Langley v. Commissioner of Internal Revenue , 61 F.2d 796 ( 1932 )

AUGUSTUS N. HAND, Circuit Judge

(dissenting).

On May 29,1928, Congress by section 166 of chapter 852 of 45 Stat. 840 (26 USCA § 2166) provided that: “Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net ineome of the grantor.”

After the passage of the act, and during the year 1928, the petitioner created two trusts whereby the ineome was to be paid to her nephew and her daughter, respectively, for life-or until the prior termination of the trusts by the death of the settlor or by revocation, when the principal should be paid to the settlor or to her estate.

The settlor reserved the right to revoke each trust prior to the determination thereof “upon and at the expiration of twelve months'and one day after notice of revocation” to the trustees. The trusts succeeded in time similar trusts which terminated by limitation the day before the above mentioned trusts were set up. Section 2191 (g) of the Revenue Acts of 1924 (26 USCA § 960 nóte) and 1926 (43 Stat. 33, 34) contained provisions identical with section 166 of chapter 852 of 45 Stat. 840 (26 USCA § 2166), above quoted. In none of the trusts did the settlor exercise her powers of revocation. The constitutionality of section 219 (g) of the Act of 1924 was sustained by the Supreme Court in Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 74 L. Ed. 916, in a case where the power of revocation might' always be exercised, and was subject to no requirement of notice before exercise. Justice Holmes there said (at page 378 of 281 U. S., 50 S. Ct. 336, 337, 74 L. Ed. 916) that: “If a man disposes of a fund in such a way that another is allowed to enjoy the ineome which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent.”

The question before us .is whether the condition manifestly ingrafted upon the execution of the power in order to avoid taxation can be regarded as a means of accomplishing the result aimed at either (1) because the statute does not cover such a power as we have here; or (2) because, if it did, it would violate the Constitution.

■ It is evident-that, if the act can be defeated by such a simple mode of drafting a power of revocation as was employed here, a settlor who consults skilled counsel can never be taxed upon the ineome of a revocable trust. While a man has a perfect right to keep outside of a taxing statute if he can, such an obvious mode of completely avoiding a tax while substantially occupying the position the tax was intended to reach is not to be lightly assumed.

The taxpayer contends that the words “at any time during the taxable year” qualify “to revest” rather than “has the power.” But the clause justifies no such construction. On the contrary, when read most naturally, it imposes a tax wherever during the taxable year the taxpayer has the power to revest the corpus in himself at any time. During the year 1926, Mrs. Langley had the power to revest the corpus in herself, though revesting would not take place until the prescribed twelve months and one day after giving notice had expired. In Clapp v. Heiner, 51 F.(2d) 224, the Circuit Court of Appeals of the Third Circuit held income taxable against a settlor who bad provided by his trust that the trust might be revoked upon six months’ notice.

Even if section 166 and its predecessors he regarded as ambiguous, the ambiguity should he resolved in a way that reasonably supports the purposes of the act. United States v. Katz, 271 U. S. 354, 362, 46 S. Ct. 513, 70 L. Ed. 986; Ozawa v. United States, 260 U. S. 178, at page 194, 43 S. Ct. 65, 67 L. Ed. 199; Holy Trinity Church v. United States, 143 U. S. 457, 12 S. Ct. 511, 36 L. Ed. 226; Fidelity Nat. Bank & T. Co. v. Commissioner (C. C. A.) 39 F.(2d) 58 at page 61.

The taxpayer’s argument that a power exercisable only after notice is not a power within the meaning of the statute leads to extreme results. It would allow the tax to he avoided by requiring even one day’s notice of revocation.

The taxpayer also says that the report of the Senate Finance Committee supports her construction of the statute. That committee rewrote section 219 (g) of the Bill as it orginally came from the House, which read: “Where the grantor of a trust reserves a power of revocation which if exercised would revest in him title to the corpus of the trust then the income of such trust shall he included in computing the not income of the grantor.”

The Senate Committee reported that: “The subdivision of the House Bill has been rewritten in order that there shall not he taxed to the grantor the income of a trust as to which the grantor has a power of revocation subject, however, to a condition which has not happened.”

But the “condition” referred to in the committee’s report cannot reasonably he thought to have been a mere notice of intention to revoke within the sole control and whim of the settlor, hut something of substance dependent on an occurrence other than what amounts to an exercise of the power itself. I think a reasonable construction of the statute supports the finding of the Board of Tax Appeals that Mrs. Langley had a taxable power during the year 1928.

Nor do I think the construction advocated by the government would render the act unconstitutional. In Hoeper v. Tax Commission, 284 U. S. 206, at page 205, 52 S. Ct. 120, 122, 76 L. Ed. 248, Justice Roberts said that what “is not in fact the taxpayer’s income cannot be made such by calling it income.” But that decision involved an income tax statute which authorized an assessment against a husband of a tax computed on the combined total of his own and his wife’s income. In the present case, the settlor by voluntary act retained power to revest herself with title to the corpus of the trust which she had' set up. The trustees held the corpus subject to her ultimate direction. The settlor’s tax could be measured by the income of such a trust just as the income of an assignor who has irrevocably assigned future income without transferring the property from which it arises can be measured by assigned accruals. Burnet v. Leininger, 285 U. S. 136, 52 S. Ct. 345, 76 L. Ed. 665.

It is to he remembered that the statute under consideration was not retroactive in respect to the transactions involved. At the time the settlor set up the trust containing the power of revocation in .1928, the statute had been enacted. Likewise at the time a similar power was inserted in a trust comprising the same corpus the act of 1924 was in effect taxing such powers. She created the trust with the statute in operation and, as in the ease of the donee in Taft v. Bowers, 278 U. S. 470, 49 S. Ct. 199, 73 L. Ed. 460, 64 A. L. R. 362, the transactions took place with the knowledge that a tax would be imposed. To apply the statute under such circumstances is not unreasonable or arbitrary.

For the foregoing reasons I think the decision of the Board of Tax Appeals was correct and should be affirmed.