*974 On February 10, 1933, the taxpayer created a revocable trust for the life of the settlor, the income of which was payable in such proportions as his wife, trustee, determined in her discretion or to be accumulated, in her discretion, for distribution, before or at the termination of the trust, to a beneficiary other than the taxpayer. On June 19, 1934, the taxpayer wrote the trustee revoking the trust, and of said trust as of January 1, 1937. pursuant to a contract with the trustee for a consideration of $100, taxpayer wrote to the trustee, relinquishing any further right to revoke the trust. At the termination of the trust, the principal, but none of the accumulated income, was to revert to the taxpayer or his estate. Held, the income of the trust for the period from June 19, 1934, to January 1, 1935, was taxable to the trust under sections 161 and 162 of the Revenue Act of 1934, and was not taxable to the taxpayer under section 166 or 167 of the same revenue act.
*803 This is a proceeding*975 to redetermine a deficiency of $3,955.56 in income tax for the calendar year 1934. The issue is whether certain trust income for 1934 is taxable to petitioner under either section 166 or section 167 of the Revenue Act of 1934.
FINDINGS OF FACT.
On February 10, 1933, petitioner transferred property in trust, with his wife, Ethel Y. Woolley, as trustee. The pertinent provisions of the trust are:
To take control and management thereof and to invest and reinvest and keep the same invested and to receive the income therefrom, and, after paying the reasonable and proper expenses of the trust, to pay and distribute the principal thereof and the income therefrom as follows:
:a) During the life of the Settlor, to pay over and distribute the whole or any part of the net income thereof annually, in such amounts and proportions as Ethel Y. Woolley, the said Trustee hereunder may, in her sole, absolute and uncontrolled discretion, determine, to and among one or more of the following, in accordance with their respective, needs, of which she shall be the sole judge, to wit:
The Settlor,
Robert W. Gardner, Jr., of Asheville, North Carolina, infant nephew of the Settlor, Ethel Y. Woolley, *976 wife of the Settlor, and to accumulate the balance of such net income, if any, for the benefit of such of the above named persons, who may be infants at the time of such accumulation, and in such proportions among them, as the said Trustee may in her sole discretion determine. All income so accumulated shall be paid over to the person for whose benefit it is accumulated upon his attaining the age of twenty-one :21) years but, if such person shall die before attaining the age of twenty-one :21) years, then such income accumulated for his benefit shall thereupon be paid over to those persons who under the laws of the State of New York in effect at the time of the death of such person, would be entitled to the property of such person had he died intestate.
:b) Upon the death of the Settlor, the trust herein created shall terminate and the principal amount, together with any additions thereto, shall be paid over to the estate of the Settlor.
SECOND: The trustee may hold as an investment any property coming into her hands hereunder, although the same may not be of the character permitted for investment hereunder or for the investment of trust funds by the *804 laws of New*977 York, provided, however, that if, from time to time, there shall be delivered to the Trustee a notice in writing signed by the Settlor directing the sale or leasing of any property, real or personal, thereupon the Trustee shall sell or lease the same, as the case may be, and if, from time to time, there shall be delivered to the Trustee a notice in writing signed by the Settlor directing the purchase of any property or the investment of any of the funds of the trust, the Trustee, out of any funds held hereunder, shall purchase and hold the same as an investment hereunder, or make the investment so directed, as the case may be, although the same may not be of the character permitted for investment hereunder or for the investment of trust funds by the laws of New York, until a subsequent notice of sale, as aforesaid, or a subsequent direction, shall be delivered to the Trustee. Provided, however, that such sale or purchase shall be at a price equal to the fair market value of such property at that time. The Trustee shall not be responsible or liable in any way for any loss or depreciation by reason of the sale, lease, purchase and/or retention of any property so sold, leased, purchased*978 and/or held, and/or for any investment so directed.
The Settlor further reserves the right at any time to assign, transfer and deliver to the Trustee any other investments, securities or property that he may wish to substitute for property then constituting the principal of the trust, and such substituted securities or property shall be held by the Trustee and shall be subject to all the conditions and provisions herein contained, it being understood that the property so substituted shall be of equal market value on the date of such substitution to the property for which the substitution is made.
All stock dividends which shall be received by the Trustee hereunder shall be added to the principal and all cash dividends, except liquidating dividends, shall be treated as income.
A part of the property hereinafter described in Schedule and made a part hereof, is now in the hands of The National City Bank of New York, as collateral for a certain loan heretofore made by the settlor with the aforementioned. The Trustee shall not be obligated to pay said loan either as to interest or principal or to relieve the said securities from their liability as collateral for the aforementioned*979 loan or to withdraw such securities as such collateral, it being the specific intention of this agreement to convey to the Trustee the Settlor's equity in said property for the purposes herein expressed.
THIRD: The trust herein created may be revoked in whole or in part by the Settlor by an instrument in writing executed after December 31, 1933. The Settlor may, at any time, by an instrument or instruments in writing, extend the period during which this instrument may not be revoked.
Robert W. Gardner, Jr., was the only infant beneficiary during the tax year.
On June 19, 1934, petitioner wrote Ethel Y. Woolley, his wife, and trustee under the trust, as follows:
Pursuant to the power reserved to me by paragraph mentioned trust agreement, I hereby revoke the said agreement and the trust thereby created, said revocation to effect a termination of said instrument and of said trust as of January 1, 1937.
Ethel Y. Woolley as trustee acknowledged receipt of the letter and that the trust would thereby terminate on and as of January 1, 1937. *805 On the same day, petitioner entered into an agreement with the trustee, the material part of which reads as follows:
WHEREAS, *980 the parties hereto on February 10, 1933 entered into an agreement under which the party of the first part transferred to the party of the second part certain assets in trust for the uses and purposes set forth in said agreement and pursuant to the provisions thereof, and
WHEREAS, the party of the second part is a beneficiary of the trust created by said agreement, and
WHEREAS, the party of the first part, pursuant to his right of revocation reserved in paragraph of revocation caused said instrument and the trust thereby created to terminate on and as of January 1, 1937, and
WHEREAS, despite such revocation the party of the first part may nevertheless have a further right to revoke said instrument as of a date earlier than January 1, 1937, and
WHEREAS, the party of the second part desires that the trust shall in any event continue until such termination date and that the party of the first part shall not take advantage of any further right of revocation which he may still possess in order to anticipate the said termination date and to earlier revoke.
Now, THEREFORE, in consideration of the above and of the sum of One Hundred Dollars : $100), lawful money, paid by the party*981 of the second part to the party of the first part, receipt whereof is hereby acknowledged:
The party of the first part hereby agrees to waive, cancel, resign, annul, relinquish, renounce and abandon any and all rights, which may still in any way under the terms of the above mentioned instrument or by operation of law, or in any other manner, by reserved to or possessed by him to revoke the trust created by said instrument on or before January 1, 1937.
The following day petitioner wrote another letter to Ethel Y. Woolley as trustee, as follows:
The above mentioned trust agreement and the trust thereby created having been revoked by me to terminate as of January 1, 1937 by an instrument dated June 19, 1934, I hereby waive, cancel, resign, annul, relinquish, renounce and abandon any and all rights of whatsoever kind and nature which, despite such revocation, may still be reserved to me or which I may still possess, by further revocation or in any other manner, to cause the said trust to terminate as of a date earlier than January 1, 1937.
Ethel Y. Woolley as trustee distributed to herself in 1935 the sum of $5,000. She also distributed some of the trust income to petitioner*982 in that year.
The net income of the trust prior to June 19, 1934, is not in controversy. The net income of the trust, in dispute, is that for the period from June 19 to December 31, 1934. That income was accumulated by the trustee and was not "properly paid or credited during * * * [1934] to any beneficiary."
OPINION.
LEECH: The single issue presented is whether the income of the trust for the period from June 19, the date of petitioner's relinquishment *806 of his power of revocation of the trust, to December 31, 1934, was taxable to the petitioner.
The Revenue Act of 1934 is controlling. Section 161:a):4) provides, inter alia, that the income tax imposed by the act shall apply to the income of trusts discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. the amount of such trust income for the taxable year, which is, under the trust, properly paid or credited during such year to a beneficiary, shall be allowed as a deduction in computing the net income of a trust, but shall be included in the net income of the beneficiary for that year.
None of the trust income for the period June 19 to December 31, 1934, which is*983 here in controversy, was during * * * £ 1934] to any beneficiary. 161 and 162 of the Revenue Act of 1934, that income was properly included in the net income of the trust and taxed as such, unless excludable therefrom and taxable to the settlor, under sections 166 and 167 1 of the same revenue act and the regulations construing those sections. Arts. 166-1 and 167-1, Regulations 86.
*984 In our judgment, the facts here disclose that the trust, while originally revocable, was, in effect, validly amended on June 19, 1934. Thereafter it was irrevocable, terminating, by its terms, on January 1, 1937.
*807 The trust, as thus amended, is the only one with which we are here concerned. Olive H. Prouty,30 B.T.A. 1068. It was simply a trust for a term of years. The only right in reference to the corpus of that trust, under its terms which petitioner, grantor, had, at any time, was to have that corpus returned to him at its termination. The Board has held that such a right in the grantor does not constitute a vested power to revoke the trust, and thus revest himself of its corpus, but is a mere reversion. Meredith Wood,37 B.T.A. 1065 (on appeal, C.C.A., 2d Cir.); John Edward Rovensky,37 B.T.A. 702; Phebe Warren McKean Downs,36 B.T.A. 1129. See also I.T. 3238, 1938 Int. Rev. Bull.No. 50. Cf. Warren H. Corning,36 B.T.A. 301 (on appeal, C.C.A., 6th Cir.). Upon the authority of those cases, we hold that none of the contested income was taxable to*985 the petitioner under section 166, supra.
Section 167 of the Revenue Act of 1934 provides, so far as is here pertinent, that trust income shall be taxed to the grantor when any part of such income is, or in the discretion of the grantor or of any person not having a substantial interest in the disposition of such part of the income, may be accumulated for future distribution to the grantor, or when, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition thereof, such income may be distributed to the grantor. But, not only because of less direct implications contained in the trust instrument, but particularly because of the express directions therein taken in connection with the fact that Robert W. Gardner, Jr., or his estate, was the only infant beneficiary during the tax year, he, or his estate, was the only possible recipient of the accumulated income of the trust for that year. Thus, the applicability of section 167 is confined to the second alternative. It is true that the income of the trust may be distributed, when not accumulated, to petitioner.
But such distribution may be made by Ethel Y. Woolley, the trustee, *986 to and among one or more of £the beneficiaries] * * * in accordance with their respective needs * * *.
If that discretion, thus limited, is not within the meaning of as used in section 167, supra (see Higgins v. White, 93 Fed.(2d) 357; First National Bank of Boston v. Welch,24 Fed.Supp. 695), obviously the section would not apply. On the other hand, if that limitation does not deprive this power to distribute of the discretionary character to which the section refers :see Lewis Hunt Mills, Administrator,39 B.T.A. 798, and cases cited therein), then Ethel Y. Woolley, trustee, can exercise that discretion by distributing any part of the contested income to herself, as beneficiary. Since the settlor is a like beneficiary of this income, though even thus *808 contingent, this right of the trustee constitutes a substantial adverse interest to that of the settlor. Sophia P. O. Morton38 B.T.A. 419; Jane B. Shiverick,37 B.T.A. 454. Thus, under the express terms of the statute, section 167 is not applicable.
The grantor was not the trustee here. The grantor reserved the right*987 to direct the trustee to buy or sell property when funds were available from corpus or income, and to lease property, but even then the trust instrument significantly provided that such sales or purchases must be made at the fair market price. Nothing restricted the trustee from making such investments or sales as she desited in her discretion. The petitioner, grantor, reserved no right under the trust instrument to borrow from the trust estate with or without security, nor to vote stock held by the trust.
So, respondent's contention, if it be a separate one, that petitioner did not divest himself of control of the corpus of this trust other than by power of revocation, so as to preclude its taxibility to him as grantor :see Warren H. Corning, supra ), we think is likewise without merit. Commissioner v. Waterbury, 97 Fed:2d) 383; Henry A. B. Dunning,36 B.T.A. 1222; Carson Estate Co.,31 B.T.A. 607; affed., 80 Fed.:2d) 1007.
The income of the trust from June 19 to December 31, 1934, was properly taxable to the trust for that year and not to the grantor, the petitioner here.
Reviewed by the Board.
Decision will*988 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 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." ↩