Newman v. Commissioner

5 T.C. 603, 1945 U.S. Tax Ct. LEXIS 99

• Court: United States Tax Court
• Decided: August 20, 1945
• Docket: Docket No. 3952
• Status: Published

Opinions

OPINION.

Disney, Judge:

Respondent has determined a deficiency in petitioner’s income tax by including in his income the income of certain trusts created for the benefit of his children. The only question is whether petitioner has such dominion over the income and the trust estate as to be deemed the real owner thereof, in which event the income would be taxable to him under the provisions of section 22 (a) as construed by the United States Supreme Court in Helvering v. Clifford, 309 U. S. 331. Recently we had occasion to consider whether the income from this tx ast was taxable to petitioner’s wife, the grantor. In Lillian M. Newman, 1 T. C. 921, we held that the present petitioner, as an individual, had a substantial interest in the trust estate, which interest was adverse to that of his wife, and that the income was not taxable to her under sections 166 and 167. We further held that petitioner’s wife had parted with all rights of ownership and control of the trust property and that she was not the owner thereof for the purposes of section 22 (a). We further held that the trust income was not taxable to her under the rule of Douglas v. Willcuts, 296 U. S. 1; Stuart v. Helvering, 317 U. S. 154. Respondent concluded that the trust income was taxable to petitioner and determined the deficiency before us.

Respondent relies largely upon Edward Mallinckrodt, Jr., 2 T. C. 1128; affd., 146 Fed. (2d) 1; Jergens v. Commissioner, 136 Fed. (2d) 497; certiorari denied, 320 U. S. 784; and Richardson v. Commissioner, 121 Fed. (2d) 1, for the proposition that Helvering v. Clifford, supra, has not been limited in its application to cases where effort is made to tax settlors with trust income. Each of those cases involved the ownership for tax purposes of trust income by persons other than the grantors. In each case it was held that the taxpayer, because of his power and control over the trust property and the trust income, was taxable as the owner. However, in our opinion, the same conclusion is not justified here. In the MallincJcrodt case the petitioner had power to take all trust income except $10,000, and to take the trust corpus upon terminating the trust. In the Richardson case also the petitioner had power to take trust corpus upon termination by him of the trust. In the Jergens case the petitioner could withdraw all trust corpus, except that in case of certain insurance the trustor’s consent was necessary.

Here, however, though the petitioner (not the settlor) could revoke the trust agreement in whole or in part and could alter or amend it, or free any property from its terms, he had, in our view, no power, as in the cases above mentioned, himself to receive the benefit of such action, either as to income or trust corpus. It is clear that the trust instrument contains no specific grant to him of such right, and we do not understand that it is so contended. Revocation alone would, of course, revest the trust corpus in the grantor; and upon any property being freed from the terms of the trust, by the petitioner, such property is required to be turned over to the grantor.

Does the general grant of power “to alter or amend” the trust confer upon the petitioner such right to take the benefit of the trust as to make him taxable upon its income ? We think that a reasonable interpretation of the entire trust instrument requires a negative answer. The petitioner was given other and specific rights in the trust corpus; i. e., if living, to receive the remainder upon the death of the primary beneficiary, and to dispose of such remainder by will, or in default of testamentary disposition, to have the remainder go to his distributees, which we interpret to tnean his heirs. The grant of such specific rights to the petitioner indicates to us that the indefinite expression “alter or amend” may not reasonably be interpreted to confer upon him additional power to take over or receive the trust income or corpus. In any event, petitioner may not, by such amendment or alteration, under any reasonable interpretation, dispose of the trust corpus to himself during the life of the primary beneficiary, for during the life of such beneficiary plainly his right to the entire trust income is the first concern of the grantor, and it may not, because of a general power to amend or alter, be diverted to the petitioner. This only serves to indicate further to us that the general power to alter or amend should not be construed to confer the power to destroy the trust, so far as primary beneficiaries are concerned, by conveyance to the petitioner; and we need not consider whether the power is in the petitioner as trustee or individually, for in neither case do we consider, under reasonable interpretation, that the language used vested in the petitioner the right to convey the trust corpus, and therefore income, to himself. Without that power, he may not, under any case cited or of which we know, be considered so completely in economic control of the trust as to be taxed upon its income. To so hold in the case of one not the settlor would be to broaden unjustifiably the concept embodied in HeVoering v. Clifford, supra. We conclude and hold that the Commissioner erred in including the trust income in that of the petitioner.

Reviewed by the Court.

Decision will ~be entered under Rule 50.