Greenough v. Commissioner

MALCOLM W. GREENOUGH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Greenough v. Commissioner Docket Nos. 58098, 58942. United States Board of Tax Appeals 29 B.T.A. 315; 1933 BTA LEXIS 955; November 14, 1933, Promulgated *955 Where the grantor of a trust has the power, either alone or in conjunction with any person not a beneficiary of the trust, to cause to be distributed to him, or to be held or accumulated for future distribution to him, the income of the trust fund, such grantor is liable to income tax in respect of the income over which he has such authority. W. Sidney Felton, Esq., for the petitioner. Prew Savoy, Esq., for the respondent. SMITH *315 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for 1927, 1928, and 1929 of $1,520.66, $12,755.37, and $5,362.49, respectively. The deficiencies arise principally from the addition to the income reported by the petitioner for the years in question of profits from the sale of securities by a trust fund of which the petitioner was the grantor and beneficiary. FINDINGS OF FACT. The petitioner became of age on January 22, 1925, and at that time came into outright possession and enjoyment of property worth approximately $770,000. At the same time he also acquired a vested right to all of the income from a certain fund of approximately $400,000. Four months*956 later, on May 22, 1925, he executed an indenture of trust whereby he turned over to the Old Colony Trust Co., Charles P. *316 Greenough, 2d, and himself, as trustees, substantially all the assets which he had received when he became of age, thus subjecting that property to the trusts set forth in the indenture. This trust indenture provided in part as follows: FIRST: To hold, sell, invest and reinvest the same in their sole discretion and to pay over the net income therefrom to me, the said MALCOLM W. GREENOUGH, quarterly or oftener if I so request, during the term of five (5) years from the date hereof and thereafter until I shall in a writing addressed to the Trustees direct the termination of the Trust and the delivery of the Trust Estate. SECOND: In the event of my death before the expiration of said term of five (5) years, or subsequent thereto but before this trust has been terminated by me as aforesaid, I direct that the principal of the Trust Fund shall be paid over and distributed as I may direct or appoint by will or, failing such direction or appointment, shall be distributed to those persons who would be entitled to my personal property had I died intestate*957 and domiciled in Massachusetts. THIRD: Prior to the expiration of said term of five (5) years, this trust shall not be subject to revocation, alteration or amendment, but, after the expiration of said term, I reserve the right to extend, alter, amend or revoke the same. FOURTH: The Trustees hereunder shall at all times be two (2) individuals and one (1) trust company. Any one of the Trustees may be removed by a written communication to that effect delivered to him or it and signed by the remaining two (2) trustees, provided, however, that I may not be so removed. If I shall hereafter establish legal residence in another state, I reserve the right to nominate as successors to the present trustees an individual and a trust company having residence and doing business in the state of my then residence and, upon receipt from me of a written statement to the effect that I have established such residence (upon which statement the Trustees may rely conclusively), the remaining trustees shall join with me in transferring the trust property to the new trustees. In case of the death, resignation or incapacity of any trustee, the title to the trust property shall vest in the surviving*958 trustee or trustees, if any, and they shall have all the titles, powers, authorities and immunities herein given to the trustees unless and until a successor is appointed. Upon the death or resignation of any trustee, the successor shall be such person or trust company, as the case may be, as I may appoint in writing and such successor shall have all the rights, titles, powers, authorities and immunities herein given to the trustees. FIFTH: In addition to the payments of income, the trustees, upon my request, shall pay to me from the principal of the Trust Fund such sum or sums as they may deem fit to meet any extraordinary expenses occasioned by my sickness, disability or other circumstances necessitating unusual outlays or to enable me to acquire or to build a home. The decisions and determinations off the Trustees in respect to the matters contained in this paragraph shall be final and conclusive. * * * EIGHTH: The trustees are hereby given power and authority to invest or reinvest the trust fund in such amounts and to such extent and in such property as they may see fit and to retain any investment notwithstanding that such investment may be a wasting investment or*959 would not be sanctioned by a court in equity, and they are particularly authorized to retain a large part of the trust property in Common or in Preferred stocks of corporations if they *317 deem it advisable, and if any stocks, bonds or securities are retained or purchased by the trustees at a premium above their par value or are wasting securities the trustees may if they see fit so to do regard the whole of the dividends or interest on said securities as income or may retain part of the income of any investment to strengthen the principal against possible loss or waste and they may generally determine in their discretion what receipts shall be deemed income and what principal, and what expenses and charges shall be charged to principal and what to income. They may treat all stock dividends and rights to subscribe or the proceeds of the sale thereof as either income or capital as they may deem best. * * * All of the net income of the trust for the years 1927, 1928, and 1929, exclusive of profits realized from the sale of securities (including in 1929, $1,125 from the sale of rights to subscribe to shares of stock), was included in the original returns of the petitioner. *960 The respondent, in determining the deficiencies involved herein, added to the net incomes returned by the petitioner the profits realized by the trustees from the sales of securities and stock rights. In 1931 the petitioner revoked the trust and received his property. OPINION. SMITH: The applicable statutes are as follows: Revenue Act of 1926: SEC. 219. (g) Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. (h) Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes*961 and in the manner specified in paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor. Revenue Act of 1928: SEC. 166. REVOCABLE TRUSTS. Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. SEC. 167. INCOME FOR BENEFIT OF GRANTOR. Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be *318 applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(n), relating to the so-called "charitable*962 contribution" deduction), such part of the income of the trust shall be included in computing the net income of the grantor. In these proceedings the respondent makes two contentions. He first contends that the trust was a revocable trust during the tax years involved herein. He submits that under articles 4 and 5 of the trust indenture petitioner was the sole trustee who could not be removed; that if he continued to reside in Massachusetts he could remove, in conjunction with one of the trustees, the third trustee, who might not consent to a revocation of the trust, and appoint one who would consent. He also submits that the petitioner could establish his legal residence in another state; then remove the two trustees and appoint others compliant with his wishes. Hence, it is argued that the petitioner in effect had the right to revoke the trust. The second contention made by the respondent is that the gains made by the trust upon the sales of securities were taxable gains within the purview of the taxing statutes; that the trustees could determine in selling capital assets whether they would treat the gain derived therefrom as income or principal and that they could act*963 similarly with respect to stock dividends, stock rights, etc., all without court sanction. The argument is that the petitioner, being the grantor of this trust, could, with the consent of the other trustees, declare that the gains from the sale of securities were income and that as such they could have been distributed currently to the petitioner. Without expressing an opinion as to the merits of the first contention of the respondent, we are of the opinion that the second contention is sound. In , the Supreme Court, speaking through Mr. Justice Holmes, said: It does not matter that in Ohio, where the properties lie, these long leases are treated as in many respects like conveyances of the fee. The Act of Congress has its own criteria, irrespective of local law, that look to certain rather severe tests of liability and exemption and that do not allow the deductions demanded whatever the lessees may be called. * * * Consonant therewith, we are of the opinion that it is immaterial that under the decisions of the Massachusetts courts profits from the sale of securities constituting the corpus of a trust fund are treated as principal*964 and not income. Under the taxing statute such gains clearly constitute taxable income. The statute is plain that if the grantor of a trust in conjunction with any person not a beneficiary of the trust may cause the profits of the fund to be distributed to him, the grantor is liable to income tax in respect of such income received by the trust fund. That is the *319 situation here. Cf. ; affirmed in principle in . In Docket No. 58942 the petitioner alleges error in that the respondent included in his taxable income for 1929, $1,125 representing the proceeds of the sale of stock rights. These proceeds were received by the trustees. At the hearing of this proceeding counsel for the petitioner stated that the $1,125 in question "represented rights to subscribe to bonds of the American Telephone & Telegraph Co. which, under the rulings, I understand, are subject to the surtax but not to the normal tax." The petitioner submitted no further evidence upon the point. The respondent has treated the proceeds from the sale of the stock rights as income of the petitioner liable*965 to surtax only. In the absence of evidence showing error on the part of the respondent in so treating the amount, his action is sustained. Judgment will be entered for the respondent.