Pettus v. Commissioner

*856 These proceedings were consolidated. In Docket No. 102775, the respondent has determined a deficiency of $11,984.24 in income tax for the year 1936, against the petitioner, James T. Pettus. The error assigned is respondent's action in increasing this petitioner's income by the sum of the dividends paid on shares of stock which respondent contends were held by two trusts created by this petitioner for his two minor children and of which his wife, May W. Pettus, was trustee. In both Docket No. 102776 and Docket No. 102777 respondent has determined a deficiency $980of for 1936, and a delinquency penalty of $245 against May W. Pettus, as trustee of the trust created for each child. *1063 A claim was made by James T. Pettus for overpayment of taxes for the year 1936.

FINDINGS OF FACT.

The petitioner, James T. Pettus, has been connected with the International Shoe Co. since its organization, and at the time of the hearing he was vice chairman of its board of directors. He and the petitioner, May W. Pettus, are husband and wife. They have two children, Irene Pettus Crowe, born in 1916, and James T. Pettus, Jr., born in 1919. James T. Pettus filed his imcome tax return for the year 1936 with the collector of internal revenue for the first district of Missouri at St. Louis, Missouri. No income tax returns were filed by May W. Pettus as trustee for either of the children.

In 1925 and 1926, having in mind a reduction of his income tax among other considerations, James T. Pettus made three gifts of International Shoe Co. stock owned by him to each of his minor children. A total of 1,500 shares of stock was given each child. The transfers were effected by James T. Pettus endorsing stock certificates standing in his name to his wife, designated as natural guardian for each child who was designated on the transfer as "minor donee." Separate stock certificates*1064 were issued by the International Shoe Co., in each instance, in the name of May W. Pettus as natural guardian for the child who was named on the certificate as the "minor donee."

James T. Pettus advised his wife of these transfers when made and then told her that they were gifts of the transferred stock to the children. The reissued certificates were delivered to her but thereafter were placed in his safe deposit box. On october 29, 1927, as a result of the recapitalization of the International Shoe Co., the 1,500 shares of stock given to each child were increased to 6,000 shares.

Following these transfers, returns were filed each year in the name of each child, reporting for tax the dividends received on the stock. In some instances these returns were signed by James T. Pettus as "Agent" and in other instances by May W. Pettus as "Natural Guardian." The dividends in question were paid in each year prior *857 to 1936, by the International Shoe Co. to May W. Pettus and were turned over by her to James T. Pettus. Beginning in the year 1936, the dividends received by May W. Pettus from this stock were, in each instance, deposited by her to accounts maintained as trustee*1065 for each child.

In 1933, an officer of the International Shoe Co. called the attention of the petitioner, James T. Pettus, to the fact that the stock was issued to a natural guardian, that this was irregular, and that, for purposes of transfer if need arose, it should be placed in trust. As a result of this information, James T. Pettus employed an attorney to take such steps as were necessary and, as a result, two agreements were drawn and executed by James T. Pettus and May W. Pettus during 1933. Each of these instruments purported to reduce to writing the terms of a verbal trust created at the time of the transfer of the stock to each child, as hereinbefore described. In the case of the transfer to the daughter the instrument purported to evidence a transfer as having been made in trust to May W. Pettus for the benefit of the daughter, the income to be used for her benefit during minority and paid to her thereafter during her life, and after her death to be paid in equal shares to her heirs, with distribution of the proportionate part of the corpus to each heir upon reaching a certain age. In the case of the transfer to the minor son, the agreement purported to evidence a*1066 trust of the stock in May W. Pettus, the income to be used for the benefit of the minor during minority and paid to him thereafter until he reached the age of 25 years, at which time the trust would terminate and the corpus be paid over to him. Each instrument set out powers as possesed by the trustee to sell and reinvest the corpus.

Following the execution of these two instruments in 1933, no change whatever was made in the method of reporting the income received from the stock in the case of each child except that in those instances where the return for the child was signed by May W. Pettus such signature was made as "trustee." In some instances the return filed after that time was by James T. Pettus as agent for the child. When each child arrived at the age of 21 years, the 6,000 shares of stock held for it were delivered to it.

For the year 1936, here involved, the dividends from the stock held by May W. Pettus for each child were, in each instance, received by her and deposited by her in separate accounts as trustee for each child. From these accounts disbursements were made by May W. Pettus from time to time during that year in payment of expenses of the child for whose*1067 benefit the deposit was held. Petitioner, James T. Pettus, reimbursed each of these accounts for such expenditures *858 with his own personal checks delivered by him to May W. Pettus, who deposited them to the respective accounts.

On June 15, 1936, these two petitioners executed amendments to the two instruments executed by them on November 10, 1933. These amendments were similar. The principal change was in the provision of each original instrument providing for the use of the income for the maintenance of the child. This was amended to provide that the entire net income, until the child reached 21 years of age, should be invested by the trustee and that such investments should become a part of the corpus of the trust.

On November 10, 1938, a deficiency notice for the year 1936 was mailed to James T. Pettus, proposing a deficiency of $3,188.73, resulting, in part, from respondent's increasing his income for that year by the amount of the trust income received in that year, which was used by May W. Pettus for the support, education, maintenance, and pleasure of the children. In determining this deficiency respondent contended that the agreements of June 15, 1936, amending*1068 the agreements dated November 10, 1933, could not be applied retroactively to January 1 of that year and, consequently, amounts paid in 1936 for the benefit of the children prior to the execution of the amendments, even though reimbursed to each child's account by this petitioner, must be considered as paid in accordance with the trust as it then existed and were, therefore, taxable to James T. Pettus as paid in satisfaction of his liability to support and maintain the child. James T. Pettus paid the amount of this deficiency with interest on March 9, 1939, and filed a claim for refund thereof on March 6, 1941. During the year 1936, May W. Pettus had received dividends of $13,500 from the stock held for each child and out of this income had paid expenses for the daughter in the total amount of $4,442.31, and $3,067.94 for the son. In reimbursement of these expenditures, James T. Pettus had given his checks in the amount of $2,916.46 in March and $3,780 in December of that year to May W. Pettus for credit to the account of his daughter, and $1,307.22 in March and $5,140 in December of that year for credit to the account of his son. These reimbursements were in each instance deposited*1069 to the credit of the respective account.

On April 1, 1939, Irene Pettus Crowe, the daughter of these petitioners, then being of age, filed a petition in the Circuit Court for the County of St. Louis, State of Missouri, against the petitioner, James T. Pettus, individually and as grantor under a certain purported trust agreement dated November 10, 1933, and against May W. Pettus, individually and as former natural guardian of Irene Pettus Crowe, and also as trustee under the trust agreement of November 10, 1933. This petition alleged that the stock transfers by the petitioner, James *859 T. Pettus, in 1925 and 1926, to May W. Pettus as natural guardian for Irene Pettus Crowe, as a minor donee of such stock, were complete gifts to Irene Pettus Crowe at that time, that James T. Pettus had then divested himself of any title or interest therein, and that the so-called trust agreement of November 10, 1933, and as amended was null and void. It was alleged that May W. Pettus, under the original transfer of this stock, had no interest as trustee but merely held the stock as natural guardian, that the petitioner, Irene Pettus Crowe, was entitled to an accounting of this stock, of*1070 all income therefrom and accrued profits thereon, and should receive such stock and income free from any claims or interest arising by virtue of the purported trust. On the same date an entry of appearance was made for and an answer denying generally the allegations of the petitioner was filed by defendants, James T. and May W. Pettus. Neither of the defendants had any desire to contest the suit. The trial lasted about one hour and a half. The court, on the same day, entered a decree holding that the transfers of stock by James T. Pettus in 1925 and 1926 were gifts to the minor daughter, were thereafter owned by her, and were held by May W. Pettus only as natural guardian for such minor until the minor should reach the age of 21 years, that such gift to the minor daughter was valid, complete, and effective, that thereafter James T. Pettus had no right, title or interest of any kind in the shares given, and that the purported trust agreement entered into on November 10, 1933, was null and void. The court gave judgment against the defendant, James T. Pettus, for the stock, together with dividends received thereon by him from the date of the gifts in 1925 and 1926 in the sum of $169,845, *1071 together with the sum of $52,723.20 representing interest thereon.

OPINION.

LEECH: As to the petitioner, James T. Pettus, respondent contends that he is taxable under section 167 of the Revenue Act of 1936 ¹ upon the 1936 income of two trusts evidenced by trust agreements executed by him on November 10, 1933. In the alternative he contends that the petitioner, May W. Pettus, as trustee in each instance, is liable *860 for tax on such income, together with penalties thereon, due to her failure to file returns as such trustee.

The question is resolved by our finding*1072 that the petitioner, James T. Pettus, in 1925 and 1926, made complete and effective gifts then to his two minor children of the stock he transferred to them at that time.

The requisites of a valid gift inter vivos are concisely stated in , as:

* * * (1) A donor competent to make the gift; (2) a donee capable of accepting the gift; (3) a clear and unmistakable intention on the part of the donor to divest himself of title, dominion, and control over the subject matter of the gift; (4) an irrevocable transfer by the donor to the donee, or to someone acting as trustee or agent for the donee; and (5) an acceptance of the gift by or on behalf of the donee. [Citations.]

All these requisites are present here. The minor children were capable of taking and accepting the gift. . At least this is so here through their natural guardian, May W. Pettus, the mother. Sec. 375, Revised Statutes of Missouri, 1939. The intention of the petitioner, James T. Pettus, when the contested transfers were effected is a fact to be determined, as any other. This petitioner has testified*1073 that his intention in the transfer of this stock in 1925 and 1926 was to make present gifts to each of his two minor children, the income thereof to be received by his wife as their natural guardian and the property to be turned over to them in each case upon reaching majority. Petitioner May W. Pettus testified she was advised of this intention by petitioner James T. Pettus, and so understood it at the time these transfers were made. The testimony of both of these witnesses is convincing and we believe it.

That such was the intention in the making of these transfers is supported by many facts and circumstances. The original transfer of the stock designated petitioners' children as minor donees of the transfer and they were so designated on the stock certificates as reissued. Following this, for a period of some eight years, returns were duly filed each year for the individual child, in some instances by James T. Pettus, as agent, and in others by May W. Pettus, as natural guardian, reporting for tax all of the income received from the stock.

Under the circumstances, the execution of the purported trust agreements of November 10, 1933, is easily understood. These instruments*1074 were drawn by petitioners' attorney. The petitioner, James T. Pettus, is not a lawyer. These alleged trusts were drawn and executed because of a suggestion from an officer of the corporation in which the stock was held that the method of its holding should be by trust in order to more readily effect its transfer if such need arose. The fact that the *861 significance of the agreements executed on November 10, 1933, was not apparent to these petitioners is, we think, clearly demonstrated. Following the execution of these documents, returns as trustee were never filed. Upon reaching their majority each child received delivery of the stock held for it, in total disregard of the provisions of the so-called trusts, which purported to give to the daughter only a life interest in the stock and to the son a right to possession at 25 years of age.

The petitioner, James T. Pettus, admitted that a reduction of his income taxes was one of the considerations moving him in making the transfers in 1925 and 1926. But that fact, although requiring careful scrutiny of the transaction, is not decisive. *1075 . After that careful scrutiny of the evidence, we think our finding that these transfers were present and complete gifts of the stock transferred to his two minor children is amply supported by the evidence. This finding makes necessary, without more, a decision for the petitioners.

However, we think it proper to say that if we were of the opinion that the evidence here was insufficient upon which to base a finding that James T. Pettus made a present and complete gift in the transfer of this stock in 1925 and 1926, we would be concluded, at least as to the stock then transferred to Irene Pettus, by the finding and decree of the Circuit Court of St. Louis County establishing that fact. The question presented in that proceeding is a matter of property rights controlled by local law and the decision of the state court thereon is binding upon us. ; ; ; *1076 ; affd., ; ; Burton v. Burke,U.S. Dist. Ct., (Kans.), July 1, 1941. Upon its face the decree in this case was rendered by a court of competent jurisdiction in an adverse proceeding with all parties represented, and evidence was presented and considered by the court.

The petitioner, James T. Pettus, having made a final and completed gift of the stock in question to his two minor children, in 1925 and 1926, and not a transfer in trust, is not taxable under section 167, supra, on the dividends received therefrom in 1936. It follows that the petitioner, May W. Pettus, did not hold title as trustee of the stock and therefore is not taxable as such on those dividends received from such stock. As their natural grardian, she was undoubtedly trustee of such dividends for each child after receipt, but the liability for tax on such income was that of the child to whom the stock belonged.

Decisions will be entered under Rule 50.