Source: https://supreme.justia.com/cases/federal/us/289/670/
Timestamp: 2019-04-23 02:43:28+00:00

Document:
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.
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.
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.
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.
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.
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.
"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."
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.
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.
in slavery to forms or phrases.
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.
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.
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.
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 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 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.
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.
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.

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