Brainard v. Commissioner of Internal Revenue
91 F.2d 880 (1937)

  • Brainard wanted to trade stocks. For tax purposes he decided to trade in trust. That means he bought and sold stocks with his own money, and had the profits from those sales directly placed into a trust. From there the profits were distributed to his family members.
    • The family members all reported their share of the income on their individual tax returns.
      • Coincidentally, the family members were all in much lower tax brackets than Brainard…
    • However, none of the family members actually received the money.
    • Two of the trust’s beneficiaries were his children, ages 1 and 3.
  • The IRS stepped up and claimed that the trust income should be considered Brainard’s and he should pay the taxes.
    • The IRS argued that Brainard was the one directly benefiting from the trust, not his family members.
  • The Tax Court found for the IRS. Brainard appealed.
  • The Federal Appellate Court affirmed.
    • The Appellate Court noted that according to the Restatement of the Law of Trusts § 1-75, an interest which has not come into existence can not be held in trust.
      • In this case Brainard created a trust before he had any money to put into the trust. The trust was designed to collect the profits from stock trades, but you can’t put an ‘intention’ into a trust, you can only put in real dollars.
      • Therefore the trust didn’t exist until the specific dollars existed, and that didn’t happen until the profits were made.
    • The Appellate Court found that Brainard could not put the profits from the stock sales into a trust unless he first owned them himself (even if it was only for a second.)
    • Therefore, since Brainard received the profits from the stock sales, he was responsible for paying taxes on those profits before he could put them into the trust.
  • The basic rule is that in order to be a valid trust, the money in the trust (aka the res) must be ascertainable and must explicitly exist.