1041 Trusts Legal Citations

 

Five Negative Cases Against The Contract Trust

Cite 1

Wesenberg v. C.I.R., 69 T.C. 1005 (1978) where the issue was the Wesenberg's transfer of his life income to the Trust. Using C.I.R. v. Culbertson, 337 U.S. 733, 739-449 (1949) the Wesenberg case was lost.

Cite 2

Markosian v. C.I.R., 73 T.C. 1235 (1980) showed that the Trust lacked "Economic Reality" as shown in Matthews v. C.I.R. Markosian accepted personal payment and deposited it in his own account and later transferred periodic payments into the Trust. Also the argument called "Form over Substance" drawn from Furman v. C.I.R. 45 T.C. 360 (1966) showed that Markosian had all but abandoned the "Advise & Consent" of independent or adverse trustees.

Cite 3

Para Technologies v. C.I.R. T.C. Memo 1992-575 The grantor was held to be taxable and liable. since he didn't meet IRR 301.7701 or the IRC 671-679 restraint. There was commingling of various Trust assets, absence of trustee review, and bad advice. It was taxed as a corporation because it had majority characteristics.

Cite 4

Vercio v. C.I.R., 73 T.C. 1246 (1980) is a case often cited in refuting the business Trust. Vercio had a trustee exist for 18 days before resigning. He then had his two children function as trustees (mistake) and they not only were not paid, they never attended trustee meetings, and finally signed blank Minutes. The grantor conducted all business, signed all checks, and kept poor records. The assignment of lifetime income was also incorporated in the Trust in conflict with Culbertson v. C.I.R. 337 U.S, 733.

Cite 5

Dahlstrom v. C.I.R., 85 T.C. 812. Dahlstrom advanced business Trusts that shifted the income to offshore Trusts in order to accomplish tax avoidance. He was indicted and convicted in District Court, and had all convictions overturned in 9th Circuit Court (Dahlstrom T13 F 2d. 1423 (1983). Any reference to "Dahlstrom Trust" is usually a broad criticism of the business Trust in general and is usually an attempt to defame.

 

One Hundred Twenty-Eight Positive Cases Supporting The Contract Trust

Cite 1

An equity Pure Trust is a lawful, irrevocable, separate legal entity.

In the cast of Baker vs. Stern, 58 A.I,.R. 462 the Court said that. "IT IS ESTABLISHED BY LEGAL PRECEDENT THAT PURE TRUSTS ARE LAWFUL, VALID BUSINESS ORGANIZATIONS.''

In the case of Burnett vs. Smith, S.W. 1007 (1920. The Court ruled that "TRUST OR TRUST ESTATES IS A LEGAL ENTITY FOR MOST ALL PURPOSES AS ARE COMMON LAW TRUSTS."

In Edwards vs. Commissioner, 415 F 2d 578, 582. 10th Cir. (1969) the Court said "DIGNITY OF CONTRACT CANNOT BE SET ASIDE BECAUSE A TAX BENEFIT RESULTS EITHER BY DESIGN OR ACCIDENT. "

In Weeks vs. Sibley, (D.C.) 269 F, 135, the Court said "A PURE TRUST IS NOT ILLEGAL IF FORMED FOR THE EXPRESS PURPOSE OF AVOIDING TAXATION."

Cite 2

A pure Trust is established by contract, and any law or procedure in its operation. denying or obstructing contract rights, impairs contract obligation and is, therefore, violative of the United States Constitution. (Smith vs. Morse, 2 CA 524.)

Cite 3

The Trustees of a Trust have all the power necessary to carry out their obligations which they assume and their books and records are not subject to review or subpoena, so held Boyd vs. U.S., 116 US 618; and also in Silver Thorne Lumber Co. vs. U.S., 1251 US 385. (See Article IV of the Constitution.)

Cite 4

A Trust organization, consisting of a U.S. Constitutional right of contract, cannot be abridged. The agreement when executed becomes a Constitutionally protected organization and not under the laws passed by any of the several legislatures. (Crocker vs. MacCloy, 649 US SUP. 39 at 270.)

Cite 5

A Pure Trust is not subject to legislative control. The United States Supreme Court holds that Trust Relationship comes under the realm of equity, based upon the common law, and is not subject to legislative restrictions as are corporations and other organizations by legislative authority. (Elliot vs. Freeman, 220 US 178.)

Cite 6

The creator of a Pure Trust may mold and give it any shape he chooses, and he or the Trustees, upon such terms as they may choose to impose. (Shaw vs. Plaine. 12 Allen (Mass) 293; also in Harwood vs. Tracy. 118 Mo. ~31. 24 SW 214.)

Cite 7

The Court will support the Trustees in carrying out the terms of their Trust contract and agreement. (Clews v. Jamison 182 US 461. 21 S. Ct.845.)

Cite 8

Article 1. Section 10 of the US. Constitution states "in part" no State shall pass any law impairing the obligations of contracts. Accordingly, since the Trust "indenture" is a contract between the grantor and the Trustee and Beneficiaries, this indenture CONTROLS and no one has the legal authority to violate its provisions. Also no one can change the Trust indenture except those so authorized by the indenture.

Pure Equity irrevocable Trust is not an Abusive Trust because the courts have said that it is aperfectly legal and constitutional entity. The courts take a dim view of anyone or any bureaucracy that violates a Trusts' constitutional and/or civil rights, no matter under what guise, including the attempt to abrogate its rights by passing and then attempting to enforce rules, statutes, or so-called laws that violate the Constitution.

We Quote the following cases to confirm this:

Cite 9

"WE FIND IT INTOLERABLE THAT ONE CONSTITUTIONAL RIGHT SHOULD HAVE TO BE SURRENDERED IN ORDER TO ASSERT ANOTHER." (Simon vs. US, 390, 389. 1968.)

Cite 10

"THE CLAIM AND EXERCISE OF A CONSTITUTIONAL RIGHT CANNOT BE CONVERTED INTO A CRIME." (Miller vs. US., 230 F 2d 486 at 489.)

Cite 11

In the case of Miranda vs. Arizona, 380 US 436 (1966) the Court said: "WHERE FUNDAMENTAL RIGHTS UNDER THE CONSTITUTION ARE INVOLVED, THERE CAN BE NO RULE-MAKING OR LEGISLATION WHICH CAN ABROGATE THEM."

Cite 12

Chief Justice Marshall said in the case of Marbury vs. Madison 5 US ( 1 cranch), 137, 174, 176,(1830) that: "ALL LAWS WHICH ARE REPUGNANT TO THE CONSTITUTION ARE NULL AND VOID."

A Constitutionally valid Trust cannot be also abusive, nor can the Trust Creator or trustee or beneficiaries be penalized for doing what they have a constitutional right to do. We quote the following court case to prove our point:

Cite 13

"THERE CAN BE NO SANCTION OR PENALTY IMPOSED UPON ONE BECAUSE OF HIS EXERCISE OF CONSTITUTIONAL RIGHTS." (Sherar vs. Cullen, 481 F 2d 946 (1973).

Cite 14

Trust property cannot he held under attachment nor sold upon execution for the Trustees personal debt (Mayo vs. Mortitz 24 N.E. 1083 (1890).).

Cite 15

Personal liability of a Trustee cannot be enforced against the Trust property. If the Trustee owned personally any amounts of beneficial interests, these C.B.I.'s can be attached.

Cite 16

In the case of United States National Bank of Omaha Kaminski, civil action #77 cv. 1830. District court of Jefferson County, Colorado. June 16, 1980, the Bank alleged that Kaminski owed them $20,000. When he had no personal assets to seize after they obtained judgement, they tried to seize the assets of an Equity Pure Trust that Mr. Kaminski had set up a few years before. The Bank's action failed and they were unable to penetrate the Trust.

Cite: 17

To further illustrate how creditors or the IRS cannot penetrate a Trust that has been established by the grantor at a time when he was personally solvent, the case of Mr. John M. King is an example. In 1969 oil entrepreneur John M. King, was worth 300 million dollars. In September 1971, he became involved in bankruptcy proceedings. Despite personal bankruptcy which began in June 1971, Mr. King testified thereafter that he and his wife and their four children still lived in an elegant, walled estate in a Denver suburb and had the use of vacation places in Palm Springs and La Jolla, California, as well as property in Vale, Colorado and Maui, Hawaii. He was able to do this because although his personal assets were currently tied up in bankruptcy court, Mr. King had, according to him, given 80% of his assets to various Trusts which he had established several years prior for the benefit of his children. Thus, when creditors with claims of 42 million dollars, including 5.3 million dollars allegedly owed to the IRS, tried to collect, they discovered they could not penetrate the Trusts which held these former assets. This proves that a Trust, properly established, is a separate legal entity from the grantor and the assets that have been placed in this Trust are immune from seizure.

Cite 18

A Trust established in good faith by the Grantor for the benefit of his children cannot be penetrated and assets seized to pay the alleged tax debts of the Grantor on the grounds that the Trust was established to defraud the Grantor's creditors where this conveyance of the assets of the Grantor did not leave him insolvent and where it was done prior to him having knowledge that at some future date he may allegedly owe taxes or other debts.

(U.S.A. vs. Jack E. Cissner. et al., Civil Court, Wash. Civ. #C82-436T.)

COURT RULES WIFE CAN BE AN ADVERSE PARTY IN A FAMILY TRUST

The IRS and many of the state revenue departments have been claiming legal taxable entity, and one of their arguments is that the wife cannot be a true adverse party on the Board of Trustees because she is married to the grantor of the Trust. The following court case proves beyond a shadow of a doubt that the wife can stand on her own two feet as a true adverse trustee to the grantor if he is a husband or is not a trustee on the board.

Cite 19

"It has been said that because of family solidarity a wife's interest in income is not truly adverse to her husband's." (Almaier vs. Commissioner, 6 Cir., 1940, 116 F 2d 162 (41-1 USTC 9141), cert. den., 312 US 706; ef: Fulham vs. Commissioner, supra.)

Cite 20

However, such a concept often counters reality. Is the Commissioner to investigate the existing rapport, or lack of it between a particular taxpayer and his wife before determining the incidence of the tax? We believe that a single rule must be adapted and that the preferable one is to assume that each wife stands on her own feet. (Commission vs. Katz, 7 Cir.. 1943, 139, F 2d 107, 110 (43-2 USTC 9640), Phipps vs. Commissioner, 2 Cir., 1943, 137 F 2d 141, 144, (43-2 USTC 9513).

Cite 21

A Trust can be a profit making, separate legal business entity, and when Trust income is to be accumulated or distributed at the sole discretion of fiduciary (the Board of Trustees), net income held and accumulated is taxable to the fiduciary (the Trust), and only that which is distributed to the beneficiaries is taxable to them. The IRS claimed that the Trust was "an association" and taxed it as such. The then "Board of Tax Appeals" held that the estate was not an association. Also, income earned by the Trust in any given year, not distributed in the same year to the beneficiaries is taxable to the Trust. If beneficiaries, it cannot be taxed a second time as is the case of incorporated business, with the exception of personal corporations (P.C.). (Guitar Family Trust Estate vs. Commissioner, 72 F 2d 544 (1934).

Cite 24

The courts condemn the demands of the government defendants who demand that they be exempted from constitutional mandate. In the case of Sloat vs. Board of Examiners, 274 N.Y. 367; N.E. 2d 12; 112ALR 660, the Court said: "DISOBEDIENCE OR EVASION OF A CONSITIUTIONAL MANDATE MAY NOT BE TOLERATED, EVEN THOUGH SUCH DISOBEDIENCE MAY, AT LEAST TEMPORARILY PROMOTE, IN SOME RESPECTS, THE BEST INTERESTS OF THE PUBLIC."

Cite 25

Justice Bandeis eloquently affirmed his condemnation of abuses practiced by Government officials, who were defendants acting as government officials. In the case of OImstead vs. U.S. 277 US 438, 48 S. Ct564, 575; 72 L Ed 944 (1928) he declared: "DECENCY, SECURITY, AND LIBERTY ALIKE DEMAND THAT GOVERNMENT OFFICIALS SHALL BE SUBJECTED TO THE SAME RULES OF CONDUCT THAT ARE COMMANDED TO THE CITIZEN IN A GOVERNMENT OF LAWS, EXISTENCE OF THE GOVERNMENT WILL BE IMPERILED IF IT FAILS TO OBSERVE THE LAW SCRUPULOUSLY. OUR GOVERNMENT IS THE POTENT, THE OMNIPRESENT TEACHER; FOR GOOD OR FOR ILL. IT TEACHES THE WHOLE PEOPLE BY ITS EXAMPLE. CRIME IS CONTAGIOUS. IF THE GOVERNMENT BECOMES A LAW-BREAKER, IT BREEDS CONTEMPT FOR LAW; IT INVITES EVERY MAN TO BECOME A LAW UNTO HIMSELF; IT INVITES ANARCHY. TO DECLARE THAT IN THE ADMINISTRATION OF THE LAW THE END JUSTIFIES THE MEAN WOULD BRING A TERRIBLE RETRIBUTION. AGAINST THAT PERNICIOUS DOCTRINE THIS COURT SHOULD RESOLUTELY SET ITS FACE."

Cite 26

A Trust has a legal right to sue in its own name or be sued. In the case of Waterman v. MacKenzie, 138 US 252 (1891), the court ruled that the Trust had a right to sue in its own name. In the case of U.S. vs. Carruthers 219 F 2d (1925), the court ruled that the Business Trust has the right to own property and be sued.

Cite 27

"WHEN ANY COURT VIOLATES THE CLEAR AND UNAMBIGUOUS LANGUAGE OF THE CONSTITUTION, A FRAUD IS PERPETUATED AND NO ONE IS BOUND TO OBEY IT." (State vs. Sutton 63 Minn. 147; 65 NW 262; 30 ,AL R 839.)


THE VALIDITY OF IRREVOCABLE TRUSTS AS SEPARATE LEGAL AND BUSINESS ENTITIES

Cite 28

A Trust for wife's benefit was not revocable merely because under the Trust agreement the corpus might revest in grantor if he survived his wife. (C.I.R. vs. Branch C.C.A. 1940. I14 F 2d 985, 132 A.L.R. 839)

Cite 29

A "Trust" is a separate and distinct entity from its beneficiaries for income tax purposes. (Brigham vs. U.S., D.C. Mass 1941. 38 F Supp. 625. appeal dismissed 122 F 2d 792.)

Cite 30

Trusts are taxable entities which compute their deductions basically as individuals. (Faben vs. C.I.R.. C.A. 1, 1975, 519 F 2d 1310.) The Purpose settlor had in establishing a Trust is irrelevant on the question of whether income from a Trust is taxable to settlor. (Halvering vs. Achelis. C.C.A. 1940, 112 F 2d 929.)

Cite 32

Title 26 para 676 power to revoke. (a) General rule. -The grantor shall be treated as the owner of any portion of a Trust, whether or not he is treated as such owner under any other provision of this part, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a non adverse party, or both. (Source: I.R.C., Sec, 166, 1939 Code)

Cite 33

Where taxpayer prior to the taxable year created separate Trusts for each of his five minor children, which Trusts were to last for the life of the respective beneficiaries, and no power to revoke the Trusts was reserved by the grantor or vested in anyone else, the Trusts were irrevocable and the income of the Trusts was not taxable to the taxpayer. (Revenue Act 1934, par a. 166, Auer vs. C.I.R., 1941, 45 B.T.A. 146.)

Cite 34

Where taxpayer created an irrevocable Trust, making his wife sole beneficiary and co-trustee with him and reserving no rights to corpus or income, and where no provision was made for payment of taxpayer's obligations or insurance premiums which were paid by the wife as absolute assignee of the policies, the Trust income was not taxable to the taxpayer. (Hexter vs. C.I.R., 1942, 47B.T.A. 1014.)

Cite 35

Where taxpayer 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 the Trusts were substantial and taxpayer was not taxable on the income from the Trusts. (Revenue Act 1934, para. 166. Milbank vs. C.I.R., 1940, 41 B.T.A. 1014.)


THE DEFIINITION OF AN ADVERSE PARTY AND COURT CASES TO THE SAME

Cite 36

Title 26, par a. 672. Definitions and rules.

(a) Adverse party - For purposes of this subpart, the term adverse party means any person having a substantial beneficial interest in the Trust which would be adversely affected by the exercise or non-exercise of the power which he possesses respecting the Trust. A person having a general power of appointment over the Trust property shall be deemed to have a beneficial interest in the Trust.

(b) Non-Adverse Party - For purposes of this subpart. the term non-adverse party means any person who is not an "adverse party".

(1) The grantor's spouse if living with the grantor.

(2) Any one of the following: The grantor's father, mother, issue, brother or sister, an employee of thegrantor, a corporation or any employee of a corporation in which the stock holdings of the grantor and the Trust are significant from the viewpoint of voting control or a subordinate employee of a corporation in which the grantor is an executive.

For the propose of sections 674 and 675, a related or subordinate party shall be presumed to be subservient to the grantor in respect of the exercise or non-exercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence.

(d) Rule where power is subject to condition precedent.  A person shall be considered to have a power described in this subpart even though the exercise of the power is subject to a precedent giving of notice or takes effect only on the expiration of a certain period after the exercise of the power.

Cite 36a

Historical Note: No similar provisions were contained in the 1939 Internal Revenue Code. 

Cite 36b

Comment: Section 672c is misleading because it appears to rule out a wife or husband as an adverse party. However, any person who is not a grantor, has a substantial interest in the Trust corpus, and possesses the power of appointment or control over the Trust property can qualify as an adverse party. Among hundreds of federal court decisions dealing with Trusts, there is not one that even implies that a wife or husband cannot serve in this capacity.

Cite 37

A person having a substantial adverse interest, within Revenue Acts of 1934 and 1936, par a. 166, is a person who has a vested right under the Trust and insists upon its performance and cannot be compelled to surrender it. (C.I.R. vs. Beets, C.C.A. 1941m 123 F 26 534)

Cite 38

Substantial adverse interest means a direct legal or equitable interest in the Trust property and not merely a sentimental interest in seeing Trust fulfilled for advantage of other beneficiaries.

(C.I.R vs. Prouty, C.C.A 1940, 115 F2d 331, 133.A.L.R. 977. See also. Flood vs. U.S., C.C.A. Mass. 1943, 133F2d 173.)

Cite 39

"Substantial adverse interest" is a relative term. to be measured by facts of each case.

(Morton vs. C.I.R. 9, 1975. 520F 26 923. Cert 1oran denied 96 S. Ct. 459, 423 U.S. 1016, 46 L. Ed. 2d 389.)

Cite 40

Where Trustee processed only 3-4% interest in Trust,. which represented share of assets he would receive at termination, and Trustees had discretion to distribute income to holders of certificates of interest, of which grantors held 86.38%, Trustee's interest was not adverse as to the entire Trust, but only as to his share, which thus could not preclude taxation of a portion of the income of the Trust to the grantor on the grounds that it was a grantor Trust. (Paxton vs. C.I.R.. C.A. 9. 1975. 520 F26 923. certiorari denied 96 S. Ct. 459. 423 U.S. 1016. 46 I. Ed. 2d 389.)

Cite 41

Mere fact that Trustee of inter Vivos Trust, not a beneficiary thereunder, was required by law to act solely in interest of beneficiaries, did not make Trustee adverse party under this section and regulations which would have permitted grantors to exclude Trust's income from their individual gross income if Trustee had been adverse party.

(Duffy; vs. C.I.R.. C.A. Ohio 1973, 487F 2d 282, certiorari denied 94 S. Ct. 1939, 416 U.5.938.)

Cite 42

From section 676: To prevent tax avoidance, Congress may constitutionally prescribe general rules that Trust income must be included in computing net income of grantor if power to distribute income or revest corpus in grantor is vested in one not having a substantial reasonable assumption that more often than not, having a substantial adverse interest in disposition of income or Trust, on the reasonable assumption that more often than not, vesting of power in person who has property interest as beneficiary of Trust would enable grantor to retain substantial mastery over corpus or income.

Flood vs. U.S., C.C.A. Mass 1943m 133 F 2d 173.)

Cite 43

Where the wife of a grantor of a Trust was given the current income for life and a limited testamentary power of appointment over corpus and income, she had an interest in the corpus substantially adverse to that of the grantor, and capital gains of the Trust are not taxable to the grantor.

(Revenue Act 1936, para. 166. Child's Estate vs. C.I.R., 1941, 44 B.T.A. 1191.)
 
 

Cite 44

Where husband created Trust for benefit of wife and child for purpose of insuring that a considerable part of income should go to wife, and wife as well as husband was a Trustee. wife had a substantial adverse interest in disposition of corpus and income within Revenue Act 1934, par a. 166, and hence husband was not taxable on Trust income paid to wife.

(Phipps vs. C.I.R., C.C.A. 2, 1943, 137F 2d 141.)

Cite 45

Where sole duty of commercial Trustee was to invest and reinvest Trust corpus and pay large income to beneficiaries, and Trustee received annual fee of $700 and could revoke Trust at any time, Trustees had no substantial adverse interest within Revenue Act 1934, par a 166.

(Morton vs. C.I.R., C.C.A. 1940, 109 F 2d 47.)

Cite 46

Under Trusts created in Illinois for the benefit of grantor's children, authorizing grantor's wife and brother, who with grantor were the Trustees, under Illinois law. could not vest the property in themselves, and hence had no substantial adverse interest within Revenue Act 1934. par a 1966 (2).

(Halvering vs. Stuart. 1942 63 S. Ct. 140. 317 U. S. 154. 87 L. Ed, 154.)

Cite 47

Where, under terms of Trust for benefit of wife and children, the wife upon death of any of children would receive interest in corpus and income of Trust, finding that she had such substantial adverse interest within Revenue Act 1936. para. 166. relating to revocable Trusts, that provision requiring her consent to termination of Trust would preclude taxing income thereof to grantor was warranted.

(C.I.R vs. Katz, C.C.A. 7, 1943, 139F2d. 107.)

Cite 48

From Section 677: Where taxpayer, as beneficiary of Trust set up in divorce decree, could exercise her own judgment as to amount of Trust income necessary for suitable support of children, taxpayer had a substantial adverse interest to husband as grantor, and income from Trust was taxable to beneficiary and not to grantor. (Ketcham vs. C.I.R., C.C.A. 2, 1944, 142 F 2d 996.)

Cite 49

Where taxpayer created Trust for wife, which could only be amended or altered by taxpayer with wife's consent, there was a substantial adverse interest and the income was not taxable to the settlor.

(Heaslet vs. C.I.R., 1942, 47 B. T.A. 1006.)

Cite 50

Taxpayers wife, as guardian of taxpayers children, would be strictly accountable for children's share for income of Trust created for their benefit, and hence had substantial adverse income in distribution of Trust income, within this section. (Halverings. Hormel, C.C.A. 1940, 111 F 2d 1 affirmed 61 S. Ct. 719, 312 U.S. 552, 85 L. Ed. 1037.)

Cite 51

Where wife's Trusts for children named herself and husband Trustees and gave him power to modify or terminate each Trust until children became 21, income of Trusts for children who had become 21 was not taxable to settlor since the power of husband to terminate the Trusts may not be imparted to settlor on the ground that her husband was subject to her control.

(Estate of Backus vs. C.I.R., 1946, 6 T.C. 1036.)


ELEMENTS THAT CAN MAKE TRUST INCOME NON-TAXABLE TO THE CREATOR

Cite 52

From section 441- That which is not in fact the taxpayer's income cannot be made such for tax purposes by calling it income.

(Bach vs. Rothensies, D.C. Pa. 1941. 37 F Supp. 217, reversed on other grounds 124 F 2d 306, 142 A. L. R. 210. certiorari denied 62 S. Ct. 1035, 316 U.S. 666. 86 L. Ed. 1 742.)

Cite 53

Income: from a long-term Irrevocable Trust of which taxpayer was Grantor and Trustee, and over which the trustee had broad powers of management, was not taxable to taxpayer.

(Small vs. C.I.R., 1944, 3 T. C. 1142.)

Cite 54

The power of trustees to accelerate payments of principal in whole or in part to beneficiary is not the equivalent of a power to terminate the Trust and revest the assets in the creator of Trust, as respects taxability of Trust income to creator on ground of revocability of Trust.

(Chertoff vs. C.I.R.., C.C.A.,1947, 160 F. 2d. 691.)

Cite 55

Where according to fixed provisions of Trust instrument, Trust was not revocable. Income received by beneficiaries was taxable to her, and revision to grantor when Trust terminated at death of survivor of named beneficiaries did not make Trust revocable or income taxable to grantor.

(Preston vs. C.I.R., C.C.A. 2, 1951, 197 F. 2d. 531.)

Cite 56

The income of a Trust was not taxable to grantor under Revenue Acts 1934, 1936, par a. 166, to Trusts where there was power to revest, and did not extend it to Trusts which might revert to grantor.

(Suhr vs. C.I.R, C.C.A. 1942, 126 F 26. 283.)

Cite 57

Capital gains of the Trust were not taxable to taxpayer in View of the impossibility of reversion to him.

(Bush vs. C.I.R., 194145 B.T.A. 609, reversed on other grounds T33F2d 1005.)

Cite 58

Where the income of a Trust was all to be distributed to the wife of the grantor and the corpus was to revert to him only in the event that he survived her and exercised the power to revoke, the income of the Trust was not taxable to him.

(Revenue Acts of 1934 and 1936. par a. 166, Estate of Fish vs. C.I.R, 1940, 42 B.T.A 260.)

Cite 59

Where power to revest title was only a contingent power, Trust income was not taxable to settlors under this section. (Chertoff vs. C.I.R., C.C.A. 6 1947, 160 F. 2d. 691.)

Cite 60

The power of grantor to revoke Trust which is contingent upon happening of future remote events, over which grantor has no control and which may never come to pass, is not subject to his control, and does not render Trust income taxable as against him.

(Revenue Acts off 1934 and 1936, para. 166. C.I.R. vs. Bets. C.C.A 1941, 123F 2d 534. See also C.I.R. vs. O'Keefe, C.C.A. 1941, 118 F. 2d. 639.)

Cite 61

Where taxpayer created Trust for benefit of his Wife and mother, and income received by mother under Trust was in excess of taxpayers liability under State statute, Smith-Hurd Stats. c. 107 para. 1 for her support, and income received by wife was not used for support, wife and mother were persons with substantial adverse interest notwithstanding relationship and hence, power does not render Trust income taxable to taxpayer under Revenue Acts 1934 and 1936, para. 166.

(C.I.R. vs. Betts. C.C.A. 1941, 123 F 2d 534.)

Cite 62

Income was not taxable to donor where Trusts could not be revoked, altered or amended for his benefit without the consent of the primary beneficiary or a person having a substantial interest in the disposition of the corpus or the income. (Bradley vs. C.I.R., 1943. 1 T.C. 566.)

Cite 63

Where instrument recited that settlor transferred to his mother for life all dividend income from 250 shares of preferred stock and that he held the stock as Trustee for that purpose, and thereafter he caused stock to be conveyed to himself as Trustee, settlor thereby made a present gift of irrevocable interest in the stock, and income thereof was not taxable to him.

(McHaffey vs. Helvering, C.C.A. 8, 1944, 140 F 2d 879.)

Cite 63

A provision permitting the grantor, as income beneficiary, to call for corpus if needed to make the total distribution for any year $10,000, was lost to that beneficiary when he assigned all of his rights in the Trust income to his wife, and Trust was irrevocable so that income thereof was not taxable to grantor.

(Huber vs. C.I.R., 1946, 3 T.C. 1205.)

Cite 65

Where, by Trust instruments operative during the taxable periods in question, taxpayer, as settlor, declares that he, as Trustee, holds certain stock in Trust irrevocably to pay net income therefrom to his wife and provides that the Trust shall terminate upon death of himself or his wife, whichever event first occurs, whereupon corpus shall be paid over to grantor if living or his Estate if dead and, further, provide that the trustee shall not be liable to pay certain loans made to taxpayer as collateral, Trust was not revocable and taxpayer was not liable for tax (Frazier vs. C.I.R., 1940, 41 B.T.A. 146.).

Cite 66

Where grantor could never obtain any of capital gains of Trust created for benefit of his wife and mother except upon happening of a remote, uncertain and improbable contingency, the capital gains of Trust were not taxable to grantor. (C.I.R. vs. Betts, C.C.A, 1941, 123 F 2d 534.)

Cite 67

Where grantor of Trust has stripped himself of all command over income for an indefinite period, and under terms of the Trust instrument will probably never regain beneficial ownership of the corpus, Trust income should not be treated as grantor's income merely because grantor is Trustee with broad powers of management. (C.I.R vs. Branch, C. C.A. 1940, 114 F 2d 985, 132 A.L.R. 839.)

Cite 68

The power granted by Trust of which the grantor was a co-trustee to deal with Trust fund and to manage the affairs as if trustees were the absolute owners of the property constituting Trust fund did not directly benefit the grantor so as to render income of Trust taxable to grantor.

(Morss vs. U.S., D.C. Mass. 1946. 64 F Supp. 996, affirmed 159 F 2d 142.)

Cite 69

Taxpayers reservation of broad powers of control over income and corpus of his Trust for his children did not make income taxable to him, although he might receive income as parent of minor beneficiaries on their behalf.

(Lees vs. C.I.R.,1946. 7 T.C.3~3. See also Foster vs. C.I.R., 1937, 8 T.C.197.)

Cite 70

Where powers reserved to the grantor/trustee were solely for the benefit of the beneficiary they were not taxable upon the income of the Trusts. (Smith vs. C.I.R, 1945, 4 T.C. 573.)

Cite 71

Where Trust established by grantor for his children in addition to granting extensive powers of control and management of Trust estate for the best interests of children, but power to revoke or retake any of the corpus or income was specifically denied to grantor, and termination of Trust both corpus and income were to be distributed to children named or their issue, Trust income was not taxable to grantor under Section 22,167 (I.R.C.1939). (Jones vs. Norris, C. C.A. Okla. 1941, 122 F 2d 6.)

Cite 72

The possibility that the corpus of a Trust might revert to the grantor does not make the income of the Trust taxable to the grantor under Revenue Act 1934, para. 166,167.

(McLean vs. C.I.R., 1940, 41 B.T.A565, affirmed F 2d 942.)

Cite 73

Under Trusts created in Illinois for the benefit of grantor's children, authorizing grantor's wife and brother who, with the grantor, were Trustees, to change during grantor's life the Trusts in any respect, grantor was not taxable as direct beneficiary of income, where under Illinois law it would be possible for trustees to accumulate the income for, or to distribute it to the grantor directly.

(Halvering vs. Stuart, 1942, 63 S.Ct. 140, 317 U.S. 154, 87 L. Ed.154.)

Cite 74

Where Trustees had primary responsibility to pay indebtedness incurred in purchase of Trust corpus and settlors had only contingent liability to pay if trustees should fail to do so, and indebtedness was incurred contemporaneously with establishment of Trust and solely for accommodation of Trust and settlors had no right to Trust income, Trust income used to pay indebtedness was not used to pay personal indebtedness of settlors and hence was not taxable to settlors.

(Edwards vs. Greenwald, C.A. Ga. 1954, 217 F 2d.)

Cite 75

The possibility of indirect benefits to grantor of a Trust is insufficient to make Trust income taxable to grantor. (Morse vs. U.S., D.C. Mass. 1946, 64 F supp. 996, affirmed 159F 2d 142.)

Cite 76

Where trust deed authorized grantor to change beneficiaries and modify their interests and to change Trustee but provide that income should not be paid to or applied to use or benefit of grantor, the Trust income was not required to be included in computing the grantors income tax under Section 167

(I.R.C. 1939 (now this section). (C.I.R. vs. Brown, C. C.A. 1941. 122 F 2d 800.)

Cite 77

Taxpayer who was appointed guardian for his children and made absolute transfer to his children of buildings in which his office was located was not taxable for rent collected as guardian and applied to children's insurance, health, and education beyond requirements of Montana law, where taxpayer retained few, if any controls over Trust property, other than as tenant, and there were non-tax motives, grounded in economic reality, for transfer. (Brooke vs. U.S., C.A. Mont. 1972, 468 F 2d 1155.)

Cite 78

Although grantor of Trust who has power of disposition of Trust is generally treated as owner in income-producing property, mere power to allocate income to designated beneficiaries of Trust does not alone render income of Trust taxable.

(Brooks vs. U.S., D. C. Mont. 1969, 300 F Supp. 465, affirmed 468 F 2d 1155)

Cite 79

A Trust is defined as a juristic entity created under obligation of contract, and said contract under common law. This indicates the Trust to be a created "person." The substantiation that a Trust is identified as a person is found in Title 26 of the United States Code (annotated USCA), Section 6012, sub. a, sub. 4, and further referred to as a "separate and distinct taxable person" in the head note of Muir vs. C.I.R., C.A. 4, 1950, 182 F 2d 819.

Cite 80

A Trust is a separate and distinct entity from its beneficiaries for income tax purposes.

(Bringham vs. U.S.D. C. Mass. 1941, 38 F Supp. 625, appeal dismissed 122 F 2d 792 ) reported in Title 26 I.R C. 31, page 356)

Cite 81

Now, because the courts have repeatedly ruled that Trusts are lawful, separate, profit making business organizations, any disallowance of the fiduciary fee paid to establish this Trust is in error. The fiduciary fee is a tax deductible business expense.

(I.R. C. Sec 212, see R.N. Bagley, 8 T. C. 130, also Treasury Regulation #6161t-5)

Cite 82

"No particular form of words is essential to create a Trust, provided there be reasonable certainty as to the property, the objects, and the beneficiaries."

(Chicago. M&T. P.R. Co. vs Des Moines Union R. Co., 254 U.S. 196. 31 S. Ct. Bit 65 L.Ed. 219)

Cite 83

"When a Trust is established and acknowledged, it does not need to be constantly reiterated or confessed."

(Chicago, M&T. P.R. Co. vs Des Moines Union R. Co., 254 U.S. 196, 31 S. Ct. 81, 65 L.Ed. 219)

Cite 84

U.S, adopted common laws of England with the Constitution.

(Caldwell vs. Hill, 178 SE 383 (1934)

Cite 85

If it is free of control by Certificate Holders, then it is a Pure Trust.

(Schuman-Heink vs. Folsom 159 NE 250 (1927)

Cite 86

A Pure Trust is a contractual relationship in Trust form.

(Berry vs. McCourt, 204 NE 2d 235 (1965)

Cite 87

Trustees are legal owners of property in Trust (fiducial).

(Johnson vs. Lewis, 6 F 27 (1881)

Cite 88

Fair Market Value is determined by property received by taxpayer and not the F.M.V. of the property transferred by taxpayer to the Trust. Commissioner vs. Marshman, C.A. 6 279 F 2d (1960)

Cite 89

Certificates are personal property and convey no interest in the Trusts property.

(Parker vs. Mona-Marie Trust, 278 SE 321)

Cite 90

Certificates in exchange are not taxable until a realized gain has occurred.

(Burnet vs. Logan, 283 U.S. 404 - 1931)

Cite 91

Gift tax is only on less than adequate consideration.

(Tyson vs. Commissioner, 146 F 2d 50 - 1944)

Cite 92

Even bad bargains in genuine business transactions do not result in taxable gifts.

(Estate of Anderson, 8 T.C. 706 (A) - 1947)


THE CIRCUMSTANCES UNDER WHICH A TRUST MAY MAKE YEARLY CHARITABLE CONTRIBUTIONS UP TO 100% OF ITS NET YEARLY INCOME

Cite 93

Deduction for amounts paid or permanently set aside for a charitable purpose. GENERAL RULE In the case of an estate of Trust (other than Trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170 (a): relating to deductions for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170 (c) (determined without regard to section 170 (c, 2A). If the charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during the taxable year. The election shall be made at such time and in such manner as the secretary prescribes by regulations.

The following is an explanation of all sections and subparts referred to above. Section 170(a). Payment must be made in the same taxable year, or by the 15th day of the 3rd month following the taxable year.

Section (c). A charitable contribution means a gift or contribution to (a) A State, the United States, a possession of or any political subdivision of the United States, providing it is used for public use only. (b) A corporation, Trust or Community Chest, fund or foundation created in the United States or any possession organized exclusively for religious, charitable, scientific, literary, or educational purpose, or to foster any amateur sports competition (only to the part of the athletics involved in providing athletic facilities or equipment), or for the prevention of cruelty to children or animals. (c) A post or organization of war veterans, or an auxiliary unit or society of, or Trust or foundation for any post or organization. (d) Operation of a cemetery not operated for profit. Subpart B. The only exception is a Trust which has an indenture and/or by-laws specifically stipulating that income must be distributed in the year it is earned.


MISCELLANEOUS APPLICABLE CITES
 
 

Cite 94

Latitude of power and activities of Pure Trust trustee is greater than ordinary Trustees.

(Ashworth vs. Hagar Estates., 181 S.E. 381 (1935)

Cite 95

The power to tax is subject to the 5th and 14th Amendments (due process) provisions. Congress can deprive no one of due process. (Beeland Wholesale Co. vs. Kaufman. 174 P 2d 791 (1937)

Cite 96

Community interest may be dissolved by either spouse by knowingly conveying interest to another.

(Baldwin Estates vs. Baldwin. 71 P 2d 791 (1937)

Cite 97

Trustees must act jointly unless express authority is given to the contrary.

(Brown vs. Donald, 216 SW 2d 679 (1949)

Cite 98

The fair market value is determined by property received by taxpayer, not by the fair market value transferred by the taxpayer in exchange for property received.

(Commissioner vs. Marshman, C.A. 6 279 F 2d 27 (1960)

Cite 99

A Trust may apply to a Court of Equity for an action of declaratory judgement to establish the meaning of an intent of indenture. (Dunbar vs. Redfield 61 P 2d 744).

Cite 100

Certificates are not chattels but are evidence of intangible rights.

(Goodhue vs. State ST. Trust Co., 267 Mass. 28)

Cite 101

A Trustee cannot acquire for himself property which it is his fiduciary duty to acquire for the Trust.

(Hamrick vs. Bryan. 21 F Supp. 392 (1937)

Cite 102

Indenture binding upon Certificate Holders.

(Hardee vs. Adams Oil Assn., 254 SW 602 (1923)

Cite 103

Trustees of Pure Business Trusts (not corporations) are the owners of the Trust property in a fiduciary relationship. A relationship of partners does not exist between Certificate Holders.

(Johnson vs: Lewis, 6 F 27 (1881)

Cite 104

Federal Jurisdiction is not to extend beyond strict construction of the statute.

(Kesberg vs. InternationaI Paper Co., 149 F 2d 911 (1945)
 
 

Cite 105

Agreement of which the preliminary step is an offer by one and acceptance by the other.

(Lee vs. Travelers Ins. Co. of Hartford, Conn., 173 SC 185)
 
 

Cite 106

Tax can only be shifted where the "Tree" (income) is conveyed. Mere anticipatory assignment is not good enough. Lucas vs. Earl, 281 U.S. 111 (1930)
 
 

Cite 107

Certificates are without determinable fair market value. No gain or loss is recognized until the cost or other basis of the property disposed of has been recovered. (Master Tax Guide. para. 910)

Cite 108

An unconstitutional law is not a law, it confers no rights, imposes no duties, and affords no protection.

(Norton vs. Shelby County 118 U.S. 425.)

Cite 109

The organization of a Common Law Business Trust was held not unlawful. Subscription to stock in a Common Law Trust was held to be NOT a gift but an investment.

(Palmer et. al. vs. Taylor et. al., 269 SW 996 (1925)

Cite 110

An association does not include a Pure Trust and is not taxed as a corporation, partnership, etc.

(Pennsylvania Co. vs. U.S., (CA 3) 138 F 2d 869 (1943)

Cite 111

A labor contractor is taxable for income paid to it by a third party.

(R&H Corp. vs. U.S., 255 F Supp. 870 91966)

Cite 112

It is established by legal precedent that Pure Trusts are lawful and valid business organizations.

(Reeves vs. PowelI, 267 SW 328 (1928)

Cite 113

A Trust is not limited to any given state in conducting business because it is a common law entity.

(Shirk vs. City Lafayette, 52 F 857 (1892)

Cite 114

Exchange - the giving of one thing for another in kind and excluding money as a basis of measure.

(Trenton Cotton Co. vs. Commissioner, 147F 2d 33 (1945)

Cite 115

The argument of force in its worst form, recognizing the occasional tyrannies of governing majorities, they amend the Constitution so that free speech and assembly should be guaranteed.

(Whitney vs. California, 47 S. Ct. 641.)

Cite 116

The basis for the terminology "Common Law Trust", in this connection, is not that such organizations are the creatures of the common law, as distinguished from equity, but that they are created under the common law of contracts and do not depend upon any statute.

Schumann-Heink vs. Folsom. 159 NE 250.)

Cite 117

It has been held that public policy is not offended by permitting a business to be carried on by the Trustees who limit their liability to the Trust estate (Schumann-Heink vs. Folsom, 328 Ill. 321.).

Cite 118

Founded in equity, a Pure Trust enjoys the advantage that the Trustees may avail themselves by one of the exceptions to the general principle that Courts will not declare future rights and they may apply to a court of Equity for directions in the execution of the Trust, or maintain a suit for a declaratory judgement to establish the meaning and the intent of the Trust instrument.

(Dunbar vs. Redfield, 7 Cal. 2d 515.)

Cite 119

A Pure Trust is as general and as elastic as a contract (Schumann-Heink vs. Folsom, 1 59 NE 250.

Cite 120

According to the generally accepted view, that is, the "Control Test", the status of a Pure Trust for the purpose of determining the liability of the shareholders depends upon who has the power of control over the business and property of the Trust. If the ultimate power of control is vested in the Trustees, who also hold the legal title to the Trust property, the organization is treated as a True (Pure) Trust, rather than as a partnership, and the shareholders are not liable for the debts or contractual obligation incurred by the trustees.

(Bank of America National Trust and Saving Association vs. Scully (Ca. 10), 92 F 2d 97 (Law of Calif.)

Goldwater vs. Oltman, 210 Cal. 408; Schumann-Heink vs. Folsom 328 Ill. 321; Commercial Casualty Ins, Co. vs. Pearce, 320 Ill. App 221; Rosemond vs. March, 287 Mach 580 (Rehearing denied, 287 Mich. 270)

Carling vs. Buddy, 318 M. 784 (re. Winter 133 NJ Eq. 245); Rhode Island Trust Co. vs. Copeland, 39 RI 193.)

Cite 121

If the organization is actually a Massachusetts Trust, or a Pure Trust, the shareholders are not liable for its debts (Re: Conover 295 Ill. App 443. Breco vs. Hubbard 242 Mass 37.). 

Cite 122

If the shareholders have the power of effectual control over the Trustees or over the affairs of the Trust, the concern is regarded as a partnership, and the shareholders are consequently liable.

(Bank of America National Trust and Saving Association vs. Scully(Ca. 10), 92 F 26 97 (Law of Calif:)

Rand vs. Morse (Ca 8), 289 F 339 (Law of Missouri); Goldwater vs. Oltman 210 Cal. 408;

Schumann-Heink vs. Folsom 328 Ill. 321; First National Bank vs. Charter, 305 Mass. 316' Neville vs. Clifford, 242 Mass. 124)

Cite 123

The motive in forming a Trust is generally not considered by courts in determining validity, and it has been held that a Pure Trust is not rendered illegal because of the fact that it was formed for the express purpose of reducing or avoiding taxation.

(Weeks vs. Sibley (DC), 269 F 155; Phillips vs. Platchford. 127 Mass. 510.)

Cite 124

The Court said, "It is an evasion of legal responsibility to take what advantages may accrue from the choice of any particular form of organization permitted by the law."

(Narragansett Mutual Fund Ins. Co. vs. Bum ham, 51 RI 371.)

Cite 125

The provisions of the Declaration of Trust are binding upon the holders of beneficial interests of a Pure Trust and said Declarations of Trust determines their rights.

(Todd vs. Ford. 92 Cole. 392; Weimer & Co. vs. Downs, Inc., 77 Colo. 377; Hardee vs. Adams Oil Assn.. (Tex. CIV. App.), 254 SW602.)

Cite 126

The Government must show a compelling interest that a relevant correlation or substantial relation exists between the governments interests and the information required to be disclosed.

(NAACP -vs - Alabama, 357 U.S. 449, 460 (1958) @ 461, 463, also see: Buckley vs. Valeo (1976) 424 U.S. 1, 96 S. Ct. 612, 694, 46 L. Ed. 2d 659, 759. No such showing has been made by the Government as of the date.)

Cite 127

IRS LOSES CORPORATE RECORDS: Reprint from The Grapevine. Waiter Hommert ran the M & H Plastics Co. and owned all its stock with his wife and son. In a criminal investigation, the IRS issued a summons ordering Waiter to produce his corporate records. Waiter refused, invoking his Fifth Amendment Constitutional right against self-incrimination. The IRS said the records had to be produced because a corporation has no Fifth Amendment rights, and only corporate records had been summoned.

TAX COURT: The summoned corporate records could be used against Waiter personally, so he did not have to produce them. (M&H Plastics, Inc., ED Cal., No. SPARE M&H Plastic vs. US, Eastern District of California, 5-85-1523 RAR (Judge Ramirez) (Still open 10/12/87)

Cite 128

The Court said "A PURE TRUST IS NOT ILLEGAL IF FORMED FOR THE EXPRESS PURPOSE OF AVOIDING TAXATION." (Weeks vs. Sibley, (DC) 269 F, 135.)