## Facts

- In December 1927, an individual taxpayer planned to trade stocks during 1928 and sought to have any resulting profits benefit his wife, mother, and two minor children.
- After consulting counsel, the taxpayer orally declared that his 1928 stock-trading would be conducted “in trust” for those family members on stated terms.
- The stated terms included that the taxpayer would personally bear any trading losses and would distribute any profits in equal shares to the four family members after deducting reasonable compensation to himself.
- In 1928, the taxpayer traded securities using his own funds and credit and realized profits.
- The taxpayer determined his compensation at slightly less than $10,000 and reported that amount on his own 1928 return.
- He then allocated the remaining profits in roughly equal shares to the wife, mother, and two children by crediting amounts to them on his books; little or no cash was actually paid over (except some payments to the mother), and the children were one and three years old.
- The Commissioner determined a deficiency, treating the full 1928 trading profits (beyond the reported compensation) as the taxpayer’s income.
- The Board of Tax Appeals sustained the deficiency, and the taxpayer sought appellate review.

## Issues

1. Whether an oral declaration in 1927 could create a valid trust over as-yet-unrealized future profits from contemplated 1928 stock trading.
2. Whether, absent a valid trust res at the time of the declaration, the 1928 trading profits were taxable to the taxpayer rather than to the asserted beneficiaries.
3. Whether book credits to family members reflected trust income or merely post-accrual transfers of the taxpayer’s income.

## Decision

- The Seventh Circuit affirmed the Board of Tax Appeals.
- The court held that no valid trust existed in 1927 because the alleged trust property consisted only of future, unascertained profits not yet in existence.
- The court concluded that the 1928 profits first accrued to the taxpayer when realized and were therefore taxable to him for 1928.
- The later allocation of profits to family members, reflected largely by book entries and minimal distributions, did not shift the incidence of taxation.

## Legal Principles

- A valid trust requires an existing, identifiable trust res at the time of creation; an expectancy or interest not yet in existence cannot be held in trust.
- Where there is no trust res at the time of an initial declaration, a trust does not arise until the property comes into being and the settlor then manifests intent to hold that property in trust.
- For federal income tax purposes, income is taxed to the person to whom it first accrues as a matter of property rights; later transfers or allocations generally do not reassign the original tax liability.
- An anticipatory attempt to divert future income derived from the taxpayer’s own capital and efforts—before it is earned or realized—does not prevent taxation of that income to the taxpayer when realized.

## Conclusion

The court held that an oral “trust” of future stock-trading profits failed for lack of a present trust res, so the 1928 profits accrued to and were taxable to the taxpayer when realized; subsequent book allocations to family members were treated as dispositions of the taxpayer’s income rather than trust income taxable to the beneficiaries.


Brainard v. Comm’r of Internal Revenue, 91 F.2d 880 (7th Cir. 1937)