Pulitzer v. Commissioner

RALPH PULITZER AND MARGARET L. PULITZER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Pulitzer v. Commissioner Docket No. 82246. United States Board of Tax Appeals 36 B.T.A. 964; 1937 BTA LEXIS 633; November 26, 1937, Promulgated *633 The grantor of a trust who retains the power to appoint another with the right to terminate the trust and receive the fund, has a power to revest the fund in himself and is taxable upon the income of the trust. John G. Jackson, Esq., for the petitioners. Harold Allen, Esq., for the respondent. STERNHAGEN *964 The Commissioner determined an income tax deficiency of $4,357.49 for 1931, by reducing by the amount of capital losses the basis of the percentage limitation of deductions for charitable contributions and a deficiency of $22,287.11 for 1932 by taking petitioner Ralph Pulitzer upon the income of a trust established by him. FINDINGS OF FACT. Petitioners, husband and wife, are residents of New York, New York. They filed a joint income tax return for 1931 and separate returns for 1932. The notice of deficiency was addressed only to Ralph Pulitzer, and advised him that deficiencies had been determined in his income taxes for 1931 and 1932. 1. In 1931, petitioners made charitable contributions aggregating $36,445.05. The amount of their ordinary net income, computed without any deduction for charitable contributions or capital*634 losses, was $249,961.62. The amount of capital losses was $242,956.15. 2. On December 31, 1931, Ralph Pulitzer transferred certain property to the Central Hanover Bank & Trust Co., as trustee, to hold in trust during the life of his wife and of one of their sons. The trustee was empowered to invest and reinvest the corpus, to collect the income, and pay expenses, and was directed to distribute the net income quarterly to the wife during her life and thereafter to their children in a specified manner, and, upon termination of the trust term, to distribute the corpus among the grantor's children or descendants according to given contingencies. The trust instrument further provided: SIXTEENTH: The right and power to terminate this trust as to the whole or any part thereof is hereby given and granted to such individual other than the Grantor as the Grantor shall designate and appoint by an instrument or instruments in writing duly signed and acknowledged by the Grantor, which instrument shall particularly specify the extent to which said trust may be revoked by the individual designated. Upon any such termination it shall be the duty of the Trustee to convey, assign, transfer*635 and deliver free from and discharged *965 of all trusts the whole of the trust fund, or such part or parts thereof as to which the trust shall have been so terminated, unto the individual designated and appointed as above provided. In case the trust shall be terminated only as to a part of the trust fund, the Trustee shall thereafter continue to hold only the residue of the trust fund as to which he trust shall not then have been terminated, with like power in the Grantor to again designate and appoint an individual other than himself who shall have the right and power to terminate the trust as to such residue or any part thereof. The grantor further reserved the right to modify, supplement, or change the trust instrument: * * * with respect to any administrative feature and with respect to the powers and authorities and duties of the Trustee * * *. This reservation shall not extend to any right, power or authority to affect the devolution of the property or the income thereof, as herein provided. During 1932 the trustee distributed to the wife trust income of $46,855.16. OPINION. STERNHAGEN: Although at the hearing the question was suggested as to the participation*636 in this proceeding of the wife, and both counsel were directed to deal with the subject, it has been ignored by them. Since no deficiency has been determined as to her or notice sent to her, there is no subject as to her within the jurisdiction of the Board, ; ; ; see ; ; ; . Her name is therefore stricken as a party petitioner, and the proceeding as to both years will be confined to a consideration of the deficiencies determined as to Ralph Pulitzer. 1. The Commissioner computed the deduction for charitable contributions by applying the statutory 15 percent limit to a net income of $7,005.47, being the remainder after subtracting capital losses, $242,956.15, from ordinary net income, $249,961.62. The petitioner assails the subtraction of capital losses. The question is no longer open, *637 ; certiorari denied, , rehearing denied, ; ; certiorari denied, U.S. (Oct. 11, 1937); ; affd., ; (on review, C.C.A., 3d Cir.). The disallowance is sustained. 2. By paragraph sixteenth of the trust instrument, the power rests in the grantor to appoint an individual other than himself with the right to terminate the trust entirely or in part, whereupon the trustee shall transfer so much of the fund to the appointee as the terms of the appointment provide, up to the entire amount. The Commissioner *966 determined that this was a revocable trust and hence that the income is properly taxable to the petitioner. The respondent here supports this determination by sections 166 and 167, 1 Revenue Act of 1932, and by citing , and *638 . The petitioner argues, relying upon ; ; and , that because the power to revest the corpus is not reserved or given to the grantor by the express terms of the instrument itself, the statute is not applicable. *639 There is, however, no such restriction in the statute and nothing from which it can be implied. The statutory requirement that the income of a trust shall be attributed to the grantor operates whenever there exists in fact the described "power to revest." It is not limited to cases where such power is derived from the express terms of the instrument, ;; (on appeal C.C.A., 1st Cir.). That such a power actually is in the grantor of the present instrument seems plain. He may at any time, without let or hindrance from any of the beneficiaries, the trustee, or anyone else, appoint whomsoever he will, with the direction to terminate the trust. The direction may be made a contractual obligation upon the appointee; and although the trustee is required to transfer the fund directly to the appointee alone, there is nothing to prevent the creation by the grantor of a *967 legal obligation in his appointee to transfer the fund at once to the grantor. This ready and simple method available to the grantor for taking ownership*640 and possession of the trust fund and having the trust terminate or diminish at his pleasure is hardly less than a power to revoke or revest. Indeed, the use of the word "revoke" in the instrument carries the implication that the control is intended to remain in the grantor, for strictly the word could not suitably be applied to the act of termination by another. The same considerations are here as moved the decision in , and require that the taxable income of the trust should be included in that of the grantor. The opinion of the Board in , was promulgated before the Supreme Court's opinion in , and must give way to the extent that it may conflict with the later and superior authority. In the Holmes case, the power of revocation held by the grantor was expressly conditioned upon the consent of the beneficiary, an adverse interest. In the Yeiser case, the husband was appointed by the instrument not only with power to terminate beyond the control of the grantor, but also to protect the interests of the minor children. *641 This was regarded by the court as substantially to circumscribe the power and control of the grantor. The determination of the Commissioner is sustained. Judgment will be entered for the respondent. Footnotes 1. SEC. 166. REVOCABLE TRUSTS. Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, 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. (a) Where any part of the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distribution to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income 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 and in the manner specified in section 23(n), relating to the so-called "charitable contribution" deduction); then such part of the income of the trust shall be included in computing the net income of the grantor. (b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question." ↩