Gordon v. Commissioner

*237 The Commissioner determined a deficiency of $4,129.43 in petitioner's income tax for 1932, by including in petitioner's income the accumulated incomes of six trusts.

FINDINGS OF FACT.

Sarah A. Gordon, Bernard L. Gorfinkle, and Max I. Mydans are executors under the will of Nathan H. Gordon, who died a resident of Weston, Massachusetts, on June 3, 1938. On May 2, 1922, Gordon established six trusts, designated Nathan H. Gordon's Trusts Nos. 1 to 6, "for the maintenance, support and comfort of" Abraham Edinberg, Ida Edinberg, Gussie Edinberg, Jennie Chain, Sarah Scovelle, and Bertha Scovelle, respectively. By each of the trust instruments, identical in terms, the settlor transferred*1054 5,000 common shares of Olympia Theaters, Inc., to Bernard L. Gorfinkle, trustee, to hold and collect the dividends and income therefrom and semi-annually to pay to the beneficiary:

* * * the whole or such portion or portions of said dividends and income as said trustee shall in his discretion determine to be necessary for the maintenance, support and comfort of * * *

the beneficiary, and in case all of the dividends and income should not be paid to the beneficiary or applied to his maintenance, the trustee might invest the balance remaining, with the settlor's written consent and approval, in securities or other property, to "be held and administered by the trustee as part of the principal of the trust * * *." The trustee had no power to encumber or dispose of trust principal except at the written direction or with the written consent of the settlor.

7. The said Nathan H. Gordon may at any time or times, by written notice mailed or delivered to the trustee or trustees, change the disposition of the whole or any part of the income of said trust fund by eliminating any beneficiary or *238 beneficiaries and substituting in place of the same, any other peron or persons, *1055 excepting himself, * * *.

* * *

12. The trust shall not be revocable. The trust shall terminate on December 31, 1935, or upon the prior death of the said Nathan H. Gordon, or of the beneficiary hereunder, whichever event shall first occur.

13. At the termination of this trust, all the shares * * *, and any and all accrued income thereon and additions thereto, and any and all other property * * * then held by the trustee hereunder, shall forthwith vest in and become the sole and absolute property of said Nathan H. Gordon, or his heirs, executors, administrators or assigns * * *.

In trust No. 6, Bessie M. Lockwood was substituted as beneficiary on February 17, 1930, and in trust No. 1, James S. Edinberg was so substituted on January 2, 1931.

On March 10, 1931, Gordon executed an instrument transferring to the Nathan H. Gordon Corporation:

* * * all my right, title and interest, in and to any and all property and assets remaining in each of said trusts upon the termination thereof.

The Nathan H. Gordon Corporation was organized in 1923, with a paid-in capital of $1,166,035.50. Gordon and his wife transferred 80 of its shares of July 9, 1924, to themselves, Gorfinkle, *1056 and three others as trustees of the Nathan H. Gordon Foundation Trust, and during 1931 and 1932 the trustees held the corporation's entire outstanding stock, represented by 1,000 shares. Gordon and his wife created this trust by an instrument which as modified by him on February 18, 1930, and again on January 18, 1931, provided that out of the annual income the trustees pay $50,000 (or in case the annual income should be less than that amount, then the whole of it) to Gordon's wife and children, two-fifths to the wife and one-fifth to each child (or accumulated for him prior to his twenty-fifth year); that from the remainder, if any, the trustees pay specific amounts annually to named relatives of Gordon and his wife; and also that they contribute in their discretion an aggregate of $5,000 or less to charitable institutions chosen by them. Any income then remaining was to be distributed two-fifths to Gordon's wife and one-fifth to each child. The trust was not revocable and was to continue for 21 years after the death of the survivor of Gordon and his wife. Provision was made for the distribution of trust principal to the settlors' descendants and to charities in accordance with*1057 specified contingencies. In administration the six trustees were empowered to hold or sell the corporation's stock and generally to invest and reinvest trust funds at their discretion, but "so far as possible and practicable" in accordance with certain express recommendations tending to insure the safety of the investment. All transfers of trust property had to be authorized by a vote of the majority of the trustees. Gordon reserved the right to remove a trustee and appoint a successor.

*239 Gordon was for some years a salaried officer of the Nathan H. Gordon Corporation. Under its account "Loans Receivable" are numerous entries of loans by it to Gordon, representing his personal borrowings, and in its account "Loans Payable" are numerous entries of amounts owed to him by it. During the period 1924-1935 the Nathan H. Gordon Trusts Nos. 1-6 each made loans, substantial in amount, to the corporation, which credited accrued interest on them and made some repayments. On December 31, 1935, the balance of loans and notes receivable from the corporation by trust No. 1 was $191,246.33; by trust No. 2, $175,756.65; by trust No. 3, $210,457.91; by trust No. 4, $194,479.23; by*1058 trust No. 5, $178,771.90; by trust No. 6, $209,148.49. When the six trusts terminated under the terms of the instruments on December 31, 1935, the property of each was assigned to the corporation by the trustee.

In 1932 the six trusts received incomes aggregating $50,837.32, of which the trustee, in the exercise of his discretion, distributed an aggregate of $7,194.35 to the beneficiaries and added the balance of $43,642.97 to the trusts' corpora.

OPINION.

STERNHAGEN: In determining Gordon's income tax for 1932, the Commissioner included the $43,642.97 in his taxable income, saying "This office holds that under the provisions of the trust instruments the undistributed income was held or accumulated for future distribution to you and that the income so accumulated and added to principal is taxable income to you under section 167 of the Revenue Act of 1932." This determination Gordon's executors assail.

The facts clearly show that the Commissioner's determination is in error. The taxpayer, regardless of what right, power, or interest he may have had in the income of any or all of the six trusts during earlier years, had before 1932 divested himself of it entirely by transferring*1059 it to the corporation. If the corporation were wholly dissociated from Gordon, there would have been no conceivable theory of the statute under which the accumulated trust income could have been taxed to him. For one may effectively relieve himself from tax by assigning his interest in a trust from which he has been deriving income. .

The Commissioner urges that because of Gordon's relation to the corporation and the Foundation Trust, by which the corporation's shares were owned, "control of the entire situation was in petitioner's hands, and the purported transfer to the corporation of his reversionary interests in the trusts numbered 1 to 6 did not diminish his interests therein." The evidence, however, shows that the "purported" transfer was genuine and it must be recognized as such. The corporation was an operating legal person which had been in existence *240 and active since 1923, and there is nothing in the evidence to support a finding that it was in reality less or different from the separate corporation it purported to be or to justify disregarding it. The Foundation Trust owned all the corporation's shares. *1060 This trust was, however, managed by six trustees, of whom a majority was needed to authorize a disposition of trust property; and the taxpayer was only one of the six. His power to remove and substitute trustees is not the equivalent of a power to acquire the corporation's shares in the trust fund. The fact that Gordon had been paid a salary by the corporation in earlier years or that there were borrowings and lendings to and by it does not serve to obliterate it or prove it a sham. Indeed the accurate accounting by both the borrower and lender in recognition of the indebtedness and its fluctuations tends rather to support the recognition of them as genuine.

The Commissioner's determination is reversed.

Decision will be entered under Rule 50.