Corliss v. Bowers

• Citation: 34 F.2d 656
• Decision Date: 24 June 1929
• Docket Number: No. 328.,328.
• Parties: CORLISS v. BOWERS, Collector of Internal Revenue.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

34 F.2d 656 (1929)

CORLISS v. BOWERS, Collector of Internal Revenue.^*

No. 328.

Circuit Court of Appeals, Second Circuit.

June 24, 1929.

White & Case, of New York City (Joseph M. Hartfield, Russell D. Morrill, and A. C. Newlin, all of New York City, of counsel), for appellant.

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

Before MANTON, L. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

On December 29, 1922, appellant delivered a trust indenture to the trustee therein named, the Bankers' Trust Company of New York City, together with corporate stocks and securities listed in the schedule annexed to the indenture. It was a trust revocable at any time at the will of the settlor. The trustee was obligated to collect the income from the securities and pay them to the appellant's wife for the term of her life. Upon her death the principal of the trust was then to be paid in equal shares to the appellant's children then living and the issue of any deceased child or children, and in default thereof to such persons as appellant's wife might designate and appoint. The trust was conceded to be valid under the laws of the state of New York. By its terms, the appellant reserved the right, in addition to revocation, to modify or alter in any manner, in whole or in part, the indenture and trust created thereby. The trust remained in this form in 1924, when the income for that year was paid by the trustee to the appellant's wife. The appellant received none of it. In appellant's report of his income for that year, he made note of this trust and the amount of the income, but claimed exemption from tax. He was later assessed $44,687.43, with interest, on the income so paid to his wife, which he has paid under protest and now sues to recover it.

The appellant's contention is that section 219(g)(h) of the act of 1924 (43 Stat. 277 26 USCA § 960, note), under which this assessment was made, is unconstitutional, because it requires him to pay a tax upon the income of another, and, if it be constitutional, it is retroactive, and therefore invalid as applied to income for 1924 upon the trust created in 1922. Section 219 provides:

"(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 moneys paid to the appellant's wife, as income from this trust were taxable to her (Irwin v. Gavit, 268 U. S. 161, 45 S. Ct. 475, 69 L. Ed. 897) prior to the 1924 act. The trust indenture vested the legal title to the corpus of the estate in the trustee. Jones v. Clifton, 101 U. S. 225, 25 L. Ed. 908; Farmers' Loan & Trust Co. v. Bowers (C. C. A.) 29 F.(2d) 14. The present estate vested in the beneficiary, created by this revocable trust, was valid until the power of revocation was exercised. The question here is whether Congress had the power to tax the grantor of the trust for income paid to the beneficiary, where the money, as income in the hands of the trustee, was paid to the beneficiary therein named. In Taft v. Bowers, 278 U. S. 470, 49 S. Ct. 199, 73 L. Ed. ___, an increase in the value of a gift accruing prior to the time the gift was made, while in the hands of the donor, was held to be subject to a tax to be paid by the donee, when she, at a later date, sold the securities. A husband was held subject to the payment of a tax upon the whole of the income of community property held under a state statute of California, and owned jointly by husband and wife, in United States v. Robbins, 269 U. S. 315, 46 S. Ct. 148, 70 L. Ed. 285.

Section 219, according to the legislative debates, was enacted to "secure clarity and prevent the evasion of taxes by means of estates and trusts." House of Rep. vol. 1, 68th Cong. 1st Session, dealing with H. R. 6715 (1924) Revenue Act; Senate Reports, vol. 1, p. 25 (1924); 68th Congress, 1st Session, vol. 4, pp. 19, 20. Congress, by the Sixteenth Amendment, was granted power to lay and collect taxes on incomes, and we think, under the principle of the cases referred to, it could command a settlor of a revocable trust to pay a tax on income paid to a beneficiary in the scheme of lawful taxation, if the method devised by Congress does not become arbitrary or capricious and violate the Fifth Amendment. A settlor of a revocable trust has a sufficient interest in the income of the trust and a relation thereto to justify the claim of a necessity for a fair and proper tax imposition requiring the settlor to pay. He, at all...