Caspersen v. Commissioner

FREDA R. CASPERSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Caspersen v. Commissioner Docket No. 92765. United States Board of Tax Appeals 40 B.T.A. 759; 1939 BTA LEXIS 806; October 19, 1939, Promulgated *806 The grantor of a trust whose husband, as trustee, may, in his discretion, accumulate the trust income and use it for the support of his minor son, held, not taxable on the income of the trust, since her husband has a substantial adverse interest in the disposition of the trust income. Jackson R. Collins, Esq., for the petitioner. B. M. Brodsky, Esq., for the respondent. STERNHAGEN *759 The Commissioner determined deficiencies of $1,369.51 and $1,406.03 in petitioner's income tax for 1934 and 1935, respectively, including in petitioner's income the income of a trust of which she was the grantor. FINDINGS OF FACT. Petitioner, a resident of New Jersey, on June 3, 1932, transferred to her husband, Olaus W. Caspersen, as trustee, certain shares of stock having a value of about $55,000 in trust, the trust agreement providing in part that: (3) From the net quarterly income arising from the trust fund hereby created, to pay FIRSTLY, to the said Freda R. Caspersen for and during such time *760 as the said Olaus W. Caspersen, her said husband, shall live, the sum of Six hundred ($600.00) dollars every three months, provided, however, *807 that she shall during such time remain the wife of the said Olaus W. Caspersen, and SECONDLY, to pay out of the remaining balance, after the aforesaid payment, to any blood relative or relatives of the said Freda R. Caspersen and Olaus W. Caspersen at such time, in such amounts, and to such person as in the sole judgment of said Trustee, Olaus W. Caspersen, he shall choose and deem best or proper, to aid them in meeting their necessary living expenses, and THIRDLY, any unexpended income remaining after the aforesaid payments in the discretion of and during trusteeship of Olaus W. Caspersen may be paid in whole or in part to the said Freda R. Caspersen or if not paid at the close of the calendar year, shall FOURTHLY, be added to the corpus of the trust and shall be reflected in a special account on the books of the trust. Such amount as may be accumulated as evidenced by this account may be distributed in the discretion of Olaus W. Caspersen, during his trusteeship only, for the payment of educational, food, shelter, clothes, medical or other necessary expenses of any children of Olaus W. Caspersen and Freda R. Caspersen or any issue of such child. Numerous contingencies and final*808 distribution of the trust fund were provided for in the trust instrument. The trust was not to end until both the petitioner and her husband had died and their son had attained the age of 40 years, or sooner died, but the petitioner's husband had power to terminate the trust during his life, in which case the trust fund was to be distributed to the children of petitioner and her husband or to the issue of such children. The trust has not been terminated. Some of the shares of stock transferred in trust petitioner had purchased and the rest she had received as a gift from her husband. The petitioner and her husband live together. They have one son now living, who was born in January 1929. He had a few thousand dollars' worth of property in his own name in 1935. Petitioner's husband created a turst of which the son is a beneficiary. Petitioner also set up another trust for the son. The son is the beneficiary of a life insurance policy. Petitioner's husband opened a bank account for the son; petitioner and her husband made gifts to him of $25 each month, and these were deposited in the account. The income of the 1932 trust was $9,522.30 in 1934 and $10,482.12 in 1935. Of*809 this, $5,200 was distributed to petitioner in 1934 and $3,400 in 1935; approximately $3,400 was added to the corpus in 1934 and $4,756.95 in 1935, and the balance in each year was distributed to blood relatives of petitioner and her husband. Those relatives in 1934 included petitioner's mother, and her husband's niece, two aunts, two aunts of his father and an aunt of his mother; and in 1935, also the mother of petitioner's husband and his cousin. Most of them were old and not wealthy. None of the accumulated income has been paid to or on behalf of the son. The trust has not loaned or borrowed money. *761 In the years 1932-1935 petitioner's husband had gross income and net income as follows: Gross income Net income [1932] $43,742.58 $41,407.00 [1933] 41,225.32 37,301.61 [1934] 43,137.81 40,782.06 [1935] 54,432.76 51,786.00 In 1932 he had approximately $100,000 in assets. In 1934 he paid for a governess who took care of the son. He owns a house in Montclair, New Jersey, for which he paid approximately $14,000 or $15,000, and he maintains it as a home. He pays all the bills in connection with its upkeep and maintenance and supports his wife*810 and son according to their station in life. OPINION. STERNHAGEN: The Commissioner held that the income of the trust of June 3, 1932, was properly taxable to the petitioner under the Revenue Act of 1934, section 167, and the controversy narrows down to the question whether the petitioner's husband is by virtue of subdivision 3 of the instrument a "person not having a substantial adverse interest in the disposition of such part of the income." The amounts actually distributed to the grantor are not in question, since she included them within her income. The power of the husband with regard to the income remaining after the mandatory distribution to petitioner of $600 each quarter is entirely discretionary, first as to distributing it to blood relatives and then as to distributing it to petitioner. As to the distribution under these powers, the petitioner is without right or control. The power is exclusively in the husband. The income which in the husband's discretion remains undistributed is added to corpus, and the grantor is likewise helpless as to its disposition. Thus the excess income over the grantor's prescribed share is beyond her control and is subject to disposition*811 solely by the husband. Whether under these circumstances alone it could be said that the husband had a substantial adverse interest is a question which we pass in view of the important sentence which follows in the instrument. Bearing in mind that all of the excess income may in the husband's sole discretion be withheld from blood relatives and from the grantor, it is clear that it may all be permitted by the husband to be added to the corpus. However, the trust then provides that the husband in his discretion may direct the disposition of such income "for the payment of educational, food, shelter, clothes, medical or other necessary expenses of" his child. This seems to us to give the husband a substantial adverse interest in the disposition of the income, for it enables him without hindrance or accountability to use the income *762 for the discharge of his own obligation. By New Jersey law it is clear that the husband is under a duty to support his minor child, ; *812 ; ; ; . Although this duty rests apparently equally upon the child's mother and father, as respondent suggests, that fact does not lessen the duty of the father or detract from the proposition that it exists. Thus the husband had an untrammeled power to use the excess trust income in his own behalf to discharge his personal parental obligation. This was not a remotely possible legal or contingent obligation, as in . It was a presently existing obligation inherent in the fact that the child was a minor and, as shown by the evidence, was without sufficient means of support and maintenance. The power to use the income for his child's support gave the husband such a substantial interest in it as to support a disregard of the financial position of his wife and a refusal of any demand or request which she might make for the income or in regard to its use. This we think was an interest adverse to that of the grantor, irrespective of their common interest in the welfare of the child and their*813 apparently harmonious relations, ;; . We find no decision which is sufficiently close to this case to need reconciliation. The Commissioner was in error in adding to the petitioner's income any part of the trust income in excess of the amounts which in the taxable years were actually distributed to her. Decision will be entered under Rule 50.