Sawtell v. Commissioner of Internal Revenue, 3065.

• Decision Date: 06 March 1936
• Docket Number: No. 3065.,3065.
• Citation: 82 F.2d 221
• Parties: SAWTELL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

82 F.2d 221 (1936)

SAWTELL v. COMMISSIONER OF INTERNAL REVENUE.

No. 3065.

Circuit Court of Appeals, First Circuit.

March 6, 1936.

Charles M. Rogerson, of Boston, Mass. (Roger W. Hardy, of Boston, Mass., on the brief), for petitioner for review.

Arnold Raum, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., on the brief), for Commissioner.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

MORTON, Circuit Judge.

The question is whether the petitioner, Mrs. Sawtell, was properly taxed on the gain on a sale of certain shares of stock which at the time when the sale was made were owned by trustees. The Commissioner held that the gain was income taxable to her, and the Board of Tax Appeals affirmed his decision.

In April, 1930, the petitioner owned 600 shares of the capital stock of the Charlestown Gas & Electric Company represented by voting trust certificates. The stock had been given to her by her husband during the preceding month. After it had become known that the shares were to be sold at a large profit, she transferred them to the Malden Trust Company as trustee on two separate trusts, 300 shares in each, one for each of her daughters. The terms of the trusts were that the trustee should sell the shares and hold the proceeds until January 1, 1931, on which date all the trust property was to be paid over to the grantor if she were then living; if not, each trust was to continue until the daughter of the petitioner, who was made the contingent beneficiary in it, reached the age of twenty-five years. The petitioner was then forty-two years old and in good health. The daughters were six and eight years old respectively. "The controlling motive of the petitioner and her husband in creating the trusts was to effect the sale of the shares of stock through the trusts in such a manner as to reduce the petitioner's individual income tax liability by eliminating the profits from the sale (of the stock) from her income of 1930." (Opinion of Board.)

The Board said in its opinion, "It is not to be supposed that in enacting the trust provisions of the statutes Congress intended that they should be availed of by taxpayers merely for the purpose of gaining an advantage in the computation of their tax." It accordingly held that the trusts should be disregarded and the gain taxed to the petitioner personally. This view cannot, we think, be supported. Nothing is better settled than that persons are free to arrange their affairs to the best advantage for themselves under the law as it stands. A purpose to minimize or avoid taxation is not an illicit motive. "A taxpayer may resort to any legal method available to him to diminish the amount of his tax liability." Mathews, J., Commissioner v. Eldridge (C.C.A.) 79 F.(2d) 629, 631. See, too, Bullen v. Wisconsin, 240 U. S. 625, 631, 36 S.Ct. 473, 60 L.Ed. 830; Jones v. Helvering, 63 App.D.C. 204, 71 F.(2d) 214.

In a very recent English case on this point it was said, "It was not, I think denied — at any rate it is incontrovertible — that the deeds were brought into existence as a device by which the respondent might avoid some of the burden of surtax. I do not use the word device in any sinister sense, for it has to be recognized that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his dispositions so far as they affect tax." Lord Atkin in Inland Revenue Commissioners v. Duke of Westminster, L.R.1936 — A.C. 1, at pages 7, 8. "I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if, in accordance with a court's view of what it considers the substance of the transaction, the court thinks that the case falls within the contemplation or spirit of the statute. The subject is not taxable by inference or by analogy, but only by the plain words of a statute applicable to the facts and circumstances of his case." Lord Russell of Killowen, L.R.1936 — A.C. page 24.

The trusts in this case were actual transactions legally established. While the petitioner's controlling motive in establishing them was to reduce her tax, it was clearly not the only motive. If she had died before January 1, 1931, it is unquestioned that the trusts would have continued many years for the benefit of her daughters, and that the trust property would not have been administered as part of her estate. Cases of fictitious sales or of transactions which were merely "masquerades" are not in point. Unless the trusts come within section 167, the income was not taxable to the petitioner.

Section 167 under which...