The opinion of the court was delivered by: BONDY
This is an action for the refund of taxes together with interest and penalties amounting to $ 251,515.12 paid by the plaintiff Morris Moskin to the defendant, Collector of Internal Revenue. The plaintiff contends that dividends paid on 10,000 shares of Moskin Stores, Inc. in the years 1935 to 1941 inclusive constituted income of a trust established by him for the benefit of his three children, and therefore was erroneously held to be taxable to him.
The Government contends that the circumstances surrounding the creation and administration of the trust established that the plaintiff did not create a trust for his children in good faith; that the transaction was a paper transaction contrived for the purpose of evading payment of taxes by him without parting with the control over corpus or income of the trust and that the control of the corpus and income which plaintiff retained was more than sufficient in any case to make the income from the trust taxable to him as grantor under the doctrine of Helvering v. Clifford, 1940, 309 U.S. 331, 60 S. Ct. 554, 84 L. Ed. 788.
Although the taxes which plaintiff seeks to recover are only those paid on dividends of Moskin Stores, Inc. each year between 1935 and 1941, the entire administration of the trust may be reviewed in order to decide the issues raised by the Government.
The capital stock of Moskin Stores, Inc. consisted of 25,000 shares all owned by the plaintiff. On August 1, 1930, a certificate for 5,000 of these shares was issued to plaintiff's wife Irma, a certificate for 15,000 shares to the plaintiff and 5,000 shares were reserved by Moskin for issuance to executives of the company.
In an instrument dated October 1, 1930, and signed by plaintiff and his wife, it is stated:
'This will confirm our agreement with respect to the 10,000 shares of Moskin Stores Inc., stock which is held in trust for Irma Moskin and the children.
'These shares of stock are to be held in trust by Irma Moskin as Trustee, 5,000 shares separately for Frances Moskin, 2500 shares separately for John Robert Moskin and 2500 shares separately for Allan Donald Moskin.
'The income is to be held by Irma Moskin in trust for Frances Moskin separately, for Allan Donald Moskin separately, and for John Robert Moskin separately.
'As Frances Moskin separately, and John Robert Moskin separately, and Allan Donald Moskin separately reach their majority (the age of 21 years) the shares of stock designated herein for each separately shall be distributed to each of them in their own full name and right, and all accumulated income.
'In the event of the death of either Frances Moskin, John Robert Moskin or Allan Donald Moskin prior to reaching the age of 21, the shares of stock and the income held in trust separately shall become the sole property of Irma Moskin, or if she is not living then to be divided amongst the surviving children.
'In the event of the death of Irma Moskin then Morris Moskin is to succeed the said Irma Moskin as Trustee hereunder and any and all other provisions of the Trust to remain as provided for herein.
'The Trustee shall have the right to dispose of all or any part of its Trust Property and the right to invest all or any part of the Trust money in any securities or property as she or he may consider proper.'
The plaintiff retained possession of the 15,000 share certificate until June or July, 1931, when certificates for 5,000 shares and 10,000 shares were issued in plaintiff's name in place of the 15,000 share certificate in his name in order to provide a separate certificate of 10,000 shares mentioned in the trust agreement. Both certificates were predated August 1, 1930, the date of the 15,000 share certificate, on which there was then noted 'Cancelled. Issued in error.' The plaintiff endorsed the 10,000 share certificate in his name and delivered it to Irma, who deposited it in their safe deposit box. At an unknown time, the work 'trustee' was inserted after the name of Morris Moskin on this certificate.
On January 4, 1932 the following letters were exchanged by plaintiff and his wife:
'This will acknowledge that I am holding for you as Trustee for the children, 10,000 shares of Common Stock of Moskin Stores Inc., which shares of stock are their property, and which are to be delivered to each of them when they become of age:
'5,000 shares to be delivered to Frances Moskin
'2,500 shares to be delivered to John Robert Moskin
'2,500 shares to be delivered to Allen Donald Moskin
'I am to account to you for any dividends with may be declared on these stocks.
'Yours very truly, 'Morris ...