*967 After the expiration of a certain period, income to the amount of $500 per month from a trust was to be paid to the grantor for life, the excess income to be accumulated and invaded, if necessary to obtain such amount. At grantor's death, income was to be accumulated until the expiration of the trust upon the death of five persons, the grantor, his wife, two daughters, and his grandson, whereupon the entire estate would vest in grantor's heirs at law. The power to amend, in whole or in part, to terminate, and to revoke was vested in the grantor's grandson, with consent of either his mother or aunt, or if they both be dead, upon his own direction. In the event of his death, similar powers were vested in his mother and aunt, or the survivor of them, with the consent of a certain stranger to the trust, or if he be dead, upon their direction or the direction of the survivor. Held, that sections 166 and 167 of the Revenue Act of 1932 are not applicable.
*881 These proceedings were brought to redetermine deficiencies*968 in the income taxes of the petitioners as follows:
| Petitioner | Year | Amount |
| Mrs. M. D. (Laura E.) Huffman | 1931 | $1,167.68 |
| Do | 1932 | 2,154.37 |
| M. D. Huffman | 1931 | 1,167.68 |
| Do | 1932 | 2,015.82 |
| Nina H. Terrill | 1931 | 6.08 |
| Do | 1932 | 685.70 |
The issues as to the year 1931 were settled by stipulation and decisions were duly entered, leaving in controversy only the question whether the income from three trusts established August 4, 1932, by each petitioner was taxable to the grantors, respectively, or to the trustee.
FINDINGS OF FACT.
The stipulations and the record disclose the following facts:
On June 18, 1927, M. D. Huffman and his wife, Laura E. Huffman, and Idyll Hardie entered into an oil and gas lease with the Superior Oil Co., a California corporation, for the drilling of oil wells on property which they owned, being the northeast quarter of section 29, Township 21 south, Range 17 east, M.D.B.M. The lease provided that the lessee should pay to the lessors as royalty the one-eighth part of the value of all oil removed from the leased premises. M. D. Huffman and his wife owned three-fourths of the lessor's interest, which they declared to be community*969 property within the laws of the State of California.
On or about March 1, 1931, M. D. Huffman and his wife made an assignment of 48 percent of their interest in the lease, assigning 16 percent to each of their two children, Nina H. Terrill and Leona H. Hobson, and 16 percent to their grandson, Milton W. Terrill.
Under date of August 4, 1932, M. D. Huffman and his wife and his daughter, Nina H. Terrill, executed separate trust agreements with the Title Insurance & Trust Co. of Los Angeles, as trustee.
On August 4, 1932, each of the petitioners, concurrently with the execution of the trust agreements and as a part thereof, conveyed and assigned to the trustee certain fractional interests in the oil-gas lease of June 18, 1927, with the Superior Oil Co.
Section three, provision A, of each of the trust instruments provided that no income should be distributed if an appeal was taken from the judgment entered in favor of M. D. Huffman and Laura E. Huffman, et al., in case No. 47094 in the Superior Court of the State of California, in and for the County of Fresno, entitled F. R. Kellogg,*882 G. J. Symington, W. A. Shearer, Elmer Weagley and J. Foster Kell, as Trustees,*970 Plaintiffs v. M. D. Huffman, Laura E. Huffman, Idyll Hardie and Charles W. Hanslip, Defendants, and if such appeal were taken, until the final adjudication thereof. An appeal was taken from the aforesaid judgment of the Superior Court mentioned in section three, provision A, to the District Court of Appeals, and in turn to the Supreme Court of the State of California. The date of final adjudication of the appeal was after the close of the taxable year here in question, viz., May 7, 1934.
Subject to the exceptions hereinafter set forth, each of the three trust instruments substantially directed the trustee (1) to accumulate the net income which arose under the trust during a designated period :i.e., from August 4, 1932, to a date in 1934 on which there was rendered the final decision in a case which was commenced in October 1930 and might have affected the title to the properties, but which did not do so); :2) to pay the trustor, if living, $500 per month from net income arising under the trust after the expiration of such period (except that the Nina H. Terrill trust instrument directs the trustee to pay the $500 to the trustor, if living, or if she be dead, to her husband, *971 William W. Terrill); :3) to accumulate the remainder of such net income; :4) if the net income in any month or months be insufficient for the payment of the $500, to resort to the accumulated net income then and thereafter belonging to the trust, and pay therefrom the amount of any deficiency to the trustor :except that the Nina H. Terrill trust instrument directs the trustee to pay the amount of any deficiency to the person, i.e., to the trustor or to the said William W. Terrill, as the case may be, entitled thereto); and :5) if the trustor :except that the Nina H. Terrill trust instrument provides that if both the trustor and William W. Terrill) be not living at any time first mentioned in paragraph :4-b) of section four of the trust instrument, to retain and accumulate all of the net income.
Section five of the M. D. Huffman trust instrument substantially provides, in part, that there Milton W. Terrill, the power to amend, revoke, or terminate the trust at any time or times, with the written approval of either of the trustor's daughters, Leona H. Hobson and Nina H. Terrill, if both be living at the time, Terrill then be dead after the death of Milton W. Terrill then in trustor's*972 daughters, Leona H. Hobson and Nina H. Terrill, and the survivor of them, with the written approval of C. H. Hartke :counsel for the trust) if he be living, or if he be dead, then solely by the two daughters or the survivor of them.
*883 The remaining parts of section five provide:
It is hereby expressly provided, however, that no amendment, termination and/or revocation hereinbefore in this * * * £ net income accumulated from August 4, 1932, to the date in 1934 when said final decision was rendered] * * * and held under this Trust at time of receipt by the Trustee of * * * £such amendment, termination or revocation] * * * can be made prior to * * * £said date in 1934] * * * without the written approval and consent of Title Insurance and Trust Company £the company is the trustee] :but this proviso shall not be construed to prohibit and shall not prohibit any aforesaid amendment, termination or revocation, affecting trust estate hereunder other than accumulated and unexpended at time of receipt by the Trustee of * * * £such amendment, termination or revocation] * * * at any time or times whatsoever during the life of this Trust if otherwise made in pursuance*973 of the provisions of this "SECTION FIVE").
It is also expressly provided that upon any aforesaid termination and/or revocation * * * of this Trust, the then entire net trust estate - except as provided in the immediately foregoing paragraph - shall be conveyed and/or assigned by the Trustee to the aforesaid Trustor, M. D. Huffman, if living, or, if he then be dead, in that event to and in said M. D. Huffman's heirs at law, ascertained and determined as of the time of said termination and/or revocation of this Trust, and in the proportions to which they would be entitled by the laws of seccession then in force in the State of California.
Section six of the M. D. Huffman trust instrument provides:
Unless sooner terminated pursuant to provisions of Trust * * * SHALL FULLY CEASE AND TERMINATE upon the death of the last survivor of the aforesaid M. D. Huffman, Laura E. Huffman, Leona H. Hobson, Nina H. Terrill, and Milton W. Terrill.
WHEREUPON the then entire net trust estate shall pass and vest and thereupon be delivered to and in the heirs at law of said M. D. Huffman :the Trustor), ascertained and determined as of the time of said final termination of this Trust hereinbefore*974 in this section mentioned, and in the proportions to which they would be entitled by the laws of succession then in force in the State of California. £ Explanation in brackets added.]
With the exception of the trustor's name, sections five and six of the Laura E. Huffman trust instrument are essentially in form and substance identical with sections five and six of the M. D. Huffman trust instrument.
Section five of the Nina H. Terrill trust instrument substantially provides, in part, that there W. Terrill, the power to amend, revoke, or terminate the trust with the written consent of the trustor's sister, Leona H. Hobson, if living, or if she be dead, then solely by Milton W. Terrill, or (2) after the death of Milton W. Terrill, in Leona H. Hobson, with the approval of C. H. Hartke :counsel for the trust), if he be living, or if he be dead, then solely in Leona H. Hobson.
With the exception of the trustor's name, the remaining parts of section five and all of section six of the Nina H. Terrill trust are *884 essentially in form and substance identical with the remaining parts of section five and all of section six of the M. D. Huffman trust instrument.
The grantors*975 of all three trusts filed gift tax returns for the year 1932 relating to the corpus of their respective trusts of August 4, 1932. The respondent determined deficiencies in such returns, the petitioners filed their petitions with the Board, stipulations were filed, and orders of deficiency were entered in all three cases. In arriving at the net value of the gift, the value of the reserved life interest of $500 per month was deducted from the gross value of the property transferred in trust. The gift taxes were paid about November 19, 1936, in the following amounts:
| Name | Tax | Interest | Total |
| M. D. Huffman | $12,605 | $2,779.32 | $15,384.32 |
| Laura E. Huffman | 12,605 | 2,779.32 | 15,384.32 |
| Nina H. Terrill | 4,990 | 1,100.26 | 6,090.26 |
Drilling was commenced by the Superior Oil Co. and the first well was brought in in 1930. There*976 were four producing wells on the property on December 31, 1932. Well No. 2 was brought in in May 1931; well No. 3 was brought in in October 1931; and well No. 4 was brought in in June 1932. The four wells had produced approximately 4,500,000 barrels of oil by December 31, 1932. In June 1932 plans were adopted whereby the Superior Oil Co. would drill a total of eight wells on the property. About 140 acres of the leased property had been proven by the end of 1932. The price for oil between August 4 and December 31, 1932, was approximately $1 per barrel. The daily flow of oil was approximately 15,000 barrels, but it was cut to 10,000 or 11,000 barrels by reason of the state conservation program. The production from the lease during 1932 was about 1,500,000 barrels. The approximate income for the last six months of 1932 was $750,000. Based upon conditions existing and known on December 31, 1932, the gross income from the sale of oil from the lease would not drop below $34,000 per month for at least 25 years.
The amounts received from the Superior Oil Co. by the trustee with respect to each trust during 1932, being all of the royalty income *885 received for the Huffman-Superior*977 lease during the period between August 4 and December 31, 1932, were as follows:
| Trust P-9704 :M. D. Huffman) | $11,298.79 |
| Trust P-9705 :Mrs. M. D. Huffman) | 11,298.77 |
| Trust P-9706 :Nina H. Terrill) | 6,935.39 |
None of these receipts received by the Title Insurance & Trust Co. as trustee of these trusts were distributed to the beneficiaries during the year 1932. The trustee filed fiduciary returns as well as individual income tax returns :form 1120) for the year 1932 and paid the tax on the income here in question.
OPINION.
VAN FOSSAN: The parties agree that the disposition of the cases at bar turns on the question of whether or not the persons who are vested by the trust agreement with the power to amend, in whole or in part, to revoke, and to terminate the trust, have a substantial adverse interest. 1
Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested -
:1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or*978 the income therefrom, or
:2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
:a) Where any part of the income of a trust -
:1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
:2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
* * *
then such part of the income of the trust shall be included in computing the net income of the grantor.
:b) As used in this section, the term discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.
The provisions of the three trust agreements are essentially the same, varying only*979 in the designation of the person or persons who are given the right to amend, revoke, and terminate, and those persons bear a substantially similar family relationship to the grantors. Therefore, we shall confine our discussion to the material provisions of the M. D. Huffman trust and our conclusion will be equally pertinent to the Laura E. Huffman and the Nina H. Terrill trusts.
*886 The M. D. Huffman trust irrevocably transfers a certain interest in an oil and gas lease to a trust company as trustee. The trust grants rather broad powers to the trustee in the management, acquisition, and conversion of the corpus. It prohibits distribution of income during the period of a possible appeal from and final adjudication of a judgment rendered in favor of the grantor and others, defendants, in the Superior Court of Fresno County, California. An appeal was taken and the final adjudication was not made until May 7, 1934. Thus, no distributions provided by the trust were made to the grantors, as hereinafter mentioned.
The trust provided that after the termination of the appeal the trustee should pay certain costs, expenses of management, etc., and then distribute to the grantor*980 $500 per month and accumulate the excess as invaded if the current income of the trust were not sufficient to make the specified monthly payments to the grantor. After the grantor's death all net income shall be accumulated.
The right and power to amend, in whole or in part, and fully to terminate or revoke were reserved and vested in Milton W. Terrill with the written consent of either Leona H. Hobson or Nina H. Terrill or, if they be dead, upon his own direction. After the death of Terrill similar rights and powers were vested in Mrs. Hobson and Mrs. Terrill and the survivor of them with the written consent of C. H. Hartke, or, if he be dead, upon the direction of Mrs. Hobson and Mrs. Terrill or the survivor. The trust instrument provided, however, that no amendment, termination, or revocation relating only to the accumulation of net income should be made prior to the final adjudication of the appeal.
Unless sooner terminated by operation of the powers so granted, the trust was to cease upon the death of the last survivor of M. D. Huffman, Laura E. Huffman, Leona H. Hobson, Nina H. Terrill, and Milton W. Terrill; whereupon the entire net trust estate would vest in the grantor's*981 heirs at law.
The accumulation or distribution of the trust income is not subject to the discretion of the grantor or to anyone not having a substantial adverse interest in its disposition. Therefore, that factor is eliminated from consideration. The distribution of $500 per month to the grantor was held in abeyance pending the settlement of the appeal case. If and when that case were adjudicated :an event which occurred on May 7, 1934), that sum was properly and admittedly distributable and taxable to the grantor. :Sec. 167:a):1).)
The power of amendment, termination, and revocation includes the power to revest title to the corpus in the grantor. That power is lodged in Terrill. The question for determination, therefore, is, Did *887 he have a substantial adverse interest in the disposition of the trust corpus or income? On consideration of the trust instrument we have no doubt that he did.
In the first place, Terrill is one of the heirs at law of the grantor. The respondent argues that he has no interest in the grantor's trust estate because the trust will not terminate until the death of all five of the persons mentioned, including himself, and, therefore, *982 he can not be the recipient of the trust property. The respondent states that the only other method of terminating the trust is by revocation. If revoked during the trustor's life, the trustor would reacquire the corpus; if revoked after trustor's death the corpus would go to the heirs, who during 1932 were Terrill, his mother, and his aunt. The respondent asserts that the the trust property does not constitute a substantial adverse interest within the meaning of the statute.
The vital defect in the respondent's argument is that he has overlooked the power to amend, vested in Terrill by the trust instrument. Assuming, for the sake of argument, that the termination or revocation of the trust under the circumstances could not work to Terrill's interest, the power of amendment certainly could. Under it, he might, with the consent of his mother and his aunt, designate himself as sole beneficiary to the exclusion of all other heirs at law of the grantor. In other ways he might modify the trust to his own advantage. He would have only to secure the consent of his mother and his aunt, if either were living, to obtain for himself the control, management, and disposition of the*983 trust corpus, together with the entire ownership of both the corpus and the accumulated income after the grantor's death. Such a power is not a - it is a present right, fraught with great actual and potential value. See , and . Cf. .
Nor can it be said that the interests of Mrs. Terrill and Mrs. Hobson are identical with those of the grantor, thereby giving to the grantor effective control over the right to amend and revoke. On the contrary, the rights of the two daughters of the grantor more nearly coincide with those of Terrill. By an agreement of all three, the trust could be amended to their mutual advantage and to the disadvantage or even of the exclusion of the grantor. It is no answer to say that in this particular case the daughters and grandson of the grantor, doubtless, would not make such an amendment. The trust instrument grants them the power to do so. It is the power to revest title and to control, with which the statute deals. *984 . Under neither section 166 nor 167 is the disputed trust income taxable to the grantor.
*888 We are constrained to observe that no attempt to escape taxation was evidenced in these proceedings. The respondent already has assessed and collected a gift tax on the very property which he now asserts to be within the control of the grantor and the income from which he seeks to tax to the grantor. Taxes on the income from that property have been assessed to and paid by the trustee. Taxes on the distributable portion of the income have been assessed to and paid by the petitioners as beneficiaries thereof.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 166. REVOCABLE TRUSTS. £ Revenue Act of 1932.] ↩