*1168 1. Petitioner, prior to the taxable year, created separate trusts for each of his five minor children. He named himself and his wife as trustees. The trusts were to last for the life of the respective beneficiaries. No power to revoke the trusts was reserved by the grantor or vested in anyone else. Held, the trusts were irrevocable and the income of the trusts is not taxable to petitioner under section 166, Revenue Act of 1934.
2. Each of the trust indentures provided that the trustees "may pay to the beneficiary of the trust so much of the net income as they may deem necessary for his support, education, comfort and happiness and so much of the principal as they deem necessary from time to time for his maintenance and support and to add the balance of the net income, if any, in any year to the principal." None of the income was used in the taxable year for the support and maintenance of the minors, but was accumulated and added to the corpus of the trusts. Held, the net income of the trusts is not taxable to petitioner under section 167, E. E. Black,36 B.T.A. 346">36 B.T.A. 346; held, further, that the mere possibility of a reverter does not make the income*1169 of the trusts taxable to petitioner under section 167. William E. Boeing,37 B.T.A. 178">37 B.T.A. 178.
3. Where the petitioner, who created the trusts, reserved no power either in himself or anyone else to revoke the trusts and restore either the income or the corpus to himself, the duration of the trusts was the lifetime of the respective beneficiaries, and petitioner's only chance to repossess the principal and accumulated income was a remote possibility of a reverter, held, the income of the trusts is not taxable to petitioner under section 22(a), although the trusts conferred on petitioner extensive powers as trustee. Commissioner v. Branch, 114 Fed.(2d) 985.
*146 The Commissioner has determined a deficiency in petitioner's income tax for the year 1934 of $55,715.91. The deficiency is the result of four adjustments made by the Commissioner in the net income of petitioner as disclosed by his income tax return for the taxable year. One of these adjustments was in petitioner's favor and two of the others he now concedes*1170 to be correct. The principal adjustment which the Commissioner made was to add to the net income which petitioner reported in his return the sum of $104,579.95, representing the income received by five separate trusts which petitioner had created in a prior year. As to this adjustment, the Commissioner stated in his deficiency notice as follows:
(a) It is noted that you are both the grantor and one of the trustees of the Frederick Ayer Trusts dated January 11, 1927, which were created by you for *147 the benefit of your five children. It is considered that the income of the trusts is taxable to you, the grantor, under the provisions of section 166 of the Revenue Act of 1934 and of article 166-1(b)(2) of Regulations 86.
The petitioner contests this action of the Commissioner by an appropriate assignment of error.
FINDING OF FACT.
The facts have been stipulated and we adopt the facts so stipulated as our findings of fact. The following of those facts are stated herein for the purpose of clarifying the issue to be decided.
Petitioner is an individual residing at Wenham, Massachusetts. On January 11, 1927, he transferred 1,000 shares of Groton Realty Corporation*1171 stock to himself and Hilda Rice Ayer, his wife, as trustees under separate indentures of trust, executed on that date, for the benefit of each of his five children, Ethan Ayer, Neil R. Ayer, Hilda R. Ayer, Frederick Ayer, Jr., and Anne Proctor Ayer.
The Groton Realty Corporation was a corporation organized under the laws of New York to deal in real estate. Its capital stock consisted of 42,280 shares, of which the petitioner owned 6,040 shares prior to January 11, 1927, and the remaining shares were owned by the petitioner's four half-brothers and half-sisters and two sisters or by members of their families or by trusts for the benefit of members of their families. After the transfers of January 11, 1927, petitioner owned 1,040 shares. The petitioner was a director of Groton Realty Corporation from January 11, 1927, through the calendar year 1934.
The written indentures of trust constituted the whole agreement between the taxpayer, as grantor, and the taxpayer and Hilda Rice Ayer, as trustees of said trusts, with respect to the property transferred to the trusts. The indenture for the benefit of Ethan Ayer is typical of all the trusts and is as follows, omitting the signatures:
*1172 INDENTURE OF TRUST FOR THE BENEFIT OF ETHAN AYER AND OTHERS:
Between Frederick Ayer, of Wenham, Massachusetts, hereinafter called the Settlor, and said Frederick Ayer and Hilda Rice Ayer, hereinafter called the Trustees.
WHEREAS, the property specified in the schedule hereto annexed has been transferred by the Settlor to the Trustees and from time to time hereafter other property may be so transferred;
Now, THEREFORE, This Indenture
WITNESSETH:
That the Trustees, in consideration of the premises, covenant and agree that they will hold the said property and any other property which may be transferred to them under this instrument on the following trusts:
To manage and administer the same; with power, - to keep any of the trust property in the form in which it shall have been received from the Settlor; to enter into any agreements in the nature of option agreements or otherwise and make deposits of said property or any of it in connection therewith; to incur indebtedness and borrow money in their discretion and secure any such loan *148 or indebtedness by mortgage or pledge; to sell, at public or private sale, exchange, transfer, and convey, by proper deeds or other*1173 instruments, any of the trust property; to invest and reinvest the same in such securities or property as the Trustees may deem advisable, although of a kind or in an amount which ordinarily would be considered unsuitable for a trust investment, or in securities which may pay a high rate of income or no income at all, it being the express intention to confer upon the Trustees full power and authority to invest the trust property from time to time in such manner as they may deem advisable and as if they were purchasing property for their own personal account; to keep any and all property in their own names, without disclosing their trust capacity, or in the name of some other person with power of attorney for transfer attached; to determine whether any money or other property received shall be considered as income or principal; to make payments to minors as though they were of age; to decide whether or not and to what extent to make deductions for depreciation, obsolescence, amortization, or losses; and generally to do all things in relation to the trust property which the Settlor could do if this instrument had not been made.
To pay to Ethan Ayer, son of the Settlor, so much of*1174 the net income as they may deem necessary for his support, education, comfort, and happiness, and so much of the principal as they deem necessary from time to time for his maintenance and support, and to add the balance of the net income, if any, in any year to the principal.
And after his death, to pay and distribute the principal then held in trust to and among the wife of said Ethan and any of the Settlor's descendants, in such proportions as said Ethan may by his last will appoint, and in default of appointment to his issue then living by right of representation, and if he leaves no issue him surviving, to the Settlor if living, or if not living to his wife, and if both are deceased, to those persons who would have been entitled to the property of said Ethan if he had then died intestate, under the laws of the Commonwealth of Massachusetts then in force, and in the proportions provided by said laws.
None of the principal or income that any person shall be entitled to receive under the terms of this instrument shall be in any case assignable by anticipation or subject to attachment, levy, or seisure, or in any way subject to the claims of any creditor of a beneficiary.
*1175 No Trustee at any time acting under the provisions of this instrument shall be required to give bond for the faithful performance of his duties. The Trustees shall not be responsible for any act done or omission made in good faith, and neither Trustee shall be responsible for the act or default of any other Trustee.
Any Trustee may resign. Upon a vacancy from any cause the title of the outgoing Trustee shall vest in the remaining Trustee, and all such deeds, transfers, and other instruments shall be made as may be deemed necessary to vest the trust property in a Trustee appointed as herein provided. In case of a vacancy, the remaining one of the two Trustees named herein shall have the power to appoint a new Trustee.
Whenever the Trustees shall have occasion to set aside or to pay over any of the trust property, they shall have full power to select and use for said purpose such portions of the property, real or personal, as they shall deem to represent fairly in value the portion so required to be set aside or paid over, or they may sell and convey sufficient of said property to enable them to pay in money what they deem to be the just value of such share or portion.
*1176 Immediately upon the transfer by the taxpayer of the Groton Realty Corporation stock to each of the above trusts, said stock was registered *149 of record and thereafter continued to be held in the name of the taxpayer and his wife, as trustees under the indentures dated January 11, 1927, with specific reference to the respective beneficiaries of said trusts. None of the securities purchased for or at any time owned by the trusts have at any time been held in the taxpayer's own name. At no time have any of the funds or property of the trusts been mingled with the taxpayer's own funds or property, and separate books of account have at all times been maintained for each of said trusts.
The taxpayer's children, designated as respective beneficiaries of the five trusts, were minors and were unmarried in 1934. During the calendar year 1934 no part of the income or principal of said trusts was paid to or applied for the benefit of the respective beneficiaries of the trusts by the trustees nor was any part of the net income or of any other property of the trusts otherwise paid out or distributed by the trustees, except amounts necessary to defray expenses and taxes of the trusts.
*1177 Since January 11, 1927, the entire net income of each of the above mentioned trusts has been accumulated. The income so accumulated has been invested in securities selected by the petitioner, as trustee of the above trusts, and sales of securities have been made by petitioner, as trustee. Since April 10, 1934, the selection of securities for investment and sales of securities for the trusts have been made by petitioner, as trustee, after analysis by and consultation with investment counsel.
Petitioner attended directors' meetings of any corporation of which he was a director where any of its shares were held by the above trusts. Petitioner did not attend stockholders' meetings of any corporations of which any shares were held by the above trusts, but petitioner, as trustee, caused proxies to be sent to stockholders' meetings with respect to stock held by the trusts.
During the calendar year 1934 the petitioner and Hilda Rice Ayer were acting as trustees under each of the five above mentioned indentures of trust. Petitioner's business is that of acting as trustee and fiduciary. The books of account of the trusts were maintained in petitioner's office, income tax returns*1178 for the trusts were prepared in petitioner's office, and all routine matters affecting the trusts and the assets thereof were handled by the personnel of petitioner's office in the same manner as were other trust and fiduciary accounts in petitioner's office. Decisions with respect to the administration and property of the trusts, including the determination of assets to be purchased or sold, were made by the petitioner, as trustee. Hilda Rice Ayer took no active part in the administration of the trusts.
It was also stipulated by the parties that:
In making the five trusts referred to in the original stipulation, the petitioner, Frederick Ayer, was influenced by the fillowing facts: (1) He desired to provide a fund for each of his children, and (2) he also expected that the rate of *150 income tax payable by his children or by the trusts for their benefit would be less than by him and considered that result an advantage to them and he was glad to have them have that benefit.
OPINION.
BLACK: In taxing the income of the five children's trusts to petitioner the Commissioner, in his deficiency notice, relied upon section 166 of the Revenue Act of 1934 and article 166-1(b)(2) *1179 of Regulations 86. At the hearing of this proceeding the Commissioner, however, amended his answer and stated therein, among other things, as follows:
* * * In support of said determination the respondent relies not only on the provisions of Section 166 but also on Sections 167 and 22(a) of the Revenue Act of 1934.
The petitioner denies that he is subject to tax under either of the named sections of the statute. We shall examine the respective sections of the statute relied upon by respondent and determine whether the trust indentures involved herein fall within their respective provisions, or of any of them.
Section 166.
Section 166 and article 166-1(b)(2) of Regulations 86, which respondent named in his deficiency notice, are printed in the margin. 1
*1180 The provisions of the trust indentures herein involved retain no power of revocation lodged either in petitioner or in anyone else. The trusts were created under and have been administerd according to *151 Massachusetts law. Decisions of the Supreme Judicial Court of Massachusetts hold that a reservation of powers in the grantor of an inter vivos trust must be made by words of specific reservation in the trust indenture. ; ; ; .
Respondent cites no authority to the contrary. He merely argues in his brief that:
In view of the presence in each trust instrument of the very broad general provision permitting the trustees to "do all things in relation to the trust property which the Settlor could do if this instrument had not been made", plus the fact of absence from each trust instrument of any limitation on, or exception to, said general provision indicating that the trusts might have been intended to be irrevocable, respondent contends that the trusts are in fact revocable by the trustees and that the income is*1181 properly taxable to the grantor under Section 166 of the Revenue Act of 1934.
The broad power of the trustees referred to by respondent in the above quotation from his brief was not an unlimited power in the trustees, but concerned only the management of the trust property for the purposes of the trust as set forth in the indentures.
In ; affd., , the trustees were given the power "to exercise freely and in their uncontrolled discretion all the rights, powers and privileges appertaining to full and complete ownership thereof." In referring to the broad powers of the trustees, we stated in our opinion as follows:
* * * Those powers which petitioner as grantor reserved to himself as one of the trustees relate to the management of the trust corpus and do not vest in the grantor any control as an individual over the economic benefits or enjoyment of the trust property. * * *
We held that the trust in that case was not a revocable trust within the meaning of section 166. Likewise, we hold in the instant case that petitioner is not taxable on the income of the five children's trusts under section*1182 166.
Section 167.
It is respondent's contention that petitioner is taxable on the income of the trusts under section 167, printed in the margin. 2
*1183 In support of his contention that the incomes of the trusts were taxable to petitioner under section 167, respondent points out that each of *152 the trust indentures provides that the trustees shall pay to the child of petitioner therein named as beneficiary so much of the income as they may deem necessary for his support, education, comfort, and happiness and so much of the principal as they may deem necessary from time to time for his maintenance and support and to add the balance of the net income, if any, in any year to the principal.
In , we held with respect to a trust established by a taxpayer for the benefit of his wife and children, under which the trustees had a discretionary power to apply the income for the support and maintenance of the taxpayer's wife and children, that the grantor was not taxable on the income of such a trust where, as a matter of fact, none of the income was distributed or used by the trustees in discharge of the grantor's legal obligation to support the members of his family.
In the instant case none of the net income of the trusts was applied or distributed by the trustees during the calendar*1184 year 1934 for the children's benefit. The entire net income was accumulated in accordance with the provisions of the trusts. Therefore, on authority of the Black case, we hold against respondent on this point. See also (appeal dismissed, C.C.A., 3d Cir., June 12, 1939); .
Respondent advances, as his next reason why the trust income is taxable to petitioner under section 167, that each trust instrument provides that upon the death of the child named as beneficiary, without issue and in default of appointment, the principal of the trust shall go to the settlor, if living. The Board has held that the mere possibility of a reverter is not sufficient to cause the income of an irrevocable trust to be taxable to the settlor under section 167. ; ; . On the authority of these cases we hold against respondent on this point.
Section 22(a).
It is the Commissioner's further contention that petitioner is taxable on the income*1185 of the trusts under section 22(a) of the Revenue Act of 1934, printed in the margin. 3
*153 We think this latter contention of respondent presents considerable more difficulty than those which we have discussed above. Respondent relies principally upon . There is some uncertainty as to the extent of the applicability of section 22(a) under the decision of the Clifford case. Cf. *1186 . It should be remembered that the trusts involved in the instant case were not short term trusts, as in the Clifford case, but were for the life of the beneficiary named in the respective trusts. The corpus and accumulated income were not to revert to the grantor except upon a remote contingency. Under these circumstances, we do not think , is controlling.
As the court pointed out in : Helvering v. Clifford rests on its particular facts, as the court was careful to say. We do not understand that the case, as a general proposition, obliterates the separate legal personality of the wife for purposes of determining the gross income of the husband under Section 22(a). Where the grantor has stripped himself of all command over the income for an indefinite period, and in all probability, under the terms of the trust instrument, will never regain beneficial ownership of the corpus, there seems to be no statutory basis for treating the income as that of the grantor under Section 22(a) merely because he has made*1187 himself trustee with broad power in that capacity to manage the trust estate. See . We do not read the dictum in , as implying the contrary.
, was also a trust which was to last for the lifetime of the beneficiary, as in the Branch case, and was decided by the same court as decided that case. The court in its decision in White v. Higgins pointed out the distinction in the facts there present from those which were present in the Branch case. Among the powers reserved to the settlor in White v. Higgins was one, as pointed out by the court, whereby the settlor:
* * * Under paragraph (b) of Article Fourth she need not even wait these three years; she may at once pay any or all of the principal or income to herself, if she as trustee thinks that this will most promote her "best interests and welfare."
There are no such provisions contained in the trusts in the instant case. Likewise, in *1188 , in which Helvering v. Clifford was followed, although not a short term trust, large powers were reserved to the settlor, such for example as the power "to alter, modify or vary the terms of the trust except not in such a manner as that any part of the trust income could be paid to him during the lifetime of his wife." On account of the large powers reserved to the grantor of the trust in that case, we held that the income was taxable to him under section 22(a).
*154 We think the facts in the instant case more nearly correspond with those present in Commissioner v. Branch than any of the other cases cited above. Therefore, following the Blanch case, we hold that none of the income of the trusts was taxable to petitioner in the year 1934. Cf. .
The parties have stipulated that if our decision is in favor of the petitioner on this main issue, then it is agreed that petitioner has made an overpayment of income taxes for the year 1934 in the amount of $170.50, which amount was paid by the petitioner within three years before the filing of the petition in this proceeding.
*1189 Reviewed by the Board.
Decision will be entered for petitioner in accordance with the stipulated amount.
LEECH dissents.
OPPER, dissenting: This income falls literally within the language of section 167(a)(2) for it "may, in the discretion * * * of any person [the petitioner and his wife] not having a substantial adverse interest [Reinecke v. Smith,289 U.S. 172">289 U.S. 172; Commissioner v. Caspersen (C.C.A., 3d Cir.) 119 Fed.(2d) 94] * * * be distributed to the grantor," he being the natural guardian of his minor children. Melanefy v. O'Driscoll,164 Mass. 422">164 Mass. 422; 41 N.E. 654">41 N.E. 654; Freeman v. Coit,27 Hun. 447; 96 N.Y. 63">96 N.Y. 63; Cleveland Clinic Foundation v. Humphrys (C.C.A., 6th Cir.), 97 Fed.(2d) 849; certiorari denied, 305 U.S. 624">305 U.S. 624; Creeley v. Creeley,258 Mass. 460">258 Mass. 460; 155 N.E. 424">155 N.E. 424. That he can obtain such income only for a specific purpose does not avail to transform a literal distribution to the grantor into something which we can fairly say Congress did not intend to include; for it is a purpose*1190 involving his own pecuniary benefit, a "restriction entailing only what would cause grantor's taxability under Douglas v. Willcuts,296 U.S. 1">296 U.S. 1 * * *", in any event. George H. Whiteley, Jr.,42 B.T.A. 402">42 B.T.A. 402, 416; affd. (C.C.A., 3d Cir.), 12o Fed.(2d) 782; J. S. Pyeatt,39 B.T.A. 774">39 B.T.A. 774.
If such a distribution was not made in the taxable year, that is no ground for ignoring section 167, since it is the possibility, not the result, which that section prescribes as the criterion of taxability. ;, distinguishing , and similar cases. Actual or constructive receipt of income is a consideration more appropriate to the determination of gross income under section 22(a). See ; reversed, . But subdivision (a)(2) of 167 refers to income which "may" be distributed. The word "is" does not even appear.
*155 Only a total disregard of reality can justify us in viewing the same individual in his capacities of taxpayer, grantor, *1191 trustee, natural guardian, and father, as separate beings. Lacking acceptable proof that petitioner can not benefit from this trust except by violating its terms - an inconceivable result, since the instrument specifically sanctions his use of the income for the payment of his own obligations - I am unconvinced that there is warrant for reading section 167 as though it used the word "grantor" to describe a capacity instead of a man. See ;; ; ; affd. (C.C.A., 10th Cir.), ; certiorari denied, .
SMITH, HILL, and DISNEY agree with this dissent.
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.
ART. 166-1. Trusts in the corpus of which the grantor retains an interest. -
* * *
(b) Test of taxability to the grantor. - The sufficiency of the grantor's retained interest in the corpus resulting in the taxation of its income to the grantor is determined by a single test, namely, whether the grantor has failed to divest himself, permanently and definitively, of every right which might by any possibility enable him once more to possess and enjoy in title the trust corpus. For the purposes of this article the sufficiency of the grantor's retained interest in the corpus is not affected by the fact that the grantor has provided that the right to cause the title to the corpus to revest in himself is, or may at some future time be, vested in any person (either alone or in conjunction with the grantor) not having a substantial interest in the corpus or income therefrom adverse to the grantor.
If the grantor has retained any such interest in the corpus he is taxable on the income therefrom regardless of -
* * *
(2) whatever the nature of interest retained may be; whether the interest retained is vested, contingent, in reversion, or otherwise; whether conditioned on the precedent giving of notice, or on the elapsing of a period of years, or on the happening of a specified event; whether taken by appointment, or by designation in the trust instrument, or merely by virtue of the grantor not conveying his whole estate in the corpus, or otherwise; ↩
2. 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." ↩
3. SEC. 22. GROSS INCOME.
(a) GENERAL DEFINITION. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, or whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * ↩