*2244 1. Petitioner created certain trusts the income from which was used to pay premiums on life insurance policies on his life. Held that under section 219(h) of the Revenue Acts of 1924 and 1926 such income should be included in petitioner's net income regardless of whether the trusts created were revocable or irrevocable.
2. The provisions of section 219(h) are not so arbitrary or capricious as to amount to confiscation of property without due process of law.
*1214 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes of $4,809.37 for 1924, $3,057.16 for 1925, and $5,470.30 for 1926. The petition in Docket No. 29159, involving the deficiency for 1924, alleges the following errors:
(1) The Commissioner, in determining the net income of the taxpayer for the said calendar year 1924, included the net income of five irrevocable trusts which the taxpayer had created prior to the enactment of said act, the income of which was or might be applied to*2245 the payment of premiums upon policies of insurance on the life of the grantor (taxpayer) who had divested himself of all rights, interests and benefits under said policies, the said action of the Commissioner being contrary to the intent of section 219(h) and other provisions of the Revenue Act of 1924.
(2) In the event that it is held that the taxpayer is subject to tax on any part of the income of said trusts in accordance with section 219(h) of the Revenue Act of 1924, then the taxpayer further avers that said section is unconstitutional so far as it relates to the inclusion in the taxable net income of the grantor of any part of the income of a trust which is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor.
The petitions in Dockets Nos. 36459 and 40915, involving the deficiencies for 1925 and 1926, respectively, allege error on the part of the respondent as hereinabove set forth in allegation one of Docket No. 29159.
The petitioner submitted the case upon the pleadings, an agreed statement of facts, certain documentary evidence and brief.
FINDINGS OF FACT.
On December 30, 1922, the petitioner created by three separate*2246 trust indentures certain trusts, hereinafter referred to as trusts Nos. 1, 2, and 3. On August 6, 1923, by separate trust indentures, he created two additional trusts, hereinafter referred to as trusts Nos. 4 and 5.
By the provisions of trust No. 1 petitioner assigned, transferred, and conveyed unto the Minneapolis Trust Co., Trustee, "Certificate No. 8 for 1000 shares of the six per cent cumulative preferred stock *1215 of The Wells Securities Company, a Delaware corporation, said stock being of the par value of $100.00 per share; not for its own use and benefit, however, but upon the trusts hereinafter defined * * *."
The trustee was empowered to take possession of, manage, and control the trust estate, demand, receive, and collect income and dividends therefrom, invest and reinvest the trust estate, or sell and convey the same as it deemed best. In case of sale the proceeds were to be invested and reinvested only in such securities as are now authorized by the laws of the State of Minnesota for the investment of funds of trust companies. The income of the trust estate was to pay the net annual premiums upon a certain life insurance policy upon the petitioner's life, *2247 hereinafter more fully considered. The trustee was given full power and authority to deal with the insurance in any manner that it deemed best for the interest of the said Minneapolis Trust Co., trustee, and the trustee was authorized to borrow money thereon or avail itself of any of the conditions, privileges, or benefits under said policy. The trustee was to accumulate the income in excess of the net annual premiums until an amount sufficient to pay one additional net annual premium had been accumulated, any income in excess thereof was, in the discretion of the trustee, to be paid over to petitioner's daughter, Mary Wright Peavey Wells, at the end of each year. Upon petitioner's death the trustee was to collect the face amount of the policy and purchase from petitioner's estate securities amounting to $100,000, and the trustee was empowered to manage and control, sell and reinvest the trust corpus and/or the proceeds from any sale, in accordance with the laws of Minnesota relating to the investment of trust funds. After the petitioner's death the income from the trust estate was to be paid over to his daughter during her lifetime in quarterly installments. Upon the death of*2248 petitioner's daughter the trust was to cease and determine, and the trustee was to pay over the corpus to such person or persons as were appointed by the daughter's will or in default thereof, to her issue, and in default of disposition by will or issue of the daughter, then in equal parts to petitioner's sons when the youngest thereof, or the youngest of the survivors, attained the age of twenty-five years.
The insurance policy under trust No. 1 was taken out by petitioner on his life on the same day the trust was created, naming the Minneapolis Trust Co., trustee, as his beneficiary. Petitioner's application for said policy stated that the right to change the beneficiary was waived.
By the provisions of trust No. 2, the petitioner assigned, transferred, and conveyed unto the Minneapolis Trust Co. and Leontine Lindstrom, trustees, $450 in cash, 75 shares of 6 per cent cumulative *1216 preferred stock of the Wells Securities Co., and a certain life insurance policy, not for their own use and benefits, however, but on the trust hereinafter defined. The duties of the trustees were substantially the same as the duties of the trustee in trust No. 1. The income from the*2249 trust estate was to be applied to the payment of the net annual premiums due upon the life insurance policy, assigned and conveyed to the trustees, and the trustees were given the same powers with respect to said policy as were given the trustee in trust No. 1. Upon petitioner's death the trustees were to pay over to the Minneapolis Foundation, the said 75 shares of preferred corporate stock, or such securities as were held in lieu thereof, and the trustees were to collect the proceeds of the life insurance policy and invest and reinvest the same in their discretion. The annual income resulting from the trust estate remaining in the hands of the trustee and so much of the principal as in the discretion of the trustees was necessary, was to be paid over for the support, maintenance, and education of Shirley Irene Lindstrom until she attained the age of twenty-five, at which time the entire trust estate remaining in the hands of the trustee was to be paid over to the said Shirley Irene Lindstrom. In the event that Shirley Irene Lindstrom predeceased the petitioner, the trust in her favor was to cease and determine and the trustees were to surrender the life insurance policy, collect*2250 the cash surrender value and pay over the same to the Minneapolis Foundation. If petitioner survived until Shirley Irene Lindstrom attained the age of twenty-one, to wit, March 12, 1938, the trust in her favor was to cease and determine and the trustees were to surrender the policy of life insurance for cancellation, collect the cash surrender value, and pay the same over to Shirley Irene Lindstrom. Also, by trust No. 2, petitioner gave, granted, and conveyed in perpetuity to the Minneapolis Foundation the 75 shares of preferred stock, or the securities held in lieu thereof at the date of his death, upon the following trusts: To manage and control the trust estate, invest and reinvest the same and sell or convey securities as it deemed best; to pay the net annual income to the rector and wardens and vestrymen of St. Marks Church for the sole purpose of carrying on the work of the Wells Memorial, a definite charity conducted by the said church corporation. If the Wells Memorial ceased to be conducted as a definite charity, then the net income was given to the Minneapolis Foundation for its own uses and purposes. With respect to both trusts created by trust No. 2, it was provided*2251 that if the accumulation of income in the living trust be declared void for any reason, such accumulation was to be paid over to the Minneapolis Foundation for its own uses and purposes, but should either the living trust or the perpetual trust, herein defined, be declared void as a trust, then the trust shall revert to *1217 petitioner if living, otherwise to his heirs, executors, administrators, or assigns.
The life insurance policy assigned, transferred and conveyed as a part of trust No. 2 was taken out by petitioner on November 27, 1922, with his executors, administrators, or assigns as beneficiary thereof. On January 16, 1923, the policy was made payable at the death of the insured to the Minneapolis Trust Co. and Leontine Lindstrom, as trustees, and "the right to make future changes of any beneficiary herein, without the consent of the beneficiary or beneficiaries herein, has been revoked and canceled; a legal request therefor having been received."
By the provisions of trust No. 3 the petitioner assigned, transferred, and conveyed unto Minneapolis Trust Co. $3,550 in cash, and certificate No. 2 for 625 shares of 6 per cent cumulative preferred stock of the Wells*2252 Securities Co., not for its own use and benefits, however, but upon the trusts hereinafter defined. The trustee's powers were substantially the same as those set forth in trust No. 1, and the net income from the trust estate was to be applied to the payment of net annual premiums of four life insurance policies written upon petitioner's life for the benefit of persons therein named, three of the four beneficiaries being relatives of the petitioner, and one a valued employee. As in the preceding trusts, the trustee was empowered to deal with the insurance policies in any manner that it deemed for the best interests of the beneficiaries, to borrow money thereon, or to avail itself of the conditions, privileges, or benefits of said policies. The income from the trust estate in excess of the sum necessary to pay annual premiums was to be retained to pay future premiums. If, during petitioner's lifetime, the insurance company failed to demand payment, or each of the beneficiaries named under the four policies predeceased the petitioner, or if for any other reason payments on said policies shall cease to be demanded or paid, then the trustee was to convey the trust estate to the Minneapolis*2253 Foundation in trust. The terms of this latter trust with respect to the Minneapolis Foundation were almost identical with the terms of the trust created in trust No. 2 for the benefit of said Minneapolis Foundation.
Three of the four insurance policies provided that, in the event of the death of the beneficiary therein named before receiving all the monthly payments provided for in said policies, the remainder of said payments should go to Helen R. Golding, valued employee of the petitioner, otherwise to the trustees of the Minneapolis Foundation. The fourth policy named Helen R. Golding as beneficiary and provided that if any installments payable under said policy remained unpaid at the death of said Helen R. Golding, that such unpaid installments *1218 should go to the Minneapolis Foundation. The face of each policy bears the following notation: "Springfield, Mass. March 22, 1923. The right to make future changes of any beneficiary herein without the consent of the beneficiary or beneficiaries herein has been specifically surrendered and canceled. (Signed) Albert D. Shaw, Asst. Sec."
By the provisions of trust No. 4, the petitioner assigned, transferred and conveyed*2254 unto the Minneapolis Trust Co., trustee, certificate No. 16 for 1,000 shares of 6 per cent cumulative preferred stock of the Wells Securities Co., not for its own use and benefit, however, but upon the trust hereinafter defined. The duties and powers of the trustee were essentially the same as those in trust No. 1, and the income from the trust estate was to be expended to discharge the net annual premiums on thirteen policies of accident and life insurance written upon the life of the petitioner. Income in excess of the net annual premiums was to be retained until the trustee had accumulated an amount equal to two successive annual premiums upon all of the policies of insurance, and any income in excess of such accumulations should be distributed among petitioner's children in the proportion in which they would ultimately receive the income from the trust estate. Upon petitioner's death, the trustee was to collect the principal sums on the insurance policies and expend the proceeds thereof to purchase securities from petitioner's estate. Income from the trust estate after being thus augumented was to be distributed as follows: The income from $225,000 to be paid in equal parts*2255 to petitioner's three sons so long as they live, with power in the trustee to withhold the income until such sons shall attain the age of thirty years. Income from the residue of the trust to be divided equally between petitioner's sons and his daughter. Upon the death of each son $75,000 in cash or securities, and one-fourth of the residue of the trust, to be paid over to such person or persons as the son shall designate by will, and in default of appointment, to such persons as are entitled by the laws of descent in Minnesota. Upon the death of petitioner's daughter her one-fourth of the residue, as she should appoint or in the default thereof, to such persons as are entitled under the laws of Minnesota. Petitioner reserved the right to appoint a trustee in the event of resignation or disqualification of the trustee named or any successor in trust.
The thirteen insurance policies upon which the trustee was to pay annual premiums were taken out on petitioner's life during the period 1906 to 1922, seven policies being entered into in 1911 and four in 1920. The ten life insurance policies were duly assigned by the beneficiaries therein named to the Minneapolis Trust Co., as*2256 trustee, during the period May 1, 1923, to February 14, 1924, six *1219 assignments occurring on May 1, 1923, three in June, 1923, and one on February 14, 1924. The beneficiary of each of the three accident policies was changed to the Minneapolis Trust Co., trustee, in June or July, 1923.
By the provisions of trust No. 5, the petitioner assigned, transferred, and conveyed unto Minneapolis Trust Co., trustee, certificate No. 17 for 1,000 shares of 6 per cent cumulative preferred stock of the Wells Securities Co., not for its own use and benefit, however, but upon the trust hereinafter defined. The provisions of this trust are for the purposes of this proceeding identical with the provisions of trust No. 4. The trustee was to pay the net annual premiums on eleven life and accident insurance policies written upon the life of the petitioner, and the beneficiaries under the several policies assigned, transferred, and set over their interests therein to the Minneapolis Trust Co., trustee. As in trust No. 4, these policies were taken out at various times from 1898 down to and including the year 1922. The accident policies were made payable to the Minneapolis Trust Co., as trustee, *2257 and the life insurance policies were assigned by the beneficiaries to said trustee as follows: five on May 1, 1923; one in June, 1923; one in August, 1923; and one on February 14, 1924. On July 16, 1923, petitioner changed the beneficiary on one policy to the Minneapolis Trust Co., trustee.
The net income of the said trust No. 1 and the insurance premiums paid thereunder for the calendar years 1924 to 1926, inclusive, were as follows:
| Year 1924 | ||
| INCOME | ||
| Dividends from domestic corporation | $6,000.00 | |
| Interest | 4.66 | |
| Total income | 6,004.66 | |
| DEDUCTIONS | ||
| Interest paid | $79.73 | |
| Trustee fees | 150.37 | |
| 230.10 | ||
| Net income | 5,774.56 | |
| Insurance premium paid | 3,866.00 | |
| Year 1925 | ||
| INCOME | ||
| Dividends from domestic corporation | $4,500.00 | |
| Interest | 32.51 | |
| Total income | 4,532.51 |
| DEDUCTIONS | ||
| Interest paid | $20.54 | |
| Trustee fees | 121.33 | |
| $141.87 | ||
| Net income | 4,390.64 | |
| Insurance premium paid | 3,830.00 | |
| Year 1926 | ||
| INCOME | ||
| Dividends from domestic corporation | $7,500.00 | |
| Interest | 60.54 | |
| Total income | 7,560.54 | |
| DEDUCTIONS | ||
| Interest paid | $2.97 | |
| Trustee fees | 179.30 | |
| 182.27 | ||
| Net income | 7,378.27 | |
| Insurance premium paid | 3,690.00 |
*2258 The net income of the said trust No. 2 and the insurance premiums paid thereunder for the calendar years 1924 to 1926, inclusive, were as follows:
| Year 1924 | |
| INCOME | |
| Dividends from domestic corporation | $450.00 |
| Interest | 3.06 |
| Total income | 453.06 |
| DEDUCTIONS | |
| Trustee fees | 20.37 |
| Net income | 432.69 |
| Insurance premium paid | 368.30 |
| Year 1925 | |
| INCOME | |
| Dividends from domestic corporation | $337.50 |
| Interest | 4.57 |
| Total income | 342.07 |
| DEDUCTIONS | |
| Trustee fees | 9.09 |
| Net income | 332.98 |
| Insurance premium paid | 364.00 |
| Year 1926 | |
| INCOME | |
| Dividends from domestic corporation | $562.50 |
| Interest | 5.15 |
| Total income | 567.65 |
| DEDUCTIONS | |
| Trustee fees | 9.06 |
| Net income | 558.59 |
| Insurance premium paid | 346.50 |
The net income of the said trust No. 3 and the insurance premiums paid thereunder for the calendar years 1924 to 1926, inclusive, were as follows:
| Year 1924 | |
| INCOME | |
| Dividends from domestic corporation | $3,750.00 |
| Interest | 34.32 |
| Total income | 3,784.32 |
| DEDUCTIONS | |
| Trustee fees | 94.86 |
| Net income | 3,689.46 |
| Insurance premiums paid | 3,024.77 |
| Year 1925 | |
| INCOME | |
| Dividends from domestic corporation | $2,812.50 |
| Interest | 51.38 |
| Total income | 2,863.88 |
| DEDUCTIONS | |
| Trustee fees | 75.83 |
| Net income | 2,788.05 |
| Insurance premiums paid | 2,991.63 |
| Year 1926 | |
| INCOME | |
| Dividends from domestic corporation | $4,687.50 |
| Interest | 64.91 |
| Total income | 4,752.41 |
| DEDUCTIONS | |
| Trustee fees | 76.22 |
| Net income | 4,676.19 |
| Insurance premiums paid | 2.856.89 |
*2259 *1222 The net income of the said trust No. 4 and the insurance premiums paid thereunder for the calendar years 1924 to 1926, inclusive, were as follows:
| Year 1924 | ||
| INCOME | ||
| Dividends from domestic corporation | $6,000.00 | |
| Interest | 25.40 | |
| Total income | 6,025.40 | |
| DEDUCTIONS | ||
| Interest | $4.75 | |
| Trustee fees | 120.40 | |
| 125.15 | ||
| Net income | 5,900.25 | |
| Life insurance premiums paid | 4,596.17 | |
| Accident insurance premiums paid | 190.00 | |
| Year 1925 | ||
| INCOME | ||
| Dividends from domestic corporation | $4,500.00 | |
| Interest | 41.35 | |
| Total income | 4,541.35 | |
| DEDUCTIONS | ||
| Trustee fees | 120.79 | |
| Net income | 4,420.56 | |
| Life insurance premiums paid | 4,853.23 | |
| Accident insurance premiums paid | 190.00 | |
| Year 1926 | ||
| INCOME | ||
| Dividends from domestic corporation | $7,500.00 | |
| Interest | 60.02 | |
| Total income | 7,560.02 | |
| DEDUCTIONS | ||
| Trustee fees | 121.07 | |
| Net income | 7,438.95 | |
| Life insurance premiums paid | 4,746.09 | |
| Accident premiums paid | 190.00 |
The net income of the said trust estate No. 5 and the insurance premiums paid thereunder for the calendar years 1924 to 1926, inclusive, were as follows:
*1223
| Year 1924 | ||
| INCOME | ||
| Dividends from domestic corporation | $6,000.00 | |
| Interest | 15.86 | |
| Total income | 6,015.86 | |
| DEDUCTIONS | ||
| Interest paid | $47.05 | |
| Trustee fees | 120.10 | |
| 167.15 | ||
| Net income | 5,848.71 | |
| Life insurance premiums paid | 4,962.83 | |
| Accident insurance premiums paid | 100.00 | |
| Year 1925 | ||
| INCOME | ||
| Dividends from domestic corporation | $4,500.00 | |
| Interest | 11.83 | |
| Total income | 4,511.83 | |
| DEDUCTIONS | ||
| Interest paid | $21.04 | |
| Trustee fees | 120.20 | |
| 141.24 | ||
| Net income | 4,370.59 | |
| Life insurance premiums paid | 4,875.65 | |
| Accident insurance premiums paid | 200.00 | |
| Year 1926 | ||
| INCOME | ||
| Dividends from domestic corporation | $7,500.00 | |
| Interest | 25.26 | |
| Total income | 7,525.26 | |
| DEDUCTIONS | ||
| Interest paid | $25.68 | |
| Trustee fees | 120.38 | |
| 146.06 | ||
| Net income | 7,379.20 | |
| Life insurance premiums paid | 4,765.37 | |
| Accident insurance premiums paid | 200.00 |
*2260 In computing the deficiency in income tax for the calendar year 1924 the Commissioner included as taxable income of the petitioner dividends of a domestic corporation in amount of $16,132.95 received *1224 by five trusts created by the petitioner and allowed a deduction from the taxable income of the petitioner for said calendar year of $326.23 on account of said trusts. The petitioner omitted the said income and deduction from his income-tax return for said year.
In computing the deficiency in income tax for the calendar year 1925 the Commissioner included as taxable income of the petitioner dividends of a domestic corporation in amount of $16,650 received by the said five trusts created by the petitioner, and allowed a deduction from the taxable income of the petitioner for said calendar year of $347.18 on account of said trusts. The petitioner omitted the said income and deduction from his income-tax return for said year.
In computing the deficiency in income tax for the calendar year 1926 the Commissioner included as taxable income of the petitioner dividends of a domestic corporation in the amount of $27,750 received by the said five trusts created by the petitioner, *2261 and allowed a deduction from the taxable income of the petitioner for said calendar year of $318.80 on account of said trusts. The petitioner omitted the said income and deduction from his income-tax return for said year.
In computing the amount that he determined should be added to taxpayer's 1924 gross income, the Commissioner inadvertently omitted, from his total of $16,132.95 mentioned above, an item of $5,774.56, being the net income of trust No. 1 for 1924, heretofore mentioned. The item so inadvertently omitted does not differ in any material respect from the other items included in the said $16,132.95.
For the year 1924 the total contributions made by petitioner amounted to $26,515.94. The Commissioner in his determination of the proposed deficiency for 1924 allowed $22,761.96 as a deduction for contributions, such amount being equal to 15 per cent of the net income determined by him without allowance for any deduction for contributions. For the year 1925 the total contributions made by petitioner amounted to $18,121 and the entire amount thereof was allowed as a deduction by the Commissioner in his determination of the proposed deficiency for 1925. For the year*2262 1926 the total contributions made by petitioner amounted to $16,267, and the entire amount thereof was allowed as a deduction by the Commissioner in his determination of the proposed deficiency for 1926.
OPINION.
MORRIS: The petitioner is the grantor of five separate trusts, by the terms of which the trustee therein named was to use such portion of the trust income as might be needed to pay annual premiums on life insurance policies taken out on the grantor's life. The facts show that such annual premiums were paid out of trust income during the calendar years 1924, 1925, and 1926. Respondent in computing *1225 petitioner's net income for these years included therein the amounts paid each year out of trust income as premiums on said policies, in accordance with the provisions of section 219(h) of the Revenue Acts of 1924 and 1926, which read 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, or where any part of the income of a trust is or may be applied*2263 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 paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.
The petitioner contends that Congress did not intend to apply the provisions of section 219(h) to situations where the grantor created an irrevocable trust and parted with all rights and benefits under such trust and under the insurance policies.
In order to answer this contention we must ascertain the Congressional intent or purpose in writing this particular provision into the taxing statutes. The subdivision first appears in the Revenue Act of 1924, and the Committee on Ways and Means of the House of Representatives, speaking with respect thereto, explained the purpose of section 219 as follows, Report No. 179 of the House of Representatives on the Revenue Bill of 1924, p. 21:
This section has been rewritten in order to secure clarity and to prevent the evasion of taxes by means of estates and trusts. The changes made are quite important.
*2264 It is provided in the section that in the case of a trust where the trustee has the discretion to distribute or not, the income is taxed to the beneficiary if distributed and to the trustee if not distributed.
Subdivision (g) of this section provides that where the grantor of a trust reserves the right to change the trust in favor of himself the income is taxed to the grantor.
Subdivision (h) of this section provides that the income of a trust which may be distributed to the grantor or which may be used for the payment of premiums upon policies of insurance on his life shall be included in the gross income of the grantor. Trusts have been used to evade taxes by means of provisions allowing the distribution of the income to the grantor or its use for his benefit. The purpose of this subdivision of the bill is to stop this evasion. [Italics supplied.]
The Senate Committee on Finance in its report No. 398 on the Internal Revenue Bill of 1924, p. 25, spoke with reference to section 219 of said bill as follows:
Section 219: This section has been rewritten in order to secure clarity and to prevent the evasion of taxes by means of estates and trusts.
(1) It is provided*2265 in this section that in the case of a trust where the trustee has the discretion to distribute or not, the income is taxed to the beneficiary if distributed and to the trustee if not distributed. The wording *1226 of subdivision (b) has been changed (1) to except from its provisions specifically subdivisions (g) and (h), which lay down special rules in lieu of the general provisions of subdivision (b); (2) to permit as an additional deduction that part of the gross income which, pursuant to the terms of the will or deed, is to be used exclusively for the prevention of cruelty to children or animals, since contributions by individuals to organizations for these purposes are deductible under section 214(a)(10).
* * *
(3) Subdivision (h) of this section provides that the income of a trust which may be distributed to the grantor or which may be used for the payment of premiums upon policies of insurance on his life shall be included in the gross income of the grantor. Trusts have been used to evade taxes by means of provisions allowing the distribution of the income to the grantor or its use for his benefit. The purpose of this subdivision of the bill is to stop this evasion.*2266
The provisions of the House bill have been altered to exclude from taxation to the grantor of a trust income thereof used to pay premiums on insurance policies which are irrevocably payable to the benevolent organizations described in section 214(a)(10). A trust of this kind is a proper method of providing for a gift to such organizations, and since the income is being used for these benevolent purposes rather than for the grantor's personal benefit it should not be taxed to him. [Italics supplied.]
It appears from the above excerpts that Congress attempted by section 219(g) and (h) of the 1924 Act to provide against the evasion of taxes by estates and trusts. In subdivision (g) the language used indicates that Congress had in mind revocable trusts, since that subdivision provided that, where a grantor reserved the power to revest in himself title to any part of the trust corpus, the income from such part of the trust should be included in computing the grantor's net income. But in subdivision (h), the latter portion of which is applicable to the present facts, Congress used no language which would limit the application of this subdivision to either revocable or irrevocable*2267 trusts. Throughout this subdivision the term "trust" is used in such a manner as to preclude any limitation of that term to a particular class of trusts.
In our opinion, therefore, it is immaterial whether the trusts created by petitioner were revocable or irrevocable, because the test laid down by the statute is not revocability, but whether trust income "is or may be applied" to pay premiums upon policies of insurance taken out on the grantor's life. In this case the stipulated facts show that trust income was applied during each of the taxable years to pay such premiums. It also appears that in none of the trusts were the proceeds of the policy irrevocably payable in the first instance to the Minneapolis Foundation so as to bring the trust within the exception in subdivision (h). In trust No. 2, upon the death of the grantor the original trust corpus went to such Foundation, and upon the happening of certain contingencies additional sums were to be paid over to it under trusts Nos. 2 and 3, but the exception of *1227 the statute is applicable only where the policies of the insurance are irrevocably payable to or for the charitable purposes defined in section 214(a)(10). *2268 Therefore, where the facts show that trust income was applied to the payment of premiums of life insurance policies which are outside the exeception, the mandate of the law is that "such part of the income of the trust shall be included in computing the net income of the grantor." [Italics supplied.]
In Docket No. 29159 petitioner avers as an alternative issue that section 219(h) of the Revenue Act of 1924 is unconstitutional in so far as it relates to the inclusion in his taxable income of any portion of the income of the trusts. On brief petitioner supports this issue by contending that the income from the trust was not income to him because such income was not received or drawn for his separate use, benefit, and disposal, citing the language of the Supreme Court in Eisner v. Macomber,252 U.S. 189">252 U.S. 189, and United States v. Phellis,257 U.S. 156">257 U.S. 156. Petitioner further contends that the trust corpus and the insurance policies were no longer a part of his estate and were not subject to his debts; that section 219(h) is arbitrary and capricious so as to amount to confiscation, since it shifts the burden of tax from the persons benefited to*2269 those who have no personal interests in the income tax; and, finally, that to tax petitioner would impose an unexpected liability, from which petitioner is powerless to obtain relief, since he has irrevocably parted with all rights, interests, and benefits in the trust properties.
Petitioner's first contention under the alternative issue seems to be completely answered by the opinion of Mr. Chief Justice Taft in the Old Colony Trust Co.,279 U.S. 716">279 U.S. 716, wherein he states that the discharge by a third person of an obligation to him is equivalent to receipt by the person taxed. As to the contention that the trust corpus and the insurance policies were no longer a part of the petitioner's estate nor subject to his debts, it seems true that petitioner, by the trust indentures and by the assignments of insurance policies, has parted with all right to revest such property in himself. But by the terms of the trust indentures he has provided that the income from the trust corpus shall discharge him from obligations which he had assumed and by the same indentures he has disposed of the proceeds of the insurance policies upon his death just as effectively as he could have*2270 done had he disposed of the same by will as a part of his personal estate.
In Corliss v. Bowers, 34 Fed.(2d) 656, affirmed by the Supreme Court, April 28, 1930, the Circuit Court of Appeals, Second Circuit, had for consideration virtually the same contentions with respect to the constitutionality of section 219(g) and (h) of the 1924 Act, as are here raised by this petitioner. The facts in that case were that *1228 the grantor had created a revocable trust, the income from which was to be paid to his wife. The plaintiff contended that the trust income paid to his wife under the trust instrument was not income to him, and that, if it be held to be his income, section 219(g) and (h) was unconstitutional in that it was arbitrary and capricious and violated the Fifth Amendment. The court upheld the constitutionality of both subdivisions (g) and (h) of section 219, upon the theory that the grantor, having reserved control of the trust corpus and income, could at any time have revoked, altered, or modified the trust, and could have appropriated either the trust corpus or the income therefrom. In its opinion the court stated that it was "not unfair to tax*2271 the person who always has a will he may exercise and divest from the recipient a part or all of the income."
Petitioner distinguishes the Corliss case from the facts herein in that here the grantor created irrevocable trusts and parted with all rights, interests, and benefits with respect to the trust corpus and the insurance policies. With this contention we can not agree, because it seems apparent that a direct benefit flowed to the petitioner from the disposition which he made of the trust income. Prior to, or at the time, the trusts were created petitioner had obligated himself to pay certain premiums on various policies of insurance taken out on his life. Petitioner was primarily liable under these policies to pay the annual premiums. This liability he shifted to the trustee by vesting in the trustee certain securities and cash, the income from which was to be used by the trustee to meet petitioner's obligations. He derived an additional benefit in that by the trust indentures he disposed of each trust corpus after it had been augmented by the proceeds from insurance policies on his life. Furthermore, he benefited in that in trusts numbered one, four and five the trustee*2272 was to use the proceeds of the several insurance policies to purchase securities from petitioner's estate which afforded some assurance that petitioner's executor or administrator in administering the estate would have available a large amount of cash.
In view of the foregoing we are of the opinion that subdivision (h) of section 219 of the Revenue Act of 1924 is not arbitrary or capricious so as to amount to confiscation of property without due process of law within the meaning of the Fifth Amendment to the Constitution. We believe that with respect to this particular case the law imposes the tax on the person directly benefited, and that in the absence of such a provision insurance trusts of this sort, or similar hereto, would be used to evade taxes.
In computing the amount of trust income to be included in petitioner's gross income for the calendar year 1924 the respondent inadvertently omitted the item of $5,774.56, being the net income of trust *1229 No. 1 for 1924. In redetermining the deficiency for 1924 this amount should be included as a portion of petitioner's taxable income. Since the effect of this decision is to increase petitioner's taxable income for*2273 1924, it follows that there will be a corresponding increase in the deduction for contributions under the provisions of section 214(a)(10).
Reviewed by the Board.
Decision will be entered under Rule 50.