Morsman v. Commissioner of Internal Revenue
113 A.L.R. 441, 19 A.F.T.R. (P-H) 775, 90 F.2d 18 (1937)
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Rule of Law:
A valid express trust requires a present existing beneficiary distinct from the sole trustee and capable of enforcing the trust duties; where the settlor declares himself trustee for future or non-existent beneficiaries, the legal and equitable titles merge in the settlor, and no trust is created until a transfer of legal title to a third-party trustee or the beneficiaries come into existence.
Facts:
- On January 28, 1929, Robert P. Morsman, who was a bachelor without issue, executed an instrument titled “Trust Agreement” naming himself as trustee and the United States Trust Company as successor trustee.
- The agreement provided that income would accumulate until January 1, 1934, then be paid to Morsman for life, and upon his death, to his issue; if none, to his widow; and if none, to his heirs, to be ascertained by Nebraska law.
- At the time of signing, Morsman owned 100 shares of A.T.&T. Co. stock and 600 shares of International Utilities Pfd. B stock, which he merely indorsed in blank and placed with the trust instrument in his safe deposit box, without formally assigning them to himself as trustee.
- Morsman sold the A.T.&T. stock on February 1, 1929, and the International Utilities stock on February 8, 1929, knowing these sales would generate significant profit, and he had discussed the tax implications of creating a trust with his brother.
- Using the proceeds from these sales, Morsman purchased cashier's checks payable to himself as trustee, but he did not maintain a separate bank account for the trust funds.
- On February 8, 1929, Morsman added $3,371.78 to the fund with a personal check payable to himself as trustee and, acting as trustee, used most of the proceeds to buy mortgages from himself as an individual.
- On March 30, 1929, Morsman added another 100 shares of A.T.&T. stock to the fund, indorsing the certificate in blank, and upon its sale on May 1, 1929, used the proceeds to purchase mortgages from himself and bonds from the United States Trust Company for the trust fund.
- On May 3, 1929, Morsman assigned and delivered all accumulated funds, totaling $59,337, to the United States Trust Company, which accepted the property as successor trustee.
Procedural Posture:
- The Commissioner of Internal Revenue determined a deficiency in Robert P. Morsman's income tax for the year 1929.
- Morsman petitioned the Board of Tax Appeals for a redetermination of the deficiency.
- The Board of Tax Appeals sustained the Commissioner's determination, ruling that the trustee and the cestui que trust were one and the same person, and thus no legal trust was created prior to May 3, 1929.
- Morsman (petitioner) filed a petition in the Circuit Court of Appeals for the Eighth Circuit to review the decision of the Board of Tax Appeals.
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Issue:
Does a grantor's declaration of himself as trustee for his own benefit during his life, with remainder interests to non-existent beneficiaries (unborn issue, future widow, or heirs), create a valid present trust for tax purposes, thereby severing legal and equitable title?
Opinions:
Majority - Thomas, Circuit Judge
No, a valid present trust was not created prior to May 3, 1929, because there was no present existing beneficiary capable of enforcing the trust. The court emphasized that a trust requires a severance of legal and equitable titles. Since Morsman was the sole trustee and the only presently existing beneficiary (for his lifetime interest), the legal and equitable titles merged in him. The named future beneficiaries (issue, widow, or heirs) were non-existent at the time of the trust's purported creation. While a trust can be created for an unborn child if property is conveyed to a third-party trustee (creating a resulting trust for the settlor until the child is born), a settlor cannot declare himself trustee for unborn issue because the legal and equitable titles cannot be severed without another present, identifiable beneficiary. "A living person has no heirs," so prospective heirs have no present beneficial interest. Furthermore, a gratuitous promise to transfer property to a successor trustee in the future does not create a present trust until the actual conveyance of legal title occurs. The court underscored that a legal transaction may be scrutinized to see if it is in reality what it appears to be, especially when tax evasion is an admitted motive.
Dissenting - Gardner, Circuit Judge
Yes, a completed trust was created on January 28, 1929. The dissenting opinion argued that an owner of personal property can impress it with a present trust by unequivocally declaring himself a trustee, without needing to transfer the physical property. It contended that the non-existence of a beneficiary at the time of the trust's creation does not inherently invalidate it, citing cases where trusts for unborn children were upheld. The dissent also stated that a "prospective or potential heir," such as Morsman's brother, fulfills the requirement of a beneficiary, possessing a contingent interest that could be enforced in equity. It criticized the majority for relying on facts (Morsman's bachelor status) that were not part of the record before the Board of Tax Appeals and were introduced for the first time on appeal, suggesting a remand would be appropriate to allow parties to address these new issues.
Analysis:
This case is foundational in trust law, particularly regarding the elements required for a self-declared trust and the "merger doctrine." It clarifies that for a trust to be effective where the settlor names himself as trustee, there must be a presently existing beneficiary distinct from the trustee, capable of enforcing the trust. This ruling has significant implications for tax planning, reinforcing the idea that superficial compliance with trust formalities will not suffice if the substantive legal requirements (like severance of legal and equitable title) are not met. Future cases must carefully consider the existence and enforceability of beneficiaries' rights when a settlor attempts to create a trust with themselves as trustee.
