Commissioner of Internal Revenue v. Blair

• Citation: 60 F.2d 340
• Decision Date: 03 October 1932
• Docket Number: No. 4509.,4509.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. BLAIR.
• Court: U.S. Court of Appeals — Seventh Circuit

60 F.2d 340 (1932)

COMMISSIONER OF INTERNAL REVENUE v. BLAIR.

No. 4509.

Circuit Court of Appeals, Seventh Circuit.

June 23, 1932.

Rehearing Denied October 3, 1932.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

G. A. Youngquist, Asst. Atty. Gen., A. H. Conner and Wm. Cutler Thompson, Sp. Assts. to the Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Prew Savoy, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for petitioner.

J. F. Dammann, Stuart J. Templeton, and Calvin F. Selfridge, all of Chicago, Ill. (Wilson & McIlvaine, of Chicago, Ill., of counsel), for respondent Edward T. Blair.

SPARKS, Circuit Judge (after stating the facts as above).

The statutes involved in this appeal are Revenue Act of 1921, c. 136, 42 Stat. 227, 233, 246, §§ 210, 211 (a) (1), 219 (a) (3, 4), and so much thereof as is applicable is set forth in the margin.¹

The only question presented for our determination is whether the law will permit the trust income devised to respondent by his father's will to be assigned by him prior to his actual receipt of it. If this question be answered in the affirmative, the ruling of the Board is correct; if it be answered in the negative, respondent is properly chargeable with the taxes assessed, and the cause must be reversed.

The citizenship of respondent and testator, the location of the trust property, and the creation and administration of the trust all being in Illinois, we are required to be guided by the laws of that state in determining the question presented. Spindle, Assignee, v. Shreve, 111 U. S. 542, 4 S. Ct. 522, 28 L. Ed. 512.

In Merchants' Loan & Trust Co. v. Patterson, 308 Ill. 519, 139 N. E. 912, 916, the court said: "In a court of law the legal estate of the trustee, as a general rule, has the same properties, characteristics and incidents as if the trustee were the absolute, beneficial owner, and he may so deal with it. In equity, on the other hand, the cestui que trust may deal with his equitable estate as property. He is the beneficial and substantial owner, and if under no disability may sell and dispose of his estate, and any legal conveyance will have the same operation upon the equitable estate as a similar conveyance of the legal estate would have at law upon the legal estate. 1 Perry on Trusts, § 321. It is a fundamental proposition that equitable estates are governed by the same rule as legal estates * * * In the consideration of a court of equity the cestui que trust is actually seized of the freehold. He may alien it, and any legal conveyance by him will have the same operation in equity upon the trust estate as it would have had at law upon the legal estate."

This principle was also recognized and approved in Bryan v. Howland, 98 Ill. 625, Binns v. La Forge, 191 Ill. 598, 61 N. E. 382, Young v. Gnichtel, Collector (D. C., 3d Cir.) 28 F.(2d) 789, and O'Malley-Keyes v. Eaton, Collector (D. C., 2d Cir.) 24 F.(2d) 436; but in none of the cases hereinbefore referred to were there any restrictions against alienation by the assignee, nor was there attempt to protect the trust fund or the income therefrom against liability for assignee's debts or obligations.

As a general rule, the creator of a trust which forms the basis of an annuity may restrict annuitant from alienating the annuity, and may protect it in the hands of the trustee against liability for annuitant's debts. Spindle v. Shreve, supra; Nichols, Assignee, v. Eaton, 91 U. S. 716, 23 L. Ed. 254; Congress Hotel Co. v. Martin, 312 Ill. 318, 143 N. E. 838, 33 A. L. R. 562; Steib v. Whitehead, 111 Ill. 247. In each case cited in this paragraph the instrument which defined the trust contained an express restriction as to alienation or its equivalent. Indeed, it has been quite generally believed that there must be a clear and express restriction in order to prevent the owner of an equitable estate from alienating it, if he so desires.

It is respondent's contention that in testator's will there is no clear and express restriction against alienation of respondent's income from the trust therein established. On the other hand, the Commissioner contends that under the more recent decisions of Illinois there are sufficient restrictions in the instant will to prevent alienation, and that the trust thereby created is a spendthrift trust.

There is no doubt that the courts of Illinois have gone further than many other American courts in upholding limitations as to alienation of equitable estates, and no courts have been more liberal in recognizing spendthrift trusts than have they.

In Bennett v. Bennett, 217 Ill. 434, 75 N. E. 339, 341, 4 L. R. A. (N. S.) 470, the question at issue was whether a legacy in trust until the legatee should arrive at forty years of age could be required to be paid to him before he reached that age. The fact that there was a gift over if the legatee died under forty apparently settled the question in the negative. The court, however, was of the opinion that the legacy was contingent in the sense of being subject to a condition precedent that legatee survive the age of forty, and held that the testator had expressed the spendthrift purpose. The court said: "`It is not necessary that an instrument creating a spendthrift trust should contain an expressed declaration that the interest of the cestui que trust in the trust estate shall be beyond the reach of his creditors, provided such appears to be the clear intention of the testator or donor as gathered from all parts of the instrument construed together in the light of the circumstances.' * * * The fact that a trustee was appointed and vested with the estate and the beneficiary was given the income only is a circumstances from which the intention of the testator to create a spendthrift trust may be inferred."

In Wagner v. Wagner, 244 Ill. 101, 91 N. E. 66, 70, 18 Ann. Cas. 490, the question was whether the cestui, who was of age, could terminate the trusteeship of his absolute and indefeasible equitable interest before the time fixed by the testator, and the court held that the cestui could not so terminate it. There were no express restraints on alienation, and yet the court held that it was a spendthrift trust and, in so holding it, said: "To create a valid spendthrift trust it is not necessary that the cestui que trust should be denominated a spendthrift in the will or that the testator should give his reasons for the creation of it. Nor is it necessary that the will shall in express terms contain all the restrictions and qualifications incident to such trusts. If, upon a consideration of the will, it appears the intention of the testator was to create such a trust, effect will be given to that intention."

Quoting from 26 Am. & Eng. Ency. of Law (2 Ed.) 138, the court said: "`Spendthrift trust is the term commonly applied to those trusts that are created with a view of providing a fund for the maintenance of another and at the same time securing it against his own improvidence or incapacity, for selfprotection. The provisions against alienation of the trust fund by the voluntary act of...