Goulder v. Commissioner

*671 This is a proceeding to redetermine a deficiency in income tax of $6,721.39 for the calendar year 1934. Of this amount, petitioner contests $6,681.89.

The issue is whether the 1934 income of a trust created by petitioner is taxable to him.

FINDINGS OF FACT.

Petitioner is an individual, living in Cleveland Heights, Ohio, and is married to Edna G. Goulder. He filed his income tax return for the calendar year 1934 with the collector of internal revenue at Cleveland, Ohio.

On October 1, 1934, he was the owner of 5,000 shares of the common capital stock of the Federal Knitting Mills Co. On that day, for the purpose of making his wife a gift of the income on that stock, and reducing his income taxes, the petitioner executed an agreement, transferring that stock to himself, as trustee, for the benefit of his wife. The shares were transferred on the books of the company from the petitioner, *1000 individually, to Herbert G. Goulder, as trustee. The preamble of the trust agreement was

Whereas, the Settlor is desirous of making provision for the maintenance, support and welfare of his wife, EDNA G. GOULDER, (hereinafter referred to as the beneficiary), as hereinafter provided.

The agreement then provided that the trustee was:

TO HAVE AND TO HOLD the same [the original trust corpus], together with such additional property as may be added thereto by the Settlor from time to time, or otherwise, IN TRUST, NEVERTHELESS, for the following uses and purposes and subject to the following provisions and conditions * * *.

It provided that the trust should terminate on the occurrence of any one of four events: on September 30, 1939; on the death of the settlor; on the death of the beneficiary during the life of the settlor; or upon the receipt by the trustee of an instrument in writing, signed by the settlor and his wife, directing termination. The trustee was to receive the income from the trust estate and, at his discretion, distribute it to the beneficiary or retain it in an "accumulated income account." Distributions from this account could be made to the beneficiary from*1001 time to time in the trustee's discretion and, upon termination of the trust, any undistributed balance in such account was to be paid over to the beneficiary, if living, otherwise to the settlor's sons, per stirpes, or, if they or their lineal descendants should be dead, as the beneficiary should, by her will, appoint, or, in default of appointment, to her heirs. The principal of the trust, upon termination, was to be transferred to the settlor or his estate.

The trustee was given power to sell the corpus and invest and reinvest the proceeds in his discretion, to exchange securities for other *672 securities, and, in general, "to exercise in respect to all securities and property held by him as Trustee all the rights and powers which are or may be exercised by individuals owning similar property in their own right." Capital gains realized in the sale of trust property were to be distributed to the beneficiary or held in the "accumulated income account," in the trustee's discretion. The trustee was not required to amortize any premium included in the purchase of securities. Nor was he responsible for any diminution of the principal of the trust estate by virtue of its*1002 depreciation in value. He was required to render annual statements to the beneficiary, showing all the transactions of the trust during the preceding year, and was "empowered to charge or apportion expenses or losses to principal or income as he may deem just and equitable, and to bind the beneficiary and distributees under this indenture by his judgment therein." The trustee was authorized but not obligated to borrow money for the improvement, protection, or preservation of the trust estate and pledge the trust estate as security therefor. Upon the division or distribution of the trust estate, the trustee was authorized in his sole discretion to make such division or distribution in kind or partly in kind and partly in money, and for such allotment his judgment as to the propriety of that action and the relative value of the property thus allotted for the purposes thereof was to be binding on the interested parties. Provision was also made for the appointment of a successor trustee in the event petitioner should become incapacitated or cease to serve.

Dividends totaling $15,625 were received by the trustee in 1934 on the stock comprising the corpus of the trust. None of these*1003 dividends were paid over to the beneficiary in that year but were distributed to the beneficiary in 1935. The trust was terminated on October 1, 1937, by a letter signed by both the settlor and the beneficiary, Edna G. Goulder, following which the principal of the trust was transferred to the grantor and the accumulations in the "accumulated income account" were transferred to Edna G. Goulder, the beneficiary. When the trust was created the settlor and beneficiary agreed orally that her use of the income therefrom was to be unrestricted.

Before and since the creation of the trust, petitioner has paid his wife $600 per month for support and maintenance.

In 1936, an agent of the Internal Revenue Bureau, in checking petitioner's returns, directed his attention to the preamble of the trust and said it would make petitioner liable for tax on the income of the trust. Petitioner, thereupon, after consultation with his attorney, executed a "memorandum of agreement" on May 4, 1936, individually, and as trustee, together with his wife. This instrument recited that petitioner had just learned of the existence of the preamble in the trust instrument and that he had not intended to include*1004 it therein *673 since he did not propose to have the trust income used to provide for the support and maintenance of his wife, but that he intended to support her independently; that the trust was not created to discharge his legal obligation of support and that, in fact, none of the income derived from the trust estate had been used for her support and maintenance. This memorandum then stated that petitioner's intent was to make an outright gift of the income from the stock to his wife, that such income was intended to be used by her in her absolute discretion, and that the preamble should henceforth be void and that petitioner had and would continue to support his wife from his own means.

None of the funds received by Edna G. Goulder from the trust estate were used for her maintenance or support, but all of them were invested by her in property and securities for her separate estate.

Petitioner filed a gift tax return for the year 1934 and included therein, as one of the gifts to his wife in that year, the value of the income from the 5,000 shares of the Federal Knitting Mills Co. common stock, the corpus of the trust, for its original five-year term.

OPINION.

*1005 LEECH: The respondent determined the disputed deficiency by taxing the income received but not distributed by the trust, in 1934, to the petitioner, settlor. He supports this action on three grounds: (1) The trust constituted a mere assignment of future income, which left such income taxable to the grantor under the doctrine of Lucas v. Earl,281 U.S. 111; (2) the trust is in the nature of a maintenance trust, the income of which is taxable to petitioner under the principle announced in Douglas v. Willcuts,296 U.S. 1; and (3) the income of the trust is taxable to petitioner under the provisions of section 166 of the Revenue Act of 1934, and the regulations construing the same.

One purpose for the creation of the trust was admittedly to reduce the petitioner's income taxes. This fact, though justifying a careful scrutiny in the premises, does not, itself, vitiate the legal consequences of the creation of the trust. Gregory v. Helvering,293 U.S. 465. See James Nicholson,32 B.T.A. 977; affd., *1006 90 Fed.(2d) 978. The disputed income here was not compensation, past or future, for personal services of the petitioner. See Gerald A. Eubank,39 B.T.A. 583. It was "the net income of the property held in trust," to which the beneficiary was entitled, under the trust, either during or at the termination thereof. The beneficiary "thus became the owner of an equitable interest in the corpus of the property." See Blair v. Commissioner,300 U.S. 5. Upon the authority of that case, we think respondent's first position is unsound. See also Commissioner v. Field, 42 Fed.(2d) 820; Anna S. Whitcomb,37 B.T.A. 806.

*674 The validity of respondent's second position must rest upon the fact that the trust required the use of the contested income in the maintenance and support of the petitioner's wife, the beneficiary. Jay C. Hormel,39 B.T.A. 244. Whether the trust was thus mandatory depends, of course, upon the intention of the settlor, which is to be gleaned, alone, from the trust instrument, as a whole, if unambiguous. *1007 Mississippi Valley Trust Co. et al., Executors,28 B.T.A. 387; affd., 72 Fed.(2d) 197; certiorari denied, 293 U.S. 604; rehearing denied, 293 U.S. 631, and cases cited therein.

Except in the preamble or recital of the present trust, the respondent points to nothing, nor are we able to find anything in the entire trust instrument which indicates any restriction upon the use to which the beneficiary, Edna G. Goulder, shall put the funds she receives from the trust. The contracting clauses contain no obligation whatever limiting her use of these funds. The applicable rule of construction in such cases has been stated in Williams v. Barkley,165 N.Y. 48; 58 N.E. 765, thus:

Where the recital in an agreement is so inconsistent with the covenant or promise that they cannot be harmonized, the latter, if unambiguous, must prevail, because it is the most important. The promise is what the parties agreed to do, and hence is the operative part of the instrument, while the recital states what led up to the promise and gives the inducement for making it. When the explanation of the reason for the promise*1008 is at variance with the promise itself, the latter, if clear and unambiguous, must prevail, as it is the transaction between the parties. The rule governing the subject is well stated in a late English case as follows: "If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous and the operative part is clear, the operative part must prevail. If both the recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred." Ex parte Dawes, 17 Q.B. 275, 286. See, also, Young v. Smith, L.R. 1 Eq. 180, 183; Bailey v. Lloyd, 5 Russ. 330, 344.

Moreover, the reference in the recital here was not limited to maintenance and support. The "welfare" of the beneficiary was added. That word is not synonomous with support or maintenance. It is broader. Lord v. Roberts,84 N.H. 517; 153 Atl. 1.

Under such circumstances, "desirous", as used in this preamble, is scarcely indicative of a command. Its use here rather seems merely precatory. *1009 Cooper v. United States,19 Fed.Supp. 752; Brown v. Commissioner, 50 Fed.(2d) 842; Brubaker v. Lauver,322 Pa. 461; 185 Atl. 848.

Thus, it would seem, the most that can be said for the position of the respondent now under discussion is that the trust instrument is ambiguous in conveying the intention of the settlor. Such ambiguity as exists, if any, is cleared up by the record. See Baird v. United States,3 Fed.Supp. 947; affd., 65 Fed.(2d) 911; certiorari denied, 290 U.S. 690. The settlor, trustee, and the beneficiary agreed, orally, *675 when the trust was created that the gift of the income of the trust to her was to be absolute and that its use was to be unrestricted in her hands. With the consistent knowledge of the settlor, no part of the funds the beneficiary received from the trust was used for her maintenance and support, but, with his advice, these funds were invested in property and securities for her separate estate, while the settlor continued afterward, as before the creation of the trust, to support and maintain his wife, the beneficiary, *1010 with other funds.

The conclusion is thus inescapable that this trust did not require the beneficiary, Edna G. Goulder, the wife of the settlor, to use the funds she received therefrom for her maintenance and support. It follows that the rule of the Douglas v. willcuts case, supra, does not apply. Jay c. hormel, supra.

Respondent's third position is likewise untenable.

Since, during the term of the trust - under the trust instrument - the only power to revoke and thus revest any part of the corpus in the petitioner, grantor, was jointly vested in him with the beneficiary, who had a substantial adverse interest in the disposition of that corpus, no part of the contested income therefrom was taxable to petitioner under section 166 of the Revenue Act of 1934. The provision that, upon termination of the trust by its terms, its corpus should revert to petitioner, has been held by the Board not to be a vested right in the corpus of the trust but a mere reversion therein. Meredith wood,37 B.T.A. 1065 (on appeal, C.C.A., 2d Cir.); *1011 John Edward Rovensky,37 B.T.A. 702; Phebe Warren McKean Downs,36 B.T.A. 1129. See also I.T. 3238, 1938Internal Revenue Bulletin No. 50. Cf. Warren H. Corning,36 B.T.A. 301 (on appeal C.C.A., 6th Cir.).

The contention of the respondent that the petitioner retained such control over the corpus of the trust aside from a vested power to revoke so as to render the income therefrom taxable to him under Regulations 86, article 166-1, and its amendments, is likewise without merit.

Respondent admits the validity of this trust. The Corning case, supra, and other cases upon which respondent relies, are clearly distinguishable upon their facts. It is true the settlor was also the trustee of the trust involved here. But that, in itself, is not controlling. Becker v. St. Louis Union Trust Co.,296 U.S. 48; Reinecke v. Northern Trust Co.,278 U.S. 339; Helvering v. Bowen, 85 Fed.(2d) 926; Henry A. B. Dunning,36 B.T.A. 1222; *1012 Robert Allerton,13 B.T.A. 1383; Frances Marshall Canfield et al., Executors,31 B.T.A. 724; Rose v. Commissioner, 65 Fed.(2d) 616; Preston R. Bassett,33 B.T.A. 182. Under no circumstances here could the income of the trust ever go to the petitioner or his estate. Nothing in the trust instrument relieved the petitioner as trustee from full responsibility to the beneficiary for *676 his proper administration of the trust estate. The trust instrument did not permit the trustee to deal with himself individually and such dealings, if not expressly authorized by the deed of trust, are prohibited in Ohio expressly by statute. Page's Annotated Ohio General Code, §§ 10506-49. The authority of the trustee to borrow money was limited, in its exercise, for the improvement, protection or preservation of the estate. The securities composing the trust corpus were registered in the name of the petitioner, as trustee, and not as an individual. In short, we think no such control as is necessary to support the argument now being discussed was retained by the settlor here. *1013 Henry A. B. Dunning, supra;Carson Estate Co.,31 B.T.A. 607; affd., 80 Fed.(2d) 1007.

Decision will be entered under Rule 50.