1. A husband who declared himself trustee of certain securities
for the term of five years, to pay to his wife the income accruing
during that period, but retained in himself the right to accumulate
income, and, with insignificant exceptions, the complete control
over the principal fund -- its conversion, investment,
reinvestment, etc. -- and the reversion of the Corpus at the end of
the term, may properly be found by the federal taxing authorities
to be owner of the fund, within the intent of § 22(a) of the
Revenue Act of 1934, notwithstanding the trust, and taxable on the
trust income as part of his personal income. P.
309 U. S.
335.
Where the benefits directly or indirectly retained blend so
imperceptibly with the normal concepts of full ownership, it cannot
be said that the triers of fact committed reversible error when
they found that the husband was the owner of the corpus for the
purposes of § 22(a). P.
309 U. S.
336.
2. The broad language of § 22(a) of the Revenue Act of 1934
indicates the purpose of Congress to use the full measure of its
taxing power within the definable categories specified therein. P.
309 U. S.
337.
3. Whether the creator of a trust may still be treated under §
22(a) as the owner of the corpus is not determined by
technicalities of the law of trusts and conveyances, but must
depend on analysis of the terms of the trust and on all the
circumstances attendant on its creation and operation. P.
309 U. S.
334.
Where the grantor is the trustee, and the beneficiaries members
of his family group, special scrutiny is necessary, lest what is in
reality but one economic unit be increased to two or more by
devices which, though valid under state law, are not conclusive
under § 22(a) of the Revenue Act. P.
309 U. S.
335.
4. The fact that Congress made specific provision in § 166 of
the Revenue Act of 1934 for revocable trusts, but failed to adopt a
Treasury recommendation that similar specific treatment should be
given income from short term trusts, did not subtract the latter
from § 22(a). P.
309 U. S.
337.
105 F.2d 586 reversed.
Page 309 U. S. 332
Certiorari, 308 U.S. 542, to review a judgment which reversed a
decision of the Board of Tax Appeals (38 B.T.A. 1532) sustaining a
deficiency assessment.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
In 1934, respondent declared himself trustee of certain
securities which he owned. All net income from the trust was to be
held for the "exclusive benefit" of respondent's wife. The trust
was for a term of five years, except that it would terminate
earlier on the death of either respondent or his wife. On
termination of the trust the entire corpus was to go to respondent,
while all "accrued or undistributed net income" and "any proceeds
from the investment of such net income" was to be treated as
property owned absolutely by the wife. During the continuance of
the trust, respondent was to pay over to his wife the whole or such
part of the net income as he, in his "absolute discretion," might
determine. And, during that period, he had full power (a) to
exercise all voting powers incident to the trusteed shares of
stock; (b) to "sell, exchange, mortgage, or pledge" any of the
securities under the declaration of trust,
"whether as part of the corpus or principal thereof or as
investments or proceeds and any income therefrom, upon such terms
and for such consideration"
as respondent, in his "absolute discretion, may deem fitting;"
(c) to invest "any cash or money in the trust estate or any income
therefrom" by loans, secured or unsecured, by deposits in
Page 309 U. S. 333
banks, or by purchase of securities or other personal property
"without restriction" because of their "speculative character" or
"rate of return" or any "laws pertaining to the investment of trust
funds;" (d) to collect all income; (e) to compromise, etc., any
claims held by him as trustee; (f) to hold any property in the
trust estate in the names of "other persons or in my own name as an
individual" except as otherwise provided. Extraordinary cash
dividends, stock dividends, proceeds from the sale of unexercised
subscription rights, or any enhancement, realized or not, in the
value of the securities were to be treated as principal, not
income. An exculpatory clause purported to protect him from all
losses except those occasioned by his "own willful and deliberate"
breach of duties as trustee. And finally, it was provided that
neither the principal nor any future or accrued income should be
liable for the debts of the wife, and that the wife could not
transfer, encumber, or anticipate any interest in the trust or any
income therefrom prior to actual payment thereof to her.
It was stipulated that, while the "tax effects" of this trust
were considered by respondent, they were not the "sole
consideration" involved in his decision to set it up, as, by this
and other gifts, he intended to give "security and economic
independence" to his wife and children. It was also stipulated that
respondent's wife had substantial income of her own from other
sources; that there was no restriction on her use of the trust
income, all of which income was placed in her personal checking
account, intermingled with her other funds, and expended by her on
herself, her children, and relatives; that the trust was not
designed to relieve respondent from liability for family or
household expenses, and that, after execution of the trust, he paid
large sums from his personal funds for such purposes.
Respondent paid a federal gift tax on this transfer. During the
year 1934, all income from the trust was distributed
Page 309 U. S. 334
to the wife, who included it in her individual return for that
year. The Commissioner, however, determined a deficiency in
respondent's return for that year on the theory that income from
the trust was taxable to him. The Board of Tax Appeals sustained
that redetermination. 38 B.T.A. 1532. The Circuit Court of Appeals
reversed. 105 F.2d 586. We granted certiorari because of the
importance to the revenue of the use of such short-term trusts in
the reduction of surtaxes. 308 U.S. 542.
Sec. 22(a) of the Revenue Act of 1934, 48 Stat. 680, 686,
includes among "gross income" all
"gains, profits, and income derived . . . from professions,
vocations, trades, businesses, commerce, or sales, or dealings in
property, whether real or personal, growing out of the ownership or
use of or interest in such property; also from interest, rent,
dividends, securities, or the transaction of any business carried
on for gain or profit, or gains or profits and income derived from
any source whatever."
The broad sweep of this language indicates the purpose of
Congress to use the full measure of its taxing power within those
definable categories.
Cf. Helvering v. Midland Mutual Life
Insurance Co., 300 U. S. 216.
Hence, our construction of the statute should be consonant with
that purpose. Technical considerations, niceties of the law of
trusts or conveyances, or the legal paraphernalia which inventive
genius may construct as a refuge from surtaxes should not obscure
the basic issue. That issue is whether the grantor, after the trust
has been established, may still be treated, under this statutory
scheme, as the owner of the corpus.
See Blair v.
Commissioner, 300 U. S. 5,
300 U. S. 12. In
absence of more precise standards or guides supplied by statute or
appropriate regulations, [
Footnote
1]
Page 309 U. S. 335
the answer to that question must depend on an analysis of the
terms of the trust and all the circumstances attendant on its
creation and operation. And, where the grantor is the trustee and
the beneficiaries are members of his family group, special scrutiny
of the arrangement is necessary lest what is in reality but one
economic unit be multiplied into two or more [
Footnote 2] by devices which, though valid under
state law, are not conclusive so far as § 22(a) is concerned.
In this case, we cannot conclude as a matter of law that
respondent ceased to be the owner of the corpus after the trust was
created. Rather, the short duration of the trust, the fact that the
wife was the beneficiary, and the retention of control over the
corpus by respondent all lead irresistibly to the conclusion that
respondent continued to be the owner for purposes of § 22(a).
So far as his dominion and control were concerned, it seems
clear that the trust did not effect any substantial change. In
substance, his control over the corpus was in all essential
respects the same after the trust was created as before. The wide
powers which he retained included, for all practical purposes, most
of the control which he as an individual would have. There were, we
may assume, exceptions, such as his disability to make a gift of
the corpus to others during the term of the trust and to make loans
to himself. But this dilution in his control would seem to be
insignificant and immaterial, since control over investment
remained. If it be said that such control is the type of dominion
exercised by any trustee, the answer is simple. We have, at best, a
temporary reallocation of income within an intimate family group.
Since the income remains in the family, and since the husband
retains control over the investment, he has rather complete
assurance that the trust will not effect
Page 309 U. S. 336
any substantial change in his economic position. It is hard to
imagine that respondent felt himself the poorer after this trust
had been executed, or, if he did, that it had any rational
foundation in fact. For, as a result of the terms of the trust and
the intimacy of the familial relationship, respondent retained the
substance of full enjoyment of all the rights which previously he
had in the property. That might not be true if only strictly legal
rights were considered. But, when the benefits flowing to him
indirectly through the wife are added to the legal rights he
retained, the aggregate may be said to be a fair equivalent of what
he previously had. To exclude from the aggregate those indirect
benefits would be to deprive § 22(a) of considerable vitality, and
to treat as immaterial what may be highly relevant considerations
in the creation of such family trusts. For, where the head of the
household has income in excess of normal needs, it may well make
but little difference to him (except income tax wise) where
portions of that income are routed -- so long as it stays in the
family group. In those circumstances, the all-important factor
might be retention by him of control over the principal. With that
control in his hands, he would keep direct command over all that he
needed to remain in substantially the same financial situation as
before. Our point here is that no one fact is normally decisive,
but that all considerations and circumstances of the kind we have
mentioned are relevant to the question of ownership, and are
appropriate foundations for findings on that issue. Thus where, as
in this case, the benefits directly or indirectly retained blend so
imperceptibly with the normal concepts of full ownership, we cannot
say that the triers of fact committed reversible error when they
found that the husband was the owner of the corpus for the purposes
of § 22(a). To hold otherwise would be to treat the wife as a
complete stranger, to let mere formalism obscure
Page 309 U. S. 337
the normal consequences of family solidarity, and to force
concepts of ownership to be fashioned out of legal niceties which
may have little or no significance in such household
arrangements.
The bundle of rights which he retained was so substantial that
respondent cannot be heard to complain that he is the "victim of
despotic power when, for the purpose of taxation, he is treated as
owner altogether."
See Du Pont v. Commissioner,
289 U. S. 685,
289 U. S. 689.
We should add that liability under § 22(a) is not foreclosed by
reason of the fact that Congress made specific provision in § 166
for revocable trusts, but failed to adopt the Treasury
recommendation in 1934,
Helvering v. Wood, post, p.
309 U. S. 344,
that similar specific treatment should be accorded income from
short-term trusts. Such choice, while relevant to the scope of §
166,
Helvering v. Wood, supra, cannot be said to have
subtracted from § 22(a) what was already there. Rather, on this
evidence, it must be assumed that the choice was between a
generalized treatment under § 22(a) or specific treatment under a
separate provision [
Footnote 3]
(such as was accorded revocable trusts under § 166); not between
taxing or not taxing grantors of short term trusts. In view of the
broad and sweeping language of § 22(a), a specific provision
covering short-term trusts might well do no more than to carve out
of § 22(a) a defined group of cases to which a rule of thumb
Page 309 U. S. 338
would be applied. The failure of Congress to adopt any such rule
of thumb for that type of trust must be taken to do no more than to
leave to the triers of fact the initial determination of whether or
not on the facts of each case the grantor remains the owner for
purposes of § 22(a).
In view of this result, we need not examine the contention that
the trust device falls within the rule of
Lucas v. Earl,
281 U. S. 111, and
Burnet v. Leininger, 285 U. S. 136,
relating to the assignment of future income; or that respondent is
liable under § 166, taxing grantors on the income of revocable
trusts.
The judgment of the Circuit Court of Appeals is reversed, and
that of the Board of Tax Appeals is affirmed.
Reversed.
[
Footnote 1]
We have not considered here Art. 166-1 of Treasury Regulations
86, promulgated under § 166 of the 1934 Act, and, in 1936, amended
(T.D. 4629) so as to rest on § 22(a) also, since the tax in
question arose prior to that amendment.
[
Footnote 2]
See Paul, The Background of the Revenue Act of 1937, 5
Univ.Chic.L.Rev. 41.
[
Footnote 3]
As to the disadvantage of a specific statutory formula over more
generalized treatment,
see Vol. I, Report, Income Tax
Codification Committee (1936), a committee appointed by the
Chancellor of the Exchequer in 1927. In discussing revocable
settlements, the Committee stated, p. 298:
"This and the three following clauses reproduce section 20 of
the Finance Act, 1922, an enactment which has been the subject of
much litigation, is unsatisfactory in many respects, and is plainly
inadequate to fulfil the apparent intention to prevent avoidance of
liability to tax by revocable dispositions of income or other
devices. We think the matter one which is worthy of the attention
of Parliament."
MR. JUSTICE ROBERTS, dissenting.
I think the judgment should be affirmed.
The decision of the court disregards the fundamental principle
that legislation is not the function of the judiciary, but of
Congress.
In every revenue act from that of 1916 to the one now in force,
a distinction has been made between income of individuals and
income from property held in trust. [
Footnote 2/1] It has been the practice to define income
of individuals, and, in separate sections, under the heading
"Estates and Trusts," to provide that the tax imposed upon
individuals shall apply to the income of estates or of any kind
Page 309 U. S. 339
of property held in trust. A trust is a separate taxable entity.
The trust here in question is a true trust.
While the earlier acts were in force, creators of trusts
reserved power to repossess the trust corpus. It became common also
to establish trusts under which, at the grantor's discretion, all
or part of the income might be paid to him, and to set up trusts to
pay life insurance premiums upon policies on the grantor's life.
The situation was analogous to that now presented. The Treasury,
instead of asking this Court, under the guise of construction, to
amend the act, went to Congress for new legislation. Congress
provided, by § 219(g)(h) of the Revenue Act of 1924, that, if the
grantor set up such a life insurance trust, or one under which he
could direct the payment of the trust income to himself, or had the
power to revest the principal in himself during any taxable year,
the income of the trust, for the taxable year, was to be treated as
his. [
Footnote 2/2]
After the adoption of these amendments, taxpayers resorted to
the creation of revocable trusts with a provision that more than a
year's notice of revocation should be necessary to termination.
Such a trust was held not to be within the terms of § 219(g) of the
Revenue Act of 1924, 43 Stat. 277, because not revocable within the
taxable year. [
Footnote 2/3]
Again, without seeking amendment in the guise of construction
from this court, the Treasury applied to Congress, which met the
situation by adopting § 166 of the Revenue Act of 1934, which
provided that, in the case of a trust under which the grantor
reserved the power at
Page 309 U. S. 340
any time to revest the corpus in himself, the income of
the trust should be considered that of the grantor.
The Treasury had asked that there should also be included in
that act a provision taxing to the grantor income from short-term
trusts. After the House Ways and Means Committee had rendered a
report on the proposed bill, the Treasury, upon examination of the
report, submitted a statement to the Committee containing
recommendations for additional provisions; amongst others, the
following:
"(6) The income from short-term trusts and trusts which are
revocable by the creator at the expiration of a short period after
notice by him should be made taxable to the creator of the
trust."
Congress adopted an amendment to cover the one situation, but
did not accept the Treasury's recommendation as to the other.
[
Footnote 2/4] The statute, as
before, clearly provided that the income from a short-term
irrevocable trust was taxable to the trust, or the beneficiary, and
not to the grantor.
The regulations under § 166 of the Act of 1932 contained no
suggestion that term trusts were taxable to the creator, though, if
the petitioner is right, they would be equally so under that act as
under later ones. Thus, though the Treasury realized that
irrevocable short-term trusts did not fall within the scope of §
166, instead of going to Congress for amendment of the law, it
comes here with a plea for interpretation which is, in effect, such
amendment.
Its claim, in support of this effort, that a reversionary
interest in the grantor is a "power to revest" the corpus within
the meaning of § 166 so as to render the income taxable to the
grantor is plainly untenable. [
Footnote
2/5] That theory
Page 309 U. S. 341
was first advanced in a regulation issued under the 1934 act,
[
Footnote 2/6] but was abandoned
March 7, 1936, when the regulation was revised to read
substantially in its present form. [
Footnote 2/7] The Board of Tax Appeals held a
possibility of reverter is not the "power to revest" described in §
166. [
Footnote 2/8] The petitioner
acquiesced in the decision. [
Footnote
2/9] The Treasury thereafter ruled that a grantor was not
taxable on the income of a trust where he had retained a
reversionary interest. [
Footnote
2/10]
I think it clear that the administrative interpretation has not
been consistent, and that reenactment of § 166 is therefore not a
ratification by Congress of the present construction.
The revised regulations indicating that, in some circumstances,
the separate taxability of the trust may be ignored are said to
rest on § 166, and also on § 22(a), which defines income. The
regulation is not only without support in the statute, but contrary
to the entire statutory scheme, and, as it now stands, is vague and
meaningless as respects the taxability to the grantor of income
from an irrevocable term trust.
To construe either § 166 or § 22(a) of the statute as justifying
taxation of the income to respondent in this case is, in my
judgment, to write into the statute what is not there, and what
Congress has omitted to place there.
If judges were members of the legislature, they might well vote
to amend the act so as to tax such income in order to frustrate
avoidance of tax; but, as judges, they exercise a very different
function. They ought to read the act to cover nothing more than
Congress has specified.
Page 309 U. S. 342
Courts ought not to stop loopholes in an act at the behest of
the Government, nor relieve from what they deem a harsh provision
plainly stated at the behest of the taxpayer. Relief in either case
should be sought in another quarter.
No such dictum as that Congress has, in the income tax law,
attempted to exercise its power to the fullest extent will justify
the extension of a plain provision to an object of taxation not
embraced within it. If the contrary were true, the courts might
supply whatever they considered a deficiency in the sweep of a
taxing act. I cannot construe the court's opinion as attempting
less.
The fact that the petitioner is, in truth, asking us to
legislate in this case is evident from the form of the existing
regulation and from the argument presented. The important portion
of the regulation reads as follows:
"In determining whether the grantor is in substance the owner of
the corpus, the Act has its own standard, which is a substantial
one, dependent neither on the niceties of the particular
conveyancing device used nor on the technical description which the
law of property gives to the estate or interest transferred to the
trustees or beneficiaries of the trust. In that determination,
among the material factors are: the fact that the corpus is to be
returned to the grantor after a specific term; the fact that the
corpus is or may be administered in the interest of the grantor;
the fact that the anticipated income is being appropriated in
advance for the customary expenditures of the grantor or those
which he would ordinarily and naturally make, and any other
circumstance bearing on the impermanence and indefiniteness with
which the grantor has parted with the substantial incidents of
ownership in the corpus."
In his brief the petitioner says:
"On the other hand, the income of a long-term irrevocable trust
which committed the possession and control
Page 309 U. S. 343
of the corpus to an independent trustee would not likely be
taxed to the settlor merely because of a reversionary interest. The
question here, as in many other tax problems,
is simply one of
degree. The grantor's liability to tax must depend upon
whether he retains so many of the attributes of ownership as to
require that he be treated as the owner for tax purposes, or
whether he has given up the substance of his dominion and control
over the trust property."
"Under these circumstances, the question of
precisely where
the line should be drawn between those irrevocable trusts
which deprive the grantor of command over the trust property and
those which leave in him the practical equivalent of ownership is,
in our view,
a matter peculiarly for the judgment of the agency
charged with the administration of the tax law."
(Italics supplied.)
It is not our function to draw any such line as the argument
suggests. That is the prerogative of Congress. As far back as 1922,
Parliament amended the British Income Tax Act, so that there would
be no dispute as to what short term-trust income should be taxable
to the grantor, by making taxable to him any income which, by
virtue of any disposition, is payable to, or applicable for the
benefit of, any other person for a period which cannot exceed six
years. [
Footnote 2/11]
If some short-term trusts are to be treated as nonexistent for
income tax purposes, it is for Congress to specify them.
MR. JUSTICE McREYNOLDS joins in this opinion.
[
Footnote 2/1]
Revenue Act of 1916, 39 Stat. 756, 757, § 2(a)(b); Revenue Act
of 1918, 40 Stat. 1057, 1065, 1071, § 213(a), § 219; Revenue Act of
1921, 42 Stat. 227, 238, 246, § 213(a), § 219; Revenue Act of 1924,
43 Stat. 253, 267, 275, § 213(a), § 219; Revenue Act of 1926, 44
Stat. 9, 23, 32, § 213(a), § 219; Revenue Act of 1928, 45 Stat.
791, 797, 838-840, § 22(a), §§ 161 to 169, incl.; Revenue Act of
1932, 47 Stat. 169, 178, 219-222, § 22(a), §§ 161 to 169 incl.;
Revenue Act of 1934, 48 Stat. 680, 686, 727-729, § 22(a), §§ 161 to
167, incl.; Revenue Act of 1936, 49 Stat. 1648, 1657, 1706, 1707, §
22(a), §§ 161 to 167, incl.
[
Footnote 2/2]
See Corliss v. Bowers, 281 U.
S. 376;
Burnet v. Wells, 289 U.
S. 670.
[
Footnote 2/3]
Lewis v. White, 56 F.2d
390;
White v. Lewis, 61 F.2d 1046;
Langley v.
Commissioner, 61 F.2d 796;
Commissioner v. Grosvenor,
85 F.2d 2;
Farber v. United States, Ct.Cls. 1 F. Supp.
859.
[
Footnote 2/4]
Hearings on H.R., 7835, 73d Cong., 2d Sess., p. 151; H.R. 1385,
73d Cong., 2d Sess., p. 24.
[
Footnote 2/5]
United States v. First National Bank, 74 F.2d 360;
Corning v. Commissioner, 104 F.2d 329.
[
Footnote 2/6]
Regulations 86, Art. 166-1.
[
Footnote 2/7]
T.D. 4629, C.B. XV-1, 140.
[
Footnote 2/8]
Downs v. Commissioner, 36 B.T.A. 1129.
[
Footnote 2/9]
C.B.1938-1, p. 9.
[
Footnote 2/10]
I.T. 3238, C.B. XVII-2, p. 204.
[
Footnote 2/11]
12 and 13 Geo. 5, ch. 17, § 20, L.R. Statutes, Vol. 60, p. 373.
Though the provision has been thought unsatisfactory, the
suggestion made for improvement is that the matter be brought
before Parliament for action.