*1101 On July 1, 1929, petitioner created a separate trust for the benefit of each of her four children, naming her husband as trustee of each trust. The ordinary net income was directed to be used in the discretion of the trustee for the support, education and maintenance of the respective beneficiaries and the remainder accumulated to their respective accounts until each reached the age of twenty-one years. Thereafter such accumulated income was to be paid to the beneficiaries and the current income currently distributed to them. At termination of each trust the corpus was to be distributed in accordance with detailed provisions of the trust instrument, but such corpus was to revert to petitioner only in the event she survived both her husband and the child beneficiary. Capital net gains were to be accumulated as part of the corpus of each trust fund. Petitioner, as grantor, reserved the right at any time to change the trustee and appoint a successor, or to modify or revoke either trust at any time after January 15, 1936, and all four trusts were revoked effective March 4, 1936. Held, (1) no part of the ordinary net income received by the trusts during the taxable years 1934*1102 and 1935 is taxable to petitioner; and (2) the capital net gains derived by the trusts in the taxable years, which were accumulated as part of the corpus and paid over to petitioner upon revocation of the trusts in 1936, are taxable to petitioner under section 167, Revenue Act of 1934.
*1109 Petitioner appeals from a determination by respondent of deficiencies in her income tax liability for the years 1934 and 1935 in the *1110 amounts of $6,664.68 and $6,566.51, respectively. The question for decision is whether capital gains, interest, and dividends received during the taxable years by four certain trusts created by petitioner are taxable to her.
FINDING OF FACT.
Petitioner is a citizen of the United States, and resides at Armonk, Westchester County, New York.
On July 1, 1929, in the city of New York, petitioner, as grantor, and her husband, Henry Hart Elias, as trustee, executed four trust indentures, in which were designated as the respective beneficiaries Albert Jay, Josephine, Robert Henry, and Catherine Elias, children of petitioner*1103 and her husband. All of the children named are still living, and, in the order stated, were born on September 28, 1924, December 28, 1917, September 17, 1914, and July 21, 1919. Henry Hart Elias continued as trustee until the trusts were terminated.
At the time of the execution of the trust indentures mentioned, petitioner possessed net financial resources of about a million and a half dollars. The principal of each trust fund was $25,000, and petitioner's purpose in creating the four trusts was to provide financial security for her children at a time when conditions generally were in a state of uncertainty.
The four trust indentures contained provisions substantially similar in all respects material here. The instrument establishing the turst for the benefit of petitioner's son, Albert Jay Elias, which is fairly representative of the others, empowered the trustee to invest and reinvest the trust fund of $25,000 and any additions thereto; to receive the income and profits therefrom and, after payment of all lawful charges and expenses, to use and expend the net income, or so much thereof as the trustee in his sole discretion might deem advisable, for the support, education, *1104 and maintenance of the beneficiary until he reached the age of twenty-one years, when the trustee was directed to pay over to him all accumulated and unexpended income. Thereafter, the annual net income was payable to such beneficiary until the death of either petitioner or the beneficiary, at which time it was provided the trust should terminate and the principal fund then remaining be paid over to petitioner's husband. In the event petitioner's husband should predecease Albert Jay Elias and petitioner, the net income was payable to such first named beneficiary until his death, with remainder over to petitioner. Additional provisions relate to the disposition of the corpus or principal fund upon the happening of other contingencies not important here.
It was further directed that during the lifetime of Henry Hart Elias he should be the sole trustee, with absolute discretion as to the *1111 character of investments for the trust fund; that he should have full power to sell the same and reinvest the proceeds in such manner as he might deem advisable, "and to do everything in the management and investment of the trust fund and property which an individual can do with his*1105 own property."
The trust instrument provided that the term "net income" should not include profits realized upon any sale or exchange of trust property, and that any profits or losses upon such sales or exchanges, including stock dividends and profits realized from subscription rights, or any appreciation or depreciation in value, should accrue to and be borne by the corpus or principal of the trust fund.
Upon termination of the trust, otherwise than by revocation, the funds and property representing such profits and appreciation were to be paid over to Henry Hart Elias, or, if he should then be dead, to the person to whom the principal of the trust was to be paid under other provisions of the trust.
It was also provided that if at any time during the minority of the beneficiary the net income of the trust, in the judgment of Henry Hart Elias as trustee, should be insufficient for the proper education, support, and maintenance of the beneficiary, then such trustee was vested with authority to apply and expend for such purposes, in addition to the net income then available, such part of the principal or corpus of the trust as in his judgment should be advisable.
It was provided*1106 that during the minority of the beneficiary, as long as Henry Hart Elias should be living and competent to administer the trust, the net income should be applied and expended as Henry Hart Elias, in his sole discretion, might determine; but, in the event of the substitution of another trustee during minority of the beneficiary, the net income in its entirety should be paid over by the substituted trustee to the legally constituted guardian of the beneficiary. The trust instrument further provided that the absolute discretion given to Henry Hart Elias as trustee respecting the character of investments of the trust fund should not apply to any substituted trustees; that the powers of the substituted trustees and their successors should be only such as are the usual and customary powers of trustees, with exceptions and detailed instructions not material here.
The trust instrument authorized petitioner's husband, as sole trustee, to borrow from the trust fund, for himself and for his own use, in his own discretion, an amount or amounts not exceeding 80 percent of the trust fund, upon such terms as he might deem advisable, upon payment of interest on the sum borrowed at the rate of*1107 4 percent per annum. The trust instrument further provided:
The party of the first part, the grantor herein of this trust, hereby expressly reserves to herself the right to modify, alter or entirely revoke this instrument *1112 at any time after January 15, 1936, as to all or any part of the trust herein created, without the consent of any Trustee or beneficiary hereunder, upon thirty days' previous notice in writing to the then acting Trustees of the grantor's intention to so modify, alter or revoke this trust indenture. Until said 15th day of January, 1936, this trust is absolutely irrevocable. In the event that the grantor at any time shall revoke this instrument, the corpus or principal of the trust fund, together with all accumulations and profits and appreciations, shall be immediately paid over by the Trustees to the party of the first part, the grantor herein, or to such person or persons as she may designate.
In event of the death of Henry Hart Elias before termination of the trust, petitioner, as grantor, appointed a trust company and a certain individual to act as substituted trustees. She also reserved to herself the right to change any or all of the trustees*1108 named in the instrument, and to appoint a successor or successors.
During the continuance of the four trusts involved herein the trustee kept a separate account in the name of and for each trust, in which account were entered all items and transactions of the trusts, including purchases and sales of securities, and receipts of income consisting of interest on bonds and dividends on stocks. The trustee also kept a separate account in the name of and for the benefit of each beneficiary. All income consisting of interest and dividends received from each trust fund, after first being entered in the trust account where the capital items were kept, was transferred therefrom and credited to the separate account of the beneficiary; and such portion of the income as the trustee deemed advisable was expended from such separate account for the support, education, and maintenance of the beneficiary.
During the continuance of the four trusts, capital net gains on sales of securities were added to and treated as a part of the capital or princital of each trust fund; such gains were not segregated or recorded in an account separate from the capital or principal of the trust fund, but such*1109 amounts were intermingled and invested with the rest of the trust principal from which gains were derived. For Federal income tax purposes, the trustee included such capital gains in the taxable income reported in returns filed by him as trustee each year, including the taxable years 1934 and 1935, and the taxes shown to be due thereon were paid from the principal of the respective trust funds.
Interest and dividends were treated as income of the trusts, and credited to the respective beneficiaries. Such income was reported in Federal income tax returns filed by or in behalf of the beneficiaries each year, including the taxable years 1934 and 1935, and the taxes shown to be due thereon were paid from income held in the separate accounts of the beneficiaries.
Respondent included in petitioner's taxable income for the years 1934 and 1935 interest, capital net gain, and dividends received by the four trusts herein as follows:
| 1934 | |||
| Trust | Interest | Capital net gain | Dividends |
| Albert J. Elias, 2nd | $42.58 | $3,584.00 | $5,575.00 |
| Josephine Elias | 3.31 | 3,808.00 | 6,685.00 |
| Robert Henry Elias | 9.69 | 3,359.00 | 6,075.00 |
| Catherine Elias | 12.08 | 3,711.50 | 6,467.50 |
| Total | 67.66 | 14,462.50 | 24,802.50 |
| 1935 | |||
| Albert J. Elias | $6,580.00 | ||
| Josephine Elias | 7,180.00 | ||
| Catherine Elias | 7,080.00 | ||
| Robert H. Elias | $2,014.30 | 6,367.50 | |
| Total | 2,014.30 | 27,207.50 |
*1110 *1113 Such portion of the credited income as the trustee deemed advisable was applied to the support and maintenance of each beneficiary, and the unexpended balance was held by the trustee in a separate account, credited to the beneficiary as his or her property.
All such income from the trust for Robert Henry Elias was paid over to him when he attained his majority on September 17, 1935, and thereafter all income from his trust until revoked was paid over directly to him.
None of the income that consisted of interest and dividends received from any of the four trusts in question was ever credited or paid over, directly or indirectly, to petitioner, or applied for her benefit, or used to pay premiums on insurance on her life, or to pay any life insurance premiums.
On February 3, 1936, petitioner executed and delivered to the trustee four notices of revocation, revoking each of the four trusts hereinabove mentioned, which revocation became effective thirty days later, on March 4, 1936.
On or about the date on which revocation of the trusts became effective, the capital or principal of each trust fund, including net gains on sales made prior thereto, as shown on*1111 the balance of the capital account of each trust, was delivered and paid over by the trustee to petitioner.
The balance of the income then held in the accounts of the respective beneficiaries, including interest received or accrued and dividends received or declared prior to March 4, 1936, was not paid over or delivered to petitioner, but was transferred to separate accounts of each of the minor beneficiaries, and the unexpended income of the trust for the benefit of Robert Henry Elias, who had theretofore attained his majority, was paid over to him. When Josephine Elias thereafter attained her majority on December 28, 1938, the balance of the income derived from her trust was paid over to her.
*1114 The trustee, Henry Hart Elias, never exercised the power conferred on him to borrow money from any of the four trusts.
Henry Hart Elias, who was the father of the beneficiaries named in the four trusts created by his wife, was, on July 1, 1929, and during the taxable years 1934 and 1935 and ever since has been, financially able to support, maintain, and educate his children. No guardian has ever been formally appointed by any court for any of the beneficiaries named in*1112 the trusts here involved. The reason for the revocation, effective on March 4, 1936, of the four trusts created July 1, 1929, was that petitioner had previously, on August 15, 1935, created irrevocable trusts for the benefit of the same beneficiaries.
OPINION.
HILL: Respondent included in petitioner's taxable income both the ordinary net income and the capital net gains derived in the taxable years 1934 and 1935 by each of the four trusts established by petitioner in 1929 for the benefit of her children. Respondent contends that his action is in accordance with the provisions of sections 166 and 167 of the Revenue Act of 1934. 1
*1113 If we are to sustain respondent in taxing the income of the trusts to petitioner, obviously our approval must rest on one of two grounds, namely, (1) because the income of the trusts, by the facts appearing in the record, is brought within the purview of section 166 or section 167, supra; or (2) because petitioner retained such dominion and control over the corpus that she did not by creation of the trusts cease to be the owner thereof, and the income therefore, must be regarded for tax purposes as her income within the meaning of section 22(a), which defines gross income as including "gains or profits and income derived from any source whatever." . Cf. .
*1115 If either section 166 or section 22(a) is applicable with respect to the ordinary income, it would be taxable to petitioner. If neither section is so applicable, the ordinary income is not taxable to petitioner, but we would still have to consider whether she is taxable on the capital gains under section 167 or section 22(a).
A brief consideration of the facts will make it clearly apparent, we think, that the*1114 ordinary income here in controversy can not be taxed to petitioner under the doctrine of the cited cases and similar decisions. In the Clifford case, the grantor declared himself trustee of certain securities, for a term of five years, to hold the net income for the benefit of his wife. On termination of the trust, the corpus was to revert to the grantor, while all accrued or undistributed income was to be treated as property of the wife. The grantor retained very broad powers respecting the management of the trust property, including the right to accumulate income or pay it over to his wife within his discretion; to sell, exchange, mortgage, or pledge any of the securities, whether as corpus or investment or proceeds, and any income therefrom; and exercise all voting powers incident to the trusteed shares of stock. The Court said:
In this case we can not conclude as a matter of law that respondent [grantor] ceased to be the owner of the corpus after the trust was created. Rather, the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent*1115 continued to be the owner for purposes of § 22(a).
So far as dominion and control were concerned it seems clear that the trust did not effect any substantial change. In substance his control over the corpus was in all essential respects the same after the trust was created, as before.
In the case at bar petitioner retained no powers of control over the corpus of her trusts comparable to those retained by the grantor in the Clifford case. On the contrary, petitioner appointed her husband, not herself, to act as trustee and vested in him all powers of management, including the power to accumulate or expend income for the henefit of the children. And it may be noted in this connection that the husband clearly had a substantial adverse interest in the disposition of both corpus and income. Each trust provided that when the beneficiary reached the age of 21 the accumulated or unexpended income of the trust fund was to be paid over to him, and thereafter he was to receive annually the net income until the death of either the beneficiary or the grantor, at which time the trust would be terminated and the corpus paid over to petitioner's husband, the trustee. In the*1116 event the husband predeceased both the beneficiary and petitioner, the trust was to continue until the death of the beneficiary, when it was to terminate and the corpus revert to petitioner, if she survived the beneficiary; otherwise the corpus would go in remainder to others named in the trust instrument.
*1116 Thus, it seems plain that petitioner retained no power of control over any part of the corpus of either trust during the period ending January 15, 1936, nor did she retain any like power exercisable thereafter unless the retention of such a power may be said to have been effected by reservation of the right to modify, alter or revoke the trusts at any time after January 15, 1936, upon the giving of 30 days previous notice in writing to the trustee.
Section 166 provides for taxing the income of a trust to the grantor where "at any time" the power to revest in the grantor title to any part of the corpus is vested in the grantor. The application of the statute depends wholly upon the vesting of the described power. The provision that the trust should terminate and the corpus be paid over to petitioner if she survived both her husband and the beneficiary*1117 did not constitute a vested power to recall the corpus, and hence does not make applicable section 166. Such result would follow because of a retained reversion and not because of the retention of a vested power to revest the corpus in petitioner. , affirming , which affirmed . In that case, the Supreme Court pointed out that at least in the law of estate a power to revest or revoke is not synonymous with reversion; that "a reversion is the residue left in the grantor on determination of a particular estate."
The provision in each of the trust instruments involved here reserving to petitioner the right to revoke and thus to recapture the corpus at any time after January 15, 1936, did not constitute the retention of a presently vested power. Such right depended upon the subsequent existence of certain conditions, which were beyond the power of petitioner to control. If either the beneficiary or petitioner had died prior to the date mentioned, the trust would have been thereby terminated and the corpus paid over to petitioner's husband. Hence petitioner's power to revoke*1118 the trust was contingent upon its not having terminated by its terms prior to January 15, 1936, and whether the trust would terminate by its terms prior to such date was contingent upon the happening or nonhappening of certain events beyond the control of petitioner. Such power did not exist in the taxable years. Prior to January 15, 1936, the power not only did not exist, but in the taxable years it was not known, and could not then have been known, whether the power would ever come into existence.
The power to direct revestment of a trust corpus, which is dependent upon a contingency that may never happen or that is beyond the power of the grantor to control, is not a presently existing power, or, as the principle may be otherwise stated, there is no presently existing power in the grantor to revest "at any time" where the reservation of the power is conditioned upon a contingency that may never occur. "A *1117 power which is not presently exercisable and may never be capable of being exercised, does not exist." , reversing *1119 ; ; . See also ; . Nor is a possibility of a reverter a "power to revest" within the meaning of section 166, . As above indicated, there is a plain and material distinction between reversion and a power to revest.
Respondent's action in including in petitioner's income for the taxable years the ordinary income of the trusts in question, consisting of interest and dividends, is disapproved.
A different situation is presented in respect of capital net gains. The trust instruments provided that capital net gains should be accumulated and treated as part of the principal fund of each trust and ultimately go to the one entitled to receive the trust corpus. And such gains were in fact accumulated and paid over to petitioner upon revocation of the trusts in 1936.
We can not agree with petitioner's construction of the trust instruments, which specifically provided that the term "net*1120 income" payable to the beneficiaries, as used therein, "does not and shall not include any profits that may be realized upon a sale or exchange of securities or of any other property that the trust fund at any time may be invested in." Other references to this point in the trust instruments included the provision that such "profits and appreciations realized shall be added to and become part of the corpus or principal of the trust, to be invested and reinvested by the Trustee as a part thereof."
Petitioner reserved the right, upon certain conditions heretofore mentioned, to revoke the trust instruments at any time after January 15, 1936, and it was provided that in the event of the exercise of such right "the corpus or principal of the trust fund, together with all accumulations and profits and appreciations", should be paid over by the trustee to her, or to such person or persons as she might designate. The fact that upon the happening of certain specified contingencies the accumulated capital gains, along with the corpus then remaining, would be payable to others, does not prevent the taxation of such gains to petitioner.
The circumstances here disclosed bring the capital gains*1121 clearly within the purview of section 167. Paraphrasing the statute, such gains during the taxable years were being held or accumulated for possible future distribution to the grantor; and during the taxable years it was known that such accumulated gains might, in the discretion of the grantor, ultimately be distributed to her. They were in fact so distributed. Where a grantor may and does become a beneficiary of *1118 the trust, and may and does utilize the trust to manipulate as he sees fit his receipt of a portion of the income, such income is within section 167. ; affd., . See also , affirming
Respondent did not err in taxing the capital gains in controversy to petitioner pursuant to section 167, and this conclusion renders it unnecessary for us to consider whether such income is also taxable to petitioner under section 22(a).
Reviewed by the Board.
Decision will be entered under Rule 50.
KERN and OPPER dissent.
BLACK, dissenting: I respectfully dissent from the*1122 conclusion reached in the majority opinion.
Petitioner, the settlor of the trusts, reserved to herself in each of the trust indentures, "the right to modify, alter, or entirely revoke this instrument at any time after January 15, 1936, as to all or any part of the trust herein created, etc." It seems to me this reserved power in the grantor brings the trusts squarely within the provisions of section 166 of the Revenue Act of 1934, relating to revocable trusts. It may be true, as the majority opinion points out, that subsequent events might happen, such as the settlor's death prior to January 15, 1936, which would completely divest her of the power to revoke these trusts. Such a condition subsequent had not, however, happened during the taxable years here in question.
During the taxable years 1934 and 1935 the settlor of the trusts was living and, in my judgment, was completely vested with a power to revoke the trusts, although such power was not exercisable until after January 15, 1936, and this, I think, brings the trusts within the provisions of section 166, even though such power could not be exercised until then. Such cases as *1123 , and , in my judgment, are not in point and do not support the conclusions reached in the majority opinion. In those cases the power to revoke the trusts was not vested in the grantor of the trusts during the taxable year, but was to vest only upon the happening of some future contingency, which might never happen. That fact I think makes the Corning case and the Rovensky case easily distinguishable from the instant case.
As I have already stated, I think the facts of the instant case bring it squarely within the provisions of section 166 of the Revenue Act of 1934, and, unless that section is unconstitutional when applied to such a situation as we have here, it seems to me that we must give it *1119 effect and tax the income of such trusts to the grantor thereof. Considering the nature of the trusts and that the beneficiaries were petitioner's four children, and that petitioner retained the unqualified right to revoke the trusts and revest in herself the corpus after the lapse of only a few years, I see nothing to indicate that section 166, when applied*1124 to such a situation, is unconstitutional. Cf. .
MURDOCK, TURNER, 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) * * *
then the income of such part of the trust shall be included in computing the net income of the grantor.
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust -
(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
(3) * * *
then such part of the income of the trust shall be included in computing the net income of the grantor. ↩