Corliss v. Bowers

• Decision Date: 09 January 1929
• Citation: 30 F.2d 135
• Parties: CORLISS v. BOWERS, Collector of Internal Revenue.
• Court: U.S. District Court — Southern District of New York

30 F.2d 135 (1929)

CORLISS v. BOWERS, Collector of Internal Revenue.

District Court, S. D. New York.

January 9, 1929.

White & Case, of New York City (Joseph M. Hartfield and Russell D. Morrill, both of New York City, of counsel), for plaintiff.

Charles H. Tuttle, U. S. Atty., of New York City (Samuel C. Coleman, of New York City, of counsel), for defendant.

MACK, Circuit Judge.

Motion to dismiss complaint in an action to recover income taxes collected pursuant to section 219 (g) and (h) of the Revenue Act of 1924, 43 Stat. 277 (26 USCA § 960, note).

The complaint sets forth that in 1922 plaintiff established a "bona fide" trust of personalty, the income to be paid to his wife, with remainders over for his children. The instrument reserved to the settlor full control over the trust investments and provided:

"Notwithstanding anything to the contrary herein contained, the party of the first part may, from time to time, during the continuance of the trust by instrument in writing and acknowledged * * * modify or alter in any manner, or revoke in whole or in part, this indenture and the trusts then existing, and the estates and interests in property hereby created, and in case of such revocation said instrument shall direct the disposition to be made of the trust fund * * * and no one shall have any right, interest or estate under this indenture except subject to the proper modification, alteration or revocation thereof."

The complaint further shows that during the year 1924 the net income from the trust, $124,325.97, was paid over to the wife, and that plaintiff was assessed in respect thereto $44,687.43. The action is to recover this sum paid under protest.

The relevant statutory provisions are:

"(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."

"(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, or 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), such part of the income of the trust shall be included in computing the net income of the grantor."

The sole issues in this case are whether the statutory provisions are constitutional, and, if so, whether they may constitutionally be applied to trusts created before their passage.

Under the Revenue Acts before that of 1924, there had been doubt and confusion as to whether the income from revocable trusts was taxable to the settler or the beneficiary. Originally the settlor was held taxable; this administrative practice was reversed, pursuant to an opinion by Solicitor Mapes of the Treasury Department (Cum. Bull. 1-2, p. 5, L. O. 1102). After the decision in Stoddard v. Eaton (D. C.) 22 F.(2d) 184, the department returned to its original practice. The Stoddard Case is greatly limited by Warden v. Lederer (D. C.) 24 F.(2d) 233.

Meanwhile the committees of Congress, in framing the 1924 Revenue Act sought, as the reports of both bodies said, "to prevent the evasion of taxes by means of estates and trusts." The report of the Senate Finance Committee also said:

"The creation of a revocable trust constitutes nothing but an assignment of the right to future income. Since such an assignment does not operate to decrease the taxable income of the assignor, the creation of a revocable trust should not so operate, but the income of such trust should be included in the income of a grantor. The bill so provides."

It is properly conceded that the first sentence of the quotation from the Senate report is not a technically correct statement of the law. The creation of a revocable trust vests in the beneficiary a present estate in all respects valid until the power of revocation is exercised. Jones v. Clifton, 101 U. S. 225, 25 L. Ed. 908; Van Cott v. Prentice, 104 N. Y. 45, 10 N. E. 257. Bing v. Bowers (D. C.) 22 F.(2d) 450, a case within the language of the quotation, illustrates the incorrectness of the quotation with respect to the present case. It was there held that a transfer of the right to the net proceeds of future rents from realty owned by and under the control of the donor was nothing but an assignment of the right to receive future income. Here the income arose from property equitably owned for life by the beneficiary; this income came immediately into her possession through the hands of the trustee. Plaintiff therefore argues that the holding in Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, that Congress cannot constitutionally tax as income what is not in law income, logically implies that Congress cannot tax as plaintiff's income what is not his but his wife's income.

The Macomber Case, however, is not authority for the proposition which plaintiff asserts. There Mr. Justice Pitney (page 207 40 S. Ct. 193) says:

"Here we have the essential matter: Not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital, however invested or employed, and coming in, being `derived,' that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; that is, income derived from property."

But the context and the italicization show that the emphasis was not at all upon that part of the sentence which would be relevant here. The decision merely holds that, since the power given by the Sixteenth Amendment was to tax income, only income could be taxed; there was no occasion to decide, and there was no decision, as against whom the income could be taxed. Regardless of whether or not the Solicitor of the Treasury Department was properly influenced by Eisner v. Macomber in interpreting a doubtful statute, it is not a precedent on the present question of constitutionality.

It...