Opinion · United States Tax Court
Richards v. Commissioner
19 T.C. 366
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1952-11-28
- Topic
- estate-planning
OPINION. Harron, Judge: The issue in these proceedings is whether the income of nine trusts which Richards, as head of the community, created for the benefit of his children is includible in his income and that of his wife under section 22 (a). The petitioners contend that the income which was paid to the trustees of the Burke Trusts is taxable to the trustees because under the terms of the trusts there is no retention by the settlor of any beneficial enjoyment of the income, or of any control over the trusts corpus. The petitioners argue that the trusts involved in these proceedings do not come within the reach of the rule of Helvering v. Clifford, 309 U.
Citator
UpLaw has not yet analyzed Richards v. Commissioner. The absence of a flag is not a finding that it is good law.
- Cited by
- 1 opinion
RICHARDS v. COMMISSIONER OF INTERNAL REVENUE,19 T.C. 366(1952)
LORETTO McKENNA RICHARDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
ERNEST V. RICHARDS, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
Docket Nos. 25437, 25438.
United States Tax Court.
Promulgated November 28, 1952.
The taxable income of the marital community which was reported has been increased by the respondent for 1942, 1943, and 1944, to $311,924.89, $395,458.60, and $439,150.11, respectively. The one-half share of the community net income as adjusted by the respondent, of each petitioner, has been determined to be $155,90.44, $197,729.30, and $219,575.06, respectively.Page 367
The deficiencies in income tax for 1943 and 1944, have been determined by the respondent to be as follows:Docket No. 1943 1944
25437 ......................... $171,245.76 $170,095.65 25438 ......................... 171,245.76 168,730.65
At the trial of these proceedings, the respondent confessed error in adding to the community income for the taxable years, the income of the "Clay Trusts"; and the petitioners conceded that they are not entitled to deductions in 1943 and 1944 which they claimed on their returns as amortization of rights under leases. Effect will be given to these stipulations under Rule 50.
The general question is whether the petitioners are taxable on the income of the "Burke Trusts" in the taxable years, as has been determined by the respondent. The income of the "Burke Trusts" which has been added to the community income of the petitioners by the respondent is $194,943.16 for 1942, $267,019.16 for 1943, and $301,015.91 for 1944. The question arises under section 22 (a) of the Internal Revenue Code.
The petitioners filed their returns with the collector for the district of Louisiana.
The parties are in agreement upon the facts, and they have submitted a written statement, or stipulation, of all the facts which they deem necessary for determination of the issue by the Court. Although 10 joint exhibits are attached to the agreed statement of facts, some of which are lengthy, under Rule 31 (b) of the Court's Rules of Practice the agreed statement of facts is understood to set forth the facts which are established by the supporting exhibits, and it is understood that the lengthy exhibits are appended only for the Court's inquiry if it desires to check the agreed statement of facts against the supporting documents. Rule 31 (b) of the Court's Rules of Practice is for the purpose of saving the Court's time in culling from lengthy exhibits the facts which are not in dispute and which the parties are able to state in a stipulation of the material facts which are necessary for decision of the issue. Regrettably the parties have left to the Court the performance of the very task which, by the adoption of Rule 31 (b), we had intended to be spared.
FINDINGS OF FACT.
The stipulation of facts and the supporting exhibits are incorporated herein by this reference. The material facts which are necessary for an understanding of the issue to be decided are as follows:
In 1941, although living separate and apart, petitioners were married and were the parents of nine children. On December 26, 1941, petitioner, Ernest V. Richards, Jr., who will hereinafter be referredPage 368to sometimes as Richards, sometimes as petitioner, and sometimes as the settlor, executed nine separate trust instruments, each of his nine children being the sole beneficiary of one trust. Except for the designation of the beneficiary the trust instruments were identically drawn. The same three persons were named as trustees for each trust. They were John J. Richards, a son of petitioner and a beneficiary of one of the trusts; H. K. Oliphint, an officer and a director of Paramount-Richards Theatres, Inc. (hereinafter referred to as Paramount-Richards), and Gibbons Burke, a member of a New Orleans law firm which represented both petitioner and Paramount-Richards. Hereinafter the nine trusts will be referred to as the Burke Trusts. Theresof each of the Burke Trusts was declared by the settlor to be:
ESTIMATED VALUE PER SHARE
Legal title in and to a beneficial interest in and to 233 1/3% shares of the Class A Stock of Paramount-Richards Theatres, Inc. ................... $375.00 Legal title in and to a beneficial interest in and to 19 4/9% shares of the Class A Stock of Paramount-Richards Enterprises, Inc. ................ 100.00
The full legal title to all of the shares of stock, the beneficial interest in which was conveyed to the Burke trustees, was retained by the settlor and represented 70 per cent of his respective stockholdings in Paramount-Richards and Paramount-Richards Enterprises, Inc., hereinafter referred to as Enterprises. The settlor also reserved to himself, and in the event of his death, to his legal representatives, the right to vote all of the foregoing shares without regard to the wishes or instructions of those to whom he had transferred beneficial interests. Each trust instrument purported to create a spendthrift trust which was to be irrevocable and was to endure for the maximum period allowable under Louisiana law, the applicable provisions of which are noted in the margin.1
No express provision is made in the trust instruments respecting the disposition of corpus upon termination of the trusts.
The settlor reserved no power to discharge any of the trustees, but provided that in the event of the death or resignation of any trustee, a successor was to be chosen by him.
The trustees were given very wide latitude and uncontrolled discretion in connection with the administration of the trusts. With respect to trust property, they were given the power,inter alia,to invest and reinvest, to buy, sell, lease, mortgage, and borrow; they were expressly prohibited from accumulating any income for distributionPage 369to the settlor and from paying any premiums on policies insuring the life of the settlor. The trustees were directed to pay the income of each trust to the respective beneficiary, or to the legal representative of any infant beneficiary at least annually, or semiannually, or quarter-annually if practicable. In their discretion, however, they might set aside portions of the net income for reinvestment.
Each trust instrument contained the following provision:
The Settlor, or in case of his death his legal representatives, may, with the consent of the Corporation but without the consent of the Trustees, dispose of the Class A Stock, the beneficial interest in which has been hereby transferred, for any consideration deemed appropriate by the Settlor or his legal representatives, as the case may be, and that upon such disposition the interest of the Trustees shall be converted from a beneficial interest in the Class A Stock to an interest in the proceeds of such disposition; provided, however, that if the proceeds of such disposition shall consist in whole or in part of stock of a corporation in which the Corporation is a stockholder at the time of or immediately after such disposition, then and in that case the interest in such proceeds, insofar as such stock is concerned, resulting from such conversion shall be only a beneficial interest, and legal title to such stock shall be vested in the Settlor, or in case of his death in his legal representatives, and the Settlor or his legal representatives shall remain the holder of record of such stock; * * *
Each trust instrument concluded with a reference to a series of agreements previously entered into by the settlor and Paramount-Pictures, Inc., hereinafter referred to as Paramount, and each trust was stated to be subject to the terms and conditions of those agreements which, accordingly, we now consider briefly in the light of the circumstances under which they were drawn.
In 1933, Saenger Theatres, Inc., and Saenger Realty Corporation, Inc., hereinafter collectively referred to as Saenger, were debtors in reorganization, and Richards was appointed by the United States District Court for the Eastern District of Louisiana as Trustee of Saenger.
Paramount Publix Corporation, the owner of all outstanding shares of Saenger, was also a debtor in similar proceedings. It and its trustees and Paramount Pictures, Inc. (its reorganized corporate successor) are hereinafter collectively referred to as Paramount.
In the early part of 1934, the reorganization of Saenger appeared practicable and feasible; and Paramount desired to obtain the assistance of Richards in financing and in the operation of reorganized Saenger. Richards was willing to give such assistance, but only upon the basis of a proprietorship interest in him. Paramount, after several months of negotiation, acquiesced in Richards' acquiring such proprietorship interest in Saenger.
On November 22, 1934, Richards and Paramount entered into an agreement whereby Richards acquired 3,000 shares of class A stock of Paramount-Richards being one-half of the shares thereof; and ParamountPage 370caused Paramount-Richards to be vested with all the shares of reorganized Saenger.
The capital stock of Paramount-Richards consisted of the aforesaid 3,000 shares of class A stock acquired by Richards, and 3,000 shares of class B stock retained at all times by Paramount. Each of said shares of both classes is entitled to one vote at all meetings of shareholders, and the only distinction between the classes is that the class A shares have the right to elect three directors and the president and secretary, and the class B shares have the right to elect three directors and the vice president and treasurer.
The main agreement provided that Paramount should have the option for a 5-year period ending April 29, 1940, of either buying Richards' class A stock or of selling its class B stock to Richards pursuant to a formula not here material. If after the expiration of the 5-year period Richards received a bona fide offer from a third party for the purchase of his stock, he was to permit Paramount, its successors and assignees, to purchase all or part of Richards' stock at the price contained in such bona fide offer. By subsequent agreement the period of option was extended until April 29, 1950, and the aforementioned preemptive rights were to vest in Paramount at the expiration of the extended option period. In order to insure the enforceability of these rights, Paramount required Richards to place and Richards did place all of his stock in escrow with a depository agreed upon between the parties.
The main agreement also provided that Richards was to be nominated and elected as president and designated as general manager of Paramount-Richards and of all wholly owned subsidiaries thereof. The combined salaries of Richards as president and general manager of Paramount-Richards and of any subsidiary thereof and of one assistant directly serving under him were to be limited to an aggregate $600 per week. Pursuant to these provisions Richards has at all times, with which we are here concerned, served as president of both Paramount-Richards and of Enterprises. He has also served as director of each corporation.
The reorganization of Saenger was consummated April 29, 1935.
In order to comply with the provisions of an agreement of sale theretofore made by Richards of 750 shares (or 25 per cent of his holdings) of the stock of Paramount-Richards to M. F. Barr, N. L. Carter, Gaston J. Dureau, H. W. McCoy, and H. K. Oliphint, who are hereinafter referred to as the Individuals (150 shares to each for the purchase price of $2,336.07 by each) it was necessary for Richards to obtain the consent of Paramount to the transfer.
Paramount prepared, and Richards executed, a letter requesting the consent of Paramount to the transfer to the Individuals; ParamountPage 371executed the consent and the transfer was made by an instrument of assignment.
In 1941, Paramount and Richards determined that they should engage in the business of erecting and operating open air drive-in theatres as well as in ordinary motion picture exhibition. Because the drive-in theatre was a comparatively new venture which might have been unsuccessful and because Paramount and Richards desired to limit their losses in such case, they determined to organize Paramount-Richards Enterprises, Inc., to engage upon the venture. Whereupon, an agreement, dated August 28, 1941, was executed by Paramount and Richards for the organization of such corporation and for the distribution of its shares.
The option applicable to the stock of Paramount-Richards was by appropriate agreements made applicable also to the stock of Enterprises in which Richards' holdings consisted of 250 shares of class A stock.
Richards requested and Paramount consented to the transfer of 62 1/2 shares (or 25 per cent of his holdings) of Enterprises to the Individuals, subject to the same terms, conditions, limitations, restrictions, and reacquisition options as to the transfers to the Individuals of the shares in Paramount-Richards. The request and consent containing all of the applicable terms, etc., were reduced to writing and signed by the respective parties.
Sometime in 1941, Richards expressed to his counsel, Burke, his desire to create the several trusts for his nine children. Burke thereafter communicated with certain officials of Paramount in New York who agreed to acquiesce in the creation of the Burke Trusts provided the various agreements between Richards and Paramount were incorporated in the trust instruments by reference, thereby subjecting the trusts to all the terms and conditions of such agreements. As in the case of the assignment to the Individuals, a written "request and consent" was executed by Richards and Paramount, respectively, as of December 1, 1941, and as executed was incorporated by reference into the instruments creating the Burke Trusts. The "request and consent" of December 1, 1941, provided,interalia,as follows:
Theatres, Enterprises and the Corporation [Paramount] shall not be required for any purpose, * * * to recognize any of the persons to whom such a beneficial interest shall have been so transferred as the owner of any interest in the Class A Stock of either Theatres or Enterprises; and the full legal title in such Class A Stock retained as aforesaid by me, or in case of my death by my legal representatives, shall include, (but not be limited to) the right to vote such shares of such Class A Stock without regard to the wishes or instructions of any of the said persons to whom such a beneficial interest shall have been so transferred. * * *
On March 15, 1942, petitioners filed gift tax returns in which werePage 372reported the donations to the nine Burke Trusts, and paid a gift tax in the sum of $117,552.68 to the collector at New Orleans.
On December 26, 1944, after receiving, notices of gift tax deficiencies, the petitioners paid additional gift tax in the sum of $39,847.50, and interest thereon in the sum of $6,464.56, in full settlement of such deficiencies.
Dividends on all the class A shares of Paramount-Richards and Enterprises stocks during the years 1942 through 1944, inclusive, were paid to Richards as stockholder of record and deposited in his bank account; and, contemporaneously, Richards issued his personal checks to Individuals in amounts equal to the dividends applicable to 25 per cent of said stock, and to the trustees in amounts equal to the dividends applicable to 70 per cent of said stock.
Amounts thus received by the trustees were reported by them in the 1942, 1943, and 1944 income tax returns filed by the several Burke Trusts. No part of such amounts was included in gross income in the individual income tax returns of the petitioners for the years 1942 to 1944, inclusive.
Richards has at all times retained and exercised the power to vote personally or through proxy all his 3,000 shares of class A stock of Paramount-Richards and of all of his 250 class A shares of Enterprises.
The only stockholders' meeting of class A shareholders held during the years 1942 to 1944, inclusive, was held on March 17, 1941. Richards was not present but was represented by N. L. Carter, one of the Individuals and H. K. Oliphint, one of the Burke trustees.
The trustees of the Burke Trusts have made partial distributions of trust income to the respective beneficiaries and they have reinvested the undistributed balance.
In March 1943 the Burke Trusts joined with Richards in purchasing what is now known as the "Richards Building" located in New Orleans, Louisiana. Richards paid one-fourth of the purchase price and the Burke Trusts paid the remaining three-fourths. A part of this three-fourths was from accumulated trust income representing undistributed trust income of prior years, and a part was from the proceeds of a loan obtained from Rochelle Investment Corporation.2This loan was secured by a first mortgage on the Trusts' three-fourths undivided interest in the "Richards Building."
OPINION.
The petitioners contend that the income which was paid to the trustees of the Burke Trusts is taxable to the trustees because under the terms of the trusts there is no retention by the settlor of any beneficial enjoyment of the income, or of any control over the trusts corpus. The petitioners argue that the trusts involved in these proceedings do not come within the reach of the rule ofHelveringv.Clifford,309 U.S. 331.
On the other hand, the respondent contends that the settlor, Richards, retained economic rights which make the dividends — the income in question — taxable to the petitioners under the reasoning of theCliffordcase.
The provisions of the trust instruments are for the most part clear and simple.
The instruments themselves were skillfully drawn and manifest an awareness on the part of the draftsman of the countless legal pitfalls to be avoided, in order to insulate a settlor from tax liability on trust income. In this regard, we have observed that the trust was to be irrevocable, spendthrift, and of the maximum duration permissible under Louisiana law; the trustees are free from any control by the settlor in their administration of the trust and handling of trust assets and are expressly prohibited from using the assets for the settlor's benefit. It can hardly be gainsaid that if the interest in petitioner's stock which was conveyed to the trustees amounts to income producing property, that fact taken in conjunction with the features of the trusts enumerated above would entitle petitioner to prevail in this proceeding. Accordingly, we have scrutinized with utmost care the character of that interest which petitioner conveyed to the trustees under the label of "legal title in and to a beneficial interest in and to" certain shares of stock. In so doing we have analyzed not only that which the settlor purported to give but that which he expressly retained in respect to such stock. We have carefully considered not merely the trust instruments themselves, the various agreements entered into between Richards and Paramount, and the "request and consent" of December 1, 1941, but the entire background against which all of the foregoing were cast for such illumination as may be gleaned from each element.
With respect to background, we have found that Paramount's purpose in associating itself with Richards in the formation and operation of Paramount-Richards and Enterprises was to reap the benefit of Richards' personal ability and experience in the field in which the two corporations were to be engaged. To that end, Paramount entered into the series of agreements with Richards to which detailed referencePage 374has been made in our Findings of Fact. From Paramount's point of view, therefore, among the most important provisions of these various agreements were those designed to induce Richards to remain associated with Paramount. Included among these were the provisions limiting Richards' power to dispose of his stocks in the two corporations for the period of the option, at least, to a sale to Paramount itself, and vesting in Paramount broad preemptive rights at the expiration of the option periods. Since Richards was limited in this matter with respect to any disposition of the stocks, when he wanted to create the trusts involved here, he found it necessary, as in the case of the assignment to Individuals, to obtain from Paramount its consent to his plan to convey an interest in the stocks to the trustees. Richards assured Paramount, in his letter of December 1, 1941, that Paramount and Enterprises would not be required for any purpose, whether or not relating to the association and agreements between Richards and Paramount, to recognize any of the persons [trustees of the trusts] to whom a beneficial interest was transferred as the owner of any interest in the stock of Paramount-Richards or Enterprises because the full legal title in the stocks of each corporation would continue to be held by Richards, who would at all times exercise the rights and powers derived therefrom and remain liable for the performance of any obligations undertaken in connection therewith. In other words Richards was saying to Paramount that, although he was going to convey "beneficial interests" in his stock to certain persons, as far as Paramount was concerned, these persons were to be regarded as having no interest whatsoever in that stock, but that he would continue to hold legal title with the same rights, privileges, and obligations as if no transfer had taken place. On the strength of these representations Paramount consented to the transfers. Moreover it was with this same understanding as to the true state of affairs that the Burke trustees accepted, in writing, the several transfers.
In retaining the full legal title to the stocks in question, Richards retained the right to receive stock dividends, and to subscribe to new shares. He also retained the power to vote the shares of stock, which he has continued to exercise since the creation of the Burke Trusts. As he was the president of each corporation, both before and after the trusts were created, the voting rights which he retained could be used to advance or benefit his own economic interest, particularly in maintaining the aggregate salary, in the amount of close to $600 per week, payable to himself, as president, and to one person serving directly under him, the maximum provided in the November 22, 1934, agreement. Cf.Helveringv.Clifford, supra; H. Friedman,7 T.C. 54;Lillian R. Chertoff,6 T.C. 266, affd.160 F.2d 691. The right to vote stock has been regarded as one of the major rights of ownership entitled to considerable weight. SeeKohnstammv.Pedrick,Page 375153 F.2d 506;Millerv.Commissioner,147 F.2d 189,193;Edisonv.Commissioner,148 F.2d 810, certiorari denied326 U.S. 721;Pricev.Commissioner,132 F.2d 95. In this proceeding we must attribute substantial weight to the retention of his voting power by Richards, since the votes represented by 70 per cent of his stock in the two corporations, when added to the other 30 per cent which he retained, spell the difference between equal control — with Paramount — and a mere minority interest.
As the owner of the legal title to the stocks in question, Richards retained power to dispose of the stock, but the exercise of this power was subject to the option which Paramount held. Since the trustees of the trusts were subject to all of the agreements of Richards with Paramount, whatever expectancy, if any, the trustees had to ever receive any part of any proceeds derived from sales of the stocks was wholly contingent upon what Paramount might do under its option, and upon whether the option would be extended. In fact, the petitioners concede that Richards' power over the disposition of the stock itself was very greatly restricted by his agreements with Paramount. On the other hand, there was the possibility that Paramount would allow its option to buy the stock standing in the name of Richards to lapse, or that Paramount would exercise its option to have Richards purchase stock which it owned. In either eventuality, Richards' power to dispose of the stock for any consideration he might deem sufficient would no longer be restricted. Therefore, we cannot lightly dismiss the power retained by Richards to dispose of the stock, and we regard such power as one which must be evaluated as having economic value to Richards. The trust instruments do not clearly provide the extent to which the trusts would share in the proceeds of the sale of the stocks, if the stocks should be sold. This ambiguity in the trust instruments is further evidence that Richards retained, in reality, substantial economic interests in the stock. Cf.Chandlerv.Commissioner,19 F.2d 623, affirming41 B. T. A. 165;Leslie H. Green,7 T.C. 263, affd.168 F.2d 994;GordonM. Mather,5 T.C. 1001, affd. 157 F.2d 680, certiorari denied330 U.S. 819;Charles T. Fisher,28 B. T. A. 1164.
The petitioners contend that the various attributes of ownership which Richards retained were retained in a fiduciary capacity, or were reserved for the benefit of the beneficiaries of the trusts. The facts, the terms of the trust instruments, and the circumstances surrounding Richards' ownership of the stocks do not support this contention of the petitioners, and with it we cannot agree. Our conclusion is that the rights retained by Richards, which made up his legal title to the stocks were retained for Richards' own benefit, and therefore, his exercise of the rights which he retained was not subject to the control which is imposed upon a fiduciary. 2 Scott, Trusts, sec. 185 (1939);Page 3761 Restatement, Trusts, sec. 185, comments (c) and (d) (1935)Commissionerv.Branch,114 F.2d 985.
The critical point here is that, under all of the conditions to which the trustees were subject, and where substantial and important attributes of ownership of the stock were retained by the settlor, as well as the full legal title to the stock, the donations of Richards to the trusts were no more than conveyance of the right to receive dividends. The owner of property must transfer more than the bare right to receive the income of the property,Helveringv.Horst,311 U.S. 112, if he is to escape the incidents of tax upon such income.
The petitioners have referred us to the case ofParamount-Richards Theatres, Inc. v.Commissioner,153 F.2d 602. That case is not in point since the question involved there bears no relation to the question presented here.
It is held that the income from the class A shares of stock of Paramount-Richards and of Enterprises for the years 1942, 1943, and 1944, is includible in the income for the petitioners for the taxable years.
The trustees of the trusts, however, have reinvested that part of the income received by the trusts which was not distributed to the beneficiaries. During the years in question, the trusts received income from such investments. The parties have not made any distinction between the income from the investments made by the trustees and the income from the dividends on the stock of Paramount-Richards and of Enterprises. Such distinction, however, should be made. Once the trusts received the income from the shares of stock, Richards no longer had any control over it, and that part which was not distributed to the beneficiaries became part of the corpus of the trusts over which Richards could exercise no control. Just as once income of the trusts was distributed to the beneficiaries, subsequent income from the investment of such amounts could only be taxable to the beneficiaries and not to Richards and his wife, so the subsequent income from the investment of the undistributed income of the trusts is not properly taxable to Richards and his wife.Abe Schreiber,6 T.C. 707,714, affd. 160 F.2d 108; cf.Blairv.Commissioner,300 U.S. 5;Helveringv.Horst, supra,at page 119; andEstate of James E. Frizzell,9 T.C. 979,986-990, affd. (C. A. 5, 1949)177 F.2d 739. Accordingly, it is held that the petitioners are not taxable on the income received by the trusts in the taxable years from securities or property which the trustees purchased out of undistributed and accumulated income derived from dividends on the Paramount-Richards and Enterprises stock.
Reviewed by the Court.Decision will be entered under Rule 50Page 377
- Section 4, Act 81 of 1938, which is cited "Trust Estates Act," Dart's General Statutes 9850.1, provides: "Unless an earlier termination to required by the trust instrument or by the proper court, every inter vivos or testamentary trust created under this Act shall terminate at the expiration of ten years from the settlor's death * * * as to a beneficiary who is a natural person and of full age at the settlor's death, and at the expiration of ten years from the beneficiary's majority as to a beneficiary who is a natural person and a minor at the settlor's death. * * *" ↩
- The Rochelle Investment Corporation is Richards' individual holding company. A small part of the stock of Rochelle Investment Corporation had in 1988 been transferred to nine trusts set up for the benefit of Richards' nine children, known as the Clay Trusts. ↩