Burnet v. Wells

Citation53 S.Ct. 761,289 U.S. 670,77 L.Ed. 1439
Decision Date29 May 1933
Docket NumberNo. 792,792
PartiesBURNET, Commissioner of Internal Revenue, v. WELLS
CourtUnited States Supreme Court

The Attorney General andMr. Erwin W. Griswold, of Washington, D.C., for petitioner.

Mr. James S.Y. Ivins, of Washington, D.C., for respondent.

[Argument of Counsel from page 671 intentionally omitted] 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 the creator of the trust in so far as it has been applied to the maintenance of insurance on his life. Section 216(h) of the Revenue Acts of 1924 and 1926 (26 USCA § 960 note) 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 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 application to trusts to be created afterwards. A writ of certiorari brings the case here. 289 U.S. 716, 53 S.Ct. 528, 77 L.Ed. —-.

The meaning of the statute is not doubtful, whatever may be said of its validity. 'Where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section (214) 955 (the exception having relation to trusts for charities)), such part of the income of the trust shall be included in computing the net income of the grantor.' Section 219(h), Revenue Act of 1924, c. 234, 43 Stat. 253, 26 U.S. Code, § 960 (26 USCA § 960 no e); Revenue Act of 1926, c. 27, 44 Stat. 9, 26 U.S. Code App. § 960 (26 USCA § 960 note).

The purpose of the law is disclosed by its legislative history, and indeed is clear upon the surface. When the bill which became the Revenue Act of 1924 was introduced in the House of Representatives, the report of the Committee on Ways and Means made an explanatory statement. Referring to section 219(h) it said: 'Trusts have been used to evade taxes by means of provisions allowing the distribution of the income to the grantor or its use for his benefit. The purpose of this subdivision of the bill is to stop this evasion.' house Report, No. 179, 68th Congress, 1st Session, p. 21. There is a like statement in the report of the Senate Committee on Finance. Senate Report, No. 398, 68th Congress, 1st Session, pp. 25, 26. By the creation of trusts, incomes had been so divided and subdivided as to withdraw from the government the benefit of the graduated taxes and surtaxes applicable to income when concentrated in a single ownership. Like methods of evasion, or, to speak more accurately, of avoidance (Bullen v. Wisconsin, 240 U.S. 625, 630, 36 S.Ct. 473, 60 L.Ed. 830), had been used to diminish the transfer or succession taxes payable at death. One can read in the revisions of the Revenue Acts the record of the government's endeavor to keep pace with the fertility of invention whereby taxpayers had contrived to keep the larger benefits of ownership and be relieved of the attendant burdens.

A method, much in vogue until an amendment made it worthless, was the creation of a trust with a power of revocation. This device was adopted to escape the burdens of the tax upon incomes and the tax upon estates. To neutralize the effect of the device in its application to incomes, Congress made provision by section 219(g) of the Revenue Act of 1924 (26 USCA § 960 note) that, '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.' The validity of this provision was assailed by taxpayers. It was upheld by this court in Corliss v. Bowers, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916, as applied to a trust in existence at the enactment of the statute, the power of revocation in that case being reserved to the grantor alone, and recently, at the present term, was upheld where the power of revocation had been reserved to the grantor in conjunction with some one else. Reinecke v. Smith, 289 U.S. 172, 53 S.Ct. 570, 77 L.Ed. —-, April 10, 1933. Cf. Burnet v. Guggenheim, 288 U.S. 280, 53 S.Ct. 369, 77 L.Ed. 748. Other amendments of the statute were directed to the trust as an instrument for the avoidance of the tax upon estates. By section 302(d) of the Revenue Act of 1924 (26 USCA § 1094 note), the gross estate of a decedent is to be taken as including the subject of any trust which he has created during life 'where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for a fair consideration in money or money's worth.' The validity of this provision as to trusts both past and future is no longer open to debate. Porter v. Commissioner, 288 U.S. 436, 53 S.Ct. 451, 77 L.Ed. 880. Cf. Reinecke v. 'Northern Trust Co., 278 U.S. 339, 49 S.Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397; Chase National Bank v. United States, 278 U.S. 327, 49 S.Ct. 126, 73 L.Ed. 405, 63 A.L.R. 388; Saltonstall v. Saltonstall, 276 U.S. 260, 48 S.Ct. 225, 72 L.Ed. 565. Through the devices thus neutralized, as well as through many others, there runs a common thread of purpose. The solidarity of the fam ly is to make it possible for the taxpayer to surrender title to another and to keep dominion for himself, or, if not technical dominion, at least the substance of enjoyment. At times escape has been blocked by the resources of the judicial process without the aid of legislation. Thus, Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, held that the salary, earned by a husband was taxable to him, though he had bound himself by a valid contract to assign it to his wife. Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665, laid down a like rule where there had been an assignment by a partner of his interest in the future profits of a partnership. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918, and United States v. Boston & Maine...

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