Garland v. Commissioner

*732 The report of the Board in these proceedings was promulgated on June 28, 1940, published at 42 B.T.A. 324. Subsequently, petitioners' motion for reconsideration and the taking of additional evidence was granted and the case comes before us again on the stipulation of the parties entered at the hearing held pursuant*1461 to the order granting such motion. These further stipulations are adopted as our additional findings and are set out here in the portion necessary to an understanding of the issue. The findings of fact in our previous decision are not repeated here except in so far as may be necessary.

The single issue presented is whether petitioners are taxable for the years 1934 and 1935 on the income of the trust established by the decedent on March 25, 1931.

FINDINGS OF FACT.

The decedent, William J. Garland, on March 25, 1931, established a trust, which was by its terms irrevocable, for the care and support of his then wife and four minor children, by the provisions of which his wife was to receive a monthly income of $1,250 for her own use and an additional sum for the maintenance and education of her children. It was stated in the trust instrument that decedent desired to make thereby financial provisions for the support of his wife from whom he was living apart, and his wife, in consideration thereof, released decedent from all claims to alimony or support. Additional terms of the trust provided that the sum of $60,000 should be disbursed from the corpus for decedent's personal*1462 use, that the sum of $35,000 should be paid from the corpus in discharge of decedent's debts, and that decedent should have the right to borrow for his personal use from the corpus $100,000 on his unsecured note or borrow that amount from outside sources, the trustee to furnish collateral. The last mentioned right to borrow was to cease upon the decedent's default on loans made thereunder. The decedent reserved no powers of management in the corpus, but reserved the right to exercise all of the insured's rights, options, and privileges under certain insurance policies on decedent's life transferred by him as a part of the corpus and to receive all payments, dividends, surrender values, and benefits accrued or to accrue thereunder. Decedent did not guarantee the amount of the income to be received by his wife from the trust.

Alzoa E. Garland, decedent's then wife, was granted an interlocutory decree of divorce from decedent by the Superior Court of Los Angeles County, California, on July 16, 1931, pursuant to suit for divorce filed by her on June 22, 1931. At the hearing the court, being informed as to the existence of the trust and agreement dated *733 March 25, 1931, and*1463 being satisfied that there was no occasion to award alimony or make a property settlement in favor of Alzoa E. Garland and the children, made no such award. The decree, however, did not make any mention of the trust agreement. The custody of the children was awarded by the court ot the wife.

Final judgment of divorce, based on the interlocutory decree above described, was entered on July 20, 1932. Such final judgment contained only such provisions as were contained in the interlocutory decree.

On August 17, 1932, Alzoa E. Garland married Willard L. Scott and is now and ever since has been his wife.

Prior to January 1, 1934, the trustee paid out of the trust corpus the sums of $35,000 and $60,000 for decedent's debts and personal use as provided in the trust instrument. On January 17, 1934, the debt of the decedent in the sum of $100,000 was paid by the trustee, thereby terminating his right to borrow that sum or secure collateral in that amount from the trust.

The trust established by the decedent had assets of the values shown on the dates indicated:

*1464 These assets were made up in part of nontaxable securities. Prior to January 17, 1934, the trust had taxable assets worth at least $350,000 and thereafter worth at least $250,000.

Included in the assets of the trust valued above, at a nominal value of $50, were life insurance policies having the following aggregate loan or cash surrender values: 1934, $11,493.50; 1935, $14,133.50.

No dividends were paid on these policies nor were they cashed or surrendered during the taxable years; loans on them in the sum of $1,550 were outstanding during this time, on which the trustee paid interest. Premiums on the policies were paid by the trustee and these sums were included by decedent in his income.

The respondent held petitioners taxable on the income of the trust for the years 1934 and 1935 in the sums of $10,915.47 and $7,964.98, respectively. ¹ Petitioners do not contest their taxability on the following portions of these amounts used for the purpose indicated:

*1465 *734 The parties agree that in the event we hold petitioners taxable on the following portions of the trust income, these sums will be proper additions to the amounts already indicated:

William J. Garland, whose estate is petitioner herein, died on July 27, 1940, and Harry C. Mabry has been duly appointed executor of his estate.

OPINION.

HILL: The ultimate question in this case is whether petitioners are taxable an all or any part of the income of the trust involved herein which was distributable to decedent's former wife, Alzoa Garland, during the years 1934 and 1935. The respondent seeks to tax such income to petitioners, first, on the ground that it was paid in discharge of decedent's continuing obligation to support his divorced wife. His argument sustaining this action is based on *1466 Douglas v. Willcuts,296 U.S. 1, and Helvering v. Leonard,310 U. S. 80, in each of which cases the settlor of a trust, entered into in contemplation of divorce, was held taxable on the income used to discharge a continuing obligation to support a divorced spouse. On this point, however, the present case is controlled by Murray Brookman,41 B.T.A. 557, where in a substantially similar situation we held that, since remarriage of a divorced spouse in California closed out the obligation of the husband to continue to support his wife, trust income used for that purpose could not be taxed to him. This disposition of the first argument makes it unnecessary to consider the contention of the petitioners that the trust here involved was not established in contemplation of divorce.

As a second ground for taxing to petitioners the income in dispute respondent argues that the trust here falls within the principles laid down in Helvering v. Clifford,309 U.S. 331, where it was held that the income arising from a trust corpus, the substantial control and benefits of which, other than income, the trustor had reserved*1467 to himself, was taxable to the trustor as though arising from his own property or enterprise. In the instant case, however, we find no such an illusory trust. The decedent-trustor did not designate himself a trustee nor reserve powers of management in the corpus. The trust corpus was transferred out of the settlor and the control given to others.

*735 Decedent did, however, reserve rights to have specified portions of the corpus applied to his own use and benefit and on this basis we held in our former opinion that to the extent decedent retained the right to reach and apply to his own use the corpus of the trust it was revocable despite formal irrevocability. The trust income to that extent was thus held taxable to petitioners under section 166 of the Revenue Act of 1934. ² Petitioners have now shown, however, that prior to the beginning of the taxable year, all these powers, save two, ceased to exist and that one of them, the right to borrow $100,000 from the trust corpus, was terminated on January 17, 1934. The other power, the right to have the loan or cash surrender value of the insurance policies held by the trust, could be exerdised as to only a very limited*1468 part of the trust corpus, the extent of which the parties have stipulated.

We think that our holding must still be held applicable to the limited extent of the decedent's rights to reach the corpus of the trust. The statute is specific that where the settlor's power extends "to any part of the corpus of the trust * * * then the income of such part of the trust shall be included in computing the net income of the grantor." See Sarah A. W. Coursey,33 B.T.A. 1068; *1469 Charles T. Fisher,28 B.T.A. 1164; 34 B.T.A. 1215; affd., 108 Fed.(2d) 707.

To the extent of decedent's right to secure the surrender value of the insurance policies throughout the two taxable years and of his right to borrow $100,000 from the trust corpus during the first 17 days of 1934, petitioners must accordingly be held taxable on the income of the trust in question.

In addition to the reservations of right in the corpus already considered the decedent retained rights to have certain of his obligations paid out of the trust income. Thus his minor children were supported and his insurance premiums were paid out of trust income. The petitioners do not deny their taxability on these amounts. We think that the additional amounts paid by the trust as interest on decedent's insurance loans must also be placed in this category and taxed to petitioners. See Helvering v. Blumenthal,296 U.S. 552; Louis W. Hill,33 B.T.A. 891; affd., 88 Fed.(2d) 941; *1470 James L. Knight,39 B.T.A. 436.

*736 The parties have stipulated the sums to be taxed to petitioners in the event we reached the decision which we have indicated above. In accordance with the stipulation petitioners' income should be reduced below the amounts shown in the deficiency letter by the sum of $5,547.04 for the year 1934 and $3,263.60 for the year 1935.

Decision will be entered under Rule 50.