Rollins v. Helvering

• Decision Date: 29 October 1937
• Docket Number: No. 10805-10809.,10805-10809.
• Citation: 92 F.2d 390
• Parties: ROLLINS v. HELVERING, Commissioner of Internal Revenue (five cases).
• Court: U.S. Court of Appeals — Eighth Circuit

92 F.2d 390 (1937)

ROLLINS v. HELVERING, Commissioner of Internal Revenue (five cases).^*

Nos. 10805-10809.

Circuit Court of Appeals, Eighth Circuit.

October 5, 1937.

Rehearing Denied October 29, 1937.

J. G. Gamble, of Des Moines, Iowa (J. F. Rosenfield and Gamble, Read & Howland, all of Des Moines, Iowa, on the brief), for petitioners.

John J. Pringle, Jr., Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key and Norman D. Keller, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before STONE, SANBORN, and THOMAS, Circuit Judges.

STONE, Circuit Judge.

These are five individual petitions to review separate redeterminations, by the Board of Tax Appeals, of the respective personal income taxes for 1929 of Harry T. Rollins, Glendora M. Rollins, Margaret C. Rollins, Ellen F. Rollins, and Ralph E. Rollins.

The facts are undisputed. Ellen F. Rollins is the mother of Harry T. and Ralph E. Rollins; Glendora M. Rollins is the wife of Harry T. Rollins, and Margaret C. Rollins is the wife of Ralph E. Rollins. On January 1, 1929, petitioners were the owners, in different amounts, of all but two of the corporate shares of the Rollins Hosiery Company. February 13, 1929, an option to purchase all of this stock was given. On July 19, 1929, this option passed into a "memorandum of agreement" of sale — differing from the option in respects not here important. The memorandum provided that, not later than August 15, 1929, and upon three days notice, the stock would be delivered against the purchase price.

On August 3, 1929, each of the petitioners created certain separate trusts wherein the corpus of each was designated shares of the above stock then owned by the grantor — there were 26 of the trusts in all.¹ So far as here material, the provisions of the various trust instruments are identical. The trustee in all was the City Bank Farmers' Trust Company. The beneficiaries in each were the grantor and either the husband or wife or child or grandchild.

One provision required the trustee to sell "any of the trust property" upon the direction of Harry T. Rollins and "in such manner" as he might direct. On August 8, 1929, the stock passed to the trustee under all of the above 26 trusts, and on the same day the trustee received the required direction to sell to the purchaser under the above memorandum agreement of sale. The trustee sold the stock and collected and holds the proceeds under the trust agreements. Such sales were for more than the cost of the stock to the respective grantors. It is these profits which the Commissioner claims and the Board found to be taxable to the respective grantors as individual capital gains. Petitioners contend that any gains were taxable to the trustee under each of the separate trusts and not to the grantors as individuals.

There being no dispute as to facts, the question here is purely one of law. The situation is that the trustee had legal title to the stock at the time of sale; that it sold the stock in accordance with the trust instruments; that it holds the proceeds of the sales in accordance with such instruments; and that none of the grantors received any part of these proceeds.

If the grantors are individually subject to taxation for gains from these sales, it must be because the transactions fall within section 167 of the Revenue Act of 1928 (45 Stat. 791, 840 26 U.S.C.A. § 167 note). So far as material here, that section is: "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, * * * such part of the income of the trust shall be included in computing the net income of the grantor."

Petitioners contend that the above-quoted provision is not here applicable for two reasons: First, that these capital gains never were distributable income because each of the trust instruments expressly required that "all profits realized from the sale of any part of the trust corpus shall be considered as principal"; and, second, that no discretion was vested in the respective grantors to have such gains paid to them during the tax year 1929.

1. Capital Gains.

The contention that these capital gains are not taxable income to the grantors because the trust instruments expressly treat such as not distributable to the beneficiaries is not conclusive. The taxing statutes are (within constitutional limits) determinative of what is taxable gain and when and to whom it is taxable. Here, there is no dispute as to the existence of a taxable capital gain. The statement in the instruments that such profits "shall be considered as principal" has no effect upon the fact that they are actually profits, and therefore no effect upon the legal situation that such profits are subject to taxation to someone. The effect of such a provision is upon the distribution of what is gain and, therethrough, upon the particular person liable for the tax thereon.

Generally speaking, parties can, by genuine contracts, establish legal relations which may result in locating tax liability. However, if such contracts leave any power of enjoyment of gains (in their nature taxable) in any person, the constitutional power exists in the Congress to tax such gain to that person. DuPont v. Commissioner, 289 U.S. 685, 689, 53 S.Ct. 766, 767, 77 L.Ed. 1447; Burnet v. Wells, 289 U.S. 670, 678, 53 S.Ct. 761, 764, 77 L. Ed. 1439; Reinecke v. Smith, 289 U.S. 172, 177, 178, 53 S.Ct. 570, 572, 573, 77 L.Ed. 1109; Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916. If these instruments had no other pertinent provisions relating to power over these gains by the grantors or if Congress had not used its constitutional authority to tax the grantor for gains of trusts created by him, this provision in these trust instruments as to sales profits being principal might well be controlling. However, there are other provisions in the instruments which require examination in connection with such congressional action. Thus, while giving full force to the provision as to sales profits being treated as principal, we cannot rule these cases upon that point alone, but must consider the other pertinent provisions of the instruments in relation to the application of section 167 to them.

2. Discretion in Grantors.

Section 167 provides that "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, * * * such part of the income of the trust shall be included in computing the net income of the grantor." "Income," as used in this section, means income as defined in that act and, therefore, includes these capital gains. "Grantor" means the person (who creates the trust) as an individual and not merely when acting as grantor. "Discretion" means a power of choice. The full meaning of the quoted provision is that, when an individual who creates a trust has the power thereunder to distribute any part of the income of such trust to himself, he is taxable for such part as though it were a part of his personal income.

Each of these petitioners was a creator of certain of these trusts and these capital gains were incomes of the respective trusts. The inquiry remains as to whether these petitioners had the power to distribute any of such gains to themselves under the terms of the respective trusts created by each of them. The answer must be sought in the trust instruments which set forth, the powers of petitioners. In construing such instruments, we accept the definition in the instruments of terms used therein. The instruments define "principal" or trust corpus as including these capital gains — the word "income" in the instruments does not refer to these capital gains. The pertinent trust provisions dealing with disposition of such corpus are as follows:

"2. The trustee may from time to time apply to the use of myself and my descendants or any of us so much of the principal of the trust as in its discretion it may deem advisable for our proper education, care, comfort and support."

"8. After January 1st, 1930, I reserve the right, from time to time, by an instrument in writing delivered to the trustee, to amend or revoke this agreement, in whole or in part, and to change any beneficial interest hereunder; provided, however, that I shall not have the power at any time during any taxable year within the meaning of the revenue laws of the United States to revest in myself title to any part of the corpus of the trust, except upon written notice delivered to the trustee during the preceding taxable year, or except with the written consent of the beneficiary, other than myself, currently entitled to the distributable income of the trust or of such share thereof as may be affected thereby. * * *

"11. * * * I reserve the right at any time to require the resignation of any trustee at any time acting hereunder and to appoint a successor trustee. * * *"

Paragraph 8, above quoted, contains no power to distribute any of these capital gains to petitioners during the year 1929. It defines the power of revocation or amendment of the trust by the grantor as such; and, purely as a limitation upon that power, prohibits the grantor from exercising such for the purpose of "revesting" in himself any part of the corpus except by giving written notice to the...