Fulham v. Commissioner of Internal Revenue
| Decision Date | 10 April 1940 |
| Docket Number | No. 3531.,3531. |
| Citation | 110 F.2d 916 |
| Parties | FULHAM v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — First Circuit |
Samuel S. Dennis, 3d, of Boston, Mass. (George H. B. Green and Hale & Dorr, all of Boston, Mass., on the brief), for petitioner for review.
Warren F. Wattles, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, and Helen R. Carloss, all of Washington, D. C., on the brief), for Commissioner.
Before MAGRUDER and MAHONEY, Circuit Judges, and PETERS, District Judge.
Petitioner was the grantor of a trust. The Commissioner of Internal Revenue concluded that the income of the trust was taxable to the grantor, under Section 166 of the Revenue Act of 1934, 48 Stat. 729, 26 U.S.C.A.Int.Rev.Code,1 and determined a deficiency in petitioner's income tax for 1935 in the sum of $1184.89. We have before us a petition to review a decision of the Board of Tax Appeals upholding the Commissioner.
The trust was created in 1930. Petitioner conveyed certain property to himself and another as co-trustee. Clause First provided:
Clauses Second and Third contained detailed provisions, operative upon the death of Mary E. Fulham, for the payment of income, and eventually the principal, to the children of the grantor and their issue. Clause Fourth gave the trustees broad powers of management "as if they were the absolute owners free of all trust", specifically mentioning among others the power to invest and reinvest "irrespective of rules of law" and the power "to lend money to any person including any trustee or beneficiary with or without security". Clause Fifth set up a committee of three named persons having a joint power, exercisable in writing by any two of the committee, in terms as follows:
At this time revocable trusts were governed by Section 166 of the Revenue Act of 1928, 45 Stat. 840, 26 U.S.C.A.Int.Rev. Acts, which provided that the income was taxable to the grantor where the grantor had "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 the corpus of the trust. Here the grantor reserved to himself no formal power of revocation either alone or in conjunction with the members of the committee. Section 166 was amended in the Revenue Act of 19322 in order to block a possible means of tax avoidance by the device of vesting the power to revoke the trust in some person other than a beneficiary, whereby in fact the grantor may retain "substantially the same control as if he alone had power to revoke the trust". We set forth in the footnote a portion of the Committee report indicating the general purpose of the 1932 amendment.3
It is specifically conceded in the brief of the petitioner that the committee, in whom the power to revoke the trust was originally vested, did not have "a substantial adverse interest" in the disposition of the corpus or income therefrom, and we shall consider the case on the basis of that concession. Cf. Corning v. Commissioner, 6 Cir., 104 F.2d 329, 333. Consequently, if the provisions of the trust instrument had remained unaltered, the income from the entire corpus would have been taxable to the grantor under paragraph 2 of Section 166 of the Revenue Acts of 1932 and 1934.
However, shortly after the enactment of the 1932 amendment the designated committee executed an instrument amending Clause Fifth of the trust indenture by inserting the following at the end of paragraph A thereof:
By this amendment the power of the committee to revoke the trust and revest the corpus in the grantor became subject to the written consent of Mary E. Fulham. If Mrs. Fulham is found to be a person "not having a substantial adverse interest" in the disposition of the corpus or income therefrom, then the amendment has failed of its obvious purpose, and the income is taxable to the grantor under Section 166.
We think Mrs. Fulham does not have "a substantial adverse interest" within the meaning of the statute.
The evident policy of the Revenue Act is to tax the income to the grantor of a trust when he retains the substantial mastery over the corpus. Even though in form he lodges the power of revocation in someone other than himself, Section 166 is founded on the reasonable premise that the grantor still retains practical mastery, when this power is given to someone having no stake in the trust, or a stake so insubstantial that the holder of the power would not improbably be amenable to the grantor's wishes. This calls for a realistic appraisal.
On the face of the trust instrument, the main objective seems to be to accumulate the income during the life of Mrs. Fulham for the benefit of the children. True, it is provided that the trustees "may" make payments to Mrs. Fulham. On the strength of this, petitioner argues that "Mrs. Fulham is a beneficiary of the trust, to whom the trustee owes a duty of loyalty, and to whom the trustee is accountable in the event of arbitrary, unreasonable or dishonest action". Perhaps Mrs. Fulham has some interest, of a tenuous sort, cognizable in equity. Thus, a court of equity might, at her instance, enjoin ...
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