Alldis v. Commissioner

ESTATE OF FREDERICK L. ALLDIS, DECEASED, EVELYN M. LIBBY, ADMINISTRATRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EVELYN M. LIBBY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FRANK A. ALLDIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Alldis v. Commissioner Docket Nos. 106390, 106389, 106391. United States Board of Tax Appeals 46 B.T.A. 1171; 1942 BTA LEXIS 764; May 19, 1942, Promulgated *764 TRUSTS - INCOME OF BENEFICIARY UP TO DATE OF DEATH. - The Chrysler Corporation created a trust for a definite term of years as part of a plan for the benefit of certain of its executives. As required by the trust indenture and upon death of an employee beneficiary of the trust during the trust term, the decedent's beneficial interest therein, evidenced by 100 shares, was sold by his administratrix to the corporation, which thereupon became a beneficiary of the trust on equal terms with all other beneficiaries. Held: (1) The trust was not an association taxable as a corporation. (2) The trust was not for the "exclusive" benefit of the corporation's employees and was therefore not an "employees' trust" under section 165 of the 1938 Act, but was a pure trust, taxable under section 161 of that act and prior acts. (3) The decedent's beneficial interest in the trust's assets at date of death constituted a property interest and as such a capital asset which passed to his estate and was sold by the latter to the Chrysler Corporation for a cash consideration. (4) The cash consideration paid by the Chrysler Corporation to the decedent's estate was not "income" to the decedent*765 and section 42 of the 1938 Act is not applicable. George L. Cassidy, Esq., for the petitioners. Philip M. Clark, Esq., for the respondent. TYSON *1172 These proceedings have been consolidated for hearing and opinion. The proceeding in Docket No. 106390 involves a deficiency of $9,234.92 in income tax for the calendar year 1938 determined against Frederick L. Alldis, deceased, and a claimed overpayment of $4,377.04 in his income taxes for that year. The proceedings in Docket Nos. 106389 and 106391 involve the proposed assessment of the amount of the above mentioned deficiency against Evelyn M. Libby and Frank A. Alldis, respectively, as their transferee liability, and it is stipulated that they received all of the assets of the decedent's estate and that each is liable as a transferee for the income tax deficiency for 1938, if any, redetermined herein against the decedent. The question presented is whether there should be included in the decedent's income for 1938, the year of his death, the amount of $56,472.20, as income "accrued up to the date of his death", under section 42 of the Revenue Act of 1938, where such amount represented the*766 value, at date of death, of the decedent's 100 shares of beneficial interest in the Chrysler Management Trust and the sum paid to the decedent's estate, not by the trust but by the Chrysler Corporation, upon the surrender and assignment of such shares to that corporation during 1938, after the decedent's death, pursuant to the terms of the trust indenture. The proceedings have been submitted upon the pleadings therein, respectively, and a stipulation of facts embracing certain exhibits. We find the facts to be as admitted by the pleadings and as stipulated by the parties and such facts as are not set forth herein are incorporated by reference. FINDINGS OF FACT. In Docket No. 106390 the petitioner, Evelyn M. Libby, an individual residing in Detroit, Michigan, is the duly appointed administratrix *1173 of the estate of Frederick L. Alldis, who died on January 27, 1938. In Docket No. 106389 Evelyn M. Libby is the petitioner, individually, and in Docket No. 106391 Frank A. Alldis, a resident of Columbus, Ohio, is the petitioner, individually. At date of death Frederick L. Alldis, the decedent, owned 100 shares of beneficial interest in the Chrysler Management Trust. *767 Pursuant to the provisions of the indenture creating that trust, such 100 shares were allotted to the decedent by the Chrysler Corporation, of which he was an officer, and were issued to him by the trustees in 1929 and, prior to January 1, 1932, he paid to the trustees the amount of $25 per share, or a total of $2,500 for such shares. It is stipulated that the decedent recovered his entire cost of those shares prior to January 1, 1938, and prior to his death. Subsequent to the decedent's death, and during 1938, the administratrix of his estate, acting pursuant to the provisions of the trust indenture, surrendered, transferred, and assigned the decedent's 100 shares of beneficial interest to the Chrysler Corporation and received from the latter the sum of $56,472.20 representing the value of those shares at date of death, as determined in accordance with the method of computation provided for in article seven of the trust indenture, i.e., upon the basis of the assets and liabilities of the trustees on April 30 preceding the date of decedent's death. The Chrysler Management Trust (hereinafter referred to as the trust) was formed by a trust indenture dated April 16, 1929, by and*768 between the Chrysler Corporation (hereinafter referred to as the corporation), as the first party, the holders from time to time of certificates for shares of beneficial interest issued under the indenture, as the second parties, and certain named trustees, as the third parties. The trust indenture was executed by the corporation and the named trustees and set forth that the corporation's board of directors and stockholders had approved the "plan" set forth in the indenture "to attract and retain desirable officers and/or executives and to insure the permanency of sound and efficient management of the Corporation and its subsidiary corporations by enabling such officers and/or executives to become owners of stock of the Corporation on a basis favorable to them." The trust indenture provided, in part, as follows: Article one provided that the corporation would lend $3,000,000 to the trustees on the latter's 5 percent interest-bearing note to purchase common stock of the corporation; that the trustees had the right to purchase, during the term of the trust, all or any part of 60,000 shares of common stock of the corporation for $60 per share in cash, and that the corporation would*769 pay over to the trustees, annually, a certain percentage of its net annual earnings computed as per a stated formula. *1174 Article two provided that the trustees would hold the funds, shares, dividends, and income received by them upon the trusts therein declared. Article three provided that the trust would terminate on December 31, 1938, unless sooner dissolved, as provided, upon a merger or consolidation of the corporation or a sale of the latter's assets. Article four provided that, other than certain temporary investments, the trustees should invest all available funds in common stock of the corporation, except such funds as might be (1) required for expenses of administration of the trust and payments of interest and principal on its note to the corporation, and (2) used for distributions to beneficiaries of the trust; that the trustees maintain on their books two surplus accounts, namely, "Surplus A Account," to which there should be credited all amounts received as interest, dividends, and similar income from funds of the trust estate and from which the trustees might make pro rata distributions in cash to the holders of shares of beneficial interest, and "Surplus*770 B Account," to which there should be credited the annual payments received from the corporation and all profits from any sales of securities and against which should be charged all necessary expenses of the trust. Articla five provided that the "Beneficial Interest" in the trust estate should consist of 30,000 equal "Shares of Beneficial Interest", evidenced by certificates in a specified form which set forth, inter alia, that all of the provisions of the trust indenture are made a part thereof. Article six provided that certificates for beneficial shares should be issued only in the number "allotted" to officers and/or executives of the corporation or its subsidiaries, "selected" by a designated committee of the corporation and upon the selectee's payment to the trustees of $25 per share in cash. Article seven provided: The Shares or Certificates for Shares of Beneficial Interest shall not be transferable or assignable by any Beneficiary to any person, firm or corporation except to the Corporation upon the termination of his employment by the Corporation or its subsidiary corporations. When any Beneficiary dies or for any other reason whatsoever ceases to be in the*771 employ of the Corporation or its subsidiary corporations, he shall cease to be a Beneficiary and he or his executor or executors or administrator or administrators shall cease to have any right, title or interest, beneficial or otherwise, in the Trust Estate. Upon said termination of employment or within a reasonable time, but in no event more than one year thereafter, he, or in the event of his death, the executor or executors or administrator or administrators of his estate, shall surrender, transfer and assign to the Corporation his Certificate cate or Certificates for Shares of Beneficial Interest and upon such surrender, transfer and assignment the Corporation will pay to him, or in the event of his death, to the executor or executors or administrator or administrators of his estate an amount computed upon the assets and liabilities of the Trustees as at the close of business on the 30th day of April preceding the date on which *1175 the employment ceased, as follows: * * * [Two formulas, (a) for determining "book value" of the shares in event of death of the beneficiary and (b) for determining the "aliquot interest" represented by the shares in event employment of the*772 beneficiary ceased.] The Corporation may retain the Shares of Beneficial Interest in the Trust Estate acquired from any holder or may transfer the same to such of its officers and/or executives or officers and/or executives of its subsidiary corporations as may be selected by the Bonus Committee and at such prices as may be determined by the Bonus Committee. So long as the Corporation shall retain any of said Shares it shall have the same rights therein as if it were a Beneficiary, and upon the transfer of any of said Shares by the Corporation as authorized in this paragraph, and the payment by the transferee to the Corporation of the price fixed by the Bonus Committee, the transferee shall become and be a Beneficiary entitled to all of the rights and subject to all of the obligations of a Beneficiary as set forth herein, except only the duty to pay $25 per share to the Trustees. Article eight set forth the trustees' duties, liabilities, and powers, the latter consisting of the usual powers granted to trustees, and does not authorize the trustees to engage in any business enterprise, but instead authorizes them merely to invest, conserve, and distribute the trust assets as specifically*773 provided for by the trust indenture. Articles nine and ten provided for the tenure of office of the trustees and their successors, for their appointment by the board of directors of the corporation, and for their service without compensation. Article eleven provided that upon termination of the trust term, the trust estate should be dissolved and the trustees, after paying the corporation all sums due on the note given it and all the administration expenses of the trust, should distribute the balance of the trust estate pro rata to holders of shares of beneficial interest, "including the Corporation if it then be the holder of any such Shares." Article twelve provided that the accounts of the trustees and of the corporation should be audited by te same firm of accountants, whose decision shall be final as to the determintion of book values of shares of beneficial interest and of the earnings of the corporation to be paid annually to the trustees. Article thirteen provided: Nothing herein contained or otherwise shall constitute the Beneficiaries partners with one another or with the Trustees, or impose upon the Beneficiaries any liability whatsoever, except (1) for the*774 payment of the sum of $25.00 in cash for each Share of Beneficial Interest allotted to them and accepted, and (2) to surrender to the Corporation their respective Certificates for Shares of Beneficial Interest upon termination of their employment by the Corporation or any subsidiary of the Corporation against payment therefor in the amount provided by the Trust Indenture. Article fourteen provided that no officer, executive, or employee of the corporation or its subsidiaries should have any right, title, or interest under the indenture or in the trust estate other than specifically provided for and that all holders of beneficial shares, by acceptance *1176 thereof, should be deemed to have assented to the indenture as if they had executed the same. The first amendment, dated October 31, 1935, of the Chrysler Management Trust provided, inter alia, that the term of trust be extended to December 31, 1942, and for partial dissolution of the trust on certain dates beginning on December 31, 1938, and distribution of such part of the trust estate to the then holders of shares of beneficial interest. The second amendment thereto, dated December 2, 1938, and subsequent to*775 the date of death of the decedent herein, provided, inter alia, that upon termination of a beneficial shareholder's employment by the corporation or its subsidiaries, his shares of beneficial interest should not be transferable or assignable to any person, firm, or corporation except to the trustees for the appropriate distribution thereon and cancellation thereof; that any shares of beneficial interest held by the corporation on December 31, 1938, should be surrendered to the trustees for cancellation in exchange for distribution thereon of certain amounts to the corporation and that thereafter no part of the trust income or corpus should be used for or diverted to purposes other than for the exclusive benefit of employees under the trust. During the years 1932, 1936, and 1937 and on January 10, 1938, the decedent herein actually received from the trustees, as distributions on his 100 shares of beneficial interest, sums of cash amounting to $18,350 and shares of stock having a value of $1,945, or a total of $20,295, all of which distributions were reported by him on his tax returns as income for the years in which they were made, except that from his 1936 distributions he deducted*776 the $2,500 cost of his 100 shares of beneficial interest. The decedent's tax returns for 1936 and 1937 were filed on the cash basis of accounting. The petitioner, Evelyn M. Libby, administratrix, filed with the collector of internal revenue at Detroit, Michigan, a Federal income tax return for Frederick L. Alldis, deceased, for the period from January 1, 1938, to the date of his death on January 27, 1938, and such return was made on the accrual basis. On that return the $56,472.20 received by her from the corporation for her transfer to it of the decedent's 100 beneficial shares was reported as moneys received from the sale of a capital asset by the decedent at the date of his death and the amount of $26,986.10 was returned as the taxable income therefrom. The petitioner claims that such return was erroneous and seeks redetermination of an overpayment of $4,377.04 in decedent's income tax. The petitioner's claim for refund of $4,583.82 (the total tax shown on the decedent's return) was filed on September 12, 1940, and has been rejected by respondent. The respondent determined that the amount of $56,472.20, representing the value of decedent's 100 shares of beneficial interest*777 at *1177 date of death and the amount actually paid by the corporation to the decedent's estate upon the surrender and transfer of such shares to the corporation, became available by reason of death of the decedent and constituted ordinary income taxable to the decedent for the period January 1 to January 27, 1938, as income accrued up to the date of death within the meaning of section 42 of the Revenue Act of 1938. OPINION. TYSON: The respondent contends that the Chrysler Management Trust is an "employees' trust" within the meaning of section 165 of the Revenue Act of 1938 1 and similar provisions of prior acts, citing Chrysler Corporation,42 B.T.A. 795, as establishing that the corporation's earnings contributed to the trust constituted additional compensation to the corporation's executives who became beneficiaries of the trust. He further contends that the amount of $56,472.20 here involved represents an "amount * * * made available" to the decedent as a distributee of the trust in excess of cost of decedent's 100 shares of beneficial interest and, accordingly, is "taxable to him in the year in which so * * * made available", pursuant to section*778 165, supra. He further contends that, the $56,472.20 being income made available by reason of decedent's death, such amount, under authority of Helvering v. Enright,312 U.S. 636, constituted ordinary income to the decedent which "accrued up to the date of his death" within the meaning of section 42 of the Revenue Act of 1938 2 and must be included in decedent's gross income for the period of January 1 to January 27, 1938. In Chrysler Corporation, supra, the Board *1178 did not have before it, and did not decide, the specific question of the character of the trust entity involved in the instant proceeding and the decision there has no application here. *779 Petitioners contend that the trust is an association taxable as a corporation 3 and that the decedent's shares of beneficial interest therein were the equivalent of shares in a corporation and thus constituted a capital asset, the mere appreciation in the value of which does not constitute income to the decedent "accrued to the date of his death" within the purview of section 42, supra. Further, if the trust is held not to be an association taxable as a corporation, petitioners contend: (a) That the trust is not an "employees' trust" within section 165, supra, and, even if it is, that no part of the $56,472.20 was ever made available out of the trust's assets either to the decedent or his estate, and (b) that the trust is a pure trust, taxable under section 161 of the Revenue Act of 1938 and prior acts, and for that reason no part of the $56,472.20 here involved constitutes income taxable to the decedent up to the time of his death. *780 In our opinion, the Morrissey and its companion cases, supra, have no application to the trust here involved, for it was not an association of interested parties organized in a manner similar to corporate form to carry on any business enterprise and, further, the shares of beneficial interest were not freely transferable, but could be assigned only to the Chrysler Corporation in certain events. The trust was essentially a part of a plan with the primary purpose of enabling certain executives of the Chrysler Corporation to become owners of stock of that corporation on a basis favorable to them. It was created and was operated as an ordinary trust, principally to hold and conserve the funds paid over to it by the corporation under that plan and to invest such funds primarily in shares of stock of the corporation for the benefit of those who became beneficiaries of the trust. We hold that the trust was not an "association" taxable as a corporation. In our opinion, the trust was not an "employees' trust" within the meaning of section 165, supra. While the trust was created as part of a plan for the benefit of certain persons who continued in the employ of the corporation*781 and were designated by the corporation as beneficiaries of the trust, nevertheless, the important and decisive fact is that the trust was not for the "exclusive" benefit of employees of the corporation within section 165, supra. Cf. W. F. Parker,38 B.T.A. 989. Here, upon termination, by death or otherwise, of the *1179 corporation's employment of a beneficiary of the trust the corporation not only had the right, but was contractually obligated, to purchase such former employee's beneficial interest in the trust and thereupon became the owner thereof as a participating beneficiary having the same rights as all other remaining beneficiaries under the specific provisions of the trust indenture. Pursuant to that obligation, and up to and including the year 1938 here involved, it was possible for the corporation, through a series of acquisitions of beneficial interests, to become the principal beneficiary of the trust estate. Furthermore, while it is true that any owner of a beneficial interest living at the termination of the trust term was entitled to certain distributions out of the accumulated trust estate, consisting primarily of shares of stock of the*782 corporation, yet upon his death or the severance of his employment by the corporation prior to the termination of the trust no portion of the trust assets could be "actually distributed or made available" to either the owner of the shares of beneficial interest or his personal representative. Instead, article seven of the trust indenture required that such beneficial interest be sold at its then determinable value to the corporation for cash. The instant case is distinguished on its facts from Estate of Frederick C. Kirchner,46 B.T.A. 578; Estate of A. M. Berry,44 B.T.A. 1254; Dillis C. Knapp,41 B.T.A. 23; and Ralph H. Jackson,40 B.T.A. 1094, and, accordingly, the principles announced in those cases are not applicable here. It is our opinion that the trust involved was a pure trust, subject to tax on its income as provided by sections 161 and 162 of the Revenue Act of 1938 and prior acts. In the instant proceeding the established facts are that no amount either was or could be distributed or made available in 1938 out of the trust estate by reason of the decedent's death and his ownership at that time*783 of 100 shares of beneficial interest in the trust. The decedent's shares were not and could not be surrendered to the trust for cancellation and a pro rata distribution of trust assets to the holder thereof. Instead, those shares represented an interest owned by the decedent in the trust assets, which interest, by the terms of the trust indenture, was specifically made assignable to the corporation for the cash value thereof, and upon the corporation's acquisition thereof those shares remained outstanding as evidence of its pro rata interest in the undiminished assets of the trust, a taxable entity separate from both the corporation and the decedent herein. In our opinion, the decedent's pro rata beneficial interest in the assets of the trust evidenced by his 100 shares, at date of death, constituted a property interest and as such a capital asset, which passed to his estate and was sold by the latter to the corporation for a cash consideration of $56,472.20. *1180 We hold that the amount of $56,472.20 involved herein was not "income" to the decedent and for that reason section 42, supra, and *784 Helvering v. Enright, supra, relied upon by respondent, are not applicable in the instant case. Respondent erred in his determination of the deficiency in question and, further, the petitioner erroneously reported the above mentioned amount of $26,986.10 as a capital gain on the decedent's income tax return for 1938. Decision will be entered under Rule 50. Footnotes 1. SEC. 165. EMPLOYEES' TRUSTS. (a) EXEMPTION FROM TAX. - A trust forming part of a stock bonus, pension, or profitsharing plan of an employer for the exclusive benefit of some or all of his employees - (1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees, shall not be taxable under section 161, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of interest specified in section 25(a). (b) TAXABLE YEAR BEGINNING BEFORE JANUARY 1, 1939. - The provisions of clause (2) of subsection (a) shall not apply to a taxable year beginning before January 1, 1939. ↩ 2. SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. ↩ 3. Citing Morrissey v. Commissioner,296 U.S. 344; Swanson v. Commissioner,296 U.S. 362; Helvering v. Combs,296 U.S. 365; and Helvering v. Coleman-Gilbert Associates,296 U.S. 369↩, laying down the salient features distinguishing an "association" from a strict trust as being (1) a voluntary association for carrying on a business enterprise, (2) centralized management with title in the trustees, (3) continuity of the business enterprise secure from termination by death of the participants, (4) transferability of participating interests without affecting the continuity of the enterprise, and (5) limitation of personal liability of the participants.