1. Under § 219(h) of the Revenue Acts of 1924 and 1926, where an
irrevocable trust is established to pay for insurance on the
settlor's life, collect the policy upon his death, and hold or
apply the proceeds, under the trust, for the benefit of his
dependents, income of the trust fund used by the trustee in paying
the premiums is taxable to the settlor as part of his own income.
P.
289 U. S.
675.
2. This tax is constitutional as applied to income accruing
since the enactment of the legislation from trusts created earlier.
Pp.
289 U. S. 677,
289 U. S.
682.
3. Refinements of title are without controlling force in
determining whether a statute arbitrarily attributes to one person
a taxable interest in the income of another. The question is not
whether the concept of ownership reflected in the statute squares
with common law traditions, but rather whether that concept could
reasonably be adopted because of privilege enjoyed or benefit
derived by the taxpayer, some regard being had also to
administrative convenience and the practical necessities of an
efficient taxing system. P.
289 U. S.
678.
4. To overcome this statute, the taxpayer must show that, in
attributing to him the ownership of the income of the trusts, or
something fairly to be dealt with as equivalent to ownership, the
lawmakers have done a wholly arbitrary thing, have found
equivalence where there was none nor anything approaching it, and
laid a burden unrelated to privilege or benefit. P.
289 U. S.
679.
Page 289 U. S. 671
5. Income permanently applied by the act of the taxpayer to the
maintenance of contracts of insurance made in his name for the
support of his dependents is income used for his benefit in such a
sense and to such a degree that there is nothing arbitrary or
tyrannical in taxing it as his. P.
289 U. S.
679.
63 F.2d 425 reversed.
Certiorari to review the reversal, in part, of a ruling of the
Board of Tax Appeals, 19 B.T.A. 1213, upholding certain assessments
of income.
Page 289 U. S. 672
MR. JUSTICE CARDOZO delivered the opinion of the Court.
Income of a trust has been reckoned by the taxing officers of
the government as income to be attributed to
Page 289 U. S. 673
the creator of the trust insofar as it has been applied to the
maintenance of insurance on his life. Section 216(h) of the Revenue
Acts of 1924 and 1926 permits this to be done. The question is
whether, as applied to this case, the acts are constitutional.
On December 30, 1922, the respondent, Frederick B. Wells,
created three trusts, referred to in the record as Nos. 1, 2, and
3, and, on August 6, 1923, two additional ones, Nos. 4 and 5, all
five being irrevocable.
By trust No. 1, he assigned certain shares of stock of the par
value of $10,000 to the Minneapolis Trust Company as trustee. The
income of the trust was to be used to pay the annual premiums upon
a policy of insurance for $100,000 on the life of the grantor.
After the payment of the premiums, the excess income, if any, was
to be accumulated until an amount sufficient to pay an additional
annual premium had been reserved. Any additional income was, in the
discretion of the trustee, to be paid to a daughter. Upon the death
of the grantor, the trustee was to collect the policy, and with the
proceeds was to buy securities belonging to the Wells estate
amounting to $100,000 at their appraised value. The securities so
purchased, which were a substitute for the cash proceeds of the
policy, were to be held as part of the trust during the life of the
daughter, who was to receive the income. On her death, the trust
was to end, and the corpus was to be divided as she might appoint
by her will, and, in default of appointment or issue, to the
grantor's sons.
The other trusts carried out very similar plans, though for the
use of other beneficiaries. Thus, trust No. 2 had in view the
preservation of a policy of life insurance which was to be held
when collected for the use of one Lindstrom, said to be a
kinswoman. Trust No. 3 was directed to the maintenance of four
policies of insurance for named beneficiaries, three of them
relatives of the
Page 289 U. S. 674
grantor and one a valued employee, who later became his wife.
Trust No. 4 kept alive seven policies of life insurance which had
been taken out by the grantor for the use of sons and daughter, and
three accident policies for his own use. Trust No. 5 kept alive
nine life policies for his sons and daughter, and two accident
policies for himself. Several of the deeds made provision for
contingent limitations for the benefit of charities.
The grantor, in making the returns of his own income for the
years 1924, 1925, and 1926, did not include any part of the income
belonging to the trusts. Upon an audit of the returns, the
Commissioner of Internal Revenue assessed a deficiency to the
extent that the income of the trusts had been applied to the
payment of premiums on the policies of insurance. There was no
attempt to charge against the taxpayer the whole income of the
trusts, to charge him with the excess applied to other uses than
the preservation of the policies. The deficiency assessment was
limited to that part of the income which had kept the policies
alive. The Board of Tax Appeals upheld the Commissioner. 19 B.T.A.
1213. The Circuit Court of Appeals reversed, except as to the
premiums on the policies of accident insurance, those policies, in
the event of loss thereunder, being payable to the insured himself.
As to the income applied to the maintenance of the policies of life
insurance, payable, as they were, to persons other than the insured
or his estate, the Court of Appeals held that an assessment could
not be made against the creator of the trust without an arbitrary
taking of his property in violation of the Fifth Amendment. 63 F.2d
425. Section 219(h) of the Revenue Acts of 1924 and 1926,
permitting such an assessment, was adjudged to be void. The court
drew no distinction between the validity of the statute in its
application to trusts in existence at the time of its enactment and
its validity in
Page 289 U. S. 675
application to trusts to be created afterwards. A writ of
certiorari brings the case here.
The meaning of the statute is not doubtful, whatever may be said
of its validity.
"Where any part of the income of a trust is or may be applied to
the payment of premiums upon policies of insurance on the life of
the grantor (except policies of insurance irrevocably payable for
the purposes and in the manner specified in paragraph (10) of
subdivision (a) of § 214 [the exception having relation to trusts
for charities]), such part of the income of the trust shall be
included in computing the net income of the grantor."
Section 219(h), Revenue Act of 1924, c. 234, 43 Stat. 253, 26
U.S.Code, § 960; Revenue Act of 1926, c. 27, 44 Stat. 9, 26
U.S.Code App. § 960.
The purpose of the law is disclosed by its legislative history,
and indeed is clear upon the surface. When the bill, which became
the Revenue Act of 1924, was introduced in the House of
Representatives, the report of the Committee on Ways and Means made
an explanatory statement. Referring to § 219(h). it said:
"Trusts have been used to evade taxes by means of provisions
allowing the distribution of the income to the grantor or its use
for his benefit. The purpose of this subdivision of the bill is to
stop this evasion."
House Report, No. 179, 68th Congress, 1st Session, p. 21. There
is a like statement in the report of the Senate Committee on
Finance. Senate Report No. 398, 68th Congress, 1st Session, pp. 25,
26. By the creation of trusts, incomes had been so divided and
subdivided as to withdraw from the government the benefit of the
graduated taxes and surtaxes applicable to income when concentrated
in a single ownership. Like methods of evasion, or, to speak more
accurately, of avoidance (
Bullen v. Wisconsin,
240 U. S. 625,
240 U. S.
630), had been used to diminish the transfer or
succession taxes payable at death. One can read in the revisions of
the Revenue
Page 289 U. S. 676
Acts the record of the government's endeavor to keep pace with
the fertility of invention whereby taxpayers had contrived to keep
the larger benefits of ownership and be relieved of the attendant
burdens.
A method, much in vogue until an amendment made it worthless,
was the creation of a trust with a power of revocation. This device
was adopted to escape the burdens of the tax upon incomes and the
tax upon estates. To neutralize the effect of the device in its
application to incomes, Congress made provision by § 219(g) of the
Revenue Act of 1924 that,
"where the grantor of a trust has at any time during the taxable
year, either alone or in conjunction with any person not a
beneficiary of the trust, the power to revest in himself 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."
The validity of this provision was assailed by taxpayers. It was
upheld by this Court in
Corliss v. Bowers, 281 U.
S. 376, as applied to a trust in existence at the
enactment of the statute, the power of revocation in that case
being reserved to the grantor alone, and recently at the present
term was upheld where the power of revocation had been reserved to
the grantor in conjunction with some one else.
Reinecke v.
Smith, ante, p.
289 U. S. 172.
Cf. Burnet v. Guggenheim, 288 U.
S. 280. Other amendments of the statute were directed to
the trust as an instrument for the avoidance of the tax upon
estates. By § 302(d) of the Revenue Act of 1924, the gross estate
of a decedent is to be taken as including the subject of any trust
which he has created during life
"where the enjoyment thereof was subject at the date of his
death to any change through the exercise of a power, either by the
decedent alone or in conjunction with any person, to alter, amend
or revoke, or where the decedent relinquished any such power in
contemplation of his death, except in case of a
bona
fide
Page 289 U. S. 677
sale for a fair consideration in money or money's worth."
The validity of this provision as to trusts both past and future
is no longer open to debate.
Porter v. Commissioner,
288 U. S. 436.
Cf. Reinecke v. Northern Trust Co., 278 U.
S. 339;
Chase National Bank v. United States,
278 U. S. 327;
Saltonstall v. Saltonstall, 276 U.
S. 260. Through the devices thus neutralized, as well as
through many others, there runs a common thread of purpose. The
solidarity of the family is to make it possible for the taxpayer to
surrender title to another and to keep dominion for himself, or, if
not technical dominion, at least the substance of enjoyment. At
times, escape has been blocked by the resources of the judicial
process without the aid of legislation. Thus,
Lucas v.
Earl, 281 U. S. 111,
held that the salary, earned by a husband was taxable to him though
he had bound himself by a valid contract to assign it to his wife.
Burnet v. Leininger, 285 U. S. 136,
laid down a like rule where there had been an assignment by a
partner of his interest in the future profits of a partnership.
Old Colony Trust Co. v. Commissioner, 279 U.
S. 716, and
United States v. Boston & Maine R.
Co., 279 U. S. 732,
held that income was received by a taxpayer when pursuant to a
contract a debt or other obligation was discharged by another for
his benefit, the transaction being the same in substance as if the
money had been paid to the debtor and then transmitted to the
creditor.
Cf. United States v. Mahoning Coal R. Co., 51
F.2d 208. In these and other cases, there has been a progressive
endeavor by the Congress and the courts to bring about a
correspondence between the legal concept of ownership and the
economic realities of enjoyment or fruition. Of a piece with that
endeavor is the statute now assailed.
The controversy is one as to the boundaries of legislative
power. It must be dealt with in a large way, as questions of due
process always are, not narrowly or pedantically,
Page 289 U. S. 678
in slavery to forms or phrases.
"Taxation is not so much concerned with the refinements of title
as it is with actual command over the property taxed -- the actual
benefit for which the tax is paid."
Corliss v. Bowers, supra, p.
281 U. S. 378.
Cf. Burnet v. Guggenheim, supra, p.
288 U. S. 283.
Refinements of title have at times supplied the rule when the
question has been one of construction and nothing more, a question
as to the meaning of a taxing act to be read in favor of the
taxpayer. Refinements of title are without controlling force when a
statute, unmistakable in meaning, is assailed by a taxpayer as
overpassing the bounds of reason, an exercise by the lawmakers of
arbitrary power. In such circumstances, the question is no longer
whether the concept of ownership reflected in the statute is to be
squared with the concept embodied, more or less vaguely, in common
law traditions. The question is whether it is one that an
enlightened legislator might act upon without affront to justice.
Even administrative convenience, the practical necessities of an
efficient system of taxation, will have heed and recognition within
reasonable limits.
Milliken v. United States, 283 U. S.
15,
283 U. S. 24-25;
Reinecke v. Smith, supra. Liability does not have to rest
upon the enjoyment by the taxpayer of all the privileges and
benefits enjoyed by the most favored owner at a given time or
place.
Corliss v. Bowers, supra; Reinecke v. Smith, supra.
Government, in casting about for proper subjects of taxation, is
not confined by the traditional classification of interests or
estates. It may tax not only ownership, but any right or privilege
that is a constituent of ownership.
Nashville, C. & St. L.
Ry. Co. v. Wallace, 288 U. S. 249,
288 U. S. 268;
Bromley v. McCaughn, 280 U. S. 124,
280 U. S. 136.
Liability may rest upon the enjoyment by the taxpayer of privileges
and benefits so substantial and important as to make it reasonable
and just to deal with him as if he were the owner, and to tax him
on that basis. A margin must be allowed for the play of
legislative
Page 289 U. S. 679
judgment. To overcome this statute, the taxpayer must show that,
in attributing to him the ownership of the income of the trusts, or
something fairly to be dealt with as equivalent to ownership, the
lawmakers have done a wholly arbitrary thing, have found
equivalence where there was none nor anything approaching it, and
laid a burden unrelated to privilege or benefit.
Purity Extract
& Tonic Co. v. Lynch, 226 U. S. 192,
226 U. S. 204;
Hebe Co. v. Shaw, 248 U. S. 297,
248 U. S. 303;
Milliken v. United States, supra. The statute, as we view
it, is not subject to that reproach.
*
A policy of life insurance is a contract susceptible of
ownership like any other chose in action. It "is not an assurance
for a single year, with a privilege of renewal from year to year by
paying the annual premium." It is "an entire contract of assurance
for life, subject to discontinuance and forfeiture for nonpayment
of any of the stipulated premiums."
N.Y. Life Insurance Co. v.
Statham, 93 U. S. 24,
93 U. S. 30;
Vance on Insurance, pp. 260, 262, and cases there cited. One who
takes out a policy on his own life, after application in his own
name accepted by the company, becomes, in so doing, a party to a
contract, though the benefits of the insurance are to accrue to
someone else.
Mutual Life Insurance Co. v. Hurni Packing
Co., 263 U. S. 167,
263 U. S. 177;
Vance on Insurance, pp. 90, 91, and 108. The rights and interests
thereby generated do not inhere solely in those who are to receive
the proceeds. They inhere also in the insured who, in cooperation
with the insurer, has brought the contract into being. If the
Minneapolis Trust Company, the trustee, were to refuse to apply the
income to the preservation of the insurance,
Page 289 U. S. 680
the insured might maintain a suit to hold it to its duty. If the
insurer, without cause, were to repudiate the policies, the insured
would have such an interest in the preservation of the contracts
that he might maintain a suit in equity to declare them still in
being.
Cohen v. N.Y. Mut. L. Ins Co., 50 N.Y. 610, 624;
Meyer v. Knickerbocker L. Ins. Co., 73 N.Y. 516, 524;
Fidelity National Bank v. Swope, 274 U.
S. 123,
274 U. S. 132;
cf. Croker v. N.Y. Trust Co., 245 N.Y. 17, 18, 20, 156
N.E. 81;
Johnson Service Co. v. Monin, Inc., 253 N.Y. 417,
421, 171 N.E. 692; American Law Institute, Restatement of the Law
of Contracts, §§ 135, 138; Williston, Contracts, §§ 358, 359. The
contracts remain his, or his at least in part, though the fruits
when they are gathered are to go to someone else. American Law
Institute, Restatement of the Law of Contracts,
supra.
With the aid of this analysis, the path is cleared to a
conclusion. Wells, by the creation of these trusts, did more than
devote his income to the benefit of relatives. He devoted it at the
same time to the preservation of his own contracts, to the
protection of an interest which he wished to keep alive. The ends
to be attained must be viewed in combination. True, he would have
been at liberty, if the trusts had not been made, to put an end to
his interest in the policies through nonpayment of the premiums, to
stamp the contracts out. The chance that economic changes might
force him to that choice was a motive, along with others, for the
foundation of the trusts. In effect, he said to the trustee that,
for the rest of his life, he would dedicate a part of his income to
the preservation of these contracts, so much did they mean for his
peace of mind and happiness. Income permanently applied by the act
of the taxpayer to the maintenance of contracts of insurance made
in his name for the support of his dependents is income used for
his benefit in such a sense and to
Page 289 U. S. 681
such a degree that there is nothing arbitrary or tyrannical in
taxing it as his.
Insurance for dependents is today, in the thought of many, a
pressing social duty. Even if not a duty, it is a common item in
the family budget, kept up very often at the cost of painful
sacrifice, and abandoned only under dire compulsion. It will be a
vain effort at persuasion to argue to the average man that a trust
created by a father to pay premiums on life policies for the use of
sons and daughters is not a benefit to the one who will have to pay
the premiums if the policies are not to lapse. Only by closing our
minds to common modes of thought -- to everyday realities -- shall
we find it in our power to form another judgment. The case is not
helped by imagining exceptional conditions in which the advantage
to the creator of the trust would be slender or remote. By and
large, the purpose of trusts for the maintenance of policies is to
make provision for dependents, or so at least the lawmakers might
not unreasonably assume. Trusts to give insurance to creditors are
beneficial to the grantor by reducing his indebtedness. Trusts for
charities are expressly excepted from the operation of the tax.
Section 219(h); § 214(a)(10). If other classes of life policies
exist, they must be relatively few. The line of division between
the rational and the arbitrary in legislation is not to be drawn
with an eye to remote possibilities. What the law looks for in
establishing its standards is a probability or tendency of general
validity. If this is attained, the formula will serve, though there
are imperfections here and there. The exceptional, if it arises,
may have its special rule.
Dahnke-Walker Co. v. Bondurant,
257 U. S. 282,
257 U. S.
289.
Trusts for the preservation of policies of insurance involve a
continuing exercise by the settlor of a power to direct the
application of the income along predetermined
Page 289 U. S. 682
channels. In this, they are to be distinguished from trusts
where the income of a fund, though payable to wife or kin, may be
expended by the beneficiaries without restraint, may be given away
or squandered, the founder of the trust doing nothing to impose his
will upon the use. There is no occasion at this time to mark the
applicable principle for those and other cases. The relation
between the parties, the tendency of the transfer to give relief
from obligations that are recognized as binding by normal men and
women, will be facts to be considered.
Cf. Rinecke v. Smith,
supra, distinguishing
Hoeper v. Tax Commission,
284 U. S. 206. We
do not go into their bearing now. Here, the use to be made of the
income of the trust was subject, from first to last, to the will of
the grantor announced at the beginning. A particular expense, which
for millions of men and women has become a fixed charge, as it
doubtless was for Wells, an expense which would have to be
continued if he was to preserve a contract right, was to be met in
a particular way. He might have created a blanket trust for the
payment of all the items of his own and the family budget,
classifying the proposed expenses by adequate description. If the
transaction had taken such a form, one can hardly doubt the
validity of a legislative declaration that income so applied should
be deemed to be devoted to his use. Instead of shaping the
transaction thus, he picked out of the total budget an item or
class of items, the cost of continuing his contracts of insurance,
and created a source of income to preserve them against lapse.
Congress does not play the despot in ordaining that trusts for
such uses, if created in the future, shall be treated for the
purpose of taxation as if the income of the trust had been retained
by the grantor.
It does not play the despot in ordaining a like rule as to
trusts created in the past -- at all events when, in so doing, it
does not cast the burden backward beyond the income
Page 289 U. S. 683
of tee current year.
Reinecke v. Smith, supra; Corliss v.
Bowers, supra; Brushaber v. Union Pacific R. Co., 240 U. S.
1;
Cooper v. United States, 280 U.
S. 409,
280 U. S. 411;
Milliken v. United States, supra.
The judgment is
Reversed.
* The trusts, having been created in 1922 and 1923, were not
subject to the gift tax of 1924, 43 Stat. 253, 313-314, c. 234, §§
319, 320, 26 U.S.Code §§ 1131, 1132. Whether they would have been
subject to that tax if they had been created at a later date is a
question not before us. There is no inconsistency between a gift to
take effect in enjoyment upon the death of a grantor and the
reservation of benefits to be enjoyed during his life.
MR. JUSTICE SUTHERLAND, dissenting.
MR. JUSTICE VAN DEVANTER, MR. JUSTICE McREYNOLDS, MR. JUSTICE
BUTLER, and I think otherwise.
The powers of taxation are broad, but the distinction between
taxation and confiscation must still be observed. So long as the
Fifth Amendment remains unrepealed and is permitted to control,
Congress may not tax the property of A as the property of B, or the
income of A as the income of B.
The facts here show that Wells created certain irrevocable
trusts. He retained no vestige of title to, interest in, or control
over, the property transferred to the trustee. The result was a
present, executed, outright gift, which could then have been taxed
to the settlor.
Burnet v. Guggenheim, 288 U.
S. 280. That the property which was the subject of the
gift could never thereafter, without a change of title, be taxed to
the settlor is, of course, too plain for argument. To establish the
contention that the income from such property, the application of
which for the benefit of others had been irrevocably fixed, is
nevertheless the income of the settlor and may lawfully be taxed as
his property requires something more tangible than a purpose to
perform a social duty or the recognition of a moral claim, as
distinguished from a legal obligation, which, we think, is not
supplied by an assumption of his desire thereby to secure his own
peace of mind and happiness or relieve himself from further concern
in the matter. If the trusts in question had irrevocably devoted
the income
Page 289 U. S. 684
to charitable purposes, to the cause of scientific research, or
to the promotion of the spread of religion among the heathen, and
the statute had authorized its taxation, probably no thoughtful
person would have insisted that the relation of the settlor to the
benefaction was such as constitutionally to justify the tax against
him. And yet, in each of these supposed cases, it would not be hard
to find a purpose to discharge a social duty, or unreasonable to
assume the desire of the settlor thereby to enjoy the mental
comfort which is supposed to follow the voluntary performance of
righteous deeds.
If there be any difference between the cases supposed and the
present one, it is a difference without real substance. In each,
the motive of the taxpayer is immaterial. The material question is,
what has he done? not, why has he done it?, however pertinent the
latter query might be in a different case. Obviously, as it seems
to us, the distinction to be observed is between the devotion of
income to payments which the settlor is bound to make, and to those
which he is free to make or not make, as he may see fit. In the
former case, the payments have the substantial elements of income
to the settlor. In the latter, whatever may be said of the moral
influence which induced the settlor to direct the payments, they
are income of the trustee for the benefit of others than the
settlor.
It is not accurate, we think, to say that these trusts involve
the continuing exercise by the settlor of a power to direct the
application of the income along predetermined channels. The
exertion of power on the part of the settlor to direct such
application begins and ends with the creation of the irrevocable
trusts. Thereafter, the power is to be exercised automatically by
the trustee under a grant which neither he nor the settlor can
recall or abridge. The income, of course, is taxable, but to the
trustee, not to the settlor. The well reasoned opinion of
Page 289 U. S. 685
the court below, which fully sustains respondent's contention
here, renders it unnecessary to discuss the matter at greater
length. We think that opinion should be sustained. It finds ample
support in
Hoeper v. Tax Commission, 284 U.
S. 206,
284 U. S. 215;
Heiner v. Donnan, 285 U. S. 312,
285 U. S. 326,
and other decisions of this Court.