Source: https://supreme.justia.com/cases/federal/us/289/172/
Timestamp: 2019-04-19 10:55:57+00:00

Document:
"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."
1. A trustee is not a "beneficiary" of the trust within the meaning of the statute. P. 289 U. S. 174.
2. The provision is not arbitrarily retroactive, since it applies not to transactions consummated before its passage, but to the income accruing after the effective date of the Act, January 1, 1924. P. 289 U. S. 175.
3. The same considerations as to ownership and control affect the power to impose a tax on the transfer of the corpus and upon the income. P. 289 U. S. 175.
4. Where a settlor of a trust vests the power to modify or revoke it in himself and the trustee, the trustee is under no fiduciary obligation to the cestui que trust to refrain from exercising the power, and the situation in that regard is as though it were vested in the grantor jointly with a stranger to the trust. P. 289 U. S. 176.
5. To tax the income of such a trust to the settlor while he and the trustee jointly retain the power to revoke or modify the trust is consistent with the Fifth Amendment, and helps to make the income tax system complete and consistent and prevent evasions. P. 289 U. S. 177.
Certiorari, 288 U.S. 596, to review the affirmance of a recovery from the Collector of money collected as taxes from the respondents' testator.
"Anything herein contained to the contrary notwithstanding, this Trust may be modified or revoked at any time by an instrument in writing signed by Douglas Smith [the grantor] and either one of the other two trustees or their successors."
"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 Commissioner of Internal Revenue held that this section required a return by Smith of the trust income for the period January 1, 1924, to October 22, 1924, and assessed against him additional tax, which was paid under protest. The respondents, who are the personal representatives of Smith, now deceased, brought this suit to recover the sum paid. A demurrer to the declaration was overruled, and judgment given for the respondents. The Circuit Court of Appeals affirmed, holding that, as to trusts created prior to the adoption of the act, § 219(g) violates the Fifth Amendment when applied to impose a tax by reason of property and the income therefrom disposed of by the grantor before the passage of that or any other law taxing the income of such a trust to the settlor. 61 F.2d 324. The case is here on certiorari.
Petitioner maintains the section in terms applies in the circumstances disclosed; as the tax is laid only upon income accruing after January 1, 1924, the statute is not retroactive, and, as the grantor retained a measure of control, to tax him upon the income is not arbitrary or unreasonable though the trusts were created before any statute had laid a tax upon the settlor measured by the income of such a trust.
The respondents argue in support of the judgment that the trustee is a beneficiary of the trust as the phrase is used in the section, and the income in question is therefore exempt from taxation to the settlor, and that, if this view be rejected, the provision offends the Fifth Amendment.
advantages of such administration. The ordinary meaning of the terms used, which we are bound to adopt (Old Colony R. Co. v. Commissioner, 284 U. S. 552, 284 U. S. 560), and the view held by those charged with enforcement of the act, ratified by reenactment of the section, [Footnote 1] alike forbid the adoption of the construction for which the respondents contend.
Nor do we think the act has such a retroactive effect as to render its requirements arbitrary within the principle announced as to estate and gift taxes in Nichols v. Coolidge, 274 U. S. 531, Untermyer v. Anderson, 276 U. S. 440, and Blodgett v. Holden, 275 U. S. 142. In those cases, the issue was the validity of a tax on a transaction consummated before the enactment of the statute authorizing the exaction. In the present case, the subject of the tax is not the creation of the trusts or the transfer of the corpus from the grantor to the trustees, but the income of the trusts which accrued after January 1, 1924, the effective date of the Revenue Act of 1924. [Footnote 2] Although the act was passed June 2, 1924, the imposition of the act on income received or accrued from the beginning of the year has been held unobjectionable. Cooper v. United States, 280 U. S. 409, 280 U. S. 411. Compare Fawcus Machine Co. v. United States, 282 U. S. 375, 282 U. S. 379.
argument proceeds upon the theory that, until alteration or revocation of the trust, the trustees held the legal title to the property for the sole benefit of the cestuis, and received the income; that both principal and income were beyond the control of the grantor until the alternation of the trust on October 22, 1924.
We have not heretofore had occasion to pass upon the question thus presented. In Corliss v. Bowers, 281 U. S. 376, the section of the Revenue Act of 1924 now under consideration was held to justify assessment of income tax to the settlor with respect to the income of a trust revocable by him alone. Reinecke v. Northern Trust Co., 278 U. S. 339, construed § 402(c) of the Revenue Act of 1921, which included within the sweep of a transfer tax any interest of which a decedent had at any time made a transfer, or with respect to which he had created a trust intended to take effect in possession or enjoyment at or after his death. The tax was upheld as applied to the corpus of trusts over which the grantor had sole power of revocation. It was, however, condemned as to those where revocation was dependent upon joint action of the grantor and the beneficiary, for the reason that the interest of the beneficiary was adverse and the grantor unable at will to alter or destroy the trust. In the latter case, the transfer was said to be effective when made, not at death. As pointed out in Burnet v. Guggenheim, 288 U. S. 280, the same considerations as to ownership and control affect the power to impose a tax on the transfer of the corpus and upon the income.
income, but the very fact that he participates in the right of alteration or revocation negatives any fiduciary duty to the beneficiary to refrain from exercising the power. The facts of this case illustrate the point, for it appears the trust in favor of the grantor's wife was substantially modified, to her financial detriment, by the concurrent action of the grantor and the trustees. This case must be viewed, therefore, as if the reversed right of revocation had been vested jointly in the grantor and a stranger to the trust.
deemed to accrue from property of some one other than Douglas Smith. The case is plainly distinguishable from Hoeper v. Tax Commission, 284 U. S. 206, on which respondents rely, for there the attempt was to tax income arising from property always owned by one other than the taxpayer, who had never had title to or control over either the property or the income from it. The measure of control of corpus and income retained by the grantor was sufficient to justify the attribution of the income of the trust to him. The enactment does not violate the Fifth Amendment.
A contrary decision would make evasion of the tax a simple matter. There being no legally significant distinction between the trustee and a stranger to the trust as joint holder with the grantor of a power to revoke, if the contention of the respondents were accepted it would be easy to select a friend or relative as co-holder of such a power and so place large amounts of principal and income accruing therefrom beyond the reach of taxation upon the grantor while he retained to all intents and purposes control of both. Congress had power, in order to make the system of income taxation complete and consistent and to prevent facile evasion of the law, to make provision by § 219(g) for taxation of trust income to the grantor in the circumstances here disclosed. Compare Taft v. Bowers, 278 U. S. 470, 278 U. S. 482-483; Tyler v. United States, supra, at 281 U. S. 505.
Revenue Acts of 1926, c. 27, 44 Stat. 32; 1928, c. 852, 45 Stat. 840; 1932, c. 209 47 Stat. 221. Regulations 65, Art. 347; Regulations 69, Art. 347; Regulations 74, Art. 881.
See § 283, 43 Stat. 303.

References: § 219
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 § 402
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 § 219
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 Art. 347
 Art. 347
 Art. 881
 § 283