Petition for Writ of Certiorari — Emery v. Commissioner

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Subject Index.

Opinions below

Jurisdiction

Questions presented

Statute involved

Statement

Specifications of error now urged

Reasons for granting the writ

Brief in support of petition for certiorari

rtidétewaun

(1) Conflict of the decision below with a decision

of the Circuit Court of Appeals for the Ninth

Circuit and with a previous decision of the Cir-

cuit Court of Appeals for the First Circuit, the

principles of which are here reasserted

(2) Probable conflict of the decision below with

applicable decisions of this Court

Conclusion

Appendix

Table of Authorities Cited.

CasEs.

Burnet v. Whitehouse, 283 U.S. 148

Commissioner v. Giannini, 129 F. (2d) 638

Corliss v. Bowers, 281 U.S. 376

Harrison v. Schaffner, 312 U.S. 579

Helvering v. Butterworth, 290 U.S. 365

Helvering v. Clifford, 309 U.S. 331

Helvering v. Eubank, 311 U.S. 122

Helvering v. Grinnell, 294 U.S. 153

Helvering v. Horst, 311 U.S. 112

Helvering v. Pardee, 290 U.S. 365

Helvering v. Stuart, 317 U.S. 154

Jergens v. Commissioner, 136 F. (2d) 497

———————ee ——

14

21

7,14

7, 9,11, 13

16, 17, 19

7, 14, 16,19

7,14

19, 20

19

7, 14,19

7, 14, 15, 19

7, 14

16, 17, 18, 19

19

AUTHORITIES CITED

Page

Kellogg v. Commissioner, 2 T.C. 1126 13

Loew v. Commissioner, 7 T.C. No. 43 19

Mallinckrodt v. Nunan, 146 F. (2d) 1 20

Morgan v. Commissioner of Internal Revenue, 309

_ US. 78 il

Old Colony Trust Co. v. Gardner, 264 Mass. 68 11

Plimpton v. Commissioner, 135 F. (2d) 482 7,13

Richardson v. Commissioner, 121 F. (2d) 1 19

Russell, Ella E., 45 B.T.A. 397 20

SratTurEs.

Internal Revenue Code

Sec. 22(a) 2

Sec. 22(b) (3) 2

Sec. 23(0) 2, 4, 17, 21

Sec. 162(a) 2, 21

Sec. 167(c) 18

Revenue Act of 1943 18, 19

Rules of U.S. Supreme Court, Rule 38, sec. 5 6

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Supreme Court of the United States.

Ocroser Term, 1945.

} ELSIE C. EMERY,

PETITIONER,

against

COMMISSIONER OF INTERNAL REVENUE,

> RESPONDENT.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

> FOR THE FIRST CIRCUIT AND BRIEF IN SUP-

PORT THEREOF.

The petitioner by her counsel hereby prays that a writ

of certiorari issue to review the judgment of the United

5 States Circuit Court of Appeals for the First Circuit en-

tered in the above case on July 22, 1946, affirming the deci-

sion of The Tax Court of the United States, promulgated

October 31, 1945.

Opinions Below.

The opinion of The Tax Court of the United States ap-

pears at pages 28-40, inclusive, of the Record, and may be

found in 5 T.C. No. 122. The opinion of the Circuit Court

Deal 8s « > SN ARABI TG TUN NER SU A

> ETE

a

2

of Appeals for the First Circuit appears at pages 119-125,

inclusive, of the Record, and has not as yet been reported.

Jurisdiction.

The original judgment of the Circuit Court of Appeals

was entered the 22d day of July, 1946. Thereafter the

petitioner sought a rehearing, and a petition for such re-

hearing was filed the 5th day of August, 1946, and was

denied the 26th day of August, 1946. The jurisdiction of

this Court is invoked under Sections 22(a), 22(b) (3), 23(0)

and 162(a) of the Internal Revenue Code.

Questions Presented.

The questions presented are three in number:

1. Whether an annuity under each of five certain trusts

created by the petitioner’s husband, Allan C. Emery, under

date of August 20, 1937, is taxable to the petitioner for the

tax years 1939, 1940 and 1941.

2. Whether the sum of $10,943.62, representing the in-

come of said trusts for the tax year 1939, in excess of the

annuities paid to the petitioner during such tax year, is

also taxable to the petitioner.

3. Whether the determinations made by the respondent

in this case violated the petitioner’s right of freedom of

contract.

Statute Involved.

The pertinent provisions of Sections 22(a), 22(b) (3),

23(0) and 162(a) of the Internal Revenue Code are fully

set forth in the appendix hereto attached and made a part

hereof.

—

3

Statement.

On August 20, 1937, Allan C. Emery, husband of the peti-

tioner, created five certain trusts with the Boston Safe De-

posit and Trust Company as sole trustee of each trust.

Paragraphs 1, 2 and 5 of each of these trusts are herein- .

below set forth. Paragraph 6, referred to in paragraph 2,

is without any particular materiality.

‘‘1, To pay to Elsie Conant Emery, wife of the

Donor, during her lifetime or for such period thereof

as the accrued income and principal of this trust will

permit, the sum of Three Hundred ($300.00) Dollars

per month, payable monthly commencing May 15, 1938,

first out of income and thereafter out of principal, if

necessary.

‘2. Subject to the provisions of the preceding para-

graph and Paragraph 6 hereof, said trust is created

and organized and shall be administered exclusively

for religious, charitable and educational purposes, and

any and all funds of the trust estate and any and all in-

come derived therefrom which shall be paid, applied or

set aside by the Trustee pursuant to the provisions

hereinafter set forth shall be used exclusively for such

religious, charitable or educational purposes as may be

designated by the Donor and the said Elsie Conant

Emery, and the survivor of them, or, following the de-

cease of the survivor, by a majority of the adult bene-

ficiaries during the term of this trust; and no part

thereof shall be at any time applied for or inure to the

benefit of any private individual. The Trustee is ex-

pressly relieved from the duty of seeing to the use or

application of funds paid by it to any person, corpora-

tion, association or institution for the purposes afore-

said.

PEE eee

_ STS ag OD

4

**5. Should the net income from the principal of the

trust fund prove insufficient at any time to meet and

discharge the annuity obligation in Paragraph 1 here-

of imposed, or if for any reason to be expressed at any

time by the said Elsie Conant Emery, it should be her

desire or wish that the trust in this indenture created

be terminated, she is hereby vested with full power

and authority to cancel or revoke this trust at any time

in whole or in part by a writing to that effect addressed

to the Trustee, and she is further vested with the power

to amend or alter this trust in such manner and at

such time or times as she may see fit. In the event of

cancellation or revocation by the said Elsie Conant

Emery, it shall be the duty of the Trustee forthwith to

pay unto her the whole of the principal of the trust

fund, or such part or amount thereof, as she may des-

ignate, together with any accrued and undistributed

income, less the charges thereagainst, free and dis-

charged of all trusts.’’

During the tax years 1939, 1940 and 1941, the tax years

herein involved, the trustee paid the petitioner her annuity

of $3600.00 from each of the five trusts. During the tax

year 1939 the excess of income of the five trusts, over the

annuities so paid the petitioner for such tax year, aggre-

gating $10,943.62, was set aside by the corporate trustee as

required of it under the terms of the trust indentures, and,

pursuant to suggestions made by the petitioner, in con-

junction with her said husband, the trustee paid such excess

income during the tax year 1939 to religious, charitable and

educational institutions, all coming within the immunity of

Section 23(0) of the Internal Revenue Code. (R. p. 38.)

On four separate occasions has the petitioner exercised

the power conferred upon her to amend the said trusts.

These amendments, however, have largely had to do with

ee

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administrative details and were necessitated somewhat by

the petitioner’s son, who had been invested by her with the

power to vote certain securities forming a part of the cor-

pus of each of the trusts, entering the Service. These

amendments are all a part of the Record. (R. pp. 55-75.)

In none of these amendments, however, did the petitioner

in any wise capture or claim any part of the corpus, nor did

she in any wise enlarge or enhance her annuity. In her last

amendment, dated January 21, 1944, the petitioner not only

released and relinquished her right to alter or amend, can-

cel or revoke the trusts, but at the same time she reduced

the amount which each of her children might receive from

the trusts, following her decease, from $300.00 per month

each to $250.00 per month each, thus enlarging the poten-

tial rights of religious, charitable and educational institu-

tions under the several trusts.

Because of the right invested in her by each of the trusts,

as they were originally drawn, to alter or amend, cancel or

revoke these trusts at any time, and if cancelled in their

entirety to capture both corpus and undistributed income,

the respondent has determined that the petitioner is tax-

able for the whole of the income of these several trusts

during the tax years herein involved. The excess of income

over the annuities for each of the tax years 1940 and 1941

was, for some reason not explained in the record, but obvi-

ously through some error or oversight, included in the peti-

tioner’s tax return for those years as though such excess

had actually been received by her, whereas in truth she was

not entitled to nor did she receive a dollar thereof, and as

the record reveals (p. 50), a goodly portion of such excess

was actually paid to charity during each of these years,

and the remainder of such income for such years was per-

manently set aside by the trustee under the terms of the

trust indentures for distribution among and for payment

to religious, charitable and educational institutions as di-

5

Poona s

6

rected under the trust indentures. Having paid the taxes

on the excess income for the tax years 1940 and 1941, and

the petitioner now being without relief in connection there-

with, liability on such excess income for said tax years is

not here in question.

Specifications of Error Now Urged.

The Court of Appeals erred (a) in holding that the an-

nuities paid the petitioner under the several trusts in the

tax years 1939, 1940 and 1941 are taxable to her; (b) in

holding that the whole of the income of the several trusts

for the tax year 1939 is taxable to her; and (c) in depriv-

ing the petitioner of the right of freedom of contract by

holding that under the facts in the case at bar and under

the law applicable thereto the petitioner is liable for income

taxes on the whole of the income from the several trusts for

each of the tax years here in question merely because the

petitioner was invested with the right to engage in a con-

tract whereby she could have acquired the corpus of each

of the trusts and the undistributed income therefrom, but

which, in truth, she elected not to do.

Reasons for Granting the Writ.

Rule 38, Section 5, of the Rules of this Court specifies, as

two of the classes of cases in which applications for writs

of certiorari to a Circuit Court of Appeals will be consid-

ered, those—

‘*Where a circuit court of appeals has rendered a

decision in conflict with the decision of another circuit

court of appeals on the same matter .. . or has de-

cided a federal question in a way probably in conflict

with applicable decisions of this court .. .’’

7

It is submitted that in the present case—

(1) The decision of the Court below is in conflict with the

decision of the Court of Appeals for the Ninth Circuit in

the case of Commissioner v. Giannini, 129 F. (2d) 638, and,

moreover, is also in conflict with its own decision in the

case of Plimpton v. Commissioner, 135 F. (2d) 482, which

case very evidently was not intended to be reversed by the

decision in the instant case, for the principles laid down in

the Plimpton case are reasserted and an attempt is made

to distinguish that case from the instant one. Confusion

only can result from these conflicting opinions on a tran-

scendingly important federal question.

(2) The decision of the Appellate Court below very prob-

ably conflicts with the decisions of this Court in the follow-

ing cases:

Burnet v. Whitehouse, 283 U.S. 148;

Helvering v. Butterworth, 290 U.S. 365; and its

companion case—

Helvering v. Pardee, 290 U.S. 365;

Helvering v. Grinnell, 294 U.S. 153;

and with what was said by this Court both in—

Harrison v. Schaffner, 312 U.S. 579, and

Helvering v. Horst, 311 U.S. 112.

8

Brief in Support of Petition for Certiorari.

_ For convenience, the issues presented in this case are

here restated:

1. Whether an annuity under each of five certain trusts

created by the petitioner’s husband, Allan C. Emery, under

date of August 20, 1937, is taxable to the petitioner for the

tax years 1939, 1940 and 1941.

2. Whether the sum of $10,943.62, representing the in-

come of said trusts for the tax year 1939, in excess of the

annuities paid to the petitioner during such tax year, is also

taxable to the petitioner.

3. Whether the determinations made by the respondent

in this case violated the petitioner’s right of freedom of

contract.

The Court of Appeals combined these issues into a

single question in the following language:

‘*This case presents the question of whether a bene-

ficiary of a trust is taxable for the income of the trust

under Sec. 22(a) of the Internal Revenue Code, when

she has the power to revoke, alter or amend the trust.’’

(R. p. 119.)

The Tax Court of the United States stated the case as

follows:

‘*Petitioner’s principal contention is that the $18,000

paid to her under paragraph 1 of the five trusts for

each of the three years in question was ‘property ac-

quired by gift’ and was exempt from taxation to her

under section 22(b)(3), I.R.C.; Burnet v. Whitehouse,

283 U.S. 149; and Helvering v. Pardee, 290 U. S. 365.

Petitioner’s next contention is that the $10,943.62 of

trust income for 1939 which was reported by the fiduci-

ary as ‘set aside for religious, charitable, and educa-

9

tional purposes’ is not income to petitioner because of

petitioner’s alleged renunciation of any right to receive

such income.’’ (R. p. 37.)

‘The respondent contends that because of the power

vested in petitioner under paragraph 5 of the trusts

‘to cancel or revoke this trust at any time in whole or

in part’ petitioner possessed the equivalent of owner-

ship of all the corpora of the trusts and as such owner

she is taxable on all of the income therefrom after de-

ducting all contributions to charity subject to the 15

percent limitation.’’ (R. p. 37.)

And continued The Tax Court:

‘We would agree with both of petitioner’s conten-

tions heretofore mentioned if it were not for the power

vested in petitioner under paragraph 5 of the five

trusts.’’ (R. p. 38.)

(1) CoNnFLICT OF THE DECISION BELOW WITH A DECISION OF THE

Circurr Court or APPEALS FOR THE NintH Circuit AND

WITH A PREVIOUS DECISION OF THE Circuit Court or Ap-

PEALS FOR THE First CiRCUIT, THE PRINCIPLES OF WHICH ARE

HERE REASSERTED.

The decision of the Appellate Court very obviously con-

flicts with the decision of the Cireuit Court of Appeals for

the Ninth Circuit in the case of Commissioner v. Giannini,

129 F. (2d) 638 (1942). The facts there are briefly:

The taxpayer entered into a contract of employment with

a corporation of which he was the chief executive. Pre-

sumably, this contract was entered into by the taxpayer of

his own volition and for his own personal gain. Later he

renounced the right to receive the whole of the compensa-

tion due him under his contract and ‘‘suggested’’ that the

remainder thereof, a very substantial sum of money, be paid

PORN

eee eee

10

to an educational institution for the creation of a founda-

tion. The corporation carried out the suggestion. The

respondent contended—

‘*That actual receipt of money or property is not

always necessary to constitute taxable income; that it

is the ‘realization’ of taxable income rather than actual

receipt which gives rise to the tax; that a taxpayer

‘realizes’ income when he directs the disposition there-

of in a manner so that it reaches the object of his

bounty; that in the instant case the taxpayer had a

right to claim and receive the whole 5% of the corpora-

tion profit as compensation for his services; and that

his waiver of that right with the suggestion that it be

applied to some useful purpose was such a disposition

thereof as to render the taxpayer taxable for income

‘realized’ in the tax year in which the suggestion is

carried out’’ (p. 640).

The taxpayer claimed—

‘*A person has the right to refuse property proffered

to him, and if he does so, absolutely and uncondition-

ally, his refusal amounts to a renunciation of the prof-

fered property, which, legally, is an abandonment of

right to the property without a transfer of such right

to another’’ (p. 640).

Both the Board of Tax Appeals and the Appellate Court

found that—

‘*. . . the taxpayer did not receive the money, and )

that he did not direct its disposition. All that he did

was to unqualifiedly refuse to accept any further com-

pensation for his services with the suggestion that the

money be used for some worth while purpose’’ (p.

641).

ll

Because the income paid to the educational institution was

not actually received by the taxpayer and its disposition

was not actually directed by him, therefore, the Court held

that he was not liable for the Commissioner’s deficiency as-

sessment.

The facts in the Giannini case are far less favorable to

the taxpayer than are those in the case at bar. In the

Giannini case the taxpayer was lawfully entitled to receive

income for which he had contracted, and his company was

lawfully entitled to make the payment. The taxpayer had

to do something to avoid the receipt of the income in order

to prevent himself from being taxed with it, and so he re-

nounced the right to receive. In the instant case the tax-

payer was never actually entitled to receive the excess

income over and above her annuities during the tax years

in question, nor was the trustee lawfully permitted to

pay any such excess income to her. She was, however,

possessed of a right to create a right under which latter

the excess income would have been payable to her.

This right could have been exercised only by the creation

of a contract and the substitution of that contract for the

one previously made by her husband. Under the Massa-

chusetts law, so far as the same may be here applicable

(cf. Morgan v. Commissioner of Internal Revenue, 309 U.S.

78), the right to alter or amend a trust is not tantamount

to a general power of appointment, for the right to amend

is merely a right to create a condition precedent prelimi-

nary to the exercise of a power. Old Colony Trust Com-

pany v. Gardner, 264 Mass. 68.

In distinguishing the Giannini case the Appellate Court

below, at pages 6 and 7 of its opinion (R. p. 124), said:

‘‘The Giannini case involved a repudiation of a right

to receive income in the future. In our case, the tax-

payer did not, during the taxable years involved, re-

12

nounce her right or release her power to obtain all the

income and principle of the trust. Cf. Frank v. Com-

missioner, 145 Fed. (2d) 413, (CCA 3rd, 1944), distin-

guishing the Giannini case. All during the taxable

years, she possessed the power to take the corpus and

income for her own use.’’

That part of the above finding to the effect that ‘‘the tax-

payer did not, during the taxable years involved, renounce

her right or release her power to obtain all the income and

principal of the trust,’’ is absolutely at variance with the

respondent’s determination, with the decision of the Tax

Court, and with another finding made by the Court below.

The Appellate Court at page 3 of its opinion found:

‘*The income of the trust for that year (1939) was

$28,943.62. The trustee reported the $10,943.62 was

‘set aside for religious, charitable, and educational pur-

poses’ and reported the balance of $18,000 as taxable

to the trust. This $18,000 was paid to the petitioner in

satisfaction of the annuity. The sum set aside was

apparently paid to charities in 1939.’’

At pages 7 and 8 of The Tax Court opinion it is stated:

‘*. . . the respondent determined in the notice of

deficiency that the contributions were ‘actually paid’

by the fiduciary.”’’

Only the petitioner, in conjunction with her husband, could

lawfully determine and suggest the charities to whom the

trustee could pay the excess of income over the annuities.

Your petitioner submits that by joining with her husband

in making such determinations and suggestions she thereby

unmistakably, unequivocally and completely renounced any

13

right she could possibly have had ever to receive such ex-

cess income.

The principles laid down in the Giannini case were

adopted by The Tax Court in Kellogg v. Commissioner, 2

T.C. 1126, the facts therein being quite similar to the facts

in the Giannini case, and the Commissioner, the respondent

herein, accepted the principles of law as laid down in these

two cases by giving his formal acquiescence to the Kellogg

case.

The decision of the Court below in the instant case also

is in conflict with its own opinion in the case of Plimpton v.

Commissioner, 135 F. (2d) 482 (1943), the principles of

which latter case are again reasserted and an attempt made

to distinguish the case from the instant one.

In the Plimpton case the taxpayer was a beneficiary-

trustee. He had a corporate co-trustee which was ‘‘amen-

able’’ to his desires. The trustees were invested with the

discretionary power of paying to Plimpton additional in-

come upon his request. He had merely to make the re-

quest, or, indeed, draw himself a check for the additional

income, in order to constitute the exercise of the discre-

tion vested in him as one of the trustees, and his co-trustee

would have been ‘‘amenable.’’ The taxpayer in the case at

bar was without any such power. She had the right to

create new estates in the law to entitle her to receive the

income. She was obliged to substitute her contract for her

husband’s, whereas Plimpton could receive the additional

income without making a single change in the trust inden-

ture. The petitioner therefore contends that the Plimpton

case amply supports her contentions in the instant case.

ee

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(2) PropaBLE CONFLICT OF THE DECISION BELOW WITH APPLI-

CABLE DECISIONS OF THIS CouRT.

The decision of the Appellate Court below in the case at

bar unmistakably conflicts with applicable decisions of this

Court. See—

Burnet v. Whitehouse, 283 U.S. 148;

Helvering v. Butterworth, 290 U.S. 365; and its

companion case—

Helvering v. Pardee, 290 U.S. 365;

Helvering v. Grinnell, 294 U.S. 153;

and with what was said by this Court both in—

Harrison v. Schaffner, 312 U.S. 579, and

Helvering v. Horst, 311 U.S. 112.

A. In Burnet v. Whitehouse, supra, Helvering v. Butter-

worth, supra, and Helvering v. Pardee, supra, this Court

expressly held that an annuity payable whether or no and

at all events, and out of principal if need be, was in the

nature of a legacy or gift and hence not taxable as income.

By paragraph 1 of each of the trusts in question the tax-

payer was entitled to receive her annuities whether or no

and at all events and out of principal if need be. Because

the petitioner could have engaged in a contract under which

the sums paid her as annuities would have been received by

her in the form of taxable income, consequently the respon-

dent holds that, under the law, it was obligatory upon the

taxpayer to make such a contract or else be taxed on the

assumption that she had constructively engaged in such a

contract. Such contention on the part of the respondent is

certainly without warrant in the law.

In Helvering v. Grinnell, supra, an estate tax case to be

sure, but definitely in point because of its direct analogy,

15

this Court had posed before it the very question which con-

stitutes the principal issue in this case. There the facts in

a few words were these:

A decedent had bequeathed or devised a life estate to his

widow with a general testamentary power of appointment,

and in the event of her failure to exercise such power the

property covered thereby was to descend to a specified

group. The widow by her will appointed the property to

the very group who would have received it under the pre-

vious testator’s will had she failed in the exercise of such

power. The respondent asserted that, because the widow

had made a will and appointed the property thereunder,

therefore the property passed under the power and so was

subject to an additional set of estate taxes. At page 157

this Court said:

‘‘His [the appointee’s] consent is necessary before

the attempt to exercise the power becomes binding upon

him the same as consent is necessary in making a con-

tract or agreement.”’

In short, this Court there held in unequivocal terms that it

was not the mere existence of a right, nor indeed the at-

tempted exercise of such right, which imposed liability, but

rather the effective exercise of such right. This case is

absolutely decisive, as your petitioner contends, of the prin-

cipal issue in the case at bar.

Again, and as was said by this Court in Helvering v.

Horst, 311 U.S. 112, at page 118:

‘‘The power to dispose of income is the equivalent of

ownership of it. The exercise of that power to pro-

cure the payment of income to another is the enjoy-

ment .. .’’ and the realization for tax purposes.

np Ri TE IRE SNEEIORTE BOERNE: ie “

16

And still again, in Harrison v. Schaffner, 312 U.S. 579, at

pages 580-582, this Court said:

‘Decision in these cases was rested on the principle

that the power to dispose of income is the equivalent

of ownership of it and that the exercise of the power

to procure its payment to another, whether to pay a

debt or to make a gift, is within the reach of the statute

taxing income ‘derived from any source whatever,’

‘« |. It was for that reason that in each of those

cases it was held that one vested with the right to re-

ceive income did not escape the tax by any kind of an-

ticipatory arrangement, however skillfully devised, by

which he procures payment of it to another, since, by

the exercise of his power to command the income, he

enjoys the benefit of the income on which the tax is

laid.’’ (Italics supplied.)

Obviously none of these cases invested in the respondent

the power to determine the contracts one should or could

make, their scope or extent, and the taxable gain which

should or could be realized thereunder, for the purpose of

enabling him to impose a tax thereon. The petitioner re-

spectfully submits that no bureaucracy was ever invested

with such a limitless power.

B. The Appellate Tax Court below predicated its de-

cision very largely upon the decisions of this Court in the

eases of Corliss v. Bowers, 281 U.S. 376, and Helvering v.

Stuart, 317 U.S. 154.

In Corliss v. Bowers, supra, the facts briefly were these:

The grantor of a trust appointed the income therefrom

to his wife for her life but reserved to himself the power to

17

eancel the trust at any time and to recapture the corpus.

This Court’s ultimate concern, as there expressed, was to

‘‘protect the power of Congress to prevent escape from

taxes or surtaxes by devices that easily might be applied to

that end.’? It would certainly seem a far cry from a ‘*de-

vice’? for the avoidance of taxes to a philanthropic trust

with the income thereon payable to charity, subject only to

a primary annuity, and to the possible power vested in the

taxpayer under paragraph 5 of each of said trusts. That

the taxpayer had a profound regard for and fully respected

her husband’s philanthropic desires, and was no less phil-

anthropic herself, is evidenced by the fact that in the tax

year 1939 the whole of the income from the trusts in excess

of the annuities, to wit, $10,943.62, was paid to charities, all

of a character coming within the immunity of Section

23(0) of the Internal Revenue Code, and all income for the

tax years 1940 and 1941 from said trusts, in excess of the

annuities, amounting to $7837.53 and $26,177.01 respec-

tively, was either permanently set aside for or actually paid

to charities during said tax years. (R. pp. 35-36.) The

petitioner submits that it cannot fairly be contended that

there is any analogy between the case at bar and Corliss

v. Bowers, supra, and Helvering v. Stuart, supra.

The decision of this Court in Helvering v. Stuart, supra,

was posited chiefly upon the Corliss v. Bowers case. Briefly,

the facts in Helvering v. Stuart, here material, are that the

grantor of the trust was empowered to use income of the

trust in discharge of paternal obligations in the care, main-

tenance and support of minor children. The trustee did not

make use of the income in the manner he was permitted to

do. At pages 170-171 this Court said:

‘« |. the possibility of the use of income to relieve

the grantor, pro tanto, of his parental obligation is

sufficient to bring the entire income of these trusts for

GA PPT EIN IBN j

18

minors within the rule of attribution laid down in

Douglas v. Wilicuts.’’

It was the decision in the Helvering v. Stuart case which

gave rise to the amendment to Section 167 of the Internal

Revenue Code in the Revenue Act of 1943, at which time

Congress enacted Section 167(c), which is as follows:

**Sec. 167(c)....

‘*(¢) Income of a trust shall not be considered tax-

able to the grantor under subsection (a) or any other

provision of this chapter merely because such income,

in the discretion of another person, the trustee, or the

grantor acting as trustee or co-trustee, may be applied

or distributed for the support or maintenance of a ben-

eficiary whom the grantor is legally obligated to sup-

port or maintain, except to the extent that such income

is so applied or distributed. In cases where the

amounts so applied or distributed are paid out of cor-

pus or out of other than income for the taxable year,

such amounts shall be considered paid out of income

to the extent of the income of the trust for such taxable

year which is not paid, credited, or to be distributed

under section 162 and which is not otherwise taxable to

the grantor.’’

Here Congress declared its intent and expressly declared

that ‘‘Income of a trust shall not be considered taxable to

the grantor under subsection (a) or any other provision of

this chapter merely because’’ such income might be made

available to the taxpayer either through his own act or

through a discretionary act or power of another. (Italics

supplied.) It is only when income from a trust is actually

distributed to a beneficiary or applied for his benefit or

economic gain that the income so distributed or applied

19

shall be taxable. Simpler, more forceful and more direct

language than that here employed by Congress would be

hard to find. By Congressional enactment we are told in

perfectly unequivocal terms that one is to be taxed with

trust income only when such income is actually distributed

to him or is economically applied for his benefit. Interpre-

tative of this contention and in line with it is the recently

decided case of Loew v. Commissioner, promulgated July

12, 1946, 7 T.C. No. 43. It is to be assumed that the Court

below overlooked the Congressional amendment in the

Amendatory Revenue Act of 1943 when it advanced Helver-

ing v. Stuart, supra, and, to a more limited extent, perhaps,

also Corliss v. Bowers, supra, as authoritative cases.

The fact that this Court had also placed its qualifications

on the broad scope sometimes accorded Corliss v. Bowers,

supra, because of the generality of ‘the language therein

employed, likely enough was also overlooked by the Court

below. See Helvering v. Grinnell, supra; Helvering v.

Horst, supra; Harrison v. Schaffner, supra. While the

facts in these three latter cases differ quite materially from

those in the case at bar, yet in the application of principles

they are well in point as above set forth.

C. Among other authoritative cases upon which the Ap-

pellate Court below also relied are—

Helvering v. Clifford, 309 U.S. 331 (1940) ;

Helvering v. Eubank, 311 U.S. 122 (1940) ;

Jergens v. Commissioner, 136 F. (2d) 497

(C.C.A. 5) (1943) ;

Richardson v. Commissioner, 121 F. (2d) 1

(C.C.A. 2) (1941), and other cases.

In every one of the cases just above specifically enumer-

ated the question of good faith was raised. The validity

20

of the transfers was questioned. They were claimed to be

shams and devices, and in Helvering v. Clifford this Court

said, in substance, that a completed transfer was never in-

tended. The validity underlying the transfer in the instant

case is acknowledged, or at least it is not in question, nor

are the bona fides of the transaction doubted.

Your petitioner submits that the distinction between the

good and the bad is still to be observed and preserved, es-

pecially in the law.

D. Another group of cases advanced by the Appellate

Court below as authoritative in the case at bar are the cases

of Mallinckrodt v. Nunan, 146 F. (2d) 1 (C.C.A. 8) (1945),

and Ella E. Russell, 45 B.T.A. 397. In each of these cases

the trustee-beneficiary (the taxpayer) had the absolute and

unequivocal right to request and receive income additional

to that specifically provided for such taxpayer to the extent,

indeed, of the whole of the income of the trust if desired.

A simple request would have provided either of these tax-

payers with the additional income from their trusts and to

the full amount thereof if wanted. No alteration or change

in the trust indenture, nor the creation of any new estate

or estates in the law, was at all necessary to enable this right

to be exercised. Without again repeating the limitations

upon the taxpayer in the case at bar, can it possibly be said

that there is any real analogy between the Mallinckrodt v.

Nunan case, supra, and the Ella E. Russell case, supra, and

the instant case?

E. Your petitioner submits—

1. The contentions of the respondent as here laid down,

if upheld, would constitute the undoing of the law as laid

down throughout centuries, both by legislative bodies as

well as by judicial edict. Can it be said that Congress ever

21

intended that a man desiring to provide protection for his

wife might not employ some elasticity in the accomplish-

ment of his purpose, for certainly economic cycles do arise

from time to time, and, as they occur, they reveal to us all

that tremendous fluctuations in values also occur and oft-

times with a great diminution in such values? Without the

exercise of some elasticity, any attempt at adequate pro-

tection might well prove an abortive effort. The petitioner

submits that it was to provide relief against the rigors and

penalties of the law that equity was long ago devised.

2. Again, the petitioner submits that Congress intended

that organized charities should be advantaged and not dis-

advantaged by the provisions of the Internal Revenue Code

as from time to time amended. The very provisions of Sec-

tions 23(0) and 162(a) of the Code would gainsay anything

to the contrary. Obviously, if every income dollar should

first have to go through a private pocket, with a tax there-

on, before any part of it could find its way into charity,

clearly charity would be placed at a distinct disadvantage.

3. And still again, it is most unthinkable that Congress

ever intended to place in the hands of any bureaucracy the

right to determine the contracts one should or could make

and the benefits one might or could receive thereunder, con-

structively or otherwise, for, no less obviously, every con-

tract made in this land, or so constructively made under the

respondent’s regulations, would be reviewable and revis-

able by the respondent for tax purposes.

Conclusion.

The petitioner, therefore, submits that the petition for

certiorari should be granted (a) because the questions in-

volved in this case are ones on which the Lower Courts are

definitely in conflict; (b) because of the possible conflict

22

with the decisions of this Court; and (c) because the issues

herein involved present a most important question of fed-

eral law which has not been but should be settled by a de-

cision of this Court.

Respectfully submitted,

ROBERT A. B. COOK,

Counsel for Petitioner.

Of Counsel:

Putrrs, Duran & Cook.

23

Appendix.

Srarute Iyvo.vep.

The pertinent provisions of Sections 22(a), 22(b)(3),

23(0) and 162(a) of the Internal Revenue Code are as fol-

lows:

‘‘Sec. 22. Gross Income.

‘*(a) General Definition. ‘Gross income’ includes gains,

profits, and income derived from salaries, wages, or com-

pensation for personal service (including personal service

as an officer or employee of a State, or any political subdi-

vision thereof, or any agency or instrumentality of any one

or more of the foregoing), of whatever kind and in what-

ever form paid, or from professions, vocations, trades,

businesses, commerce, or sales, or dealings in property,

whether real or personal, growing out of the ownership or

use of or interest in such property; also from interest, rent,

dividends, securities, or the transaction of any business

carried on for gain or profit, or gains or profits and income

derived from any source whatever.”’

‘See. 22. Gross Income.

‘*(b) Eaclusions from Gross Income. The following

items shall not be included in gross income and shall be

exempt from taxation under this chapter:

‘*(3) Gifts, bequests, and devises. The value of

property acquired by gift, bequest, devise, or inheri-

tance (but the income from such property shall be in-

cluded in gross income) ;’’

(Note: This section was amended by the Amendatory

Revenue Act of October 15, 1942, but by the express pro-

24

visions of the amendment, with an exception not here mate-

rial, its application was limited ‘‘to taxable years beginning

after December 31, 1941.’’)

**Sec. 23. Depucrions rrom Gross Income.

‘‘In computing net income there shall be allowed as de-

ductions:

‘*(o0) Charitable and Other Contributions. In the case

of an individual, contributions or gifts payment of which is

made within the taxable year to or for the use of:

**(1) The United States, any State, Territory, or

any political subdivision thereof or the District of Co-

lumbia, or any possession of the United States, for ex-

clusively public purposes ;

‘*(2) A corporation, trust, or community chest,

fund, or foundation, created or organized in the United

States or in any possession thereof or under the law of

the United States or of any State or Territory or of

any possession of the United States, organized and

operated exclusively for religious, charitable, scientific,

literary, or educational purposes, or for the prevention

of cruelty to children or animals, no part of the net

earnings of which inures to the benefit of any private

shareholder or individual, and no substantial part of

_ the activities of which is carrying on propaganda, or

otherwise attempting, to influence legislation ;

‘*(5) a domestic fraternal society, order, or associa-

tion, operating under the lodge system, but only if such

contributions or gifts are to be used exclusively for

religious, charitable, scientific, literary, or educational

25

purposes, or for the prevention of cruelty to children

or animals;

to an amount which in all the above cases combined does

not exceed 15 per centum of the taxpayer’s net income as

computed without the benefit of this subsection. Such con-

tributions or gifts shall be allowable as deductions only if

verified under rules and regulations prescribed by the Com-

missioner, with the approval of the Secretary.’’

(Note: The foregoing section was amended by the

Amendatory Revenue Acts of 1942 and 1944, but these

amendments have no application to the tax years herein in-

volved. )

‘Sec. 162. Net Income.

‘*(a) There shall be allowed as a deduction (in lieu of

the deduction for charitable, etc., contributions authorized

by section 23 (o0)) any part of the gross income, without

limitation, which pursuant to the terms of the will or deed

creating the trust, is during the taxable year paid or per-

manently set aside for the purposes and in the manner

specified in section 23 (0), or is to be used exclusively for

religious, charitable, scientific, literary, or educational pur-

poses, or for the prevention of cruelty to children or ani-

mals, or for the establishment, acquisition, maintenance or

operation of a public cemetery not operated for pro:it;’’