Milbank v. Commissioner

DUNLEVY MILBANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Milbank v. Commissioner Docket No. 93050. United States Board of Tax Appeals 41 B.T.A. 1014; 1940 BTA LEXIS 1111; May 1, 1940, Promulgated *1111 Petitioner created a trust in favor of his wife for his life, and two short term trusts naming his sister-in-law and uncle as respective beneficiaries. Held, petitioner is not taxable on the income from these trusts under section 166 of the Revenue Act of 1934, Meredith Wood,37 B.T.A. 1065; affd., 309 U.S. 344; held, further, that the trusts were substantial and not within the scope of Helvering v. Clifford,309 U.S. 331. Clarence Castimore, Esq., and Charles W. Crawford, Esq., for the petitioner. W. Frank Gibbs, Esq., for the respondent. VAN FOSSAN *1014 This proceeding was brought for the redetermination of petitioner's income tax liability for the year 1934 in the amount of $43,725.53. The sole issue before the Board involves the taxability to petitioner of the income of three trusts created by petitioner in favor of his wife, sister-in-law, and uncle, respectively. FINDINGS OF FACT. Petitioner is an individual residing in Rye, New York. By an indenture dated December 30, 1914, petitioner created an irrevocable *1015 trust hereinafter referred to as the Milbank*1112 trust, naming his wife, Katherine F. Milbank, as beneficiary and himself as trustee. The income of the trust was payable to the wife during the lifetime of the grantor and upon the grantor's death the principal was to be paid to the wife. In the event of the death of the wife prior to the decease of the grantor, the principal would revert to the grantor. The trust instrument provided that it might be modified by the grantor with the consent of the beneficiary. In a memorandum dated May 10, 1917, petitioner appointed his brother, Jeremiah Milbank, as cotrustee of the Milbank trust. Petitioner's wife assented to the appointment of the cotrustee and so indicated by signing the aforementioned memorandum. Ther has been no other modification of the trust since the appointment of the cotrustee. Petitioner and his wife were living together at all times during the year 1934. Petitioner did not receive any part of the income of the Milbank trust. Petitioner's wife used the income from the trust for the purchase of securities, payment of taxes, and other personal expenses. No part of the income of the Milbank trust was used to pay insurance premiums on petitioner's life, or to pay*1113 household expenses. Petitioner and his wife had no agreement concerning the use to which the income was to be put. The income of the Milbank trust for the year 1934 was $60,675.08. In filing his income tax return for 1934, petitioner did not include the income of the Milbank trust. In determining the deficiency against petitioner, the respondent included the income of the Milbank trust in petitioner's gross income for the year 1934. By written indenture dated December 24, 1931, petitioner set up a trust, hereinafter known as the Palmer trust, naming his wife as trustee and his sister-in-law, Isabel F. Palmer, as beneficiary. The principal of the trust consisted of 2,000 shares of $5 cumulative preferred stock of the Consolidated Gas Co. of New York. These securities were transferred to the name of Katherine F. Milbank at the time of the creation of the trust and stock transfer stamps were paid thereon. The trust instrument provided that the net income should be paid: * * * in quarterly installments as nearly equal as possible to ISABEL F. PALMER, residing in the City of New York, until her death or until the expiration of three years from the first day of January, 1932, *1114 whichever shall first occur, and upon her death or the expiration of said three year period, whichever shall first occur, to pay over, assign, transfer and deliver all the property then constituting the principal of said trust to the Grantor, if living, and if not living in such manner and in such amounts as the Grantor may by his Last Will and Testament, duly executed and proved, direct and appoint, and failing such appointment to the next of kin of the Grantor in accordance with the statutes of the State of New York providing for the distributionof intestate estates. *1016 In 1934 dividends were paid by checks drawn in favor of the beneficiary and sent to Katherine F. Milbank at petitioner's office. Petitioner's secretary, Charles H. Bell, endorsed the checks "Isabel F. Palmer" and deposited them to the beneficiary's credit in her account in Bankers Trust Co., New York City. Isable F. Palmer was notified by petitioner's secretary each time a check was deposited to her account and a receipt from her was requested. The beneficiary of the Palmer trust did not live in petitioner's family residence and was in no way under his control. The income from the Palmer trust for*1115 the year 1934 was $9,875. Petitioner did not include such amount in his 1934 income tax return. In determining the deficiency against petitioner, respondent included $9,875, the income from the Palmer trust, in petitioner's gross income for the year 1934. Petitioner created a third trust, hereinafter referred to as the Dunlevy trust, in favor of his uncle, Elias F. Dunlevy, by a trust indenture dated December 28, 1931. Petitioner again named his wife as trustee. The corpus of the Dunlevy trust consisted of 400 shares of $5 cumulative preferred stock of the Consolidated Gas Co. of New York. The securities were transferred to the name of Katherine F. Milbank and transfer stamps were paid thereon by the grantor. The terms of the Dunlevy trust were similar to those of the Palmer trust, except that the duration of the trust was "until his death or until the expiration of five years from the first day of January, 1932, whichever shall first occur." The income of the Dunlevy trust consisted of dividends from the Consolidated Gas Co. of New York. In 1934 those dividends were paid by check drawn in favor of Dunlevy and sent in care of Katherine F. Milbank at petitioner's office. *1116 Petitioner's secretary sent the checks directly to Dunlevy. The petitioner received no part of the income of the Dunlevy trust in the year 1934. In 1934 the income from the Dunlevy trust amounted to $1,975. Petitioner did not include such income in reporting his gross income for the year 1934. In determining the deficiency against petitioner, respondent included the income from the Dunlevy trust in petitioner's gross income for the year 1934. Both Isabel F. Palmer and Elias F. Dunlevy were in need of financial assistance at the time the Palmer and Dunlevy trusts were created. Katherine F. Milbank, as trustee, served permanent dividend orders upon the Consolidated Gas Co. of New York so that dividends on the shares comprising the corpus of the Palmer and Dunlevy trusts would be paid to Isabel F. Palmer and Elias F. Dunlevy, in *1017 care of "Mrs. Katherine F. Milbank." Receipt of these orders was acknowledged in a letter signed by the treasurer of the Gas Co. and dated January 5, 1932. In both the Palmer and Dunlevy trusts it was provided that, in the event of the resignation or decease of the trustee or other occasion requiring an accounting: * * * such accounting*1117 shall be submitted to the Grantor and need not be submitted to any other person, and the acquittance and approval thereof by the Grantor shall operate as a complete discharge of the Trustee and the estate of any deceased trustee as to all matters embraced in such accounting. The indentures of the Palmer and Dunlevy trusts each provided: THIRD: The trustee may in her sole discretion cause the securities which may from time to time comprise the trust fund or any part thereof to be registered in her name as Trustee hereunder or in her own name or in the names of her nominees and take and keep the same unregistered and retain them or any part thereof in such condition that they will pass by delivery. Isabel F. Palmer and Elias F. Dunlevy filed income tax returns for 1934 and included the income from the Palmer and Dunlevy trusts, respectively. OPINION. VAN FOSSAN: The single issue to be determined is whether or not the income of three trusts created by petitioner is taxable to petitioner for the year 1934. Petitioner contends that all three trusts were valid and enforceable under New York law and that there was no such retention of the incidents of ownership or control as*1118 would cause the income of the trusts to be taxable to the petitioner. Respondent argues that the three trusts should be considered in two separate groups - (1) the Milbank trust, and (2) the Palmer and Dunlevy trusts. He concedes that the Milbank trust is a valid and enforceable trust, but asserts that the Palmer and Dunlevy trusts were without substance and, hence, not enforceable trusts. Respondent seeks to tax the income of all three trusts to petitioner under section 166 of the Revenue Act of 1934. In addition, he urges that the income of the Palmer and Dunlevy trusts was substantially that of petitioner. This latter contention raises the question of the applicability of section 22(a) of the Revenue Act of 1934. Respondent also concedes upon brief that the taxability of the income from the Milbank trust falls within the purview of our decisions in ; ; affirmed per curiam, (C.C.A. 2d Cir.); and *1119 . The Supreme Court has recently affirmed our position in those cases in . On that authority we hold that section 166 of the Revenue Act of 1934 does not apply and that *1018 the income of the Milbank trust is not taxable to petitioner for the year 1934. As to the Palmer and Dunlevy trusts, respondent urges that we look through form to substance and find that these trusts were not valid for income tax purposes. Respondent further maintains that the validity of the trusts under local law is not sufficient to prevent taxation of the income from the trusts to the petitioner. The Supreme Court, in , said: * * * Congress establishes its own criteria and the state law may control only when the Federal taxing act by express language or necessary implication makes its operation dependent upon state law. Applying this statement of the law to the taxing act, there is a necessary implication that what is or is not a trust should be determined by application of the local law. Whether or not the donor of such a trust is*1120 subject to taxation on the income thereof under Federal law is another question. See . All three trusts were set up in the State of New York. Trusts created for a short term of years but limited to the lives of two persons have been held valid by the New York courts. ; . The Palmer and Dunlevy trusts were limited upon the lives of the respective beneficiaries. Moreover, all the elements of a true trust were present. There was a declaration of trust, an acceptance of the trust by the trustee, and a transfer of the trust corpus to the name of the trustee. The trusts were binding upon petitioner and enforceable by the beneficiaries. To support his contention that we should look through form to substance and hold the income of the two trusts taxable to petitioner, respondent relies on the case of , where we held that a settlor who named himself trustee with broad powers of control over a short term trust was taxable on the income from the trust. In that case, however, *1121 the evidence indicated that the settlor did not intend to create a true trust or, if he did so intend, he merely established an obligation to hold the income in trust for the beneficiaries after it was derived by him from the securities. The facts of the present case must be distinguished from those of the Rands decision. Here there is every indication that the petitioner intended to create true trusts. The beneficiaries needed financial aid. The trusts were the petitioner's solution for the problem. Since the date of hearing of this proceeding the Supreme Court has handed down its decision in . *1019 The Court there held that the grantor of a short term trust in favor of his wife retained such control as to remain substantially the owner of the corpus and the income was taxable to him under section 22(a). The Court stated: * * * the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent continued to be the owner for purposes of section 22(a). That case differed from the*1122 one at bar with respect to the possible or exercised control, the relationship of the beneficiaries, and the identity of the trustee. In the Clifford case the grantor was trustee, having extensive powers with regard to the trust corpus, and the beneficiary was his wife. In this proceeding petitioner was not trustee, he retained or exercised no control over the trust principal during the period of the trusts, and the beneficiaries were not members of his immediate family circle. The fact that these beneficiaries were relatives of petitioner is not sufficient to bring the trusts within the doctrine of the Clifford case. Here the dividend checks which constituted the income of the trusts were made out in the names of the beneficiaries. Moreover, the Consolidated Gas Co. of New York, the stock of which formed the corpus of the Palmer and Dunlevy trusts, was notified of the trusts. Permanent dividend orders were executed requiring that the company pay the dividends to the beneficiaries in care of Mrs. Milbank. Respondent contends that the formation of the Palmer and Dunlevy trusts amounted to nothing more than an assignment of the dividends from the preferred stock of*1123 the Consolidated Gas Co. We can not agree with this contention. The securities upon which the dividends were declared were transferred to the name of Katherine F. Milbank and transfer stamps were paid thereon. Moreover, as owners of the beneficial interests, the beneficiaries were entitled to the income and, in turn, paid a tax on the income. There was no legal obligation of the petitioner to support his sister-in-law or uncle. For this reason the principles laid down by the Supreme Court in , and , are not applicable. The trust instruments made no provision for distribution to or accumulation for the benefit of the grantor, and none of the income was used for such distribution or accumulation. For the reasons mentioned above we hold that the income of the Palmer and Dunlevy trusts is not taxable to petitioner for the year 1934. Decision will be entered for the petitioner.