Reinecke v. Smith

• Decision Date: 10 April 1933
• Docket Number: No. 601,601
• Parties: REINECKE v. SMITH et al
• Court: U.S. Supreme Court

289 U.S. 172

53 S.Ct. 570

77 L.Ed. 1109

REINECKE

v SMITH et al.

No. 601.

Argued March 22, 23, 1933.

Decided April 10, 1933.

The Attorney General and Mr. Erwin N. Griswold, of Washington, D.C., for petitioner.

Mr. Albert L. Hopkins, of Washington, D.C., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

In 1922 Doublas Smith, by five instruments, created as many trusts for the benefit of his wife and four children. The trustees named were the grantor, a son who was a direct beneficiary of one of the trusts and a contingent beneficiary of the others, and a banking company possessed of trust powers. Neither the grantor nor the corporate trustee was a cestui que trust under any of the writings. In each agreement it was stipulated:

'Anything herein contained to the contrary notwithstanding, this Trust may be modified or revoked at any time by an instrument in writing signed by Douglas Smith (the grantor) and either one of the other two trustees or their successors.'

October 22, 1924, each of the agreements was modified by striking out the quoted clause, and the grantor resigned as trustee. He did not report any of the income which accrued in the year 1924 upon the trust property. The Revenue Act of 1924, § 219(g), 43 Stat. 253, 275, 277 (26 USCA § 960 note), directs:

'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 Commissioner of Internal Revenue held that this section required a return by Smith of the trust income for the period January 1, 1924, to October 22, 1924, and assessed against him additional tax, which was paid under protest. The respondents, who are the personal representatives of Smith, now deceased, brought this suit to recover the sum paid. A demurrer to the declaration was overruled, and judgment given for the respondents. The Circuit Court of Appeals affirmed, holding that, as to trusts created prior to the adoption of the act, section 219(g) violates the Fifth Amendment when applied to impose a tax by reason of property and the income therefrom disposed of by the grantor before the passage of that or any other law taxing the income of such a trust to the settlor. 61 F.(2d) 324. The case is here on certiorari, 288 U.S. 596, 53 S.Ct. 397, 77 L.Ed. —-.

Petitioner maintains the section in terms applies in the circumstances disclosed; as the tax is laid only upon income accruing after January 1, 1924, the statute is not retroactive; and, as the grantor retained a measure of control, to tax him upon the income is not arbitrary or unreasonable though the trusts were created before any statute had laid a tax upon the settlor measured by the income of such a trust.

The respondents argue in support of the judgment that the trustee is a beneficiary of the trust as the phrase is used in the section and the income in question is therefore exempt from taxation to the settlor, and that, if this view be rejected, the provision offends the Fifth Amendment.

The unambiguous phraseology of the act precludes the suggested construction. A trustee is not subsumed under the designation 'beneficiary.' Both words have a common and accepted meaning—the former signifies the person who holds title to the res and administers it for the benefit of others; the latter the cestui que trust who enjoys the advantages of such administration. The ordinary meaning of the terms used, which we are bound to adopt (Old Colony R. Co. v. Commissioner, 284 U.S. 552, 560, 52 S.Ct. 211, 76 L.Ed. 484), and the view held by those charged with enforcement of the act, ratified by re-enactment of the section,¹ alike forbid the adoption of the construction for which the respondents contend.

Nor do we think the act has such a retroactive effect as to render its requirements arbitrary within the principle announced as to estate and gift taxes in Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081, Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 645, and Blodgett v. Holden, 275 U.S. 142, 48 S.Ct. 105, 72 L.Ed. 206. In those cases the issue was the validity of a tax on a transaction consummated before the enactment of the statute authorizing the exaction. In the present case the subject of the tax is not the creation of the trusts or the transfer of the corpus from the grantor to the trustees, but the income of the trusts which accrued after January 1, 1924, the effective date of the Revenue Act of 1924. ² Although the act was passed June 2, 1924, the imposition of the act on income received or accrued from the beginning of the year has been held unobjectionable. Cooper v. United States, 280 U.S. 409, 411, 50 S.Ct. 164, 74 L.Ed. 516. Compare Fawcus Machine Co. v. United States, 282 U.S. 375, 379, 51 S.Ct. 144, 75 L.Ed. 397.

We come then to the final position of the respondents: That when applied in this case the statute is so arbitrary and unreasonable as to deny the due process guaranteed by the Fifth Amendment, since the exaction is based, not on the settlor's income or on income from his property, but on that which accrued to other persons from property to which they alone had sole and exclusive title. The argument proceeds upon the theory that until alteration or revocation of the trust the trustees held the legal title to the property for the sole benefit of the cestuis, and received the income; that both principal an d income were beyond the control of the grantor until the alternation of the trust on October 22, 1924.

We have not heretofore had occasion to pass upon the question thus presented. In Corliss v. Bowers, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916, the section of the Revenue Act of 1924 now under consideration was held to justify assessment of income tax to the settlor with respect to the income of a trust revocable by him alone. Reinecke v. Northern Trust Company, 278 U.S. 339, 49 S.Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397, construed section 402(c) of the Revenue Act of 1921 (42 Stat. 278), which included within the sweep of a transfer tax any interest of which a decedent had at any time made a transfer, or with respect to which he had created a trust intended to take effect in possession or enjoyment at or after his death. The tax was upheld as applied to the corpus of trusts over which the grantor had sole power of revocation. It was, however, condemned as to those where revocation was dependent upon joint action of the grantor and the beneficiary, for the reason that the interest of the beneficiary was adverse and the grantor unable at will to alter or destroy the...