Tiernan v. Commissioner

MARTIN F. TIERNAN, TRUSTEE, MARTIN F. TIERNAN TRUST FOR MARTIN T., CHARLES W., JOHN W., ANN C. AND MARY E. TIERNAN, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tiernan v. Commissioner Docket Nos. 83167, 83169, 83171, 83173, 83175, 83177, 84276, 84277, 84278, 84279, 84291, 84292, 84293, 84294. United States Board of Tax Appeals 37 B.T.A. 1048; 1938 BTA LEXIS 949; June 14, 1938, Promulgated *949 1. The income of a trust which in the trustee's discretion might be used for the support of the grantor's children but was not so used, is not taxable to the grantor. E. E. Black,36 B.T.A. 346. 2. A mother, under no duty to support her children, is not taxable on the income of a trust created by her which might be but was not used for their support. Commissioner v. Yeiser, 75 Fed.(2d) 956. 3. A trust instrument, the language of which indicates that a separate trust was intended for each beneficiary and under which the trustee kept separate accounts for each, created separate trusts, the income of which is to be separately computed and taxed. United States Trust Co. of New York v. Commissioner,296 U.S. 481. Henry P. Molloy, Esq., and Melville J. France, Esq., for the petitioners. Frank M. Thompson, Jr., Esq., and Jesse F. Gregory, Esq., for the respondent. STERNHAGEN *1049 The Commissioner determined the following deficiencies in petitioners' income taxes for 1932 and 1933: Deficiency Petitioner Docket [1933] Martin F. Tiernan 84291, 84276 $122,706.00 $179,026.27 Purcell C. Tiernan 84294, 84279 5,795.54 6,416.77 Charles F. Wallace 84293, 84278 115,941.44 161,116.68 Florence M. Wallace 84292, 84277 7,189.11 5,121.31 Martin F. Tiernan, trustee 83167 28,338.96 Purcell C. Tiernan and Martin F. Tiernan, trustees 83169 85,206.10 Fidelity Union Trust Co., trustee 83171 1,691.57 Charles F. Wallace, trustee 83173 47,844.65 Florence M. Wallace and Charles F. Wallace, trustees 83175 56,640.98 Fidelity Union Trust Co., trustee 83177 1,700.90 *950 The individuals assail the Commissioner's inclusion in their respective incomes of the incomes of trusts which they severally created for the benefit of their respective children. The trustees assail the Commissioner's determination that each of the trust instruments under which they respectively acted created a single trust, and contend on the contrary that a separate trust for each child beneficiary resulted from each of the several instruments. FINDINGS OF FACT. Martin F. Tiernan and Purcell C. Tiernan, residents of Essex Fells, New Jersey, are husband and wife and the parents of five children: Martin T., born June 20, 1917; Charles W., born August 2, 1918; John W., born March 4, 1922; Ann C., born December 2, 1924; and Mary E., born October 28, 1926. Charles F. Wallace and Florence M. Wallace, residents of Westfield, New Jersey, are husband and wife and the parents of three children: Jane Murray, born June 27, 1915, and married in October 1937; Barbara Stewart, born October 12, 1920; and Elizabeth Glover, born June 25, 1922. The Fidelity Union Trust Co. is a New Jersey corporation, with principal office at Newark, New Jersey. 1. On December 24, 1931, Martin F. Tiernan, *951 as grantor, executed a trust instrument (herein called instrument 1), transferring to himself as trustee specified securities, which, by section 2 of the instrument he was to divide: 2. * * * into five (5) equal parts, and to hold one of said parts IN TRUST for each of the five children of the Grantor, * * * which several five Trusts shall be known by the names of the said five children, and to continue to hold *1050 the principal of each of said Trusts throughout the lifetime of the survivor of said five children unless any of them shall be terminated prior thereto in whole or in part in accordance with the provisions of this instrument * * *. The trustee was vested with ample powers to manage, sell, and invest "each of said Trust Funds and the securities thereof, and to collect the gross income therefrom." By subsection 2(a) he was directed to: (a) * * * apply the net income of each Trust so far as it may be deemed advisable and necessary, to the education and support of the child of the Grantor for whom each of said Trusts has been created, and income not so required shall be by the Trustee invested and added to the corpus * * *, and if such child should die then*952 it shall be applied in the same manner to the issue of such child per stirpes; By subsection 2(b), upon the grantor's death the trustee was to pay to the wife, if surviving, such part of the net income "of each and all of the said Trust Funds" as she should request for life, applying the balance to the education and support of each child. Subsections 2(c)-(e) provide that upon the wife's death the trustee shall hold "the principal of each Trust" throughout the lifetime of the survivor of the children, and in case a child die without issue, shall add the principal of his trust fund in equal shares "to the other existing Trust Funds created hereunder." (d) Upon the death of the last survivor of the children of the Grantor the undistributed portion of the several Trusts then existing shall be distributed in equal shares to the then living grandchildren of the Grantor, * * * or to the issue of deceased grandchildren per stirpes. If at any time "during the period of the several Trusts herein created" the income of the grantor's wife should fall below $20,000 a year, the trustee was directed to pay her the amount of the deficiency from the income, or if necessary, from the principal, *953 "of the several Trusts" proportionately, and if she should be living after January 1, 1939, "in any event ten percent (10%) of the income of each of said Trusts." 7. * * * This Trust Agreement with respect to each of the Trusts herein created is irrevocable, except as herein provided. No amendment in this agreement with respect to any trust created thereby shall be made prior to January 1st, 1940, and thereafter during the year 1940 any amendment may be made by the Grantor, but only with the written consent annexed hereto of a beneficiary who has a substantial adverse interest in the income of the Trust in which the amendment is to be made * * *. No amendment or change of any kind whatsover shall in any event be made by which the Grantor shall acquire or receive any interest of any kind whatsoever in either the principal or income of any Trust created hereby. Other provisions relate to management and name the Fidelity Union Trust Co. as successor trustee upon the death of the grantor-trustee. On the same date Charles F. Wallace, as grantor, transferred to himself as trustee specified securities for like purposes by a trust *1051 instrument (herein called instrument*954 2) identical in substance and in language except for the persons named. Separate accounts under the names of the several beneficiaries were set up and maintained on the respective books and records of Tiernan and Wallace in their administrations as trustees and since January 6, 1933, the Fidelity Union Trust Co. has acted as the custodian of the securities held by the trustees and has kept them in eight separate folders under the respective names of the beneficiaries. Both trustees filed separate fiduciary and income tax returns for 1932 and 1933 for each of the children named in his respective trust instrument and paid the tax reported due. For 1933 Tiernan paid $592.23 as tax on each of the five incomes reported by him as trustee. Wallace paid $5,167.11 as tax on each of the three reported by him. The Commissioner treated the groups of five incomes and three incomes so reported as each received by a single entity. Under this theory he computed an income tax liability of $28,338.96 against Tiernan as trustee, all of which he determined as a deficiency in tax for 1933, and an income tax liability of $47,844.65 against Wallace as trustee, all of which he determined as a deficiency*955 in tax for 1933. 2. On December 24, 1931, Martin F. Tiernan executed a second trust instrument (herein called instrument 3), subscribed by himself as grantor and by himself and his wife as trustees, transferring to the trustees specified securities in the same terms and for the same purposes as set forth in instrument 1, except that in lieu of the provisions of subsections 2(c)-(e) therein the "trustee" was empowered at discretion during the grantor's life to distribute to a child at his majority any part of the child's principal fund, and after the grantor's death the wife was so empowered to distribute one-half of the principal when the child should reach 30 years of age and the other half when he should reach 35. Any undistributed principal could be passed by the child's will or, failing a will, would go to his legal successors. On the same date Charles F. Wallace, as grantor, transferred specified securities to himself and wife as trustees by an instrument (herein called instrument 4) identical in substance and in language with instrument 3, except for the persons named. Separate accounts under the names of the several beneficiaries were set up and maintained on the*956 trustees' respective books and since January 6, 1933, the Fidelity Union Trust Co., as custodian, has kept the trusts' securities in separate folders under the respective names of the eight beneficiaries. The trustees filed separate fiduciary and income tax returns for 1932 and 1933 for each of the children named in their respective trust instruments, and paid the tax shown. For 1933 Tiernan reported and paid a tax of $4,061.90 on each of the *1052 five income tax returns filed by him, and Wallace reported and paid a tax of $6,673.68 on each of the three filed by him. The Commissioner treated the groups of five incomes and three incomes so reported as each received by a single entity. Under this theory he computed an income tax liability of $85,206.10 against Tiernan and wife, as trustees, all of which he determined as a deficiency for 1933, and an income tax liability of $56,640.98 against Wallace and wife as trustees, all of which he determined as a deficiency for 1933. 3. In 1932 and 1933 Tiernan, as trustee under instrument 1, received incomes of $89,408.10 and $109,630.47, respectively, and he and his wife, as trustees under instrument 3, received incomes of $159,481.55*957 and $224,797.89, respectively. No part of the 1932 incomes was used in 1932 for the education or support of Tiernan's wife and children, and no part of the 1933 incomes was so used in 1933. A part of the incomes was invested in 1932, but the major portion was held in cash. Investments during 1933 reduced the cash balances in each child's fund under each instrument to slightly over $1,000. In determining Tiernan's individual income taxes for 1932 and 1933, the Commissioner included in income the respective amounts of income received under the two trust instruments in those years. In 1932 and 1933 Wallace, as trustee under instrument 2, received incomes of $115,433.64 and $151,805.62, respectively, and he and his wife, as trustees under instrument 4, received incomes of $118,397.81 and $167,914.27, respectively. No part of the 1932 incomes was used in 1932 for the education or support of Wallace's wife and children, and no part of the 1933 incomes was so used in 1933. A part of the incomes was invested in 1932, but the major portion was held in cash. Investments during 1933 reduced the cash balances in each child's fund under instrument 2 to $1,324 and under instrument 4 to*958 $733. In determining Wallace's individual income taxes for 1932 and 1933, the Commissioner included in income the respective amounts of income received under the two trust instruments in those years. 4. On June 1, 1932, Purcell C. Tiernan, as grantor, executed a trust instrument (herein called instrument 5), transferring to the Fidelity Union Trust Co., as trustee, an undivided one-half interest in specified patents and royalties, which had been assigned to her by Martin F. Tiernan on December 24, 1921. Section 2 and subsection 2(a) of this instrument were substantially identical in words and substance with the divisions of instrument 1, so numbered. By subsection 2(b) the trustee was directed to pay to the grantor's husband, Martin F. Tiernan, at his request such part of the net income "of each of said Trust Funds" as should be required to make his annual income from all sources $25,000. By subsection 2(c) the trustee was empowered during the life of the grantor to distribute principal to any child at majority if the trustee thought him capable of *1053 managing the investment, and after the death of the grantor and her husband to distribute one-half of the principal*959 when the child should reach 35 years and one-half when he should reach 40, provided that the child was deemed competent to manage. Otherwise, by subsection 2(d), the principal was to be held and distributed to the child's legatees or legal successors. Other provisions of the instrument are similar to those of instrument 1. On June 1, 1932, Florence M. Wallace, as grantor, executed a trust instrument (herein called instrument 6), transferring to the Fidelity Union Trust Co., as Trustee, an individed one-half interest in specified patents and royalties, which had been assigned to her by Charles F. Wallace on December 24, 1921. This instrument was identical in substance and in language with instrument 5, except for the persons named. The Fidelity Union Trust Co. has acted as trustee under instruments 5 and 6 since their execution. It entered in its cash accounts a separate account of the transactions for each of the beneficiaries, and in its securities ledger a separate record of the securities held for the benefit of each of the beneficiaries. It filed separate fiduciary and income tax returns for 1932 and 1933 for each of the children named in the trust instruments, and paid*960 the tax shown. For 1933 $113.20 was so paid as tax under each of the five returns filed for a Tiernan beneficiary and $277.68 under each of the three filed for a Wallace beneficiary. The Commissioner treated the groups of five incomes and three incomes so reported as each received by a single entity. Under this theory he computed an income tax liability of $1,691.57 against the Fidelity Union Trust Co. as trustee under instrument 5, and $1,700.90 against it as trustee under instrument 6, and determined these amounts as deficiencies in tax for 1933. 5. In 1932 and 1933 the Fidelity Union Trust Co., as trustee under instrument 5, received incomes of $17,793.58 and $19,325.53, respectively. No part of the 1932 income was used in 1932 for the education or support of the children of Purcell C. Tiernan, and no part of the 1933 income was so used in 1933. Investments of income reduced the cash balance in the fund of each child to $2,516 at the end of 1932, and to $134 at the end of 1933. In determining the individual income taxes of Purcell C. Tiernan for 1932 and 1933, the Commissioner included in her income the respective amounts of income received by the trustee under instrument*961 5 in those years. In 1932 and 1933 the Fidelity Union Trust Co., as trustee under instrument 6, received incomes of $17,796.74 and $19,356.43, respectively. No part of the 1932 income was used in 1932 for the education or support of the children of Florence M. Wallace, and no part of the 1933 income was so used in 1933. Investments of income reduced *1054 the cash balance in the fund of each child to $3,835 at the end of 1932, and $232.76 or less at the end of 1933. In determining the individual income taxes of Florence M. Wallace for 1932 and 1933, the Commissioner included in her income the respective amounts of income received by the trustee under instrument 6 in those years. OPINION. STERNHAGEN: All fourteen of these proceedings arise from several methods used by the Commissioner in taxing the income of the six trusts described in the findings. No argument has been made in behalf of the Commissioner, either orally or by written brief, attempting to support any of the determinations made. In eight of the proceedings the individual grantors of the trusts assail for each year, 1932 and 1933, the Commissioner's treatment of the trust incomes as if they were individually*962 their own and taxable to them. In the remaining six proceedings the trustees assail the Commissioner's determination that each trust instrument sets up a single trust the income of which is taxable as a single lump sum instead of separate trusts for the several beneficiaries the incomes of which are taxable separately. 1. Although the four trusts established by Tiernan and by Wallace were for the benefit of their children in one case and of their children and wives in another, there was no power of revocation and no provision whereby under any circumstances either the corpus or the income could be revested in the grantor, hence there is no foundation for the application of section 166 or 167, Revenue Act of 1932. There is in each trust instrument a provision under which the trustee may in his discretion use the income for the education and support of the grantor's child, but it appears that in fact no such use was made of the income and that in fact the grantor was not relieved of any parental duty or obligation to maintain a child. The income was in fact accumulated and invested by the trustee. The wives in the taxable years in question actually received nothing from the trustees*963 either by way of maintenance or otherwise. Thus the circumstances in evidence take the case entirely outside the scope of , and similar cases, 1 and bring it within , holding that the income of the trust is not under such circumstances taxable to the grantor. 2. In the four proceedings of the two wives, Purcell C. Tiernan and Florence M. Wallace, there is in addition to the reasons supporting the contentions of the husbands, the added reason that under New Jersey law, which governs the two families in question, there is no duty of a *1055 mother to support a child during the life of the father. 2 The Commissioner's determination as to the wives is likewise reversed. ; *964 ; cf. . 3. There is in each of the trust instruments language which unmistakably indicates that a separate trust was intended to be and was actually set up for each child beneficiary. In section 2 and subsection 2(a) appear words, "to hold one of said parts in trust for each of the five children"; "which several five trusts shall be known by the names of the said five children"; "the principal of each of the said trusts", etc. In conformity with this clear language, each trustee was careful to keep the principal and the income which he held for each child in an account separate from all the rest. Thus the situation is entirely similar*965 to that in , in which the Supreme Court held that separate trusts were to be recognized for the several beneficiaries and the income of each separately computed and taxed. Upon this authority the Commissioner is held to have erred in determining the deficiencies of the trustees as if there were but six trusts, one under each instrument. It results, from the authorities cited, that upon all the issues raised the petitioners' contentions are sustained and the Commissioner's determinations are reversed. Judgments will be entered under Rule 50. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Purcell C. Tiernan and Martin F. Tiernan, Trustees, Martin F. Tiernan Trust for Martin T., Charles W., John W., Ann C. and Mary E. Tiernan; Fidelity Union Trust Company, Trustee, Purcell C. Tiernan Trust for Martin T., Charles W., John W., Ann C. and Mary E. Tiernan; Charles F. Wallace, Trustee, Charles F. Wallace Trust for Jane M., Barbara S. and Elizabeth G. Wallace; Florence M. Wallace and Charles F. Wallace, Trustees, Charles F. Wallace Trust for Jane M., Barbara S. and Elizabeth G. Wallace; Fidelity Union Trust Company, Trustee, Florence M. Wallace Trust for Jane M., Barbara S and Elizabeth G. Wallace; Martin F. Tiernan; Florence M. Wallace; Charles F. Wallace; Purcell C. Tiernan. ↩ 1. ; ; ; . ↩ 2. ; ; affd., ; ; ; ; ; ; ; ; . ↩