Respondents Brief — Douglas v. Willcuts

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INDEX

0 8 * Page

ß xx *

.. ö 1

. — — — 2

Statutes and regulations involved. — baiibeninlindlaeaddadd ies 3

SESSA aR ean R. er eee See ee aC Se 2

r cop ceseneeegunsummnteianbeons 7

Argument:

I. The income derived from the trust securities during

the taxable years was used to satisfy the petitioner’s

legal obligation for support and maintenance of his

divorced wife, and accordingly constituted income of

the petitioner taxable as sun 8

IL. Tho tent providens —— 46 oct

preclude the taxation of this income to the petitioner. 20

— ͤ . 26

. . . ˙ 27

: CITATIONS ‘

Cases: .

Adams v. Commissioner, 18 B. T. A. 31ũ1ĩI1. 12

Bensel v. Hall, 177 Mina. 1788. 9

Blumenthal v. Commissioner, 76 F. (2d) 507, No. 82, October

Death, SEED. ccccaccceseceseeboucedesccoccoossesescs 24

Brooks v. Commissioner, 31 B. T. A. 70bo. 17

Burnet v. Wells,-289 U. 8. 67 %u „ 14, 18. 16, 19

Burnet v. Whitehouse, 283 U. 8. 1.

Carbon Steel Co. v. Lewellyn, 251 U. 8. 50. 23

Clark v. Commissioner, 31 B. T. A. 10622 18

Commissioner v. Plant, 76 F. (2d) . 20

Corliss v. Bowers, 281 U. 8. 37. 14, 19, 21

Corey v. Commissioner (C. C. A. 3d), decided September 25,

1935, not yet reported... .............-.-.-.--- a

Danforth v. Commissioner, 18 B. T. A. 1221 12

Dickey v. Burnet, 56 F. (2d) 917, certiorari denied, 287 U. 8.

— . ˖⏑— 14, 21

DuPont v. Commissioner, 289 U. 8. 685 eee 16, 23

Briékson v. Erickson, 181 Minn. 41. 4

‘Gould v. Gould, 245 U. 8. 161. — 24

Grosvenor v. Commissioner, 31 B. T. A. 7 18

Haskell v. Haskell, 119 Minn. 4. .

21344—25-—1 . 4

. Cases—Continued. , Page

Helvering v. Butterworth, 290 U. S. 36 7, 21, 23, 25, 26

Helvering v. Pardee, 290 U. S. 3633. 25

Helvering v. Stockholms &c. Bank, 293 U. S. 84. 13

Hyde v. Commissioner, 31 B. T. A. 25. ae 17

‘Irwin v. Gavit, 268 U. S. 161. — se

Joyce v. Commissioner, 3 B. T. A. 39333... 22

Lansill v. Burnet, 58 F. (2d) 512 a 12

Longyear v. Commissioner, 28 B. T. A. 1086, affirmed, 77 F.

% „eee 18, 19, 22

Lynch v. Commissioner, 23 B. 3300 17

McCauley v. Commissioner, 44 F. (2d) 9199. 2 14, 21

O Donnell v. Commissioner, 64 F. (2d) 634, certiorari denied,

, è⅛½²ÄrAu7 O . 14, 21

Old Colony Tr. Ca. v. Commissioner, 279 U. 8. 716 1 12

Randall v. Randall, 181 Minn. 1. 9

Savage v. Commissioner, 31 B. T. A. 633. 18

Schweitzer v. Commissioner, 30 B. T. A. 155, reversed, 75 F.

(2d) 702, Nos. 69 and 70, October Term, 19355. 17, 25

Sessions v. Sessions, 178 Minn. 7ũ1ʒ . 9

Spencer v. Commissioner, 20 B. T. A. 5838. 17, 24

Steele v. Drummond, 275 U. 8. 19999... 11

Stokes v. Commissioner, 28 B. T. A. 1243, affirmed (C. C. .

3d), July 31, 1935, reported in C. C. H. (1935), Vol.

Statutes:

% ⁰ „„. 17

Turner v. Commissioner, 28 B. T. A. 91, affirmed, 71 F.

re è⅛ö²tdd . eee 18, 19

Tulile v. Commissioner, 31 B. T. A. 782 17

United States v. Boston & M. R. Co., 279 U. 8. 732 12

United States v. Henry Prentiss & Co., 288 U. 8. 73. 11

United States v. Mahoning Coal R. R. Co., 51 F. (2d) 208,

certiorari denied, 285 U. 8. 559....................... 12

Van Den Bosch v. Commissioner, 26 B. T. A. 679 81 22

Warren v. Warren, 116 Minn. 4888. 9

Welch v. Commissioner, 12 B. T. A. 800. 18

Yeiser v. Commissioner, B. T. A. unreported, affirmed, 75°

EEE a 18

Yuengling v. Commissioner, an.. eee 12

Mason's Minnesota Statutes (1927), Vol. 2:

CC , , r 27

r eee 27

r esse 28

Revenue Act of 1924, c. 234, 43 Stat. 253:

Sec. 219 (U. 8. C., Title 26, Sec. 960) ............... 21

Revenue Act of 1926, c. 27, 44 Stat. 9:

Sec. 213 (U. 8. C. App., Title 26; Sec. 984) 28

Sec. 215 (U. 8. C. App., Title 26, Sec. 956) 29

29

Sec. 219 (U. 8. C. App., Title 26, Sec. 960)

111

Statutes—Continued. é Page

Revenue Act of 1928, c. 852, 45 Stat. 791:

ee — ͤ 31

1 C 31

c 31

ccc 31

1 — ͤ( Lae 1 31

Miscellaneous:

G. C. M. 13308, XIII-2 Cumulative Bulletin 184. 17

I. T. 2628, XI-1 Cumulative Bulletin 344 93

O. D. 399, 2 Cumulative Bulletin 150. 17

O. D. 1092, 5 Cumulative Bulletin 1990o0o 17

Treasury Regulations: ,

1 ͤ e A‚— 22

Regulations 62, Art. 291. . ................-.- hoows 22

Regulations 65, Art. 291-...............---.----.- ‘ 22

Regulations 69, Art. 2111 1 22, 31

OS 31

I. ˙w—— 22

eee ee 22

* Supreme Gour of the Gnited sins

C OCTOBER TERM, 1935

No. 1

Epwarp B. DouGLas, PETITIONER

17 v. :

Levi M. WII urs, as CoLLector oF INTERNAL RE -

enue for the District of Minnesota

0 WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE EIGHTH CIRCUIT .

No written opinion was rendered by the District

Court. Its findings of fact and conclusions of law

appear in the record at pages 56 to 64. The opin-

ion of the Cireuit Court of Appeals (R. 82-87) is

reported in 73 F. (2d) 130.

JURISDICTION ~

The judgment of the Circuit Court of Appeals

was entered September 13, 1934. (R. 87-88.) A

Q)

2

petition for rehearing was denied October 22, 1934.

(R. 88.) Petition for a writ of certiorari was filed

November 26, 1934, and was granted April 8, 1935.

(R. 89-90.) The jurisdiction of this Court is in-

voked under Section 240 (a) of the Judicial Code,

as amended by the Act of February 13, 1925.

QUESTION PRESENTED

The petitioner in 1923 created a trust by the

terms of which the-trustee was to pay a specified

income for life to the petitioner’s wife, about to be

divorced from him, in lieu of all alimony and any

other rights in his estate, with the provision that

if the income should be insufficient to meet the

payments as they fell due, the trustee should re-

quest the petitioner to make good the deficiency,

and if the petitioner should fail to do so, that the

deficiency should be made up from the principal

of the trust fund, and that in case any securities

should become impaired or of doubtful value, the

petitioner at the request of the trustee should sub-

stitute therefor an equal amount of income-produe-

ing securities satisfactory to the trustee. The trust

further provided that in event the net income ex-

ceeded the required payments, and if the principal

was not then impaired, the excess income should

be paid to the petitioner, and that upon the wife's

death the trust should terminate. The state court

in granting the divorce decree specified that the

wife should have the provision made-in the trust

3

in lieu of all other alimony or interest in the prop-

erty or estate of the petitioner. N

The question presented is whether the portion of

the income from the trust paid to the petitioner’s

divorced wife in 1927 and 1928 was taxable to the

petitioner for those years. ,

STATUTES AND REGULATIONS ———

These will be found i in the Appendix to this brief,

infra, pp. 27-31.

STATEMENT

Te petitioner brought this suit in the District

Court for the District gf Minnesota for the recov-

ery of additional income taxes paid for the years

1927 and 1928. (R.1-7.) Jury trial was waived

in writing (R. 56), and the court made findings of

fact and conclusions of law (R. 57-64). The facts

so found may be summarized as follows:

On September 12, 1923, the petitioner, his wife,

Ida M. Douglas, and Minneapolis Trust Company,

as trustee, executed an agreement, a copy of which

is attached to the petitioner’s complaint filed in the

District Court. (R.7-12.) It provided that peti-

tioner thereby assigned to the trustee certain se-

eurities listed in an attached schedule of a par a

estimated value of $300,000, and that he would f

ther assign and deliver on November 6, 1927, such

portion of the. properties as he would then receive

from the estate of his father under the latter's will

as $120,000 bore to the entire property then re-

ceived by him under the will, the petitioner agree-

4

ing at said time to transfer to the said trustee-se-

curities of the par value of $120,000. (R. 8.) e

trustee was to pay to Ida M. Douglas from

principal of the trust estate the sum of $30,

for the purpose of satisfying certain accrued bills

and attorney’s fees, and from the income the fol-

‘ lowing amounts in quarterly installments: (a) the

sum of $15,000 per annum, beginning as of Sep-

tember 1, 1923, up to and until November 6, 1927;

(b) the sum of $21,000 per annum, beginning No-

vember 6, 1927, and continuing during her lifetime.

(R. 8-9.)

The agreement further provided that in case the

net income was not sufficient at any time to make

these payments, then the trustee should request

such deficiency to be immediately made by the

petitioner, and if the petitioner should fall to do so

before the’ next installment became payable, the

trustee should make up the deficiency from the

principal of the trust fund; that in case the net

income exceeded the required payments, and if the

principal was not impaired, the trustee should pay

the excess to the petitioner, with the right, how-

ever, to reserve from time to time a reasonable

amount of income to fairly insure the prompt pay-

ment of future installments to Ida M. Douglas;

that if the principal should at any time be impaired,

and if the petitioner should not make good such

impairment, all income in excess of the amount re-

quired for annual payments and charges should be

added to and become a part of the principal until

the aggregate should reach the principal amount

specified ; and that in case any securities in the fund

should become impaired or of doubtful value, or not

likely in the opinion of the trustee to produce a fair

proportionate amount of the necessary income,

then the petitioner, at the request of the trustee,

should substitute refor an equal amount of

| income-producing securities satisfactory to the

trustee (R. 9-10).

It was expressly agreed that the provisions made

for Ida M. Douglas in the agreement were in lieu

of and in full settlement of alimony, and of any

and all dower rights or statutory interests in the

petitioner’s estate, and in lieu of any and all claims

for separate maintenance and allowance for her

support. (R. 10.) It was provided that upon the

death of Ida M. Douglas, the trustee should trans-

fer all securities and money held by it to the peti-

tioner, and the trust should then terminate.

(R. 12.)

On September. 12, 1923, the —— conveyed

to the trustee the securities described in he sched-

ule attached to the agreement; and on Nayember

6, 1927, certain additional securities pursupnt to

the agreement. (R. 58, 15, 17.)

On September 15, 1923, the Distriet Court of

Beltrami County, Minnesota, entered a decree ab-

solutely divorcing the petitioner and Ida M. Doug-

las, and further adjudging that the petitioner

provide the trust fund as set out in the agreement

between the parties on file with the trustee, and

2134435 — 2

6

that Ida M. Douglas have the provision therein

made in lieu of all other alimony”’ or interest in

the property or estate of the petitioner. (R.

62-63, 55.)

The net income of the trust for the calendar year

1927 was $12,610.52, and for the calendar year 1928,

$17,617.39. (R. 58-59.) The amounts were not

included by the petitioner in the gross income on

his returns filed for those years. (R. 59-60.)

Upon audit of the returns the Commissioner of

Internal Revenue included the amounts in income

and assessed additional taxes for those years,

which, together with interest thereon, were paid by

the petitioner under protest. (R. 60-63.) The

petitioner duly filed claims for refund, and upon

failure of the Commissioner to allow the same this

suit was instituted.

The District Court concluded as a matter of Jaw

that in the taxahle years involved the petitioner did

not receive or enjoy the income of the trust or eco-

nomie benefits of the property transferred (R. 63)

and entered judgment in his favor (R. 64). The

Circuit Court of Appeals, reversing the District

Court, held that the amounts involved were taxable

as income to the petitioner because they dir

benefited him by discharging a legal obligation he

was bound to perform.

The taxability for 1928 of the income from another trust

created by the petitioner on March 16, 1928 (R. 59) is not

now involved.

7 *

SUMMARY OF ARGUMENT

The income from the trust operated to discharge

the petitioner of a legal obligation. It was income

to him within the meaning of the Sixteenth Amend-

ment; it was also income to him within the statu- °

tory definition of gross income,

The petitioner is therefore accountable for such

income unless the existence of the trust provisions

of the statute precludes the operation of the gross

income provision. The trust provisions, however,

are silent as to such trusts, and if they do prevent

the operation of the gross income provision, it is

by implication only. It would seem clear,that they

have no such effect for two reasons: First, the

courts have construed the trust provisions as non-

exclusive; second, to construe the trust provisions

as exclusive would furnish the means for cireum-

venting the prior und long-existing statutory ꝓro-

hibition against deductions on account of personal

expenses, and thus violate the sound rule of con-

struction that where avoidance is made easy under

one interpretation another is to be preferred.

Nor does the decision in Helvering v. Butter-

worth, 290 U. S. 365, require a different result.

That case held that Congress evidenced an inten-

tion not to permit any trust income to escape taxa-

tion completely. There the sole question was as

between trustee and beneficiary and the continuing

obligation of another taxpayer was not involved.

This Court held that since the trustee was not tax-

able under the statute, the beneficiary was subject

eee.

te the tax. It did not hold that in every type of

trust the income must be taxed only to the fiduciary

or the named beneficiary.

ARGUMENT

I

THE INCOME DERIVED FROM THE TRUST SECURITIES

DURING THE TAXABLE YEARS WAS USED TO SATISFY

THE PETITIONER’S LEGAL OBLIGATION FOR SUPPORT

AND MAINTENANCE ‘OF HIS DIVORCED WIFE, AND

ACCORDINGLY CONSTITUTED INCOME OF THE PETI-

TIONER TAXABLE AS SUCH

We submit it-is plain that the trust was estab-

lished to provide annual payments for the wife of

the petitioner in satisfaction of his legal duty or

obligation for her support and maintenance. The

instrument provided for fixed payments to the peti-

tioner’s wife, which she agreed to accept in lieu of

and in full settlement of alimony, and of any statu-

tory interests in his estate, and in lieu of any sepa-

rate maintenance and allowance for her support.

The divorce decree, entered three days thereafter,

directed the petitioner to provide the trust fund

agreed upon, and that the wife should have the pro-

vision therein made in lieu of all other alimony or

interest in the petitioner’s estate (R. 55). Thus,

although the terms were agreed upon before the

divorce decree, that decree specifically provided for

the payments thereafter made and established a_

legal obligation of the petitioner to the extent pro-

vided for in the trust. Cf. Mason’s Minnesota

Statutes, Sections 8601 and 8602, infra, p. 27.

The power of the court to make such a decree was

not only provided by statute but was also inherent -

in its equity jurisdiction. Bensel v. Hall, 177 Minn.

178. This was not a contractual obligation, but was

a legal one, founded upon the natural duty of the

petitioner to support his wife after the termina-

tion of the marriage as well as during its existence,

and translated into terms of money by the court

decree. Bensel v. Hall, supra; Sessions v. Sessions,

178 Minn. 75. The court may modify or increase

the award despite the fact that its original decree

was made pursuant to stipulation of the parties.

Warren v. Warren, 116 Minn. 458; Randall v. Ran-

dall, 181 Minn. 18; Erickson v. Erickson, 181 Minn.

421; Haskell v. Haskell, 119 Minn. 484. And the.

court is not controlled by the stipulation, but may

adopt or reject it as seems consistent and proper.

Warren v. Warren, supra. |

The income paid durimg the years involved was

thus used to meet a personal and legal obligation

of the petitioner. Petitioner's liability was not

met by the mere creation of the trust itself. As we

have noted heretofore, it was subject to change by

the court. Moreover, his wife did not have to look

solely to the income of the trust for the payments

of the specified amounts. If the income should be

insufficient to meet the required payments the trus-

tee could call upon the petitioner, and if he failed

10

to satisfy the deficiency, then it was to be met by

application of a part of the corpus (R. 9).

Furthermore, if the principal became impaired,

or in the judgment of the trustee was insufficient,

the petitioner was bound to substitute other securi-

ties satisfactory to the trustee (R. 10). Thus, we

submit, there was a continuing obligation upon the

petitioner, adjudged by the court, to furnish suffi-

cient funds to meet the specified annual ‘payments,

and the court below correctly determined that, to

the extent that the income from the trust was actu-

ally paid to the divorced wife, it operated only pro

tanto to discharge a continuing personal obligation

of the creator.

Petitioner argues (Br. 14-15) that there was in

substance merely an approval by the divorce court

of an earlier division of property between the

parties. This we contend is riot an accurate de-

scription of the court’s action. Under the statute

. (Mason’s Minnesota Statutes (1927), Sec. 8602,

mfra, p. 27), the court may order to the wife for

her support such part of the personal and real

estate of the husband and such alimony out of his

estate, earnings and income as it may deem just

and reasonable, not exceeding in present value

one-third of his personal estate, earnings and in-

come, and one-third in value of his real estate.

Apparently proceeding under the authority of this

section the court awarded to the petitioner’s wife

the amount agreed upon, consisting of a yearly

sum to continue during her life and ceasing upon |

11

her death. The sum payable during each of the

years involved was less than one-third of the pe-

titioner’s total net income, including the income

from the trust. (R. 58-59, 60.)

This constituted, we contend, an annual income

provided for the wife's support, and in no true

sense a division of property. She received uo title

to the corpus of the trust, and the title held by the

trustee was to revest in the petitioner or his heirs

or assigns upon her death. No property was

divided between the parties, the sole effect being

to establish a present fund from which the pay-

ments were to be made in the first instance. What-

ever its characterization, it represented a legal obli-

gation of the petitioner for his wife's support,

decreed by the court and subject to change, and met

thereafter by payments from the income of the

trust.’

In any event, the petitioner is precluded at this stage of

the proceedings from contending that the income was not

used to satisfy a legal obligation. The petition for certiorari

in this case was originally denied and the subsequent grant-

ing thereof would seem to have been based solely upon the

asserted conflict between this case and Schweitzer v. Com-

missioner, 75 F. (2d) 702 (C. C. A. 7th), decided subsequent

to the original denial of certiorari here. The income in the

Schweitzer case was used to discharge a legal obligation of

the grantor and the alleged conflict between the two cases

must necessarily presuppose the existence of a similar obli-

gation here which was likewise discharged by the income

from the trust. We believe, therefore, that it should be

assumed, for the purpose of litigation in this Court, that

the court below correctly disposed of this subsidiary issue.

Cf. United States v. Henry Prentiss d Co., 288 U. S. 73, 88;

Steele v. Drummond, 275 U. S. 199, 208.

*

12

We submit, accordingly, that the income in ques-

tion was so obviously devoted and used for the peti-

tioner’s own benefit as to constitute it his income

taxable as such.

The principle, that the payment of one’s obliga-

tions by another by the former’s direction consti-

tutes income to the person whose obligation is dis-

charged, is exemplified by the decisions of this

Court in Old Colony Tr. Co. v. Commissioner, 279

U. S. 716, and United States v. Boston d M. R. Co.,

279 U. S. 732. In the former case the amount of

an employee’s income taxes paid by his employer

was held to be taxable income to the employee, and

in the latter case it was held that a lessor received.

income where his income taxes were paid by the

lessee. This principle was further extended in

United States v. Mahoning Coal R. R. Co., 51 F.

(2d) 208 (C. C. A. 6th), certiorari denied, 285 U. S.

559, to a payment of income taxes of a lessor by

a lessee, even though the lessee under no obli-

gation to pay the taxes. Again, it has been de-

eided that an employee realized income where an

employer paid premiums on a policy of insurance

on the life of the employee even though the em-

ployee’s wife was the beneficiary. Yuengling v.

commissioner, 69 F. (2d) 971 (C. C. A. 3d);

Adams v. Commissioner, 18 B. T. A. 381; Dan-

forth v. Commissioner, 18 B. T. A. 1221. Cf. Lan-

sill v. Burnet, 58 F. (2d) 512 (App. D. C.)

We subrnit there is no real difference in principle

between those situations and the case here. The

13

payments made to satisfy the petitioner’s legal obli-

gation were equivalent to receipt by him just as

much as the payments of the taxpayers’ income

taxes were constructively received in the cases cited-

above. In each instance there was a substantial

and real benefit to the taxpayer by reason of the

satisfaction of his obligation. If the petitioner

here had directed his bank to pay over income as it

accrued from deposits for the support of his wife,

we believe there can be no doubt that the income so |

accruing and paid would constitute taxable income

to him in the first instance. The fact that he ac-

complished the same purpose and met his obligation

by payments from a fund placed in trust should

make no real difference in the incidence of the tax.

The trust was simply a means by which he met his

legal obligation to his wife, and the trustee was in

reality acting as his agent for this purpose.

The gross income provisions of Section 213 of the

Revenue Act of 1926 (infra, p. 28), and Section

22 (a) of the Revenue Act of 1928 (infra, p. 31)

are broad and all- inclusive. They tax income from

whatever source derived. This Court has stated

that Congress intended to use its power to the full

extent. Irwin v. Gavit, 268 U. S. 161, 166; Helver-

ing v. Stockholms &c. Bank, 293 U. 8. 84, 89. We

submit, that under these provisions the income for

the years 1927 and 1928 was taxable to the peti-

tioner. There can be no doubt that this constituted

income whith might constitutionally be taxed to

21344—35—_8 oii

14 *

the petitioner. This is illustrated by the decision of

this Court in Burnet v. Wells, 289 U. S. 670, hold-

ing that under the statute income from an irreyo-

cable trust devoted by direction of the grantor to

pay prethiums on his life insurance policies was

taxable as his income. While the statute under

consideration there specifically laid a tax upon the

grantor of the trust, and the sole question invalved

the constitutionality of the provision, the necessity

of a specific legislative direction may weil be

_ doubted in view of the broad gross income provi-

sions af the Revenue Acts. So, in Corliss v. Bow-

ers, 281 U. 8. 376, this Court_upheld the validity

of a legislative provision specifically taxing income.

to a grantor of a trust who retained the power to

revoke. Yet in certain cases involving similar cir-

cumstances, but undegRevenue Acts containing no

such specific provision, the courts have held that the

income was taxable to the grantor. Of. McCauley

v. Commissioner, 44 F. (2d) 919 (C. C. A. 5th);

Dickey v. Burnet, 56 F. (2d) 917 (C. C. A. 8th),

certiorari denied, 287 U. S. 606; O'Donnell v. Com-

missioner, 64 F. (24) 634 (C. C. A. 9th), certiorari

denied, 290 U. S. 698.

In the McCauley case the court, discussing the

decision in Corliss v. Bowers, supra, said (p. 920):

It is true that decision is under the Rev-

enue Act of 1924 §§ 219 (g), (h), 26 U. 8.

©. A. § 960 note, which provided in terms

that the grantor of a trust who reserved the

power to revest in himself title to any part

“>

15

of the corpus of the trust should be liable

for the tax. But that Revenue Act, as it

appears to us from its history, was merely

declaratory of existing law, and the lan-

guage quoted is therefore applicable to the

facts of. this case.

In the Wells case, supra, this Court, in holding

that the income from a trust used to pay insurance

premiums might be taxed as income to the grantor,

also indicated that such taxation was desirable in

order to prevent avoidance of taxes by taxpayers

who had contrived to keep the larger benefits of

ownership and be relieved of the attendant bur-

dens.

677):

In this respect this Court said in part (p.

Through the devices thus neutralized as well

as through many others there runs a com-

mon thread of purpose. The solidarity of

the family is to make it possible for the tax-

payer to surrender title to another and to

keep dominion for himself, or if not tech-

nical dominion, at least the substance of en-

joyment. At times escape has been blocked

by the resources of the judicial process with-

out the aid of legislation . In

these and other cases there has been a pro-

gressive endeavor by the Congress and the

courts to bring about a correspondence be-

tween the legal concept of ownership and

the economic realities of enjoyment or

fruition. Of a piece with that endeavor is

the statute now assailed. |

We contend that the present situatiqn is one

where such avoidance may and should be prevented

“wy 0

16

if necessary by judicial process, which can be ae.

complished without doing violence to the law.

There is no need for a specifie legislative declara-

tion in view of the broad scope of the gross income

provisions of the statute. This is a stronger case

than the Wells case, supra, in which to hold that

income is attributable and taxable to the grantor.

There the income was not used to satisfy a strict

legal obligation but was devoted to Keeping alive

contracts of insurance which the taxpayer was not

forced to continue. The dissenting opinion in the

Wells case recognizes that income devoted to pay- —

ments which the settlor is bound to make has (p.

684) „the substantial elements of income to the

settlor.’’ Clearly, in the present case, since the in-

come was devoted pursuant to court decree to meet

the obligation of the petitioner to provide an an-

nual income for his wife, it had the substantial ele-

ments of income to the petitioner.’ Therefore.

even if the grantor in the Wells case would not

have been taxable in the absence of a specific legis-

lative declaration, we submit that the income herein

is economically more closely income to the grantor

than in the Wells case, and hence may be included

in the gross income provision of the statute.

*The members of the Court who dissented in the Wells

case concurred in the companion case of DuPont v. Commis

sioner, 289 U. S. 685, on the ground that the grantor in the

latter case did not divest himself permanently of title to the

trust property. It is worthy of note that the grantor herein

similarly reserved to himself the corpus. to be turned orer

to him at the termination of the trust.

17

Authority on the point involved is conflicting.

‘The present admiilistrative rulings provide that

the settlor shall be taxed upon income from an irre-

vocable trust created to provide payments in lieu of

alimony. IL. T. 2628, XI—1 Cumulative Bulletin 34;

G. C. M. 13308, XIIT-2 Cumulative Bulletin 184.

This represented the earlier view of the Bureau

(O. D. 399, 2 Cumulative Bulletin 156), which had

been overruled. (O. D. 1092, 5 Cumulative Bulletin

190). The Board of Tax Appeals has held that

income derived from trusts created to meet alimony

payments is not taxable to the creator. Lynch v.

Commissioner, 23 B. T. A. 435, petition for review

dismissed. without opinion, by the Circuit Court of

Appeals for the Fifth Circuit on February 2, 1932;

Brooks *. Cowimissioner, 31 B. T. A. 70; Hyde v.

_. Commissioncr, 31 B. T. A. 256; Tuttle v. Commis-

stoner, 31 B. T. A. 782. But of. Spencer v. Com-

missioner, 20 B. T. A. 58. In those cases, however,

the trusts were created merely by agreement, pur-

suant to no direction by the court decreeing the

divorce. and the Board has expressly distinguished

this case on that ground. Tuttle v. Commissioner,

supra, Accordingly, the attitude of the Board in

acase where the obligation is adjudged by the court

i a matter of conjecture.“ In Cozey v. Commis-

, ©The Board's tregtment of the similar cless of cases de

volving trusts for maintenance and support of minor

children has not been éntirely consistent. In Schweitzer v.

Commisrioncr, 3) B. T. A. 155, the grantor was. held ac-

countable. But be was held not liable in Stokes v. Com-

2 18

Sioner, decided September 25, 1935, not yet offi-

cially reported, the Circuit Court of Appeals for

the Third Circuit, one judge dissenting, affirmed

the Board’s decision, refusing to tax the husband

where the assignment of trust income was made

some time before divorce and the deetee made no

provision for alimony. . a

Certain other decisions of the Board and of the

courts are, we contend, authority fot taxation of

the petitioner in the instant case, even without

specific declaration in the divorce decree. Those

are cases in which it has been held that alimony

payments made from.a fund transferred or dedi-

cated as collateral security for such payments were

taxable as income to the husband. Welch v. Com-

‘missioner, 12 B. T. A. 800; Turner v. Commissioner,

28 B. T. A. 91, affirmed, per curiam (on the author-

ity of Gould v. Gould, 245 U. 8. 151) by the Circuit

Court of Appeals for the Second Circuit, 71 F.

(2d) 1018; Longyear v. Commissioner, 28 B. T. A.

1086, affirmed, 77 F. (2d) 116 (App. D. C.). The

provisions of the agreement demonstrate that sub-

stantially the same situation exists here. The

petitioner's wife was to receive, not the entire in-

come which might result from the securities trans-

missioner, 28 B. T. A. 1243, affirmed July 31, 1935, not yet

officially reported but may be found in C. C. H. (1935), Vol.

3A, p. 10307 (C. C» A. 3d); Yeiser v. Commissioner, un-

published decision, affirmed, 75 F. (2d) 956 (C. C. A. 6th) ;

Grosvenor v. Commissioner, 31 B. T. A. 574; Savage v.

Commissioner, 31 B. T. A. 633; Clark v. Commissioner, 31

B. T. A. 1082.

19

ferred to the trustee, but a specified — amount,

and the trustee held the fund only for the period

during which the payments were required to be

made. The petitioner could be called upon to sup-

ply any deficiency in the income, and ig default it

might be made good from the principal. Further-

more, the petitioner was required to make good any

impairment of the principal. In essence the fund

placed in trust was no more than security to insure

the payment of amounts du e from the petitioner

for the support of his wife.

The fact that legal title to the principal rested

temporarily in another should not prevent taxa-

tion of the payments as petitioner’s income any

more than did a similar situation in.the Turner and

Longyear cases, su pra. As stated by this Court in

Corliss v. Bowers, 281 U. S. 376, 378, and repeated

in Burnet v. Wells, 289 U. S. 670, 678, taxation is

not so much concerned with the refinements of

| title as it is with actual command over the prop-

erty taxed—the actual benefit for which the tax is

paid. The petitioner here did not divest him-

self of all interest in the fund which produced the

income. It reverted to him or his heirs upon his

wife's death, when the obligation to support ceased.

Prior to that time he had the right to recover the

securities by substitution and thus dispose of them, .

subject only to the approval of the trustee. (R.

9). “Meanwhile, the income was devoted to the

payment of his obligation, and he was in a real

sense the beneficiary of the trust. We-submit that

20 att

the amounts so paid during the taxable years were

income to the petitioner within the purview’ of the

gross income provisions of the statutes, infra, and

were properly taxable to him as such.’

Ae II

THE TRUST PROVISIONS OF THE STATUTES INVQLVED DO

NOT PRECLUDE THE TAXATION OF THIS INCOME TO

THE PETITIONER 7 .

We believe it is plain, as above indicated, that

the income herein should be considered. as falling

within the general definition of gross income, tax-

able to the grantor:, But the petitioner contends

that the trust provisions (Section 219, Revenue Act

of 1926, infra, p. 29; Section 162 (b), Revenue Act

of 1928, infra, p. 31) furnish an exclusive method

»The situation herein ig also not unlike that in those cases

in which an assignor of income has been held taxable

although the assignment was irrevocable: The court, in

Commissioner v. Plant, 76 F. (2d) 8 (C. C. A. 2d), com-

mented on that similarity, saying (p. 10)7õ±½:-ꝗ/;)7j˙

The recent decision of the Court of Appeals of the

Eighth Circuit in Willeuts v. Douglas, 73 F. (2d) 130,

is also relied on by the Commissioner. There a trust

was set up by a husband me a provision for

his wife in lieu of alimony as reqifired by a decree of

divorce. The income, though payable to her, was held

— taxable against the settlor. But in that case the in-

come was derived from property originally belong-

_ing to the settlor, and was deyoted to the discharge

of the latter’s legal obligations. The transaction re-

sembled an assignment by a husband to his wife of

his future salary or of his interest in future profits

of his firm. Lucas v. Earl, 281 U. S. 111, 50 8. Ct.

241; 74 L. Ed. 731; Burnet v. Leininger, 285 U. S. 136,

52 8. Ct. 345, 76 L. Ed. 666. sp

Le nuh

21

for taxing trust income, and that since the grantor

would not be accountable for that income under

‘the trust provisions, he may not be taxed under any

other section of the Acts. And in this connection

he relies upon the decision of this Court in Helver-

ing v. Butterworth, 290 U. S. 365:

But the trust provisions have not been regarded

as furnishing an exclusive mode of taxing such in-

come. For example, it was hot until the Revenue

Act of 1924° that the grantor of a revocable trust

was made specifically accountable as to the income

therefrom. Prior to that time, however, there was.

a comprehensive system of taxing trust income as

between the trustee and the beneficiary. Yet the .

qourts held in cases arising under such prior Reve-

nue Acts that income from a revocable trust was

taxable to the grantor. MoVauley v. Commissioner,

44 F. (2d) 919 (C. C. A. 5th); Dickey v. Burnet,

56 F. (2d) 917 (C. C. A; 8th), certiorari denied, 287

V. S. 606; O’Donnell v. Commissioner, 64 F. (2d)

634 (C. C. A. 9th), certiorari denied, 290 U. S. 699.

Moreover, whatever reasons may exist for con-

struing the trust proyisions as exclusive are coun-

‘teracted in this case by the express statutory

prohibition against deductions for personal and

family expensgs.' This prohibition clearly has the

. Section 219 (g) and (h), Revenue Act of 1924. c 234, 43

Stat. 253 (U. S. C., Title 26, Sec. 960). See Corliss v. Bow-

ers, 281 U. S. 376.

Section 215 (a) (1) of the 1926 Act and Section 24 (a)

(1) of the 1928 Act, infra, pp. 29, 31.

0

—

22

effect of denying deductions for payments of ali-

« ° mony. Such payments are not business experises, ~

which are thie only deductions allowable to an indi-

vidual under the Revenue Acts, and the regulations

| have uniformly denied their deduction (Regula-

tions 69, Article 291, infra, p. 31; Regulations 74,

Article 281. See also Regulations 45, Article 291;. .

Regulations 62, Article 291; Regulations 65, Ar-

‘ticle 291; Regulations 97, Article 281; Regulations

86, Article 24-1). This Court has stated that they

do not decrease the taxable income of the husband.

Gould v. Gould, 245 U. S. 151. And see Longyear v.

Helvering, supra; Joyce v. Commissioner, 3 B. T.

A. 393; Van Den Bosch v. Commissioner, 26

B. T. A. 679, 682. Certainly the petitioner would

have been precluded from deducting amounts paid

to his wife as alimony had he paid them directly

rather than by way of the trust. We coutend that

he should not be- allowed such a deddction merely

because he arranged for the payments to be made

- indirectly.

The device for which the petitioner seeks judicial

sanction is alarming in its potentialities: If the

“petitioner is correct, anyone with income-produe-

ing property could rendér meaningless the prohi-

bition against-deductions for personal expenditures .

by creating a blanket trust (or series of trusts) to

meet specified obligations, such as rent and other

personal expenses, retaining to himself the excess

income as well as the right to the corpus at the ter-

— 8) etre Gere ery eh yer — —

23

mination of the trust.“ But this Court has held

that where tax avoidance is made easy under one

interpretation of the statute another interpretation

is to be preferred. Carbon Steel Co. v. Lewellyn,

251 U. 8. 501.

The income in question is definitely income to

the grantor, we submit, within both the meaning

of the Sixteenth Amendment and the statutory defi-

nition of gross income. It must therefore be taxed:

to him unless the trust provisions of the statute .

operate to exclude that income from the, general

category of gross income. That those provisions do

not have that effect is evidenced, first, by the fact

that courts have construed them as non-exclusive,

‘and second, by the principle that such construction

would be contrary to the poliey of the Act to deny

‘deductions on. account of personal expenses, and

would thus conflict with the sound canon of con-

struction not to iriterpret a statute in such manner

as to render avoidance a simple matter;

Helvering v. Butterworth; supr does not, we

contend, stand for the proposition d income de-

rived from securities placed in trust is taxable only

to the fiduciary or the named beneficiary and no

one else. ‘here may be situations in which it is

taxable to the creator as well as to the named bene-

ficiary. Or, again, it may happen that the creator:

only should be taxable, and not the beneficiary.

For example: Let it be assumed that the trust is

Ct. DuPont v. Commissioner, 289 U. S. 685.

a

‘formed for him by the beneficiary. It would seem

clear that the beneficiary is taxable, since he is es;

sentially receiving wages or salary. Such result

would be entirely consistent with taxiny the grant-

or also, since payments out of income from prop-

- erty placed in trust by him operate to relieve him

of a legal obligation and confer upon him exactly

the same economic * as though he had directly

received the income ftom the property and paid it

over to his creditors. In the latter situation there

can be no doubt but that both debtor and creditor

would be taxable.

Again, let it be assumed that the trust is created

to repay borrowed money-to the beneficiary. In

such case the beneficiary would probably not be

taxable, since he is receiving merely a return of

capital.“ Or, ‘consider the benefleiary in the in-

stant case. Since the payments under the trust are

in lieu of alimony, it may be that the beneficiary is

not taxable under this Court’s decision in Gould v.

Gould, 245 U. S. 151. And see Spencer v. Commis-

sioner, 20 B. T. A. 58. In any event, since she

could look to the corpus of the trust if the income

were insufficient to meet the specified annual pay-

— for example, Blumenthal v. Commissioner,

76 F. (2d) 507 (C. C. A. ach, certiorari applied for, Hel ver-

ing v. Blumenthal, No. 82, October Perm, 1935. There

trust was for the repayment of a $75,000 loan bearing 5

interest. It would seem that the creditor would not be-tax-

able to the extent that he receives 2 return of principal, but

would be taxable to the extent of the interest. .

* * *

* >,

* ~~ VEE ORR. Gee er > CCC orn one

25 .

created by the grantor to pay for services per |

ts, she would appear to be exempt. - Burnet v.

Whitehouse, 283.U. S. 148; Helvering v. Pardee,

290 U. S. 365, 370-371 (reported in the same

opinion as Helvering v. Butterworth, supra).

Another situation is presented by the trusts

created for the maintenance and support of the

grantor’s-minor children.“ The contention is there

made that the children are taxable since they are

“beneficiaries” within the meaning of Helvering

v. Butterworth, supra, and, theréfore, that Con-

gress did not intend to tax both grantor and bene-.

ficiary in that kind of case, But that line of argu-

ment loses the true import of the Butterworth d

cision. There, failure to tax the beneficiary would

have resulted in the trust income going entirely un-

taxed. . The trust under consideration in that case

was testamentary, and ‘the only question before the

‘Court was the tax liability as between the bene-

ciary and the trustee, which is not true here. The

trustee was held not-taxable under the statute. In

holding*the beneficiary liable, this Court declared’

that Congress did not intend to allow income from

a trust to escape taxation completely. It may well

See Schweitzer. v. Commissioner, 7 F. (2d) 702

(C. C. A. 7th), certiorari applied for, Helvering v.

‘+ | Schweitzer, Nos. 69 and 70, October Term, 1935. It is as-

sumed, of course, that the funds are employed to discharge

the grantor of a legal obligation to support his children. If

the income is in excess of his legal obligation, the present ~

issue is raised only to the extent that the income is within

such obligation.

2 Nb ae

26

be, therefore, that if the grantor in this case is held

taxable, the reason for applying the Butterworth

* decision will fail, and the beneficiary may be thus

‘exempt. In any event, if the same item is actually

income (as distinguished from a mere return of

capital, ete.) to a beneficiary, there would appear

to be nothing inconsistent with taxing him in re-

spect thereto, and at the same time taxing the

grantor for something entirely different, namely,

the discharge of his legal obligation.

We submit that the Butterworth decision does

not compel income from a trust in every case to he

taxable either to the fiduciary or to the beneficiary

to the exciusion of any other person, and that the

grantor is properly taxable where the income is ap-

plied for his benefit. e

_ CONCLUSION

The evant below properly held that the i income of

the trust for the taxable years involved was used

to satisfy a legal obligation of the petitioner and

was accordingly taxable as income to him. Its

decision should be affirmed.

Respectfully submitted.

STANLEY REEp,

Solicitor General.

Frank J. WIDEMAN,

Assistant Attorney General.

SWI Key,

Norman D. KELLER,

Aanotp Raum,

Special Assistants to the * General

Octoser, 1935.

APPENDIX

Mason’s Minnesota Statutes 41927), Vol. 2:

Sec, 8601. Trustee of alimony.—The court

may appoint trustees, whenever it is deemed

expedient, to receive any money ordered to

be paid to the wife, upon trust to invest the -

same, and pay over the income for the sup-

port of the wife, or of the wife and mjnor

children of the parties, or any of them, in

such manner as the court shall direct, or to

pay over to the wife the principal sum in

such proportions and at such times as the

court shall order, regard. being had in all

such cases to the situation and cireumstanc

of such wife, and the children if there .

any, provided for in the order; and suc

trustees shall give such bond, as the court

shall require, for the faithful performance

rr their trust.

t Property of husband—Perma-

nent a mony.—U po n a divoree for any

cause except that pot adultery committed

by the wife, if the estate and property

stored or awarded to her is insufficient for

@he ‘stiitable support of herself and such

children of the marriage as shall be com-

mitted to her care and custody, or if there

is no such estate dnd property, the court —

further order and d to her such —

of the personal and real estate of the hus-

band, not exceeding in value one-third here-

of, as it deems just and reasonable, having

regard to the ability of the husband, the

(27)

nan

*

>

222

character and situation of the parties, and

all other circumstances of the case. The

court may also, in the cases provided for in

this section, decree to the wife such alimony

out of the estate, earnings, and income of the

husband as it may deem just and reasonable.

having regard to the ability of the husband.

the character and situation of the parties

and other circumstances of the case. and

may by its decree make the same a specific

lien upon any specified parcels of his real

estate, or authorize its enforeement by exe-

cution against his property, real and per-

sonal; but the aggregate award and allow-

ance made to the wife from the estate of the

husband under this section shall not in any

case exceed in present value one-third of the

personal estate. earnings. and income of the

-husband, and one-third in value of his real

“estate.

Sec. 8603. Order for alimony, te., re-

vised.—After an order or decree for alimony.

or other allowance for the wife and children.

or either of them. or for the appointmept of

_ trustees to receive and hold any property for

the use of the wife or children, the court:

from time to time, on petition of either of the

parties, may revise and alter such order or

decree respecting the ameunt of such alimony

or allowance, and the payment thereof, and

also respecting the appropriation and pay-

ment of the principal and income of the prop-

erty so held in trust. and may make any order®

regfecting any of the said matters which it

might have made in the original action.

Reventie Act of 1926, c. 7. 44 Stat. 9. 23. 28, 32:

woman °* °% ©

(a) The term gross income” includes

gains, profits. and income derived from Sal-

aries, wages, or compensation for personal

29

service * * of whatever kind and in

whatever form paid, or from professions,

vocations, trades, businesses, commerce, or

sales, or dealings in property, whether real —

personal, growing out of the ownershi

use of or interest in such property ; also

interest. rent, dividends, securities, or the

transaction of business carried on for

gain or profit, or or profits and income

derived from any source whatever.

(T. S. C. App., Title 26, Sec. 954.)

‘Sac. 215. (a) In computing net income no

deduction shall in any case be allowed in

respect of —

0) Personal, living, or fan expenses;

*. 8. C. App. Title 28 Se 956:)

Ser. 219. (a) The tax imposed by Parts I

and II of this title shall apply to the income

of estates or of any kind of property held

im trust, including

(2) Income which i is to be distributed cur-

rently by the fiduciary to the beneficiaries,

and income collected by a guardian of an in-

fant which is to be held or distributed as the

court may direct;

+ * * „ * *

(b) Except as otherwise provided in sub-

divisions (g) and (h), the tax shall be com-

puted upon the net income of the estate or

trust. and shall be paid by the fiduciary.

The net income of the estate or trust shall

be computed in the same manner and on the

same basis as provided in section 212, ex-

cept =

* * * * *

2) There shall be allowed as an addi-

tional deduction in computing the net income

30

of the estate or trust the amount of the

income of the estate or trust for its taxable

year which is to be distributed currently by

the fiduciary to the beneficiaries, and the

amount of the income collected by a guard-

ian of an infant which is to be held or dis-

tributed as the court may direct, but the

amount so allowed as a deduction shall be

included in computing the net income of the

beneficiaries whether distributed : to them or

not. Any. amount allowed as a deduction

under this paragraph shall not be allowed

as a deduction under paragraph (3) in the

same or any succeeding taxable year;

(3) In the case of income received by es-

tates of deceased persons during the period

of administration or settlement of the estate,

and in the case of income whieh, in the dis-

eretion of the fiduciary, may be either dis-

tributed to the beneficiary or accumulated,

there shall be allowed as an additional deduc-

tion in computing the net income of the es-

tate or trust the amount of the income of the

estate or trust for its taxable year which is

properly paid or credited during such year

to any legatee, heir, or beneficiary, but the

amount so allowed as a deduction shall be

included in computing the net income of the

legatee, heir, or beneficiary.

* * 7

(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.

31

(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 * * such part of the income of

the trust shall be included in computing the

net income of the grantor.

(U. S. C. App., Title 26, Sec. 960.)

To the extent that they are material, the corre-

sponding sections (22 (a), 24 (a), 162 (b), 166, and

167) of the Revenue Act of 1928, c. 852, 45 Stat.

791, 797, 802, 838, 840, are substantially identical

with the above.

Treasury Regulations 69, issued under the Reve-

nue Act of 1926:

* ART. 291. Personal and family expenses.— °

2 *. Alimony and an allowance paid

1 a separation agreement are not deduc-

tible from gross income. * * *.

„This statement is also contained in Article 281

of Treasury Regulations 74, issued under the Reve-

nue Act of 1928.

9 «

U.S GOVERNMENT PRINTING OFFICE, 1988