1937 BTA LEXIS 624 | B.T.A. | 1937
Lead Opinion
Respondent has conceded that petitioner properly deducted $5,000 from gross income which represented interest paid by petitioner 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.
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 herself, 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, 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
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 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
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 income 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 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 Douglas v. Willcuts, 296 U. S. 1; 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 is, therefore, not taxable under the principle of Douglas v. Willcuts, supra.
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 pro
We are satisfied that under its terms the trust is outside the scope of both sections 166 and 167.
Decision will be entered under Rule 50.
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.”
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.
SEC. 166. REVOCABLE TRUSTS.
Where the grantor of a trust has, * * * the power to revest in himself title to any part of the corpus of the trust * * *. [Italics supplied.]
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.]