*55 Decision will be entered for the petitioner.
Gift Tax -- Gift of Trust Income Taxable To Grantor. -- Where income of a trust is realized by the trust so that it is impressed with the trust as it arises, it does not represent a gift from the grantor, even though it is taxable to him.
*986 The Commissioner determined the following deficiencies in gift tax and 25 per cent additions thereto on account of failures to file returns:
| Year | Deficiency | 25% addition |
| 1936 | $ 12,991.17 | $ 3,247.79 |
| 1937 | 7,821.97 | 1,955.49 |
| 1938 | 20,374.84 | 5,093.71 |
| 1939 | $ 4,543.76 | $ 1,135.94 |
| 1940 | 8,826.48 | 2,206.62 |
| 1941 | 4,039.45 |
*56 The petitioner contends that he did not make taxable gifts of $ 96,089.31 in 1936, $ 52,146.43 in 1937, $ 133,111.63 in 1938, $ 26,340.66 in 1939, and $ 48,731.43 in 1940, each amount representing a part of the annual income of two trusts.
FINDINGS OF FACT.
The petitioner is an individual, with his residence and principal place of business at Salt Lake City, Utah. All gift tax returns filed by him, including the gift tax return for the year 1941, were filed with the collector of internal revenue for the district of Utah. He filed no gift tax returns for the years 1936 to 1940, inclusive.
The Commissioner included as taxable gifts made by the petitioner the net gains and profits from marginal trading in securities and grain futures realized by two trusts, the Copley trust and the Three trust.
The Copley trust was created in 1922 by the petitioner and his wife. It was irrevocable and none of the income or principal of the trust *987 could ever revert to the petitioner. He retained no right to alter, to amend, or to change the beneficial interests. The trust was to consist of a trading account, to be operated under the direction of the petitioner. A third party was named *57 trustee, but his participation was to be nominal. The profits and benefits, if any, were to be and were divided on April 15, 1945, among the petitioner's three children in fixed proportions stated in the deed of trust, and the trust was then terminated. No interim distributions were authorized or made. The petitioner was to stand any losses resulting from trading in the account, but any losses made good by him were to be returned to him out of the first profits of subsequent transactions. No property was transferred to the trust in 1922. It started with a trade in an account set up on the books of a brokerage business regularly carried on by a partnership consisting of the petitioner, his wife, and, later, his children. Property was transferred to the account prior to the years here in question. The trading in the account resulted in gains in all years except 1928 and 1929, in which losses amounting to more than $ 150,000 were sustained. The net worth of the account during the years involved herein was far more than was necessary to provide the margin required for the trading carried on in the account.
The Three trust was created by the petitioner and his wife in 1932. It *58 was like the Copley trust in all material respects, except that it was to terminate on April 15, 1950, and meanwhile income could be distributed to the children at the discretion of the petitioner and any two of the three trustees. An account was opened for this trust similar to the account for the Copley trust. Gains and profits were realized in every year. The net worth of the account during the years involved herein was far more than was necessary to provide the margin required by the trading carried on in the account.
The Commissioner mailed a notice of deficiencies in income tax to the petitioner in 1940, holding, inter alia, that all of the income of these two trusts for the years 1934 to 1937, inclusive, was taxable to the petitioner. The Board of Tax Appeals sustained the Commissioner under section 22 (a) and Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. See 46 B. T. A. 122. The Circuit Court of Appeals for the Tenth Circuit reversed and held that the income from interest, dividends, outright sales, and all income of the accounts, other than income from trading on margin, was not taxable to the petitioner, but that*59 income from trading on margin was taxable to him because it was directly attributable to the voluntary exercise by him of his personal skill in trading for the account of the trusts. See Hogle v. Commissioner, 132 Fed. (2d) 66. The parties then stipulated the amount of the income of the trusts from trading on margin for each year and decisions based upon that stipulation became final.
*988 The Commissioner, in determining the deficiencies in gift tax involved herein, included in taxable gifts the following amounts representing the profits from trading on margin for the accounts of the two trusts during the years stated:
| 1936 | $ 96,089.31 |
| 1937 | 52,146.43 |
| 1938 | 133,111.63 |
| 1939 | 26,340.66 |
| 1940 | 48,731.43 |
Most of the facts have been stipulated and the stipulation is incorporated as a part of these findings of fact.
OPINION.
The only question presented for decision in this case is whether the Commissioner erred in including in taxable gifts the profits from trading on margin for the accounts of the two trusts. The Commissioner argues that, since the income from marginal trading in the accounts for the years 1934 through 1937 was held taxable*60 to the petitioner, it follows that the similar income for the years 1936 through 1940 must first have belonged to the petitioner and have been given by him to the trusts. This contention is not supported by the authorities cited by the respondent or by the facts in this case. It does not follow as a matter of course that, because income of a trust is taxable to the grantor, the transfer in trust is incomplete as to that income for gift tax purposes and that a gift tax liability arises when, as the income is earned, it is allowed to remain in the trust. The two taxes are not that closely integrated. Commissioner v. Prouty, 115 Fed. (2d) 331; Commissioner v. Beck's Estate, 129 Fed. (2d) 243.
The opinion of the Circuit Court in Hogle v. Commissioner, 132 Fed. (2d) 66, does not hold that Hogle was ever actually the owner of any of the corpus or income of these trusts. The court pointed out that Hogle could not share in the corpus or income of the trusts in any way. It recognized that all of the income realized in the accounts was realized as the income of the trusts and not the*61 income of Hogle. The court was discussing the taxability of "the income derived by the trust" and it held that the profits derived by the trusts through trading on margins were taxable to Hogle because the earning of that income involved the exercise of personal skill and judgment by Hogle which he could exercise or withhold as he chose and it was proper to tax those profits for income tax purposes to him as "in substance personal earnings of Hogle." It is apparent from the opinion as a whole, despite certain statements, that the court regarded the profits from marginal trading as belonging in law to the trusts and not as profits actually belonging to Hogle, despite the fact that they were taxable to him under section 22 (a). The court recognized that the profits in *989 question could be realized only by the trust and never by Hogle personally.
The profits of the trusts from trading on margins were partly due, of course, to the personal skill and judgment of Hogle, who advised the trusts in the use of their funds. However, the profits arose from the use of trust corpus, i. e., only after the funds or securities belonging to the trusts were invested or sold in accordance with*62 the advice of Hogle. While Hogle could give or withhold his advice, nevertheless, once he had given his advice he could not control the profits which the trust thereafter realized on its investments. He could not give or withhold those profits. The profits as they arose were the profits of the trust, and Hogle had no control whatsoever over them. He could not capture them or gain any economic benefit from them for himself. The question here is not whether Hogle may have made a gift to the trusts of personal services which might be valued independently of the profits derived from the marginal trading. The question is only whether he made a "transfer * * * of property by gift" to the trusts, consisting of the profits on the marginal trading accounts. Sec. 1000 (a), I. R. C. Neither the corpus nor the profit in the accounts was the property of Hogle under the law of Utah. He never made a gift of the profits to the trusts. The parties themselves seem to realize this. They have stipulated that the items in dispute are "the net gains and profits realized from marginal trading in securities and from trading in grain futures for the account of two certain trusts." (Italics *63 added.) This, in effect, is a stipulation that the gains and profits were the gains and profits of the trusts as they were realized. Furthermore, that stipulation appears to us to be in accordance with the facts. Consequently, those amounts could not be the subject of any transfer by gift from the petitioner to those trusts.
This case is different from Lucas v. Earl, 281 U.S. 111">281 U.S. 111, in which the Supreme Court was dealing with salaries and attorneys' fees earned by Earl. Earl and his wife had agreed that his earnings should be considered as having been received and owned by him and his wife as joint tenants. The Court hesitated to say that the salary did not vest, as earned, in Earl, but held it taxable to him because he earned it, even if it never for a moment vested in him. Here the profits vested as realized in the trusts, not in Hogle, and he could not make a transfer of them by gift.
The Supreme Court said that the issue in Helvering v. Clifford, supra, was "whether the grantor after the trust had been established may still be treated, under this statutory scheme, as the owner of the corpus." The statutory*64 scheme which it was considering was "the broad sweep" of section 22 (a). The holding was that the grantor continued to be the owner of the corpus for purposes of 22 (a). The *990 Court recognized "his disability to make a gift of the corpus to others during the term of the trust." It has been held in the present case that the profits in question were taxable to the grantor under 22 (a), but the Clifford case is not authority for the proposition that, by allowing the profits to remain the property of the trusts, the grantor thereby made a gift of those profits to the trusts. When we examine this transaction from the standpoint of gift taxes as opposed to income taxes, we find there is no statute such as 22 (a) which has a broad sweep and which requires us to look behind the legal situation to some other in order to impose a gift tax. Also, it must be remembered that this is not a revocable trust in which the grantor, seeing a potential gain which he could capture for himself by revoking, may be said to have made a gift when he fails to revoke. Nor is it a trust where the grantor has retained the power to determine directly or indirectly which of two or more beneficiaries*65 may receive the income, and finally allowing it to go one way, might be said to have made a gift at that time.
We must hold in this case that legal title to the amounts in question was never in the petitioner and was never transferred by him to the trusts, either in the taxable years or in any other years. Those profits were impressed with a trust when they first came into existence and the trust did not merely attach after they had come into existence. It is our understanding that the deficiencies result entirely from the action of the Commissioner in including in taxable gifts the gains and profits from trading on margin discussed above, and that if these amounts are not taxable gifts there is no deficiency for any year and, consequently, there can be no addition for failure to file returns.
Decision will be entered for the petitioner.
Black, J., dissenting: It seems clear enough that the gift tax is imposed in the year when the gift becomes complete. Burnet v. Guggenheim, 288 U.S. 280">288 U.S. 280.
In the instant case the petitioner and his wife in 1922 created the Copley trust, which was irrevocable, for the benefit of their three children. *66 The trust was to consist of a trading account, to be operated under the direction of petitioner. No property was transferred to the trust in 1922. No gift tax law was in effect in 1922, but if there had been one in effect at that time no gift tax could have been imposed upon petitioner and his wife upon the creation of these trading accounts because any gifts thus made, from the point of view of substance, were inchoate and imperfect. It was only in later years when petitioner actually operated these trading accounts and they ripened into actual fruit represented by large profits that the inchoate and *991 imperfect gifts made back in 1922 became complete. It seems to me that the court in Hogle v. Commissioner, 132 Fed. (2d) 66, correctly characterized the fruits which arose from the operation of these margin accounts in the following language:
* * * The income thus created and the profits thus realized were not merely income accruing from the corpus of the Trust or from capital gains realized from disposition of corpus, but were profits earned through trading on margins involving the exercise of personal skill and judgment of Hogle, and*67 were in substance personal earnings of Hogle. The amount of trading on margins which Hogle was to carry on for the Trust was wholly in his discretion. He could trade little or much or not at all for the benefit of the Trust as he saw fit. Thus, he exercised practical control over what portion of income from his personal efforts in trading on margins should accrue to the Trust.
Hogle allocated to the Trust in each of the taxable years in question such portion of his personal efforts in trading on margins as he saw fit. In substance, he gave to the Trust in each of those years the profits derived from a designated portion of his individual efforts. It amounted in each of those years to a voluntary assignment of a portion of his personal earnings. * * *
It is true, of course, that the foregoing language of the court was used with reference to the imposition of the income tax under section 22 (a) and would not necessarily control the incidence of the gift tax. However, I think it correctly characterizes what was done for the purpose of the imposition of the gift tax as well as that of the income tax.
The majority opinion in the instant case lays much stress on the fact that, once*68 the profits were earned from the operation of the margin accounts by petitioner, they belonged to the trusts and could not be recalled nor deflected in any manner by petitioner. That is undoubtedly true, but it is, in my opinion, no answer to the issue that the gifts of the earnings in these margin accounts were not complete until the respective years when such profits were earned.
The court in Hogle v. Commissioner, supra, took note of the fact that it was not until the years that earnings from the margin accounts were realized that they fell into corpus. On that point the court said:
On the other hand, after the earnings which arose from trading on margins passed to the trust they became part of the corpus of the trust and were no longer within Hogle's control. Once they fell into corpus, the rights of the beneficiaries thereto and to the income therefrom were irrevocable. * * *
In considering the issue which we have here for decision, it should be borne in mind that the Commissioner is making no contention that the earnings of the trust corpus, as such, such as interest and dividends, were the subject of gifts in any of the years which we have*69 before us. All that the Commissioner seeks to tax as being the subjects of gifts in each of the taxable years are the earnings from these margin accounts, and in this, I think, he is correct for reasons I have already endeavored to explain.
*992 What I have said with reference to the Copley trust, created in 1922, seems to be equally applicable to the Three trust, created in 1932, and there is no necessity for repetition.
For the reasons above stated, I respectfully dissent from the majority opinion.