*1184 1. Petitioners' decedent created a trust and reserved the power to change the beneficiaries or substitute beneficiaries other than himself. In 1937 he renounced the reserved power. Held the renunciation of the reserved power in 1937 resulted in a taxable gift of the fair market value of the corpus at that time.
2. During the taxable years the trustee distributed the net income of the trust property to the beneficiary named in the trust instrument. Held that such distribution did not result in a taxable gift of decedent in the years distributed.
*424 The respondent determined deficiencies in gift taxes against the petitioners for the calendar years 1932 to 1937, inclusive as follows:
| 1932 | $39.55 |
| 1933 | 188.98 |
| 934 | 394.52 |
| 1935 | 931.34 |
| 1936 | $2,010.84 |
| 1937 | 173,186.88 |
| Total | 176,752.11 |
The term "calendar year" as applied to the year 1932 means the period from June 6, 1932, the date of the enactment of the Revenue Act of 1932, to and including December 31, 1932. The term "calendar year" as used herein when applied to the*1185 year 1937 means the period from January 1, 1937, to and including December 4, 1937, the date of decedent's death.
Petitioners allege that the respondent erred in determining (1) that Giles W. Mead, the decedent, made taxable gifts during any of the years involved of any amount representing income from a certain trust *425 created May 17, 1928; (2) that the decedent made a taxable gift in any amount representing the value on July 13, 1937, of the assets of a certain trust created by decedent May 17, 1928, and (3) the fair market value of the assets of the trust as of July 13, 1937. No evidence is submitted as to allegation of error (3) and we must regard it as abandoned by petitioners.
The case was submitted on the pleadings, a stipulation of facts, and exhibits attached thereto, from which our findings are formulated.
FINDINGS OF FACT.
Petitioners are the duly qualified executors of the estate of Giles W. Mead, who died December 4, 1937, a resident of Beverly Hills, California.
On May 17, 1928, the decedent created a trust and the Central Union Trust Co. of New York was made trustee. The trust instrument was executed in the State of New York by both the grantor*1186 and the trustee, and at the date of execution the assets comprising the trust corpus were located in New York City.
At the date of the creation of the trust the decedent was a resident of New Jersey and continued to reside in that state until about January 1, 1936, when he became a resident of Beverly Hills, California, where he continued to reside until his death on December 4, 1937.
When decedent became a resident of California, the Farmers & Merchants National Bank of Los Angeles, California, was substituted as trustee under the trust and has continued to act in that capacity since that date.
At the time the trust was created the decedent was married to Elise G. Mead, and they had two minor children, a son and a daughter.
The trust instrument established two separate trust funds, designated as "Trust Fund A" and "Trust Fund B." The income from both of these funds was payable to the decedent's wife during her lifetime and, thereafter, the income of trust fund A to decedent's daughter and of trust fund B to decedent's son during their respective lives, if they survived their mother.
Upon the death of the survivor of the life tenant the remainder over of the corpus of*1187 trust fund A and trust fund B was to be distributed to designated issue or heirs. In the event of the failure of such issue or heirs one-half of each trust fund was to be distributed to Middlebury College, Middlebury, Vermont, and one-half to Brown University, Providence, Rhode Island.
The nineteenth paragraph of the trust provided as follows:
That the right is hereby expressly reserved by and to the Grantor at any time during his lifetime to change the terms and provisions of this Deed of *426 Trust and Agreement as to the beneficiaries hereunder and/or as to the disposition of the income and/or principal, in whole or in part, of either or both of said Trust Funds and to exclude as a beneficiary hereunder any person hereby designated as such a beneficiary and to designate and include in addition to or in substitution for any of the beneficiaries hereunder any person or persons other than the Grantor; provided, however, that no such change in said terms and provisions shall be applicable to any income from and/or principal of said respective Trust Funds theretofore distributed by the Trustee; and provided, further, however, that no such appointment or substitution or revocation*1188 or partial substitution or partial revocation shall be valid and effective unless made by notice in writing given by the Grantor to the Trustee.
The twenty-first paragraph of the trust provided: "The trusts hereby created shall in all respects be governed by the laws of the State of New Jersey."
On June 26, 1937, the decedent executed a "Relinquishment of Reservations" by which he surrendered and relinquished the right and authority of control over the trust retained by him in the trust instrument. He filed this relinquishment with the trustee July 13, 1937.
The trust was not intended to nor did it effect or constitute a property settlement between decedent and his wife, Elise G. Mead, nor was it a settlement in lieu of or in satisfaction of decedent's obligation to maintain and support either his wife or children. Throughout the period here in question decedent wupported his wife and minor children from his own funds.
Respondent determined that the fair market value of the corpus of the trust on July 13, 1937, was $905,161.88, and that the relinquishment by decedent constituted a gift by him to the extent of the fair market value on that date.
From the date of the*1189 creation of the trust until decedent's death, December 4, 1937, all the net income of the trust was distributed to the grantor's wife. No part of such income or of the principal of the trust was paid to or received by decedent either directly or indirectly, and no part of the income from the trust was employed to discharge any of his obligations nor accumulated for his benefit.
From June 6, 1932, to and including July 13, 1937, decedent's wife, Elise G. Mead, received from said trust, pursuant to the terms thereof, certain amounts representing the net income thereof for said periods, as follows:
| June 6 to Dec. 31, 1932 | $10,273.40 |
| 1933 | 19,883.46 |
| 1934 | 20,611.50 |
| 1935 | 22,410.44 |
| 1936 | 24,411.04 |
| Jan. 1 to July 13, 1937 | 19,055.82 |
All of the amounts specified above and paid to said Elise G. Mead were included by her in her Federal income tax returns as taxable *427 income for said periods and the appropriate income tax thereon was duly paid by her.
The respondent determined that all of the amounts paid to Elise G. Mead, as set out above, were taxable gifts to her by decedent in the year of payment to her.
A gift tax return was filed by decedent*1190 for the calendar year 1935 and by petitioners herein on behalf of decedent for the period from January 1 to December 4, 1937, the date of decedent's death. The taxable gifts shown in said returns included none of the items here involved. The return filed by petitioners for the period from January 1 to December 4, 1937, referred to the execution and filing by decedent of the relinquishment filed with the trustee on July 13, 1937, but specifically disclaimed and gift tax liability in connection therewith.
In August 1932 petitioners were advised by the collector of internal revenue at Los Angeles, California, that the respondent requested gift tax returns for all the years for which gift tax returns had not theretofore been filed. Petitioners, thereafter, on August 27, 1938, filed gift tax returns for the period June 6 to December 31, 1932, and for the calendar years 1933, 1934, and 1936. Such returns specifically disclaimed any gift tax liability for these periods in connection with any of the items here in controversy.
OPINION.
KERN: The first issue presented for our decision involves, substantially, the same question that was decided by the Supreme Court in *1191 , whether in the case of an inter vivos transfer of property in trust, the donor reserving to himself the power to designate new beneficiaries other than himself, the gift becomes complete and subject to the Federal gift tax at the time of the relinquishment of the power.
In the Sanford case the donor in 1913 created a trust of personal property for the benefit of named beneficiaries, reserving to himself the power to terminate the trust in whole or in part or to modify it. In 1919 he surrendered his power of revocation, reserving the right to modify the trust, but provided that such reservation should not be construed to include any right in the donor to withdraw principal or income from the trust. In 1924, after the effective date of the gift tax statute, the donor renounced his remaining power to modify the trust. The court held that the gift became conpleted and taxable only upon the donor's final renunciation of his power to modify the trust.
The facts in the case before us bring it squarely within the decision of the Sanford case, supra, and upon the authority of that decision we hold that*1192 the renunciation by the decedent, in 1937, of his power to alter or amend the trust instrument resulted in the completion of a taxable *428 gift with respect to the corpus of the trust to the extent of its fair market value at the date of the renunication of the power. Since the petitioner has offered no evidence of the value of the assets of the trust as of that date, the determination of the respondent is approved.
The second issue presents the question of whether the distribution by the trustee to Elise G. Mead, the beneficiary under the trust instrument of both the A and B trusts, resulted in taxable gifts by decedent in the amounts so distributed during the respective years before us. This issue arises from the determination by the respondent that each distribution of trust income made to the beneficiary, prior to the renunciation by the grantor of his reserved power to change beneficiaries, constituted a completed gift to her by the grantor in the amount distributed.
The respondent cites ; *1193 ; and , as authority for his determination. In these and related cases cited by the respondent, the question before the court was whether the transfer of the corpus became completed and subject to tax on the termination of the reserved power to modify the trust either by renunciation of the power or by death of the donor.
The issue here involves only the income from the trust property and as we view the case the rationale of the decisions applicable to gifts of corpus is not controlling. Our attention has not been called to any decided case precisely in point. The argument of the respondent that the gift of income was completed when distribution was made by the trustee, "even though the first step of the gift may have been taken when the trust was established" is ingenious, but, in our opinion, is untenable under the facts before us.
The instrument creating the trust entitled the beneficiary to the net income of the property held in trust during her lifetime or until the donor exercised his power to change beneficiaries. She thus became the owner of an equitable*1194 interest in the corpus of the trust property, subject to being divested by the happening of a subsequent event. Cf. ; ; . By virtue of this interest in the corpus of the trust she was entitled to enforce the trust. to have a breach of trust enjoined, and to require the net income to be paid over to her by the trustee. The interest was present property, alienable like any other in the absence of a valid restraint upon alienation. Since the net income was currently distributable to her, it became her property within the meaning of the taxing statutes at the time of its receipt by the trustee. . The reserved power of the donor did not affect the quantum of her interest. It only made its duration contingent upon the exercise of the power by the decedent to change beneficiaries. *429 The termination of the power in 1937 merely removed the contingency. In this situation it is obvious that when net income from trust*1195 property accrued there arose an obligation of the trustee to distribute such income to the beneficiary of the trust. The distribution was in satisfaction of that obligation and not a gift of income to the beneficiary by the donor of the trust at the time of distribution. We hold that the amounts distributed are not taxable as gifts of the donor in the respective years before us.
It should be borne in mind that the trust involved herein is not a revocable trust of such a nature that the income therefrom would be taxable to the donor. ; . Since the income will not be considered for purposes of taxation as having been received by the donor of the trust, it would appear illogical to consider it as being the subject of a gift from the donor of the trust to the beneficiary.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK, dissenting: I dissent from that part of the opinion which holds that the periodic payments of income were not gifts.
OPPER, dissenting: I feel obliged to question the soundness of the majority opinion in*1196 its second phase - that which deals with the taxation as gifts of the periodic payments of income.
Section 501(c) of the Revenue Act of 1932 1 describes certain circumstances under which a transfer of principal is excluded from the category of taxable gifts; prescribes the change in that situation which will render the transfer taxable; and concludes:
* * * and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift.
*1197 We know that a reservation of the right to change beneficiaries prevents a gift of principal from being sufficiently complete to invoke the tax, , (C.C.A.2d Cir.), certiorari denied, ; and that only the renunciation of that right by inter vivos action or at death is considered definitive, ; see ; *430 . In fact, that is the majority view in this case. Why then is no correlative principle applicable to the intervening payments of income so that these become complete and taxable as gifts only when they actually inure to the benefit of a specific grantee?
It matters little whether the principle of the cases cited is that complete control over the designation of beneficiaries is equivalent to that power to "revest in the donor" as to which the statute is articulate; or whether such control is so fundamentally opposed to the concept of a gift that as a matter of general law the tax would be inapplicable to such*1198 arrangements even in the absence of any express exception in the statute. Cf. Under either hypothesis, it is clear that the rule of expressio unius is not to apply strictly to the exemptions specified in 501(c). The donor need not be a potential beneficiary of the principal in order to defer the tax until a definite grantee is ascertainable. Why need he be of the income?
I can not read the applicable authorities except as establishing that the gift tax provisions are suspended until it can be determined whether the grantor is an "Injun giver." He might have been such here as to the payments of income, no less than with respect to the corpus, until each completed transfer put it beyond his power of recall. Are we to say that, before this, the beneficiary's ownership of future income was more secure than her equitable interest in the principal?
The majority's conclusion is stated to derive in some degree from the assumed proposition that the grantor was not taxable on the trust income. It is thought this renders it anomalous to treat as a gift from him that which he never received. *1199 But it seems to me by no means clear that the grantor must be regarded as immune from taxation on income of this nature, for the reasons stated in the dissenting opinion in , particularly the last paragraph thereof. And certainly if one's dominion over these fruits be sufficiently real it is of little moment whether they pass physically through his hands. ; ; (C.C.A., 5th Cir.); certiorari denied, .
SMITH and HARRON agree with this dissent.
Footnotes
1. (c) The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but the relinquishment or termination of such power (other than by the donor's death) shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift. ↩