Opinion · United States Tax Court
Chertoff v. Commissioner
Chertoff v. Comm’r, 6 T.C. 266 (T.C. 1946)
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1946-02-27
- Topic
- general
OPINION. Hill, Judge: The first issue is whether the petitioners are taxable on the income of the trusts created by them in 1937 and 1940. If respondent is correct in his contention that the petitioners are so taxable, we need not consider whether they are likewise so taxable in 1940 and 1941 under the partnership aspects of the case. Respondent contends that the petitioners are taxable on the income of these trusts under section 22 (a), Internal Revenue Code, as construed in Helvering v. Clifford, 309 U.
Citator
UpLaw has not yet analyzed Chertoff v. Commissioner. The absence of a flag is not a finding that it is good law.
- Cited by
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CHERTOFF v. COMMISSIONER OF INTERNAL REVENUE,6 T.C. 266(1946)
LILLIAN R. CHERTOFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
GEORGE J. CHERTOFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
Docket Nos. 4382, 4383.
United States Tax Court.
Promulgated February 27, 1946.
The issues are: (1) whether the income of certain trusts created by the petitioners is taxable to them under the provisions of section 22 (a), 166, or 167 of the Internal Revenue Code; and (2) whether the income of a partnership created in December 1940 is properly taxable one-half to each petitioner, as held by the respondent.
FINDINGS OF FACT.
The facts are all contained in a stipulation, together with the exhibits attached thereto. They may fairly be summarized as follows:
The petitioners, George J. Chertoff and Lillian R. Chertoff, are husband and wife and live at Shaker Heights, Ohio. Returns for the years in controversy were filed with the collector of internal revenue for the eighteenth district of Ohio. For convenience, the petitioners will hereafter individually be referred to as Chertoff and Mrs. Chertoff, respectively.
Chertoff is a chemist. In 1917 he caused the formation and incorporation of the Synthetic Products Co., hereinafter called the company, to engage in the business of producing water-repellent powder necessary in the manufacture of rubber paint. The powder is made by a formula which was owned by Chertoff and which he transferred to the company in exchange for 450 shares of its capital stock. Since about 1924 the company has been a manufacturer of chemicals.
On September 15, 1937, the company had 900 shares of stock outstanding, of which Chertoff owned 451 shares and Mrs. Chertoff 449 shares.
The petitioners have three children: Garry, born in 1922; Arlyne, born in 1923; and Gertrude, born in 1925. On September 15, 1937, Chertoff executed three indentures of trust, one of which was for the benefit of his son, Garry, who was then 15 years old, and the other two for the benefit of each of his daughters, Arlyne and Gertrude, who werePage 26814 and 12, respectively. In all material respects the trust indentures are identical. George J. Chertoff and Lillian R. Chertoff are named therein as trustees. In each case Chertoff, as settlor, "unconditionally and irrevocably" transferred to the trust 150 shares of common stock of the company. The provisions of the instrument, as typified by those of the Garry Chertoff trust, are as follows:
THIS INDENTURE MADE at Cleveland Heights, Ohio, this 15th day of September, 1937, by GEORGE J. CHERTOFF, hereinafter known as the "SETTLOR" and GEORGE J. CHERTOFF and LILLIAN R. CHERTOFF, hereinafter known as the "TRUSTEES,"
WITNESSETH:
WHEREAS, The Settlor in consideration of the premises simultaneous herewith unconditionally and irrevocably has given, assigned and transferred to the Trustees and their successors all of his right, title and interest in and to 150 shares of the common stock of The Synthetic Products Co., an Ohio Corporation, in TRUST, NEVERTHELESS, for the benefit of Garry B. Chertoff, which said shares are now evidenced by stock certificate No. 20 of said company, such certificate, however, being made to George J. Chertoff and Lillian R. Chertoff, TRUSTEES.
NOW, THEREFORE, in order to more particularly set forth the benefits to be derived by said Garry B. Chertoff under and by virtue of said gift and this trust, the Trustees, do hereby declare and acknowledge that they hold such stock for the sole and exclusive use and benefit of said Garry B. Chertoff as hereinafter set forth.
The Trustees shall have and hold the corpus and invest the same, receive the income, rents, issues and profits arising therefrom and pay said income over to said Garry B. Chertoff or his legal guardian without restrictions as to use or purpose, and upon his death to pay over the principal and any accumulation of income to such person or persons and in such shares and lawful estates as the said Garry B. Chertoff may nominate and appoint by his Last Will and Testament, or other valid written instrument, and in default of the same to pay and transfer the same in equal shares to George J. Chertoff and Lillian R. Chertoff or the survivor of them.
IT IS FURTHER EXPRESSLY COVENANTED that the Trustees shall have authority, without order of Court, to invest and re-invest all sums of money coming into their possession, according to their absolute discretion in such ventures, loans, stocks, securities and real estate as they shall deem for the best interests of the beneficiary hereunder, irrespective of any statutes, rules or practices of Chancery Courts now or hereafter in force, limiting the class of investments of trustees generally, giving to the Trustees absolute discretion as to the terms, conditions and rate of interest in respect to such investment, and with the right to transpose the stock above described and any other investments into others of like or similar nature, as they may deem for the best interests of the beneficiary.
THE TRUSTEES ARE HEREBY granted the power and authority in their sole discretion to pay to the beneficiary hereunder or his legal guardian from the principal from time to time such sum or sums as said Trustees may deem advisable without restrictions as to use or purpose. The receipts of the beneficiary, when of age, shall be sufficient discharge to the Trustees for payments made.
THIS TRUST SHALL terminate:
(a) As Garry B. Chertoff becomes 30 years of age and the Trustees hereby covenant that they will, as or at any time after said Garry B. Chertoff becomes 30 years of age, at the latter's request, assign, transfer and convey all of the right held by the Trustees hereunder to him.Page 269
(b) Upon the decease of Garry B. Chertoff prior to his becoming 30 years of age in which event they will assign, transfer and convey to the persons entitled thereto, all of the rights held by the Trustees hereunder.
In the event of either of the Trustees dying, resigning the aforesaid trust or becoming incapable of acting in the same, the survivor or remaining Trustee shall continue and act in the place and stead of the two Trustees herein appointed with the same power and authority as is herein granted to the two of them.
In the event of the death of the surviving Trustee, the executor or executors named in the Will of George J. Chertoff shall act as trustee or trustees under the same terms and conditions as is herein provided for the original trustees.
The Trustees hereby accept this trust and covenant that they will execute the same with due fidelity, it being understood, however, that they or either of them, or their successors, shall not be held liable or accountable for any mere error of judgment in the execution of said trust and that they or either of them may at any time resign from said trust; that by joining in the execution hereof, they hereby acknowledge the receipt of said certificate of stock and signify their acceptance of the trust thereby created.
In the event that any person in whose favor any trust of income or principal as hereinbefore declared shall, at any time or times, while so in the possession and control of the trustees, alienate, charge or dispose of the income or principal sum or part thereof to which he shall be, or but for this proviso, would be entitled, or if, by reason of his bankruptcy, or any other event happening, such income shall, or, but for this proviso, would, wholly or in part, fail or cease to be enjoyed by such person as aforesaid, then such income shall immediately thereupon cease and determine, and the devise to such person of a principal sum shall be deemed revoked and thereafter my Trustees shall pay or apply the principal and/or income, the trust whereof shall have so failed or determined, to and for the benefit of the person or persons who would be entitled thereto under this trust, if such person aforesaid were dead.
Execution and delivery of the three trusts are admitted.
The stock books of the company as of September 15, 1937, show the transfer of 450 shares into the names of George J. Chertoff and Lillian R. Chertoff as trustees for the respective trusts.
In 1938 Chertoff filed a gift tax return showing the 450 shares of stock so transferred to the trustees. Each share was valued at $22, or $9,900 for the 450 shares. The gifts were within the exemption provisions of the gift tax law at that time in force and no gift tax was due or paid.
On December 13, 1937, Chertoff, doing business as Synthetic Products Sales Co., entered into a contract with the company to act as the sole and exclusive sales agent and distributor of the products of the company for a period of ten years, beginning January 1, 1938.
The sales of the company prior to January 1, 1938, were made entirely by and in behalf of that corporation and all profits accruing therefrom were reported in its income tax returns. During the years 1938, 1939, and 1940 sales of the company's products were made at a price slightly in advance of their cost to Chertoff. The sales reportedPage 270in his individual income tax returns for the years 1938 to 1940, inclusive, were as follows:
1938 .................................. $86,692.79 1939 .................................. 125,508.80 1940 .................................. 170,978.25
The net profits reported by him from these sales were as follows:
1938 .................................. $8,985.70 1939 .................................. 13,810.94 1940 .................................. 23,484.44
The salaries paid to Chertoff by the company during the years 1935 to 1940, inclusive, were as follows:
1935 .................................. $8,500 1936 .................................. 18,000 1937 .................................. 18,000 1938 .................................. 3,600 1939 .................................. 5,200 1940 .................................. 7,500
On December 11, 1940, the net assets of the company were sold to Chertoff and the company was liquidated. The certificate of dissolution is dated December 11, 1940, and it was filed with the State of Ohio on December 17, 1940.
On December 12, 1940, Mrs. Chertoff executed three indentures of trust for the benefit of her minor children, naming herself and Chertoff as trustees. She transferred 75 shares of stock of the company to the trustees under each trust. The trust indentures are identical to those executed by Chertoff on September 15, 1937, except for the settlor. Execution and delivery of the three trusts are admitted.
On December 12, 1940, the petitioners, as individuals and as trustees, entered into a partnership agreement, the material portions of which are as follows:
ARTICLE 1. That the parties hereto have agreed to and do by these presents agree as of January 1st, 1941, to become partners under the firm name and style of The Synthetic Products Co. with the principal office and place of business in the City of Cleveland, Ohio.
ARTICLE 2. The purpose and business of said partnership is the purchase, manufacturing and sale of chemicals and synthetic products and the doing of all things necessary and incident thereto.
ARTICLE 3. The said George J. Chertoff shall contribute to the capital of said partnership his skill, knowledge and experience in the business to be conducted by the partnership and his entire time, attention and $10,000.00, together with the right to the use of the name The Synthetic Products Co., which right he now has.
The said Lillian R. Chertoff, George J. Chertoff and Lillian R. Chertoff as Trustees for Garry B. Chertoff, George J. Chertoff and Lillian R. Chertoff as Trustees for Arlyne E. Chertoff, and George J. Chertoff and Lillian R. Chertoff as Trustees for Gertrude H. Chertoff, shall each contribute to the capital of said partnership the sum of $10,000.00 in cash.Page 271
It is understood and agreed that George J. Chertoff and Lillian R. Chertoff are trustees under two separate trusts for each of the above named children, Garry B. Chertoff, Arlyne E. Chertoff and Gertrude H. Chertoff. That the trusts created September 15th, 1937, are each contributing $6666.67 and the trusts created December 11th, 1940, are each contributing $3333.33 to the partnership but for purposes of this agreement, the contribution from the two trusts of each child totalling $10,000.00 shall be deemed one share, a (one-fifth 1/5th interest) [sic] in the partnership, that is, the partnership shall recognize the two trusts of each child as one partner.
ARTICLE 4. The said George J. Chertoff will devote his entire time, skill and experience to advancing and rendering profitable the interest and business of said partnership.
ARTICLE 5. It shall be the further duty of George J. Chertoff, as agent of each of the other partners, to attend to and have charge of the business of the partnership including the buying, selling, manufacturing and finances of the firm. Contracts shall be made and taken only in the firm name. The appointment of George J. Chertoff as agent of the various partners is terminable at the will of any partner. For the services of George J. Chertoff under this contract, he shall receive a compensation exclusive of his share of profits equal to 2% of the annual sales of the firm. Notwithstanding the duties of George J. Chertoff as in this contract defined, the management of the partnership shall at all times be in the partners.
ARTICLE 6. Each partner agrees that all gains, profits and advances, which shall arise by reason of the copartnership, shall be, from time to time during the existence of the copartnership, equally divided between them, share and share alike, and all losses and expenses as shall happen or be incurred in said business without fraud, shall be paid and borne equally between them.
ARTICLE 7. Each partner shall promptly pay his individual debts and liabilities and shall at all times indemnify and save harmless the partnership property therefrom.
ARTICLE 8. There shall be kept at the principal office and place of business of said firm at all times during the continuance of said partnership true, accurate, full and complete books of account in which shall be entered all transactions of the partnership.
ARTICLE 9. All moneys received on behalf of the partnership shall be deposited in the bank of said partnership to the account and credit of the partnership and debts and obligations of said firm shall be paid by check on said bank account or accounts.
ARTICLE 10. This agreement shall be binding and in force and the term of this partnership shall be for a period of ten years from the date hereof unless sooner terminated by the death of a partner hereto, or other cause.
ARTICLE 11. On dissolution of said partnership, any partner may make a written offer or offers to the other partners of the sum or price in cash for which he will purchase the interest of such others in said partnership, or for which he will sell his own interest therein to such partners, and the partners receiving such offers shall, within thirty (30) days thereafter, make an election in writing whether to sell or purchase for said sum or price, and if he fails so to do within said time, the partner who has made such offer is hereby given the right and option within ten (10) days after the expiration of said time at his own election to purchase the interest of such other partner or partners or to sell his own interest to such other or others for the sum or price so offered.Page 272
ARTICLE 12. The death of a partner, the transfer or attempted transfer of any interest in this partnership shall operate to dissolve and terminate this partnership.
As of January 1, 1941, the manufacturing and sales activities of the company were consolidated and were so conducted throughout the year 1941.
The entries on the books of the Synthetic Products Co. showing liquidating assets and liabilities were as follows:
Debits Credits
George J. Chertoff ....................... $40,049.12 Loans Payable — Products Sales .......... 10,000.00 Accruals Payable — Frt. NKP Railroad .... 482.25 " " — Steam ................ 850.00 " " — Power ................ 125.00 " " — Old Age Insurance .... 56.15 " " — Unemployment Insurance 110.78 George J. Chertoff — Personal account ... 900.00 Cash — Central National Bank ....................... $13,170.07 Accounts Receivable ................................. 703.90 Inventory — Raw materials .......................... 25,530.00 Machinery Equipment — Net book value ............. 13,169.33 Capital Stock — outstanding ............. 9,000.00 Surplus — December 31, 1940 ............. 31,049.12 George J. Chertoff .................................. 40,049.12 ---------- ---------- 92,622.42 92,622.42
To liquidate Assets — Liabilities — Capital Stock and Surplus of The Synthetic Products Co., Inc., as at December 31, 1940 per agreement made at Cleveland, Ohio, December 11, 1940, between The Synthetic Products Co., Inc., and George J. Chertoff, his heirs and assigns.
George J. Chertoff ....................... $40,049.12 Loans Payable — Products Sales .......... 10,000.00 Accruals Payable — Frt. NKP Railroad .... 482.25 " " — Steam ................ 850.00 " " — Power ................ 125.00 " " — Old Age Insurance .... 56.15 " " — Unemployment Insurance 110.78 George J. Chertoff — Personal account ... 900.00 Cash — Central National Bank ....................... $13,170.07 Accounts Receivable ................................. 703.90 Inventory — Raw materials .......................... 25,530.00 Machinery Equipment — Net book value ............. 13,169.33 Capital Stock — outstanding ............. 9,000.00 Surplus — December 31, 1940 ............. 31,049.12 George J. Chertoff .................................. 40,049.12 ---------- ---------- 92,622.42 92,622.42
DISTRIBUTION — CAPITAL STOCK LIQUIDATING DIVIDENDSLiquidatingStock Dividends
Lillian R. Chertoff ......................... $2,250.00 $7,750.00 Garry B. Chertoff — Trust No. 1 ............ 1,500.00 5,166.67 Garry B. Chertoff — Trust No. 2 ............ 750.00 2,583.33 Arlyne E. Chertoff — Trust No. 1 ........... 1,500.00 5,166.67 Arlyne E. Chertoff — Trust No. 2 ........... 750.00 2,583.33 Gertrude H. Chertoff — Trust No. 1 .......... 1,500.00 5,166.67 Gertrude H. Chertoff — Trust No. 2 .......... 750.00 2,583.33 George J. Chertoff ........................... 49.12 ---------- ---------- 9,000.00 31,049.12
Page 273
Lillian R. Chertoff ......................... $2,250.00 $7,750.00 Garry B. Chertoff — Trust No. 1 ............ 1,500.00 5,166.67 Garry B. Chertoff — Trust No. 2 ............ 750.00 2,583.33 Arlyne E. Chertoff — Trust No. 1 ........... 1,500.00 5,166.67 Arlyne E. Chertoff — Trust No. 2 ........... 750.00 2,583.33 Gertrude H. Chertoff — Trust No. 1 .......... 1,500.00 5,166.67 Gertrude H. Chertoff — Trust No. 2 .......... 750.00 2,583.33 George J. Chertoff ........................... 49.12 ---------- ---------- 9,000.00 31,049.12
The opening entries on the books of the "unincorporated company" were as follows:
OPENING ENTRIES — JANUARY 1ST, 1941
SYNTHETIC PRODUCTS CO. — UNINCORPORATEDDebits Credits
Cash — Central National Bank .............. $13,170.07 Accounts Receivable ........................ 703.90 Inventory — Raw materials ................. 25,530.00 Machinery Equipment ...................... 13,169.33 Loans Payable — Products Sales Co. ................... $10,000.00 Accruals Payable — Freight ........................... 482.25 " " NKP Railroad ........................ 0.00 " " Steam ............................... 850.00 " " Power ............................... 125.00 " " Old Age Insurance ................... 56.15 " " Unemployment Insurance .............. 110.78 George J. Chertoff, Personal account .................. 900.00 George J. Chertoff, Personal account .................. 40,049.12Investment Accounts
George J. Chertoff ................................ 10,000.00 Loans Payable — Product Sales Co. ..... 10,000.00 Lillian R. Chertoff ............................... 10,000.00 Garry B. Chertoff — Trust No. 1 ...................... 6,666.67 Garry B. Chertoff — Trust No. 2 ...................... 3,333.33 Arlyne E. Chertoff — Trust No. 1 ..................... 6,666.67 Arlyne E. Chertoff — Trust No. 2 ..................... 3,333.33 Gertrude H. Chertoff — Trust No. 1 ................... 6,666.67 Gertrude H. Chertoff — Trust No. 2 ................... 3,333.33 George J. Chertoff — Personal Account ................ 49.12 George J. Chertoff — Personal Account ..... 40,049.12 ------------ ---------- 102,622.42 102,622.42
Income tax returns were filed for each of the trusts created by Chertoff for the years 1937, 1940, and 1941 and for each of the trusts created by Mrs. Chertoff for the years 1940 and 1941. Income shown thereon consisted of dividends from the company for 1937, liquidating dividends for 1940, and partnership profits for 1941. The tax shown due on such returns was paid by the trusts, respectively.
SYNTHETIC PRODUCTS CO. — UNINCORPORATEDDebits Credits
Cash — Central National Bank .............. $13,170.07 Accounts Receivable ........................ 703.90 Inventory — Raw materials ................. 25,530.00 Machinery Equipment ...................... 13,169.33 Loans Payable — Products Sales Co. ................... $10,000.00 Accruals Payable — Freight ........................... 482.25 " " NKP Railroad ........................ 0.00 " " Steam ............................... 850.00 " " Power ............................... 125.00 " " Old Age Insurance ................... 56.15 " " Unemployment Insurance .............. 110.78 George J. Chertoff, Personal account .................. 900.00 George J. Chertoff, Personal account .................. 40,049.12Investment Accounts
George J. Chertoff ................................ 10,000.00 Loans Payable — Product Sales Co. ..... 10,000.00 Lillian R. Chertoff ............................... 10,000.00 Garry B. Chertoff — Trust No. 1 ...................... 6,666.67 Garry B. Chertoff — Trust No. 2 ...................... 3,333.33 Arlyne E. Chertoff — Trust No. 1 ..................... 6,666.67 Arlyne E. Chertoff — Trust No. 2 ..................... 3,333.33 Gertrude H. Chertoff — Trust No. 1 ................... 6,666.67 Gertrude H. Chertoff — Trust No. 2 ................... 3,333.33 George J. Chertoff — Personal Account ................ 49.12 George J. Chertoff — Personal Account ..... 40,049.12 ------------ ---------- 102,622.42 102,622.42
The trusts have never been revoked and such sums as were collected were retained by the trustees in the respective trusts. The statements of account set up for each trust on the books of the partnership show withdrawals only for taxes, insurance, and bond purchases.
The petitioners have treated all the trusts as valid and subsisting trusts.
The partnership return of income for 1941 showed total sales in the amount of $307,459.72, gross income of $114,979.04, and total deductionsPage 274(including $14,021.34 for commissions paid) of $38,268.33. Net income shown by the return was $76,710.71, distributable as follows:
George J. Chertoff .................... $15,342.15 Lillian R. Chertoff ................... 15,342.14 Garry Chertoff ........................ 15,342.14 Arlyne Chertoff ....................... 15,342.14 Gertrude Chertoff ..................... 15,342.14 ------------ Total ............................. 76,710.71
OPINION.
On September 15, 1937, petitioner Chertoff created a trust for each of his three children with a corpus of 150 shares of the stock of the Synthetic Products Co., a corporation. At that time the corporation had 900 shares of stock outstanding. He owned 451 shares and his wife owned 449 of such shares. Chertoff and Mrs. Chertoff were made trustees of each trust. The children were minors when the trusts were created and were also minors during the tax years here involved. Chertoff controlled the corporation in all its operations prior to the creation of the trusts and continued to exercise such control subsequent to such creation. He held in his own name only one share of the corporation's stock after creation of the trusts, but obviously his control of the corporation was not minimized or otherwise affected by his transfer in trust to himself and Mrs. Chertoff of 450 shares of his original holding of 451 shares. Chertoff and Mrs. Chertoff, as holders of stock individually and as trustees of the trusts which Chertoff created in 1937, were in complete control of the corporation, of whosePage 275stock they owned individually only 50 percent. Under such control Chertoff continued to receive large amounts as compensation for services to the corporation by virtue of agreements between him and the corporation. Chertoff's compensation for services to the corporation for 1937 and the two preceding years totaled $44,500. His compensation for such services for 1938, 1939, and 1940 totaled $62,581.08.
The instrument provides for the termination of the trust upon the happening of either of the following four specified events: (1) Request of the beneficiary at or at any time after he becomes 30 years of age for the conveyance to him of the trust property; (2) alienation of the trust income or principal by the beneficiary, or the latter's bankruptcy, or any other event whereby the benefits should wholly or in part cease or fail to be enjoyed by the beneficiary; (3) the payment at any time in the sole discretion of the trustees to the beneficiary or his legal guardian of the principal of corpus of the trust; and (4) the death of the beneficiary, provided neither of the specified events (1), (2), or (3) has occurred.
The trust provides that upon the death of the beneficiary the principal and any accumulation of income shall be paid to the beneficiary's appointee under his last will and testament or other valid written instrument, or, if no such appointment has been made, then to petitioners, George J. and Lillian R. Chertoff, in equal shares or to the survivor of them. This same provision as to the devolution of the trust property is made applicable by the trust instrument in the case of termination of the trust under the above specified event numbered (2).
Since the beneficiary would be under legal disability to make a valid appointment by will or otherwise during his minority, it is apparent that in the event of his death during minority the trust corpus with the accumulation of any trust income would go in equal shares to Chertoff and Mrs. Chertoff orin tototo the survivor of them. In this connection attention is directed to the stipulation that all moneys which have been collected under the trust have been retained in the trust. The stipulation further shows that the income of the trust for each of the years 1937, 1940, and 1941 was reported as the income of the trust and that the tax shown to be due thereon was paid by the trust. In other words, all of the trust income has been accumulated and none has been distributed to the beneficiary. It appears, therefore, that the death of the beneficiary during his minority or in the event of his death after reaching his majority without having exercised validly his power of appointment as to the trust property, the corpus and accumulated income of the trust would devolve upon the petitioners or the survivor of them. Also, the same devolution would result in the case of the termination of the trust by virtue of the above specified event numbered (2) in the absence of a valid exercise of the power of appointment by the beneficiary.Page 276
The power of petitioners as trustees to terminate the trust at any time is inherent in the trust provision under which the trustees may "in their sole discretion pay to the beneficiary hereunder or his legal guardian from the principal from time to time such sum or sums as said trustee may deem advisable without restriction as to use or purpose." By the exercise of this power the trustees may entirely eliminate the beneficiary's appointee as a remainderman or may reduce as they choose the amount of trust property which shall go in remainder to such appointee. Also, by the exercise of such power the trustees may pay to themselves as guardians of the beneficiary during his minority a part or the whole of the principal of the trust (including therein the accumulated trust income) and devote such payments to any use or purpose without restriction, including the discharge of their parental obligation to support, educate, and maintain such minor, as well as the carrying on of business enterprises completely controlled and managed by petitioners to their economic benefit. In such case petitioners' powers as guardians in relation to such funds would be as broad as their powers as trustees.
In view of the above enumerated provisions of the trust it appears that if the beneficiary should die before he attains the age of 21 years the corpus of the trust and the accumulated income thereon would be paid in equal shares to the petitioners orin tototo the survivor of them, since the beneficiary can not make a valid appointment during his minority. Should the beneficiary die before reaching the age of 30 years without having made a valid appointment the corpus of the trust and the accumulated income would likewise be paid to petitioners in equal shares orin tototo the survivor of them. Also, should the beneficiary die, having made a valid appointment, the appointee would receive the corpus and the accumulated income. In neither of the events enumerated will the beneficiary receive the corpus or the accumulated income of the trust, or the current income thereof, unless petitioners as trustees choose to pay it to him, notwithstanding that the trust instrument purports to confer upon him at least a life estate in the trust property.
During the taxable years here involved the beneficiaries of the various trusts were minors. Under the law of Ohio a husband and wife living together are the joint natural guardians of their minor children and are equally charged with their care and welfare, as well as the care and management of their estates.1In addition, Ohio seems to follow the common law rule that a father has paramount right to the custody of his minor children and, further, can name a guardian for them by will. SeeIn re Coons,20 O. C. D. 208; sec. 10507-13, Pages' Ohio General Code, Ann.
The trust instruments provide that the petitioners, as trustees, may pay the income to the beneficiary of the trust or his legal guardianPage 277without restriction as to its use or purpose. They are further granted the power in their sole discretion to pay to the beneficiary orhis legal guardiansuch part of the principal as they may deem advisable without restriction as to its use or purpose. Petitioners seek to make quite a point of the fact that neither of them is the "legal" guardian of their children. Inasmuch as in Ohio a natural guardian has the care and management of a child's estate and a legal guardian has the same rights and powers, we can not agree that the use of the term "legal guardian" in the trust instruments has any real significance.2The record does not disclose and petitioners disclaim the appointment of a legal guardian for the beneficiaries of the trusts. In such situation it appears that under Ohio statutes the petitioners are natural guardians of their minor children, with the powers of a legal guardian as to their estates. Therefore, each of the petitioners is grantor in three of the trusts, is a cotrustee in all of the trusts, and has the status of legal guardian of the estates of the beneficiaries.
The three trusts which petitioner Lillian R. Chertoff created on December 12, 1940, are identical with the George Chertoff trusts in respect of their terms and provisions. Hence, a discussion of such terms and provisions as to any one of the trusts applies equally to the others. Each of these latter trusts was created with a corpus of 75 shares of stock of the Synthetic Products Co. after the resolution to dissolve the corporation was passed and only five days before the dissolution became effective. By the provisions of the trust agreements petitioners are given absolute discretion in the control and management of investments. They are not accountable as ordinary trustees would be under similar circumstances. It would be difficult to formulate or visualize broader administrative powers in respect of the trust properties and investment and reinvestment of trust funds than those invested in the trustees herein. In so far as the powers of management of the trust estates are concerned, they are practically the same as those which an individual might exercise over his own property. These powers were availed of to serve the economic interests of Chertoff.
It is stipulated that when it was determined to liquidate and dissolve the corporation in December 1940 the net assets thereof were sold to George. The sale to Chertoff was effected, as shown by entries on the books of the corporation, at the price of the net book value of the assets. The method of arriving at such net value is disclosed by a balance sheet contained in the stipulation of facts.
The purported transactions covering the sale of the corporation's net assets to George Chertoff, the liquidating distribution to the stockholders, the taking over of the corporation's debts, assets, and businessPage 278by the partnership, and the investment accounts in the partnership were effectuated solely by the closing book entries of the corporation and, simultaneously therewith, the opening book entries of the partnership. The result, as thus shown, was the passing of the corporation and the emergence of the partnership. Nothing was paid and no property or cash was distributed. The assets, liabilities, and business of the corporation passed directly to the partnership. A partnership agreement was executed by petitioners individually and the six trusts through Chertoff and Mrs. Chertoff as trustees. The two trusts for each child were assigned jointly a one-fifth interest in the partnership and petitioners each had a one-fifth interest therein. The agreement provided that the partnership should continue for a period of ten years beginning January 1, 1941. Chertoff was to "contribute to the capital of said partnership his skill, knowledge and experience in the business * * * and his entire time, attention and $10,000 together with the right to the use of the name The Synthetic Products Co., which right he now has." The agreement constituted George the agent of each of the other partners and gave him exclusive control and management of the partnership business, with a compensation, exclusive of his share of the profits, equal to two percent of the sales.
It is true that the agreement provides that, "Notwithstanding the duties of George J. Chertoff as in this contract defined, the management of the partnership shall at all times be in the partners," yet it is obvious that his powers and duties in this respect can not be curtailed without his consent, since he is a cotrustee of the trusts holding a three-fifths interest in the partnership and also a holder in his own right of a one-fifth interest therein.
It is at once apparent that the continuance of Chertoff's absolute control of the business which he formerly conducted for the corporation throughout the latter's existence was assured under the partnership arrangement and also that his own economic interests were conserved and continued under the latter arrangement.
The provision of the trust instrument for paying the trust income to the beneficiary or his legal guardian was not observed by the trustees, but instead such income was accumulated. However, had the trust income been distributed in compliance with such provision it would have been paid in the taxable years by petitioners as trustees to themselves as guardians of the beneficiary. They would have received it in the latter capacity without restriction as to its use or purpose and accordingly could have invested and controlled it in a way to subserve their own economic interests under as broad powers as if it had been handled under the trust.
In addition to the fact that from the time of the creation of the trusts no distribution, either of income or principal, was made to the beneficiaries named, it should be borne in mind that during the taxablePage 279years involved the corpora of the existing trusts were employed in the business of which George J. Chertoff was the sole manager at a lucrative compensation in addition to a share of the profits of the business, under contractual arrangement which could not be terminated without his consent. It thus appears that petitioners have retained control of the business and the use of the trust estates therein through their power as trustees to control investments. SeeAnna Morgan,5 T.C. 1089. We think that for all practical purposes these petitioners continued to remain the substantive owners of the property constituting the corpus of these trusts. As was said inStockstromv.Commissioner,148 F.2d 491, affirming3 T.C. 255:
* * * Certainly, what in the hands of an outsider-trustee may only amount to administrative powers over property can well as to a settlor-trustee have more than a fiduciary significance or value in the nexus of previous ownership, family economics, technical dedication, and continued control. * * *
It is well established that in construing the effect ofHelveringv.Clifford, supra,on such trust agreements, all the facts and circumstances surrounding the execution of the trust must be examined to determine whether or not there has been a real change in the economic position of the settlors. No one factor is determinative. It is the sum total of the different rights and powers that is important. In the light of all the circumstances surrounding the creation of the trusts, can it be said that respondent erred in ignoring the separate entity of the trusts and taxing the income therefrom to the petitioners? Would we be justified in holding that the execution of the trust instruments effected a material change in the economic position of the petitioners? We think not.
The contingencies set up in the trust instrument and the powers of control over the principal and income of the trust conferred upon the trustees, together with the power either to terminate the trust within the lifetime of the beneficiary or permit it to continue for his lifetime, and also to withhold or distribute to the beneficiary the income of the trust, creates such a problematical status in respect of the property interests of the beneficiary and the remainderman under the trust as to render it impossible to determine whether the beneficiary named or his appointee or the petitioners will ultimately receive the corpus and/or the income of the trust. At least, it can not be said that, so long as the contingencies, controls, and powers hereinabove referred to continue, the beneficiary named, or any potential remainderman, has any measurable or determinable vested right in the trust property. Also, the broad powers of management granted to the petitioners, the retention of the trust assets in the business conducted by George J. Chertoff, and the rights conferred upon petitioners by the laws of Ohio in so far as their children's property is concernedPage 280all lead inevitably to the conclusion that the petitioners are taxable on the income of the trusts under section 22 (a) of the Internal Revenue Code, and we so hold. Under such circumstances we are impelled to hold that petitioners have retained such a bundle of rights in respect of the trust property as to amount, for Federal tax purposes, to substantial ownership thereof and that each is taxable on the income of the respective trusts which he created.Helveringv.Clifford, supra; Rose Mary Hash,4 T.C. 878; affd.,152 F.2d 722;Morris Eisenberg,5 T.C. 856. Cf.Commissionerv.Estate of Holmes,326 U.S. 480.
Reviewed by the Court.Decisions will be entered under Rule 50.
MURDOCK and LEECH,JJ.,concur in the result.
ARUNDELL, VAN FOSSAN, BLACK, TYSON, and DISNEY,JJ.,dissent.