Opinion
No. 4692.
October 7, 1932.
Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.
Action by Kenneth G. Smith and another, as executors of the will of Douglas Smith, against Mabel G. Reinecke, former Collector of Internal Revenue for the First District of Illinois. Judgment for plaintiffs, and defendant appeals.
Affirmed.
The appeal is from a judgment for the recovery of income taxes paid under protest by Douglas Smith, now deceased. In 1922 Smith created five trusts for the benefit of his wife and children. Each trust agreement named as trustees Foreman Bros. Banking Company, Kenneth Smith, and the grantor. Kenneth Smith was a beneficiary under each trust. Douglas Smith, the grantor, was not a beneficiary under any of the trusts.
Each of the trusts contained a provision that "this trust may be modified or revoked at any time by an instrument in writing signed by Douglas Smith and either one of the other two trustees or their successors."
The Revenue Act of 1924, approved June 2, 1924, section 219(g), 43 Stat. 275, 277 ( 26 USCA § 960 note), contained the following: "(g) 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 income of the grantor."
On October 22, 1924, Douglas Smith resigned as trustee, and the trust agreements were modified by striking out the provision for the modification or revocation of the trust.
The income of the five trusts for the year 1924 was distributed by the trustees and received by the beneficiaries in accordance with the provisions of the trust agreements. Douglas Smith did not receive any of such income, except as he acted as one of the trustees.
Douglas Smith filed an income tax return for 1924, in which he did not include the income of the five trusts in question. He was required, however, to make an amended return in which such income was included; and, as is admitted by the pleadings, paid involuntarily and under protest and duress $59,898.51 more as taxes for 1924 than he would have paid if the income of the trusts had not been included as a part of his own income.
A claim for refund was rejected by the Commissioner of Internal Revenue. Appellees thereupon brought this suit, which resulted in a judgment for the amount of the claim.
George E.Q. Johnson, U.S. Atty., and John Potts Barnes, Sp. Asst. U.S. Atty., both of Chicago, Ill., for appellant.
Albert L. Hopkins, Bruce Johnstone, Harry B. Sutter, and Anderson A. Owen, all of Chicago, Ill. (Hopkins, Sutter, Halls De Wolfe and Burry, Johnstone, Peters Dixon, all of Chicago, Ill., of counsel), for appellees.
Before ALSCHULER and SPARKS, Circuit Judges, and WILKERSON, District Judge.
In support of the judgment it is urged:
(1) Under a proper construction of section 219(g) of the Revenue Act of 1924, the term "beneficiary" is broad enough to include a trustee.
(2) As to trusts created both before and after the passage of the act, the section contravenes the Fifth Amendment, unless the term "beneficiary" is construed to cover any interest adverse to that of the grantor.
(3) As to trusts created before the passage of the act, the section violates the Fifth Amendment when applied to impose a tax on the grantor by reason of property and its income disposed of by him prior to any imposition of such tax and when no similar tax existed.
As we are of the opinion that the third point must be ruled in favor of the taxpayer in this case, it is not necessary to consider the first two points. In 1922, when the trusts here in question were established, the grantor was not taxable on the income of trusts in which the power of revocation was reserved. The power to revoke the trusts in question could not be exercised by the grantor alone. The consent of the trustee was essential to revocation. The grantor had parted with all interest in and control over the income of the trusts. And, in fact, the income here in question was distributed among the beneficiaries in accordance with the terms of the trusts. To be sure, the trustee in October, 1922, assented to a modification of the trusts. We may not conjecture from that, however, that the trustee would have consented to a revocation of the trusts prior to that time, if it had been requested by the grantor to do so.
The power of Congress as to the taxation of the income of trusts which are under the unfettered control of the grantor or which may be created in the future is broad. Corliss v. Bowers, 281 U.S. 376, 50 S. Ct. 366, 74 L. Ed. 916; Milliken et al. v. United States, 283 U.S. 15, 51 S. Ct. 324, 75 L. Ed. 809; Taft v. Bowers, 278 U.S. 470, 49 S. Ct. 199, 73 L. Ed. 460, 64 A.L.R. 362; Purity Extract Co. v. Lynch, 226 U.S. 192, 33 S. Ct. 44, 57 L. Ed. 184; Jacob Ruppert v. Caffey, 251 U.S. 264, 40 S. Ct. 141, 64 L. Ed. 260; Lambert v. Yellowley, 272 U.S. 581, 47 S. Ct. 210, 71 L. Ed. 422, 49 A.L.R. 575. All measures reasonably necessary to prevent escape from taxes or surtaxes may be adopted.
When an attempt is made to apply those measures to past lawful transactions by which the grantor has parted with control over the trust fund and has made it impossible to regain such control by his own act, a different question arises. Under the broadest conception of legislative power, that which is not the income of the taxpayer and which it is impossible for him to make a part of his income may not be required arbitrarily to be included in his income. Such an attempt amounts to confiscation, and offends the Fifth Amendment. Nichols v. Coolidge, 274 U.S. 531, 542, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A.L.R. 1081; Heiner v. Donnan, 285 U.S. 312, 326, 327, 52 S. Ct. 358, 76 L. Ed. 772.
The judgment is affirmed.