*961 Where under trust created by petitioner, she, as trustee, could in her absolute discretion determine upon the amount of trust income to be accumulated, convert it into corpus and invade the trust corpus for her own to her under section 167 of the Revenue Act of 1934.
*904 This proceeding was brought for a redetermination of a deficiency in petitioner's income tax in the sum of $2,603.68 for the calendar year 1934. By his answer to the amended petition respondent admits *905 the payment of interest by the trust hereinafter mentioned in the sum of $5,207.12, for which no deduction has been allowed, and adjustments by reason thereof will be reflected in the decision entered herein.
The primary question presented is whether petitioner is taxable on the entire net income of a trust created by her.
FINDINGS OF FACT.
The facts are found as stipulated. A summary thereof will suffice for present purposes.
Petitioner, an individual who resides at Arkansas City, Kansas, on May 16, 1932, executed*962 a trust agreement naming herself and Robert R. Cox as trustees, who during the taxable year were the qualified and acting trustees. By the trust agreement it was provided that the net income from the trust estate should be paid in stated portions to the petitioner's son, daughter, sisters, and sister-in-law after the payment of one-half thereof to the petitioner herself. The portion to be paid to petitioner was changed by an amendment of January 8, 1933, to one-tenth. Article second :c) provides:
:c) During the lifetime of the Donor, the Trustees may, in their sole discretion, pay to any beneficiary only part of his or her income, the balance to be held and accumulated by the Trustees for future distribution to such beneficiary; the amount to be paid, and the time when such accumulated income is to be distributed to the beneficiary to be determined solely by the Trustees. * * *
Upon the death of any of the beneficiaries, other than petitioner, prior to the termination of the trust, the income to which such beneficiary would be entitled, if living, was to be added to and become a part of the corpus of the trust.
It was further provided :article second :d)):
In case the*963 net income from the trust estate allotted for the benefit of any beneficiary hereunder is at any time or times insufficient, in the opinion of the trustees, for the comfort, maintenance and/or education of such beneficiary the trustees may pay out from time to time such sums from the principal as in their sole discretion may be necessary for such purpose or purposes.
The trust instrument also provided that it should terminate upon the death of petitioner, at which time the entire corpus and accumulated income was to be divided into five parts and paid over to the remaining beneficiaries or their lawful issue.
It was also provided by paragraph sixth, as amended June 11, 1932:
SIXTH: This agreement, and the Trust hereby created, may be altered, amended, and/or revoked, in whole or in part, at any time, and from time to time, by the Donor, in conjunction with any other beneficiary hereinabove named then sui juris and having a substantial adverse interest in the disposition of the corpus of this Trust Agreement, or the income therefrom, which *906 alteration, amendment or revocation shall be evidenced by a written instrument signed by the Donor and such other above-described*964 beneficiary, and in the event of a complete revocation thereof in the manner hereinabove set forth the entire corpus, and all accumulated income, and all other property or money of the Trust Estate then in the hands, or under the control, of the Trustees shall be transferred and delivered to the Donor, and no beneficiary other than the Donor shall have the right, title or interest therein or thereunder, or to any part thereof.
Power was given to the trustees to invest and reinvest the trust estate in designated forms of investment, and it was further provided :article fourth :c)):
* * * that during the lifetime of the Donor, the Trustees may invest and reinvest the Trust Estate, or any part thereof, in the unsecured notes of any individual approved by the Trustee E. K. Childers, or in the unsecured notes or bonds of any corporation, firm or syndicate in which the Trustee E. K. Childers is at the time a stockholder, partner or member, if approved by the Donor, and the Trustees shall not be liable for any loss resulting to the Trust Estate from, or on account of, any such investments so approved by the Donor.
The trustees were given broad powers of management and control. The*965 agreement further provided (article fourth (e)):
The Trustees may determine the mode in which expenses are to be borne as between capital and income, and may determine which moneys or property are to be treated as capital or income, which right shall include the power to determine whether any part of the actual income of any investment purchased at a premium or discount shall be treated as capital or income. Each such determination, whether made upon a question actually raised, or implied in the acts or accounts of the Trustees, shall be conclusive and binding upon all persons.
Power was given petitioner as trustee to make of the trust estate in her sole discretion. given custody Estate for in the trust instrument. :Article fifth :a).)
It was also provided (article first):
* * * During the lifetime of the Donor the Trustees shall render to her, and after her death to each beneficiary receiving income hereunder, semi-annual statements of account showing the condition of the Trust Estate.
And in article fifth :b):
In all matters wherein any discretion is granted the Trustees under this Agreement, the decision of the Trustee E. K. Childers shall be conclusive and binding*966 upon both Trustees, and on all beneficiaries hereunder.
Pursuant to the terms of the trust agreement there were transferred to the trustees securities having a substantial value. During the taxable year 1934 the taxable net income was received by the trustees in the amount of $15,025, which amount was credited to and kept segregated in the various income funds *907 fund constituted a separate trust." Distributions were made from such income funds to the respective beneficiaries as follows:
| E. K. Childers | None |
| Robert L. Childers | $1,800.00 |
| Dorothy Childers | 1,800.00 |
| Matie B. Kehrer | 2,196.97 |
| Bertha K. Hulser | 2,662.16 |
| Edith K. Mahaffey | None |
The trustees have at no time since the creation of the trust used, withdrawn, or distributed any part of the corpus for any purpose whatsoever.
The amounts accumulated for the benefit of the beneficiaries for the years designated are as follows:
| Accumulated in separate income funds | ||||
| 1932 | 1933 | 1934 | Total accumulated | |
| E. K. Childers | $150.44 | $1,686.50 | $1,836.94 | |
| Robert L. Childers | $5,670.40 | 6,361.20 | 991.43 | 13,023.03 |
| Dorothy Childers | 5,670.40 | 6,361.20 | 991.43 | 13,023.03 |
| Matie B. Kehrer | 1,887.53 | 3,628.73 | None | 5,516.26 |
| Bertha K. Hulser | 5,870.40 | 3,778.18 | None | 9,648.58 |
| Edith K. Mahaffey | 4,920.40 | 1,678.54 | 2,227.08 | 8,826.02 |
*967 All income from has been deposited by the trustees in a bank account entitled Childers and Robert Cox, Trustees E. K. Childers Trust" and all distributions to beneficiaries have been made by checks on that account payable to the beneficiaries.
No part of any minor beneficiary's share of the trust income has been used for his support, maintenance, or education.
The trustees filed income tax returns on forms 1041 and 1040 for the taxable year 1934 and included on form 1041 all of the net income "of the trust." Income currently distributed was deducted and the undistributed portion was shown on the returns on form 1040 and the tax thereon was paid. Each of the beneficiaries filed income tax returns and included therein the income distributed to them by the trust, and paid tax thereon; and the grantor, E. K. Childers, reported and paid income tax on her one-tenth of the net income of the trust estate during the taxable year 1934.
Respondent has determined that the entire net income of the trust is taxable to petitioner.
OPINION.
OPPER: In support of his determination that the entire income from the trust is taxable to petitioner, respondent urges that the trust is in fact*968 no trust at all, due to the power and control reserved by *908 petitioner over the trust corpus and income; and, in the alternative, that the petitioner is taxable on the entire income from the trust under the provisions of section 166 or 167 of the Revenue Act of 1934. 1
*969 In support of his first contention respondent relies upon ; ; (on appeal, C.C.A., 6th Cir.); and . Although there might be merit in the application of this principle to the case at bar, we prefer to base our decision on respondent's alternative contention. The present case, in our opinion, is clearly within section 167.
Petitioner's interest either as grantor or as trustee was certainly not adverse within the meaning of that section, . Whether all or any part of the income should be accumulated, whether it was to be treated as corpus, whether the corpus should be invaded and, if so, to what extent, and whether such accumulation or invasion should be for her benefit rested entirely within her discretion. The trust instrument on this point is too clear for argument. The power to determine what was principal, to invade the corpus, and to accumulate is specifically stated to be discretionary in the trustees*970 and at another point the instrument expressly vests in the petitioner as trustee the right to exercise any discretion which by the instrument would otherwise rest in the trustees. And her determinations are declared to be binding *909 and conclusive on all concerned. True, the use of the corpus 2 is to be for her than of a residence for a beneficiary is within its scope. ; . On the present record there is no such "irreducible minimum" of the other beneficiaries' interests as is referred to in (C.C.A., 1st Cir.). .
*971 It is argued that the discretion to be exercised is that of petitioner as trustee. Whether such refinements of individuality were within the intention of Congress in enacting sections 166 and 167, it is not now necessary to decide. Cf. See Suffice it to say that even though the discretion be that of the grantor as trustee, we have found it none the less to be within the province of section 167. ; ; affirmed on this issue, (C.C.A., 1st Cir.), relied upon by the petitioner, was decided under a prior act. Under the 1934 Act, with which we are here concerned, it is not necessary that the grantor, as such, be involved in any way in the exercise of the discretion or power described. So long as these are vested in a person not adversely interested, the condition of the statute in its present form is fulfilled. Petitioner even as trustee did not have that adverse interest. *972
It is said further that the trust instrument does not confer the power upon this petitioner effectively to accumulate income and distribute principal for her own benefit. But the argument as analyzed is essentially circular in nature. It proceeds as follows: The power is not given petitioner because under the trust she must perform her duties as trustee. As trustee she owes a duty to the beneficiaries. This duty is to consult their interests as granted by the trust instrument when she exercises her discretion as trustee. The interests granted by the trust instrument to the beneficiaries include the right not to have the trust dissipated by distribution to the grantor. It will be seen that we have thus arrived at the point from which we started. The circle is completely broken when we say that the rights of the beneficiaries and the corresponding limitation on the petitioner *910 were only those contained in the trust instrument. 3 In practical and legal effect these were only that petitioner conform to the terms of the instrument. As we have seen, she could while conforming to those terms effectively exclude the other*973 beneficiaries from participation whenever she should so determine.
We have repeatedly recognized that the purpose of the enactment of sections 166 and 167 was to prevent tax avoidance by the creation of revocable trusts and to include, as revocable, trusts which might by the exercise of even a disinterested discretion be held, accumulated, or terminated for the real benefit of the grantor. It would be idle to contend that the instrument before us does not present such a situation.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 166. REVOCABLE TRUSTS.
Where at any time 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 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 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
(3) 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, 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 section 23(o), relating to the so-called "charitable contribution" deduction);
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 "in the discretion of the grantor" means "in the 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." ↩
2. It is assumed for the purposes of this decision that the "E. K. Childers Trust" was one trust with a single corpus, even though there were several beneficiaries. This assumption is made because throughout the stipulation of facts it is so treated and because petitioner does not contend otherwise. In fact petitioner states in her brief: the trust is to be kept as an entirety until final distribution, and to that total fund are to be added before distribution all undistributed accumulations." ↩
3. "In approaching the decision of the question before us, it is to be borne in mind that the trustee is not a trustee of the power of revocation and owes no duty to the beneficiary to resist alteration or revocation of the trust. Of course he owes a duty to the beneficiary to protect the trust res, faithfully to administer it, and to distribute the income; but the very fact that he participates in the right of alteration or revocation negatives any fiduciary duty to the beneficiary to refrain from exercising the power. . ↩