289 U.S. 670 (1933), 792, Burnet v. Wells

Docket Nº:No. 792
Citation:289 U.S. 670, 53 S.Ct. 761, 77 L.Ed. 1439
Party Name:Burnet v. Wells
Case Date:May 29, 1933
Court:United States Supreme Court

Page 670

289 U.S. 670 (1933)

53 S.Ct. 761, 77 L.Ed. 1439




No. 792

United States Supreme Court

May 29, 1933

Argued May 10, 1933




1. Under § 219(h) of the Revenue Acts of 1924 and 1926, where an irrevocable trust is established to pay for insurance on the settlor's life, collect the policy upon his death, and hold or apply the proceeds, under the trust, for the benefit of his dependents, income of the trust fund used by the trustee in paying the premiums is taxable to the settlor as part of his own income. P. 675.

2. This tax is constitutional as applied to income accruing since the enactment of the legislation from trusts created earlier. Pp. 677, 682.

3. Refinements of title are without controlling force in determining whether a statute arbitrarily attributes to one person a taxable interest in the income of another. The question is not whether the concept of ownership reflected in the statute squares with common law traditions, but rather whether that concept could reasonably be adopted because of privilege enjoyed or benefit derived by the taxpayer, some regard being had also to administrative convenience and the practical necessities of an efficient taxing system. P. 678.

4. To overcome this statute, the taxpayer must show that, in attributing to him the ownership of the income of the trusts, or something fairly to be dealt with as equivalent to ownership, the lawmakers have done a wholly arbitrary thing, have found equivalence where there was none nor anything approaching it, and laid a burden unrelated to privilege or benefit. P. 679.

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5. Income permanently applied by the act of the taxpayer to the maintenance of contracts of insurance made in his name for the support of his dependents is income used for his benefit in such a sense and to such a degree that there is nothing arbitrary or tyrannical in taxing it as his. P. 679.

63 F.2d 425 reversed.

Certiorari to review the reversal, in part, of a ruling of the Board of Tax Appeals, 19 B.T.A. 1213, upholding certain assessments of income.

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CARDOZO, J., lead opinion

MR. JUSTICE CARDOZO delivered the opinion of the Court.

Income of a trust has been reckoned by the taxing officers of the government as income to be attributed to

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the creator of the trust insofar as it has been applied to the maintenance of insurance on his life. Section 216(h) of the Revenue Acts of 1924 and 1926 permits this to be done. The question is whether, as applied to this case, the acts are constitutional.

On December 30, 1922, the respondent, Frederick B. Wells, created three trusts, referred to in the record as Nos. 1, 2, and 3, and, on August 6, 1923, two additional ones, Nos. 4 and 5, all five being irrevocable.

By trust No. 1, he assigned certain shares of stock of the par value of $10,000 to the Minneapolis Trust Company as trustee. The income of the trust was to be used to pay the annual premiums upon a policy of insurance for $100,000 on the life of the grantor. After the payment of the premiums, the excess income, if any, was to be accumulated until an amount sufficient to pay an additional annual premium had been reserved. Any additional income was, in the discretion of the trustee, to be paid to a daughter. Upon the death of the grantor, the trustee was to collect the policy, and with the proceeds was to buy securities belonging to the Wells estate amounting to $100,000 at their appraised value. The securities so purchased, which were a substitute for the cash proceeds of the policy, were to be held as part of the trust during the life of the daughter, who was to receive the income. On her death, the trust was to end, and the corpus was to be divided as she might appoint by her will, and, in default of appointment or issue, to the grantor's sons.

The other trusts carried out very similar plans, though for the use of other beneficiaries. Thus, trust No. 2 had in view the preservation of a policy of life insurance which was to be held when collected for the use of one Lindstrom, said to be a kinswoman. Trust No. 3 was directed to the maintenance of four policies of insurance for named beneficiaries, three of them relatives of the

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grantor and one a valued employee, who later became his wife. Trust No. 4 kept alive seven policies of life insurance which had been taken out by the grantor for the use of sons and daughter, and three accident policies for his own use. Trust No. 5 kept alive nine life policies for his sons and daughter, and two accident policies for himself. Several of the deeds made provision for contingent limitations for the benefit of charities.

The grantor, in making the returns of his own income for the years 1924, 1925, and 1926, did not include any part of the income belonging to the trusts. Upon an audit of the returns, the Commissioner of Internal Revenue assessed a deficiency to the extent that the income of the trusts had been applied to the payment of premiums on the policies of insurance. There was no attempt to charge against the taxpayer the whole income of the trusts, to charge him with the excess applied to other uses than the preservation of the policies. The deficiency assessment was limited to that part of the income which had kept the policies alive. The Board of Tax Appeals upheld the Commissioner. 19 B.T.A. 1213. The Circuit Court of Appeals reversed, except as to the premiums on the policies of accident insurance, those policies, in the event of loss thereunder, being payable to the insured himself. As to the income applied to the maintenance of the policies of life insurance, payable, as they were, to persons other than the insured or his estate, the Court of Appeals held that an assessment could not be made against the creator of the trust without an arbitrary taking of his property in violation of the Fifth Amendment. 63 F.2d 425. Section 219(h) of the Revenue Acts of 1924 and 1926, permitting such an assessment, was adjudged to be void. The court drew no distinction between the validity of the statute in its application to trusts in existence at the time of its enactment and its validity in

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application to trusts to be created afterwards. A writ of certiorari brings the case here.

The meaning of the statute is not doubtful, whatever may be said of its validity.

Where any part...

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