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Commissioner of Internal Revenue v. Brown.

September 4, 1941

COMMISSIONER OF INTERNAL REVENUE
v.
BROWN.



Petition for Review of Decision of the United States Board of Tax Appeals.

Author: Biggs

Before BIGGS, MARIS, and CLARK, Circuit Judges.

BIGGS, Circuit Judge.

The question presented by the petition at bar is whether or not the income for the year 1935 to a trust created on January 1, 1927, by the respondent and taxpayer, Antoinette K. Brown, should be treated as taxable income to her. The Commissioner insists that it should be so treated under Section 22(a), Section 166, or Section 167 of the Revenue Act of 1934, 48 Stat. 686, 729, 26 U.S.C.A., Internal Revenue Acts, pages 669, 727.

The indenture of trust provides that $35 a month shall be paid from the trust income to Margaret Kane, a retired servant of the grantor and that the residue of the income shall be paid to Josephine Ballard, a friend of the taxpayer. Stock dividends, extraordinary cash dividends, rights, and proceeds of sales are to be treated as accretions to principal. The indenture further provides that the trust shall terminate upon the death of the grantor, and that the corpus shall be distributed to the estate of the taxpayer.

The grantor retained no power to revoke the trust, but did retain the power to modify or alter "in the following particulars only":

"(A) Increasing the principal of the trust fund by adding to the property and securities set forth in said 'Property Schedule,' property and securities, which the Trustee shall receive, hold, manage, sell and invest and reinvest and dispose of, in the same manner and with the same limitations as herein specified in respect of the respective properties and securites enumerated in the said Schedule and forming the original trust estate.

"(B) Disposing of the income of the trust estate as originally constituted, or as it may exist from tiem to time, otherwise than as originally provided in this Indenture by the said 'Schedule of Income Distribution,' by altering the proportion or amount of income to be paid to or applied to the use of any one or more of the beneficiaries, by canceling any benefaction to any one or more beneficiaries, by substituting any beneficiary or beneficiaries in the place of any one or more of them, by adding to the number of beneficiaries, by providing for the proportion or amount of income to be paid or applied to the use of such additional or substituted beneficiaries; provided, however, that in no event shall any such modification or alteration direct that the said income be paid to or applied to the use or benefit of the party of the first part.

"(C) Directing the distribution of the principal of the trust estate as the same shall be constituted at the termination thereof, otherwise than as is originally provided in this Indenture by the said 'Schedule of Disposition of Principal upon Termination of Trust,' by altering the proportion or amount of the principal of said trust estate to be assigned, paid and set over to any one or more of the beneficiaries mentioned in said scheudle, by canceling any benefaction to any one or more of said beneficaries, by substituting any beneficiary or beneficiaries in the place of any one or more of them, by adding to the number of said beneficiaries, by providing for the proportion or amount of the principal of the trust estate to be assigned, paid and set over to such additional or substituted beneficiary, or for the manner in which all or any part of said principal shall be divided or distributed upon the death of said Anotinette K. Brown.

"(D) [To remove the trustee with or whthout cause and to substitute another trustee or trustees in his place.]"

The taxpayer and grantor did not exercise any of her reserved rights until after the year 1935.

The income from the trust for 1935 amounted to $26,130.92, including a capital gain amounting to $3,283.50. All income, exclusive of the capital gain, was distributed by the trustee to Margaret Kane and Josephine Ballard, as directed by the terms of the trust.

The Commissioner in his deficiency notice informed Mrs. Brown that the income was taxable to her under Sections 166 and 167, and before the Board of Tax Appeals contended that the income also was taxable to her under Section 22(a). The Board of Tax Appeals decided that the income was not taxable to Mrs. Brown under either Section 166 or Section 167 and that the Commissioner had failed to make out a case under Section 22(a), meanwhile stating in its opinion that the taxpayer had never had an opportunity to be heard on the question of her taxability under Section 22(a).The Commissioner thereupon petitioned this court for review.

The grantor is a resident of Pennsylvania and the original trustee was a resident of North Carolina. We entertain no doubt, however, that it was the intention of the parties that the law of New York should govern their rights under the trust. The original trust indenture was executed there, as were the amendments to the indenture, which need not be detailed here. Moreover, the indenture provides that the moneys belonging to the trust estate are to be deposited with the Bankers Trust Company of New York There can be no question that the weight of authority is to the effect that the suits of a trust is to be determined by finding the intent of the grantor and taking into consideration all other operative ...


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