stock, and 500 shares of class C stock, each share to have a par value1950 U.S. Tax Ct. LEXIS 277">*286 of $ 100, and only the class B stock to have voting rights. Also, dividends could be declared and paid upon such classes of stock within the absolute discretion of the directors. Following the recapitalization as thus authorized, the holders of old stock exchanged it for new stock, and thereafter all of the new class A stock was held by Wilfred J. Funk as trustee of trusts 1, 2, and 3; and all of the class C stock was held by Eleanor M. Funk as trustee of trusts A, B, C, and D; and all of the voting stock, the class B stock, was held by Wilfred J. Funk. Also, on December 30, 1936, the directors declared a dividend of $ 160 per share on the class C stock, or a total dividend of $ 80,000, which was paid to Eleanor M. Funk, as trustee of trusts A, B, C, and D.
On December 23, 1937, the directors and stockholders of Erwin Park adopted resolutions to again amend the charter of Erwin Park with respect to the dividend rights of the three classes of stock. This amendment continued the directors' discretion as to the time and 14 T.C. 198">*203 amount of dividend payments, but provided that of all dividends paid during any calendar year, 5 per cent be paid on class A stock, 15 per cent on class1950 U.S. Tax Ct. LEXIS 277">*287 B stock, and 80 per cent on class C stock. In case of liquidation or dissolution, the holders of all classes of stock are to share equally in the corporation's assets.
In 1936, and each year thereafter, Erwin Park declared dividends of virtually all its income for the year. According to the income tax returns of Erwin Park for 1936, 1937, 1938, 1939, and 1940, the net income of the corporation and the total amount of dividends paid on its stock were as follows:
Net | Dividends | |
Year | income | paid |
1936 | $ 82,756 | $ 80,000 |
1937 | 195,706 | 191,000 |
1938 | 17,518 | 17,000 |
1939 | 55,758 | 60,000 |
1940 | 59,996 | 62,000 |
Total | 410,000 |
During the years 1936 to 1940 Erwin Park paid dividends on the new class A and class B stock (held by Wilfred J. Funk), and on the new class C stock, held by Eleanor M. Funk, trustee of trusts A, B, C, and D, as follows:
Class A | Class B | Class C | |
Year | stock | stock | stock |
1936 | None | None | $ 80,000.00 |
1937 | $ 9,250.00 | $ 27,750.00 | * 154,000.00 |
1938 | 850.00 | 2,550.00 | 13,600.00 |
1939 | 3,000.00 | 9,000.00 | 48,000.00 |
1940 | 3,100.00 | 9,300.00 | 49,600.00 |
Total | 16,200.00 | 48,600.00 | 345,200.00 |
1950 U.S. Tax Ct. LEXIS 277">*288 During the years 1937 to 1940, inclusive, Wilfred J. Funk received from the Eleanor M. Funk trust of April 16, 1929; and Eleanor M. Funk received from the Wilfred J. Funk trust of April 9, 1929, the reciprocal trusts, income as follows:
W. J. Funk, | E. M. Funk, | |
Year | beneficiary | beneficiary |
1937 | $ 72,415.00 | $ 72,415.00 |
1938 | 0 | 0 |
1939 | 15,517.50 | 15,517.50 |
1940 | 15,517.50 | 15,517.50 |
According to the individual income tax returns of Wilfred J. Funk 14 T.C. 198">*204 and Eleanor M. Funk for the years 1937 to 1940, inclusive, the gross income of each was as follows:
W. J. Funk | E. M. Funk | |||
Year | Gross | Interst, | Gross | Interest, |
income, | Govt. | income, | Govt. | |
line 12 of | obligs., * | line 12 of | obligs., | |
return | sch. B | return | sch. B | |
1937 | $ 129,643.07 | $ 32,424.84 | $ 83,695.63 | $ 15,475.00 |
1938 | 20,839.16 | 30,562.34 | 6,447.55 | 11,059.85 |
1939 | 55,623.53 | 28,281.41 | 33,154.46 | 0 |
1940 | 57,357.39 | 26,162.04 | 27,061.77 | 13,100.00 |
According to the income tax returns of Eleanor M. Funk for 1937 and 1938, schedule B, she owned $ 321,000 of obligations "of a State, Territory, or political subdivision1950 U.S. Tax Ct. LEXIS 277">*289 thereof, or the District of Columbia, or United States possessions."
During the years 1930 through 1937, Wilfred J. Funk withdrew various amounts from Erwin Park, evidenced by notes carried in a notes receivable account of Erwin Park. On December 31, 1940, the total amount of these withdrawals, as shown in the unpaid balance of the notes receivable account, was $ 334,500. In 1931 Eleanor M. Funk withdrew $ 474,568.42 from Erwin Park evidenced by a demand note dated October 15, 1931, with interest at 5 per cent. The balance in the notes receivable account of Erwin Park, Inc., on December 31, 1940, on account of the withdrawals of Wilfred J. and Eleanor M. Funk was $ 809,068.42, and no payments have ever been made on the principal of the notes reflected by the above balance of the account, and no interest has ever been paid thereon. Erwin Park, Inc., has never made any demand for any payment of the principal of or interest on the notes.
Additional facts relating to the creation and the operation of trusts A, B, C, and D, of which the petitioner, Eleanor M. Funk, was the trustee, are as follows:
The trusts created by Wilfred J. Funk on December 29, 1936, known as trusts A, B, C, 1950 U.S. Tax Ct. LEXIS 277">*290 and D, were identical trusts, and the provisions of all of the indentures were the same; they are irrevocable; they will terminate upon the death of Wilfred J. Funk; they are to be administered under the laws of New Jersey. Upon the death of Wilfred J. Funk and the termination of the trusts, the corpus of each trust shall be paid over to such persons as Wilfred J. Funk has appointed by deed or will; or, in default of appointment, to a named child (Wilfred, Jr., or Peter, or Joan), in the instances of three of the trusts, A, B, and C; or, in the instance of trust D, to the three children in equal shares
14 T.C. 198">*205 During the terms of the trusts, the trustee, Eleanor M. Funk, is authorized to manage the trusts, pay taxes and expenses annually, and receive the income of the trust property. Also, the trustee is authorized to do the following:
* * * in her discretion to pay all or a part of the net income annually to me, or to herself, in accordance with our respective needs, of which she shall be the sole judge, and to accumulate and add to principal the balance of such income, if 1950 U.S. Tax Ct. LEXIS 277">*291 any.
It was provided in the trust indentures that any income which was accumulated in a trust could not thereafter be distributed by the trustee. Also, all stock dividends and liquidating dividends must be added to principal, but all cash dividends are to be treated as trust income. It was provided, also, that Eleanor M. Funk, as trustee, had the right to appoint, by will or other written instrument, a successor trustee who shall have the same powers as she has. The trustee is given broad powers in the usual management of the trust corpus; the right to register securities held by the trust in her own name; and the power to change investments.
Eleanor M. Funk accepted the trusteeship of the trusts and received the certificates of the class C stock constituting the corpus of each trust. She placed them in her own safe deposit box, to which she alone had access.
On the same day that the four trusts were created, Wilfred J. Funk addressed a letter, dated December 29, 1936, to Eleanor M. Funk, regarding the trusts; and Eleanor M. Funk addressed a letter bearing the same date to him regarding the trusts. The letters are set forth in the margin. 1
1950 U.S. Tax Ct. LEXIS 277">*292 14 T.C. 198">*206 During the years involved in this proceeding, 1938 through 1941, the only securities, or property, held by the four trusts were 500 shares of class C stock of Erwin Park, Inc., the personal holding company of Wilfred J. Funk, in which he held all the voting, or class B stock. The trusts also held some accumulations of income.
On December 30, 1936, four bank accounts were opened in the Chase National Bank, New York City, for each of the four trusts, and Eleanor M. Funk was the only person who could sign checks drawn against the four accounts. The account for trust A was designated "Eleanor M. Funk, Trust A, Eleanor M. Funk, Trustee"; and the accounts for the other three trusts were given like designations.
Wilfred J. Funk created the four trusts largely for the security of Eleanor M. Funk. He had always given consideration to the matter of her security, and to that end had given her gifts since their marriage in 1915. At one time he gave her $ 228,000 and, at another time, the 10,345 shares of Funk & Wagnalls stock; and he had created a trust for her benefit on April 9, 1929. His primary purpose in creating Erwin Park, Inc., was to provide for Eleanor M. Funk and to 1950 U.S. Tax Ct. LEXIS 277">*293 safeguard their respective estates. Tax savings was also a motive for creating Erwin Park, Inc.
Prior to creating trusts A, B, C, and D, Wilfred J. Funk discussed with Murphy, Lanier & Quinn, a firm of accountants and tax consultants, the matter of creating one or four trusts. As far as his purposes were concerned, one trust would have done as well as four. They created four trusts instead of one because there would result some modification in taxes.
The firm of Murphy, Lanier & Quinn, having offices in New York City, for many years has prepared the income tax returns of Wilfred J. Funk, of Erwin Park, Inc., and of trusts A, B, C, and D. John D. Murphy is a senior partner of the firm. He has been the accountant for Erwin Park, Inc., since its organization and, also, he is Wilfred J. Funk's accountant. He is also a director and secretary of Erwin Park, Inc.
Eleanor M. Funk received advice from Murphy, Lanier & Quinn. According to her own estimate, she is not a business woman. Although she is an officer and director of Erwin Park, Inc., she knows very little about its affairs, and whatever she had to do with that corporation she did through Murphy, Lanier & Quinn. She did what1950 U.S. Tax Ct. LEXIS 277">*294 she was told to do by her agents and lawyer. She regarded the firm of Murphy, Lanier & Quinn as her agents. The check books of the four trusts were kept in the office of the Murphy firm.
The administration of the four trusts was handled in the following manner: In each of the years involved in this proceeding, 1938, 1939, 1940, and 1941, dividends on the class C stock of Erwin Park were declared and paid, and the dividends which were payable on each 14 T.C. 198">*207 block of stock which was held by each trust were paid by a check of Erwin Park made payable to "Eleanor M. Funk, Trustee." The checks were deposited in the accounts of the trusts in the Chase National Bank. No distribution was made by the trustee of any income received by a trust during the year of the receipt thereof, so that in the fiduciary income tax return of each trust for each year the trustee did not deduct any amount as distributed or distributable to a beneficiary, and the trustee reported tax upon the entire income which the trust received during the year. Shortly after January 1 of the succeeding year, the trustee, Eleanor M. Funk, during January and within from eight to twenty days after the first of January, 1950 U.S. Tax Ct. LEXIS 277">*295 would exercise her discretion with respect to making any distribution of the income which the trusts had received in the immediately preceding year. The only persons who received distributions were herself and her husband, and in their separate income tax returns they did not include in their gross income for the years in which they received distributions from the trust, the amounts received.
The total aggregate amounts of the dividends on the class C stock of Erwin Park, Inc., which were received by the four trusts in the taxable years, and the income tax which the trustee paid on such income for each year, were as follows:
Year | Income | Tax |
1938 | $ 13,600 | $ 528.00 |
1939 | 48,000 | 3,636.00 |
1940 | 49,600 | 4,787.20 |
1941 | 53,600 | * 10,916.00 |
Total | 164,800 | 19,867.20 |
Shortly after January 1 of each year, the firm of Murphy, Lanier & Quinn mailed a letter to Eleanor M. Funk, trustee, at her home, in which they advised her of the amount of the income of each trust for the immediately preceding year, after payment of income tax; and they inquired in the letter as follows:
* * * Will you please advise us as to the disposition which you wish made of this1950 U.S. Tax Ct. LEXIS 277">*296 income in order that the proper entries may be made, checks, if necessary prepared, etc.?
Eleanor M. Funk followed the procedure of going to the office of Murphy, Lanier & Quinn after receipt of their letter and of dictating a letter at its office in which she stated what distribution, if any, she wished to make out of the income of each trust for the prior year, and what amount, if any, she wished to leave in the trust to be accumulated.
Accordingly, in January of 1939, 1940, 1941, and 1942, Eleanor M. Funk, trustee, caused the four trusts' income of 1938, 1939, 1940, and 14 T.C. 198">*208 1941 to be distributed in part, and accumulated in part, as follows:
To Eleanor | To Wilfred | ||
Year | Funk | Funk | Accumulated |
1938 | $ 12,800 | $ 272.00 | |
1939 | $ 44,000 | 364.00 | |
1940 | 8,000 | 36,000 | 812.80 |
1941 | 22,000 | 20,000 | 684,00 |
Total | 42,800 | 100,00 | 2,132.80 |
(The above sums, plus income taxes of $ 19,867.20 for 4 years, constitute the disposition of gross income of the 4 trusts in the total amount of $ 164,800.)
Eleanor M. Funk deposited the sums which she distributed to herself from the annual income of the trusts in her separate and personal bank account in a Montclair, New Jersey, 1950 U.S. Tax Ct. LEXIS 277">*297 bank; and Wilfred J. Funk deposited those made to him in his personal bank account in the Chase National Bank. Eleanor M. Funk did not use any of the distributions to herself for the maintenance of either her home or her children.
Eleanor M. Funk arrived at her decision upon each of the distributions of annual income of the four trusts independently. She did not consult or discuss the matter of distributions in any instance with Wilfred J. Funk, or with anyone in the firm of Murphy, Lanier & Quinn. She relied entirely upon her own discretion. She did not discuss with Wilfred J. Funk his needs, or ask him what he wanted. She did not discuss with her husband her own needs, if any, or what she would do with any distributions which she decided to make to herself.
In making distributions of the annual income of all of the four trusts for the taxable years, 1938 through 1941, Eleanor M. Funk, trustee, did not make the respective distributions to herself and to her husband upon the basis of the needs of either one of them. In her opinion, neither one of them had any need for any part of the income of any one of the four trusts in any one of the four taxable years, or in any of the 1950 U.S. Tax Ct. LEXIS 277">*298 years of making the distributions, because both she and her husband had their own separate and independent income in each of the taxable years; and the separate income of each of them was substantial in each one of the taxable years and in each one of the years in which she made the distributions.
Eleanor M. Funk considered that it would not make any difference to Wilfred J. Funk how she exercised her discretion in distributing the income of the four trusts, because he had such a large income of his own.
Wilfred J. Funk did not at any time ever direct her attention to the distribution of the income of the trusts nor discuss any of the distributions with her prior to her making the distributions.
During the years here involved, Eleanor M. Funk, trustee, made her decisions with respect to the distributions of the trust income in the 14 T.C. 198">*209 following manner: She took what money she wanted, if any, for her personal use, or to satisfy some desire to be extravagant, and gave her husband whatever was left, or whatever sum she wished to give him. In deciding upon the amounts, if any, which she desired to distribute to herself she was guided chiefly by her personal desires to use the money1950 U.S. Tax Ct. LEXIS 277">*299 for luxury purposes, or to pay premiums upon a life insurance policy upon the life of Wilfred J. Funk which was payable to her upon his death, or to pay income taxes, or to provide herself with "extra money," or to make contributions to charities. In deciding upon the amounts, if any, which she desired to distribute to her husband, she was governed by a desire to "give" money to him, if she wanted to do that, or by a desire to divide "the difference." She "always had absolute power to do whatever she felt she would like to do with the money" in the four trusts. She understood that the money in the trusts was her own money, to do what she wanted to do with it; to use "for extravagant things," and things she wanted "to spend money for"; or to invest. In every instance during the taxable years, she had no particular reason for the decision which she made to distribute part of the trust income to her husband. If she felt like giving him some of the income of the trusts, she did so because she is very fond of him.
Eleanor M. Funk used the money which she distributed to herself from the four trusts during the period involved in this proceeding for the following: She paid premiums of1950 U.S. Tax Ct. LEXIS 277">*300 about $ 20,000, each, on an insurance policy which she took out on the life of her husband. She bought a Rolls Royce automobile and, with that purchase, she surprised her husband. She bought for herself a mink coat, and another one of sable. She gave contributions to charity.
The petitioner did not include in her separate income tax returns any of the sums which she distributed to herself out of the income of the trusts. Wilfred J. Funk did not include in any separate income tax return any of the sums which were distributed to him out of the income of the trusts.
The respondent has included in the gross income of the petitioner for the years 1938 to 1941, inclusive, the entire income which the four trusts received in each of the years 1938 through 1941, and has held that the petitioner is taxable upon the aggregate income of the trusts for each of those years.
OPINION.
This proceeding has been considered by this Court previously. See
1950 U.S. Tax Ct. LEXIS 277">*302 In
We do not hold here that the conclusions of the Tax Court would not be sustained on a proper record or upon adequate findings of fact.
* * * *
For the reasons stated the decision of the Tax Court will be reversed and the case remanded with directions for further proceedings not inconsistent with this opinion.
Upon remandment of this proceeding, it was placed upon a calendar of this Court for trial in order that a "proper record" would be before this Court, from which it could make "adequate findings of facts." Just before the date which was set for trial, counsel for both parties filed with this Court a stipulation in which it was stipulated, in part, that:
* * * The complete record in the case of
The entire record in the
The record in this proceeding now comprises the stipulation of facts, with certain exhibits attached, which was originally submitted in this proceeding, and the entire record and the memorandum findings of fact and opinion in the proceeding of
In considering the record, as now constituted, in this proceeding, we have observed much that is irrelevant and immaterial to the issues presented and have given such parts of the record no weight. On the other hand, we have found in our findings of fact all of the facts which we deem to be relevant and material to the issue which we must decide.
The question to be decided is whether the income of four trusts, known as trusts A, B, C, and D, for the years 1938, 1939, 1940, and 1941 is taxable to the petitioner, as the respondent has determined, or to the trusts, as the petitioner contends.
The respondent contends that the income of the trusts is taxable to the petitioner under
The reasoning of the Circuit Court in the
1950 U.S. Tax Ct. LEXIS 277">*307 The question, in our opinion, turns upon the provision contained in each trust instrument which relates to the power of the trustee over trust income, which is quoted in full in the margin. 4 We fail to find any ambiguity in the terms of the clause which sets forth the powers of the trustee over the income of the trusts. Whatever the motives of the grantor of these trusts may have been, the unambiguous and specific language of article first of each trust must control.
1950 U.S. Tax Ct. LEXIS 277">*308 The narrow question is whether or not the power given to the trustee, Eleanor M. Funk, the petitioner in this proceeding, gave her control over the trusts' income, so little fettered as to be regarded as less than complete command over the income, to enjoy at her own election, for purposes of the Federal income tax.
The pertinent clause of the trust instruments gave the trustee discretion to pay to herself annually all or part of the annual net income of the trusts in accordance with her needs, "
14 T.C. 198">*213 The evidence in this proceeding is to the effect, and findings of fact have been made accordingly, that the petitioner had absolute control over the trusts' income; that she made distributions entirely by the exercise of her own discretion; that she took whatever she wanted each year, and gave some of the rest to her husband in certain years; that what1950 U.S. Tax Ct. LEXIS 277">*309 she distributed to him was determined solely by herself without any consideration of whether or not he had any need for the income; that the petitioner's husband had no need for any of the distributions which she made to him in 1939, 1940, and 1941; and that the sums which she did distribute to him were "gifts." In short, the evidence shows that Eleanor M. Funk, trustee, followed to the letter the provisions in the trust instruments that she should distribute the trust income in her discretion, and that she should be the "sole judge" of how she would distribute the income.
There is no evidence in this proceeding regarding the "necessities" of the petitioner's husband, Wilfred J. Funk, as compared with the "necessities" of the petitioner, upon which any conclusion can be made as to "the minimum which a court would have compelled" her "to give" to her husband under the trusts. Lacking such evidence, the petitioner has failed to prove what amount of income of the trusts, if any, was not within her absolute control.
As was said by the Circuit Court of Appeals for the Second Circuit in the
* * * Quite aside from whether a control, so little fettered, should ever be regarded as less than absolute, when taxes are in question, the taxpayers at bar failed to carry their burden of proof, for they did not show what part of the income they could have been compelled to pay to their sons; and how much, therefore, was not within their absolute control.
We must conclude that, upon the record of this proceeding, the pertinent clause in the trust instruments gave petitioner a command over the disposition of the annual income of the trusts which was too little fettered to be regarded as less than absolute for purposes of taxation. We conclude, further, that the petitioner can not escape taxation on the income of the trusts without showing what she could have been compelled, by a court, to give to her husband.
The respondent's determinations are sustained.
It follows from our holding above, that the petitioner understated her correct gross income for the years 1938 and 1939 by more than 25 14 T.C. 198">*214 per cent. Therefore, under
Disney,
In addition, however, it should be pointed out that in effect the present opinion of the majority is based, as shown in the syllabus, upon the idea that the petitioner failed to meet the burden of proof by not showing what part of trust income she could have been compelled to pay her husband and how much was not within her absolute control. In this the majority rely upon and quote from
The majority here, in substance, disregard the difference between trustee and beneficiary. In no case prior to this one has that been done. I merely refer to the discussion of this matter, including reference to
*. 2 payments were made in 1937; 1 on March 12 of $ 6,000, and 1 on December 28 of $ 148,000.↩
*. Not includible in gross income -- tax-exempt.↩
1. Letter of Wilfred J. Funk to Eleanor M. Funk:
"Dear Eleanor: As you know, I have to-day made you the Trustee of four trusts designated as Trusts A, B, C, and D, the property transferred to each trust consisting of 125 shares of the capital stock of Erwin Park, Inc. Under the terms of these trusts you are to have discretion annually to divide the income between us or to accumulate and add it to the principal of the trust.
"My objective in setting up the trusts in this way is to provide substantial amounts of income which you may dispose of according to the circumstances which you find to exist at the end of each year. No one can foretell with certainty what those circumstances will be, and it is my desire to put you in a position to exercise your own judgment as to how such circumstances shall be met, to the extent of the income arising from these trust funds.
"It is your legal right and duty to exercise this discretion each year as may seem best to you, and in the exercise of this discretion you are not subject to my control or to the control of any other person."
Letter of Eleanor M. Funk to Wilfred J. Funk:
"Dear Wilfred: I have read your letter of to-day with reference to the four new trusts which you are setting up, of which you have made me Trustee.
"I understand that at the end of each year I am to decide whether I will pay the income which I have received as Trustee to you or to myself or divide it between us or accumulate and add it to principal. I am to do any or all of these things in such amounts and in such proportions as I see fit.
"I understand that the effect of these trusts is to place upon me the duty of deciding how the money shall be disposed of and that in making this decision I am not subject to your control or that of any other person."↩
*. Estimated.↩
2. Upon appeal from the decision of this Court to the Circuit Court of Appeals for the Third Circuit, argument was made by counsel that this Court, through one of its judges, had, by way of judicial notice, considered the record in a prior proceeding, that of the husband of the petitioner, Wilfred J. Funk, involving the same trusts and three of the same taxable years. That argument, based upon erroneous assumptions, gave rise to an issue in the appeal of this proceeding relating to judicial notice. The learned opinion of the Circuit Court on that issue gives complete reply to the arguments which counsel on appeal undertook to make.
This Court did not, through any of its judges, take judicial notice of the record in the proceeding of
3. "We agree with the majority of the Tax Court that implications which fairly may be drawn from the opinions of the Supreme Court in
4. FIRST
During my lifetime to hold, manage, sell, invest, and reinvest the same, to receive the income thereof and to pay therefrom all taxes, assessments, and other charges and expenses accruing thereon from year to year and properly chargeable thereto, and all expenses incident to the trust hereby created, and in her discretion to pay all or a part of the net income annually to me, or to herself, in accordance with our respective needs, of which she shall be the sole judge, and to accumulate and add to principal the balance of such income, if any. Any income so accumulated and added to principal by the Trustee shall become a part of the corpus of the trust and may not thereafter be distributed by the Trustee.↩