*605 1. Where a taxpayer creates trusts under which he appoints himself as a cotrustee and gives to himself the sole power to invest and reinvest surplus income of the trust and to vote stock conveyed to the trust; and where the trust is irrevocable for a period of five years after which time it may be terminated by the grantor and the corpus of the trust returned; and where the trust is terminated in a year other than the taxable year and the corpus returned to him is only the original corpus and not investments acquired from accumulated income, held, that income of the trust is not taxable to grantor under section 167(a)(1) or (2), Revenue Act of 1932, or under respondent's theory that grantor had not divested himself of control over securities he transferred to the trust. Section 166 is not applicable since grantor had no power in taxable year in any way to revest in himself any part of the corpus.
2. Where income of trusts is payable to wife of grantor of trusts and trusts do not require that she expend the income in any way but, at suggestion of grantor, she applies part of the income from the trust to fully pay premiums on life insurance policies on grantor's life, held*606 such income is taxable to the petitioner (grantor) under the express terms of section 167(a)(3), Revenue Act of 1932.
3. Where wife voluntarily expends income she receives from trusts for household, for children, two adult and one minor, no requirement for such expenditures appearing in the trusts and no agreement with grantor to make the expenditures in evidence, held petitioner (grantor) is not taxable for such expenditures. Douglas v. Willcuts,296 U.S. 1">296 U.S. 1, distinguished.
*1223 This proceeding involves a deficiency of $70,090.66 in income taxes for the year 1933. The issue is whether petitioner is subject to tax on the income of five trusts created by him in 1932.
FINDINGS OF FACT.
Petitioner resides in Baltimore, Maryland, and has a wife and four children, of whom in 1933, three were adults and one a minor. Petitioner is a manufacturing chemist and owns 95 percent of the stock and is president and general manager of the corporation, Hynson, Westcott & Dunning, Inc.
On May 31, 1932, petitioner executed five deeds*607 of trust to Maryland Trust Co. and Henry A. B. Dunning, trustees. Except for variation as to beneficiaries, the trusts are in material respects identical. The beneficiaries are the wife and four children of the petitioner. The trusts are irrevocable in all respects until January 10, 1937, and shall terminate on that date if the grantor gives written notice to his cotrustee on or before December 31, 1936, that he desires no extension. But if no such notice is given, the trusts are to be automatically extended for five years and for successive periods of five years. Upon the termination of any trust the corpus of the trust but not the accumulated income shall revert to the grantor absolutely. In the event of termination of any trust, the trust as to the accumulated income shall continue upon the terms set forth in the trusts, i.e., one-half the income is to be paid to the grantor's wife and one-half to the grantor's children, with provision for distribution to the survivors of the wife or any child. The trust is to continue for twenty-one years after the death of the last survivor of the wife and four children and ultimately the trust property is to be divided by the trustees*608 among the then living issue of the children of Henry A. B. Dunning.
Each deed of trust conveys to the trust 7,250 shares of the capital stock of Hynson, Westcott & Dunning, Inc. Two thousand of the *1224 shares conveyed to each trust were conveyed subject to a pledge to the Maryland Trust Co. to secure indebtedness of the petitioner in the amount of $80,000, which indebtedness was later paid by the trusts, the trusts becoming the creditor of the petitioner, to which petitioner paid interest on the obligations. The petitioner, in 1932, owned 37,435 shares of the capital stock of Hynson, Westcott & Dunning. He conveyed to the trusts 36,250 of these shares and they were transferred into the names of the trustees, "Maryland Trust Company and Henry A. B. Dunning, Trustees under Deed of Trust No. , of May 31, 1932."
Each of the five trust deeds provided that the trustees shall pay first to Ethel Adams Dunning, wife of Henry A. B. Dunning, $10,000 per year out of the first income available in each calendar year beginning January 1, 1932. If the net income in any year is less than $10,000 she shall receive the whole net income for such year but the $10,000 allowances shall*609 not be cumulative from year to year. The remainder of the income of each trust could be disposed of by paying a further portion to Ethel Adams Dunning, or to other named beneficiaries, petitioner's children, and any remaining income shall be added to the corpus of the trust and reinvested in securities to be selected by Henry A. B. Dunning, in his sole discretion and judgment. The payment of additional portions of the income of the trust and the investment of income, the nature and character of investments, was, by the terms of the trust, left to the sole judgment and discretion of Henry A. B. Dunning, one of the trustees who could exercise this right without joinder of the other trustee who does not participate in the exercise of the discretion.
The voting power of the stock in Hynson, Westcott & Dunning, Inc., conveyed to the trust, is, by the terms of the trusts, vested solely in Henry A. B. Dunning, one of the trustees, for and during his natural life. The Trustees have full discretionary power and right at any time to sell any and all securities or other assets constituting the trust estate. During the life of Henry A. B. Dunning, this discretionary power shall be exercised*610 solely according to the judgment and discretion of Henry A. B. Dunning, trustee, his cotrustee not participating therein.
On January 10, 1937, the trusts were revoked as to the corpus of each trust and the stock in Hynson, Westcott & Dunning, Inc., was returned to petitioner. None of the securities purchased by the trusts out of income or accumulated income during the period of their existence was returned to petitioner. Petitioner did not receive any of the income of he trusts during the period of their existence. The trusts continued in existence after January 10, 1937, holding securities purchased out of accumulated income for the benefit of petitioner's wife and children.
*1225 The notice of December 29, 1936, sent by petitioner to the trustees contains the following paragraph:
I will ask you therefore, in accordance with the terms of said deeds, to reassign to me all of the stock of Hynson, Westcott & Dunning, Incorporated, which constitutes the corpus of each of the five trust estates. Investments which you have made out of income and any current uninvested income will, of course, remain in trust, in accordance with the terms of the five deeds respectively.
*611 A consolidated schedule of the receipts and disbursements of the five trusts for the taxable year 1933 is as follows:
| Receipts: | |
| Balance on hand December 31, 1932 | $12,608.75 |
| Dividends | 160,406.25 |
| Interest | 3,024.91 |
| Redemptions and sales | 110,550.00 |
| Total receipts | 286,589.91 |
| Disbursements: | |
| Paid Ethel Adams Dunning | 50,000.00 |
| Amounts transferred to loan department, Maryland Trust Co | 1 44,250.00 |
| Securities purchased | 188,150.59 |
| Taxes and administration expenses | 3,732.90 |
| Discount on sales of Baltimore city tax anticipation certificates | 687.22 |
| Total disbursements | 286,820.71 |
| Net overpayment as of Dec. 31, 1933 | 230.80 |
| 286,589.91 |
During 1933 petitioner had outstanding life insurance policies of the face value of $656,079.20, all of which policies had been issued prior to creation of the five trusts. These policies had been assigned to Ethel Adams Dunning, absolutely, with no reserved power to change the beneficiaries. Mrs. Dunning is the beneficiary of all the insurance policies. On June 1, 1932, she executed a deed of trust, making the Safe Deposit & Trust Co. of Baltimore, *612 trustee, transferring to the trustee all of the insurance policies in trust for the benefit of herself and children. This trust deed authorizes the trustee to collect the proceeds of the policies when they become payable and invest the proceeds in securities to be held in the trust estate and distribute income of this trust, one-half to Mrs. Dunning and the remaining half to her children. This trust is for a term not exceeding twenty-one years after the death of the last survivor of Mrs. Dunning and her children and on expiration of the trust, the principal is to be divided among the then living issue of Henry A. B. Dunning. This deed of trust is revocable during the life of Henry A. B. Dunning, but irrevocable after his death.
*1226 During 1933 Mrs. Dunning received $50,000 from the five trusts and deposited this income in her own bank account. At petitioner's suggestion, she paid all the premiums due in 1933 on the life insurance policies totaling $32,027.28. She did not enter into any formal agreement with her husband to pay the premiums. She also paid the premiums in 1934 and 1935 and the premium due January 1937. She could not have paid the premiums out of any*613 of her separate income, excepting the income from the five trusts, as her other income was not sufficient. Mrs. Dunning also paid out of the $50,000 in 1933 $9,837.50 for household expenses; $1,780.25 to adult children; $353.04 to her minor child; $1,048 to charities; $837.68, taxes; and the balance for her own uses.
In his notice of deficiency the respondent added to the petitioner's income $158,610.41 under the caption "Trust income," with the explanation:
Since you are practically the sole owner of the stock of Hynson, Westcott & Dunning, Inc., Baltimore, Maryland, of which the corpus of the H. A. B. Dunning Trusts numbers 1 to 5, are principally composed, and you have the sole right to sell any or all of the corpus of the trusts without the consent of the co-trustee, it appears that the trust income is taxable to you since you control this income.
Respondent also added to petitioner's income $66.21, disallowance of part of the deduction claimed for taxes, and $6,500, disallowance of a claimed loss on bonds. These two items are not disputed by petitioner, who concedes that these additions to taxable income are proper.
OPINION.
HARRON: Respondent contends that all*614 of the income of the five trusts created by petitioner in 1932 is taxable to the petitioner. Respondent has added to petitioner's taxable income for 1933 the amount of $158,610.41 explained as "trust income." This amount is less than the total amount of the income of the five trusts during 1933 but appears to be approximately the total amount of dividends received by the trust and, since the chief stock held was the stock in Hynson, Westcott & Dunning, it appears that respondent's chief contention is that the petitioner is taxable on the income of the trust consisting principally of dividends on the Hynson, Westcott & Dunning stock upon which petitioner would have been taxable but for the transfer of that stock to the trusts.
Respondent argues that although the trusts created by petitioner were irrevocable for approximately 4 1/2 years and the stock constituting the corpus of the trust was actually transferred of record to the trust, nevertheless, the petitioner's powers and rights were so substantial that the petitioner did not "divest himself of title to the stock *1227 in any permanent or definitive way" and "did not strip himself of every interest in the subject matter*615 of the trust estate." In making this argument respondent relies upon , and . In considering this part of respondent's argument, we first note that there are substantial differences in the facts in the Wollman and Rands cases and in the facts in this proceeding. In the Wollman case the petitioner retained title to securities, received income, and retained such interest and powers over the securities that the Board concluded that the securities could properly be regarded as his property and the income taxable to him. In the Rands case the beneficiary was not entitled to distribution of any of the gains of the trust above dividends on stock held and it was held that the trusts were without substance. The petitioner here created valid trusts and conveyed Hynson, Westcott & Dunning stock to the trusts of record. We conclude from the facts that he conveyed the stock in question completely to the trusts. The petitioner, it is true, appointed himself as one of the trustees of the trust and the trust instrument gave to petitioner, as trustee alone, powers of management of*616 the assets of the trust including the power to sell, to invest and reinvest property of the trusts, and to vote the H.W. and D. stock. However, the trust instruments clearly provide that $10,000 a year out of the trust income be paid to the grantor's wife and that any income remaining after making such payments shall be held in the trust and reinvested or distributed to named beneficiaries. During the taxable year the petitioner could not in any way receive any of the income of the trust himself and the trusts were carried out so that it is clear that the income of the trusts was used to pay the stipulated amounts to Mrs. Dunning and the surplus income was reinvested in securities which were held in the trust and are still held in the trust. Therefore, we do not agree with the contention of respondent that petitioner should be taxed on the income of the trusts on respondent's first argument. Since it is concluded that petitioner transferred completely the H.W. and D. stock to the trusts, we do not believe that powers of management of the securities in the trust, or the discretionary power with respect to the sale of trust property, reinvestment of proceeds, or the right to vote*617 the H.W. and D. stock held by the trustees constituted any such reservation of power in the petitioner, as an individual, over the economic benefits or enjoyment of the property such that we should disregard the completed transfer of the stock to the trust and tax the petitioner on dividends and income received by the trust. We do not believe that petitioner could be taxed upon the income of a trust only because he made himself a trustee, or one of the trustees, and the powers to supervise the investment of trust property, to sell and reinvest trust *1228 property, to vote stock held by the trust, and to generally manage the trust property are all part of the normal powers of a trustee. Petitioner perhaps had more confidence in his own judgment in these matters than he had in the judgment of the cotrustee, a trust company, and his assignment of these powers to himself as trustee to the exclusion of the other trustee does not appear to be a reasonable ground for sustaining the first contention of the respondent. See ; *618 .
It is clear that section 166 of the Revenue Act of 1932 is not applicable in determining the issues, for the grantor could not at any time during the taxable year revest in himself title to any part of the corpus or income of the trust, either alone or in conjunction with any other person.
The question remains whether the trusts created come within the provisions of section 167(a)(1) of the Revenue Act of 1932. 1The trusts provide that income of the trusts above the amount distributed to beneficiaries each year shall be held in the trust and reinvested. It is respondent's contention that income of the trusts could be accumulated or held for future distribution to the grantor. Consideration of this aspect of the question requires construction of the trust instruments. They provide that the trusts are irrevocable until January 10, 1937, and shall terminate on that date if the grantor elects to give notice that he desires no extension of the trusts. Upon termination of the trust the corpus of the trust but not the accumulated income shall revert to the grantor. It is our construction of the trust deeds*619 that the term "corpus" of the trust refers to the H.W. and D. stock only and not to any securities acquired by investment of the surplus income of the trusts. This construction is supported by the fact that when the trusts were terminated only the H.W. and D. stock was returned to the petitioner and that the trusts are still in existence and still possess the investments made out of surplus income. Had any of the trust property purchased with accumulated income or any of it been distributed to petitioner on *1229 termination of the trust, the trust obviously would come within section 167(a)(1).
*620 This is a proceeding where an unusual state of facts exists. The issue requires construing provisions of trusts in existence in the taxable year but which were terminated as to the original trust corpus prior to the hearing before this Board on the issues. The steps taken on the partial termination of the trust should not be disregarded. The right to terminate the trusts as to the original corpus has been exercised. That is, the grantor of the trust has reacquired the H.W. and D. stock, but this was not done in the taxable year so as to make section 166 controlling and section 167 refers to income and not principal. Under the provisions of the trust instruments the trusts as to accumulated income and the investments of such continue for a period of twenty-one years after the death of the last survivor of the wife and four children of the grantor and the property so remaining in the trust does not revert in any respect to the grantor. Under this present continuance of the trust the current income is to be paid one-half to petitioner's wife and one-half in equal parts to the four children. It is our understanding of the trust deeds that petitioner can not, under the trusts, *621 reacquire any of the property now held by the trusts. The right to reacquire the corpus of the trusts has been exercised and the grantor has reacquired the original corpus. He may not acquire what is now the corpus derived from the investment of the accumulated income.
The above construction of the trusts was as evident in 1933 as it is now, although prior to January 10, 1937, there existed some ambiguity in the use of the term "corpus" of the trusts in that it possibly could have meant both the H.W. and D. stock and other securities acquired by investment of surplus income. But this ambiguity has been cleared by the action taken. Further, there is no provision in the trusts stating specifically or indicating that the trustees might accumulate income for distribution to the grantor or distribute income to the grantor. The contention of the respondent rests entirely upon his construction of the terms of the trusts that give to the grantor, as a trustee, the power to invest and reinvest surplus income in his sole discretion taken together with the provision that on termination of the trusts the corpus of the trusts would revert to the grantor. But we do not believe respondent's*622 contention is sound in the light of the facts referred to above and in relation to the lengthy provisions in the trust directing the trustee to distribute income from investments of the accumulated income and to make ultimate distributions of the principal created by reinvesting accumulated income to the beneficiaries only and to the exclusion of the grantor. Cf. .
*1230 We now pass to the question whether petitioner is taxable for part of the income of the trust in 1933, specifically, the amount of $32,027.28 paid on insurance premiums, the amount of $9,837.50 paid on account of household expenses, the amount of $1,780.25 expended for the benefit of adult children, and $353.04 expended for the benefit of a minor child. All of these expenditures were made by Mrs. Dunning out of the $50,000 income from the trusts received by her and deposited in her own account.
The five trusts all contain the simple provision that out of the first income of each trust $10,000 shall be paid to Ethel Adams Dunning. The trusts do not contain any provision requiring that this income be used by Mrs. Dunning for any purpose or use. The income*623 was the separate income of Mrs. Dunning. However, petitioner has testified that he suggested to Mrs. Dunning that she use part of the total income to pay premiums on the life insurance policies which had been assigned to her. Mrs. Dunning carried out this suggestion.
Regarding this suggested use of income, strictly, we recognize that there was no legal obligation on Mrs. Dunning to so use part of the income and there is no evidence that before the trusts were created Mrs. Dunning agreed with her husband to make such use of part of the income. Nevertheless, petitioner made the suggestion and there is this evidence of an element of control exercised, it is true, outside of any requirement in the trust agreement. Further, section 167(a)(3) of the Revenue Act of 1932, quoted above (see also section 219(h), Revenue Act of 1926), specifically taxes the grantor of a trust, where "any part of the income of a trust is * * * applied to the payment of premiums upon policies of insurance on the life of the grantor", upon such part of the income of a trust so used. The intent of Congress in enacting this provision is well understood to have been to prevent avoidance of taxation. The statute*624 makes no restriction that to tax income the income is applied to payment of premiums upon policies of insurance pursuant to the requirements of the trust deed. The language of the statute is plain and we understand it to be broad in its application. We conclude that petitioner is taxable on the amount paid in the taxable year on life insurance premiums, under the provisions of section 167(a)(3).
Petitioner has argued forcefully that the facts take this proceeding outside the rule set forth in , because the trust instruments did not require that any of the income of the trusts be applied to pay life insurance premiums. Petitioner ably argues that to tax him on this part of the income amounts to measuring the income tax of one taxpayer by the income of another *1231 and he contends that if such construction of section 167(a)(3) is required under the statute, then the provision of the statute so construed is unconstitutional, citing . However, after giving careful consideration to petitioner's thorough argument, we conclude that the conclusion reached*625 above is in accordance with the express language of the statute. The opinion in , leaves undetermined the validity of such construction, as is indicated by the following excerpt from that opinion, at pages 681 and 682:
Trusts for the preservation of policies of insurance involve a continuing exercise by the settlor of a power to direct the application of the income along predetermined channels. In this they are to be distinguished from trusts where the income of a fund, though payable to wife or kin, may be expended by the beneficiaries without restraint, may be given away or squandered, the founder of the trust doing nothing to impose his will upon the use. There is no occasion at this time to mark the applicable principle for those and other cases. The relation between the parties, the tendency of the transfer to give relief from obligations that are recognized as binding by normal men and women, will be facts to be considered. Cf. , distinguishing *626 . We do not go into their bearing now. * * *
We believe the conclusion reached upon the facts here is correct. Mrs. Dunning had never paid premiums on the policies before the trusts were created. She did so subsequently at the suggestion of the grantor of the trusts. Also, outside of the terms of the trust, the grantor did exercise an element of control over part of the income paid to Mrs. Dunning and the use of the income so as to prevent a forfeiture of the insurance contracts by failure to pay premiums was a benefit to the petitioner. The argument that the trust income of $50,000 was Mrs. Dunning's own property and that she was not legally bound by her husband's suggestion is an argument based upon refinements of legal title which the courts have been willing to look through in recognition of the reality of the solidarity of the family unit. Cf. .
With respect to the amounts used by Mrs. Dunning for household expenditures and for three children, two adult and one minor, the contention of respondent that petitioner is taxable for all of these amounts is based upon*627 the authority of the decision in . Respondent also relies upon ; , and the decision of , is also authority. In all of the above cases the facts show that the existing trust deeds contained provisions requiring that income of a trust be used for care and maintenance of individuals and that there was *1232 an obligation in the grantor of the trust to provide for such persons. In these cases, the income of the trust having been used to discharge an obligation benefiting the grantor of the trust, it was held that there was income to the grantor and the grantor was taxable. In this proceeding the trust instrument does not contain any provision requiring that any of the income of the trust be used to pay for household expenditures, or to be used for the benefit of any children. Petitioner contends that the income was the income of Mrs. Dunning and that the grantor of the trust should not be taxed on these amounts as he did not retain, through the trust*628 instruments, such control over the use of the income that he should be taxed upon voluntary expenditures made by Mrs. Dunning. Here the argument of petitioner is that to so tax petitioner results in taxing him upon the income of another person.
There are lacking in this case the elements present in the above cited cases that made the income taxable to the creator of the trust. There is no agreement, no trust provision, no court decree requiring the expenditure of the trust income for the purposes for which it was used or for any purpose that would relieve the petitioner of any of his obligations. The facts in this proceeding show that there was no agreement or requirement that Mrs. Dunning expend part of the income she received from the trust for the expenditures in question. Clearly, there was no such requirement in the trust instruments and the evidence does not show any separate agreement between herself and her husband that she would make such expenditures. Rather Mrs. Dunning has testified that she made these expenditures voluntarily and there is no evidence to support the conclusion that Dunning did not make the major contributions to the maintenance of the home and his*629 minor child. Under such facts we believe it is proper to regard the expenditure of Mrs. Dunning for her three children as gifts to them and the expenditures she made for her home as use of her own income for an object which would naturally be of primary interest to her and, if it is necessary to label her expenditures for her home, it is reasonable to call them gifts to her household. We do not understand the rule of Douglas v. Willcuts to be that under such facts income was received by the petitioner as the result of these voluntary expenditures by Mrs. Dunning. It is, therefore, concluded that petitioner is not taxable for these amounts.
Decision will be entered under Rule 50.
Footnotes
1. Partial payment in purchase of $80,000 obligation of petitioner. ↩
1. 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(n), relating to the so-called "charitable contribution" deduction) * * *. ↩