*624 1. The grantor created a trust under which she retained no power to revoke or to have any of the income used for her benefit, ubt only the power to alter the distributive shares of principal and income of the beneficiaries of the classes named in the trust instrument. While the grantor reserved the power to alter the distributive shares of the beneficiaries, the proper construction of the trust instrument requires that all of the income and principal be paid over to some of the beneficiaries of the classes specified, and the grantor is without power to reduce all of the beneficial shares to a nominal sum and thereby effect a resulting trust for herself. Held, the income of the trust is not taxable to the grantor under either section 166 or 167, Revenue Act of 1934.
2. Part of the income of a trust was paid to a person other than the grantor pursuant to the mandatory terms of the trust. The grantor had no such powers over this part of the trust income as are the basis of tax undersection 167, Revenue Act of 1934, nor was the income used to discharge any legal obligations of the grantor. Held, that this part of the trust income is not taxable to the grantor under section*625 167, Revenue Act of 1934, nor under the principle of Douglas v. Willcuts,296 U.S. 1">296 U.S. 1; held, further, that since there was not, within the meaning of the statute, any power vested in the grantor or any other person to revest in the grantor title to any part of the corpus, this income was not subject to tax under section 166, Revenue Act of 1934, although by the terms of the trust it would terminate and the corpus would revert to the grantor or her assignees by will upon the death or remarriage of the beneficiary of this part of the income.
*1130 This proceeding involves a deficiency in income tax for the year 1934 in the amount of $9,324.59 and a claimed overpayment by the petitioner of $2,883.16. The respondent added to the petitioner's reported income $13,426.84 as income of one trust and $4,000 as income of another trust, and disallowed a deduction of $5,000 from the petitioner's distributive share of a trust created by the petitioner's father.
FINDINGS OF FACT.
The facts have been stipulated*626 and the stipulation is incorporated herein by reference. The following is a summary of the material facts contained in the stipulation:
The petitioner is an individual residing in Bryn Mawr, Pennsylvania. Petitioner filed income tax return for the year 1934 with the collector in Philadelphia. The notice of deficiency was mailed to petitioner September 11, 1936.
1. On April 6, 1923, the petitioner created a trust with hereself and the Girard Trust Co. of Philadelphia as cotrustees, whereby she conveyed to the trustees, in trust, certain securities. The beneficiaries of the income of the trust named in the trust deed were the two sons and three daughters of the grantor, all of whom had attained majority and were under no disability at the time of the trust. The trust indenture directed the trustees, after the deduction of all proper and necessary charges and expenses, "to pay over the entire *1131 net income, quarterly, Three Thousand Dollars ($3,000) thereof per annum unto S. W. McK. Downs, son of Grantor, and the balance of the said net income equally share and share alike unto T. McKean Downs, son of Grantor, Elizabeth Wharton Evans, wife of Rowland Evans, daughter*627 of Grantor, Phebe McKean Sargent, wife of J. Weir Sargent, daughter of Grantor, and Sarah Atlee Fisher, wife of Robert L. Fisher, daughter of Grantor, for and during the term of the respective natural lives of the said sons and daughters of Grantor." Upon the death of any of these children of the grantor the share of the net income was to be paid to the descendants of the deceased son or daughter of grantor per stirpes upon the principle of representation for and during the natural life of the survivor. After the death of the survivor of the grantor's children the net income was to be paid to the grantor's grandchildren share and share alike, descendants of deceased grandchildren to take their parent's share per stirpes upon the principle of representation. Upon the death of the survivor of grantor's children and the survivor of the grandchildren of the grantor living at the date of execution of the trust deed, the trustees were directed to pay over and distribute the corpus of the trust "together with all accumulations thereon and additions thereto" to all the grandchildren of grantor share and share alike, descendants of deceased grandchildren to take per stirpes upon*628 the principle of representation.
The last paragraph of the deed of trust declared the trust "to be irrevocable, save and except that Grantor reserves the right by deed duly executed by her and lodged with Trustees to alter, vary, and change the distributive shares of any and all distributees of either principal or income under this deed."
The trust deed was delivered to and accepted by the trustees on April 6, 1923, who have functioned as such from that date to the present.
The petitioner by seven subsequent deeds exercised her reserved power of altering the interests of the various beneficaries. Distributions of income of the trust have been made in accordance therewith. The last change, which was made May 20, 1935, at the same time that petitioner executed her will, provided for payment of "the entire net income" during her life to the three daughters, equally, and upon her death $200,000 of the corpus to be set aside to be paid to her grandson, Norris, Downs, 3rd, when he should reach 21, and prior thereto its income to be used for his support and education, the balance of the corpus to be distributed on the grantor's death to the three daughters and one of the sons, equally.
*629 The entire net income of the trust each year was distributed to the beneficiaries and none was ever distributed to the grantor, or accumulated. *1132 During the taxable year 1934 the net income of the trust totaled $13,426.84, which was distributed to the three daughters of petitioner under the distribution in force at that time. No part of said income was distributed to the petitioner in 1934 or at all, and no part of said income was reported as income in petitioner's income tax return for the year 1934. The grantor never attempted to make any change in the trust instrument whereby any amount less than the whole income and corpus of the trust would be distributable to beneficiaries of the classes named in the trust instrument. In 1934 the beneficiaries of the trust, the daughters, were 37, 34, and 32 years of age. The two sons, who were originally beneficiaries, had been excluded from participation in receipt of the trust income. One son died prior to 1934 and T. McKean Downs was excluded from participation in the income of the trust in and after 1928 by the petitioner.
2. On May 22, 1931, the petitioner, as grantor, executed a deed of trust to the Fidelity-Philadelphia*630 Trust Co. as trustee, whereby she conveyed to the trustee certain securities and cash for purposes stated in the trust deed. Prior to creation of this trust petitioner's son and daughter-in-law contemplated a divorce. Since the son did not have sufficient property to make appropriate provision for the support of his wife and child after divorce, petitioner voluntarily executed the trust to provide such support. The divorce was granted subsequent to execution of the trust. At the time of execution of trust the daughter-in-law was of full age and under no disability.
The daughter-in-law, Anne Merrick Downs, was made beneficiary of the trust to the extent of $4,000 per annum for life or until her remarriage, any excess of the income of the trust to be paid to the petitioner and any deficiency in the income in any year to be made up out of corpus. Upon the death or remarriage of the daughter-in-law the trust was to terminate and the corpus was to revert to the granter or to her inter vivos assignees or her appointees by will. She reserved no powers of management or any other control over the trust corpus or over the $4,000 income payable annually to Anne Merrick Downs, expressly*631 declaring the trust to be irrevocable and herself without power "at any time to revoke, change or annul" any of its provisions. During the taxable year 1934, Anne Merrick Downs was living and unmarried and received distributions from the trust in the amount of $4,000 and reported it in her income tax return. The excess of the net income of the trust over that amount was distributed to the petitioner, who reported it in her income tax return for that year. No part of the $4,000 was reported by petitioner in her income tax return.
In his determination of the deficiency, respondent added to petitioner's taxable income $13,426.84, which was the total net income in *1133 1934 of the first trust; and $4,000, part of the net income of the second trust, proposing an overassessment in favor of Anne Merrick Downs on the basis of excluding this amount of $4,000 from her gross income. Respondent also disallowed a claimed deduction of $5,000 for interest. At the hearing respondent conceded this last item of determination to be in error.
OPINION.
HARRON: Respondent has conceded that petitioner properly deducted $5,000 from gross income which represented interest paid by petitioner*632 on her indebtedness to a trust created by the will of her father. There is no issue remaining as to this item. The two remaining issues relate to whether petitioner is taxable on the net income of two trusts of which she was the grantor.
Respondent contends that the income of the first trust created in 1923 is taxable to the petitioner under the provisions of section 167 of the Revenue Act of 1934, quoted below. 1 The first trust was created in 1923 by the petitioner with her children and grandchildren as the beneficiaries. None of the income of the trust was, under the terms of the trust, currently distributable to the grantor or could, in her discretion, be accumulated for future distribution to her. There was no provision in the trust instrument for revesting in the grantor title to the corpus of the trust. In fact, the trust was expressly "declared by Grantor, after due consideration, to be irrevocable." All of the children of the grantor, who were the immediate income beneficiaries, had already attained their majority at the time of creation of the trust so that the respondent concedes that the income would not be taxable as that of the grantor under the principle of*633 ; ; and , because it did not go to discharge any legal obligation of the petitioner's to support her minor children. The respondent's case rests on the power *1134 reserved by the petitioner to alter the distributive shares of the distributees and his theory is, that under this reserved power the grantor might reduce the distributive shares of every beneficiary of income or principal to a nominal sum of, for example, $1 each. Then, since there was no disposition in the trust instrument of the balance of the income and principal, there would arise by operation of law a resulting trust in the grantor, and presumably she could draw down such principal and any accumulated income upon a possible termination of the trust. We do not need to consider the question of whether she could obtain a termination of the trust during her lifetime, under the law of resulting trusts, which appears doubtful and which apparently would be a necessary condition to the application of either section 167 or section 166 of the Revenue Act*634 of 1934. We believe respondent's position must be disapproved on his construction of the power reserved by the grantor in the trust instrument itself.
*635 We are of the opinion that the grantor did not retain the power to reduce the share of income and principal of every distributee to a nominal sum and thus effect a resulting trust for hereself, but that all of the income and principal was required to be distributed to beneficiaries of the classes specified in the trust instrument and that the only power retained was to alter the distribution as among those beneficiaries. This conclusion is based on our construction of the whole instrument, together with the apparent intention of the grantor as manifested therein, and the conduct of the parties during its operation. At the very outset the instrument provides for current distribution of the "entire net income" to the named beneficiaries. It then provides minutely the terms of distribution of income and principal to children and grandchildren and descendants of deceased children and grandchildren, with no reservation whatever of any income or remainder interest in the corpus to the grantor. But the respondent's case is based upon his construction of the last paragraph of the instrument. It reads: "All the trusts herein named and established are declared by Grantor, *636 after due consideration, to be irrevocable, save and except that Grantor reserves the right by deed duly executed by her and lodged with Trustees to alter, vary and change the distributive shares of any and all distributees of either principal or income under this deed." The general grant is contained in the first part of the sentence and clearly declares the instrument to be irrevocable; the "save and except" clause, like any exception to a grant, must necessarily be something of a smaller quantum than the grant itself else the grant would be a nullity. That construction is favored which makes the grant effective, and the trust instrument is always construed against the grantor and in favor of the beneficiaries. The excepting clause here, since it is an excepting clause, must be limited despite *1135 its broad terms to the power to alter the distribution as between beneficiaries of the named classes, for otherwise, as the respondent rightly contends, it would comprise the power to revoke, which is absolutely inconsistent with the preceding clause containing the irrevocable grant. When the trust instrument was declared to be irrevocable we think that meant irrevocable*637 by any means whatever, whether by a direct revocation or by the exercise of a power reserved under the instrument coupled with the operation of a rule of law such as the rule regarding resulting trusts. We do not think the grantor's reserved power extended any farther than to alter the distribution as between the classes of beneficiaries specified. It does not appear to have been the grantor's intention to retain any interest whatever in the income or corpus of the trust for herself, and in the construction of a trust instrument the intention of the grantor is of utmost importance. The instrument carefully provides for the distribution of principal and income to her descendants upon all possible contingencies and the grantor is not named as a beneficiary under any conditions. Furthermore, the conduct of the parties to the trust which can be looked to for assistance in the construction of a trust instrument also bears out our conclusion. Although she made seven alterations in the distributive shares of beneficiaries at various dates from 1923 to 1935, she never attempted in any of these changes to prevent the distribution of the entire net income and principal of the trust to the*638 beneficiaries or to cause any of it to be returned to herself. In fact all of the net income was each year distributed to all of the named beneficiaries.
Construing her reserved power as limited to alterations of the distribution as among beneficiaries of the classes named in the trust instrument, the petitioner is not taxable upon the income of this trust under either section 167 or 166 because there was no possibility whatever of her obtaining possession or beneficial use of either the principal or income of the trust. The $13,426.84 income of this trust, for the year 1934, is not taxable to the petitioner.
The second trust with which we are concerned was created by the petitioner on May 22, 1931. Under its terms $4,000 was to be paid annually to grantor's then daughter-in-law, Anne Merrick Downs, out of the income of the trust if sufficient, and if not, the deficiency in any year was to be paid out of principal. Any excess of income over $4,000 was distributable to the grantor. In the tax year involved there was such an excess which was distributed to the petitioner and she paid income tax thereon. The daughter-in-law was contemplating a divorce at the time of creation*639 of the trust, and the trust instrument provided that the trust should terminate at the time of her death or remarriage and the corpus of the trust should *1136 be paid over to the grantor or to her inter vivos assignees or appointees by will. The grantor had no management or other powers over the corpus for the duration of the trust. The trust was expressly made irrevocable.
The respondent is attempting to tax as income to the petitioner the $4,000 earned by the trust and paid to Anne Merrick Downs during the taxable year, in other words, respondent's contention is that all of the icnome of such a trust is taxable to the donor under section 166. The theory on which he bases this tax is not altogether clear. The deficiency letter lumps together both this trust and the one discussed above and says that the income of both is taxable to the grantor because "the agreement creating the trusts" reserves the right in the grantor to "alter, vary and change the distributive shares of any and all distributees of principal or income." However, the trusts are in actuality two separate trusts and the instrument creating the Anne Merrick Downs trust contains no such reservation*640 as that quoted in the deficiency letter and no power of alteration whatever was reserved.
At the hearing the respondent's counsel by his line of questioning indicated that he was attempting to show that the trust was established for the purpose of legally benefiting the grantor by warding off, for example, a suit for alienation of affections by Anne Merrick Downs against the grantor. However, none of the testimony supported such premise. There are no facts present to show that the income remained "in substance that of the grantor" within the rationale of ; see Regulations 94, art. 166-1. There was no legal obligation of any kind owing by the grantor to Anne Merrick Downs, nor does it appear that there was any motive of tax avoidance in establishment of the trust by the petitioner rather than by her son because it affirmatively appears that the son was without the property necessary to furnish the required trust corpus. There was not and is not any agreement for repayment by the son to the petitioner on account of her establishment of the trust. She received no legal benefit and discharged no legal obligation by her act and*641 is, therefore, not taxable under the principle of
On brief the respondent elected to submit his case on this issue "without argument." It is our opinion that respondent's action respecting the income of the second trust is in error because clearly the trust, by its terms, does not have such characteristics as would result in the application of section 167, Revenue Act of 1934, and we are of the opinion that it is not such trust as comes within the provisions *1137 of section 166 quoted in the margin. 2 That section deals with "revocable trusts", which are a well understood type of trust where a power to revoke either in whole or in part is retained by the grantor. Here the trust was expressly declared to be "irrevocable" in its entirety, the grantor being without power "at any time to revoke, change or annul any of the provisions herein contained." Respondent has not argued that the possibility of a reversion to the grantor upon the death or remarriage of Anne Merrick Downs brings the trust within section 166. A possibility of a reverter is, in our opinion, different from "the power to revest" which is comprehended by section*642 166. We have here a trust for an indefinite term, "pour autre vie" or until the occurrence of a contingency over which the grantor has no control. No exercise of volition by the grantor is required nor would have any effect upon the return of the corpus to her. When and if it returns to the grantor or her assignees or appointees it will return by operation of the terms of the trust instrument itself and not by the exercise of any "power" retained by the grantor. We believe such a trust is not covered by the terms or intendment of section 166. See , where a trust for a term of one year at the end of which the trust property would revert to the grantor was held to be without the scope of section 166 of the Revenue Act of 1928, 3 which contains language of apparently the same import in the particulars material to this question as section 166 of the Revenue Act of 1934.4 See also, Magill, Taxable Income, pp. 281, 282. But compare , where the facts are distinguishable. There a grantor was held taxable under section 166 of the Revenue Act of 1934*643 on income of a trust with a power of the ordinary type to amend or revoke although exercisable only upon certain conditions.
We are satisfied that under its terms the trust is outside the scope of both sections 166 and 167.
*1138 *644 Petitioner has made claim for a refund and it appears that the Commissioner has made an adjustment in the item of foreign dividends in his determination, not at issue. Therefore, although all the issues are decided for the petitioner, a recomputation may be necessary under Rule 50.
Decision will be entered under Rule 50.
Footnotes
1. 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) 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, 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(o) relating to the so-called "charitable contribution" deduction); then such part of the income of the trust shall be included in computing the net income of the grantor.
(b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question." ↩
2. 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) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust shall be included in computing the net income of the grantor. ↩
3. SEC. 166. REVOCABLE TRUSTS.
Where the grantor of a trust has, * * * the power to revest↩ in himself title to any part of the copus of the trust * * *. [Italics supplied.]
4. SEC. 166. REVOCABLE TRUSTS.
Where * * * the power to revest in the grantor title to any part of the corpus of the trust is vested -
(1) In the grantor, * * * . [Italics supplied.] ↩