*992 Petitioner, having placed corporate stock in the names of several sisters, with the stated intention of having the income paid to them, retaining in her own possession the stock certificates endorsed in blank; and thereafter having "borrowed" the proceeds of the redemption of such stock with an agreement that she would pay "interest" thereon in stipulated amounts to the respective sisters during their natural lives, held not to be entitled to deduct such amounts as interest paid, there being no true indebtedness within the meaning of the Revenue Act of 1934, section 23(b).
*702 This proceeding involves deficiencies in income tax for the years 1934 and 1935 in the amounts of $1,839.79 and $3,000.40, respectively. The sole contested issue is whether payments in each of those years of $2,625 to each of petitioner's three sisters are deductible as interest on indebtedness of the petitioner to alleged trusts created*993 theretofore in favor of her sisters.
*703 FINDINGS OF FACT.
The facts are found as stipulated and the following is a summary thereof:
1. On April 14, 1928, petitioner caused to be transferred into the name of each of her three sisters 500 shares of preferred stock of the International Shoe Co. These shares were transmitted to the respective sisters by petitioner's cousin, F. C. Rand, chairman of the board of directors of the International Shoe Co., with letters instructing them how to endorse the certificates and stating:
It is Cousin Irene's intention to give to you * * * the income from this stock and you will find enclosed * * * letters addressed to Cousin Irene, * * * to be signed by you * * *. After endorsing the stock certificates and signing the letters, please return the signed certificates and letters to me so that I may deliver them to Cousin Irene, in order that she may put then in her safety deposit box.
The letter enclosed for the signature of each sister was as follows:
April 16, 1928.
Mrs. Irene W. Johnson
38 Protland Place
St. Louis, Missouri.
Dear Irene:
I have endorsed the certificate for 500 shares of the Preferred stock of International*994 Shoe Company in blank and am returning it to you in accordance with the arrangement under which you had this stock placed in my name.
It is my understanding that you placed these shares in my name in order that I might receive the dividends therefrom during my natural life; that at my death my interest in and to the shares and the dividends therefrom ceases, and that the shares shall be retransferred to you, if living, and if not living then to your estate, if still in administration, otherwise to your heirs at law.
With appreciation, I am
Affectionately your sister,
Each letter was immediately signed and returned, together with the endorsed stock certificates. Petitioner had discussed the matter with her sisters prior to the transfers described.
2. On March 31, 1931, the foregoing "agreements were reduced to writing" (stip., P5), that is, separate agreements were made and executed between petitioner and each sister, identical except for the sister's name, recounting the transfer, endorsement, and return of the stock certificates as stated above, and continuing as follows:
WHEREAS, said certificate of stock was issued and endorsed, and deposited with the Party of the*995 First Part, in order that the said [named sister] might receive all dividends declared upon said stock during her natural life, and with the intention that said stock should belong to Mrs. Irene W. Johnson after the death of [named sister].
NOW, THEREFORE, IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO, AS FOLLOWS, TO-WIT:
*704 Mrs. Irene W. Johnson of the City of St. Louis, Missouri, is hereby made and constituted a Trustee for the following purposes, to-wit:
Said Trustee shall keep the said certificate of stock in safe custody during the natural life of the said [named sister]. Said [named sister] shall receive all dividends declared upon said stock during the term of her natural life. The reversion or remainder interest after the death of the said [named sister] is hereby vested in Mrs. Irene W. Johnson individually, and upon the death of [named sister], Mrs. Irene W. Johnson, as Trustee, may cause said certificate of stock to be transferred upon the books of the company to the name of Mrs. Irene W. Johnson as an individual, and thereafter the said stock shall belong to Mrs. Irene W. Johnson individually without restrictions.
In case of the*996 death of the said Mrs. Irene W. Johnson prior to the death of [named sister], said reversion or remainder interest shall vest in and belong to such persons or corporations as may be named in the will of said Mrs. Irene W. Johnson to receive the same, whether in trust or otherwise, and whether by specific legacy or as a part of her residuary estate. If, however, the said Mrs. Irene W. Johnson dies intestate, said reversion or remainder interest shall pass to her heirs and distributees at law in accordance with the laws of the State of Missouri.
It was further provided that petitioner had the power to name a substitute or successor trustee, and in case of her death without exercising this power a certain St. Louis trust company should become successor trustee, and upon the death of the named sister should transfer the stock into the name of the person or persons entitled to receive it under the terms of the instrument. It was agreed between the parties that the named sister should execute all proxies for representation at stockholders' meetings, as directed by the petitioner, and should endorse and deliver all stock dividends and subscription rights of any kind to petitioner, *997 to whom they should belong. It was further agreed:
4. In case the shares of stock represented by said certificate should at any time during the life of the said [named sister] be called, redeemed or retired for any reason, whether on final liquidation of the corporation and distribution of assets or otherwise, in accordance with the provisions of the certificate of incorporation of International Shoe Company, the said Mrs. Irene W. Johnson to International Shoe Company upon receipt of the amount to which said stock to International Shoe Company upon receipt of the amount to which said certificate shall be entitled on such call, redemption, retirement of final liquidation, and shall hold the proceeds as a trust fund, for the following purposes, to-wit:
(a) The Trustee shall have full power and authority to invest and reinvest all or any part of said trust fund in such manner, and in such securities, or other property, personal, or real, and upon such terms, and for such length of time as to such Trustee shall seem meet and proper; it being intended hereby to give unto said Trustee full and complete authority to hold, possess, manage, control, sell, convey, encumber, invest and*998 reinvest the whole or every part of said trust estate according to the Trustee's sole judgment and discretion, without any limitation upon the Trustee's power and authority so to do.
(b) During the life of the said [named sister], the said Trustee or her successor in trust shall pay over the net income and revenue derived from *705 said trust estate in monthly or other convenient installments unto the said [named sister] for and during the period of her natural life.
Paragraph (c) of subdivision 4 provided that upon the death of the sister named the "trust" was to cease and the trust estate to be paid over to petitioner individually, or her nominee by will, or if she should die intestate to her heirs and distributees under the laws of Missouri, the trustee to have sole power to appraise and apportion the estate and deliver it either in cash or in kind. The instruments were executed by petitioner and the sister named therein respectively. No stock dividends or stock rights were issued on or in connection with any of the preferred stock of the International Shoe Co.
3. On June 1, 1933, the International Shoe Co. redeemed one-half of the preferred stock referred*999 to in the foregoing agreements at $105 a share, after which there remained in the name of each of the sisters 250 shares, and petitioner as trustee was credited with the amount of $78,750 on the books of the company in an account designated "Mrs. Irene W. Johnson, Trustee." On June 13, 1933, petitioner purchased 415 shares of International Shoe Co. preferred stock from the St. Louis Union Trust Co. At that time she had 200 additional shares of like stock which she owned individually standing in her own name. On the same date these blocks and all of the unredeemed stock were transferred to "Irene W. Johnson, Trustee for the benefit of [named sister] under trust agreement dated March 31, 1931," and certificates so designated were issued each for 455 shares, naming the respective sisters. Accounts similarly designated were opened on the books of the shoe company showing the source of the stock involved in the several transfers. The 615 shares so added were paid for at petitioner's request by checks of the International Shoe Co. drawn on its bank account and made payable to the sellers, the purchase price being charged to the account of "Irene Johnson, Trustee", on the books of the*1000 company.
4. "On December 1, 1933, the International Shoe Company redeemed all of the remainder of its preferred stock for cash at $105.00 a share. Petitioner surrendered the stock then held by her for her three sisters under said agreements of March 31, 1931, that is, 455 shares for each, and the International Shoe Co. credited said account 'Irene W. Johnson, Trustee,' with $143,325.00, at which time there was a cash credit balance in said account of $14,175.00, making a total cash credit balance in said account of $157,500.00. * * * At or about this time petitioner was indebted to the First National Bank in a considerable sum, and she conceived the idea of individually borrowing said $157,500.00 and paying 5 per cent interest thereon. Petitioner wrote a letter to each of her said sisters dated December 29, 1933, asking their approval of this arrangement, and each did approve *706 of the arrangement in writing in January 1934." Omitting formal parts, the identical letters were as follows:
As you know, the International Shoe Company had redeemed 500 shares of preferred stock which I was holding as trustee for your benefit under an Indenture of Trust dated the 31st day*1001 of March, 1931. The stock was redeemed at $105, so that as trustee I received in redemption of said stock the sum of $52,500.00.
I am indebted to the bank for borrowed money and I desire to borrow said money from the trust in order to pay my indebtedness to the bank. If you are agreeable, I, as trustee under said Indenture of Trust, will invest said proceeds from the redemption of said stock as follows: I shall borrow such money and will undertake to pay the trust the sum of $2,625.00 per year as long as you live as interest upon said money.
I propose to execute an agreement, of which I am enclosing a copy, under which I shall obligate myself, and in the event of my death, my personal representatives and my heirs, to pay this $2,625.00 per year to the said trust as long as you live.
I am mailing this letter in duplicate to you so that I shall have a record in my trust file of the whole transaction. I wish that you would indicate your approval of the plan at the bottom of one copy on the line marked for your signature and return to me.
Devotedly,
IRENE W. JOHNSON.
I hereby approve:
Dated January , 1934.
"Each sister wrote her name under the words 'I hereby approve' *1002 on the letter sent to her and returned it to petitioner." Petitioner also executed three writings, one of which she sent to each of her sisters, in the following form:
I, IRENE W. JOHNSON, do hereby acknowledge that I, my heirs, executors, administrators and assigns, are indebted to Mrs. Irene W. Johnson, Trustee, and her successor in trust, under an indenture of trust dated the 31st day of March, 1931, by and between Mrs. Irene W. Johnson, of the City of St. Louis, Missouri, as party of the first part, and [named sister], now residing in [address or city], as party of the second part, in the sum of $52,500 for money borrowed.
I do hereby promise and agree for myself, my heirs, executors, administrators and assigns, to pay to the said Irene W. Johnson, as trustee, and her successor in trust, the sum of $2,625.00 per year interest upon said borrowed money for and during the natural life of said [named sister].
Upon the death of said [named sister], this obligation shall be distributed by the said trustee, or her successor in said trust, to the persons entitled to receive the same in accordance with paragraph lettered (c) of subdivision 4 of said indenture of trust.
*1003 Witness my hand and seal this 29th day of December, 1933.
[Signed] IRENE W. JOHNSON.
"Said $157,500 remained on deposit with the International Shoe Company during all of the month of December, 1933. Thereafter *707 petitioner used all of said $157,500 to reduce her indebtedness at the First National Bank."
5. "Said agreements of March 31, 1931 and said subsequent agreements have been carried out in accordance with the terms thereof. From April 14, 1928 to December 1, 1933, each sister received all of the dividends on the stock standing in her name and the name of Irene W. Johnson for her benefit. Pursuant to said agreements, petitioner paid to each of her sisters during the calendar years 1934 and 1935 the sum of $2,625.00 per year. Petitioner deducted on her Federal income tax return for the calendar year 1934, the sum of said three payments to her said sisters, $7,875.00, as 'Interest Paid to Trust $7,875.00.' Petitioner, in the same manner, deducted $7,875.00 on her income tax return for the year 1935. Respondent has denied said deductions."
OPINION.
OPPER: The actual issue is whether petitioner is entitled to deduct as "interest paid on indebtedness" *1004 1 payments to her sisters as the result of an agreement pursuant to which she undertook "to pay the trust the sum of $2,625 per year as long as you live as interest upon said money." The "trust" referred to was an arrangement whereby the dividends on certain stock or the income from the proceeds thereof were to be paid to the respective sisters for their lives; and the "said money" was the proceeds of the redemption of such stock which petitioner used for the satisfaction of her own indebtedness, acknowledging that she and her legal representatives were indebted to herself as trustee "for money borrowed."
Both parties discuss the question from two points of view. The first is whether the "trusts" were such that in fact they were ineffectual to pass from the grantor sufficient interest and control over the income-producing property to permit her to escape taxation upon the income under the doctrine of , and similar cases. 2 Although not expressed, this discussion inferentially proceeds, presumably, on the theory that, if petitioner is taxable on the income of the trusts, respondent must*1005 be sustained because any interest paid by her individually to herself, as trustee, must then be regarded as income to the trust which, if added to her other taxable income, would offset any deduction allowed for interest paid. The other contention is that the payments in question were not in any event interest upon indebtedness since there was no *708 principal obligation of petitioner to which they could attach. ; certiorari denied, .
Rather than to treat these two contentions separately it seems to us preferable to regard them as the several aspects of a single question. In such a situation as this the issue "is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act." . "We are not concerned with the refinements of title", *1006 , but rather with "the actual benefit for which the tax is paid", ibid. From this standpoint the "trusts" and the "indebtedness" can be looked at together. The reality or artificiality of the one will illuminate the true nature of the other.
We may begin by considering what appears to be the first step in these transactions, by which petitioner, having provided for the registration of certain stock in the names of her respective sisters, arranged contemporaneously and as an integral part of the transaction that the certificate would be endorsed in blank and redelivered into her hand. While there was no overt qualification of the registered interest of each sister, and as far presumably as the records of the corporation's transfer agent showed the title held was complete and unconditional, the fact is that petitioner's possession of the stock certificate endorsed in blank placed it within her power at any time to alter that apparent ownership and obliterate completely the sisters' superficial interest. *1007 . There was then no declaration of trust, no legal or equitable assignment of the certificate itself, no statement express or implied on the part of petitioner that she was purporting to transfer any interest whatever in the property represented by the stock certificate. So far as the record shows, the sole statement made by petitioner at the time - which in our view precludes any such conclusion - is that it was petitioner's "intention to give to you * * * the income from this stock." The intention to retain dominion and control over the property itself, as opposed to the future income to be derived therefrom, appears to us to be too clear to require further demonstration. See .
It may be observed that the question before us does not revolve around the enforceability of such rights as may thereby have been conferred. Passing such questions as the nature of the transaction, whether it was a legal or an equitable assignment, whether there was consideration therefor, whether it was a promise or a mere statement of intention, or whether it operated in praesenti*1008 or merely in futuro, as to all of which there may be serious doubt, the true issue is whether the assignment of future income severed from its source can have the effect upon petitioner's tax liability for which she contends. *709 "If", as Mr. Justice Holmes suggests in , "a man directed his bank to pay over income as received to a servant or friend, until further orders, no one would doubt that he could be taxed upon the amounts so paid." We are unable to perceive that the transaction before us was more than this. The effort to separate the fruits from the tree on which they grow must always be unavailing in the solution of problems of taxation. This is so whether the "tree" be the personal services of the assignor, , a combination of those services with invested capital, , or the capital alone, ; affd., . The second ground for the decision in *1009 , is precisely in point. It goes farther than is required on the present facts but clearly embraces them.
We there said (p. 1115):
As an alternative to the view that there were no trusts whatever, we think that at most the instruments established only an obligation upon Rands to hold the income in trust for these beneficiaries after it was derived by him from the securities, and that the securities themselves were at all times his own. Thus the legal effect was only as an assignment of future income, and as such did not operate to exclude it from his taxable income. It is only when the income-producing property is itself transferred that the income therefrom is no longer attributable to the transferor. . Here it seems that at most Rands attempted to transfer the property itself to himself as trustee for himself and his estate as beneficiary, and the present ownership of the principal was still in him. Upon this view, if not upon the other, the petitioner has failed to establish that the income should, as a matter of law, be excluded from his return.
This posture of petitioner's*1010 liability to tax was in no respect altered by the execution of the so-called trust agreement three years later, by the conversion of the principal, first, in part, into other preferred stock and thereafter entirely into cash, or by the use of that cash by petitioner. The trust agreement purported to be no more according to the stipulation than a procedure whereby "the agreements were reduced to writing." The implication at least is that the certificate of stock is held by petitioner as an individual and in her own right. She "is hereby made and constituted a trustee" but the trust res is not there nor at any other place defined as being the stock certificate. If no more than a written record of the arrangement theretofore existing, it must be assumed as in the Rands case, supra, that the trust, at most, covered only the income. This would be confirmed by the provisions in the trust agreement that the petitioner in her own right was to obtain all stock dividends, all rights to subscribe, and particularly the right to have the stock voted as she should direct.
*710 When the stock was converted into cash a different situation arose. *1011 By the terms of the "trust agreement" the proceeds were constituted a "trust fund", the trustee having full power and authority to invest and reinvest, and the income to be paid to the sister in each case during her natural life. Here we must look to what was done by the parties for the true construction of that provision. It was, of course, no present conveyance of any trust estate because at the time it was executed the securities were still in the form of preferred stock and there were no "proceeds" capable of being set apart. . When, two years later, the first installment of the preferred stock was converted into cash we find it credited by some mysterious process to the petitioner, as trustee, although the facts indicate that the stock redeemed had not been so carried upon the corporation's books and appeared on its face to be solely in the names of the respective sisters. Be that as it may, the ultimate result was a fund held by the corporation in the name of petitioner, as trustee. It does not, however, appear that it was ever so collected by her. For all that may be seen, it was paid*1012 by the corporation only after the petitioner had "conceived the idea of individually borrowing said $157,500 and paying 5% interest thereon." We are thus brought to the situation as it existed during the tax years when there was a purported obligation of some sort still remaining to be performed by petitioner.
For the scope and meaning, for our purposes, of that obligation we must look to the documentary evidence. This consists of a letter and an acknowledgment of an indebtedness in each case. Their purport is substantially identical. The letter says: "I shall borrow such money and will undertake to pay the trust the sum of $2,625 per year as long as you live as interest upon said money." Referring to the agreement the letter says further: "I propose to execute an agreement of which I am enclosing a copy under which I shall obligate myself and in the event of my death my personal representatives and my heirs to pay this $2,625 per year to the said trust as long as you live." The "agreement" acknowledges that the petitioner and her personal representatives are indebted to herself as trustee "in the sum of $52,500 for money borrowed," and continues:
I do hereby promise and agree*1013 for myself, my heirs, executors, administrators and assigns to pay to the said Irene W. Johnson, as trustee, and her successor in interest, the sum of $2,625 per year interest upon said borrowed money for and during the natural life of [the sister concerned].
The feature which strikes the reader at once is the absence of any promise to pay the principal. . Yet the existence of a principal debt, not merely an obligation to pay "interest", is a prerequisite of the deduction. . *711 In both the letter and the acknowledgment there is a significant failure to include any promise to repay principal, not to mention the complete absence of a time for payment. The agreement to pay interest stands alone with no accompanying promise to repay the amount "borrowed." That these omissions are not inadvertent, and that promises sometimes implied to repay a debt, and to do so upon demand, may not here be resorted to, appear from a consideration of the instruments as a whole and the purpose they were to serve. *1014 ; . The stipulation to pay "interest" was for the entire life of the donee. It is clear there was no intention to confer upon her any concern whatever with the principal. A right in her or in the trustee for her account to collect the principal would not have served, but would have defeated, the petitioner's object. So long as petitioner continued to perform her agreement to pay the periodic amounts which are designated as interest, which for present purposes we shall assume to have been enforceable, the purpose to provide an income to petitioner's sisters would best be accomplished in that way. And, on the other hand, petitioner could not on her part, even if she wished, repay the principal and thereby relieve herself of her obligation to make the periodic payments of income. For the agreement is to pay the sum mentioned annually during the entire life of each sister. It follows that the payments, despite their designation, see ; *1015 , were not in reality "interest" but were fixed sums agreed to be paid throughout a given life and in any event; and that beyond this there was no "indebtedness" upon which it can be said that the interest was being paid so as to bring into operation the provisions granting the deduction claimed. There was no debt because there was no promise to pay the principal amount; because, at the only time when payment of the principal could conceivably have been made by petitioner or demanded on behalf of the donee, the sole right to the principal rested in petitioner and her legal representatives; and because the accepted definition of a debt as being payable presently or at some future time 3 is inapplicable since that time, the death of the donee, is precisely the time when nothing would be due.
From the standpoint of both of the considerations applicable to the decision of this proceeding we regard the case*1016 of , as conclusive. Although slightly different, the facts there are in most respects more favorable to the *712 taxpayer. There, as here, there was an assignment of what purported to be certain interests connected with income-producing personal property; but there these assignments were not limited to the income, they appeared on their face to be complete. In consideration of the relinquishment of this property the taxpayer purported to execute promissory notes; but there the notes on their face were concededly payable to the holders in a certain contingency. Here the principal of the debt could never be paid. There the promisees were also members of the taxpayer's family, although somewhat closer in degree of relationship. The court found "that petitioner used the above means in providing what he conceived to be the proper allowance for the members of his family." We see no basis upon which a different result could be arrived at on the present facts. We can not do better than to phrase our conclusion in the words of the court in that case: "To permit petitioner to put his obligation in this form, classifying*1017 it as indebtedness and treat the funds furnished his family, as interest, would be to grant him deductions not authorized by the statute."
Reviewed by the Board.
Decision will be entered for the respondent.
VAN FOSSAN concurs only in the result.
ARUNDELL, LEECH, and TYSON dissent.