Fahnestock v. Commissioner

43 B.T.A. 569, 1941 BTA LEXIS 1484

• Court: United States Board of Tax Appeals
• Decided: February 12, 1941
• Docket: Docket No. 92388.
• Status: Published

Opinion

OPINION.

MtjRdock :

The Commissioner relies entirely upon section 22 (a) of the Revenue Act of 1934 and cites Helvering v. Clifford, 309 U. S. 331, and Morton Stein, 41 B. T. A. 994. There is some uncertainty as to the extent of the applicability of section 22 (a) under the decision in the Clifford case. White v. Higgins, 116 Fed. (2d) 312; Commissioner v. Berolzheimer, 116 Fed. (2d) 628. Cf. Commissioner v. Branch, 114 Fed. (2d) 985; Helvering v. Achelis, 112 Fed. (2d) 929. However, the Court in the Clifford case said that Congress intended to exercise its taxing powers to the limit in section 22 (a). The Circuit Court of Appeals for the Second Circuit in the Berolzheimer case interprets the Clifford case as holding “that a grantor of a short term trust, under which he is to be the trustee and to have such broad powers over the disposal of the principal as to approximate those of a owner and under which the income is to remain in his family and the reversion in himself, will be subjected to income taxes as owner.” The terms of the particular trust and all the circumstances attendant upon its creation and operation must be analyzed in order to determine whether the grantor has retained such substantial control over the trust property that he may be treated for tax purposes as the owner of the corpus taxable with the income under section 22 (a).

The present trust is similar to the trust in the Clifford case in many respects. The petitioner has pointed out some of the differences between the two trusts in an effort to distinguish this case from the Clifford case. The maximum limit of the present trust was ten years whereas that of the Clifford trust was five years. This does not distinguish the Berolzheimer case, however, where the maximum limit of the trust was also ten years. Furthermore, the trusts in the Higgins case and in the Stein case were for life at least. The present trust might have lasted beyond the life of the grantor, but the same was true in the Higgins trusts. The petitioner, as trustee, was required to pay over all of the net income of the trust to his wife. Berolzheimer was likewise required to pay all of the income to his wife. The powers which the petitioner had as trustee in regard to voting and managing the trust property are substantially the same as those retained by the grantor in the Clifford case. He argues that he had no power to reinvest the trust property except in investments approved by law for trusts. He cites in support of this contention a number of New York cases, which seem to be inapplicable in view of the fact that the laws of Rhode Island govern. Furthermore, he not only retained the trust property invested in bank stock, which was probably not a legal investment for trust property, but he invested the $8,000 realized from the liquidation of the First Security Co. in bank stock and gold mining stock. We are unable to distinguish this case from the Clifford case in the light of the Berolzheimer and Riggins decisions. The trust in the Branch case was for the life of the wife of the grantor and might continue longer and the corpus might never revest in the grantor.

Reviewed by the Board.

Decision will be entered for the respondent.