*1226 1. A trust provision requiring the transfer of all trust property to the grantor upon his notice to the trustee that he and his wife, a beneficiary, have separated for any cause whatever can not be viewed as a power to terminate by a factitious separation so as to subject the grantor to tax on trust income under section 166, Revenue Act of 1934.
2. A trust provision reserving to the grantor an unqualified right to direct sales of trust property to himself or others at his own price and on his own terms is substantially equivalent to a power to revest, and income from property so held is taxable to the grantor under section 166, Revenue Act of 1934.
3. A trust provision reserving to the grantor the equivalent of a power to revest through a broad control of the sales of trust property is to be read as limited by other provisions which, although ambiguous, seem to contemplate the trustee's prservation of specified properties, or substitutions therefor, and income from the latter, which are beyond the grantor's power of revestment, is not taxable to him under section 166, Revenue Act of 1934.
4. Insurance dividends received by a trustee and used to pay premiums on policies*1227 of insurance held in trust are to be excluded from gross income of the trust notwithstanding oblique suggestions in the trust instrument that the draftsman regarded them as income and their treatment as such for trust purposes.
5. Amounts contributed by a grantor for the trustee's application to premiums on insurance policies issued on the grantor's life and held in trust are not income of the trust and are not taxable as such to the grantor under section 167(a)(3), Revenue Act of 1934.
6. The income of a trust which in the trustee's discretion could be used for the support of the grantor's wife and children but in fact was not so used is not taxable to the grantor. E. E. Black,36 B.T.A. 346">36 B.T.A. 346.
7. Amounts paid by a trust of which the taxpayer was grantor and a corporation of which taxpayer was the sole stockholder, as rent and expenses of an apartment and lodge occupied by him and his family discharged the family obligations of the taxpayer and are taxable to him. Hill v. Commissioner, 88 Fed.(2d) 941.
8. The rental value of a lodge, which was occupied rent-free by the taxpayer and his family and was the property of the taxpayer's*1228 wholly owned corporation to which he rendered substantial services, held, to be compensation for such services and within his gross income.
*166 The Commissioner determined deficiencies of $1,495.52 for 1934 and $4,581.28 for 1935 in income tax of Percy M. Chandler and a deficiency of $231.86 for 1934 in income tax of Marie Langtry Chandler, including in income of the petitioners the income of a trust The facts were in part stipulated.
FINDINGS OF FACT.
The petitioners are married and living together. There are 4 children: 2 aged 21 and 18, of Mrs. Chandler by a former marriage and adopted by Chandler in 1926, and 1 aged 8, a child of the present marriage, all of whom resided with petitioners during 1934 and 1935; and a son, aged 20, a child of a former marriage of Chandler, who did not reside with petitioners. During 1934 and 1935 the petitioners were legal residents of Pennsylvania and domiciled at Pocopson, Pennsylvania. They also had an apartment at 280-296 Park Avenue, New York City, the lease*1229 to which was held by the Guaranty Trust Co. of New York as trustee under an indenture of trust dated February 8, 1930, of which Chandler was grantor and Mrs. Chandler was beneficiary.
On February 8, 1930, Chandler transferred to the trustee certain securities and other property, life insurance policies on his life, of which the trustee was designated as the payee, and the lease covering the Park Avenue apartment. The securities and other property, exclusive *167 of the life insurance policies, were carried on the trustee's books as of February 8, 1930, as follows:
| 1302 shares of capital stock of 290 Park Avenue, Inc., and a lease dated December 22, 1921, of the apartment | $65,100.00 |
| Sub-lease dated March 12, 1928, of servants rooms at 280-290 Park Avenue | |
| $30,000 Richmond Ice Company, Inc. First and General Lien Series "A" 6 1/2s due Nov. 1, 1932 | 22,500.00 |
| $1,000 C.M. St. P. & P.R.R. Co. Convertible Adjustment 5s due Jan. 1, 2000 | 740.00 |
| 1160 shares United States Dairy Products Corporation Class "A" Common Stock | 68,150.00 |
| 1400 shares Chandler and Company, Inc., First Preferred Stock | 210,000.00 |
| 300 shares P. M. Chandler and Company, Inc. Common Stock | 44,889.00 |
| 100 shares Brandywine Farms Corporation Common Stock | 106,951.00 |
| Total | $518,330.00 |
*1230 The trust indenture of February 8, 1930, provided:
SECOND: Policies: Grantor agrees to pay to Trustee, from time to time, such sums of money as may be required for the payment of the premiums becoming due on all of the policies in the Trust Fund, after the application to the payment of such premiums of the dividends, if any, allowed by the several companies issuing such policies upon said policies, it being understood and agreed that all such dividends are to be used in the reduction of premiums. Trustee shall pay the premiums which may become due and payable on the policies, or any of them, by the application of such dividends and from the cash furnished from time to time for that particular purpose by the Grantor. If such dividends and such cash as shall be so furnished by the Grantor are at any time insufficient to pay said premiums, or any thereof, Trustee shall, as Beneficiary shall from time to time direct, use for such purpose income from the Trust Fund or shall borrow upon said policies or any of them, or shall exercise any option given in any policy to change the same to paid up insurance, or to extended paid up term insurance, or to surrender the same and receive*1231 the cash surrender value thereof. From and after the death of Beneficiary, Grantor shall have the same right to direct Trustee. Should Beneficiary, or Grantor after Beneficiary's death, fail to give such directions to Trustee, then Trustee, in its sole and unrestricted discretion, may exercise said option or any of them * * *.
THIRD: Apartment at 280 Park Avenue: During the lifetime of Grantor Trustee shall not sell or otherwise dispose of the shares of capital stock of 290 Park Avenue, Inc., or any of them, nor of the lease covering the apartment at 280 Park Avenue without the consent of Grantor. After the death of Grantor, and during the lifetime of Beneficiary, Trustee shall not sell or otherwise dispose of the said shares of capital stock, or any of them, nor of the said lease, without the consent of Beneficiary. Trustee shall, whenever requested so to do by Grantor during his lifetime, and, after the death of Grantor, whenever requested so to do by Beneficiary, sell or otherwise dispose of the said shares of stock of 290 Park Avenue, Inc., and/or the said lease of the apartment at 280 Park Avenue for such considerations and upon such terms as to credit or otherwise*1232 as shall be set forth in such request. Trustee shall, whenever requested by Grantor, or whenever requested by Beneficiary after Grantor's death, apply so far as is legally permissible all or part of *168 the proceeds of the sale or other disposition of said shares of such capital stock and/or of said lease to the purchase or other acquisition of another cooperative apartment or of a private dwelling house or of a country place or both, and such new co-operative apartment, private house or country place shall be held by Trustee as a part of the Trust Fund. The co-operative apartment, private dwelling house or country place so to be purchased, the consideration to be paid therefor and the terms as to credit or otherwise upon which such payment is to be made shall be as requested by Grantor, or, after Grantor's death, by Beneficiary, and Trustee shall have no discretion with respect thereto.
Grantor and Beneficiary and the survivor of them shall have the right to occupy the said apartment at 280 Park Avenue or any co-operative apartment, private dwelling house or country place acquired by Trustee, and becoming part of the Trust Fund as provided in this paragraph, without being*1233 required to pay any rent or charge for such occupancy.
FOURTH: Brandywine farms corporation: Trustee shall not sell or otherwise dispose of the shares of the capital stock of Brandywine Farms Corporation during the lifetime of Grantor without his consent nor during the lifetime of Beneficiary, should she survive Grantor, without her consent. During the lifetime of Grantor, Trustee shall give to Grantor from time to time when requested by him proxies and powers of attorney to vote said stock at all meetings of the stockholders of said Brandywine Farms Corporation for the election of directors and/or for the authorization, approval and/or ratification of any and all corporate action whatsoever; and Grantor shall have full and complete authority to select and elect the directors of said corporation and to vote for or against the authorization, approval and/or ratification of any and all corporate action whatsoever. The directors of said corporation so elected shall have full power and authority to select and elect the officers of said corporation. Trustee shall also from time to time and whenever requested by Grantor give to Grantor such power or powers of attorney as may be*1234 necessary to permit Grantor to consent in writing to any corporate action that might be taken by the stockholders of the Corporation at a meeting thereof. Trustee shall not be liable or responsible in any manner whatsoever for the management and control of said Brandywine Farms Corporation or for anything done, suffered to be done or ommitted by said Corporation or by the directors, officers or employees thereof and shall not be expected or required to examine into the management of said Corporation, it being the intent of this Paragraph Fourth that so long as Grantor may live, he shall have and be responsible for the full and complete control and management of said Corporation and of its business and affairs. * * * In the event that Grantor during his lifetime or Beneficiary, after the death of Grantor, shall direct Trustee to sell or otherwise dispose of the shares of the capital stock of Brandywine Farms Corporation either to Grantor or to Beneficiary or to a third person, Trustee shall make such sale or disposition for such consideration and upon such terms as to credit or otherwise as may be set forth in the direction given to it by Grantor or, after his death, by Beneficiary*1235 and shall invest the proceeds of such sale or other disposition in such manner as Grantor or, after his death, Beneficiary may direct. If such directions result in the purchase by Trustee of the shares of the capital stock of another corporation, then all of the provisions of this Paragraph shall relate to such shares of stock and to the corporation by which such shares of stock are issued.
Grantor and Beneficiary and the survivor of them shall have the right to occupy, without being required to pay any rent or charge for such occupancy, *169 all or such part of the premises owned by Brandywine Farms Corporation as they or the survivor of them shall require. Grantor and Beneficiary and the suvivor of them shall have the same right of occupancy free from any rent or charge of all or any part of the property of any corporation, the stock of which is acquired by Trustee pursuant to the provisions of this Paragraph Fourth.
In a letter to the trustee, dated April 3, 1933, Chandler proposed that the trustee borrow on the life insurance policies to pay the premiums, since he wished to purchase securities with the money that he would have had to use to pay the premiums. Mrs. *1236 Chandler agreed to this on May 5, 1933. Between May 22 and November 23, 1933, the trustee borrowed $6,239.44 on three of the policies. With the funds thus released to him, Chandler purchased securities which he transferred to the trust. When the borrows were made, Chandler put in additional securities of a value equal to the amount borrowed. On March 14, 1934, the trustee was advised by its counsel to repay the amount borrowed, and Chandler, on April 9, 1934, directed it to sell the securities and make repayment. The additional securities were sold and repayment of the loans was made in April 1934. The sale resulted in a surplus of $1,223.01 after repayment of the loan.
In 1934 the trustee received $7,717.63 from Chandler to apply toward the payment of premiums and all of it was so used. Included in that sum was $557.26 received from Chandler on April 24, 1934, although not entered on the trustee's ledger until December 9, 1935, when an entry reversing a number of former 1933-1934 entries was made. The trustee's original income tax returns were made on the basis of the original uncorrected entries for 1933-1934. In 1934 $8,470.30 was paid by the trustee for premiums. Included*1237 in that amount was $634,62 received from Chandler in prior years to pay premiums and $118.05 dividends received on a policy. In 1935 Chandler contributed $5,045.82 to the trust for the payment of insurance premiums and the trustee paid $6,383.43 premiums. The balance of $1,337.61 paid by the trustee was received by it as dividends on policies during that year. The premiums paid by the trustee in 1935 were paid entirely out of amounts received from Chandler or as dividends from insurance policies held in the trust, and not at all with trust income otherwise received. On July 21, 1933, the trustee received $494.37 from Chandler as an adjustment for the loans on the policies in 1933, although that amount was not entered on the trustee's ledger as of that date until April 11, 1934.
By article fifth, the trustee was required to dispose of the trust income, after paying trust expenses, (1) by paying insurance premiums as provided, (2) paying the rent and other charges on the Park Avenue apartment or a substituted place, (3) paying from the *170 remaining net income so much as the trustee in its discretion "shall deem necessary for the support, benefit and maintenance of said*1238 Beneficiary [the wife]", and any remaining surplus, in the trustee's discretion, "for the support, benefit, maintenance and education of the children of the Beneficiary." In years prior to 1934 distributions were made to Mrs. Chandler, and there was no qualification as to whether they were for her support and maintenance. There was no call made on the trustee by Chandler, his wife, or the children for funds for their maintenance or support. Chandler paid all costs of maintenance and support of his family except for the charges on the Park Avenue apartment. In 1934 and 1935, none of the trust income was paid or distributed to any of the children.
SEVENTH: Management of Trust Estate:
* * *
During the lifetime of Grantor, Trustee shall make such sale, exchange or other disposition either to Grantor or to a third party or third parties designated by him of all or any part of the Trust Fund and for such considerations and upon such terms as to credit or otherwise as Grantor shall at any one time or from time to time direct. Trustee shall also acquire by purchase, exchange or otherwise such real or personal property for such considerations and either from Grantor or from*1239 such third party or third parties as Grantor may at any one time or from time to time direct. Grantor may be personally interested in the sale, exchange or other disposition of any part of the Trust Fund and/or in the purchase, exchange or other acquisition of real and/or of personal property for the Trust Fund. Trustee shall at all times and forever be freed from any and all liability and responsibility for acting in accordance with such directions of Grantor.
* * *
NINTH: Revocation of this Indenture: If prior to the death of Grantor, Grantor and Beneficiary shall be separated and cease to cohabit as may [sic] and wife for any cause whatsoever and regardless of whomsoever may be at fault, then Grantor shall have the right to terminate and revoke this Indenture and the trusts thereby created by notice in writing from Grantor to Trustee stating the fact of such separation and of such cessation of cohabitation. Upon receipt of any such notice, Trustee shall assign, transfer and deliver to Grantor or to the Nominee of Grantor all life insurance policies, securities or other property then a part of the Trust Fund, and the trusts hereby created shall in all respects cease*1240 and determine. Trustee shall not be bound or permitted to inquire as to the fact of such separation or cessation of cohabitation but shall be bound to act upon the written notice given by Grantor as hereinbefore provided, which said notice shall be final, binding and conclusive not only upon Trustee but upon Beneficiary and upon and parties interested in the Trust.
Chandler, who was experienced in the purchase and sale of securities, gave the trustee directions as to all purchases or sales of securities. His wife always accepted his advice as to her interest in the trust. The trust was classified by the trustee as a "direction trust", in which the trustee acts in accordance with the directions of someone else. When the trustee received instructions from Chandler *171 regarding the sale, purchase, or exchange of a any investments, it always checked with the market value and assured itself that the trust property was not depreciated. No purchases were made at above or sales at below market value. Chandler generally entered orders for the purchase or sale of securities and then notified the trustee by letter. In the years 1930-1935, there were 66 purchases of securities*1241 by the trust, made at a total cost of $161,866.50, and 87 sales, made at a total price of $168,607.04, of which $166,612.13 represented 46 sales of principal and $1,994.91 represented sales of income. The number of purchases and the number of sales of principal in the years 1930-1935 were as follows:
| Purchases | Sales of principal | |
| 1930 | 16 | 10 |
| 1931 | 5 | 5 |
| 1932 | 20 | 4 |
| 1933 | 10 | 12 |
| 1934 | 6 | 7 |
| 1935 | 9 | 8 |
| Total | 66 | 46 |
Most of the transactions were handled by Chandler & Co., which drew the regular commissions therefor. In 1930 40 percent of the preferred and all of the common stock of Chandler & Co. was owned by Chandler. Both Chandler and his wife made additions to the trust estate following the execution of the trust indenture on February 8, 1930.
On October 1, 1926, Chandler had set up a revocable trust, himself the trustee, for the benefit of the present Mrs. Chandler, whom he was about to, and did, marry in October 1926, transferring to the trust 700 shares of the capital stock of Chandler & Co., a Delaware corporation. That trust has not been revoked, and was in existence during the years 1934-1935. In 1934, $5,600 and in 1935, $18,200 of the trust*1242 income was paid to Mrs. Chandler.
Chandler in 1926 acquired 1,302 shares of the apartment building located at 280-296 Park Avenue, New York City, for $140,000, thereby acquiring a proprietary right in a specific apartment. He held such stock in trust for his wife after their marriage in 1926. He and his wife and children used the apartment as a residence about 5 months each year, but they always spent their holidays and week ends in Pocopson, where Mrs. Chandler voted in 1934-1935. In 1934, $6,190.06 was paid by the trustee for rent or assessments on the Park Avenue apartment and in 1935, $5,658.48. Such payments were made from an account called the 280-296 Park Avenue property account, containing funds received by the trustee from the trust securities, and from another account, called a rent deficiency account, containing funds received from Chandler by the trustee.
*172 The books of the trustee show a gross amount of $15,589.89 received during 1934, as follows:
| Interest | $3,987.43 |
| Dividends | 2,457.02 |
| Grantor for premiums on life insurance policies | 7,717.63 |
| Grantor for paymetn of assessments on shares of 290 Park Avenue, Inc | 785.23 |
| Dividends received on life insurance policies | 118.05 |
| Rent received on servants' rooms at 280-290 Park Avenue, New York City | 165.00 |
| Securities representing income received by trustee and sold | 370.91 |
| Securities representing income received by trustee and distributed as income | 28.62 |
*1243 The books show a gross amount of $17,110.93 received during 1935, as follows:
| Interest | $5,220.36 |
| Dividends | 3,712.26 |
| Grantor for premiums on life insurance policies | 5,045.82 |
| Grantor for payment of assessments on shares of 290 Park Avenue, Inc | 1,244.00 |
| Dividends received on life insurance policies | 1,337.61 |
| Rent received on servants' rooms at 280-290 Park Avenue, new York City | 380.40 |
| Securities representing income received by trustee and sold | 170.48 |
Disbursements of $16,083.08 during 1934 were shown as follows:
| Premiums on life insurance policies | $8,470.30 |
| General liability insurance premium | 6.00 |
| Assessment on shares of 290 Park Avenue, Inc | 7,140.29 |
| Registered mail, trustee's commissions | 466.49 |
Disbursements of $13,810.53 during 1935 were shown as follows:
| Premiums on life insurance policies | $6,383.43 |
| General liability insurance premium | 8.63 |
| Assessment on shares of 290 Park Avenue, Inc | 6,998.25 |
| Registered mail, trustee's commissions | 420.22 |
Chandler filed his individual income tax returns for teh calendar years 1934 and 1935 with the collector of internal revenue at Philadelphia, Pennsylvania. Mrs. Chandler*1244 filed her individual income tax return for the calendar year 1934 with the collector of internal revenue, third district of New York, New York City. The Guaranty Trust Co., as trustee under the trust of February 8, 1930, filed fiduciary returns for the calendar years 1934 and 1935 with the collector of internal revenue for the third district of New York.
The trustee's fiduciary return for 1934 showed net income $4,030.79, which was shown to have been distributable to Mrs. Chandler, as beneficiary. The income had been expended by the trustee in discharge *173 of liabilities of the trust and was not actually paid or held for distribution to Mrs. Chandler. Mrs. Chandler included that amount in the income shown on her personal income tax return for 1934 and paid the tax. The trust income was not included in the personal income tax return of Chandler for 1934. Thereafter the collector of internal revenue for the third district of New York made a refund of $231.86, plus interest, to Mrs. Chandler on the ground that that sum constituted an overassessment of her income taxes, due to the fact that the trust income in 1934 was not taxable to her but to Chandler, as grantor, holding*1245 that the trust was a revocable trust.
The trustee's fiduciary return for 1935 showed net income $10,260.01, of which $8,121.61 was shown as distributable to Mrs. Chandler as beneficiary, and $2,138.40 was shown as retained by the trustee. That income had been expended by the trustee in discharge of liabilities of the trust and was not actually paid or held for distribution to Mrs. Chandler. Mrs. Chandler, in her income tax return for 1935, included the $8,121.61 as income from the trust. The trust income was not included in the personal income tax return of Chandler, grantor, for the calendar year 1935.
During the years 1934 and 1935 Chandler was president of the Brandywine Farms Corporation, a Pennsylvania corporation. From its organization in 1926 to the creation of the trust on February 8, 1930, when the stock was transferred pursuant to the trust indenture, he owned the corporation's entire capital stock. At all times from its organization through the taxable years in question, he completely controlled and directed all corporate action and affairs. In 1934 it purchased approximately $60,000 worth of diversified stocks and sold approximately $48,000 worth. In 1935 it*1246 bought and sold approximately $160,000 worth. This was the main activity of the corporation.
During 1934 and 1935 the corporation held title to certain property at Pocopson, Chester County, Pennsylvania, a part of which was known as Brandywine Lodge. The corporation's property contained approximately 400 acres of land, with a furnished stone residence containing 8 bedrooms, 5 baths, and a customary ground floor space, including hall, dining room, living room, kitchen, pantry, porch, and terraces; a 4-car garage; a gardener's cottage; a 4-horse stable with an apartment above it, and other buildings; a swimming pool; and a tennis court. The corporation in 1934-1935 leased two farms which were part of its property, one of which it sold in 1935. Brandywine Lodge, which was carried on the corporation's books at a cost in excess of $400,000 as at December 31, 1934, was situated on a plot of *174 approximately 50 acres. This was the only part of the corporation's property that was farm land. The corporation's property contained the Huey, Sager, Temple, and Schuster farms. Brandywine Lodge was located on the Schuster farm, which contained approximately 300 acres.
During*1247 1934 and 1935 Brandywine Lodge was occupied rent-free by Chandler as a personal residence for himself and family. The corporation paid various maintenance and operating expenses, amounting to $10,834.70 for 1934 and $8,686.92 for 1935, without reimbursement from Chandler, such expenses being as follows:
| 1934 | 1935 | |
| General expense | $288.22 | $366.54 |
| Oil and gas | 1,241.79 | 1,257.08 |
| Stable supplies | 222.70 | 158.05 |
| Coal | 89.76 | 75.68 |
| Auto expense | 206.78 | 175.68 |
| Garden supplies | 952.91 | 376.17 |
| Telephone | 421.34 | 363.16 |
| Electric | $722.01 | $605.13 |
| Fertilizer and feed | 75.95 | 96.30 |
| Poultry expense | 254.10 | 337.18 |
| Stable food | 313.39 | 225.95 |
| Household salaries | 6,045.75 | 4,650.00 |
| Total | 10,834.70 | 8,686.92 |
On its income and excess profits tax returns Brandywine Farms Corporation deducted $5,712.55 in 1934 and $5,004.54 in 1935 as operating expenses. Of the maintenance and operating expenses during the years 1934-1935 the following were the only ordinary and necessary expenses paid or incurred by Brandywine Farms Corporation in carrying on a trade or business in those years:
| 1934 | 1935 | |
| General expense | $144.11 | $183.27 |
| Fertilizer and feed | 75.95 | 96.30 |
| Household salaries | 432.00 | 432.00 |
| Total | 652.06 | 711.57 |
*1248 The rental value of the residence and the surrounding buildings and land occupied by Chandler was, during 1934 and 1935, $4,000 per annum. In his income tax returns for the calendar years 1934 and 1935 Chandler did not report as income such rental value or any of the items of maintenance and operation paid by the corporation.
OPINION.
STERNHAGEN: The Commissioner determined that the 1934 and 1935 income of the trust created by the indenture of February 8, 1930, was taxable to Chandler under the Revenue Act of 1934, section 166, and he now contends also that it was so taxable under sections 167 and 22(a).
*175 For this determination, the first reliance is upon article ninth, which provides for the transfer of all the trust property to the grantor and the termination of the trust if Chandler and his wife "shall be separated and cease to cohabit as man and wife for any cause whatsoever and regardless of whomsoever may be at fault." This, it is argued, has the effect of a reservation of power to revest because the condition is wholly within the grantor's control. It is said that by voluntarily separating from his wife, even temporarily, and notifying the trustee of*1249 the separation, the grantor may terminate the trust and reacquire the property. This is indeed a cynical view to adopt. 1 It can not be said with any assurance that an attempt by the grantor so to terminate the trust by a factitious separation or ceasing of marital relations would withstand attack in an equity court. Such a power would stultify the remaining provisions, including the restrictions of the indenture, such as that requiring the preservation or substantial replacement of the farm and the apartment. Such an interpretation of the instrument should be supported by evidence of some circumstance to comple it or at least to suggest that the article was more than a provision against a conceivable but remote contingency. We reject it.
It is then argued by the Commissioner that the broad control reserved under article seventh is equivalent to a power to revest. The article is entitled "Management of Trust Estate", but the text goes further than management. The grantor may direct the sale "or other disposition" to himself for such consideration and upon such terms as*1250 he may direct. The terms are absolute. But they must be read in the light of the whole instrument and to preserve consistency with more specific provisions. Article third clearly provides for the preservation as trust property of the Park Avenue apartment or a similar habitation, and article fourth, although not free from ambiguity, seems to contemplate the preservation of the Brandywine Farm property and its occupancy by the grantor and his wife. Any direction by the grantor to the trustee that either of those properties should be transferred to himself would in any litigation in equity be limited by those articles. So much of the corpus is therefore beyond the power of the grantor to revest in himself.
But there is nothing else in the trust instrument from which it could be said that the power is narrower than the broad language of article seventh reserves. Thus the grantor may direct the sale to himself of the United Dairy stock, the Ice Co. bonds, or the Chandler & Co. stock, or any securities that have been substituted *176 for them, at his own price and his own terms, and the trustee must comply and is freed from liability for doing so. Whether this unqualified*1251 power to fix the price would be read as permitting the grantor to direct a sale to himself for a nominal price or upon terms so favorable as to amount substantially to a gift it is unnecessary to consider. Cf. . The purchase of the securities at a substantial but low price would still be pro tanto a power to revest so much of the property as exceeded the purchase price, ; and since there is no way in advance of drawing the line between an adequate and an inadequate price, either of which the grantor had the power to fix, the power must be judged by its latent possibilities. Therefore, on this ground, all the trust property, except the apartment shares and lease and the Brandywine shares, is within the terms of section 166 and the income therefrom is for that reason taxable to Chandler. , and , give petitioner no support, for in both the power reserved by the settlor to fix the price at which sales might be made applied only to sales to others and the settlor was not a prospective purchaser. *1252
The respondent argues that the income is taxable to Chandler because it is applicable to the payment of premiums on insurance on the grantor's life and is therefore within 167(a)(3). Article second of the indenture provides:
SECOND: Policies: Grantor agrees to pay to Trustee, from time to time, such sums of money as may be required for the payment of the premiums becoming due on all of the policies in the Trust Fund, after the application to the payment of such premiums of the dividends, if any, allowed by the several companies issuing such policies upon said policies, it being understood and agreed that all such dividends are to be used in the reduction of premiums. Trustee shall pay the premiums which may become due and payable on the policies, or any of them, by the application of such dividends and from the cash furnished from time to time for that particular purpose by the Grantor. If such dividends and such cash as shall be so furnished by the Grantor are at any time insufficient to pay said premiums, or any thereof, Trustee shall, as Beneficiary shall from time to time direct, use for such purpose income from the Trust Fund or shall borrow upon said policies or any*1253 of them, or shall exercise any option given in any policy to change the same to paid up insurance, or to extended paid up term insurance, or to surrender the same and receive the cash surrender value thereof. * * *
Dividends received by the trustee on life insurance policies amounted to $118.05 in 1934 and $1,337.61 in 1935, and these were used by the trustee to pay such premiums. In addition, the trustee received from the grantor $7,717.63 in 1934 and $5,045.82 in 1935 to apply to the premiums. The Commissioner would tax all of these amounts.
*177 The dividends received from the insurance company are by section 22(b) expressly excluded from gross income notwithstanding that the trust indenture, as in article fifth, contains some oblique suggestions that such dividends may have been regarded by the draftsman of the instrument as trust income and so treated for the purpose of the trust. Such an intimation has no power to make taxable what the statute exempts. This is true even though the dividends may be imputed to the grantor.
The indenture clearly states that the insurance premiums should be first reduced by the insurance dividends and then paid with contributions*1254 from the grantor. Only if such amounts received are insufficient to pay the premiums may the trustee use trust income at the direction of the beneficiary. There was, however, no need to use any trust income and none was in fact so used. Cf. ; .
The respondent then presses an argument that the amounts contributed by the grantor to the trustee to make up the amount needed to pay insurance premiums is income to the trustee and since it is used to pay such premiums it is taxable to the grantor under section 167(a)(3). The effect of this circuitous reasoning is to tax the grantor upon amounts expended by him. It is plainly insupportable. The contributions received by a trust from the settlor are not taxable income of the trust. Section 167(a)(3) does not attempt to label receipts by the trust, but, dealing with income of the trust, imputes it to the grantor to the prescribed extent of its use for the payment of insurance premiums. If any of the trust income were used to pay such premiums, it would to that extent be taxable to Chandler; but since none of it was, there is*1255 no support in section 167(a)(3) for taxing it to him.
There is a clear distinction in , where the trustee held a note of the grantor the interest on which was, when received from him, applied to insurance premiums. Such interest from a debtor, even though he be the settlor, is deductible by the debtor and income of the trust, and its use by the trust for the payment of premiums on policies insuring the settlor's life brings it squarely within the statute. But this can not be said of contributions by the settlor which are not deductible by him and, so far as they are paid by him with his income, have already been the subject of tax.
The respondent argues elaborately that the control of the trust property and income is so complete in substance as to amount to unfettered command and that the entire trust lacks substance. This broad conception of the trust as an empty form is not supported by *178 the evidence, as the findings show. As a general proposition, the trust must be recognized as such under the revenue act, even though its terms and operation invite the application of sections 166 and 167.
*1256 It is contended that the income of the trust serves to defray the personal expenses of Chandler and hence that , requires this income to be imputed to him. As to the income which in the discretion of the trustee could be used for the support, benefit, maintenance, or education of the wife and children, the evidence shows that no part of the trust income was so used and hence no part may be taxed to the settlor on that ground. ; ; ; dismissed, C.C.A., 3d Cir.; ; cf. .
There was, however, $6,190.06 in 1934 and $5,658.48 in 1935 paid by the trustee for rent and assessments on the Park Avenue apartment, and $10,834.70 in 1934, and $8,686.92 in 1935 paid by the farm corporation for expenses of the Brandywine Farm. Of the latter amounts only $652.06 in 1934, and $711.57 in 1935 were operating expenses of the corporation's business. The rest may be regarded*1257 as expenses of the lodge. Both the apartment and the lodge were occupied by the family and it is fair to regard their expense as Chandler's "personal, living and family expenses" (Revenue Act of of 1934, sec. 24(a)(1)). The payment of them by the trustee and the corporation, except of the small amount of business expenses, had the effect of discharging his family obligations. Thus the amounts are to be treated as his income and taxed to him. .
It is stipulated that the rental value of Brandywine Lodge was $4,000 per annum. Chandler, as president of the farm corporation, performed substantial services for it in directing its business, which to a substantial extent comprised the purchase and sale of securities. It is a fair inference that the occupancy of the lodge was permitted to him rent free as compensation for the services which he rendered. Certainly there is no support in this record for treating the occupancy as a gratuity given to him by the corporation or as essential to the corporation in the conduct of its business. Cf. *1258 ; dismissed, . The agreed rental value of the lodge is therefore properly to be included within Chandler's income.
The correlative effect of this opinion upon the deficiency of Mrs. Chandler will be redetermined under Rule 50.
Decision will be entered under rule 50.
Footnotes
1. See "Rex v. Pratt and Merry.↩ The Tax on Virtue." A. P. Herbert, Uncommon Law, p. 233.