Opinion · Court of Appeals for the Second Circuit
Bush v. Commissioner of Internal Revenue
133 F.2d 1005
- Type
- Opinion
- Court
- Court of Appeals for the Second Circuit
- Jurisdiction
- Federal
- Date
- 1943-03-04
- Topic
- estate-planning
FRANK, Circuit Judge. 1. The Tax Court held and the Commissioner contends that this case is governed by Helvering v. Leonard, 310 U.S. 80, 60 S.Ct. 780, 84 L.Ed. 1087, because (so the argument runs) the doctrine of the Leonard case applies to any trust created by a husband for his wife, during the marriage, even if the trust remains unalterable after the divorce, if it is then supplemented by the husband’s guarantee to maintain the trust income at a given level. With that sweeping generalization we cannot agree; in such a case, the situation is the same as if the wife, having independent means, were given a guarantee in connection with the divorce that the husband would make up any deficiency should the income from her own property fall below a stated amount. Nor can we agree with the Tax Court that the situation here is different merely because, in form, the 1923 trust agreement was pro tanto cancelled and the title to securities constituting the corpus of the 1930 trust was, for an instant, vested in the taxpayer who immediately caused them to be transferred to the new trustee; were there no other facts in this case, we would hold that the new agreement was, so far as Maud is concerned, but a continuation of the old one; disregarding for the moment the factor to be noted in point 2 infra, it was set up with her own property, and we think that the husband’s guarantee of the trust income did not therefore make such income his.
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BUSH v. COMMISSIONER OF INTERNAL REVENUE,133 F.2d 1005(2nd Cir. 1943)
BUSH v. COMMISSIONER OF INTERNAL REVENUE.
No. 104.
Circuit Court of Appeals, Second Circuit.
March 4, 1943.
Page 1006
Petition by Irving T. Bush to review a decision of the Board of Tax Appeals (now the Tax Court of the United States), 45 B.T.A. 609, redetermining a deficiency in income tax imposed by the Commissioner of Internal Revenue, and assessing penalties.
Cause remanded to Tax Court for further proceedings in accordance with opinion.
The taxpayer, Irving T. Bush, was divorced from his first wife in 1907. By this wife he had two daughters, Beatrice B. and Eleanor T. Bush. He married his second wife, Maud Bush, in May 1908. A son, Rufus T. Bush, was born of this second marriage. On January 15, 1923, he created a trust naming as trustee one Simonds, a close friend and business associate. The corpus of the trust consisted of 10,000 shares of the common stock of the Bush Terminal Company, of which he was then the president. During the life of the taxpayer, the income was payable 60% to Maud and 20% to each of the two daughters; but, on the taxpayer's death, Maud's income from the trust was to cease, and the corpus was to go 60% to Rufus and 20% each to the two daughters; the taxpayer reserved the right, if any of the beneficiaries, including Rufus T., should predecease him, to dispose in some other manner of that beneficiary's interest both as to income and principal. He also reserved the right at any time to make a change in the securities constituting the corpus of the trust, to authorize and direct the trustee to sell or exchange the shares of stock and to invest and reinvest the proceeds, and to vote the shares of the Bush Terminal stock or any other shares which might from time to time constitute the corpus.
The taxpayer and Maud Bush separated in 1929 and a divorce proceeding was begun in May 1930. In connection with that proceeding, she requested the taxpayer to alter the terms of the 1923 trust, segregating 60% of the trust corpus, saying that she desired this to be done, in part because she wished to have a trustee who was less closely associated with taxpayer than Simonds. Accordingly, on June 6, 1930, the taxpayer entered into a new trust agreement with Maud, naming a bank as trustee. The new agreement recited that, in the event of divorce, the agreement would constitute a complete settlement of her claims against taxpayer's property and for support. In this agreement she acknowledged that the 1923 trust had been revoked as to her and disclaimed any interest in it. The income of the new trust was to be paid to Maud to the extent of $60,000 a year, any excess to be paid to the son Rufus T.; upon her death the income was to be paid to Rufus T. for life and upon his death the principal was to be divided among his then-living issue, other remainders being created in the event that Rufus T. had no issue surviving at the termination of the trust, but there was no reversion in the taxpayer or his estate. The new agreement also contained a provision that if, in any 12-month period, the income of the trust fell below $60,000, taxpayer would make up the deficiency.Page 1007He reserved the right to add to the trust corpus at any time and also the right to instruct the trustee concerning the sale of any of the trust assets and the reinvestment of the proceeds; this right could be designated by his will in the event of his death before the termination of the trust. Attached to the agreement was a schedule of the securities transferred to the trustee; they consisted of 68% of the corpus of the 1923 trust. At that time the original investment in the Bush Terminal Company common stock had been converted into other securities. The estimated income of the securities transferred to the 1930 trust was a little more than $60,000 or almost 66% of the estimated income of the 1923 trust. Before the new trust agreement was executed, Rufus T. signed a release of all his rights under the 1923 trust. Taxpayer then believed that he had also secured the consent of his daughters to the termination and revocation of the 1923 trust to the extent that it was replaced by the 1930 trust; some question arose several years later concerning this consent, but it was later settled and the taxpayer's action in creating the new trust was ratified. Those assets of the old trust which were not transferred to the new trust remained in the old trust for the benefit of the daughters. The court in the divorce action awarded Maud Bush an absolute decree of divorce on June 9 1930; the decree referred to the 1930 trust agreement as having been entered into in lieu of her claim for alimony or maintenance or against taxpayer's property, incorporated that trust agreement by reference, and stated that it was approved, confirmed and ratified as in lieu of alimony and to provide for her future support and maintenance. The Commissioner concedes that the decree did not reserve any future jurisdiction with reference to taxpayer's duty of support.
The taxpayer has always instructed the trustee under the 1930 trust agreement with respect to sales and purchases of securities constituting the corpus and with respect to voting the stock constituting that corpus. He prevailed upon the trustee to invest in certain securities not ordinarily regarded as sound for trust purposes because he was desirous of maintaining the trust income at not less than $60,000 a year. In one year, upon being notified that the trust income had fallen below that level, the taxpayer made up the difference. The income received by Maud Bush, as beneficiary, from the 1930 trust assets was not included by the taxpayer as taxable income in his returns for the years 1931 to 1935 inclusive.
The Tax Court held that this income was taxable to the taxpayer. The case is here on a petition for review.
Samuel O. Clark, Jr., Sewall Key, Samuel H. Levy, and Arthur A. Armstrong, all of Washington, D.C., for respondent.
Before SWAN, AUGUSTUS N. HAND, and FRANK, Circuit Judges.
The Commissioner argues that the 1930 trust was not a continuation of the 1923 trust, on the ground that the wife received the equivalent of 66% of the income of the 1923 trust in place of the 60% which hadPage 1008theretofore been allotted to her, and that that income, under the 1930 trust derives from 68% of the corpus of the 1923 trust. But those increases did not come from any property theretofore belonging to the taxpayer; they reduced the interest of the daughters, who received nothing from the taxpayer in order to induce them to agree to such reduction. It cannot be said, therefore, that the increased income of the wife stemmed from any property of the taxpayer. It follows then that he was guaranteeing the income of property which had previously belonged to the wife plus income derived from additional property transferred for her benefit by third persons. Nor was her income or interest enlarged by the fact that, under the 1930 trust, the taxpayer relinquished the right he had previously reserved to dispose of the share of Rufus T. should he die before the taxpayer.
2. Nevertheless, we feel obliged to remand the instant case to the Tax Court because of Helvering v. Stuart, 63 S. Ct. 140, 87 L.Ed. ___, where the Supreme Court directed that there be remanded to the Tax Court the question whether or not the income of a trust came within the rule of Helvering v. Clifford,309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788. There the trust agreement provided that an adult child of the taxpayer should, for 15 years, receive reasonable instalments of income of the corpus of a trust created by a taxpayer, in such amounts as the trustees might deem advisable, and that then the entire net income was to be paid to the beneficiary during her lifetime; thereafter the corpus was to go to the issue of the beneficiary and, in default of such issue, to the issue of the taxpayer, and in default of the issue of either, to a named educational institution. The trustees were the taxpayer, his wife and brother. The taxpayer reserved the right to sell the corpus of the trust and reinvest the proceeds in such other property as he would direct; he further reserved the right to withdraw the whole of the trust fund on delivering other property to the trustees, satisfactory to them, of a market value at least equal to that of the property so withdrawn. The court said that "economic gain for the taxable year, as distinguished from the non-material satisfactions, may be obtained through a control of a trust so complete that it must be said the taxpayer is the owner of its income. So it was in Helvering v. Clifford,309 U.S. 331, 335, 336, 60 S.Ct. 554, 84 L.Ed. 788. Cf. Helvering v. Fuller,310 U.S. 69, 72 note 1, 76, 60 S.Ct. 784, 84 L.Ed. 1082. Section 22(a) 26 U.S.C.A. Int.Rev.Code we have said indicated the intention of Congress to use its constitutional powers of income taxation to their `full measure.' Helvering v. Clifford,309 U.S. 331, 334, 60 S.Ct. 554, 84 L.Ed. 788; Helvering v. Midland Insurance Co.,300 U.S. 216, 223, 57 S.Ct. 423, 81 L.Ed. 612, 108 A.L.R. 436; Douglas v. Willcuts,296 U.S. 1, 9, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391; Irwin v. Gavit,268 U.S. 161, 166, 45 S.Ct. 475, 69 L.Ed. 897. Control of the stocks of the company of which" the grantor was an executive "may have determined the manner of creating the trusts. Paragraph eight permits recapture of the stocks from the trust by payment of their value * * * Family relationship evidently played a part in the selection of the trustees. On the other hand broad powers of management in trustees, even though without adverse interest, point to complete divestment of control, as does the impossibility of reversion to the grantors * * * The triers of fact have made no finding upon this point. Cf. Helvering v. Clifford, supra,309 U.S. 336, 338, 60 S.Ct. 554, 84 L.Ed. 788. When the Board of Tax Appeals decided these cases under Section 166, 26 U.S.C.A. Int.Rev.Code it was not necessary for it to reach a conclusion on 22(a) or its effect upon Section 167, 26 U.S.C.A. Int.Rev.Code. That should be done * * *"
It is true that in that case the trust agreement originally reserved to the taxpayer, his wife and brother, or the survivor of them, the right to change the beneficiary; that subsequently the agreement was amended so as to make the trust irrevocable; and that the government did not claim that any trust income received after that amendment was attributable to the taxpayer. However, that portion of the opinion above quoted, relating to the possible applicability of the Clifford doctrine, does not seem to be based upon the reserved power to change the beneficiary which existed before the trust agreement was amended. We therefore interpret that portion of the opinion as if it dealt with a trust in which there was no such reserved power.
Were it not for the Stuart case, we would have held, in line with our previousPage 1009decisions,1that the 1923 trust here did not come within the Clifford doctrine and that there is no need to remand to the Tax Court to ascertain its views on what we would not have regarded as a "question of fact." But, under that trust, as in the Stuart case, the corpus originally consisted of stock in a company of which the taxpayer was an important officer; the trust agreement also reserved in him the voting power and the right to dispose of the interest of any beneficiary who predeceased him, and named as a trustee a close associate of the taxpayer. The opinion in the Stuart case, to be sure, referred to paragraph eight of the trust which permitted recapture by the donor of the stocks from the trust by payment of their value; while there is not the precise equivalent of that provision in the 1923 trust here, yet the taxpayer here did reserve the right to direct the sale of any of the trust assets and reinvestment of the proceeds; moreover, it is not clear that in the Stuart case paragraph eight alone was the controlling factor. Consequently, in the light of the Stuart case, the decision here would appear in the first instance to be for the Tax Court rather than for ourselves, and we must remand this case to that Court so that it may determine whether the 1923 trust came within the doctrine of the Clifford case as illuminated by the Stuart case. If it did, the income of that trust was, for tax purposes, the income of the taxpayer; then, as the 1930 trust is at best but a continuation of the 1923 trust, the guaranty of the income of the 1930 trust cannot be regarded as a guaranty of what had theretofore been the wife's income, and this case, on that basis, will come within the doctrine of the Leonard case.
It is true that the Tax Court, having held, on other grounds (which we hold unsound), that the 1930 trust was governed by the Leonard case, went on to say that it deemed unnecessary an extended consideration of the Commissioner's argument that the income of that trust was taxable under the Clifford case, and briefly noted that it thought that the income was not thus taxable. But the Tax Court did not consider the applicability of the Clifford case to the 1923 trust, and its decision was rendered before the decision of the Stuart case.
We remand to the Tax Court for further proceedings in accordance with this opinion.Page 122
- Commissioner v. Jonas, 2 Cir.,122 F.2d 169, 171; Commissioner v. Buck, 2 Cir.,120 F.2d 775, 778; Commissioner v. Barbour, 2 Cir.,122 F.2d 165, 167; Commissioner v. Woolley, 2 Cir.,122 F.2d 167, 168. ↩