Appeal from the United States Board of Tax Appeals.
Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
The petitioner created trusts, on December 1, 1922, in favor of her daughter and a nephew, for the duration of the life of the settlor or of the beneficiary or of the minority of the latter, whichever period should first expire. The settlor was one of the two trustees. The income was to be paid to the beneficiaries in the discretion of the trustee and to be applied to the maintenance of the beneficiary, or was to be paid to the settlor for the use of the beneficiaries. A complete power of amendment or revocation on written notice was reserved by the settlor in the original trust agreement. On June 16, 1924, the complete power of revocation in the original trust agreement was modified to read that the settlor "reserves the right to revoke this trust estate prior to the determination thereof, upon and at the expiration of twelve months and one day after notice of revocation as hereinafter set forth."
It was there stated that the notice of revocation should be sent by mail. On July 23, 1928, and November 14, 1928, the original trusts terminated by their terms upon the nephew and daughter, respectively, attaining their majorities. By the terms of the trusts, the principal became payable to the settlor. Instead of paying over the principal in each case on the day following each majority, July 24, 1928, in the case of the nephew, and November 15, 1928, in the case of the daughter, new trust agreements were executed directing the trustees to hold the principal on the terms set forth. The trust was for the life of the beneficiary or settlor, whichever proved shorter. The power of revocation remained requiring a notice of one year and one day. Notice of revocation was not given in the year 1928. The Commissioner taxed the income of these trusts to the petitioner, applying Revenue Act 1928, § 166 (26 USCA § 2166), derived from the Revenue Act of 1924, § 219 (g) (26 USCA § 960 note). The Board of Tax Appeals upheld the tax. This petition to review seeks a reversal of that determination.
The original and substituted trusts of personal property are valid under the law of New York which restricts the purposes for which express trusts may be created. The power of revocation did not affect the validity of the trusts. Van Cott v. Prentice, 104 N.Y. 45, 10 N.E. 257. In the absence of revocation, the beneficiaries could enforce the trusts. Schreyer v. Schreyer, 101 App. Div. 456, 91 N.Y.S. 1065, affirmed 182 N.Y. 555, 75 N.E. 1134.
The trust could be revoked only by complying with the terms of the power of revocation (Gage v. Irving Bank & Trust Co., 222 App. Div. 92, 225 N.Y.S. 476, affirmed 248 N.Y. 554, 162 N.E. 522) or by consent of all the persons interested as provided in the New York Personal Property Law (Consol. Laws, c. 41) § 23.
Upon the termination of the original trusts on July 23, 1928, and November 14, 1928, the principal was not paid to the settlor. But, even though the settlor may not have received title to the corpus on the termination of the original trusts and before the trustees paid over the principal, as directed by the agreements, her complete control over the fund after such termination of the original trusts is clear, and the income from the corpus after that time was disposed to another trust, the settlor retaining complete rights to the corpus for one day only in each case, and the government is not now seeking to tax the income for that period. But its claim is based on section 166 of the Revenue Act of 1928 (26 USCA § 2166), which provides that income from a trust shall be taxed to the grantor if he "has, at any time during the taxable year, * * * the power to revest in himself title * * *" to the corpus.
The question presented is whether section 166 applies, and, if it does, whether or not that application violates the Fifth Amendment to the Constitution, if the settlor be taxed. The purpose of section 166 of the Revenue Act of 1928 is to prevent a taxpayer from evading the surtax rates by distributing his income among his family or otherwise attempting to have it taxable to distributees. Congress has the power to prevent this practice. Burnet v. Leininger, 285 U.S. 136, 52 S. Ct. 345, 76 L. Ed. 665; Corliss v. Bowers, 281 U.S. 376, 50 S. Ct. 336, 74 L. Ed. 916. It is also clear that, in order to gain the advantage of the higher rates on larger incomes, the federal government cannot create large incomes and tax them accordingly by considering the income of two or more persons as the income of one person or by measuring the income of one person by that of another. Hoeper v. Tax Commission of Wisc., 284 U.S. 206, 52 S. Ct. 120, 76 L. Ed. 248. There is an ambiguity in section 166 which the legislative history referred to by counsel does not entirely remove. The Senate revision of the House draft of the tax bill makes it clear that, if the settlor's power of revocation is shackled by a condition not satisfied in the taxable year, Congress did not intend to tax the income to the settlor. A condition entirely beyond the control of the settlor brings a trust within the exempted class, but does a condition partially or completely in control of the settlor bring the case within the class of revocable trusts which Congress did not intend to tax to the settlor? It was within the power of Congress to have said that trusts revocable on a condition not happening within the year were not taxable to the settlor in that year. Congress might have inserted the phrase "at any time in the taxable year" in the House Bill. Instead, Congress stated the class of recovable trusts taxable to the settlor. The language, "the power to revest in himself [settlor] title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor," is argued, by the petitioner, to mean a revesting of the corpus within the taxable year to make it taxable to the settlor, and, by the respondent, it is argued that it requires merely the power of revocation. In Corliss v. Bowers, 281 U.S. 376, 50 S. Ct. 336, 74 L. Ed. 916, where it was held that the income was taxable to the settlor, the court pointed out that "The acquisition by the wife of the income became complete only when the plaintiff failed to exercise the power that he reserved. * * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate, it does not matter whether the permission is given by assent or by failure to express dissent.The income that is subject to a man's unfettered command and that he is free to enjoy at his own option, may be taxed to him as his income, whether he sees fit to enjoy it or not."
This settlor could not revest and obtain the income within the taxable year 1928, for she had not served the necessary notice of one year and a day. If the trust could not be revoked during such year, then the income must be taxable to the recipient thereof. The power referred to in the statute must be one by which the grantor could revest in himself the title to the corpus during the taxable year. Lewis v. White (D.C.) 56 F.2d 390; appeal dismissed Oct. 21, 1932 (C.C.A. 1) 61 F.2d 1046. In Clapp v. Heiner, 51 F.2d 224 (C.C.A. 3), the trust contained a provision of revocation on six months' notice. This gave, as Justice Holmes said, "the unfettered command" over the principal of the trust within the year and was held taxable to the settlor.
In the instant case, the principal of the trust so far as 1928 was concerned, had been irrevocably transferred and did not belong to the petitioner, and she, having put it beyond all control, gave the income during that year to another recipient. She could not by her own positive act revest herself with title to the property during the year 1928, within the terms of the trust and she had no control over the principal until the termination of the trust in that year. Therefore she had lost control of the income during the period of taxation. Burnet v. Leininger, 285 U.S. 136, 52 S. Ct. 345, 76 L. Ed. 665; Mitchel v. Bowers, 15 F.2d 287 (C.C.A. 2). Since during the year no act could be done by the petitioner so as to bring to her any portion of the corpus of the trusts or the income thereof, she is not subject to taxation within the purview of section 166. The Board of Tax Appeals in Ashforth v. Com'r, 26 B.T.A. --- has expressly overruled their decision in this case, and for the reason that they deemed it inconsistent with Corliss v. Bowers, Clapp v. Heiner, and Lewis v. White, supra.
With the view we take that the statute does not permit taxing the income of the trust to the settlor under the circumstances here disclosed, it becomes unnecessary to consider the argument advanced as to the constitutionality of section 166 of the Revenue Act of 1928.
AUGUSTUS N. HAND, Circuit Judge ...