Byrnes v. Commissioner

CLARENCE P. BYRNES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Byrnes v. Commissioner Docket No. 87919. United States Board of Tax Appeals 39 B.T.A. 594; 1939 BTA LEXIS 1011; March 14, 1939, Promulgated *1011 In 1929 petitioner established a trust providing that the income should be payable to him during his lifetime, then to his wife and others, with remainder over. The trust agreement specifically prohibited assignment of the income by the beneficiaries, or either of them, prior to actual receipt. In 1932 petitioner created a trust for the benefit of his daughter and her children, and on the same date executed a purported assignment to the latter trust of all the income which he would thereafter be entitled to receive from the former trust until January 1, 1937. Held, the purported assignment was void, and the income derived by the first trust during the years 1933 and 1934 was taxable to petitioner. Blair v. Commissioner,300 U.S. 5, distinguished. Thomas Watson, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. HILL *594 This proceeding is for the redetermination of deficiencies in petitioner's income tax liability for the years 1933 and 1934 in the amounts of $4,836.05 and $4,703.89, respectively. The pleadings raise two issues for decision, namely, (1) whether the income received by a certain*1012 trust in each of the tax years is properly taxable to petitioner, and (2) whether respondent erred in including in petitioner's taxable income the amount of $10,000 received by another trust in 1933 as consideration for the sale of a certain patent and patent rights, which theretofore had been transferred to the trust by petitioner. FINDINGS OF FACT. Petitioner, during the taxable years, was a resident of Sewickley, Allegheny County, Pennsylvania. On January 21, 1929, petitioner created an irrevocable trust, designating himself and the Union Trust Co. of Pittsburgh as trustees. The whole net income of the trust when and as received was payable to petitioner during his lifetime, then to his wife during her lifetime, thereafter to the grantor's daughter during her lifetime, and then to such daughter's children, with remainder over upon contingencies not material here. The trust instrument contained, among other things, the following provisions: Neither the said trust estate nor any income therefrom present or future, shall be subject in any manner whatsoever to the control, engagements, debts or liabilities of the cestuis que trustent, or either of them, nor subject to assignment, *1013 pledge, hypothecation, or other disposition whatsoever, said cestuis que trustent to have no right or title in the said income, or power of alienation or disposition by way of anticipation or otherwise, until the said income has been actually paid to said cestuis que trustent, in accordance with the terms hereof. *595 On July 8, 1932, petitioner entered into a trust agreement with the Union Trust Co. of Pittsburgh as trustee, for the benefit of his daughter and her children, and on the same day executed a written assignment to the latter trust of all the income which he would thereafter be entitled to receive from the former trust until January 1, 1937. The trust created January 21, 1929, had net income for the years 1933 and 1934 in the respective amounts of $8,793.53 and $7,965.85. In accordance with the provisions of the assignment dated July 8, 1932, these amounts were paid by the Union Trust Co. of Pittsburgh, as trustee under the trust created January 21, 1929, to the Union Trust Co. of Pittsburgh, as trustee under the trust created July 8, 1932. On May 5, 1934, petitioner paid a gift tax of $67.53 on the income assigned July 8, 1932. On July 21, 1931, there*1014 was issued to petitioner United States patent No. 1,815,547, relating to the manufacture of laminated glass. On May 26, 1933, petitioner executed an assignment of patent No. 1,815,547 to the Union Trust Co. of Pittsburgh, as trustee of a certain trust created January 11, 1929, by petitioner's wife for her own benefit. This trust was a separate trust not hereinbefore mentioned. Petitioner was cotrustee with the Union Trust Co. of Pittsburgh under such trust, but did not include himself as assignee. The assignment was recorded on May 29, 1933, in the United States Patent Office. On May 26, 1933, petitioner executed a nonexclusive license relative to patent No. 1,815,547 in favor of the Libbey-Owens-Ford Glass Co. of Toledo, Ohio. The license instrument recited in part as follows: The said Byrnes also hereby releases Libbey-Owens-Ford Glass Company from any and all claims for damages or profits resulting from the proposed manufacture and/or use of any inventions coming within the scope of any patents now owned or controlled by him and relating to sheet, flat or laminated glass or the manufacture thereof. On June 14, 1933, petitioner wrote and delivered to the Union Trust*1015 Co. of Pittsburgh, as trustee under the trust created January 11, 1929, a letter enclosing the assignment executed May 26 and recorded May 29, 1933, together with the original patent No. 1,815,547 and the release from petitioner to the Libbey-Owens-Ford Glass Co. executed May 26, 1933. Petitioner also transmitted with his letter a license agreement to be executed by the trust company, and requested that the documents be forwarded to the glass company by letter stating that it was the understanding that petitioner had agreed with the attorney for the latter company on $10,000 as the amount to be paid for these documents. On June 15, 1933, the Union Trust Co. of Pittsburgh, as trustee under the deed of trust dated January 11, 1929, executed an instrument entitled "License Agreement", in favor of the Libbey-Owens-Ford Glass Co. Petitioner was not designated as a grantor in such instrument, *596 but nevertheless executed the same as cotrustee. The trust company on the same date forwarded by letter to the glass company the documents above mentioned, stating that the arrangement made by petitioner involved the payment of $10,000 in full consideration for both the license and*1016 release. The consideration to be paid by the glass company and other final arrangements were agreed upon by the attorney for that company and petitioner as attorney for the trustees under the trust created January 11, 1929, subsequent to May 26 and prior to June 14, 1933. On July 1, 1933, the Libbey-Owens-Ford Glass Co. wrote a letter to the Union Trust Co. of Pittsburgh, reading in part as follows: You will find enclosed our check for $10,000 made out to Clarence P. Byrnes and Union Trust Company of Pittsburgh, Trustees, in full consideration for both the license and release submitted with your letter of June 15th. The check mentioned in the above letter was paid by the bank upon which it was drawn. The license agreement of June 15, 1933, was the consideration for the payment by the Libbey-Owens-Ford Glass Co. of the $10,000 hereinabove referred to. OPINION. HILL: The first question for decision in this case is whether or not respondent erred in including in petitioner's gross income the amount of the net income derived by a certain trust during each of the taxable years. On January 21, 1929, petitioner created a trust, the net income of which was payable to him during*1017 his lifetime and thereafter to others. On July 8, 1932, petitioner created a trust for the benefit of his daughter and her children, and on the same date executed a purported assignment to the latter trust of all the income which he would thereafter be entitled to receive from the former trust until January 1, 1937. The net income earned by the first trust in each of the taxable years was paid over to the trustee of the second trust in accordance with such assignment, and these amounts respondent has taxed to petitioner. Under the facts disclosed by the record before us, respondent's action, we think, must be sustained. Lucas v. Earl,281 U.S. 111, and Burnet v. Leininger,285 U.S. 136, established the doctrine that future income representing compensation for personal services, such as salary and attorney's fees, or a distributive share of future partnership income, can not be assigned so as to render it nontaxable to the assignor. But petitioner points out that the assignments in those cases passed no interest in property which produced the income attempted to be assigned, and argues that in the present proceeding a different rule *1018 *597 should be applied, citing, among others, Irwin v. Gavit,268 U.S. 161; Blair v. Commissioner,300 U.S. 5; and Ellen S. Booth,36 B.T.A. 141. In each of the last two cited cases it was held that the trust income paid directly to the beneficiaries' assignees, under the facts and circumstances disclosed, was taxable to the assigness and not to the original beneficiaries or assignors. Irwin v. Gavit, decided that trust income constitutes taxable income and not property acquired by bequest, while all three decisions hold that a gift of income by valid assignment transfers an equitable interest in the corpus of the trust property. The instant case is distinguishable on the facts from those cited and relied on by petitioner, in at least one important and controlling particular, namely, that in each there was no restraint upon alienation, and hence the assignment was valid. In Blair v. Commissioner, supra, the tax was not upon earnings which were taxable to those who earned them, as in the Earl and Leininger cases, but involved a tax which, as in the present case, resulted from*1019 ownership of the income-producing property, and the assignment of such property rights was valid. In its opinion the Court said: The will creating the trust entitled the petitioner during his life to the net income of the property held in trust. He thus became the owner of an equitable interest in the corpus of the property. Brown v. Fletcher,235 U.S. 589, 598, 599 * * * Irwin v. Gavit,268 U.S. 161, 167, 168 * * * Senior v. Braden,295 U.S. 422, 432, 433 * * *. The interest was present property, alienable like any other, in the absence of a valid restraint upon alienation. * * * We conclude that the assignments were valid, that the assignees thereby became the owners of the specified beneficial interests in the income, and that as to these interests they and not the petitioner were taxable for the tax years in question. [Italics supplied.] Likewise, in Ellen S. Booth, supra, we pointed out in our opinion that, "The trust agreement contained no restriction upon alienation, and the income of the trust is payable to the beneficiaries, 'their heirs and assigns.'" *1020 In the present case the trust agreement was by its terms irrevocable and contained a most carefully drawn and broadly stated spendthrift clause; indeed, it would be difficult to use plainer or more unambiguous language designed to prevent assignment of the income by any beneficiary prior to its actual receipt. The provisions are set out in haec verba in our findings of fact above. It was specifically stated that neither the trust estate nor any income therefrom should be subject in any manner to the control of the cestuis que trustent, or either of them, and that none of the cestuis que trustent should have any right or title in the trust income, or power of alienation, until actually paid over in accordance with the terms of the trust instrument. There is no suggestion by either party hereto that such *598 restraint upon alienation was invalid, and we know of no reason to question its validity. Petitioner, as donor of the trust, undoubtedly had the legal right to limit his gift to the beneficiaries as provided in the trust instrument, and he made no exception in the application of such provisions to himself as one of the cestuis que trustent. It would*1021 follow, under the doctrine of Blair v. Commissioner Supra, and the authorities cited therein, that petitioner reserved to himself an equitable interest in the corpus of the trust property to the extent of a life interest in the income, but such interest did not attach until the income was actually paid over to him, and he, as well as succeeding beneficiaries, was prohibited from assigning the income or otherwise disposing of it prior to its actual receipt. Prior to actual receipt, petitioner had no right or title to the income and no power to assign it. The purported assignment was, therefore, void. Prior to the attempted assignment, there can be no doubt that the income, when and as paid over to petitioner, constituted income taxable to him. Michael Fay et al., Executors,34 B.T.A. 662. Cf. Irwin v. Gavit, supra. Therefore, since the attempted assignment was without legal effect, and the trust income in controversy had to become petitioner's income before he could dispose of it, it was taxable to him in the same manner and to the same extent as if such assignment has never been executed. Respondent's action on the first issue is*1022 approved. The second question is whether or not respondent correctly included in petitioner's taxable income for 1933 the amount of $10,000 paid on July 1, 1933, for patent No. 1,815,547 which petitioner, on May 26, 1933, had assigned to a trust created by his wife for her own benefit on January 11, 1929. This issue is solely one of fact. On May 26, 1933, the same date on which he assigned the patent to his wife's trust, petitioner executed a nonexclusive license relative to patent No. 1,815,547 in favor of the Libbey-Owens-Ford Glass Co., which subsequently purchased the patent. This license was delivered on June 15, 1933, after the assignment of the patent to the trustee had been recorded in the United States Patent Office on May 29, 1933. The assigned patent related to the manufacture of laminated glass, and the license executed by petitioner contained a paragraph releasing the glass company from any claim by him for damages or profits resulting from the use of any inventions coming within the scope of any patents then owned by petitioner relating to sheet, flat, or laminated glass. Respondent contends that the $10,000 paid by the glass company represented not only consideration*1023 for assignment of the patent, but also for petitioner's release in respect of any other patents owned by him relating to the manufacture of laminated glass, and, since petitioner *599 did not adduce evidence to establish any basis for allocation of the $10,000 between the patent and the release, the entire amount is taxable to petitioner as the proceeds of sale of an asset having no cost basis. Respondent's contention, we think, can not be sustained. Petitioner testified that the glass company desired a general release from him in connection with the assignment of the patent from the trustee. Aside from the release, there is nothing in the record to indicate that petitioner owned any such other patents, and it appears that the release was in fact merely in the nature of a quit claim which petitioner was willing to execute without a monetary consideration. In any event, petitioner testified - and there was nothing to contradict his testimony - that the $10,000 was paid by the glass company as consideration for the assignment of the patent then owned by his wife's trust. Respondent's action on the second issue is reversed. Decision will be entered under Rule 50.*1024