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Funk v. Commissioner of Internal Revenue.

decided: September 25, 1947.


Author: Kalodner

Before GOODRICH, MCLAUGHLIN, and KALODNER, Circuit Judges.

KALODNER, Circuit Judge.

This appeal is taken from a decision of the Tax Court (six judges dissenting) in two consolidated cases. While the principal inquiry involved in the litigation relates to the scope of the petitioner's powers under certain trust instruments, the pressing question for our determination is whether the Tax Court may take judicial notice of its records in another case involving the same trusts but not the same taxpayer so as to make a critical fact finding in the instant litigation.

A further question of law is to what extent the courts of New Jersey will exercise control over the trustee of a New Jersey trust.

The Tax Court ruled that the petitioner was the owner of all the income of four trusts created by her husband and therefore taxable under Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, ยง 22(a), despite the fact that part of the trust income was accumulated and added to the corpus during all the tax years involved (1938-1941) and that during three of the four tax years substantial portions of the tax income were disbursed to the settlor husband.

The Tax Court*fn1 found the facts as stipulated by the parties. Insofar as here pertinent, they are as follows:

On March 1, 1929, petitioner's husband organized Erwin Park, Inc., a Delaware corporation, as his personal holding company. He transferred to it a substantial part of his property and became entitled to all of the capital stock of Erwin Park; such property was set up on the books of the corporation at a value of $6,603,439.32. At the beginning of 1938, the authorized capital stock of Erwin Park consisted of 500 Class A shares, 1,000 Class B shares, and 500 Class C shares. Petitioner's husband and one of the members of a firm of accountants and tax consultants were, and continued to be, the corporation's board of directors. Dividends were to be declared and paid at such time and in such amounts as the directors in their absolute discretion should determine, except that of all dividends paid during any calendar year, 5% had to be paid on Class A stock, 15% on Class B stock, and 80% on Class C stock.Voting power was vested exclusively in the holders of Class B stock, of which petitioner's husband owned all the outstanding shares. Four hundred and ninety-nine and four-fifths of the 500 shares of Class A stock constituted the corpus of three trusts which petitioner's husband had set up for each of their children.

On December 29, 1936, petitioner's husband set up four identical irrevocable trusts designated as trusts A, B, C, and D. The corpus of each trust consisted of 125 shares of Erwin Park Class C stock. Petitioner was made the trustee of each trust. The trusts are to exist during the lifetime of the husband.Upon the death of the husband, the trusts will terminate and the principal and undistributed income will be paid to such persons whom the husband may appoint by will, or, in default of appointment, to the children of petitioner and her husband, or to the issue or heirs of such children.

Each trust provided that the trustee should have the power:

"First. During my lifetime to hold, manage, sell, invest and reinvest the same, to receive the income thereof and to pay therefrom all taxes, assessments, and other charges and expenses accruing thereon from year to year and properly chargeable thereto, and all expenses incident to the trust hereby created, and in her discretion to pay all or a part of the net income annually to me, or to herself, in accordance with our respective needs, of which she shall be the sole judge, and to accumulate and add to principal the balance of such income, if any. Any income so accumulated and added to principal by the Trustee shall become a part of the corpus of the trust and may not thereafter be distributed by the Trustee.

"Third. Upon the death or resignation of the Trustee she shall have the right by will or other instrument in writing to appoint a successor Trustee who shall have the same powers as the Trustee appointed hereby."

The Trustee was also given the usual broad powers of management over the trust corpus, including the power of changing investments and registering the securities in her own name.All stock dividends must be added to principal, and all cash dividends, except liquidating dividends, are to be treated as income.

Petitioner accepted the trusts, received the stock certificates and placed them in a safe deposit box to which she alone had access.

On December 29, 1936, petitioner and her husband exchanged letters relating to trusts A, B, C, and D. The letter ...

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