*1201 The income of a trust created in Tennessee by a mother for the education and support of each of her minor children and distributed to their father, one of the trustees, for that purpose, held not within her gross income, notwithstanding the settlor's right to revoke as to principal in a future year.
*1271 Respondent determined deficiencies of $12,639.10, $10,472.69, and $6,308,93 in petitioner's income taxes for 1929, 1930, and 1931, by including in gross income the income of five trusts which petitioner contends is taxable to others who are the beneficiaries.
FINDINGS OF FACT.
Petitioner is a resident of Knoxville, Tennessee. She and her husband, Oscar Handly, Sr., have five children, who in 1925 were minors and resided with them. Petitioner was then the owner of 2,500 shares of stock in the Anderson-Dulin-Varnell Co. (now called *1272 Miller's, Inc.), a corporation successfully engaged iv the operation of a department store in Knoxville.
On September 1, 1925, petitioner transferred to the Fidelity*1202 Trust Co. of Knoxville, Tennessee, and to Oscar Handly, Sr., as trustees, five blocks of 400 shares each of her said stock, one block in trust for each of her five children, under five identical trust instruments. These instruments provide that:
The entire income, profits, increments and earnings from the properties conveyed hereunder shall be applied for the use and benefit and for the education, maintenance and support of [the beneficiary]. Said income, profits, earnings, dividends and increments shall be held and re-invested as directed by the Settlor and the Settlor shall have the right to direct the expenditure of all or any part of said income, earnings and profits for the education, maintenance and support of said child as she may determine at any time, and the Trustees and Settlor shall and are hereby expressly relieved from accounting to the said beneficiary, his heirs, executors, administrators or assigns, or to anyone else, for said expenditures but such expenditures shall be made only for the use and benefit of said child. * * *
It was further provided that upon the settlor's death or disability, the expenditure of the income be entrusted to Oscar Handly, Sr., *1203 for the child's benefit, and upon his death to the child's guardian. Subject to certain conditions, not here material, the beneficiary was to receive the principal upon reaching the age of thirty-five. Should a beneficiary die before receiving the principal, leaving no issue or widow surviving, the principal was to be equally distributed to his surviving brothers and sisters, or if a widow survived, then the income was to go to her during widowhood, and the principal thereafter distributed as above, or if widow and issue survived, then the benefits of the trust should inure to them in a specified manner.
The settlor reserved the right to change the securities in trust for others of equal value, to direct the investment of income in securities, and to exercise the voting rights of trust stock. The sixth paragraph of the instruments is as follows:
The Settlor reserves the right to revoke the trust herein created as to the original securities transferred hereunder or their equivalent in value, if converted, on January 1, 1936, or any time thereafter, but such power of revocation shall not exist in the Settlor prior to January 1, 1936. In the event of revocation, the title to*1204 the original properties conveyed hereunder, or if converted, the title to their equivalent in value shall be reconveyed and restored to the Settlor. Provided, however, that the trust herein created is not revocable as to the income, profits, or increments and earnings realized by the Trustees from the securities conveyed hereunder.
Since the creation of these trusts the Fidelity Trust Co., trustee, has retained possession of the principal, collected and disbursed the income, and kept all records thereof. On October 21, 1926, the trustees purchased 1,500 more shares of the Anderson-Dulin-Varnell Co. for $330,000, paying interest on a deferred portion of the price. *1273 This purchase was made on the settlor's instructions, with income collected for the trusts, to each of which 300 of the newly acquired shares were added. All income other than that so reinvested has been paid to Oscar Handly, Sr., who has invested it for the beneficiaries. On January 2, 1934, the Hamilton National Bank of Knoxville was substituted as cotrustee for the Fidelity Trust Co.
The aggregate income of the five trusts for 1929, 1930, and 1931 from the 2,000 shares originally contributed and*1205 the 1,500 shares subsequently acquired was as follows:
| 1929 | $85,750 |
| 1930 | 68,600 |
| 1931 | 51,625 |
The trustees have reported all income received and disbursed by them as fiduciaries, and each beneficiary has reported all income received by his guardian from the trusts and from investments made by their father, as natural guardian, with income received from the trusts, and they have paid all Federal income taxes thereon. Respondent has added the following amounts to petitioner's gross income as representing the aggregate income of the five trusts:
| 1929 | $85,750 |
| 1930 | 68,600 |
| 1931 | 51,625 |
OPINION.
STERNHAGEN: The respondent has treated the trust income as taxable to the settlor under Revenue Act of 1928, section 167.1 It is, however, hard to see this without confusing the mother and the children. She was not a beneficiary of the trust during any of the years before us, nor, during those years, could any part of the trust income be legally distributed to her individually, nor could it be held or accumulated for future distribution to her. It could only be and was only distributed to Oscar Handly for the named beneficiaries. The fact that they*1206 were minors under guardianship is consistent with their being separate individual taxpayers, .
While, as respondent says, the settlor, being the mother of the beneficiaries, is with the father a joint natural guardian and jointly *1274 charged with their care and education (Tennessee Laws of 1923, ch. 41), it is at least doubtful whether her obligation imposes on her a burden as prompt or as*1207 absolute as on the father, ; , and hence whether, short of necessity, the trust operated to relieve her of any natural onus. We think this falls far short of being a substantial economic benefit to her, comparable with that in ; cf. . Whatever power Congress may have, as supported by that decision, to tax such income to the settlor, the language of section 167 does not purport to exercise it.
It is also plain that the settlor had not, during the taxable years in question, the power to revest in herself any part of the corpus, and hence, that section 166 2 is not applicable. .
*1208 Reviewed by the Board.
Judgment will be entered under Rule 50.
SEAWELL, ADAMS, and TURNER dissent.
MURDOCK, concurring: I fully approve of the above opinion except for the reference to the case of Edmund O. Schweitzer,30 B.T.A. 155">30 B.T.A. 155. The present case and dissenting opinion in the Schweitzer case demonstrate that the latter case was incorrectly decided. The reasoning in the Schweitzer case was contrary to the Commissioner's rulings and regulations (C.B. 3, p. 116, S.O. 14), and to prior decisions of the Board. Irene O'D. Ferrer,20 B.T.A. 811">20 B.T.A. 811; S. A. Lynch,23 B.T.A. 435">23 B.T.A. 435; Lilian K. Blake,23 B.T.A. 554">23 B.T.A. 554; John H. Stevens,24 B.T.A. 52">24 B.T.A. 52; Francis J. Stokes,28 B.T.A. 1243">28 B.T.A. 1243. Cf. Frank P. Welch,12 B.T.A. 800">12 B.T.A. 800; Sidney R. Bliss,26 B.T.A. 962">26 B.T.A. 962; Edson v. Lucas, 40 Fed.(2d) 398. Where the statute provides that the income of a trust is taxable to the "beneficiaries" the word was intended to have the meaning which it always has in the law of trusts. It does not include one only indirectly benefited*1209 from income distributed for the benefit of those named in the trust instrument. The latter are the "beneficiaries." Cf. concurring opinion Iola Wise Stetson,27 B.T.A. 173">27 B.T.A. 173. The only exceptions to this rule are by specific legislative provisions. Burnet v. Wells,289 U.S. 670">289 U.S. 670; Langley v. Commissioner, 61 Fed.(2d) 796; Mabel A. Ashforth et al., Executors,26 B.T.A. 1188">26 B.T.A. 1188. I think the Schweitzer case should be overruled.
LEECH agrees with this concurring opinion.
Footnotes
1. SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
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, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(n), relating to the so-called "charitable contribution" deduction), such part of the income of the trust shall be included in computing the net income of the grantor. ↩
2. SEC. 166. REVOCABLE TRUSTS.
Where the grantor of a trust has, at any time during the taxable year, either 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. ↩