Appellants Brief — Corliss v. Bowers

FEB 18 1939

Ae Setaae casey

B.caK

Supreme Court of the United States,

OCTOBER TERM, 1929.

No. 344.

CHARLES A. CORLISS, .

Plaintiff-Appellant,

against

FRANK K. BOWERS, As CoLitectror or INTERNAL REVENUE FOR

THE Seconp District or New York,

Defendant- Respondent.

BRIEF OF PLAINTIFF-APPELLANT.

/ JOSEPH M. HARTFIELD,

Counsel for Appellant.

RUSSELL D. MORRILL,

A. C. NEWLIN,

Of Counsel. —

The Evening Post Job Printing Office, Inc., 154 Fultca St., New York, N. ¥.

a oe os Sk DAM b Nhe Ss VGAWS CERECb A Rg Chak

Pornt I. The trust indenture of December 29, 1922,

vested the legal title to the corpus of the trust in

the trustee and the equitable title in the benefi-

ciary, and the income from the corpus was the in-

come of the beneficiary ........... sevaeden cus

Point II. Congress cannot, by mere edict, declare

that income actually received by the beneficiary

shall be treated as income of the creator of the

NS PATER YE eu chedsb Coca nnhe ue os etwe w H8 ee

Point III. The Statute is so unreasonable and arbi-

trary as to be unconstitutional under the limita-

tions of the Fifth Amendment................

Point IV. The tazation of the appellant upon the

income of the trust beneficiary, cannot be justified

as necessary to the enforcement of the admitted

constitutional power to tax income............

Point V. The statutory provisions in question are in

any event unconstitutional as applied to the in-

come of revocable trusts created prior to June 2,

1924, the effective date of the Revenue Act of

ARAM EN SS CUR An a Vane ond kdhien phon hickice

Point VI. The judgments of the District Court and

of the Circuit Court of Appeals should be re-

versed, the motion to dismiss the complaint denied

and judgment directed for the appellant as prayed

ee ee ONE bos ice el oce elie:

6-13

13-18

18-22

22-25

25-26

TABLE OF CASES CITED.

Barclay & Co. v. Edwards, 267 U. 8. 442

Bing v. Bowers, 26 F. (2d) 1017

Blodgett v. Holden, 275 U. 8. 142

Brearley School vr. Ward, 201 N. Y. 358, 94 N. E. 1001.

Brewster v. Gage, 50 Sup. Ct. 115

Brushaber v. Union Pacific Railroad Company, 240

Bullen vc. Wisconsin, 240 U. 8. 625

Chase National Bank rv. United States, 278 U. 8. 327.

Clapp v. Heiner, 34 F. (2d) 506

Dickerson’s Appeal, 115 Pa. 198, 8 Atl. 64

Eisner v. Macomber, 252 U. 8. 189

Farmers’ Loan & Trust Company, The vc. Bowers, 29

F. (2d) 14

Fraser vr. Nauts, 8 F. (2d) 106

Hamilton v. Commissioner, 24 F. (2d) 668

Harkness, Appeal of Anna M., 1 B. T. A. 127

Hellman v. McWilliams, 70 Cal. 449, 11 Pac. 659....

Home Savings Bank v. City of Des Moines, 205 U. 8.

503

Hutton v. Benkard, 92 N. Y. 295

Irwin ov. Gavit, 268 U. 8. 161

Jones v. Clifton, 101 U. 8. 225

Llewellyn vc. Frick, 268 U. 8. 238

Matter of Cooksey, 182 N. Y. 92, 74 N. E. 880

Matter of Moehring, 154 N. Y. 423, 48 N. E. 818

v. Husson, 140 N. Y. 99, 35 N. E. 422

v. Bowers, 15 F. (2d) 287

v. Coolidge, 274 U. 8. 531

v. Emery, 109 Cal. 323, 41 Pac. 1089

ke v. Northern Trust Company, 278 U. 8. 339.

Schlesinger v. Wisconsin, 270 U. 8. 230 21, 22,23

Schreyer v. Schreyer, 101 App. Div. 456 (affd., 182

Stone v. Hackett (Mass.) 12 Gray 227.......+-+++++

* Footnote.

Pack

Taft v. Bowers, 278 U. B. 470. ........cceccccecs 16, 24, 26

United States v. Isham, 17 Wall. 496................ 20

United States v. Robbins, 269 U. 8. 315............. 16, 17

Untermyer v. Anderson, 276 U. 8. 440.............. 19

Van Cott v. Prentice, 104 N. Y. 45, 10 N. E. 257.... 8,10

Von Hesse v. MacKaye, 136 N. Y. 114, 32 N. E. 615... 8*, 10

Walsh v. Commissioner, 18 B. T. A. 571............ 20

Weeks v. Sibley, 368 Fed. 155.........ccccccccccccs 20

Wetmore v. Wetmore, 149 N. Y. 520, 44 N. E. 169.... 12°

STATUTES CITED.

Judicial Code, § 240, as amended (43 Stat. 938).... 2

4

Section 219(g) and (h), Revenue Act of 1924......

(43 Stat. 253)

Bm. Y. Commas, Gwe, GR. GB, OBGB. Fo cc cccscccccces 9,11

N. Y. Consol. Laws, ch. 50, § 150. ...........00000: 10

N. Y. Consol. Laws, ch. 50, § 98..........cececceees 12

N. Y. Surrogate’s Court Act, § 204................. 12

OTHER CITATIONS.

i Ge RE ae Be Bt ckka dd etodenncecdsees 4,5, 16

> Me SO -O os db etacsbatecicsdocéoves 5

Report of Senate Finance Committee, Vol. I, Sen.

Rep. 68th Cong., Ist Sess., p. 25.............. 5,19

Report of House Ways & Means Committee, Vol. I,

House Rep., 68th Cong., Ist Sess., p. 21........ 19

Conference Report, accompanying H. R. 6715, Vol.

IV, House Rep., 68th Cong., Ist Sess., pp. 19, 20. . 19

Report of Attorney General to Secretary of the

Treasury, dated June 24, 1925.............. 17, 17-19*

* Footnote.

Supreme Court of the United States.

OCTOBER TERM, 1929

No. 344

CHARLES A. CORLISS,

Plaintiff-Appellant,

against

FraNnK K. Bownrs, as Collector of

Internal Revenue for the Second

District of New York,

Defendant-Respondent.

BRIEF OF PLAINTIFF-APPELLANT.

Statement.

This action was commenced in the District Court of the

United States for the Southern District of New York on

April 4, 1927 to recover federal income taxes amounting to

$48,338.32 paid by appellant to respondent for the calendar

year 1924, on the ground that the provisions of the Revenue

Act of 1924 which taxed to the donor the income of a

revocable trust, were unconstitutional and void. To the

complaint of the appellant the respondent filed a motion to

dismiss on the ground that the complaint fails to state a

cause of action. (R., fol. 4) The District Court rendered a

judgment dismissing the complaint on July 21, 1929. (R.,

fol. 3) The opinion of the District Court (R., pp. 22-27)

is reported in 30 Fed. (2d) 135. An appeal was taken from

this judgment to the Circuit Court of Appeals for the Second

2

Circuit. The Circuit Court unanimously affirmed the judg.

ment of the District Court by decree dated July 1, 1929. (R.,

fol. 62) The opinion of the Circuit Court (R., pp. 29-33)

is reported in 34 Fed. (2d) 656.

The appellant thereupon petitioned to this Court for a

writ of certiorari to the said Circuit Court. The order

allowing certiorari was filed October 21, 1929. (R., fol. 64)

The appellant relies upon the Judicial Code, Sec. 240, as

amended by Act of February 13, 1925 (43 Stat. 938), as

authority for the jurisdiction of this Court.*

The Complaint.

The material allegations of the complaint (R., pp. 3-21)

which has been dismissed as failing to state a cause of action

may be summarized as follows:

On December 29, 1922, the appellant, in New York City,

delivered to Bankers Trust Company, a New York corpora-

tion, a trust indenture, a copy of which is annexed to the

complaint (R., fols. 15-23) and at the same time delivered

to the trustee corporate stocks and bonds listed in the sched-

ule annexed to the indenture. (R., fol. 24) Under the

terms of the trust indenture the securities listed in the sched-

ule annexed thereto were assigned to the trustee, which was

required to collect the income therefrom and to pay the same

to Anne Parrish Corliss, the appellant’s wife, for the term of

her life. The indenture directs that upon the death of the

life beneficiary the principal of the trust shall be paid in

equal shares to the children of the appellant then living and

the issue of any deceased children, and, in default thereof,

* The United States District Court for the Western Dis-

trict of Pennsylvania in the case of Clapp v. Heiner, 34 F.

(2d) 506, has rendered a decision in a similar case which

follows the decision of District Judge Mack in the instant

case.

a —————

3

» such persons as Anne Parrish Corliss shall in her will

esignate and appaint.

The complaint expressly alleges that the trust so created

constituted a bona fide, valid trust under the laws of the

tate of New York”. (R., fols. 6-7)

In the trust indenture the appellant reserved the right to

modify or alter in any manner, or revoke in whole or in

art” the indenture and the trusts and estates created

nereby. (R., fol. 20) The appellant at no time exercised

ny of such powers and in the year 1924 the trustee paid

ver to Anne Parrish Corliss, the beneficiary, the entire net

ncome of the trust for that year, amounting to $124,325.97.

R., fol. 7) None of the income of the trust was paid or

redited to the appellant or received by him in 1924, or in

ny other year. (R., fol. 8) Appellant reported no part of

ne income of the trust as taxable to him for the year 1924,

ut attached to his income tax return a rider disclosing the

mount of the trust income and claiming exemption from tax

nereon. (R., fols. 8-9) An additional tax of $44,687.43

ith interest of $4,115.83 was thereafter assessed against the

ppellant, such assessment resulting solely from the inclusion

1 the appellant’s net income for 1924 of the net income of

ne trust (R., fol. 10), all of which had been paid to the

eneficiary under the terms of the trust indenture. Appel-

int paid the additional tax and interest so assessed (R., fol.

)) and his claim for the refund thereof was rejected by the

ommissioner of Internal Revenue. (R., fol. 11)

The Issues.

The sole issues involved are whether subdivisions (g) and

h) of Section 219 of the Revenue Act of 1924 are constitu-

onal and, if so, whether they are constitutional as applied

» trusts created prior to the enactment of the 1924 Revenue

ct.

|

The Statute and Its Historical

Background.

The pertinent subdivisions of Section 219 of the Revenue

Act of 1924 read as follows:

“(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 in-

come of the grantor.

“(h) 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 to

the payment of premiums upon policies of insurance on

the life of the grantor (except policies of insurance irrey-

ocably 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 in-

cluded in computing the net income of the grantor.”

Prior to the Revenue Act of 1924, none of the federal

income tax laws contained any special provision pertaining

to revocable trusts. Under the express terms of such laws

the recipients of trust income were taxable thereon. The

Treasury Department, however, took the position as early

as 1916, that the income of revocable trusts was taxable to

the grantor of the trust even though paid to a beneficiary

other than himself. This position being clearly unsound

under the Revenue Acts of 1916, 1918 and 1921, the pertinent

regulations of the Treasury Department were generally dis-

regarded by grantors of such trusts, who were sustained in

their position by the Solicitor of Internal Revenue when the

question was presented for legal review in 1922.

In that year, Mr. Carl A. Mapes, the then Solicitor of

Internal Revenue, rendered an exhaustive opinion (L. 0.

— ———————

5

1102, Cumulative Bulletin I-2, page 50), in which he held

that income received by beneficiaries other than the grantor

of the revocable trust under consideration did not constitute

income of the grantor and was not taxable to him as such.

Asa result of this opinion, the Treasury Department there-

after published a ruling (I. T. 1589, II-1 C. B. 51) which

provided that L. O. 1102 was. applicable to all income tax

laws, and concluded :

“The nature of the return required and the liability

for the payment of tax in the case of a revocable

trust are determined in the same manner as in the case

of trusts which are not revocable.” -

This ruling remained effective for all years prior to the

year 1924, with the result that beneficiaries of revocable

trusts have paid taxes for such years upon trust income

received by them.

In proposing the inclusion of subdivisions (g) and (h) of

Section 219 in the Revenue Act of 1924, the Report of the

Finance Committee of the Senate (Vol. I, Senate Reports,

Sixty-Eighth Congress, First Session, at p. 25) states:

“Sec, 219: This section has been rewritten in order

to secure clarity and to prevent the evasion of taxes by

means of estates and trusts.

* * * * * *

“The creation of a revocable trust constitutes noth-

ing but an assignment of the right to receive future in-

come. Since such an assignment does not operate to

increase (sic) the taxable income of the assignor, the

creation of a revocable trust should not so operate, but

the income of such trust should be included in the in-

come of a grantor. The bill so provides.”

From the context, it is apparent that the Committee

intended to use the word “decrease” instead of “increase”

where the latter appears in the above quotation.

As a result of this change in the Revenue Act of 1924,

the income of revocable trusts, which had for years been

taxed to the beneficiaries, was made taxable for the year

6

1924 and subsequent years to the grantor. Congress thus

assumed authority to tax income of a revocable trust to

either one of two persons, the grantor or the beneficiary,

With due appreciation of the importance of the income tax

and the value of its contribution to national revenue, it is

submitted that its importance does not transcend in import-

ance the observance of long settled principles of trust law

and well defined constitutional limitations.

POINT I.

The trust indenture of December 29, 1922,

vested the legal title to the corpus of the trust

in the trustee and the equitable title in the

beneficiary, and the income from the corpus was

the income of the beneficiary.

Under the trust deed of December 29, 1922, the trustee

became vested with legal ownership of the trust principal and

the beneficiary became vested with the equitable ownership _

thereof. Until the exercise of the power of revocation re-

served by the grantor, the transfer, so far as material here,

was as complete and effective. when made as though the

trust had been irrevocable.

This has been clearly recognized by this Court. In Jones

v. Clifton, 101 U. S. 225, it was said (p. 229):

“The powers of revocation and appointment to other

uses reserved to the husband in the deeds in question

do not impair their validity or their efficiency in trans-

ferring the estate to the wife to be held by her until

such revocation or appointment be made.”

In that case the conveyance was directly to the wife of

the settlor, who reserved the power of revocation. After the

settlor had become insolvent, his assignee in bankruptcy

sought to set aside the deed or to exercise the power of

—_

7

revocation reserved therein. In denying the assignee the

rights asserted this Court said (p. 230) :

“The title to the land and policies passed by the

deeds; a power only was reserved. That power is

not an interest in the property which can be transferred

to another, or sold on execution, or devised by will.

The grantor could, indeed, exercise the power either by

deed or will, but he could not vest the power in any other

person to be thus executed. Nor is the power a chose in

action. It did not, therefore, in our judgment, consti-

tute assets of the bankrupt which passed to his as-

signee.”

Both the Federal Circuit Court for the Second Circuit

and the Court of Appeals of the State of New York have

recognized that, until revoked, a revocable trust, under New

York law, creates an estate as valid and effective as if the

trust had been irrevocable. In the recent case of The Farmers’

Loan & Trust Company v. Bowers, 29 Fed. (2d) 14 (C. C. A.,

2d Cire.), Cireuit Judge Manton said (p. 17):

“A power to revoke is not a property right nor an

interest in property. Jones v. Clifton, 101 U. 8. 225;

Hill v. Nichols, 18 Fed. (2d) 139; Reinecke v. Northern

Trust Co., 24 Fed. (2d) 91; In re Dolan’s Estate, 279

Pa. 582; Stone v. Hackett, 12 Gray (Mass.) 227. The

power of revocation: is perfectly consistent with the

creation of a valid trust. Title passes to the donee and

remains vested for the purpose of the trust even though

there be a right to revoke it. The power to revoke is

not evidence of an intent to postpone the legal enjoy-

ment, existence or effect of that which may perhaps

thereafter be brought to an end for the reason that the

enjoyment and possession actually passes to the bene-

ficiaries. Until the right to revoke is exercised an estate

exists by virtue of the transfer. People v. Northern

Trust Co., 289 Tll., 475; In re Dolan’s Estate, supra.

Such a power is not transferrable or descendible nor may

it be alienated or passed by a will. It is personal to the

holder. Lewellyn vy. Frick, 268 U. 8. 238; Jones v.

Clifton, supra; Reinecke v. Northern Trust Co., supra.

8

When in May, 1916, the settlor made his indenture, he

transferred his title and also all possession and enjoy-

ment. His reserved powers were not conditions of the

vesting of the estate, but merely conditional limitations.

Such has been the rule under the transfer tax in New

York State referring to a transfer intending to take

effect in possession and enjoyment at or after death.

Matter of Miller, 236 N. Y. 290; Matter of Carnegie, 203

App. Div. 91, affd. 236 N. Y. 517.”

In the leading New York case of Van Cott v. Prentice,

104 N. Y. 45, 52, 55, Judge Finch said:

“Neither the power of revocation nor the provisions

determining the trust in the event of a legal interference,

or the death of the trustee in the life of the settlor, are in

the least inconsistent with the trust as completely and

perfectly constituted. They both assume its separate

and effective existence and provide merely for its ter-

mination upon the happening of specified contingent

events. * * * Wediscover nothing in the provisions

of the deed, properly construed, inconsistent with a com-

pletely constituted trust, wholly voluntary and benevo-

lent, and subject to revocation by the settlor at any

moment; a kind of trust of which the books furnish

many instances, and which, indeed, are sometimes sub-

ject to doubt and suspicion if the power of revocation

is absent.”’*

Both Judge Mack of the District Court for the Southern

District of New York and Judge Manton of the Circuit Court

*In addition to the cases above referred to and the cita-

tions included in the quotations, to the same effect see:

Von Hesse v. MacKaye, 136 N. Y. 114, 32 N. E. 615;

Schreyer v. Schreyer, 101 App. Div. 456 (affd., 182 N. Y.

555) ;

Nichols v. Emery, 109 Cal. 323, 41 Pac. 1089;

Hellman v. McWilliams, 70 Cal. 449, 11 Pac. 659;

Dickerson’s Appeal, 115 Pa. 198, 8 Atl. 64;

Stone v. Hackett, (Mass.) 12 Gray 227.

— —————

9

of Appeals for the Second Circuit have recognized this con-

tention in their opinions. Judge Mack said (R., fol. 43):

“The creation of a revocable trust vests in the benefi-

ciary a present estate in all respects valid until the

power of revocation is exercised. Jones v. Clifton, 101

U. %. 228; Van Cott v. Prentice, 104 N. Y. 45.”

Indge Manton makes a like observation at Record, fol. 57.

The cases of Reinecke v. Northern Trust Company, 278

U. 8S. 339, and Chase National Bank vy. United States, 278

U. 8. 327, are not in conflict with this position. The most

that those cases can be said to hold is that where the grantor

of a trust or the insured under a life insurance policy

reserves the right to revoke the trust or change the benefi-

ciary of the insurance policy, the termination of that power

at death causes a shifting of “economic benefits” which is

the legitimate subject of the excise tax imposed by the fed-

eral estate tax law. Indeed, in the Chase Bank case it is

stated (p. 338):

“Termination of the power of control at the time of

death inures to the benefit of him who owns the prop-

erty subject to the power.” (Italics supplied. )

On the argument of this case in the Courts below coui:sel

for the Government placed considerable reliance upon Sec-

tion 145 of Chap. 50 of the Consolidated Laws of New York

(Real Property Law)* in support of the proposition that

the grantor of a revocable trust is both technically and in

substance the owner of the trust principal during the time

the trust remains in existence. Appellant submits that this

statute has no bearing on the present issues. Under the

express limitation of the statute it is effective only with

* “Section 145. Effect of power to revoke. Where the

grantor in a conveyance reserves to himself for his own

benefit, an absoiute power of revocation, he is to be still

deemed the absolute owner of the estate conveyed, so far as

oat of creditors and purchasers are concerned.” (Italics

ours.

10

respect to creditors of and purchasers from the transferor.

As to creditors, the specialized statutory law which has been

evolved for their protection is not to be construed as pre.

scribing general principles applicable to cases where rights

of creditors are not involved. As to purchasers from the

transferor who reserves a power of revocation, assuming that

such purchasers acquire good title in the absence of an ex-

press revocation, this is no more than logical since by the

very act of transferring the property to such third parties

the transferor exercises an implied and, indeed, a very prac-

tical revocation of his prior conveyance. For these reasons,

it is submitted that the effect of the statute is not to

change the well established law represented by Van Cott v.

Prentice, supra, Von Hesse v. MacKaye, supra, and Schreyer

v. Schreyer, supra.

Furthermore, there is grave doubt as to whether Section

145 applies to personal property at all. The cases which the

Government heretofore has largely relied upon to support

the proposition that it does relate to personalty (Hutton y.

Benkard, 92 N. Y., 295; Matter of Cooksey, 182 N. Y., 92, 97;

Matter of Moehring, 154 N. Y., 423, 427) arose under the

New York Revised Statutes and prior to the adoption of the

Consolidated Laws. Under the Revised Statutes, as stated

in Hutton v. Benkard, supra, (p. 305) :

“It is provided that ‘powers as they now exist by law

are abolished, and from the time this chapter shall be in

force the creation, construction and execution of powers

shall be governed by the provisions of this article’

(3 K. 8. [7th ed.] 2188, Sec. 73.) This language is very

broad; broad enough to include all powers, both as to

real and personal property.”

Section 130 of the Real Property Law, however, now pro-

vides :

“Sec. 130. Effect of Article. Powers, as they existed

by law on the thirty-first day of December, eighteen hun-

dred and twenty-nine, are abolished. Hereafter the crea-

tion, construction and execution of powers, affecting

11

real property, shall be subject to the provisions of this

article; but this article does not extend to a simple

power of attorney to convey real property in the name

and for the benefit of the owner.” (Italics ours.)

The article referred to is Article V, in which Section 145 is

found.

We call attention particularly to the new words “affect-

ing real property” contained in the current statute. This

phrase, new in the Consolidated Laws, clearly appears to

limit the general application of Article V of the Real Prop-

erty Law to real property. If this is true, then Section 145

is irrelevant.

Since, in the instant case, legal title to the principal of the

trust was at all times in the trustee and not in the donor and

equitable title was in the beneficiary, the income taxed, in

the words of District Judge Mack, “arose from property equi-

tably owned for life by the beneficiary; this income came

immediately into her possession through the hands of the

trustee.” (R., fol. 43) The case therefore does not present

the situation of a present assignment of the right to receive

future income where the title to the principal is at all times

in the donor, such as Bing v. Bowers, 26 Fed. (2d) 1017

(C. C. A., 2d. Cire.) and Mitchel v. Bowers, 15 Fed. (2d) 287

(C. C. A., 2d Cire.). Rather it is a case where, by reason of

the questioned statute, “A” has been taxed on income re-

ceived by “B” which was derived from property the legal title

to which was at all times while the income accrued in “C”

and the equitable title in “B”. “A” has been taxed on income

which, in fact, he never received and which arose from prop-

erty title to which was vested in another.

For the reasons above stated it is submitted that the reser-

vation of the power of revocation does not create such a re-

lationship between the donor and the principal of the trust

as to permit this Court to consider that the income taxed

arose from property owned by the donor. This case, there-

fore, does not present a situation involving principles anal-

ogous to those of constructive receipt.

|

Even if it be conceded that the existence of the power of

revocation does enable the donor to exert a very real influence

over the principal of the trust, it is believed that the exist-

ence of this power and its potentialities are immaterial.

The taxing statute is concerned with income, not with prin.

cipal. Regardless of the nature and extent of the powers of

repossession and control which the settlor reserved over the

principal of the trust, the income, once accrued, was com-

pletely and irrevocably the beneficiary’s income, in which the

settlor had no interest and over which he had no control.

(N. ¥. Surrogate’s Court Act, Sec. 204.) This income was

subject to the claims of the creditors of the beneficiary.

(N. Y. Consol. Laws, Ch. 50, § 98.*) In this respect, there-

fore, revocable and irrevocable trusts are indistinguishable.

The donor of a revocable trust has no greater interest-in the

distributable income of the corpus from the moment such

income accrues than has the donor of an irrevocable trust.

There would seem to be little question that the income

from an irrevocable trust cannot constitutionally be taxed

to the donor, and the power of control which the donor of a

revocable trust has over the principal is the only thing which

the Government can possibly seize upon for justifying its

action. Since the power of revocation with respect to the

principal is immaterial, in view of the fact that the tax isa

direct tax on income and is not affected by practical powers

which may be exerted over the principal from which that

income arose, appellant contends that the main ground on

which the tax is sought to be justified completely fails. If it

would be unconstitutional to tax the income of an irrevo-

cable trust to the donor when he is not the recipient

thereof, it is submitted that the present statute is unconsti-

tutional.

*The rule laid down by this statute has been extended

by judicial construction to trusts of personalty as well as

trusts of real estate. See Brearley School vy. Ward, 201 N. Y.

358, 94 N. E. 1001; Wetmore v. Wetmore, 149 N. Y. 520, 44

N. E. 169; Mills v. Husson, 140 N. Y. 99, 35 N. BE, 422.

7"

13

This Court has already decided (/rwin v. Gavit, 268 U.S.

161) that the beneficiary of a trust is the owner of the

income from the trust to such an extent that he may be sub-

ject to an income tax thereon. Appellant submits that, as

a fundamental proposition, two people cannot each have such

an interest in the same income that Congress, at its option,

can levy an income tax against either on account of such

income. If this be true, the established taxability of trust

income to the recipient beneficiary precludes its taxability

to the donor.

POINT II.

Congress cannot, by mere edict, declare that

income actually received by the beneficiary

shall be treated as the income of the creator of

the trust.

As shown above, the beneficiary, Mrs. Corliss, was at all

times, in every conceivable sense, the owner of and entitled

to all the beneficial interest in and economic benefit of the

income taxed. The right reserved by the donor was simply

and solely the right to reacquire title to the principal of the

trust fund, a right which was not exercised and which in

the event of exercise would not have reached any income then

accrued and held by the trustee. Therefore, the effect of the

instant statute, baldly stated, is to declare that income of

“A” shall be considered the income of “B”. For the rea-

sons above indicated, it is submitted that what counsel for

the Government in the lower Courts called the “nerus” be-

tween “A” and “B” in the case of a revocable trust is im-

material because that “nexus” relates only to the principal

and not to the income, with which alone the statute is con-

cerned. Hence, the same principles are believed applicable

which would apply if the donor and beneficiary had been

total strangers or, in any event, if this had been an irre-

vocable trust instead of a revocable trust.

14

It is submitted that Congress has no power under these

circumstances to declare that the income of Mrs. Corliss for

purposes of income taxation shall be considered the income

of Mr. Corliss. As the late Justice Moody said, in Home

Savings Bank v. City of Des Moines, 205 U. 8. 503, 511:

“With respect to taxation, usually, if not necessarily,

property and its owners are inseparable. Taxes are

assessed against persons upon the property which they

own, not upon property which others own.”

The Sixteenth Amendment to the Constitution of the

United States provides that Congress shall have power to lay

and collect taxes on income from whatever sources derived,

without apportionment among the several States, and with-

out regard to any census or enumeration. This Court said

in Eisner v. Macomber, 252 U. 8. 189, at page 206:

“As repeatedly held, this did not extend the taxing

power to new subjects, but merely removed the neces-

sity which otherwise might exist for an apportionment

among the States of taxes laid on income.”

And continuing, said:

“In order, therefore, that the clauses cited from

Article I of the Constitution may have proper force and

effect, save only as modified by the Amendment, and

that the latter also may have proper effect, it becomes

essential to distinguish between what is and what is not

‘income’, as the term is there used; and to apply the dis-

tinction, as cases arise, according to truth and substance,

without regard to form. Congress cannot by any defini-

tion it may adopt conclude the matter, since it cannot by

legislation alter the Constitution, from which alone it

derives its power to legislate, and, within whose limita-

tions alone that power can be lawfully exercised.”

(Italics ours)

The Court, in the Macomber case, defined “income” in

the following language:

“ ‘Derived—from — capital’ ; — ‘the gain—derived—

from capital, etc. Here we have the essential matter;

:

not a gain accruing to capital, not a growth or in-

crement of value in the investment; but a gain, a profit,

something of exchangeable value proceeding from the

property, severed from the capital however invested or

employed, and coming in, being ‘derived,’ that is, received

or drawn by the recipient (the taxpayer) for his separate

use, benefit and disposal ;—that is income derived from

property. Nothing else answers the description.” (The

italics are the Court’s. )

in the Macomber case, tho Supreme Court had before it

the provision of the Revenue Act of 1916, which provided

that there should be included in the term “dividends” any

stock dividends, and expressly declaring that stock dividends

should be considered income to the amount of their cash

value. The Court held that Congress could not by any such

definition declare to be income that which was in fact not

income; that it could not by legislation alter the constitution

“from which alone it derives its power to legislate.” If

Congress cannot declare to be income what is not in fact

income, clearly it cannot declare to be the income of Mr.

Corliss the income from securities, the legal title to which

was not vested in him, and when in fact another person was

entitled to and actually received such income. Such

action on the part of Congress as ‘to plaintiff is an act of

confiscation in direct violation of the Fifth Amendment to

the Constitution. be

This Court, in the Mecomber case, pointed out that Con-

gress cannot disregard or ignore the substantial difference

between the corporation and its stockholders and treat the

corporate organization as unreal, or look upon the stock-

holders as partners when they are not partners. And yet,

in the instant case, Congress has undertaken to ignore the

very substantial difference between the income of Mr. Corliss

and the income of Mrs. Corliss and has attempted to treat

the receipt of income by Mrs. Corliss as not received by her

but as in fact received by Mr. Corliss. If Congress cannot,

in the exercise of its taxing powers, disregard the difference

between the corporation and its stockholders, a fortiori it

|

16

cannot disregard the difference between Mr. Corliss’ income

and the income of Mrs. Corliss.

In the opinion of Solicitor Mapes (supra) where he had

before him a trust inuenture containing a power of revoca-

tion, and under which the settlor was the beneficiary of a

part of the trust income, he said:

“The trust being valid and passing a present right

and title to the property, it cannot be he!d, under the

facts presented, that the income arising therefrom be.

longed during his life to A, other than that amount

which went to him as a beneficiary. Otherwise, the

statute would impose an income tax upon income which

was not received by the taxpayer. It would tax one

person upon income ‘received or drawn by the recipient’,

(Eisner v. Macomber, 252 U, 8. 189.) The income from

this trust was not received or drawn by the creator of

the trust, except such amounts as he received as a benefi-

ciary. It was received by the beneficiaries, who were

the only persons entitled to receive it while the trust

remained in existence.”

We find nothing in the recent decisions of this Court in

Taft v. Bowers, 278 U. 8. 470, and United States v. Robbins,

269 U. S. 315, inconsistent with this position.

In the Taft case this Court held that where property

appreciated in value and then was given to another, Congress

could follow such appreciation into the hands of the donee

and tax him on the full amount thereof wher the property

was sold. In other words, this Court approved a statute

which permitted the levying of a tax upon the party who

received the income. The appreciation in the hands of the

donor was not income within the meaning of the Sixteenth

Amendment (Hisner v. Mecomber, supra), “Income” was

received only when the property was sold, and when tie

property was sold the party who received such income was

the party taxed. This fact obviously was considered of

great imvortance by the Court in view of its observation

(p. 482) :

“In truth the stock represented only a single invest-

ment of capital—that made by the donor. And when

— ——

17

through sale or conversion the increase was separated

therefrom, it became income from that investment in the

hands of the recipient subject to taxation according to

the very words of the Sixteenth Amendment. By re-

quiring the recipient of the entire increase to pay a part

into the public treasury, Congress deprived her of no

right and subjected her to no hardship. She accepted

the gift with knowledge of the statute and, as to the

property received, voluntarily assumed the position of

her donor. When she sold the stock she actually got the

original sum invested, plus the entire appreciation ; and

out of the latter only was she called on to pay the tax

demanded.” (Italics ours.)

It is submitted that this is a totally different thing from per-

mitting Congress to tax “A” upon the income of “B”, which

involves the constitutionality of taxing one who as a matter

of fact did not receive the income taxed.

In the Robbins case the decision was that a husband could

be taxed on the full amount of income received from property

held jointly by husband and wife under the community

property law: of California. How clearly distinguishable

that case is from the present proceeding is indicated by the

analysis of the Robbins case as contained in a report of

the Attorney General to the Secretary of the Treasury, dated

June 24, 1925, quoted in the footnote below.*

It is interesting in this connection to note that Circuit

Judge Anderson of the First Circuit in the case of Hamilton

*“In the Robbins case, consideration of the statutes and

decisions in California, in an effort to analyze the substan-

tial nature of the wife’s interest in the community property,

disclosed that during the existence of the community the hus-

band had the right to complete dominion, possession, and

control of the community property; that it was at all times

liable for the husband’s debts, both those created before his

marriage and his separate debts after his marriage; that he

might expend the community property and community in-

come ae he pleased without accountability to the wife; that

the only restrictions (prior to 1917). on the husband’s com-

plete dominion were that he might not, without her consent,

give away community property or dispose of household furni-

ture or her wearing apparel; that the wife had no right to

fd

18

v. Commissioner, 24 Fed. (2d) 668, in speaking of the Robbins

case, says (p. 671):

«* * * in which (case) the Supreme Court held

that, under the community property law of California,

the wife had only an expectancy in the, income of the

ganancial partnership * * *” (Italics ours).

On the basis of the authorities above discussed, it is re.

spectfully submitted that the power of Congress to impose

an income tax as granted in the Sixteenth Amendment is

- limited to the power to tax the recipient of the income, and

that Congress cannot by mere edict declare that income of

Mrs. Corliss shall be considered the income of Mr. Corliss

for purposes of income taxation.

POINT III.

The Statute is so unreasonable and arbitrary

as to be unconstitutional under the limitations

of the Fifth Amendment.

This Court on a number of occasions has held that a

federal taxing statute may be unconstitutional when it

reaches a certain degree of unreasonableness and arbitrari-

ness.

have a share in the cémmunity estate expended for her bene-

fit; that her right to maintenance and support was not based

on the theory that one-half of the community estate belonged

to her, but on a marital obligation of the husband srising

out of the marriage relation; that the wife could not main-

tain any action during the existence of the community with

respect to the community property; and was not a proper

party to a suit involving the community property ; that prior

to 1923, on dissolution of the community, the wife had no

right to make testamentary disposition of any part of the

community estate; that if the husband died first the wife

succeeded to half of what then remained of the community

property after paying the husband’s debts, including debts

incurred by him before marriage as well as those in connec-

tiun with his separate estate; that under an unbroken line

——7—~—_™

19

Nichols yv. Coolidge, 274 U. 8. 531;

Brushaber v. Union Pacific Railroad Company, 240

U. 8. 71;

Blodgett v. Holden, 275 U. 8. 142;

Barclay & Co. v. Edwards, 267 U. 8. 442, 445;

Schwab y. Doyle, 258 U. 8. 529;

Llewellyn v. Frick, 268 U. 8. 238;

Untermyer vy. Anderson, 276 U. S. 440.

Concededly, in the absence of the statute which is being

attacked the income from the revocable trust would have

been taxed to Mrs. Corliss. Congress considered it necessary

to change this rule in order to prevent the evasion of sur-

taxes. (See Vol. I of House Reports, Sixty-Eighth Congress,

First Session, dealing with H. R. 6715 [1924 Revenue Act]

page 21; Vol. I of Senate Reports of same Congress and Ses-

sion, page 25; Vol. IV of House Reports of same Congress

and Session, pages 19-20.)

of decisions in California the widow took as an heir and by

succession; that the community estate was liable for the

debts of the wife contracted prior to the marriage, the lia-

bility being based on the common law rule that on marriage

the husband became liable for all the debts contracted by his

wife dum sola, and in California the statute having exempted

the husband’s separate estate from debts of the wife con-

tracted before marriage left only the community estate sub-

ject to them; that the community property was not subject

to the separate debts of the wife contracted after marriage;

and that in many other respects the wife in California had

none of the rights in the community property ordinarily con-

nected with ownership of property.

“Tt was shown that, whatever adjectives or descriptive

terms may be used in an attempt to define the nature of the

wife’s interest, when it came to the ordinary rights of own-

ership they were completely wanting, and the alleged owner-

ship of the wife in a share of the community estate in Cali-

fornia was properly described as a ‘barren ideality’.

“All these considerations were advanced in the Robbins

case, and, while not dealt with at length in the opinion, no

ng form the basis for the conclusion reached.” (Italics

ours.

20

Appellant denies that the motives actuating donors of

revocable trusts in setting up such trusts are of any mate. |

riality in determining the constitutional questions involved. |

A taxpayer has the right to arrange his affairs and to carry

on his business in such a way as to reduce his taxes to a

minimum, thus legally avoiding taxes which otherwise might

have been payable.

Bullen vy. Wisconsin, 240 U. 8. 625, 630;

U. 8. v. Isham, 17 Wall. 496;

Fraser v. Nauts, 8 Fed. (2d) 106 (D. C., N. D. Ohio,

W. ENTS ;

Weeks v. Sibley, 269 Fed. 155 (D. C., N. D. Texas) ;

Walsh vy. Commissioner, 18 B. T. A. 571.

But considering the bare actuality that the statute was

passed because some taxpayers already had, and others might,

resort to this means of cutting down surtaxes, it is submitted

that the means adopted by Congress to prevent this result

was arbitrary and unreasonable. Thousands of revocable

trusts, in existence at the time the statute was passed, had

been created before the enactment of the first income tax

law in 1913, to meet a multitude of varying conditions. Still

further thousands of such trusts must have been created

after the inauguration of the surtax provisions of the income

tax laws and before the enactment of the statutes involved

here, for perfectly valid and bona fide purposes and without

advertence to income tax considerations. It is by no means

an unjustified assumption that even after the passage

of § 219 of the 1924 Act many revocable trusts were created

without any thought of the income tax. In spite of this sit-

uation, Congress concluded: “Since the device of the revo-

cable trust may be used by some individuals for the pur

pose of evading surtaxes, despite the fact that there are

an infinite variety of other circumstances which induce the

creation of such trusts, we shall penalize all creators of

revocable trusts and we shall conclusively ‘presume’ that _

all of such trusts were and would be created for the purpose

of evading surtaxes.”

—

Congress might have said that trust indentures containing

the right of revocation shall be deemed to be presumptively

fraudulent, or shall be deemed to be presumptively an at-

tempt at evasion by the taxpayer, and thereby have shifted

the burden of establishing good faith and freedom from

evasion to the creator of the trust. But it did not. It treated

all revocable trusts alike and took the position that re-

gardless of how many revocable trusts, or how few, were

created for the purpose of evading surtaxes, and regardless

of whether or not there were any normal or surtaxes to be

evaded, and regardless of whether or not any of such trusts

were bona fide, it would assume that all donors of such trusts

were and would be guilty of an attempt at evasion and it

would not afford them an opportunity to prove that they

were not.

With all due respect to the judgment of Congress in such

matters, it is vigorously maintained that in this particular

case its action is grossly arbitrary and unreasonable. Revo-

cable trusts have not come into existence since the passage

of the income tax laws. They have been recognized, valid

instruments for many years and their very number is a

graphic attestation to their utility under existing conditions.

To be suspicious that all of them were and would be created

for the purpose of evading surtaxes is unwarranted. To be

suspicious that some of them have been used for the pur-

pose is, we believe, justified. But to assume conclusively

that all were and would be created with this purpose in

view is so absurd as to render such words as “arbitrary”,

“unreasonable”, and “capricious” wholly inadequate.

The case of Schlesinger y. Wisconsin, 270 U. S. 230,

wherein this Court held that a state statute which conclu-

sively “presumed” that all gifts made within six years prior

to death were made in contemplation of death was uncon-

stitutional, seems directly in point, and its pertinency is

80 obvious as to require no elaboration.

Perhaps it may be said in answer to this argument that

the question of evading surtaxes is incidental and the vital

factor is that since the donor could have acquired the income

for himself, it is reasonable to tax him thereon. The ready

22

answer to such a contention is that whether or not the donor

could have done so, the fact is, he did not, and to levy taxes

on the basis of what people might have done is, to say the

least, such an unsound theory of taxation that it should

be promptly and firmly discouraged. The United States

Board of Tax Appeals in Appeal of Anna M. Harkness,

1 B. T. A. 127, recognized this when it said (p. 130):

“It seems to us to be fundamentally unsound to de

termine income tax liability by what might have taken

place rather than by what actually occurred.”

Surely counsel for the Government cannot maintain that,

assuming the statute were not necessary to prevent avoid-

ance of surtaxes, nevertheless, the tax would be reasonable

because of what a taxpayer might have done but did not do.

POINT IV.

The taxation of the appellant upon the in-

come of the trust beneficiary, cannot be justi-

fied as necessary to the enforcement of the

admitted constitutional power to tax income.

If we correctly construe the opinions of the Courts below,

their decisions rest upon the theory that the statutory pro-

visions in question are necessary to prevent the evasion of

surtaxes and may therefore be sustained under an implied

power of Congress to do whatever is essential to make ef-

fective the authority contained in the Sixteenth Amendment

to the Constitution.

Appellant vigorously denies that any such doctrine of

“necessity” can render constitutional an otherwise uncon-

stitutional statute. In Schlesinger v. Wisconsin, supra, this

Court stated, relative to just such an argument of the puri-

fying effect of necessity (p. 240):

“The presumption and consequent taxation are de

fended upon the theory that, exercising judgment and

23

discretion, the legislature found them necessary in order

to prevent evasion of inheritance taxes. That is to say,

‘A’ may be required to submit to an enactment forbidden

by the Constitution if this seems necessary in order

to enable the State readily to collect lawful charges

against ‘B’. Rights guaranteed by the federal Constitu-

tion are not to be so lightly treated; they are superior

to this supposed necessity. The State is forbidden to

deny due process of law or the equal protection of the

laws for any purpose whatsoever.” (Italics ours.)

In the more recent case of Nichols v. Coolidge, 274 U. 8.

531 (at page 542) this Court has implied, wholly by way of

dictum, that the taxation of gifts made in contemplation of

death is dependent upon some such doctrine of ancillary

power denied in Schlesinger v. Wisconsin, supra, but even

in the Nichols case this Court was careful to note that “the

right is limited by the necessity”.

Admitting, therefore, but merely for the purposes of

argument, that Congress does have the right to exert what

would otherwise be unconstitutional powers in order to rea-

der effective the constitutional power to tax incomes, as

limited by the language of this Court in Nichols v. Coolidge,

supra, the exercise of such a power is unjustified in the situa-

tion presently involved.

Concededly, the trustee of the trust created by the appel-

lant derived income within the meaning of the Sixteenth

Amendment to the Constitution. It is equally clear that

such income was received by Mrs. Corliss and can be taxed

toher as such. (Irwin v. Gavit, 268 U. S. 161.) That case

does not furnish the remotest authority, however, for the

proposal to tax an individual upon income which he does

not receive. On the contrary, Jrwin v. Gavit clearly holds

that income, as defined in the Sixteenth Amendment, can be

taxed to the beneficiary of a trust who receives the same.

Such income, being thus taxable, appellant submits that

there is no “necessity” for Congress to invoke any ancillary

constitutional power in this case.

None of the income of a revocable trust escaped tax prior

to the enactment of the Revenue Act of 1924. There is no

SEs ele ne a E:

—

occasion to speculate as to the power of Congress to tax one

individual upon the income of another where the latter, by

reason of other constitutional limitations, cannot be taxed

upon the same. In the present case, the entire net income

of the trust can clearly be taxed to the beneficiary, as it was

taxed prior to the enactment o: the 1924 Revenue Act. (Con-

gress is thus not put to the “necessity” of shifting the burden

of the tax to some one who did not receive the income in

order to collect a tax. “Necessity”, as applied to the Six.

teenth Amendment, cannot be construed other than as neres-

sary in order to permit a tax to be collected upon “income

from whatever source derived”. As above indicated, no such

necessity is involved in the instant case, and the mere pref-

erence of Congress, however laudable in purpose, to exact

the highest rate of tax upon income, cannot justify the

invocation of such ancillary constitutional power as Con-

gress may have.

In this connection, the attention of the Court is again

invited to its opinion in Taft v. Bowers, supra. There this

Court said (pp. 482-483) :

“The provision of the statute under consideration

seems entirely appropriate for enforcing a general

scheme of lawful taxation. T'o accept the view urged

in behalf of petitioner undoubtedly would defeat, to some

extent, the purpose of Congress to take part of all gain

derived from capital investments. To prevent that result

and insure enforcement of its proper policy, Congress

had power to require that for purposes of taxation the

donee should accept the position of the donor in respect

of the thing received. And in so doing, i* acted neither

unreasonably nor arbitrarily.” (Italics ours.)

The clear inference from this language is that if the

statute had not been necessary to enable Congress “to take

part of all gain derived from capital investments”, Congress

would have acted “unreasonably” and “arbitrarily” in pass-

ing the statute. If this be true, thence since it is not neces-

sary for Congress to tax the income of a revocable trust

to the donor in order “to take part of all gain” derived from

25

the trust investments, inasmuch as the beneficiary would be

taxable thereon under the decision of Irwin v. Gavit, supra,

the present statute is unreasonable and arbitrary, and, there-

fore, unconstitutional.

It is submitted that Congress, by taxing to thé donor

income which, as a stark reality, he never received, and in-

come which he had no right whatever to receive, has adopted

a theory of taxation entirely inconsistent with the Sixteenth

Amendment and in direct violation of the Fifth Amend-

ment, and that the mere desire of Congress to concentrate

incomes in such a manner as to yield a maximum rate of tax

does not create a “necessity” justifying the disregard of

accepted principles of constitutional and trust law

POINT V.

The statutory provisions in question are in

any event unconstitutional as applied to the

income of revocable trusts created prior to June

2, 1924, the effective date of the Revenue Act of

1924.

Even if this Court should consider that the statutory

provisions under review are a valid exercise of an ancillary

constitutional power, and are not arbitrary and unreason-

able as applied to revocable trusts created since their enact-

ment, we submit that they should be held unconstitutional

as applied to trusts created prior to the enactment of the

Revenue Act of 1924:

Nichols v. Coolidge, supra;

Blodgett v. Holden, supra;

Brewster vy. Gage, 50 Sup. Ct. 115;

The Farmers’ Loan and Trust Company v. Bowers,

supra;

Brushaber v. Union Pacific Railroad Company, 240

U. 8. 1, 20;

Barclay & Co. v. Edwards, 267 U. 8. 442, 450.

26

Stated otherwise, what may be reasonable as applied to

the income of trusts created after the effective date of the

statute may be arbitrary and unreasonable as applied to the

income of trusts created prior thereto, or, in any event, to

such trust income as accrued prior to the effective date.

This Court obviously was influenced in its determination

that the statute involved in the case of Taft v. Bowers, supra,

was reasonable by the consideration that the donee “accepted

the gift with knowledge of the statute and, as to the prop.

erty received, voluntarily assumed the position of her donor’

(see p. 482). In other words, the statute was considered

reasonable because of its prospective operation and the fact

that the act of giving was performed with a knowledge of

the consequences. Such considerations are wholly inappli-

cable to the case of a revocable trust created prior to the

enactment of Sections 219 (g) and (h) of the Revenue Act

of 1924. In the instant case the donor did not make the gift

“with knowledge of the statute” and therefore cannot be

said to have acted with full knowledge of the consequences.

While the trust here involved was created in 1922, nv-

merous trusts which will be affected by this Court’s decision

were created years prior to the inception of the present sys-

tem of surtaxes, and have at no time since been modified or

revoked. It is impossible to contend that such trusts were

created for the purpose of evading surtaxes, and it is unrea-

sonable, we submit, to penalize the donors of such trusts

because of motives actuating others in the creation of revoc-

able trusts.

For these reasons it is submitted that whether or not

the application of the statutory provisions in question are

arbitrary and capricious as applied to the income of revoc-

able trust estates created subsequent to June 2, 1924, in any

event such statutory provisions are arbitrary and capricious

as applied to the income of estates created prior to that

date and, as to such trusts, should not be sustained.

27

POINT VI.

The judgments of the District Court and of

the Circuit Court of Appeals should be reversed,

the motion to dismiss the complaint denied and

judgment directed for the appellant as prayed

for in the complaint.

Respectfully submitted,

JosppH M. HARTFIELD,

Counsel for Appellant.

Russa. D. MORRILL,

A. C. NEWL:N,

Of Counsel.