*790 1. The petitioner in contemplation of the sale of certain stock made an irrevocable gift on trust of part of his shares to his wife for life, with reversion to himself on her death, naming himself as trustee. The executory contract of sale was later carried out and petitioner received the proceeds of the sale as trustee. Held, that a bona fide trust of the shares was created and the capital gain on the sale was not income taxable to the petitioner under section 166 or 167 of the Revenue Act of 1928.
2. Under the same sale in 1929, $20,000 of the purchase price was deposited by the buyer in a bank to be held in escrow for nine months to guarantee certain obligations of the contract, and was not paid over to the sellers until 1930. Held, that no part of this sum was includable in the income of the petitioner as one of the sellers in 1929.
*182 This case comes before us on respondent's determination of a deficiency in petitioner's income tax for the year 1929 in the sum of $1,860.85. Two questions are involved. (1) Whether, under sections*791 166 and 167, Revenue Act of 1928, petitioner derived income from the sale of certain stock which he had given to his wife *183 with reversion to himself on trust for life. The trust was created without power of revocation in the petitioner, the settlor, but in contemplation of the sale which eventually took place. (2) The other question is whether that portion of the contract price which was held in escrow until the year after the sale constituted gross income to petitioner in the year of sale. This question involves any gain derived on the sale on both (a) the stock owned by him personally, and (b) the stock which he held as trustee for his wife.
The facts were stipulated and, briefly stated, are as follows.
FINDINGS OF FACT.
Petitioner is an individual, residing at Rockville Center, New York. From April 10, 1929, petitioner was the owner of 55 shares of common stock of Hall & Connolly, Inc., represented by a single certificate which he endorsed on that day and delivered to his attorney, who was also secretary of the company, with instructions to place 30 shares of this stock in trust for the petitioner's wife, Jeanne M. Bassett. On April 12, 1929, the company's*792 secretary delivered to petitioner two new stock certificates in proper form, one for 25 shares drawn to petitioner individually, and the other for 30 shares drawn to petitioner as trustee for his wife. The petitioner thereupon executed a trust covering these 30 shares, the provisions of which are set out below, and delivered a copy of the trust agreement to his wife and showed her the stock certificate representing the res. By the terms of the trust instrument petitioner declared himself trustee of the 30 shares "in an irrevocable trust to pay the net income thereof to my wife, Jeanne M. Bassett, for and during the term of her natural life, and at her death such trust to cease and the principal sum to go to her husband, and his heirs forever." The trustee was to have full power and discretion to reinvest the principal from time to time as he might see fit.
At the time this trust was created negotiations had been practically completed for the signing of the contract to sell the stock of Hall & Connolly, Inc., and petitioner's knowledge of this fact was one of the reasons inducing him to create a trust at this time, in order that he might reduce the income tax levied on the capital*793 gain in the event that the contract should be signed and the sale completed. Another fact motivating petitioner's action in making a gift on trust to his wife was that the petitioner's three sisters were at that time beneficiaries of four or five trusts to the extent of from $25,000 to $30,000 in each instance, and that he himself was the beneficiary of five trusts to the extent of $35,000.
On April 13, 1929, the day after petitioner's creation of the trust, the agreement for the sale of all the capital stock of Hall & Connolly, *184 Inc., the relevant provisions of which are set out below, was executed between Theodore Hall and Joseph Connolly, the sellers, and J. E. McAuley, the buyer. The parties to this contract had agreed to its terms on April 12, but did not actually execute it until the next day. Hall & Connolly each owned 125 shares of the capital stock, which, with the 55 shares owned by petitioner as an individual and trustee, constituted the entire outstanding stock of the company.
On or about July 12, 1929, the petitioner endorsed and delivered to the buyers under the contract the two certificates for 25 and 30 shares, respectively, held by him individually*794 and as a trustee; and at the same time the buyers, pursuant to the contract, paid the sellers the sum of $140,000, $12,000 of which had been put in escrow at the time the agreement was executed. Of this amount petitioner received $11,229.51 as his share on account of his own 25 shares, and $13,475.41 on account of the 30 shares held by him as trustee for his wife. Petitioner deposited the check for the amount of trust shares in a new account opened in the South Shore Trust Co. of Rockville Center, New York, on July 29, 1929, and thereafter invested this sum in other securities which petitioner purchased in his own name but the income from which was turned over by him to his wife for her own benefit and use.
Paragraph 4 of the contract of sale provided as follows:
4. In the event that said purchase shall be consummated, it is agreed between the parties hereto that the sum of Twenty Thousand ($20,000) Dollars, being the balance of the purchase price, shall be deposited at the same time with the depository aforesaid by the buyer, which said sum shall be held in escrow to indemnify the buyer against any loss or liability on account of accounts receivable, bad debts and for liabilities*795 not disclosed by the books of the Corporation. Said amount of Twenty Thousand ($20,000) Dollars shall be paid to the sellers at the expiration of nine (9) months from the date of consummation of said purchase less the amount of any uncollected accounts and accounts receivable and less any amounts paid for any liabilities or obligations not disclosed by the books of the Corporation at the date of the consummation of the purchase and which the Corporation shall have paid subsequent to the consummation of the purchase. Such sums or amounts so withheld or deducted shall be paid by the said depository to the buyer and any such uncollected accounts receivable shall be assigned by the buyer to the sellers.
Pursuant to this provision the amount of $20,000 representing the balance of the agreed purchase price was deposited with the bank on July 29, 1929, and held in escrow to indemnify the buyers against any loss or liability because of accounts receivable, bad debts, and liabilities not disclosed by the books of the corporation. Pursuant to the same provision, nine months thereafter, or on or about April 18, 1930, the amount of $20,000 was released from escrow and paid in full to the*796 sellers, the petitioner receiving therefrom, on or about April 22, 1930, $1,634.59 as his share on account of the 25 shares held *185 by him individually, and $1,971.97 on account of the 30 shares held by him as trustee for his wife. These funds were placed on deposit in petitioner's general business bank account, petitioner recognizing at all times his obligation to pay 6 percent on this part of the corpus of the trust so deposited.
OPINION.
ARUNDELL: The first question raised in this case is whether the gain derived from the sale in 1929 of the 30 shares of Hall & Connolly stock held in trust by the petitioner for the benefit of his wife constitutes income taxable to the petitioner. The petitioner created an irrevocable trust, naming his wife beneficiary for life, with reversion to himself and his heirs on her death, He named himself trustee and reserved full powers to manage the investment of the turst property. Assuming that a valid trust was created, a point which respondent does not concede and which will be considered hereafter, respondent's cardinal contention is that the trust would be comprehended under section 167, Revenue Act of 1928, the pertinent portion*797 of which reads as follows:
Where any part of the income of a trust 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.
The respondent urges on us the argument that, since the petitioner and his heirs have a reversion after his wife's death of the whole corpus of the trust, any gain which would constitute income under the Federal taxing statutes and which was not distributable to petitioner's wife would therefore "be held or accumulated for future distribution" to petitioner, within the meaning of the statute. The provision respecting the distribution of income in the trust deed is in very simple terms and merely states that the petitioner has created an irrevocable trust "to pay the net income thereof to my wife, Jeanne M. Bassett, for and during the term of her natural life, and at her death such trust to cease and the principal sum to go to her husband, and his heirs forever." It does not appear therefore in*798 so many words what disposition would be made of capital gain such as that involved here, but, as under the rule applicable in most states any capital gain would be added to the corpus of the trust and only gain derived from the use of the corpus would be distributable to the beneficiary, we may concede so much to the respondent's argument, that the capital gain here in question by being added to the corpus would ultimately return to the petitioner. We may concede also that such capital gain, although under local law not "income" of the trust, would clearly be income under the Federal *186 statutes. Merchants Loan & Trust Co. v. Smietanka,255 U.S. 509">255 U.S. 509; Charles Kaplan,26 B.T.A. 379">26 B.T.A. 379; affd., 66 Fed.(2d) 401. To make such a capital gain presently taxable to the settlor, however, it must come within the provisions of section 167. That section makes taxable to the settlor only such part of the income of a trust as "may in the discretion of the grantor of the trust * * * be distributed to the grantor or be held or accumulated for future distribution to him * * *." Obviously, the crucial phrase here is "in the discretion of the*799 grantor of the trust."
There is no ambiguity in this phrase. It imports an unfettered command over the income of the trust resident in the settlor, or, if not completely unfettered, hampered only by a control not adverse to the settlor's. It imports a command over the income existing not only at the time of the creation of the trust, for obviously the settlor of a trust has at this time full power to make what disposition he likes of both corpus and income, but a continuing power which may be exerted in the future from time to time after the creation of a trust and as the income on the corpus arises. "Discretion", as defined by Webster, means "freedom to decide or to act according to one's judgment; unrestrained exercise of choice or will."
Obviously the present trust does not come within this definition, for the settlor had no discretion to withhold income from the beneficiary and accumulate it for future distribution to himself. The fact that capital gains would be added to the corpus and eventually distributed to him, as already pointed out, was not the result of any exercise of his discretion, but came about through the operation of a general rule of law. It is true that*800 the petitioner in his capacity as trustee had the discretion to invest and reinvest the corpus of the trust and thereby to multiply capital gains on such conversions of the corpus, but this power was exercised by him in his capacity as trustee and not as settlor. This was his duty as the trustee. It is the power of the settlor that is aimed at by the statute and the functions of petitioner as settlor and trustee must not be confused. Cf. Reinecke v. Smith,289 U.S. 172">289 U.S. 172. But, even if this power of investment be treated as inhering in the petitioner as settlor, we do not think that that fact brings it within the section. Cf. Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339.
We are of the opinion, therefore, that the capital gain realized on conversion of the trust assets was not income to be held or accumulated for future distribution to the settlor by reason of any exercise of discretionary powers on his part, and consequently that no part of it is includable within his gross income.
Respondent relies on *801 Malcolm W. Greenough,29 B.T.A. 315">29 B.T.A. 315; affd., 74 Fed.(2d) 25; and Charles Kaplan,26 B.T.A. 379">26 B.T.A. 379; affd., 66 Fed.(2d) 401. Both of these cases are clearly distinguishable. *187 In the first the settlor made an irrevocable gift on trust for the term of five years, the income to be paid to himself and the corpus to revert to himself, and named himself as one of three trustees (none of whom except the petitioner was a beneficiary), but as the only trustee who might not be removed on motion of the two others. The trustees were given power to "determine in their discretion what receipts shall be deemed income and what principal." In such circumstances we held, and the Circuit Court (First Circuit) affirmed our judgment, that gain realized from the sale of trust assets, although constituting corpus of the trust under local Massachusetts law, was properly taxable as income to the settlor-trustee in the year of its realization by the trust. Obviously the grantor and sole beneficiary of the trust there had complete control and was simply utilizing the trust device to manipulate, as he saw fit, his receipt of income - the kind*802 of situation which section 167 sought to put an end to.
In the Kaplan case we had a situation closely analogous to that here. Petitioner made a gift on trust to his wife for life, to himself for life, remainder over to his children, irrevocable without his wife's written consent, and named himself trustee. The trustee was given full powers of management. So far we have stated no incident which is not present in the instant case. But the trustee or trustees were given additional power "to distribute the income arising from the trust property from time to time in such amounts and at such times as they shall think fit, with power to reserve a reasonable portion of the income", any such accumulated income to be held for the benefit of the particular persons entitled to it. We thought the case came within section 219(h), Revenue Act of 1924: "It contemplates a trust wherein the grantor retains dominion over the trust income to the extent of diverting it to himself." In other words, petitioner could take income that normally would go to his wife, accumulate it, and then after her death pay it over to himself as the next life tenant. The Circuit Court (First Circuit) affirmed*803 in principle, saying:
Kaplan is under the obligations imposed upon the trustees by the trust instrument. Among these is that he shall exercise his powers as trustee with due regard to the rights and interests of the immediate beneficiary [citations]. The large discretion given to the trustee diminishes these rights, but it does not extinguish them. Applying the law as above stated, the portion of the income properly taxable to Kaplan personally was the entire income minus that portion of it which constituted the irreducible minimum of which the trustee had no right to deprive Mrs. Kaplan. The commissioner held as above stated that the entire income was taxable to Kaplan personally. In this he fell into error, as did the Board of Tax Appeals in affirming his decision. * * *
The Kaplan case is readily distinguishable on its facts from the instant one, for the petitioner here had no control of the income of the trust at any time, either capital gains or ordinary income.
*188 The recent case of Margaret S. Sawtell,32 B.T.A. 687">32 B.T.A. 687, was one wherein the petitioner created a trust on April 30, 1930, to terminate at the end of the same year, solely*804 for her own benefit, the income to be paid to her alone and the corpus to revert to her on termination of the trust. At the time the trust was created a sale of the trust assets was pending. We held the capital gain on the sale to be income to the petitioner under section 167 of the Revenue Act of 1928. While we believe that that result was entirely correct on the ground that the trust was not a real one within the intent of the revenue act, but a mere disguise to postpone the realization of income, we are of opinion that the construction given section 167 in that case was too broad and was unnecessary in reaching the decision.
In Francis J. Stokes,28 B.T.A. 1243">28 B.T.A. 1243; affd., 79 Fed.(2d) 256, we held that where the income of a trust was distributable to the grantor's children during their minority and the grantor's wife was given power to withdraw securities or money from the trust, and a similar power was reserved to the grantor but to be exercised by him only on the death of his wife, the grantor retained no powers that would bring him within section 166 or 167 of the 1928 Revenue Act and he was not taxable on the income. The Circuit Court said in*805 affirming: "It is not a question of the power of Congress to provide that under such facts as before the court the income of the trust is taxable to the settlor (Burnet v. Wells,289 U.S. 670">289 U.S. 670; DuPont v. Commissioner,289 U.S. 685">289 U.S. 685), but it is a question of whether or not Congress has given statutory authority to tax the income derived from the fund to the settlor."
This brings us to respondent's secondary contention in support of the proposition that the present trust falls under section 167. Admitting by implication that the precise words of that section do not cover the present situation, the respondent offers a gloss on the section in the form of the House Report on the corresponding section in the Revenue Act of 1932. The section of the later act reads:
Where any part of the income of the trust is or in the discretion of the grantor * * * may be held or accumulated for future distribution to the grantor. [Italics ours.]
Such an amendment of the provision, as Holmes, J., said in *806 Lewellyn v. Frick,268 U.S. 238">268 U.S. 238, in respect to a similar amendment to another provision of the statute, "does not help, but if anything hinders the collector's construction of the present law." Such an enlargement of the scope of the provision in the 1932 Act can not be read retrospectively into the 1928 Act.
We must not lose sight of the fact that the trust has been treated as a separate taxable entity since the Revenue Act of 1916. Merchants Loan & Trust Co. v. Smietanka, supra. And its definition in *189 the revenue acts as a "taxpayer" has been pursued to its logical conclusion in a long series of decisions. Baltzell v. Mitchell, 3 Fed.(2d) 428; Anderson v. Wilson,289 U.S. 20">289 U.S. 20. This distinction between classes of taxpayers has been rigidly adhered to by the Supreme Court, even in the circumstances of the Wilson case, supra, where hardship to the beneficiaries, who were "men of flesh and blood", might have been relieved but for the necessity which the Supreme Court felt imposed by the statute to treat the trust, a mere "abstraction", as having a separate existence. *807 Such a provision as section 167, therefore, since it obliterates well recognized lines between classes of taxpayers, and seeks to tax to the settlor what is nominally the income of the trust or of the beneficiary, is anomalous, and finds its excuse only in the recognized necessity to prevent evasion. This was, of course, its confessed purpose, cf. House Report 179, 68th Cong., p. 21; Senate Report 298, p. 25; both on section 219(h), Revenue Act of 1924; and, within the words of the section, every effort should be made to effect this purpose, Burnet v. Wells, supra; but we do not think its meaning should be extended by construction beyond the unambiguous import of its words. Consequently, we do not think that the Committee Reports of Congress on section 219(h), Revenue Act of 1924, the prototype of section 167, employing language of wider meaning than the terms of the enactment, may be availed of. United States v. Shreveport Grain & Elevator Co.,287 U.S. 77">287 U.S. 77, 83; Crooks v. Harrelson,282 U.S. 55">282 U.S. 55, 61.
Respondent's other contentions may be briefly disposed of. He contends that in the circumstances of the sale contemplated*808 at the time the trust was created petitioner made a gift of the proceeds of the stock after sale and not of the stock itself. This contention rests on the assumption that the trust was a mere device to avoid taxation and as such is to be disregarded, for otherwise it is clearly demonstrable that the gift of the stock covered by an executory contract of sale is something essentially different from the gift of the proceeds received on the sale after its consummation, Williston on Sales, § 1, 2. The sale might well have never gone through. In fact, such a possibility was contemplated by the parties and expressly provided for in the contract, for if certain representations of the sellers were not made good by the three months' audit provided, the buyer might withdraw. He might, indeed, withdraw in any case, but if caprice were his only motive, he forfeited the $12,000 which he had put in escrow on signing the contract. Evidently, then what petitioner's wife received on April 12, 1929, was a gift of stock with an interest in the contract of sale, which was agreed upon on the day the trust was created and signed on the next day after.
*809 As for the respondent's contention that the present case falls within the ambit of section 166 on the theory that the petitioner as trustee *190 had revested in himself during the year the title to the trust property, we need only point out that petitioner's title after the creation of the trust was that of a fiduciary only for the benefit of his wife, an entirely different thing from title held for his own benefit. Helvering v. Duke,290 U.S. 591">290 U.S. 591.
Respondent's argument that the trust was not a bona fide one we regard as without substantial merit.
We are of the opinion, therefore, that any gain on the proceeds of the sale of the Hall & Connolly stock held in trust by the petitioner for his wife was not taxable to the petitioner.
The question remains whether the portion of the purchase price of the shareholders distributable to petitioner individually - not what was distributable to him as trustee for his wife, for that question is eliminated by our decision of the first issue - which was held in escrow until 1930 and then paid over to the sellers, was taxable to petitioner in 1929, the year of the sale; or in 1930, the year it was actually paid. *810 Petitioner was on a cash basis.
We think it clear from the provisions of the contract that the $20,000 to be placed in escrow with Chase National Bank as depositary was withheld by the buyers as a guarantee that the warranties and representations were true and would be faithfully carried out. It was obviously impossible to determine precisely the value of cash accounts receivable and physical assets, which were guaranteed to be $60,000, until a reasonable time had been allowed for the payment by the sellers of outstanding liabilities and for the collection of accounts receivable. Therefore, $20,000 was deposited with a common agent, who should hold this amount for both buyers and sellers until the question as to the value of these assets should be clearly resolved. It does not appear from the contract, nor from the facts stipulated, whether the depositary paid interest on $20,000 to the sellers, and we may not infer this fact without evidence.
Generally, as the Supreme Court said in Lucas v. American Code Co.,280 U.S. 445">280 U.S. 445, the income tax law is concerned only with realized gains. Moreover, where the petitioner is, as here, on the cash basis, pretty*811 clear evidence of his command over the money held in escrow would have to be present to justify our holding that it was received in the year of execution of the contract, although not paid over until nine months later. Respondent relies on Federal Development Co.,18 B.T.A. 971">18 B.T.A. 971; and on Blaine L. Stoner,29 B.T.A. 953">29 B.T.A. 953; since reversed, 79 Fed.(2d) 75. In the Federal Development Co. case the petitioner was a vendor of land under lease who had promised the purchaser possession by a certain date, with liquidated damages for every day which the lessee held over, the purchaser withholding $50,000 of the purchase price as a guarantee. Upon this sum the purchaser agreed to pay interest to the vendor at an agreed rate. We *191 held that the portion of the purchase price so withheld and not paid to the vendor until the following year was income to the petitioner in the year of purchase. The instant case is obviously distinguishable.
What has generally been made decisive of the receipt of income by a taxpayer is whether he may exercise an unlimited command over it, and this holds true although for contractual or other reasons he*812 may eventually have to part with some or all of it later on. In North American Oil Consolidated v. Burnet,286 U.S. 417">286 U.S. 417, the Supreme Court held that the taxpayer, whether on the cash or accrual basis. had received income in 1917 to the extent of certain moneys then in litigation between it and the Government, for in that year the District Court had paid these moneys over to the taxpayer, and thereafter the outcome of the litigation on appeal would only be a contingent liability which might or might not be realized.
Here the petitioner had no command over the $20,000 deposited in escrow in July 1929 until it was paid over to him in April of the following year. We think the present case is ruled, therefore, by Commissioner v. Cleveland Trinidad Paving Co., 62 Fed.(2d) 85 and Stoner v. Commissioner, supra. In the former case it was held that the percentage of the payment to be made by a city on a completed paving contract which was retained by the city to guarantee maintenance of the pavement was not taxable to the contractor until the year of its actual receipt. In the latter case, the Circuit Court held that a sum received by*813 the seller of certain stock and under the contract deposited by him on his own behalf and that of the other stockholders in a bank to guarantee against possible liabilities for income tax and other liabilities of the corporation which might not be on its balance sheet at the time the agreement of sale of the stock was carried out, which sum was not withdrawn by the petitioner for his own use until two years later, was taxable to him only in the latter year. The court thought that petitioner never received the fund except as a fiduciary and consequently he could not have realized income on it until his possession of it in that capacity had ceased.
The present case is all the stronger, as petitioner here did not have even a qualified control of the money in escrow, nor, so far as is evident, any benefit from it, until the year 1930.
We hold, therefore, that the share of this $20,000 distributable to the petitioner in his individual capacity for the 25 shares held in his own name which he had sold, in the sum of $11,229.51, should not be included in his gross income for the year 1929.
Reviewed by the Board.
Decision will be entered under Rule 50.