*3636 Agreement executed by petitioner and The Cleveland Trust Co.held not to constitute a trust within the meaning of section 219 of the Revenue Acts of 1918 and 1921.
*1352 In this proceeding the petitioner seeks a redetermination of his income taxes for the years 1920 and 1921 for which years the respondent *1353 has determined deficiencies of $28.14 and $1,309.18, respectively.
FINDINGS OF FACT.
The petitioner is an individual residing at Cleveland, Ohio. On September 5, 1918, he created what is known in Ohio as "a business man's trust," naming the Cleveland Trust Co. of Cleveland, Ohio, as trustee. The trust agreement reads as follows:
Property Trusteed.
THIS INSTRUMENT of the 5th day of September, 1918, is to evidence: that I, N. H. Boynton, of Cleveland, Ohio, have this day sold, assigned, transferred, delivered and set over unto THE CLEVELAND TRUST COMPANY the property described in "Schedule A" which, initialed*3637 by me, is hereto attached and made part hereof, and have caused to be either assigned or made payable to The Cleveland Trust Company the certain policies of insurance upon my life set forth in "Schedule B" Which, initialed by me, is hereto attached and made part hereof, all of which property is to be held, managed and controlled by The Cleveland Trust Company as Trustee, upon the trusts and for the uses uses and purposes hereinafter set forth, to wit:
THE TRUSTEE SHALL HAVE POWER:
Powers and duties of Trustee.
1. To sell, lease, transfer or exchange all or any part of said property and all property that may hereafter from time to time be substituted therefor or added thereto, at such prices and upon such terms and conditions and in such manner as it may deem best, including the right to lease for any terms irrespective of the period of the trust; to execute and deliver any proxies, powers of attorney or agreements that the Trustee may deem necessary or advisable in administering this trust; to invest and reinvest money coming into its possession either by way of sales hereunder or upon collection of the insurance policies as hereinafter provided, in such loans, stocks, securities*3638 or real estate as it may deem proper and suitable for the investment of trust funds, irrespective of any statutes or rules or practice of Chancery Courts now or hereafter in force limiting the investments of trust companies or trustees generally, with power to vary or transpose investments so made into others of like or similar nature, it being my intent that the Trustee shall have unrestricted power to manage all property held by it hereunder as if the absolute owner thereof, subject, however, to the power reserved to me as hereinafter provided.
2. To retain by way of investment any property or securities transferred to it, without liability for depreciation; and in accepting title to real estate, the Trustee shall not be held to have assumed the payment of any encumbrances thereon nor any responsibilities as to the validity of the title conveyed to or held by it. All conveyances executed and delivered by it shall be without convenants of warranty except as against its own acts.
3. To determine whether money or property coming into its possession shall be treated as principal or income, and to charge or apportion expenses and losses to principal or income, according as it*3639 may deem just and equitable; to employ suitable agents and attorneys and to pay their reasonable compensation and expenses. The Trustee shall not be liable for any neglect, omission, or wrong-doing of such agents or attorneys, provided reasonable care shall have been exercised in their selection; nor, save for its own neglect or willful default, for any loss or damage.
*1354 4. To make advances or borrow money upon such terms and conditions at any time or times during my life, for such purpose as to it may seem desirable or proper, upon obtaining my written approval thereto, and after my death at any time or times; for the improvement, protection or preservation of the trust estate. For the re-payment of such advances, with interest, the Trustee shall have a lien upon the trust estate, and for sums so borrows may issue its promissory notes as Trustee and secure the re-payment thereof by mortgaging or pledging any part or all of the trust estate.
5. To compromise, compound and adjust claims in favor of or aggainst me or the trust estate, upon such terms and conditions as it may deem best, provided that during my lifetime it shall secure my written approval thereto.
*3640 6. To purchase, in event of revocation, any notes and mortgages representing investments made by it, for amount of principal and accrued interest to date of purchase.
7. To determine by a majority vote of its Board of Directors, whose decision shall be conclusive, as to the competency of the donor, whenever the question of his competency to act hereunder shall became material.
Rights Reserved by Donor.
The Trustee shall allow and pay interest on uninvested funds at the rate and in accordance with the rules then governing deposits in its Savings Department, and render to me a quarterly statement of its receipts and disbursements.
The entire net income derived from the trust estate shall be paid in quarterly installments or oftener to me during my life, and the Trustee shall pay and deliver to me in addition thereto from time to time such further amounts from the principal of the trust as it may deem proper and necessary for my maintenance, support, comfort and enjoyment, absolute discretion being vested in the Trustee to determine what may be necessary or proper for such purposes.
The Trustee is further authorized to make or procure to be made advances to me pending*3641 accumulation of income or disposition of any part of principal, and for any such advances shall have a lien upon the trust estate.
During my life the Trustee, whenever practicable, shall secure my written approval to all sales or purchases of securities which it may propose to make. Any person or persons dealing with the Trustee shall not be required to ascertain whether or not such approval shall have been given.
Unless requested so to do in writing by me, the Trustee shall not return for taxation any personal property held by it in this trust, during my life, all obligations with respect thereto being assumed by me.
I reserve the right to direct the Trustee as to the exercise of any options granted by the policies of insurance assigned to the Trust Company hereunder, and no obligation shall rest on said Trust Company to see to the payment of premiums due or to become due on any of such policies.
I reserve the right to have all income accruing upon the investments held hereunder paid direct to me until I may otherwise direct, and also the right to exercise the voting privileges upon any stocks standing of record in my name.
The Trustee shall allow me the free use and*3642 enjoyment of all real estate conveyed to it hereunder during my life, and during such time shall not be required to see to the payment of taxes or maintenance of insurance thereon unless requested so to do in writing.
I reserve the right at any time during my life or so long as I am competent to act in the matter, to revoke the settlement hereby evidenced, either in whole or in part, as well as the right to modify in any respect the terms of this settlement, any such revocation or modification to be evidenced by written instrument *1355 to be signed by me and delivered to the Trustee. To whatever extent this settlement shall be so revoked, the Trustee shall thereupon transfer and deliver to me such part or all of the property comprising the trust estate as may have been withdrawn under such revocation, conditioned, however, upon my repaying any advances made by the Trustee and satisfactorily indemnifying it against any liabilities incurred by it in the execution of this trust.
I direct that any and all property (including the property constituting the trust estate in case the trust should for any reason fail) acquired by The Cleveland Trust Company under any Will executed*3643 by me shall be held, managed, controlled and disposed of by it as Trustee, under the powers and for all the purposes set forth in this trust, unless and insofar as the terms of the Will otherwise specifically provide. The execution of this instrument by The Cleveland Trust Company shall constitute its agreement to administer all property so received by it in trust for such purposes.
Disposition of Trust Estate after Death of Donor.
After my death the trust estate, including any accumulated income and the proceeds of such insurance policies as may be collected by the Trustee hereunder, shall be retained by the Trustee under all of the powers and discretions hereinbefore and hereinafter specified, and disposed of as hereinafter provided.
I direct that my household goods, clothing, jewelry, automobiles, books, pictures, and similar articles of tangible chattel property shall be turned over by the Trustee to my wife, Winifred C. Boynton, to be hers absolutely. In event my wife does not survive me, such articles shall be divided among my surviving children as they may agree, in or in event of disagreement, as the Trustee may determine.
Inasmuch as I am supporting two French*3644 orphans, Yvonne and Anne Chambray, I direct that there be paid from the net income of the estate, or if the same is not sufficient then from the principal, the sum of Two Hundred and Forty ($240.00) Dollars annually on the first day of September of each year, from September 1st, 1918 to September 1st, 1921, inclusive. The same shall be paid to F. S. Terry for such purposes. The foregoing directions as to payment to be effective only in case the same have not been made before my decease.
The balance of the net income arising from the trust estate shall be paid to my wife, Winifred C. Boynton, in quarterly installments or oftener during her life. In addition thereto, I authorize and empower the Trustee to pay to her from time to time such further amounts from the principal as it may deem necessary or proper for her maintenance, support, comfort and enjoyment, and to enable her to suitably maintain and educate her children, provided the income hereunder and her income from other sources be insufficient therefor, absolute discretion being vested in the Trustee to determine what may be necessary or proper for such purposes. Provided, however, that if any child or children should*3645 hereafter be born to me, the Trustee shall retain from the income and pay for the maintenance and education of such child or children, such sum or sums as, in its judgment and discretion, may be proper and necessary for such purposes, regard being had, however, to such maintenance and support as may be afforded to such child or children by my wife.
Upon the death of my wife, or in case she shall not survive me then upon my death, the trust estate shall be treated as composed of as many portions as I may leave children surviving me and deceased children leaving issues then surviving, such issue taking, however, only by way of representation a deceased parent's share, and the net income derived from each such child's or issue's portion shall be paid to such one during life or until distribution may be made as *1356 hereinafter permitted; provided, however, that in case such children or issue are boys, until each one attains the age of nineteen years, or if at such time their education is not completed then until their education is complete but not after they are twenty-five years old, and in case such children or issue are girls, then until each one attains the age of twenty-five*3646 (25) years, the Trustee is authorized to expend from the share of each one only so much as it may deem necessary and proper to provide for the suitable maintenance, support and education of each such one, but after such children or issue as are boys have attained the age of nineteen (19), or if at such time their education is not completed then when their education is completed, and after such children or issue as are girls have attained the age of twenty-five (25) years, until each of such children or issue whether boys or girls have attained the age of thirty (30) years, the Trustee shall withhold payment of income to such one, such income so unexpended or withheld arising from the share of each one shall be added to the principal from which it has arisen. The Trustee is, however, authorized to disburse income or principal if it shall deem it necessary in case any of such children or issue shall be under physical disability due to accident or sickness and unable to provide for their own needs by reason of such disability. Until the education of each of such children or issue is completed, the Trustee is authorized and empowered to use such further amounts from the principal of*3647 each one's share as it deems necessary to provide for his or her suitable maintenance or education, provided said income in the opinion of the Trustee be insufficient for such purposes, absolute discretion being vested in the Trustee to determine what may be necessary or proper therefor.
After any such child or issue attains the age of thirty (30) years, I authorize and empower the Trustee to pay from time to time over such part or all of the share of the principal held for any such one as it deems proper and for the best interests of each such one, absolute discretion being hereby conferred upon the Trustee to make or refrain from making any such distribution to any such child or issue; it being my intent that the Trustee shall make distribution in case it shall deem such one worthy to receive and competent to manage the same. Upon any payments of principal being made for any of the purposes hereinbefore set forth, the trust as to the share of each such child shall, to the extent of such distribution, cease and determine. Provided, however, that notwithstanding any provisions herein contained, the principal of the trust estate then remaining, if any, shall be distributed to the*3648 distributees entitled thereto, twenty-one (21) years after the death of the last survivor of my children now in being.
I authorize and empower each such child or issue to dispose of the share of the principal held for the benefit of such one, or so much thereof as may remain undistributed, together with any accumulation thereon, by last will and testament in such manner as each one may desire; and upon the death of any such child or issue exercising such power of testamentary disposition, the Trustee shall thereupon turn over and dispose of such share in accordance therewith.
In event of the death of any such child or issue without exercising such power of testamentary disposition, the said share of the trust estate, or the balance thereof remaining, held for the benefit of such child or issue shall vest in his or her issue, and in default of issue, in my mother, brothers and sisters, or such of them as shall at such time be surviving, and in the event that none of them survive at such time, then in the next of kin of such child under the statutes of descent and distribution of the State of Ohio at such time in force and effect.
*1357 Any division or distribution of*3649 the trust estate required under the provisions of this instrument may be made by the Trustee in kind - that is to say, in real estate, stocks, bonds, mortgages or other securities belonging to the trust estate, according to the absolute discretion of the Trustee and at such valuations as the Trustee may establish therefor.
Prohibition Against Alienation
The gifts of income hereinbefore made to my wife and my children shall not be alienated or disposed of or in any manner incumbered by said beneficiaries or any of them, while so in possession and control of the Trustee; and if any of said beneficiaries shall, at any time or times, alienate, charge or dispose of their said respective incomes, or any part thereof a any interests therein, before the same shall have been delivered to them under the provisions of this instrument; or if, by reason of their bankruptcy or other event happening either before or after my death, said income otherwise intended for said beneficiaries or any of them shall wholly or in part cease to be enjoyed by them or any of them, as above propvided, and the same, or any part thereof or interest therein, shall, or, but for this proviso, would, become vested*3650 in some other person or persons, then the trust hereinbefore expressed concerning said income shall thereupon cease and determine as to the beneficiary whose interest may be so affected, and all income otherwise hereinbefore provided for such beneficiary shall thereafter be held and distributed by the Trustee during the residue of the life of such beneficiary, according to the absolute discretion of the Trustee, but the Trustee may pay to such beneficiary, or for his or her maintenance and support, or to the wife, husband, child or children of such beneficiary, thereafter from such income, such sums, and such sums only, as it, in its absolute discretion, shall think fit and proper, using or retaining any unexpended sums for the benefit of any one or more of the beneficiaries hereunder whose interest is not so affected.
Compensation
The Trustee shall receive for its services hereunder after my death five per cent. (5%) per annum of the gross income received by it and one per cent. (1%) of any distributions of principal. In lieu of a percentage on income paid direct to me, the Trustee may make such charge as may be agreed upon between myself and the Trustee for management, custody*3651 and care of securities, which shall cover charges for holding title to real estate as to which no services are required to be performed by the Trustee.
IN TESTIMONY WHEREOF, I have hereunto set my hand, and The Cleveland Trust Company, to evidence its acceptance of the trusts herein expressed, has caused its corporate name and seal to be affixed to this instrument in duplicate, at Cleveland, Ohio, the day and year first above written.
N. H. BOYNTON.THE CLEVELAND TRUST COMPANY,
By E. L. MASON, V.P.
and H. H. ALLYN, A.T.O.
SIGNED IN THE PRESENCE OF:
G. M. CUMMINGS T. E. HERRICKSCHEDULE A
Description of policies this day delivered to The Cleveland Trust Company to be held for the uses and purposes set forth in the foregoing instrument to which this schedule is attached and made part of:
POLICIES #6,289,407 and #6,289,408 and #6,092,853 New York Life Insurance Company in the sum of $2,000, $1,000 and $2,000 respectively.
*1358 POLICIES #754,824 and #754,825 The Penn Mutual Life Insurance Company each in the sum of $1,000.
POLICIES #168,583 and #168,584 Home Life Insurance Company each in the sum of $1,500.
POLICY #S-512 Certificate of Membership*3652 in The Pure Protection Life Association in the sum of $2,000.
Coupon bond #490,243 of The United States of America of 1917 in the sum of $100.
H.H.A.
N.H.B.
MODIFICATION
THIS INSTRUMENT, of the 10th day of July, 1922, is to evidence that I, N. H. Boynton, the donor under a certain Trust Agreement entered into by and between me and THE CLEVELAND TRUST COMPANY, of Cleveland, Ohio, as Trustee, under date of September 5, 1918, pursuant to the right of revocation and modification therein reserved, do hereby modify and, to the extent necessary to carry into effect the provisions herein contained but not otherwise, do revoke the terms of said instrument, in the following respect:
I have made no provision for the maintenance of my mother, ANNA B. BONYTON, because I have full faith and confidence that my wife will undertake to see to her comfortable support, but desiring to provide for the contingency of to see to her comfortable support, but desiring to provide for the contingency of my wife pre-deceasing my mother, I do now direct and declare as follows:
In event my mother shall survive my wife, then the Trustee shall first pay to my mother such part of the net income derived*3653 from the trust estate as it deems necessary or proper for her comfortable maintenance and support, according to its discretion.
I have also made no provision for my father, AMOS R. BOYNTON, and my wife's father, V. C. VALER, on account of the fact that they are possessed of independent means. Should, however, my wife pre-decease them, or either of them, I then authorize and empower the Trustee to thereafter pay from the net income arising from the trust estate to them, or either one of them who may be in need of assistance, such amounts as it deems proper to provide for the comfortable maintenance or support of them, or such one of them as may be so in need of assistance.
In all other respects I hereby ratify and confirm said Trust Agreement of September 5, 1918.
IN TESTIMONY WHEREOF, I have hereunto set my hand and caused this instrument to be delivered to THE CLEVELAND TRUST COMPANY, TRUSTEE, the day and year first above written.
The agreement was accompanied by a will which reads as follows:
LAST WILL AND TESTAMENT.
I, H. H. BOYNTON, of Cleveland, Ohio, being of lawful age and of sound and disposing mind and memory, do make, publish and declare this my last Will*3654 and Testament, hereby revoking and making null and void all other last wills and testaments by me made heretofore.
I. I direct that all my just debts and funeral expenses be paid out of my estate as soon after my decease as shall be found convenient. II. All the rest, residue and remainder of my property, of whatsoever character and wheresoever situate, I give, devise and bequeath to The Cleveland Trust Company, of Cleveland, Ohio.III. I nominate and appoint The Cleveland Trust Company, of Cleveland, Ohio, Executor of this my last Will and Testament, hereby granting to it, *1359 as such Executor, full power and authority to sell and convey all or any part of my estate, real, personal or mixed, upon such terms and at such prices as it may deem proper. I also grant to it full power and authority in the settlement of my estate to compromise, compound, adjust and settle any and all debts and liabilities due to or from my estate, for such sums and upon such terms and in such manner as my Executor shall deem best.
I desire that no bond be required of The Cleveland Trust Company as such Executor.
I further direct that in case The Cleveland Trust Company shall not, *3655 for any reason, become Executor, or in case, following its appointment, it shall cease to act as such before final settlement of my estate, such officer of The Cleveland Trust Company as shall be designated by its Board of Directors be appointed, such individual Executor to possess all of the powers above conferred upon The Cleveland Trust Company as Executor, but shall give suitable bond.
IN WITNESS WHEREOF, I have hereunto set my hand to this my Last Will and Testament, at Cleveland, Ohio, this 5th day of September, in the year of our Lord, One Thousand Nine Hundred and Eighteen.
(Signed) N. H. BOYNTON.
The petitioner in the actual operation of the agreement exercised all the powers incident to ownership. The trust company performed its obligations for a consideration of $50 per year. The terms of the agreement and the conduct of the petitioner and trust company thereunder plainly indicate that the petitioner intended to retain for his own benefit, control over all the property deposited with the trust company. The agreement provides:
(a) All income was reserved exclusively to the petitioner;
(b) Not merely the power to revoke but the right to modify was reserved;
*3656 (c) The duty of returning the property for taxation was expressly imposed on the petitioner and also the duty of insuring buildings, and the trust company was expressly relieved from the duty of returning property for taxation;
(d) The petitioner reserved the right to use all real estate and the title to stocks continued in the name of the petitioner and he retained and exercised the voting power, and the dividends were paid direct to him;
(e) The petitioner reserved the right to direct the trust company to exercise certain options;
(f) The petitioner reserved the right to have all income accrued on investments paid directly to him;
(g) The trust company was required to pay to the petitioner interest upon all uninvested funds at rates of interest prevailing for ordinary savings deposits;
(h) The trust company was required to furnish the petitioner with quarterly statements covering all receipts and disbursements;
(i) The petitioner was compelled to see to the payment of all insurance premiums on policies deposited with the trust company;
(j) All of the powers given the trust company were expressly subject to the powers reserved to the petitioner and the trust company*3657 had practically no power to sell or purchase property without the petitioner's consent being first obtained;
(k) The trust company had no right to borrow money without the petitioner's approval;
(l) The trust company had no power to compromise claims without the petitioner's approval;
*1360 (m) The compensation of the trust company was to be from time to time agreed upon with the petitioner.
That the many powers expressly reserved to the petitioner did not lie dormant is evidenced by the fact that from time to time the petitioner exercised the various powers above referred to.
The petitioner, before he became a director of the trust company, borrowed money from the banking department of the company, giving his personal notes secured by a pledging of the collateral from the corpus of the trust company. After he had become a director of the Cleveland Trust Co. and was prohibited by law from borrowing from that institution, loans were obtained in the same manner from the Chase National Bank of New York.
The trust company was in possession of the trust property, but the property was not transferred upon the books of the various companies issuing the securities. Dividends*3658 on these securities were paid directly to the petitioner.
In the purchase and sale of securities all transactions were handled as if the petitioner was the unqualified owner. The broker was directed by the petitioner to make the purchase and the trust company directed to make the payment. The reverse of this procedure occurred in the case of sales. The record discloses that the petitioner dealt with the property as freely as if no trust agreement had been made.
The powers conferred upon the trust company in the main lay dormant. The company was in practice a mere collector and custodian and served the petitioner as a financial agent and as a means of borrowing money. The manner in which loans were handled indicates the control exercised by the petitioner, i.e., the loans were made upon the request of the petitioner who signed the notes and who acquired the possession of the fund by exercising his power of revocation. The trust company took no action with reference to the property deposited without first securing the specific approval of the petitioner.
The parties entered into the following stipulation:
(1) During the year 1920 gains and losses were realized from the*3659 sale of securities deposited with The Cleveland Trust Company under the trust agreement as follows:
| Securities sold | Gain | Loss |
| 21 shares Cities Service Company stock | $2,204.16 | |
| 16 shares The Richman Brothers Company stock | 188.80 | |
| $36,000 par value Cities Service Company 7% bonds | $1,329.50 | |
| 2,392.96 | 1,329.50 | |
| 1,329.50 | ||
| Net gain | 1,063.46 |
*1361 (2) During the year 1921 gains and losses were realized from the sale of securities deposited with The Cleveland Trust Company under the trust agreement as follows:
| Securities sold | Gain | Loss |
| $34,000 par value The Cities Service Company bonds | $7,528.75 | |
| Peerless Truck and Motor Company stock | $500.73 | |
| 500.73 | 7,528.75 | |
| 500.73 | ||
| Net loss | 7,028.02 |
It is stipulated that the amount of the several gains and losses from the disposition of securities as above set forth is to be used in determing the income of the trustee as a separate entity, or in determining the taxable income of the petitioner according to the method that shall be adopted by the Board or any appellate court after consideration of the contentions of the parties hereto. It is further stipulated that for the years*3660 1920 and 1921 the petitioner included in his individual income-tax returns income from and deductions relating to property deposited with the Cleveland Trust Co. pursuant to the trust agreement and included therein capital gains and losses resulting from the sale of such property; that the respondent in his determination of the income-tax liability of the petitioner has included all of such income except gains resulting from the sale of such property and has included all of such deductions except losses resulting from the sale of such property.
The petitioner filed timely returns for both the years under consideration, with the advice and assistance of the trust officer of the Cleveland Trust Co.
The respondent, upon a reaudit of the petitioner's returns, treated the capital gains and losses in the income of the trust and determined deficiencies in the petitioner's income tax of $28.14 for the year 1920 and $1,309.18 for the year 1921.
OPINION.
ARUNDELL: The question involved is the proper treatment to be accorded the income derived from property placed with the Cleveland Trust Co. under the terms of the instrument quoted in the findings of fact, and particularly whether*3661 the petitioner is entitled to deduct from his gross income claimed losses on the sale of securities which were held by the Cleveland Trust Co. under that agreement.
A consideration of the agreement discloses that all income was reserved exclusively to the petitioner; he had not merely the power *1362 to revoke but the power to modify the agreement; the duty of returning the property for taxation was expressly imposed on him and also the duty of insuring the buildings; he reserved the right to sell all real estate; title to stocks remained in his name and he retained and exercised the voting power and the dividends were paid direct to him; he was compelled to see to the payment of all insurance premiums on policies deposited with the trust company; the trust company had no right to borrow money or to compromise claims without petitioner's approval and it had practically no power to sell or purchase property without petitioner's consent. Nor did the many powers expressly reserved to petitioner lie dormant, for the petitioner in fact exercised repeatedly many of the rights reserved by him in his agreement with the Cleveland Trust Co. Indeed the particular securities on which*3662 the loss is here claimed were sold by petitioner without consultation with the Cleveland Trust Co. through petitioner's broker and the securities were thereafter delivered to the broker by the trust company on petitioner's order. It is contended that this action on his part served to constitute, as to the particular securities, a revocation. Whether this be true or not is not necessary to decide as we do not base our conclusion on that ground.
Stated simply, as we view it, the question for us to decide is whether or not the instrument signed by petitioner and the Cleveland Trust Co. constituted a trust within the meaning of section 219 of the Revenue Acts of 1918 and 1921. Petitioner urges that the instrument constituted nothing more than an agency, and our attention is called to section 8617 of the General Code of Ohio (which was in effect at the time the agreement was made), which reads as follows:
All deeds of gifts and conveyances of goods and chattels, made in trust to the use of the person or persons making them, shall be void and of no effect.
The case of Worthington v. Redkey,86 Okla. Stat. 128">86 O.S. 128, is cited as authority for the proposition that the attempted creation*3663 of a revocable trust results in the creation of an agency only. Though petitioner's argument in this connection is persuasive, we do not believe it necessary for us to decide whether the transaction constituted in law an agency and the argument is passed without further comment.
Since these proceedings were taken under submission there has been decided the case of Stoddard v. Eaton, decided by the United States District Court for the District of Connecticut, 22 Fed.(2d) 184. The facts in the Stoddard case bear such a close parallel to those in the case at bar as to make the court's opinion especially deserving of close consideration.
*1363 Stoddard was a donor of a revocable trust and also its beneficiary. He claimed the right to deduct from his gross income losses from the sale of securities which were held by the trustee. It appears that Stoddard, like Boynton, at all times retained control of the securities held by the trustees and directed and controlled their management, and under the trust agreement had power to retake the legal title at will. In spite of the large discretionary powers granted, no sale or other disposition of securities*3664 or of their proceeds was ever made or suggested except upon the direct order of Stoddard. In considering the contentions made by Stoddard the court stated:
The contention of the plaintiff is that the so-called "Trust Agreements" worked no severance of the trusteed securities from the corpus of the plaintiff's property and that these securities, whether in the hands of the trustees or not, were always his own assets, and, therefore, that the losses sustained on their sale were proper items of deduction from his gross income. He says that the verbal form of the transaction does not necessarily control the construction to be placed upon it; that the environing conditions - the motivation - the reactions of the parties to the situation thus integrated and to its developing phases - all have a significance which the law must evaluate before the genuine relation of the transactions to the Income Tax Act may be ascertained. With this suggestion, stated in these general terms, I am disposed to agree. For, we are not here concerned with the rights of contracting parties who may evoke a rule of estoppel to prevent the change of a comma in the written bond, nor are there innocent third*3665 parties involved who have relied upon a title or upon an authority expressed in writing.
* * *
It may well be asked, - If the plaintiff intended to deliver nothing but a general power of attorney, why didn't he employ the usual form? The explanation afforded seems cogent enough. A general power of attorney as ordinarily expressed, would, in order to be effective, either have to be too broad, or, if it were to be limited to specific property, it would be in need of intermittent amendment. This would be simple enough if it were not for the plaintiff's protracted absences in the south during the winter months.
That the equivocal formula accepted by the plaintiff has plunged him into more difficulties than those he avoided, seems to be the result of a shifting canon of interpretation in the Bureau of Internal Revenue. At one time the Bureau adopted the view that the income of a revocable trust under which the donor added or withdrew property at his will, was income of the donor regardless of the identity of the cestui que trust. If the plaintiff's views were the same he might well fail to be meticulous as to the form into whihch he cast his transaction.
After all the*3666 word "trust" as used in Section 219 of the Revenue Act of 1918, can hardly have been intended to comprehend every instance in which a trust is recognized in equity. A trust ex maleficio, a resulting trust or a constructive trust are examples of trusts which do not fit into the frame of the statute. A trust, as therein understood, is not only an express trust, but a genuine trust transaction. A revenue statute does not address itself to fictions.
* * *
The defendant apparently relies upon Baltzell v. Mitchell, 3 Fed.(2d) 428 (5 Am.Fed. Tax Rep. 5230). It does not appear that that case was one involving *1364 a revocable trust. Furthermore, it was not the donor of the trust corpus who was the plaintiff, but the beneficiary of the income. There was no identification of the settler and cestui, as is the case in the present instance. Furthermore, there was no question concerning the reality of the trust, and that is an important and material element in the case before me.
The reasoning in the Stoddard case seems to us to be sound. In every essential way, both by the terms of the instruments and in actual practice, Boynton reserved ownership*3667 and control of the property. To say that the income in question was that of the fiduciary rather than that of Boynton would be to let the form prevail over the substance. This we do not believe Congress intended. After a careful consideration of the terms of the agreement executed by petitioner, we are led to the conclusion that it did not serve to create a trust within the meaning of section 219 of the Revenue Acts of 1918 and 1921.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.
MILLIKEN did not participate.
MORRIS concurs in the result.
GREEN, dissenting: The prevailing opinion apparently sustains the petitioner's argument, as set forth in his brief, "that regardless of whether the relationship between Boynton and the Trust Company may be technically described as a trust, the property was at all times subject to Boynton's control to the same extent as if no trust had been created; that no other beneficiary acquired any greater right by virtue of the trust agreement than he would have had if named in the will, and that therefore, regarding substance, not form, the property was not held*3668 in trust within the meaning of the law, but must be treated for income tax purposes as if the so-called trust agreement had never been executed." In addition to this the petitioner contends that the agreement does not in law create a trust. The respondent urges with great emphasis that the agreement creates a revocable trust and that such trusts have been definitely recognized by the Federal taxing statutes.
As I construe the pleadings, two broad issues are presented for consideration. The first is whether a certain agreement, set forth verbatim in our findings of fact, creates a trust within the meaning of the Federal statutes the income from which should be taxed in accordance with the provisions of section 219 of the Revenue Act of 1918 and the Revenue Act of 1921, or whether it, in fact, creates nothing more than an agency with the result that the income received by the agent should be included in the gross income of the principal. *1365 If it is held that by such contract a trust, as that term is used in the taxing statutes, is actually created, it being conceded by both parties that such trust, if it exists, is a revocable trust, the question is whether the tax on*3669 the income thereof is to be paid by the trustee or the income thereof included in the gross income of the grantor with the result that the tax thereon be paid by him. The second of these questions involves the consideration of several rather important principles applicable to the taxation of the income of estates. It is upon these two broad issues that the petitioner has concentrated his efforts.
The briefs of the parties indicate beyond doubt that I have not misconceived the issues.
I am unable to agree wholly with the summary of the trust instrument as set forth in the opinion. At least it should be pointed out that it permits the trustee to sell, lease, transfer or exchange all or any part of the trust property, and to invest monies regardless of the usual laws restricting trusts, without obtaining the consent or written approval of the settler. It provides that the trustee must have the written approval of the donor to loan or borrow money or to compromise, compound or adjust claims. There are absolutely no restrictions upon the power of the trustee to sell or lease or purchase any and all properties, except securities, and as to the latter it merely requires trustee*3670 to obtain written approval of settler whenever practicable to do so, but provides that it will not be necessary for a buyer to ascertain whether such approval has been obtained.
The trust instrument makes the ordinary income payable quarterly to the settler, but leaves to the absolute discretion of the trustee the question of whether any of the principal fund shall be paid to the settler. And of extreme importance is the provision of the instrument giving the trustee the right -
To determine by a majority vote of its Board of Directors, whose decision shall be conclusive, as to the competency of the donor, whenever the question of his competency to act hereunder shall become material.
At the time the returns were filed, Office Decisions 621 and 676 had been issued. These are quoted hereinafter, and in substance provided that "The income of a revocable trust be included in the gross income of the grantor."
The returns were prepared in accordance with the above mentioned Office Decisions. Subsequently on July 24, 1922, Law Opinion 1102, which specifically revoked Office Decisions 621 and 676, was promulgated.
As pointed out above, the first question is whether under the*3671 taxing statutes the agreement created a trust or an agency. The petitioner contends that under the laws of the State of Ohio such an *1366 agreement creates an agency and not a trust, and in support of this position it cites section 8617 of the General Code of Ohio (which was in effect at the time the agreement was made), which reads as follows:
All deeds of gift and conveyance of goods and chattels, made in trust to the use of the person or persons making them, shall be void and of no effect.
It cites several cases, among them that of Worthington v. Redkey,86 Oh.St. 128, which appear to hold that the attempted creation of a revocable trust results in the creation of an agency only.
As I view this question, the fact that the statutes of the State of Ohio and the decisions of the courts of that State may make this agreement either wholly invalid or require that it be construed to be merely a contract of agency, is not conclusive when it comes to the matter of determining the liability for Federal income taxes on the income of the property which is the subject matter of the agreement. I am fully aware that this view is, to say the least, an exception*3672 to two commonly accepted principles of law. The first is that the rights of an owner of property in and to that property and the income therefrom, are governed by the law of the State. The second is that under ordinary circumstances the tax on income falls upon the owner thereof.
Due to the various causes with which we have no concern, there have grown up in several States, by reason of statutes or decisions, laws governing the ownership of property and the income therefrom, which are unusual and in some instances unique. For example, under the laws of one State men may be partners, while under the laws of many other States they are members of an association of a type which is subject to Federal income and excess-profits taxes as if it were a corporation. This results from the peculiar rule of property existing in the one State. To accept such a rule as controlling would result in Federal taxation contrary to the intent of the taxing statute. This is the precise situation with which the Supreme Court was confronted in the case of *3673 Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110">269 U.S. 110. In that case Mr. Justice Brandeis set forth very succinctly the issues involved and the laws of the State relating to the property. For the purposes of this discussion the material portions of the opinion are as follows:
The Burk-Waggoner Association contends that what is called its property and income were in law the property and income of its members; that ownership, receipt, and segregation are essential elements of income, which Congress cannot affect;
* * *
* * * and that thus what is called the income of the association can be taxed only to the partners upon their undistributed shares of the partnership profits,
* * *
* * * The *1367 association further contends that, * * * it cannot tax the income of the association, for that would make out of a business group, whose property under the law of the state is owned by the members individually, an entity capable of owning property and receiving income;
* * *
* * * The term partnership as used in these sections obviously refers only to ordinary partnerships. Unincorporated joint-stock associations, although technically partnerships under*3674 the law of many states, are not in common parlance referred to as such. They have usually a fixed capital stock divided into shares represented by certificates transferable only upon the books of the company, manage their affairs by a board of directors and executive officers and conduct their business in the general form and mode of procedure of a corporation. Because of this resemblance in form and effectiveness, these business organizations are subjected by the act to these taxes as corporations.
* * *
It is true that Congress cannot convert into a corporation an organization which by the laws of its state is deemed to be a partnership. But nothing in the constitution precludes Congress from taxing as a corporation an association which, although unincorporated, transacts its business as if it were incorporated. The power of Congress so to tax associations is not affected by the fact that, under the law of a particular state, the association cannot hold title to property, or that its shareholders are individually liable for the association's debts, or that it is not recognized as a legal entity. Neither the conception of unincorporated associations prevailing under a local*3675 law, nor the relation under that law of the association to its shareholders, nor their relation to each other and to outsiders, is of legal significance as bearing upon the power of Congress to determine how and at what rate the income of the joint enterprise shall be taxed.
In this decision the Supreme Court determined the relationship between the income and the individual, not on the basis of the State law but upon the basis of the Federal statute. They hold that the Burk-Waggoner Co. was an association for purposes of taxation even though it was a partnership under the laws of Texas. They hold that income was taxable to the association when as a matter of the law of Texas it was the property of the individual.
Following a similar line of reasoning, the Federal courts have declined to follow the State law in determining whether a certain contract constituted a sale or a lease. See Henry L. Berg et al.,6 B.T.A. 1287">6 B.T.A. 1287, in which the controlling cases are reviewed. The same line of reasoning was applied to a wholly different situation by the Court of Claims in *3676 Mary S. Aldridge, Executor, v. United States,64 Ct.Cls. 424.
This line of reason is carried forward by Mr. Justice Holmes in the case of United States v. Robbins,269 U.S. 315">269 U.S. 315, in which he says:
But the question before us is with regard to the power and intent of the Revenue Act of February 24, 1919 * * *. Even if we are wrong as to the law of California and assume that the wife had an interest in the community income that Congress could tax if so minded, it does not follow that Congress*1368 could not tax the husband for the whole. Although restricted in the matter of gifts, etc., he alone has the disposition of the fund. He may spend it substantially as he chooses, and if he wastes it in debauchery the wife has no redress. See Garrozi v. Dastas,204 U.S. 64">204 U.S. 64, 27 S. Ct. 224">27 S.Ct. 224, 51 L. Ed. 369">51 L.Ed. 369. His liability for his wife's support comes from a different source and exists whether there is community property or not. That he may be taxed for such a fund seems to us to need no argument. The same and further considerations lead to the conclusion that it was intended to tax him for the whole. For not only should*3677 he who has all the power bear the burden, and not only is the husband the most obvious target for the shaft, but the fund is not liable to be taken for the wife's, Civil Code, Sec. 167, so that the remedy for her failure to pay might be hard to find. The reasons for holding him are at least as strong as those for holding trustees in the cases where they are liable under the law. Section 219 (Com. St. Ann. Supp. 1919, Sec. 6336 1/8 ii). See Regulations 65, art. 341. (Italics supplied.)
To those who would say that Mr. Justice Holmes' conclusions in the Robbins case have no application here, I point to the fact that he there said: "The reasons for holding him are at least as strong as those for holding trustees in the cases where they are liable under the law. Section 219 (Com. St. Ann. Supp. 1919, sec. 6336 1/8 ii). See Regulations 65, art. 341."
The article of the regulations referred to reads as follows:
Art. 341. Estates and trusts. - In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned by and will be taxed to the respective beneficiaries, but the income of a trust which is to be accumulated or*3678 held for future distribution, whether consisting of ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee. The exception to this general rule is with respect to the income of a trust revocable by the grantor, and the income of a trust which may be distributed to the grantor or used to pay the premiums upon policies of insurance upon his life, which income, whether or not distributed, must be returned by and will be taxed to the grantor of the trust. (See article 347.)
See section 225 and articles 421 and 423 with reference to fiduciary returns, and article 294 with reference to deductions.
See also Zemurray v. United States,64 Ct.Cls. 657.
It is unnecessary to discuss or attempt to define the word "trust" as it is used in the Revenue Acts of 1918 and 1921. It was intended to have its usual and ordinary meaning. Giving that word its usual and ordinary meaning, I am convinced that the agreement here under consideration is a trust within the meaning of the term as used in the taxing statutes just as the partnership in the Burk-Waggoner case was held to be an association*3679 within the meaning of the taxing statute, and for the same fundamental reason. I likewise believe that the income therefrom is to be taxed in accordance with provisions of the statutes relating to the taxation of the income of trusts even though, if the State law were followed, it *1369 might be held that the agreement created merely an agency and that the income derived from the property involved was, as a matter of ownership, the property of the principal in the agency contract, that is to say, the petitioner herein. If we so held we would be but following the principles set forth in the Burk-Waggoner case and the Robbins case.
The next broad question is how and to whom the income of this trust shall be taxed. This involves a consideration of the Revenue Acts of 1918 and 1921 since the years 1920 and 1921 are before us. The two acts as regards all questions here involved are in substance the same.
The material parts of section 219 of the Revenue Act of 1921 read as follows:
SEC. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including -
* * *
(4) Income which is to*3680 be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, * * * In cases in which there is any income of the class described in paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of the income of the estate. or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraphs (1), (2), or (3) of subdivision (a) or in any other case within subdivision (a) of this section except paragraph (4) thereof the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the*3681 period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir, or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, or, if his taxable year is different from that of the estate or trust, then there shall be included in computing his net income his distributive share of the income of the estate or trust for its taxable year ending within the taxable year of the beneficiary. In such cases the beneficiary shall, for*3682 the purpose of the normal tax, be allowed as credits, in addition to the credits allowed to him under section 216, his proportionate *1370 share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.
The petitioner points out that until the issuance of Law Opinion 1102, on July 4, 1922, the Bureau of Internal Revenue, as evidenced by the various regulations and rulings, consistently took the position that in the case of a revocable trust the income therefrom should be taxed to the grantor. He points out that thereafter and at its next session, Congress enacted into law the substance of the regulations and rulings. He proved that he relied upon the regulations and rulings in effect at the time he entered into the trust agreement. He contends, and it is upon this contention that he places his main reliance, that Law Opinion 1102 is wholly wrong or, if right, wholly inapplicable to this case.
Article 29 of Regulations 33, relating to the Acts of 1916 and 1917, promulgated January 2, 1918, provides that:
A deed of trust must be absolute so far as the conveyance of title is concerned and irrevocable by the donor, otherwise*3683 the income from the property in question will accrue to the donor and must be accounted for by him.
The last sentence of article 341, Regulations 45, relating to the Revenue Act of 1918, approved by the Secretary of the Treasury and published April 21, 1919, provided:
The income of a revocable trust must be included in the gross income of the grantor.
This regulation was repeated in the revision of the regulations promulgated January 28, 1921. In 1920, the Treasury Department published the following office decision confirming and further interpreting article 341:
O.D. 621, Cumulative Bulletin No. 3 (July-December, 1920), p. 202:
The income of a revocable trust must be included in the gross income of the grantor. The position of the grantor with respect to the payment of tax on such income is the same as if the trust had not been created, and the same principles are applicable in determining the amount of taxable income.
The trustee under a revocable trust is required to file a return on Form 1041, revised, in accordance with Section 225 of the Revenue Act of 1918 and article 421 of Regulations 45, showing the grantor as the beneficiary under the trust. The trustee*3684 must also file a return of information on Form 1099, revised, as provided in section 256 of the Act upon which should be entered the name and address of the grantor in whose return the income should be included.
O.D. 676, Cumulative Bulletin No. 3 (July-December, 1920), p. 202:
Where a declaration of trust provides that during the life of the donor he may indicate the manner in which the trustee shall exercise the powers conferred by the trust agreement; that the donor shall have a voice in determining *1371 the amount of net income to be distributed to the beneficiaries; and that the estate created and the interests vested thereunder shall be subject to revocation by the donor at any time, in whole or in part, it is held that the amount of income received by the beneficiaries is in the nature of a gift, and that the trustee merely acts as agent for the donor. The income of the trust should therefore be included in the gross income of the donor in accordance with article 341, of Regulations 45. The trustee is required to file a return for the trust on Form 1041, revised, showing the grantor as beneficiary under the trust and the grantor should include the net income of*3685 the trust in gross income in his individual return under the item of income from fiduciaries.
The above quoted regulations were in full force and effect at the time the Revenue Act of 1921 was passed and approved on November 23, 1921. Article 341 of Regulations 62 is practically a restatement of article 341 of Regulations 45, but the last sentence, "the income of a revocable trust must be included in the gross income of the grantor," is omitted. On July 24, 1922, L.O. 1102 was promulgated by the Treasury Department. I.T. 1589 expressly states that L.O. 1102 revoked O.D. 621 and O.D. 676, and the respondent is herein attempting to apply L.O. 1102 retroactively.
On June 2, 1924, the Revenue Act of 1924 was passed and approved and section 219 contained the following new and additional provisions:
(g) 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.
(h) Where any part of the*3686 income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or 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 section 214), such part of the income of the trust shall be included in computing the net income of the grantor.
The intention of Congress in 1921 to adopt the executive construction of the 1918 Act which prevailed at the time the 1921 Act was passed is established by the fact that after the Treasury Department had changed such construction Congress in its next revision of the Revenue Act, on June 2, 1924, incorporated in the law specific provision which required the grantor of a revocable trust to include the income in his personal return. The intent of Congress is clearly expressed in the hearings before the committees. At page 59 of the Committee on Ways and Means report, *3687 it is stated:
Section 219. This section has been rewritten in order to secure clarity and to prevent the evasion of taxes by means of estates and trusts.
*1372 It is provided in the section that in the case of a trust where the trustee has the discretion to distribute or not the income is taxed to the beneficiary if distributed and to the trustee if not distributed.
Subdivision (g) of this section provides that where the grantor of a trust reserves the right to change the trust in favor of himself the income is taxed to the grantor.
Subdivision (h) of this section provides that the income of a trust which may be distributed to the grantor or which may be used for the payment of premiums upon policies of insurance on his life shall be included in the gross income of the grantor. 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.
and in the Senate Finance Committee report, at page 20:
Section 219: This section has been rewritten in order to secure clarity and to prevent the evasion of taxes by means*3688 of estates and trusts.
(1) It is provided in the section that in the case of a trust where the trustee has the discretion to distribute or not, the income is taxed to the beneficiary if distributed and to the trustee if not distributed.
(2) Paragraph (g) of this section provides that where the grantor of a trust reserves the right to change the trust in favor of himself the income is taxed to the grantor.
*1373 The creation of a revocable trust constitutes nothing but an assignment of the right to receive future income. Since such an assignment does not operate to increase the taxable income of the assignor, the creation of a revocable trust should not so operate, but the income of such a trust should be included in the income of the grantor. The bill so provides.
Subdivision (h) of this section provides that the income of a trust which may be distributed to the grantor or which may be used for the payment of premiums upon policies of insurance on his life shall be included in the gross income of the grantor. 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*3689 of this subdivision of the bill is to stop this evasion.
and in the Finance Committee report, at page 25:
Section 219: This section has been rewritten in order to secure clarity and to prevent the evasion of taxes by means of estates and trusts.
(1) It is provided in the section that in the case of a trust where the trustee has the discretion to distribute or not, the income is taxed to the beneficiary if distributed and to the trustee if not distributed. The wording of subdivision (b) has been changed (1) to except from its provisions specifically subdivisions (g) and (h), which lay down special rules in lieu of the general provisions of subdivision (b); (2) to permit as an additional deduction that part of the gross income which, pursuant to the terms of the will or deed, is to be used exclusively for the prevention of cruelty to children or animals, since contributions by individuals to organizations for these purposes are deductible under section 214(a)(10).
(2) Paragraph (g) of this section provides that where the grantor of a trust reserves the right to change the trust in favor of himself the income is taxed to the grantor. The subdivision of the House bill has*3690 been rewritten in order that there shall not be taxed to the grantor the income of a trust as to which the grantor has a power of revocation subject, however, to a condition which has not happened.
The creation of a revocable trust constitutes nothing but an assignment of the right to receive future income. Since such an assignment does not operate to increase the taxable income of the assignor, the creation of a revocable trust should not so operate, but the income of such a trust should be included in the income of the grantor. The bill so provides.
(3) Subdivision (h) of this section provides that the income of a trust which may be distributed to the grantor or which may be used for the payment of premiums upon policies of insurance on his life shall be included in the gross income of the grantor. 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.
The provisions of the House bill have been altered to exclude from taxation to the grantor of a trust income thereof used to pay premiums on insurance policies which*3691 are irrevocably payable to the benevolent organizations described in section 214(a)(10). A trust of this kind is a proper method of providing for a gift to such organizations, and since the income is being used for these benevolent purposes rather than for the grantor's personal benefit it should not be taxed to him.
Thus I find that the Bureau of Internal Revenue, from the date of the issuance of Regulations 33, applicable to the Revenue Acts of 1916 and 1917, down to July 24, 1922, at which time Law Opinion 1102 was issued, steadfastly adhered to its rule that the income of a revocable trust was taxable to the grantor or creator of the trust. I find Law Opinion 1102 announcing a contrary rule. I find Congress in 1924 enacting a statute which expressly provided that income of a revocable trust shall be included in the income of the grantor.
Courts have frequently been called upon to determine the weight to be given to executive constructions of statutes. Each reenactment of a statute adds weight to the executive construction of the previous statutes. The authorities for this proposition have been so often set forth by the courts and this Board that it is unnecessary to*3692 do so again. And where, as in this case, there is a succession of rulings, a departure therefrom and an immediate action by Congress to restore to the law the principle enunciated in the rulings, I would have no hesitancy in holding that the original departmental construction correctly states the law, and I am therefore of the opinion that under the Revenue Acts of 1918 and 1921 the income of a revocable trust should be included in the income of the grantor and the tax thereon paid by him.
Mr. Justice Holmes in the Robbins case, cited section 219 of the Revenue Act of 1918 and an article of Regulations 65 relating to the Revenue Act of 1924. This regulation, among other things, says:
The exception to this general rule is with respect to the income of a trust revocable by the grantor, and the income of a trust which may be distributed to the grantor or used to pay the premiums upon policies of insurance upon his life, which income, whether or not distributed, must be returned by and will be taxed to the grantor of the trust.
*1374 Whether or not any significance is to be attached to the citation of section 219 of the Revenue Act of 1918 followed by the citation*3693 of an article of the regulations relating to section 219 of the Revenue Act of 1924, it is clear that each, separately, was relied upon as a basis for the conclusion there reached.
My conclusion with respect to the liability for tax on the income of a revocable trust is in conflict with none of our decisions relating to the taxation of the income of trusts except that in Appeal of Henry Stoddard,3 B.T.A. 79">3 B.T.A. 79. In none of the others was there a revocable trust.
The respondent permitted the petitioner to return as his income a part of the income of this trust but refused to permit him to deduct its losses apparently upon the theory that the gain or loss resulting to the trust from the sale or other disposition of capital assets should be returned in a return made by the trust and the tax on the net income therefrom paid by the fiduciary.
This method of reporting the income of this revocable trust was wholly wrong. The statute and the regulations require the computation of the net income of such trust and the addition of the amount thereof to the income of the grantor or distributee. This method should be followed here. In both of the years before us the trust*3694 had net income so that we are not called upon to determine whether, if the trust had a net loss, such loss might be deducted by the grantor or distributee.
The prevailing opinion relies upon the Stoddard case as decided by the Federal court. In the discussion of that case the prevailing opinion states "Stoddard was the donor of a revocable trust and also its beneficiary." If this be true, then the case should have been decided in accordance with the provisions of section 219, as in fact I believe it to have been, for nowhere in the opinion am I able to find any definite statement to the contrary and many things therein stated indicate that the court regarded the instrument as a revocable trust, and as such within section 219.
To hold that instruments of the type here under consideration are revocable trusts and that as such they come within the provisions of section 219 of the various acts and that the income therefrom should be taxed to the grantor, in accordance with the earlier ruling of the Department and the later acts of Congress, would establish a complete uniformity of rule starting with the 1916 Act and continuing at least through the Act of 1926. Such uniformity*3695 of rule is in itself of sufficient worth to warrant the decision I propose.
To hold that a revocable trust is not within section 219 is to expressly override Congress and this, it appears to me, is what has been done in this case.
LITTLETON, SMITH, and LOVE concur in this dissent.
*1375 TRAMMELL, dissenting: I concur with the dissenting opinion to the extent that it holds that the instrument involved created a trust, but disagree as to the effect of the power of revocation reserved.