*1228 1. Where a revocable trust so remained for a portion of the taxable year 1927 and the record does not show that the dividends or any portion thereof arising from the trust and received by the trustee in that year were received after the trust ceased to be revocable within the meaning of section 219(g) of the Revenue Act of 1926, the dividends should be included in computing the net income of the grantor for the taxable year 1927, as determined by the Commissioner.
2. A trust is not revocable within the meaning of section 219(g) of the Revenue Act of 1926 or of section 166 of the Revenue Act of 1928 where the grantor has not the power, acting alone or in conjunction with another who is not a beneficiary thereof, to alter, amend, or cancel it; and dividends arising from such irrevocable trust should not be included in computing the net income of the grantor.
*1068 The respondent determined deficiencies in petitioner's income tax in the amount of $28,670.59 for the year 1927 and $42,558.11 for 1928. The errors assigned are that the respondent*1229 added to the *1069 income of the petitioner for the year 1927 dividends aggregating $149,440, and for the year 1928 dividends aggregating $224,082.54, which dividends were received by the trustees of six trusts created by the petitioner. The facts are stipulated and so far as material herein are stated either literally or in substance in our findings of fact.
FINDINGS OF FACT.
The petitioner, Olive H. Prouty, in the trust instruments, hereinafter mentioned also called Olive Higgins Prouty, is a resident of Brookline, Massachusetts.
On October 13, 1923, she created three trusts under written declarations of trust executed by her, which for convenience will be designated as "the first set of trusts," being Nos. 1, 2, and 3. In trust No. 1 she declared she held 1,476 shares of the common stock of the Norton Co. and would hold all other property which might come into her hands as trustee under the trust for the benefit of Lewis I. Prouty and "others." Jane Prouty, also hereinafter referred to as Jane C. Prouty, and Richard Prouty are included in "others." In trust No. 2, 1,475 shares of said stock were held in trust by Olive H. Prouty for the benefit of Jane Prouty and*1230 "others." Lewis I. Prouty and Richard Prouty are included in "others." In trust No. 3, 1,475 shares of said stock were held in trust by Olive H. Prouty for the benefit of Richard Prouty and "others." Lewis I. Prouty and Jane Prouty are included in "others." The trust instruments are lengthy and contain many provisions and conditions not deemed necessary nor material to the issues herein and therefore are not set out.
On June 11, 1927, the petitioner created three more trusts under written declarations of trust executed by her and Lewis I. Prouty, these trusts being designated as "the second set of trusts," and herein referred to as No. 4, No. 5, and No. 6, in each of which Lewis I. Prouty was made trustee. The property transferred to him by Olive H. Prouty was, in each of the trusts, 1,500 shares of the common stock of the Norton Co. of Worcester, Massachusetts.
The Lewis I. Prouty referred to in the declarations of trust is the husband of the petitioner, and the Jane and Richard Prouty therein named are the children of petitioner and Lewis I. Prouty. During the calendar years 1927 and 1928 all of these persons were living and the original trustee of each of the trusts was*1231 living and acting as trustee.
It is not alleged in the petition nor ascertainable from the record that the dividends or any portion of them received in 1927 by the trustee of the first set of trusts was received after the hereinafter described trust amendment of March 24, 1927.
*1070 On what specific dates the trustees of the aforesaid six trusts received the dividends or income in question or any portion thereof, the record does not disclose.
The income received by the trustees during each of the years in issue, was, as shown by the stipulation of counsel of the respective parties, as follows:
| Year 1927 | |||
| Dividends | Other Income - Deduction | 2% paid at source | |
| Olive H. Prouty, Trustee, Tr. No. 1 | $35,574.00 | ($742.20) | $12.50 |
| Olive H. Prouty, Trustee, Tr. No. 2 | 35,558.00 | (734.83) | 12.50 |
| Olive H. Prouty, Trustee, Tr. No. 3 | 35,558.00 | (735.37) | 12.50 |
| Lewis I. Prouty, Trustee, Tr. No. 4 | 14,250.00 | (645.79) | 5.00 |
| Lewis I. Prouty, Trustee, Tr. No. 5 | 14,250.00 | (645.79) | 5.00 |
| Lewis I. Prouty, Trustee, Tr. No. 6 | 14,250.00 | (645.80) | 5.00 |
| Total | 149,440.00 | 1 (4,149.78) | 52.50 |
*1232
| Year 1928 | ||||
| Dividends | Other income - Deduction | Capital Net Gain | 2% paid at Source | |
| Olive H. Prouty, Trustee, Tr. No. 1 | $44,675.64 | ($430.03) | $62.08 | $17.50 |
| Olive H. Prouty, Trustee, Tr. No. 2 | 44,655.64 | (415.54) | 62.09 | 17.50 |
| Olive H. Prouty, Trustee, Tr. No. 3 | 44,655.64 | (417.67) | 62.09 | 17.50 |
| Lewis I. Prouty, Trustee, Tr. No. 4 | 30,028.12 | (724.94) | 12.75 | |
| Lewis I. Prouty, Trustee, Tr. No. 5 | 30,030.00 | (723.41) | 12.75 | |
| Lewis I. Prouty, Trustee, Tr. No. 6 | 30,037.50 | (728.06) | 12.75 | |
| Total | 224,082.54 | 1 (3,439.65) | 186.26 | 90.75 |
The income received by the trustee of each of the trusts was included in the income tax return of the respective trusts and the tax thereon paid by the respective trustees.
None of the income received by the trustee of any of the trusts was paid or credited to the petitioner, nor did she as an individual receive directly or indirectly any of the income of the trusts.
The terms of the*1233 first set of trusts are in all respects pertinent to this case substantially similar. The trustee in all of the first three trusts was Olive H. Prouty. The declarations in trust No. 1 originally provided that she or any successor trustee therein should hold and manage the trust property, receive the income and proceeds thereof, and pay over to Lewis I. Prouty (her husband) from time to time during his life the net income, or in the discretion of the trustee or trustees, during the first two years of the trust, to add any portion of the net income to the principal of the trust fund. Upon the death of Lewis I. Prouty it was provided in trust No. 1 that the *1071 principal trust fund should be held for the benefit of the daughter, Jane C. Prouty, and the son, Richard Prouty, and in the event of their death it was to go to their issue, in default of which, to Olive H. Prouty, and if all should die leaving no issue, the fund was to be distributed to those persons who upon the death of Olive H. Prouty would under the law of Massachusetts then in force be entitled to Olive H. Prouty's estate, if she died intestate. The trustee or trustees were to have the power to exercise, as*1234 to the trust property, all the powers of absolute ownership thereof, subject only to the obligation to account to the beneficiaries for the trust property and the income thereof. The trusts further provided that, at the death of Olive H. Prouty, Lewis I. Prouty, if living, was to become trustee, and if not then living, the vacancy might be filled by any court of competent jurisdiction.
It was provided in trust No. 2 that during the lifetime of Lewis I. Prouty the trustee was to pay over the net income of the trust, quarterly or oftener if convenient, to Lewis I. Prouty and Jane Prouty or either of them in such proportions as the trustee or trustees might see fit, or in the discretion of the trustee or trustees, during the first two years of the trust, to add any portion of the net income to the principal of the trust fund. Upon the death of Lewis I. Prouty, the trust fund was to be distributed and paid over to Jane Prouty, if living, or if dead, leaving issue, then to "such issue in equal shares by right of representation." This trust provided further that if Jane Prouty should die "without leaving issue living at time of distribution, then the said principal trust fund shall*1235 be paid over to Richard Prouty, if living, and if the said Richard Prouty has died leaving issue, then to such issue in equal shares by right of representation," and if both should die without issue living, the trust fund was to be distributed as heretofore indicated in respect to trust No. 1.
Trust No. 3 was similar in its provisions to trust No. 2, the son, Richard Prouty, occupying the same position in trust No. 3 that Jane Prouty occupied in trust No. 2 and, as before stated, trusts Nos. 1, 2, and 3, so far as pertinent for our consideration in this case, were similar. Certain provisions of these three trusts, however, were changed by amendments of July 17, 1925, so that the trustee or trustees in their discretion might, from time to time, add the whole or any part of the net income of the particular trust to the principal of the trust fund, and in their discretion might, from time to time, with respect to trust No. 1, pay to Lewis I. Prouty the whole or any part of the principal of the trust fund; with respect to trust No. 2, make such payment to Lewis I. Prouty and Jane Prouty or to either; with respect to trust No. 3, make such payment to Lewis I. Prouty and Richard Prouty*1236 or to either; and upon the death of Lewis I. Prouty *1072 the trusts were to terminate and all the property was to become the property of Olive H. Prouty, free and discharged from any trust.
The provisions of these trusts were further amended on March 24, 1927, so that in trust No. 1 the trustee or trustees might add the net income to the principal of the trust and invest it as part thereof during the lifetime of Lewis I. Prouty, but "with full power and authority in the sole and uncontrolled discretion of the Trustee or Trustees from time to time to pay to Lewis I. Prouty in such proportions as the said Trustee or Trustees may see fit, the whole or any part of the principal of the trust fund if the Trustee or Trustees deem it necessary or advisable for the maintenance, support and welfare of said Lewis I. Prouty." Trust No. 2 and trust No. 3 were similarly amended on March 24, 1927, it being provided that in trust No. 2 payments were to be made, under conditions stated, to Lewis I. Prouty and Jane Prouty or either, and in trust No. 3 payments were to be made to Lewis I. Prouty and Richard Prouty or either.
The original trust instruments provided that "Olive H. Prouty*1237 expressly reserves to herself the right and power from time to time to change, add to, alter, amend or cancel any or all of the provisions of this declaration of trust * * *." In the amendment of March 24, 1927, this, however, was changed so that her right to change, add to, alter, amend, or cancel the provisions of the declaration of trust or revoke it in whole or in part "shall, so long as Lewis I. Prouty shall live, be exercised only with the written consent of said Lewis I. Prouty," but from and after the death of Lewis I. Prouty, she (Olive H. Prouty) would have her rights in trust property restored, so that she could as formerly by an instrument in writing under seal, delivered or mailed to a trustee, amend, cancel, or revoke the trusts and have title to the then existing trust property revested in her.
The terms of each of the second set of trusts are in all respects pertinent to this case substantially similar. The original declarations of the second set of trusts remained unamended during the years 1927 and 1928. The trustee of these trusts was Lewis I. Prouty. Under the trust instruments he was empowered to manage and invest the property during the lifetime of Olive*1238 H. Prouty, to accumulate and add the net income to the principal of the trust fund, and to apply for the care, support, and education of Olive H. Prouty, or of her children, any part of the trust fund which he deemed to be necessary or advisable for the health, comfort, education, or otherwise for the best interest of said persons and such application might be made either directly by the trustee or indirectly by payments to them. Upon the death of Olive H. Prouty the trustee was to pay over the trust property at that time in his hands as she should by her last will direct and appoint, or, in default of such appointment, to Lewis I. *1073 Prouty, if living, and if not living, to such one or more of the issue of Olive H. Prouty as he should in his will direct and appoint, and in default of such appointment to the issue of Olive H. Prouty living at her death by right of representation.
Olive H. Prouty had the power to remove the trustee and appoint another in his place and the trusts, during the lifetime of Olive H. Prouty and Lewis I. Prouty, in trust No. 4, and in the lifetime of Olive H. Prouty and Lewis I. Prouty or Jane C. Prouty, in trust No. 5, and in the lifetime of*1239 Olive H. Prouty and Lewis I. Prouty or Richard Prouty, in trust No. 6, could be terminated, changed, altered, or amended by written instruments signed by the following persons: trust No. 4, by Olive H. Prouty and Lewis I. Prouty; trust No. 5, by Olive H. Prouty and either Lewis I. Prouty or Jane C. Prouty; trust No. 6, by Olive H. Prouty and either Lewis I. Prouty or Richard Prouty, provided such written instruments were sealed and acknowledged in the manner prescribed for deeds of real estate and attached to the original trust instruments to which the amendments related.
OPINION.
SEAWELL: The issue in this proceeding is whether certain dividends received in 1927 and 1928 by the trustees of six trusts created by the petitioner are, under the circumstances detailed in our findings of fact, taxable to the petitioner.
In each of the three trusts, Nos. 1, 2, and 3, constituting the first set of trusts, the trust instruments provided that the petitioner, "Olive H. Prouty expressly reserves to herself the right and power from time to time to change, add to, alter, amend or cancel any or all of the provisions of this declaration of trust * * *."
Section 219(g) of the Revenue Act*1240 of 1926 (identical with section 166 of the Revenue Act of 1928) is as follows:
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.
The record shows that in the original trust instruments of the first set of trusts the petitioner expressly reserved to herself the right and power from time to time to change, amend, or cancel any or all of the provisions of the trusts and thereby revest in herself title to the corpus of trusts Nos. 1, 2, and 3. Such right and power appear from the record not to have been limited or restricted by any change thereof until the aforesaid trust amendment of March 24, 1927, which expressly revoked the aforesaid power originally reserved by petitioner. After this amendment, in our opinion, *1074 and we so hold, these trusts became in a sense irrevocable - no longer revocable within the meaning of section 219(g) of the Revenue Act of 1926 or the corresponding*1241 section of the Revenue Act of 1928.
The record herein not showing that the dividends or any portion thereof received in 1927 by the trustee of the first set of trusts was received after the trusts became irrevocable as aforesaid by reason of the trust amendment of March 24, 1927, and it also appearing from the record that the petitioner "at a time during the taxable year" 1927 (up to March 24, 1927) had the power within herself, acting alone, to revest in herself title to the corpus of trusts Nos. 1, 2, and 3, and there being no sufficient evidence in the record to overcome the presumption of the correctness of the respondent's determination with respect to the matter, it is our opinion and we hold that the dividends received from the first set of trusts for the taxable year 1927 should be included in computing petitioner's net income for that year. ; ; .
At no time during the taxable year 1928 did the petitioner have the power with reference to the first set of trusts that existed prior to the trust amendment of March 24, 1927. *1242 During the year 1928 these trusts were revocable by petitioner only in conjunction with Lewis I. Prouty. Petitioner contends that Lewis I. Prouty was a beneficiary under these trusts and therefore petitioner could not revoke any of them acting "alone or in conjunction with any person not a beneficiary of the trust." The section of the revenue act to which reference has been made uses the word "beneficiary" without qualification or enlargement of its ordinary meaning or scope.
In , the Circuit Court of Appeals of the First Circuit said:
It would seem that Congress did not intend, by the use of the term "beneficiary" in section 219(g) only a beneficiary having a present vested interest, but intended to include within that term a beneficiary or beneficiaries having contingent interests as well as those having present or vested ones.
Undoubtedly Congress could have drawn a line between beneficiaries holding vested and contingent interests, or between those having contingent interests based on their respective degrees of remoteness, but it has done neither of these things. It is therefore far more reasonable to conclude*1243 that by the word "beneficiary" Congress intended to include persons or classes of persons designated, in the particular trust under consideration, entitled to take present or contingent interests thereunder.
In the case of , the interests of the beneficiaries, her husband and her son, as trustees, were similar to the interests of Lewis I. Prouty and his children, Jane C. and Richard Prouty, respectively, under the second set of trusts, and in the case of , we held, in accordance with the opinion of the court in , that the trust *1075 involved was not revocable within the meaning of section 166 of the Revenue Act of 1928, which in all respects pertinent to this case is the same as section 219(g) of the Revenue Act of 1926. See also ; ; . Cf. *1244 .
We are of opinion, and so hold, that Lewis I. Prouty was a beneficiary under trusts Nos. 1, 2, and 3 during all of the year 1928, and the dividends received therefrom in that year are not includable in computing the petitioner's net income for 1928.
In the other three trusts, Nos. 4, 5, and 6, created by petitioner June 11, 1927, Lewis I. Prouty was trustee. The record shows that all of them were irrevocable within the meaning of section 219(g) and section 166, supra, none of them being revocable by the petitioner acting "alone or in conjunction with any person not a beneficiary of the trust." We are of the opinion and hold, therefore, that none of the dividends received by the trustee under any of these trusts are includable in computing petitioner's net income for either 1927 or 1928.
Judgment will be entered under Rule 50.
Footnotes
1. In all of the above trusts net deductions exceed net income from all sources exclusive of dividends, and, therefore, the said excess of deductions is shown as a minus income deduction. ↩
1. In all of the above trusts net deductions exceed net income from all sources exclusive of dividends and capital net gains, and, therefore, the said excess of deductions is shown as a minus income deduction. ↩