Ives v. Commissioner

CHARLES E. IVES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JULIAN S. MYRICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ives v. Commissioner Docket Nos. 40423, 40424, 51526, 51527, 63376. United States Board of Tax Appeals 29 B.T.A. 822; 1934 BTA LEXIS 1476; January 18, 1934, Promulgated *1476 1. Certain revocable trust instruments of the character shown in the findings of fact were executed by the petitioners, May 1, 1923, and remained revocable during that year. Held, the income arising from such trusts during that year is taxable to the petitioners. 2. In 1924 the aforesaid trusts were revoked and other trusts of similar character except irrevocable in nature were made by petitioners. Held, the latter trusts operated as absolute assignments or transfers of property and property rights and the income arising therefrom in 1928 and 1929, the years in issue, is not taxable to the petitioners. Watson Washburn, Esq., for the petitioners. Frank A. Surine, Esq., for the respondent. SEAWELL *823 These proceedings were consolidated for hearing and report. Each petitioner assigns as error the inclusion in his taxable income for the years in issue of certain sums representing one half of the net income of a partnership known either as Ives & Myrick or Ives & Co. for those years, which resulted in deficiencies in income taxes against petitioners as determined by the respondent in the respective amounts, as follows: Petitioner Docket No. Year Amount Charles E. Ives 40423 [1923] $668.60 Julian S. Myrick 40424 [1923] 593.61 Do 51526 [1928] 2,752.34 Charles E. Ives 51527 [1928] 2,949.06 Julian S. Myrick 63376 [1929] 2,590.18 *1477 The question for determination is whether the net income of a partnership known either as Ives & Co. or Ives & Myrick is, for the years stated, taxable to the petitioners, who originally constituted the partnership, in view of the fact that they endeavored by certain trust instruments to transfer their interests in such partnership to trustees who undertook, as set forth in our findings of fact, to conduct the same business under the partnership name for the benefit of petitioners' wives and certain relatives. FINDINGS OF FACT. The petitioners are citizens of the United States, Charles E. Ives residing in Redding, Connecticut, and Julian S. Myrick residing in New York City. For some years prior to 1907 both were employed as clerks with the Mutual Life Insurance Co. of New York. On January 1, 1907, they became general agents in New York City of the Washington Life Insurance Co. They formed, and operated at that time, a partnership under the name of Ives & Co. or Ives & Myrick, for the purchase of interests in commissions on renewal insurance premiums from such agents as wished to dispose of the same. In 1908 the Washington Life Insurance Co. was sold and the petitioners' *1478 connection with that company ceased. In 1909 petitioners were employed by the Mutual Life Insurance Co. of New York as managers, each of them having a separate or individual contract with the company, the compensation of each consisting of salary fixed at the end of the year, based on amount of business done "and renewal interests in all premiums that were done through the office, to the extent of one percent for the succeeding five years." The petitioners continued from 1907 to carry on their partnership business, which was limited to purchasing insurance renewal *824 commissions, and investing their capital so derived. The income from such renewal commissions and reinvestments covering a number of years amounted to a considerable sum of money, which was carried in their bank account in the name of Ives & Co. The partnership, however, was also known as Ives & Myrick. At the beginning of their partnership petitioners purchased insurance renewal commissions in their individual names and then tried to divide same equally between them. Later, about 1918, with the cooperation of the insurance company more satisfactory arrangements were made, under which the partnership*1479 purchased renewal commissions from agents soliciting and writing insurance, and these commissions were assigned to Ives & Co. and paid for out of the partnership account. Such assignments of renewal commissions to Ives & Co. were filed with the insurance company and payment of renewal commissions after such assignments were made by check of the insurance company to the partnership. Agents soliciting and writing insurance for the Mutual Life Insurance Co. of New York did so under contracts with the company, as represented by Ives or Myrick, who signed the contracts as manager. About 90 percent of the renewals purchased gave the agent the right to receive 12 percent of the second and third years' premium and 6 percent of the fourth year's premium. About 10 percent of the renewals gave the agent 5 percent of the premium for nine years. The partnership in each instance of purchase made by it usually paid 15 percent in cash to the agent for his right to receive renewals. Agents writing insurance for the company received 50 percent of the first year's premium as commission. The right to insurance renewal commissions on business obtained by either of the petitioners was also assigned*1480 to the partnership. Some of the rights to renewal commissions were collectible over a period of approximately nine years. Prior to May 1, 1923, the petitioners consulted their attorney, Watson Washburn, a brother of the wife of petitioner Julian S. Myrick and also a witness in these proceedings, regarding their property, with a view of turning some of it over as a gift to their wives and children and in so doing save in income taxes, inheritance taxes, and certain expenses. The petitioners were advised by counsel first to execute a new partnership agreement, the one under which they had been operating being somewhat informal, and on May 1, 1923, they executed a new partnership agreement, the part of which material to the issues herein is as follows: FIRST: This agreement takes effect immediately, superseding and cancelling all other agreements both written and oral. SECOND: This agreement refers only to the business of purchasing and owning renewals from life insurance policies wherever and by whomever issued; *825 to the bank account of Ives and Myrick kept under the account name of Ives & Company; to the rights to renewal commissions, held by Ives and Myrick; to*1481 any money or other property which may be acquired with such account or with the proceeds of such commissions; and to commissions on insurance personally written by either party hereto. THIRD: The salary and the so-called manager's one per cent (1% commission which Ives and Myrick receive from the Mutual Life Insurance Company are matters of personal agreement between them and the said company, and in the event of the retirement from the company or the death of either Ives or Myrick, the other has no claim or interest in the funds coming from these sources. FOURTH: The parties hereto will continue to engage in the business of purchasing the right to receive renewal commissions from policies of life insurance, wherever and by whomever issued, and to share equally in the profit and loss from such purchases. FIFTH: Each party hereto shall be entitled to receive in full the amount of the first year commission on any business which he may personally write, but he shall assign to the partnership the right to receive commissions on any renewals thereon. * * * EIGHTH: It is contemplated that either or both of the parties hereto may transfer his interest in the partnership to trustees*1482 for the benefit of his or their respective families, and consent to such transfer is hereby given. On the same date, May 1, 1923, that the petitioners executed their new partnership agreement, certain trust agreements were also executed by them. On that date petitioner Charles E. Ives, referred to as donor, and his wife, Harmony Twichell Ives, referred to as the trustee, executed a trust instrument, the portions of which material to the issues herein are as follows: WHEREAS the donor desires to make provision for his wife and child, and for that purpose desires to transfer to the trustee hereunder his interest in his partnership with Julian S. Myrick. NOW, THEREFORE, in consideration of the premises, and of the agreement of the trustee to carry out the purposes of this instrument, the donor does hereby assign, set over, and transfer to the trustee all his right, title, and all interest in the partnership between himself and Julian S. Myrick, and all the assets and good will thereof, being the partnership described in the agreement of even date executed by himself and the said Julian S. Myrick, a copy of which is annexed hereto, with full power to carry on the said partnership*1483 for the purposes set forth in the said agreement, as fully as he could do himself as an individual either under the name of Ives & Myrick, or of Ives & Co., or of his own or such other name, as to such trustee in her discretion may seem best. And without limiting in any way the generality of the foregoing, the donor hereby grants to the trustee the following specific powers with respect to the trust estate: 1. To employ such agents or officers of the trust estate, including herself, with such titles, powers, and salary, as she may see fit. 2. To buy, sell, exchange, rent or lease real estate. 3. To buy, sell, or exchange personal property including particularly stocks, bonds, and rights to receive renewal commissions on insurance policies. *826 4. To lend or borrow money with or without security, and to that end to pledge or mortgage any or all of the trust estate; and to make contracts of guaranty or suretyship. 5. To appoint one or more additioinal trustees in her discretion, either by instrument inter vivos or by will. 6. In general to do all acts and things necessary and proper for the complete execution of this trust. * * * The donor reserves*1484 the right at any time, by an instrument duly acknowledged, to revoke this instrument in whole or in part, or to amend it in any and all respects, and the trustee agrees, upon delivery to her of such instrument of revocation or amendment, to carry out each and all of its terms, as fully as if they were incorporated in this present deed of trust. A trust instrument executed May 1, 1923, by Julian S. Myrick, as donor, and by his wife, Marion W. Myrick, and his brother-in-law, Watson Washburn, as trustees, contained substantially the same character of provisions as were in the trust which Charles E. Ives and wife executed on the same date. Copies of both trust agreements were sent by Watson Washburn to the Guaranty Trust Co. of New York City, where the partnership's bank account under the name of Ives & Co. was kept, and a duplicate of the trust agreement under which Marion W. Myrick and Watson Washburn, trustees, opened an account at the Equitable Trust Co. of New York City, was sent it. In the letter to the Guaranty Trust Co. inclosing the trust agreements the company was authorized to continue to honor checks on aforesaid account signed in the name of Ives & Co. by either Charles*1485 E. Ives or Julian S. Myrick as theretofore, they having been appointed agents for such purpose. Harmony Twichell Ives did not, as trustee under the Ives trust agreement, open a trustee account, having been advised by her counsel that such was not thought necessary in the event she kept a careful account of the money her daughter should receive under the trust agreement executed by her husband and herself. It was arranged by Myrick and Ives and their wives and Watson Washburn for the trustees named in the trust agreements to continue the business of the former partnership under the same name, and in accordance with the terms set out in the trust instruments, most of the duties as trustees being left to Watson Washburn as the active person in charge of the business. It was arranged for Julian S. Myrick and Charles E. Ives to look after the details of the business at the same office where they handled their business as managers, partly in return for which service certain expenses of advertising, circularization, and so forth, amounting to several thousand dollars a year, paid by Ives & Co., the trust partnership, resulted in some benefit to the business of the managers, as well as*1486 to the trust partnership in its purchase of renewal insurance commissions. The *827 trust partnership employed and paid a bookkeeper and an assistant bookkeeper, who were generally governed in difficult questions arising in the business by the advice of Julian S. Myrick and Charles E. Ives. In important matters of policy Watson Washburn was consulted. Under advice of counsel, the petitioners on February 15, 1924, exercised the options contained in the trust agreements of May 1, 1923, and revoked the trusts by executing other trust agreements which were substantially the same (except as hereinafter indicated) in wording as the trust agreements of May 1, 1923, except that in the Ives trust Watson Washburn was added as a cotrustee with Harmony Twichell Ives. No provision for revocation was contained in either instrument, Provision for the Myrick and Ives children was made in the former trusts, but was not made for either in the later, irrevocable trusts. There was no certificate or notice of any change in partnership organization filed with state or county authorities when the trusts were executed and the new partnership formed, nor was there any notice given the public, *1487 the agents who sold their renewal commissions, or the insurance company, of the assignment by petitioners of their partnership interests to the trustees. However, after the execution of the irrevocable trusts on February 15, 1924, the trustees, doing business as partners, filed Federal and state returns of income, annually, and the trustees and beneficiaries individually also filed returns. Neither of the petitioners, after making the trusts described, asserted any right, title, interest, or ownership to anything described and conveyed therein or thereby. Neither of the petitioners received compensation for any advice or assistance given the bookkeeper of the trustee-partners, doing business as Ives & Co., other than what they might have received by reason of the advertising and circularization done by the trustees in carrying on the business of their partnership of Ives & Co. Up to April 11, 1928, all insurance renewal commissions earned personally by Julian S. Myrick and Charles E. Ives, or by their purchase of same, stood in their names on the books of the Mutual Life Insurance Co., and payments thereof were made by checks of the insurance company to their order, endorsed*1488 by them and turned over to the trustees and deposited to their bank account of Ives & Co., as contemplated in the trust agreements. Under date of April 11, 1928, Julian S. Myrick and Charles E. Ives each, notwithstanding the transfer and assignment embodied in the trusts previously executed, made additional and formal assignments or transfers to "Ives & Company," its successors and assigns, of all his right, title, and interest in and to the renewal *828 commissions which were then due or might thereafter become due under any and all policies of insurance issued by the Mutual Life Insurance Co. of New York upon applications procured by agents and brokers and which, under certain agreements made between the agent or broker, and either Ives or Myrick, and previously filed with the company as each policy was established, were to be payable to Ives or Myrick. Each assignment authorized "Ives & Company," its successors and assigns to collect any and all such renewal commissions for its own use and benefit. Petitioner Myrick before and also after April 11, 1928, by trust deeds conveyed and added to the trust previously established by him assets consisting of stocks, bonds, *1489 and other securities aggregating in value considerably more than one hundred thousand dollars, the tax liability on the income from which is not, however, in dispute, being accepted by the respondent as returned. The dispute or issue herein relates alone to insurance renewal commissions as heretofore indicated. The partnership return of income filed by Ives and Myrick for the period January 1 to April 30, 1923, shows a net income for that period of $8,300.14 and also shows that Charles E. Ives and Julian S. Myrick each owned a 50 percent interest in the partnership. The return of income for the period May 1 to December 31, 1923, filed by Harmony T. Ives, Marion W. Myrick, and Watson Washburn, doing business as Ives & Myrick, shows a net income of $16,066.44 and also shows that Harmony T. Ives, trustee, owns a 50 percent interest in the partnership, and Marion W. Myrick and Watson Washburn, trustees, own the other 50 percent. The return of income for the calendar year 1928 filed by the trustees doing business as Ives & Myrick shows the net income to be $28,063.91 and that the ownership of the partnership was in the trustees in the same proportion as last stated. One half*1490 of such income in each instance was determined by the respondent to be taxable to Julian S. Myrick and one half to Charles E. Ives, the petitioners herein. There is no dispute as to the amount of net income of the trustee-partnership of Ives & Myrick for 1928 or for 1929. Respondent determined that one half of its net income for 1929, amounting to $14,452.07, is taxable to petitioner Myrick. Each of the petitioners herein, in his individual income tax return for the year 1923, reported one half of the income of their partnership of Ives & Myrick for the period January 1 to April 30, 1923, but did not report any of the income of the alleged partnership of the trustees, doing business under the name of Ives & Myrick or Ives & Co., for the balance of the year or for the subsequent years in issue. *829 The record shows that, of the renewal commissions acquired by the trustee-partners or paid into their partnership bank account of Ives & Co. after the execution of the trusts, only a few hundred dollars' worth arose from insurance written by the petitioners. This is not controverted and was virtually stipulated at the hearing. The record further shows that the income from*1491 renewal commissions was substantially regular throughout the year and that the income for half a year would be about half the income for the full calendar year, and so on. The evidence also indicates that the yearly purchase of renewal commissions prior to 1923 was about the same in amount as the renewal commissions paid each year. The evidence indicates that the petitioners and trustees mentioned herein did business on a cash receipts and disbursements basis and no rights of creditors are shown to have been involved. OPINION. SEAWELL: The deficiencies in income taxes asserted by the respondent are for the years 1923, 1928, and 1929. The statutes involved, though not here quoted, are sections 212(a), 213(a), 218(a), (b), (c), and 224 of the Revenue Act of 1921, and sections 21, 22(a), 181, 182(a), 183, 184, and 189 of the Revenue Act of 1928. The record shows quite clearly that in executing the trust instruments bearing dates of May 1, 1923, and February 15, 1924, as set forth in our findings of fact, it was the intent of petitioners to reduce their tax liability by transferring their interests in their partnership of Ives & Co., also known as Ives & Myrick, to trustees*1492 for the benefit of their wives or relatives. Whether they accomplished their purpose as regards the taxes and years in issue, by resort to the means and methods adopted, is the question for our determination. The wording of the indentures of May 1, 1923, and February 15, 1924, shows that the petitioners, each, did "assign, set over and transfer to the trustee [or trustees] all his right, title and interest in the partnership," of Ives & Co. or Ives & Myrick, "and all the assets and good will thereof * * * with full power to carry on the said partnership." The expressions used in the instruments are general and inclusive enough to constitute, in our opinion, a complete transfer of the partnership interests to the trustees named and to effect the purpose for which intended, unless rendered ineffective by operation of some law or by certain conduct of the parties. The respondent contends that the trusts created by petitioners in the first instance - those dated May 1, 1923 - were revocable during that year and that therefore the income from the partnership interests for that year is taxable to the grantors, the petitioners, *830 citing as authority *1493 , and . The petitioners, through their counsel, insist that the revocability of the trust instruments during 1923 does not make the income of the partnership attempted to be created by or through the operation of the trusts taxable for that year to the grantors or (as termed by petitioners' counsel) donors, and an extended argument based largely on the dissenting opinion in , and numerous court authorities cited, are relied on. While we have carefully considered all arguments and citations, we do not, in the view we take of this particular question, deem it necessary to discuss the subject at great length. In , we held that the agreement under consideration was one of mere agency and not a trust instrument, following our holding to the same effect in In the Grace Whitney Hoff case, supra, however, there was a trust revocable in 1923, as in the instant proceedings, and in view of the fact that the petitioner therein*1494 had full power under the trust instrument to control both the corpus and the income thereof we held, as we conceived, in accordance with the principle enunciated by Mr. Justice Holmes in , that she was taxable on the 1923 income. While the question in that case was a constitutional one, involving section 219(g) and (h) of the 1924 Revenue Act - which is not found in the 1921 Revenue Act, involved in the instant proceedings - the issue related to 1924 income of a revocable trust created in 1922 and the Court in its opinion used very broad and inclusive language, saying in part: * * * The ivcome that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not. We consider the case too clear to need help from the local law of New York or from arguments based on the power of Congress to prevent escape from taxes or surtaxes by devices that easily might be applied to that end. The income for 1924, in the circumstances stated, was held taxable to the grantor. Some other and later decisions in which similar questions were involved*1495 are ; ; and . In none of these cases, nor in others considered, do we find any expressions which, in our opinion, justify a departure from the principle announced in , and followed by us in In fact we are on the contrary rather confirmed by the decisions in those cases of the correctness of our holding and statement in the Hoff case, supra, that it is clear from the Supreme Court's opinion in , that, irrespective of the special provisions of section 219(g) and (h) of the *831 1924 Revenue Act, control by the petitioner over the income has the effect of constituting it her income and so taxable. In the instant proceedings it is clear from the record that the trusts created by the petitioners on May 1, 1923, were revocable by them during the remainder of that year and in our opinion, and we so hold, the income of the respective trusts created by petitioners Charles E. Ives and Julian*1496 S. Myrick should be included in computing their net income for 1923, as determined by the respondent. On February 15, 1924, the record shows, the trusts of May 1, 1923, were revoked by petitioners and on the same day other trusts were executed by them which were irrevocable in their nature, and, petitioners insist, these trusts constituted a complete transfer of the partnership assets to the trustees. In view of the conclusion we have already reached and stated in reference to income of the trust partnership during the year 1923, we shall consider the trust instruments after they were made irrevocable and only for the years involved herein, 1928 and 1929. The respondent contends that the petitioners continued as partners in the business conducted under the name of Ives & Co. or Ives & Myrick, regardless of the alleged transfer of their interests therein. Such insistence is based on the fact that there was no change made in the name under which the business of the partnership was carried on; that the business was conducted in the same office rooms as before the asserted transfers, where the original or old partners were always available for rendering assistance in the operation*1497 of the business; that the only notice of the alleged change in the partnership was notice thereof sent to the bank where the partnership account was kept, which account continued as formerly in the name of Ives & Co.; that insurance agents continued to sell their renewal commissions to the partnership of Ives & Co.; and that the insurance company which paid the commissions was not notified of the alleged change until 1928. In behalf of the respondent it is also insisted that such a partnership as petitioners assert was created and carried on after their alleged transfer of their partnership interests to the aforesaid trustees could not legally exist under the statutes of New York, no certificate being filed in the clerk's office of the county where the business of the partnership was to be conducted. The continued use by the trustees of the partnership name, Ives & Co. or Ives & Myrick, in conducting their alleged partnership business, without filing a partnership certificate with the clerk of the county where the partnership business was to be carried on, as directed by section 81, McKinney's Consolidated Laws of New York, Annotated (Book 38, Partnership Law), did not, in our*1498 opinion, constitute a violation of any penal law of the state or make such partnership *832 absolutely null and void. See secs. 440 and 924, McKinney's Consolidated Laws of New York, supra, Book 39. See also ; affd., , in which a statute asserted by the court to be identical with that of New York is construed and decisions of courts of New York and of numerous other states having similar statutes are cited as having rendered decisions thereon holding the use of partnership names similar to the one now in question, under circumstances of like character to those in the instant case, does not make such partnership business unlawful. We have heretofore recognized the principle that in the State of New York a valid partnership may exist with a trustee as one of the partners. . See also . If, however, the trustees mentioned in the indentures or trust instruments herein were incapable of forming and operating a valid partnership in New York State, they could certainly take a transfer or assignment of the*1499 renewal commissions and bank account standing in the name of Ives & Co., own such jointly, receive payment of renewals, deposit same in the aforesaid bank account and reinvest the money in the purchase of other renewals, which the record shows was done. The trust instruments executed by petitioners conveyed "all the right, title and interest" which they had in the partnership assets. The record shows conclusively, in our opinion, that it was the intention of petitioners to make an absolute assignment of their partnership interests, subject to revocation between May 1, 1923, and February 15, 1924, and thereafter irrevocable. The evidence on this point is clear and uncontradicted. Their action in the matter was under advice of counsel and the fact that such action was with a view to reducing or avoiding to some extent the amount of income taxes which they would otherwise have to pay does not render the trust instruments ineffective or invalid. The tax liability of the trustees and beneficiaries would be the same as joint adventurers or as partners. The respondent contends that the facts herein bring these cases within the rule and principle applied in *1500 ; ; ; ; , and other cases of like nature. There are facts in the instant cases similar to those in the cases cited, but there are also material differences, in view of which those cases, in our opinion, are not controlling herein. The fact that nearly all the renewal commissions which were acquired by the trust partnership after the execution of the trusts were derived from insurance written by agents or persons other than the petitioners is established by the uncontradicted testimony of witnesses. *833 It was virtually stipulated at the hearing that of the renewal commissions acquired as stated only a few hundred dollars' worth arose from insurance written by the petitioners. The record further shows that the renewal commissions purchased by the trust partnership of Ives & Co. were paid for out of its bank account, carried in the same name, Ives & Co., under which the petitioners operated*1501 prior to the assignment. The Mutual Life Insurance Co. of New York was not notified of the assignment until April 11, 1928, prior to which date checks from the insurance company in payment of renewal commissions continued to be made payable to petitioners, were endorsed by them, and deposited in bank to the credit of the trust partnership account of Ives & Co., the petitioners having previously assigned, as shown by aforesaid trust instruments, all their right, title, and interest in such renewal commissions. However, under the circumstances of the instant case the failure to notify the insurance company did not, in our opinion, invalidate the assignment. The record shows that the petitioners, after making the revocable trusts of May 1, 1923, of their partnership interests in renewal commissions, never asserted any right, title, or interest to any of the renewal commissions and never - though they might have done so before making the irrevocable trusts of February 15, 1924 - appropriated to their own use any of the same. All the renewal commissions paid after May 1, 1923, are shown by the evidence to have been paid into the bank account of the trust partnership and all renewal*1502 commissions purchased by or for the trust partnership were paid out of its Ives & Co. account, and after the execution of the irrevocable trusts such payments were, in our opinion, made with the money of the trust partnership and the income arising therefrom was in the sense of the law, as we view it, "earnings" of the trustee-partners or trust partnership and hence not taxable to the petitioners during the years in issue, 1928 and 1929. In our opinion, the principles enunciated and applied in the cases cited below are controlling herein. What the petitioners assigned and transferred by irrevocable trust instruments were property (their Ives & Co. bank account) and rights to property (their interests in certain renewal commissions), as shown in our findings of fact. See ; certiorari denied, ; ; ; . We are, therefore, of the opinion and hold that each of the petitioners, for the years 1928 and 1929 involved herein, is liable for income*1503 taxes in issue only to the extent of income from renewal commissions derived from insurance personally written by him and *834 paid into the trust partnership account of Ives & Co., which counsel at the hearing stated was only a few hundred dollars and indicated there would be no disagreement as to the amount. Reviewed by the Board. Judgment will be entered for the respondent in Docket Nos. 40423 and 40424, and in Docket Nos. 51526, 51527, and 63376 under Rule 50. MCMAHON, GOODRICH, and LEECH concur in the result. BLACK and MATTHEWS dissent. STERNHAGEN dissents in Docket Nos. 51526, 51527, and 63376, being of the opinion that the respondent's determination should be sustained. ARUNDELL, MURDOCK ARUNDELL and MURDOCK, dissenting: We dissent from the opinion in so far as it holds that income of a revocable trust was taxable under the Revenue Act of 1921 to the grantor.