Respondents Brief — Corliss v. Bowers

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Argument:

I, Congress did not exceed its power in holding the

grantor accountable for the income produced by

the trust estate here involved

Il. The decisions of this court foreclose the contention

that the application of the statute to income from

a trust established prior to the enactment of the

revenue act of 1924 renders it invalid

CITATIONS

Cases :

Benedict, Walter 8., v. Warren G. Price, decided Nov.

Bing v. Bowers, 22 F. (2d) 450--~-

Blodgett v. Holden, 275 U. 8. 142

Brushaber v. Union Pac, R. R., 240 U. 8.1

Bullen vy. Wisconsin, 240 U. 8. 625

Burk-Waggoner Asan. v. Hopkins, 269 U. 8. 110

Chase Nat. Bank vy. United States, 278 U. 8. 327

Cooksey, Matter of, 182 N. Y. 92

Cooper, Anita H., v. United States, No. 98, October Term,

1929, decided February 24, 1930.

Eisner vy. Macomber, 252 U. 8.

Farmers’ Loan 4 Trtist Co. v. Bowers, 20 F. (2d) 14

Hill, Willard C., v. Commissioner, and William H. Plumer

v. Commissioner, decided January 23, 1930, not yet

Hutton v. Benkard, 92 N. Y.

Knowlton vy. Moore, 178 U. 8.

Leydig, J. V. v. Commissioner, 15 B. T. A. 124, 132

Mayo’s Will, In re, 136 N. Y. 8. 1066

99435—30——1 a)

38 4

Cases—Continued.

Mitchel v. Bowers, 15 F. (2d) 287, certiorari denied, 273 as

U. 8. 759. 15

Moehring, Matter of, 154 N. Y. 423 ow

Nichols v. Coolidge, 274 U. 8. 531 18, 20

Nicol vy. Ames, 173 U. 8. 509 16

Old Colony Tr. Co. v. Comm’r. Int. Rev., 279 U. 8. T16____ 17,18

Pollock vy. Farmers’ Loan & Trust Co,, 158 U. 8. 601______

Reinecke v. Northern Trust Co., 278 U. 8. 389_..-..-----_-

Rosenwald vy. Commissioner, 33 F. (2d) 423, certiorari

denied, 280 U. 8S. T7A

Saltonstall vy. Saltonstall, 276 U. 8. 260.

Taft v. Bowers, 278 U. 8. 470

United States v. Phellis, 257 U. 8. 156

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

United States v. Sulliwan, 274 U. 8. 259.

8. 440

R.

SHERERE Ba

Untermyer v. Anderson, 276 U.

Yazoo € Mississippi Valley R.

226 U. 8. 217

Statutes, etc. :

Revenue act of 1924, c. 234, sec. 219 (g), (hb), 43 Stat.

253, 277 (U. 8. C. title 26, sec. 960) 2

New York Real Property Law (McKinney’s Consolidated

Laws, Feb. 17, 1909), sec. 145 ealiniae 14

House Report No. 179, 68th Cong., 1st sess., p. 21_.-..-.-- 16

Senate Report No. 398, 68th Cong., 1st sess., p. 25....---- 16

v. Jackson Vinegar Co.,

_

~

Inthe Supreme Court of the United States

Octoser TERM, 1929

No. 344

CHARLES A, CORLISS, PETITIONER

v.

Frank K. Bowers, as CoLLector OF INTERNAL

Revenue for the Second District of New York

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE SECOND CIROUIT

OPINIONS BELOW

The opinion of the District Court (R. 22) is re-

ported in 30 F. (2d) 135. The opinion of the Cir-

cuit Court of Appeals (R. 29) is reported in 34 F.

(2d) 656.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on July 1, 1929. (R. 33.) Petition

for certiorari to review the judgment was filed Au-

(1)

gust 27, 1929, and was granted October 21, 1929.

(R. 34.) The jurisdiction of this Court rests on

Section 240 (a) of the Judicial Code as amended

by. the Act of February 13, 1925.

QUESTIONS PRESENTED

The principal question is whether subdivisions

(g) and (h) of Section 219 of the Revenue Act of

1924 are constitutional.

If so, the additional question is whether they are

constitutional as applied to the income of a re-

vocable trust created prior to the enactment of that

Act.

STATUTE INVOLVED

The pertinent portions of the Revenue Act of

1924, c. 234, 43 Stat. 253, 277 (U.S. C., Title 26, Sec.

960), reads as follows:

ae. 2a. Fo

(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 include

in computing the net income 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 ac-

cumulated for future distribution to him,

3

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 in-

surance irrevocably payable for the pur-

poses and in the manner specified in para-

graph (10) of subdivision (a) of Section

214), such part of the income of the trust

shall be included in computing the net in-

come of the grantor.

STATEMENT

On December 29, 1922, petitioner, in the County

and State of New York, delivered a trust indenture

to the trustee therein named, the Bankers Trust

Company, of New York City, together with cor-

porate stocks and securities listed in the schedule

annexed to the indenture. (R. 3-4.) The trustee

was directed to collect the income from the securi-

ties and pay it, after deducting commissions and

expenses, to the petitioner’s wife for the term of

her life. (R.9.) Upon her death the principal of

the trust was to be paid in equal shares to the peti-

tioner’s children then living, and the issue of any

deceased children, and in default thereof, to such

persons as petitioner’s wife might designate and

appoint. (R. 9-10.)

By the second paragraph of the trust indenture

petitioner reserved the right to instruct the trustee

with respect to sales of the trust property and

changes in the investment of the trust funds. (R.

10.) In the fifth paragraph the authority of the

4

trustee to deal with the stock and securities was set

forth in detail and it was specified that in all these

matters the trustee should act subject to the con-

trol and written directions of the petitioner. (R.

11-12.)

The seventh paragraph of the indenture provided

as follows (R. 12-13):

Notwithstanding anything to the contrary

herein contained, the party of the first part

may, from time to time, during the continu-

ance of the trust, by instrument in writing

executed and acknowledged in the manner re-

quired for a deed of real property so as to

enable it to be recorded in the State of New

York and delivered to the Trustee, modify

or alter in any manner, or revoke in whole

or in part, this indenture and the trusts then

existing, and the estates and interests in

property hereby created, and in case of such

revocation said instrument shall direct the

disposition to be made of the trust fund, or of

the portion thereof affected by such revoca-

tion, and the Trustee shall make, execute and

deliver such instruments, if any, and make

such conveyances and transfers of property

as may be necessary or proper in order to

carry the same into effect, and no one shall

have any right, interest or estate under this

indenture except subject to the proper modi-

fication, alteration or revocation thereof.

- The trust remained in this form in 1924 when

$124,325.97, the net income for that year, was paid

by the trustee to petitioner’s wife. (R. 4.) In

petitioner’s report of his income for that year, he

~ made note of this trust and the amount of the in-

come, but computed his tax without regard to such

income. (R. 5-6.) He was later assessed $44,-

687.43, with interest, on the income from the trust

property, which he paid under protest. (R. 6.)

A claim for refund was thereafter filed and rejected

(R. 7), whereupon this action was instituted. A

motion to dismiss (R. 3) was granted (R. 2) and

upon appeal the judgment was affirmed (R. 33-34).

Petition for certiorari was not opposed.

SUMMARY OF ARGUMENT

Petitioner had power to revest in himself title to

the corpus as well as the power to cause the income

of the trust to be distributed to himself. Looking

through the form of such a transaction, it appears

that there has been little change in substance.

Under the New York statute petitioner is still

deemed to be the absolute owner of the estate con-

veyed so far as the rights of creditors and pur-

chasers are concerned. This Court has held that the

reservation of a power of revocation makes a trans-

fer incomplete and it is not inconsistent with the

rules of property to disregard for tax purposes the

incomplete transfer and treat this transaction just

as though the propetty still belonged to petitioner.

There are many decisions to the effect that attempts

to divide income from property before the tax

attaches are ineffective for income-tax purposes.

We submit that under those decisions and under the

doctrine ef constructive receipt petitioner may con-

stitutionally be held accountable for the income

from the trust.

The contention that the application of the statute

to income from a trust established prior to the enact-

ment of the Revenue Act of 1924 renders it invalid

finds no support in the decisions of this Court.

ARGUMENT

I

CONGRESS DID NOT EXCEED ITS POWER IN HOLDING THE

GRANTOR ACCOUNTABLE FOR THE INCOME PRODUCED

BY THE TRUST ESTATE HERE INVOLVED

This case does not present any question of statu-

tory construction. The tax is plainly imposed by the

explicit language of Section 219 (g) and (h) if that

section is constitutional. It is clear and unambig-

uous and provides in effect that the grantor of a

trust who has reserved the power to revest in him-

self title to the corpus, or who in his discretion may

cause the income of the trust to be distributed or

held for future distribution to himself, shall include

the income of such trust in computing his own net

income.

In the seventh paragraph of the trust here in-

volved petitioner reserved. the right from time to

time during the continuance of the trust to ‘‘modify

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

part, this indenture and the trusts then existing.’’

(R. 12-13.) Thus it is clear that petitioner had the

7

power to revest in himself the title to the corpus, as

well as the power to cause the income of the trust

to be distributed to himself. Accordingly, subdi-

visions (g) and (h) of Section 219 both apply. Pe-

titioner’s assertion (Brief, pp. 12-13) that his pow-

ers related only to the principal, and not-to the

income, is, we submit, without foundation.

This legislation looks through the form of the

transaction and determines that in the case of

revoeable trusts there has been little change in

substance. While the property was in form trans-

ferred by petitioner, and his wife received the in-

come from the trustee, petitioner was in the same

position as if he were making gifts from time to

time of the income and without obligation to con-

tinue them. As said by the District Court in its

opinion granting the motion to dismiss (R. 25):

The New York Court of Appeals rightly

characterized the income from a revocable

trust as proceeding from his bounty and

subject to his control, Van Cott v. Prentice,

supra, pages 52-3.

Through the exereise of his power to modify,

alter, or revoke the trust, petitioner at all times

had the right either wholly to retake the corpus

or to receive the income, which is ‘‘that which gives

value to property.”’ (Pollock v. Farmers’ Loan &

Trust Co., 158 U. 8. 601, 628.)

In the language of the Distriet Court (R. 25):

The trust property may of eourse by a

prper instrument be sold by the settlor or

99435—30——2

8

the income therefrom transferred before its

acerual to a third person, such acts being

implied assertions of his unqualified right to

repossession. In the present case taxpayer

expressly reserved unfettered power to sell

and deal with the securities in the corpus of

the trust ; this would in any event have been

possible by the exercise of his power of revo-

cation. Income arising from property so

completely subject to the settlor’s needs and

wishes may properly be taxed to him in order

to effectuate the purposes of the surtax pro-

visions. The pleader’s conclusion that the

creation of the trust herein involved was

“*bona fide’’ may be disregarded, for in so far

as it means anything it means that the set-

tlor had im view other purposes than re-

duction of his tax liability ; this does not alter

the fact that the purpose of the surtax pro-

visions are set at. naught by the revocable

trust.

As the Circuit Court of Appeals expressed it

(R. 32):

A settlor of a revocable trust has a suffi-

cient interest in the income of the trust and a

relation thereto to justify the claim of a

necessity for a fair and proper tax imposi-

tion requiring the settlor to pay. He, at all

times, has the power to make the income de-

rived from the trust, hisown. To defeat tax

evasion, at least the higher surtax, Congress,

by this statute, has determined that a grantor

who may change or modify the gift, even to

putting an end to its continuance, must pay.

9

In this ease it is not so important to determine

what interest the beneficiary took under the trust;

the real inquiry is, what interest did the petitioner

retain? When it is considered that he reserved to

himself the sole power of revocation, and the right

at any time to revest in himself the corpus, and

that even without revocation he could in his discre-

tion elect to take the income, it is clear that the

property which the petitioner conveyed to the trust

is still his if he but reach out his hand and take it.

There is no authority in this Court which denies

the power of Congress to tax the income of such a

trust to the grantor thereof, and such decisions as

there are on analogous questions tend strongly to

sustain such power.

Petitioner’s argument, based upon certain lan-

guage in the opinion of this Court in Hisner v. Ma-

comber, 252 U. S. 189, 206-207, can not be answered

better than in the words of the District Court.

(R. 24): s

The Macomber case, however, is not au-

thority for the proposition which plaintiff

asserts. There Mr. Justice Pitney, says:

‘‘Here we have the essential matter: Net

a gain accruing to capital, not a growth or

increment 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 em-

ployed, 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.”

10

But the context and the italicization show

that the emphasis was not at ali upon that

part of the sentence whieh would be rel-

evant here, The decision merely holds that

since the power given by the Sixteenth

Amendment was to tax income, only income

could be taxed; there was no occasion to de-

cide and there was no decision as against

whom the income could be taxed. Regard-

less of whether or not the Solicitor of the

Treasury Department was properly influ-

enced by Eisner v. Macomber in interpret-

ing a doubtful statute, it is not a preeedent

on the present question of constitutionality.

Eisner v. Macomber, supra, is clearly not in

point, and other decisions of this Court are more

closely analogous to the present question.

This Court has already held that the reservation -

of a power of revocation makes a transfer incom-

plete. Chase Nat. Bank v. United States, 278 U. 8.

327; Reinecke v. Northern Trust Co., 278 U. 8. 339.

In Chase Nat. Bank v. United States, supra, it was

said (p. 336) :

Such an outstanding power residing ex-

clusiyely in a donor to recall a gift after it is

made is a limitation on the gift which makes

it incomplete as to the donor as well as to the

donee * «# *

Applying that prineiple, it will be seen that up

to the very moment when each individual payment

of income was made to petitioner’s wife the gift to

her was incomplete; it was not beyond the control

li

of petitioner until she actually received it. Accord-

ingly, putting aside the form of the transaction,

each separate payment to petitioner’s wife may be

treated as a separate gift from him. If instead of

allowing his wife to take the income petitioner had

exercised his absolute right to take it himself, he

would have been obliged to aeeount for it as a part

of his gross ineome, even though he immediately

made a gift of the identical funds to his wife. We

submit that petitioner could not, contrary to the ex-

press will of Congress, by first making an uncom-

pleted gift of the ineome, deprive the Government

of the right to tax it to him. We think that in sub-

stance it is not inconsistent with the rules of prop-

erty to disregard for tax purposes the incomplete

gift which has gone before and treat this transac-

tion just as though the property still belonged to the

petitioner and he had made the completed gift of the

income to his wife after first receiving it himself.

In Chase Nat. Bank v. United States, supra, this

Court disregarded the ‘‘vested’’ interest of the

beneficiaries in certain insurance policies and held

(p. 335) that the reserved interest of the decedent

was ‘‘by no means the least substantial of the legal

ineidents of ownership’ and regarded the transac- .

tion for estate tax purposes as a transfer at death of

the whole corpus. In Reineeke v. Northern Trust

Co., supra, the estate tax which was sustained was

laid upon the whole corpus of the two revocable

trusts, disregarding the fact that an interest had

12

been theretofore created through an uncompleted

gift. This Court will not hesitate to sweep aside:

technical distinctions when they are raised to de-

feat the effective operation of a revenue measure.

Thus, in Chase Nat. Bank v. United States, supra,

' it was held that the nonexercise of the power to

change the beneficiary of a life-insurance policy

was no less a transfer than would have been a trans-

fer effected in other ways.

Also in Taft v. Bowers, 278 U. 8. 470, it was

held that Congress had power to require that for

purposes of taxation the donee of a gift should

accept the position of the donor in respect of the

thing received, and the donee in that case was held

subject to tax upc the sale of the property meas-

ured by the whole gain over the original cost to the

donor.

Again, in United States v. Robbins, 269 U. 8. 315,

it was held that Congress had power to tax the hus-

band upon the whole of the income from community

property, in view of his power of disposition there-

of, even if it were assumed that the wife also had

an interest therein (p. 327).

The power of Congress to require a succeeding

owner, in respect of taxation, to assume the place

of his predecessor was pointed out in United States

v. Phellis, 257 U. 8. 156, 172.

In Bullen v. Wisconsin, 240 U. 8. 625, 631, it was

held that the Supreme Court of Wisconsin was

“* fully justified’ in treating Bullen’s general

13

power of disposition as equivalent to a fee for the

purposes of the taxing statute and that there was

no constitutional objection to its doing so. Peti-

tioner’s absolute and unconditional right to modify,

alter or revoke the trust is treated, for tax pur-

poses, as a general power to appoint (Bullenv. Wis-

consin, supra; Farmers’ Loan & Trust Co. v. Bow-

ers (C. C. A. 2d), 29 F. (2d) 14, 18) and Congress

was fully justified in treating his rights as equiva-

lent to a fee and holding him accountable for the

income which it produced.

In cases such as this, where the question is as to

the power of Congress, local rules with respect to

the subject matter of the tax are not of great im-

portance. But here the New York law tends to

support the view that the creation of a revocable

trust makes no substantial change in the position of

the grantor. The effect of a power of revocation

under the local law applicable here was stated by

the Circuit Court of Appeals as follows (R. 32) :

By Section 145 of the New York Real

Property Law (where this indenture was

made) when the grantor in the conveyance

reserves to himself for his own benefit, a

power of revocation, he is deemed the ab-

solute owner of the estate conveyed sc far

as the rights of creditors and purchasers are

concerned, illustrating how little the bene-

ficiary obtains apart from the income,

4

Seetion 145 of the Real Property Law of New

York is a part of the Consolidated Laws effective

February 17,1909. It reads as follows:

Where the grantor in a conveyance re-

serves to himself for his own benefit, an

absolute power of revocation, he is to be still

deemed the absolute owner of the estate con-

veyed, so far as the rights of creditors and

purchasers are concerned.

Both the District Court (R. 25) and the Circuit

Court of Appeals (R. 32) regarded this statute as

applying to personal property. With respect to

the doubt expressed in petitioner’s brief (p. 10)

as to whether the earlier New York cases, which

hold that it does relate to personalty (Hutton v.

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

N. Y. 92, 97; Matter of Moehring, 154 N. Y. 423,

427), are applicable since the adoption of the Con-

solidated Laws in 1909, we call attention to the

opinion of Surrogate Fowler in 1912, in the case of

In re Mayo’s Will, 136 N. Y. S. 1066, 1068, where

it was said:

Powers connected with personal property

are now for all practical purposes coexten-

sive with powers in the law of real property

of this state, and they are governed by the

same rules. (Citing cases.)

In any case to which the statute is applicable the

corpus of a trust estate created by revocable inden-

ture is manifestly still valuable to the grantor in

that it forms the basis of credit. But, in any event,

15

the statute does no more than express what is im-

plicit in the idea of a complete power of revocation.

Enjoying that right the grantor may use it for the

benefit of his creditors, or may take the property

and resell it, or may continue the trust to enjoy

the income himself. :

Of course the money was income and it was in-

come from property which in a very real sense still

belonged to the petitioner. There are many de-

cisions to the effect that attempts to divide income

frem property before the tax attaches are ineffec-

tive for income tax purposes. See Bing v. Bow-

ers (S. D.N. Y.), 22 F. (2d) 450; Willard C. Hill v.

Commissioner, and William H. Plumer v. Commis-

sioner (C. C. A. 1st), decided January 23, 1930, not

yet reported; Walter S. Benedict v. Warren G.

Price (E. D. N. Y.), decided November 26, 1929,

not yet reported; Rosenwald v. Commissioner (C.

C. A. 7th), 33 F. (2d) 423, certiorari denied, 280 U.

S.77A. In Mitchel v. Bowers (C. C. A. 2d), 15 F.

(2d) 287, certiorari denied, 273 U. S. 759, the

right to terminate a contract between a member of

a partnership and his wife providing for the divi-

sion of his share of partnership profits, so that the

absolute disposition of the profits was always within

the husband’s power, was one of the grounds on

which the court required him to account for his

entire share. The Board of Tax Appeals has con-

sistently applied the principle that where the tax-

payer retains his interest in the property or fund

16

from which the income was derived, the income is

taxable to him and not to the person who eventually

receives the money. J. V. Leydig v. Commissioner,

15 B. T. A. 124, 132.

The presumption, of course, is in favor of the

validity of an Act of Congress. This presumption,

repeatedly indulged, is particularly strong when ©

considering a Revenue Act. (Nicol v. Ames, 173

U.S. 509.)

Moreover, this statute has a special justification.

It is clearly shown by the legislative history “that

the Act was designed to prevent avoidance of the

surtaxes. See p. 21, House Report 179 on the

Revenue Bill of 1924; p. 25, Senate Report 398 on

the Internal Revenue Bill of 1924; 68th Congress,

ist Session, Serial Nos. 8226 and 8220. From the

foundation of the Government taxes have been im-

posed in proportion to ability to bear the burden

(Knowlton v. Moore, 178 U. 8. 41, 98), and the

principle of imposing taxes at higher rates on

larger incomes has been sustained. (Brushaber v.

Union Pac. R. R., 240 U. 8. 1; Burk-Waggoner

Assn. Vv. Hopkins, 269 U. 8. 110.) Therefore, a

statute designed to protect the legislative policy of

surtaxes should be treated no differently from a

statute designed to prevent the complete avoidance

of a tax.

We submit that Congress is not impotent to look

through the form of a trust such as is here involved

and require petitioner to treat the income there-

17

from as his own. In this case, as in the usual case

of this sort, the beneficiary of the trust was one

whom the grantor was bound to support and for

whose benefit he would naturally have expended

income in any event. We think that Congress

might properly assume that trusts of this sort are

commonly in lieu of other provisions for the sup-

port of dependents and that in reality the trust

does not operate to decrease the grantor’s income.

A brief amicus curiae is on file which discusses the

ease of a revocable charitable trust. In such a case,

it is true, the income is not received by some person

for whom petitioner would normally make like pro-

vision from the same income if he took it himself.

It will be time enough to consider the statute as

applied to a charitable trust when such a case is pre-

sented (United States v. Sullivan, 274 U. 8. 259,

264; Yazoo & Mississippi Valley R. R. v. Jackson

Vinegar Co., 226 U.S. 217, 219; Old Colony Tr. Co.

v. Comm’r. Int. Rev., 279 U. 8. 716, 731), but it

is submitted that no distinction as to the tax-

ability to the grantor of the income of a revocable

trust may validly be based on the character of the

recipient of the income. It is the grantor’s com-

plete control and power to dispose for his own bene-

fit of the corpus and income of the trust which is

the basis of the tax. But in the case of a revocable

charitable trust the grantor would be deemed to

have given the income to the charity and such pay-

ments would be deductible from his gross income

up to the permitted 15 per cent.

18

It is settled doctrine that Congress may require

that property transferred to avoid a tax may be

treated as part of the estate for the purposes of

the estate tax (Nichols v. Coolidge, 274 U. S. 531,

542), and under that principle even a completed

transfer may be disregarded. Accordingly, we

think it is not open to substantial doubt that Con-

gress may disregard a gift which was incomplete.

| At the moment when the beneficiary received the

~ income, the gift was completed, and under the prin-

ciple of constructive receipt which is recognized

by a long line of decisions recently collected and

approved by this Court in Old Colony Tr. Co. v.

Comm’r. Int. Rev., 279 U. 8. 716, the income from

property over which petitioner had at all times

complete control may properly be treated as having

been received by him and then paid over to the

beneficiary.

We think it is clear from the foregoing that

whatever other limitations may be imposed upon

the taxing power of Congress, it has ample author-

ity to require that an owner who has made but an

uncompleted, because wholly revocable, gift of his

property shall account for the income which it

produces.

19

Il

THE DECISIONS OF THIS COURT FORECLOSE THE CONTEN-

TION THAT THE APPLICATION OF THE STATUTE TO IN-

COME FROM A TRUST ESTABLISHED PRIOR TO THE

ENACTMENT OF THE REVENUE ACT OF 1924 RENDERS IT

INVALID

Petitioner’s argument based on the assumed

retroactivity of the statute is wholly without merit.

It is difficult to ascertain from the brief (pp. 25-26)

whether petitioner’s complaint is that it applies to

a trust created prior to the passage of the Revenue

Act of 1924, or that it applies to income derived

prior to that date. Either objection is inad-

missible.

In the first place, on the facts of this case there

is, properly speaking, no question of retroactivity

involved. As the Circuit Court of Appeals said

(R. 33) :

The statute deals with the present condi-

tion with revocability residing in the settlor.

Each payment of income which takes place

after the passage of the statute is subject

to its terms. Therefore, after the effective

date of the taxing statute, this income was

subject to taxation under its requirements.

The taxing statute is not retroactive.

(Reinecke vs. Northern Trust Co., supra;

Chase Natl. Bank vs. United States, supra;

Saltonstall vs. Saltonstall, 276 U.S. 260.)

Even if it were assumed that the application of

the Act to a trust created in 1922 involved some

element of retroactivity, it would by no means in-

validate the statute.

20

The only decisions of this Court holding a taxing

statute invalid because of retroactivity are Nichols

v. Coolidge, 274 U. S. 531; Blodgett v. Holden, 275

U. 8. 142 and Untermyer v. Anderson, 276 U. 8.

440. In none of these cases was the objection to re-

troactivity as such, but it was based on the fact that

the statute attempted to tax a past transaction

which was made at a time when no tax thereon was

foreseeable and which at the time that the taxing

gtatute was enacted the grantor was powerless to

undo. The imposition of an excise on such a trans-

action was held to be an arbitrary exaction, not

within the taxing power. No such situation is pre-

sented here. The principles enunciated in those

cases have no application to a transaction which

is completely revocable by the grantor. He can

undo the transaction at his will and make any

new disposition of the property which the law per-

mits, with full knowledge of the tax consequence.

If it was really his desire to make provision for

his wife, he may revoke the trust and create a

new one without a power of revocation, and thus

avoid from that time forward all liability for the

tax upon the income thereof.

The only remaining objection is that certain in-

stalments of income paid during the taxable year

1924, prior to the passage of the Revenue Act of

1924, may have become taxable to him without his

foreseeing that consequence. As to such a sugges-

tion the recent decision of this Court in Cooper v.

United States, No. 93, October Term, 1929, decided

21

February 24, 1930, should be a complete answer.

In that case the gift to the donee and the sale by the

donee which resulted in the tax both were consum-

mated before the enactment of the Revenue Act of

1921, under which the tax was collected. This

Court held there was nothing unusual, arbitrary or

capricious in the provision of the statute, and said:

That the questioned provision cannot be

declared in conflict with the Federal Con-

stitution merely because it requires gains

from prior but recent transactions to be

treated as part of the taxpayer’s gross in-

come has not been open to serious doubt since

Brushaber v. Union Pacific R. R., 240 U.S.

1, and Lynch v. Hornby, 247 U. 8. 339.

In the instant case the income which was the oc-

casion for the tax was received during the year 1924,

the taxable period provided by Section 200 of the

statute. The Act was passed June 2, 1924, well

within the taxable period, and it dealt with current

events. Such limited retroactivity has been uni-

formly recognized as valid.

All of the Federal Income Tax Acts have been re-

troactive in the sense that they applied to income

for a period which began prior to the passage of

the several Acts. We submit that in so far as in-

come taxes are concerned the practice in the past

forecloses the contention that retroactivity brings

an Act of Congress within the due process clause

of the Fifth Amendment. This should be particu-

larly true where, as here, the statute has a special

justification in the necessity for preventing tax

avoidance.

The measure of the tax is income received dur-

ing 1924, and the fact that the trust was estab-

lished in a prior year is of no more consequence

than it was in Reinecke v. Northern Trust Co.,

supra, or in Saltonstall v. Saltonstall, 276 U. 8. 260.

The receipt of income, the event which gave rise to

the tax, occurred in 1924, and the validity of the

application of the 1924 Act to such income is settled

by the Cooper case, supra.

CONCLUSION

In view of the foregoing, it is respectfully sub-

mitted that the judgment of the court below is

correct and should be affirmed.

v CuHartes E. Huaues, Jr.,

Solicitor General.

Y G. A. Younaguist,

Assistant Attorney General.

’ Sewa. Key,

v J. Louis Monarcn,

_ Special Assistants to the Attorney General.

VC. M. Cuaresr,

General Counsel,

Bureau of Internal Revenue,

Freperick W. Dewakr,

Special Attorney,

Bureau of Internal Revenue,

Of Counsel.

Marcu, 1930.

U. S. GOVERNMENT PRINTING OFFICE: 1980