*1261 1. INCOME - TRUST REVOCABLE BY TRUSTEE ONLY - IRREVOCABLE AS TO GRANTOR OF THE TRUST PROPERTY. Where petitioner was the settlor of a trust executed in 1928, by which certain corporate stocks were conveyed to the trustee, North Scranton Bank and Trust Company, a corporation, and the income therefrom was to be paid to petitioner during his lifetime and at his death the trust corpus was to go to his three children, and where it was provided that gains and profits resulting from a sale of the trust property should become a part of the trust corpus and not distributable as income to the petitioner, and that the trustee might revoke the trust on giving ten days written notice to the grantor, but that as to the grantor the trust was irrevocable, held, gains and profits resulting from a sale of the trust corpus in 1928 are taxable to the trust and not to petitioner, because such gains and profits were not income to petitioner as the "grantor of a revocable trust" within the meaning of section 166 of the Revenue Act of 1928.
2. INCOME TO BE PERIODICALLY DISTRIBUTED. The income received by the trustee in 1928 from dividends on the corporate stock held by the trust was taxable to*1262 petitioner, because under the terms of the trust instrument it was to be periodically distributed to him.
*732 This proceeding is for the redetermination of a deficiency for the year 1928 amounting to $17,971.58. The only issue involved is whether or not a certain living trust agreement made between the petitioner, Valentine Bliss, as grantor, and the North Scranton Bank and Trust Company, as trustee, is revocable or irrevocable as to the grantor, as to income or principal, or both. All the facts have been stipulated and we quote so much of the stipulation as we deem necessary as our findings of fact.
FINDINGS OF FACT.
That between the years 1920 and 1925, inclusive, Valentine Bliss purchased One Hundred Seventy-Two (172) shares of the capital stock of the Scranton Gas and Water Company, a Corporation with its principal place of business in the City of Scranton, County of Lackawanna and State of Pennsylvania, and in the year 1927 purchased Three Hundred Twenty-eight (328) shares of the same stock, and that stock purchased in the years 1920 to 1925 cost*1263 the total sum of Ten Thousand Eight Hundred Sixty and 50/100 ($10,860.50) Dollars, and that purchased during the year 1927 cost the sum of Thirty-five Thousand Nine Hundred Ninety ($35,990.00), or a total cost of Forty-six Thousand Eight Hundred Fifty and 50/100 ($46,850.50) Dollars.
That on the 14th day of March, 1928, Valentine Bliss, being the owner of the Five Hundred (500) shares of stock above mentioned, transferred the same to the North Scranton Bank and Trust Company, as Trustee, and on that date the North Scranton Bank and Trust Company, as Trustee, and Valentine Bliss, entered into a trust agreement, which agreement is hereto attached, under which agreement the said Five Hundred (500) shares of stock constituted the corpus.
That subsequently during the year 1928, the Five Hundred (500) shares of stock of the Scranton Gas and Water Company, which formed the corpus of *733 this trust fund, was sold by the Trustee at Two Hundred Ninety-five ($295.00) Dollars per share, and the capital net gain shown by this sale on the One Hundred Seventy-two (172) shares acquired by Valentine Bliss in the years 1920 to 1925, was Thirty-nine Thousand Eight Hundred Seventy-nine and*1264 50/100 ($39,879.50) Dollars, and the profit realized by this sale on the Three Hundred Twenty-eight (328) shares acquired by Valentine Bliss during the year 1927 was Sixty Thousand Seven Hundred Seventy ($60,770.00) Dollars, making a total of capital net gain and profit in the sum of One Hundred Thousand Six Hundred Forty-nine and 50/100 ($100,649.50) Dollars.
That the tax return for the year 1928 for this trust created as aforesaid, was filed by the Trustee and the tax upon the dividends and interest arising from this trust fund and also upon the capital net gain and profit from sale of corpus above mentioned was paid by the Trustee; and that the tax assessed against and paid by the Trustee has been determined by the respondent to be an overassessment, and a claim for refund was filed by the Trustee on March 5, A.D., 1931, a copy of which claim is hereto attached.
That the mathematical calculations as to the amount of income, made by the Commissioner of Internal Revenue and by the Internal Revenue Agent in charge at Philadelphia, are admitted to be correct, said calculations being hereto attached, the question being as to the person liable for payment of the tax.
That the*1265 Commissioner of Revenue claims that the trust agreement above mentioned was revocable as to principal and income under the Statutes applicable to the 1928 income and that being revocable, the entire tax for that year should be paid by Valentine Bliss, the grantor, and not by the trustee.
That the petitioner now concedes that the net income from the trust for the year 1928, with the exception of capital net gain and profits arising from the sale of capital assets, is taxable to the petitioner, the grantor of the trust.
That the capital net gain and profits arising from the sale of capital assets of the trust amounts to One Hundred Thousand Six Hundred Forty-nine and 50/100 ($100,649.50) Dollars, and the question before the Board of Tax Appeals is whether the tax on this sum should be paid by the grantor or by the trustee.
That Valentine Bliss is President of the North Scranton Bank and Trust Company, and on March 14, 1928, owned Eight Hundred (800) shares and his wife owned Two Hundred Sixty-eight (268) shares, out of Twenty Thousand (20,000) shares of its capital stock; that the petitioner's wife died December 18, 1930 and her Two Hundred Sixty-eight (268) shares above mentioned*1266 were distributed under and by virtue of her Will to her children on March 4, 1931, and that there was no other change in the stockholdings of the petitioner or his wife between March 14, 1928 and the date that the deficiency was assessed on February 11, 1931; that Valentine Bliss receives no salary from the North Scranton Bank and Trust Company and has no office or desk in the bank building, and is not a full time officer thereof.
That the North Scranton Bank and Trust Company is a banking corporation created and existing under the Laws of the Commonwealth of Pennsylvania, with ten directors, one of whom is Valentine Bliss; and the chief executive officer and the only full time officer, who is in charge at all times at the Bank, is E. E. Muller, Cashier and Trust Officer.
The trust agreement attached to the stipulation authorizes the trustee to collect the income from the corpus of the trust, sell and otherwise dispose of the investments, and vote the stock which constitutes the corpus of the trust fund, and all these things can be done *734 without consulting Valentine Bliss, although he does require consultation in the event of reinvestment of funds. The net income*1267 from the trust, according to the agreement, is to be paid to Valentine Bliss in periodical installments, when and as he shall direct, and upon the death of Valentine Bliss, the corpus of the trust is to be divided into three parts, one of which goes to a daughter, one of which goes to a son, and the third part remains intact in trust for the benefit of a second daughter. Stock dividends and all profits realized from the sale of corpus are to be treated and considered not as a portion of the income, but as part and parcel of the principal. The trust agreement further provides that as to the grantor it shall be irrevocable, but the trustee reserves the right to revoke the same upon ten days written notice of its intention so to do to the grantor.
The part of the trust agreement relating to the distribution of current income reads as follows:
SECOND: The said NORTH SCRANTON BANK AND TRUST COMPANY, its successors or assigns, shall pay the net income hereunder to VALENTINE BLISS in periodical installments, at such periods as, from time to time, may be designated in writing by him, during the term of his natural life, and, until the final distribution of the TRUST FUND, to the several*1268 beneficiaries thereof in accordance with the provisions hereof. In default of such designation or writing, the said net income or profit shall fall into and become a part of the principal or corpus of the TRUST ESTATE hereby created.
The portion of the trust agreement relating to stock dividends and profits resulting from the sale of corpus reads as follows:
Fourth: All stock dividends declared and paid to the said North Scranton Bank and Trust Company, Trustee, upon and in connection with any stock of any corporation or company held by the North Scranton Bank and Trust Company under this Trust Agreement, together with all stocks, bonds, securities, money or other property that hereafter may be transferred to the North Scranton Bank and Trust Company by the said Valentine Bliss, or other persons, and made subject to the terms of this Trust Agreement, as well as all profit, or profits, upon the sale, or sales, of any securities forming part of the principal or corpus of the Trust Estate, shall, in all respects be treated and considered not as a portion of the income of said Trust Estate, but as part and parcel of the principal.
The part of the trust agreement relating to revocation*1269 is as follows:
Sixth: As to Valentine Bliss, the terms and provisions of this trust agreement shall be, during his lifetime, irrevocable; but the North Scranton Bank and Trust Company hereby reserves unto itself the right and power to revoke and dissolve the same at any time upon giving ten days written notice of its intention so to do to Valentine Bliss, during his lifetime, in which event the said North Scranton Bank and Trust Company, its successors or assigns, shall true account make unto him, the said Valentine Bliss, of the amount of the trust fund still remaining in their hands, and the same pay over unto him or to such person or persons as he may in writing direct or designate.
*735 OPINION.
BLACK: The question presented to us for decision is whether the profits made by the sale of certain corporate stocks during the taxable year 1928, the legal title to which was vested in a trustee under a trust created by the petitioner, should be regarded as part of the income of the petitioner and taxable to him, or should be regarded as the income of the trust and taxable to it. The provisions of the Revenue Act of 1928 applicable to the present proceeding are printed*1270 in the margin. 1
Petitioner admits, and it has been so stipulated by the parties, that the income from the dividends received by the trust in 1928 was taxable to him because the trust instrument required that such income be distributed to him by the trustee in periodical installments, at such periods as from time to time he might designate in writing. Petitioner contends, however, *1271 that the profits resulting from the sale of the stock were not taxable to petitioner because the trust instrument specifically provided that all gains and profits resulting from sales of the corpus should in all respects be treated and considered not as a portion of the income of said trust estate, but as a part and parcel of the principal; that this principal or corpus was definitely and finally disposed of, so far as petitioner is concerned, by the trust instrument; and that as to him, the trust was irrevocable.
The respondent contends that, although the trust instrument provides that it is irrevocable as to the settlor (petitioner herein), nevertheless the trustee is given the power to revoke, and that, inasmuch as the trustee is the North Scranton Bank and Trust Company, of which petitioner is president and one of the directors, the effect is the same as giving the petitioner the power to revoke in conjunction with a person not a beneficiary of the trust, and to revest in himself title to the corpus of the trust and, hence, comes clearly within the provisions of the statute which we have quoted in the margin. The respondent cites no authority either of the Board or the courts*1272 to support his contention. The authorities cited by petitioner in support of his position are not directly in point and are only useful by analogy. We have found no decided case, either by the Board or the courts, which is directly in point.
*736 Numerous cases deal with situations where the settlor of a trust reserved the right unto himself in conjunction with the trustee to revoke the trust, but we have found no case where, as in the instant proceeding, the trust instrument provides that it is irrevocable by the settlor but may be revoked by the trustee acting alone, and without consulting either the settlor or the beneficiaries of the trust. This, it seems to us, is quite unusual, but, though quite unusual, must be interpreted, and we must decide how the gains and profits resulting from a sale of the trust corpus in 1928 are affected by the cited provisions of the Revenue Act of 1928.
Perry on Trusts, Vol. I, par. 268, says:
If a person has once accepted the office of Trustee either expressly or by implication, it is conclusive; and he cannot afterwards by disclaimer or renunciation, avoid its duties and responsibilities. And the reason is that, if the estate*1273 has once vested in the Trustee it cannot be divested by a mere disclaimer, or renunciation, nor can he convey the estate against the consent of the cestui que trust without committing a breach of trust, unless the instrument creating the trust gives him that power * * *. In such case the Trustee may resign the trust, and convey the estate in the manner pointed out in the instrument creating the trust, if it speaks upon that subject. [Italics supplied.]
In the instant case the trust instrument does speak upon the subject. The trust instrument shows that the trustee, when accepting the trust, specifically provided that it "hereby reserves unto itself the right and power to revoke and dissolve the same at any time upon giving ten days written notice of its intention so to do to Valentine Bliss during his lifetime, etc."
We therefore conclude that the trust instrument was one in which the power to revoke was vested solely in the trustee; that as to the grantor, it was irrevocable, and that the income to the trustee resulting from a sale of the corpus in 1928 was not income to petitioner as the grantor of a revocable trust within the meaning of section 166 of the Revenue*1274 Act of 1928.
Section 167 of the Revenue Act of 1928 is not applicable, because the gains and profits resulting from the sale of the trust corpus in 1928 were by the express terms of the trust not distributable to the petitioner, but were to be added by the trustee to the trust corpus. Petitioner admits that the dividends received by the trustee from the corporate stock in 1928 were taxable to him because distributable to him;
Reviewed by the Board.
Decision will be entered under Rule 50.
SEAWELL, dissenting: The trust instrument here under consideration provided that it should be irrevocable by the grantor, but that the trustee "hereby reserves unto itself the right and power to *737 revoke * * * upon giving ten days written notice of its intention so to do" to the grantor. The word "reserves" means to keep back or withhold; to exclude something from that which is granted. Certainly the trustee, the bank, had no power of revocation of the trust here involved except as the grantor therein gave it the power. Upon what imaginable reason could the trustee be interested in revocation? If it desired to be relieved of its duties, it could resign*1275 its trusteeship without the revocation of the trust.
The grantor was a stockholder, a director and the president of the trustee. If at any time the grantor should desire a revocation of the trust it may reasonably be inferred that a word or intimation from him as maker of the trust to himself as president of the trustee would receive prompt audition and be considered by the trustee as nothing less than a command. To make the income taxable to the grantor the statute requires power lodged in some one, not a beneficiary, and the grantor (where the grantor has not the power alone) "in conjunction" to revest the title in the grantor. In the trust instrument this power is lodged in (1) the bank (the trustee) which is not a beneficiary, and (2) the grantor. The trustee can not revoke without giving written notice to the grantor. The manner of "giving written notice" is not provided for, and it must therefore be by the usual legal method, unless the grantor will accept the service in some other way. The grantor must, therefore, act in a negative, if not in a positive, manner. The power to revoke the instrument and revest the property in the grantor is present in the two, to wit, *1276 the bank and Valentine Bliss. The statute does not require, necessarily, positive action of both parties in which the power resides. The power to revest may be by the action of either, provided it is "in conjunction" with the other.
Moreover, the determination of the Commissioner is presumed to be correct. In this case the petitioner has not attempted, but has failed, to negative that which appears quite evident, to wit, that this peculiar power to revoke the trust instrument is given to one who is in fact the agent and tool of the grantor, and who is purposely designated in the instrument to provide facilities whereby the grantor might be enabled to avoid tax.
Footnotes
1. [SEC. 166. Revocable Trusts. ] Where the grantor of a trust has, at any time during the taxable year, eigher alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
[SEC. 167. Income for Benefit of Grantor.↩ ] Where any part of the income of a turst may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor.