Sunday, February 26, 2012

Helvering vs. Clifford

Facts: In 1934, Respondent declared himself trustee of certain securities which he owned. All net income from the trust was to be held for the "exclusive benefit" of respondent's wife. The trust was for a term of five years, except that it would terminate earlier on the death of either respondent or his wife. On termination of the trust the entire corpus was to go to respondent, while all "accrued or undistributed net income" and "any proceeds from the investment of such net income" was to be treated as property owned absolutely by the wife. During the continuance of the trust, respondent was to pay over to his wife the whole or such part of the net income as he, in his "absolute discretion," might determine. 

Respondent paid a federal gift tax on this transfer. In the same year, all income from the trust was distributed to the wife, who included it in her individual return for that year. The Commissioner, however, determined a deficiency in respondent's return for that year on the theory that income from the trust was taxable to him. The Board of Tax Appeals sustained that redetermination. The Circuit Court of Appeals reversed. We granted certiorari because of the importance to the revenue of the use of such short-term trusts in the reduction of surtaxes. 

Issue: Whether or not the grantor, after the trust has been established, may still be treated, as the owner of the corpus 

Held: YES. We cannot conclude as a matter of law that respondent ceased to be the owner of the corpus after the trust was created. Rather, 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. 

So far as his dominion and control were concerned, it seems clear that the trust did not effect any substantial change. In substance, his control over the corpus was in all essential respects the same after the trust was created as before. The wide powers which he retained included, for all practical purposes, most of the control which he as an individual would have. 

We have, at best, a temporary reallocation of income within an intimate family group. Since the income remains in the family, and since the husband retains control over the investment, he has rather complete assurance that the trust will not effect any substantial change in his economic position. It is hard to imagine that respondent felt himself the poorer after this trust had been executed, or, if he did, that it had any rational foundation in fact. For, as a result of the terms of the trust and the intimacy of the familial relationship, respondent retained the substance of full enjoyment of all the rights which previously he had in the property. 

Thus where, as in this case, the benefits directly or indirectly retained blend so imperceptibly with the normal concepts of full ownership, it is correct to say that the husband was the owner of the corpus. To hold otherwise would be to treat the wife as a complete stranger, to let mere formalism obscure the normal consequences of family solidarity, and to force concepts of ownership to be fashioned out of legal niceties which may have little or no significance in such household arrangements. 

IMPORTANT: 

1. A husband who declared himself trustee of certain securities for the term of five years, to pay to his wife the income accruing during that period, but retained in himself the right to accumulate income, and, with insignificant exceptions, the complete control over the principal fund -- its conversion, investment, reinvestment, etc. -- and the reversion of the Corpus at the end of the term, may properly be found by the federal taxing authorities to be owner of the fund, notwithstanding the trust, and taxable on the trust income as part of his personal income. 

2. Whether the creator of a trust may still be treated as the owner of the corpus is not determined by technicalities of the law of trusts and conveyances, but must depend on analysis of the terms of the trust and on all the circumstances attendant on its creation and operation. 

Where the grantor is the trustee, and the beneficiaries are members of his family group, special scrutiny is necessary, lest what is in reality but one economic unit be increased to two or more.

Digg Google Bookmarks reddit Mixx StumbleUpon Technorati Yahoo! Buzz DesignFloat Delicious BlinkList Furl

0 comments: on "Helvering vs. Clifford"

Post a Comment