Wells v. Commissioner of Internal Revenue

• Decision Date: 04 February 1933
• Docket Number: No. 9191.,9191.
• Citation: 63 F.2d 425
• Parties: WELLS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

63 F.2d 425 (1933)

WELLS v. COMMISSIONER OF INTERNAL REVENUE.

No. 9191.

Circuit Court of Appeals, Eighth Circuit.

February 4, 1933.

COPYRIGHT MATERIAL OMITTED

James S. Y. Ivins, of Washington, D. C. (Kingman Brewster, of Washington, D. C., James B. Templeton, of Minneapolis, Minn., and O. R. Folsom-Jones and Richard B. Barker, both of Washington, D. C., on the brief), for petitioner.

Charles B. Rugg, Asst. Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and A. H. Fast and F. L. Van Haaften, Sp. Attys., Bureau of Internal Revenue, all of Washington, D. C., and Erwin N. Griswold, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before KENYON, GARDNER, and SANBORN, Circuit Judges.

KENYON, Circuit Judge.

This is a proceeding to review a decision of the Board of Tax Appeals, and involves income taxes for the years 1924, 1925, and 1926. The facts are not in dispute. Petitioner on December 30, 1922, created by separate trust indentures three certain trusts, which will be herein referred to as Trusts 1, 2, and 3. On August 6, 1923, he created two additional trusts, referred to as Trusts 4 and 5. The income from all these trusts and the principal, if necessary, was to be used by the trustee to pay premiums on certain policies of insurance on petitioner's life. As we deal with these trusts separately hereafter it will be sufficient to say at this point that they were created by irrevocable deeds of trust conveying certain property to a trustee by which benefits were conferred upon certain relatives of petitioner, annuitants, and charities. Petitioner did not include for the years in question in his income tax return the dividends received from the securities assigned to the trustee and used to pay the premiums on the life insurance policies. The Commissioner of Internal Revenue made a deficiency assessment of additional income taxes for these years, including in petitioner's taxable income that part of the dividends received by the trustee upon the securities constituting the corpus of each trust and used to pay the premiums on the insurance policies, claiming to do so in accordance with the provisions of section 219 (h), c. 234, of the Revenue Act of 1924, and section 219 (h), c. 27, Act of 1926 (26 USCA § 960 note). Sections 219 (g) and (h), which are closely related, are as follows:

"(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 955 214), such part of the income of the trust shall be included in computing the net income of the grantor."

The policies on which premiums were paid were concededly not for the purposes specified in section 214 (a) (10) of the Revenue Act of 1924, 26 USCA § 955 (a) (10).

The Board of Tax Appeals sustained the deficiencies found by the Commissioner for the years 1925 and 1926, and increased the deficiency for 1924 to cover an error made by the Commissioner. The basis of its decision is thus expressed: "As to the contention that the trust corpus and the insurance policies were no longer a part of the petitioner's estate nor subject to his debts, it seems true that petitioner by the trust indentures and by the assignments of insurance policies has parted with all right to revest such property in himself. But by the terms of the trust indentures he has provided that the income from the trust corpus shall discharge him from obligations which he had assumed and by the same indentures he has disposed of the proceeds of the insurance policies upon his death just as effectively as he could have done had he disposed of the same by will as a part of his personal estate."

When the case reached this court, being in doubt as to the questions involved, it certified the matter to the Supreme Court, and asked instructions as to these questions:

"Question 1. Does section 219 (h) of the Revenue Acts of 1924 and 1926 apply to irrevocable trusts?

"Question 2. Is section 219 (h) of the Revenue Acts of 1924 and 1926 constitutional as applied to irrevocable trusts created prior to the passage of the Revenue Act of 1924?

"Question 3. On the facts stated, did the petitioner receive income arising under the trusts during the years 1924, 1925, and 1926?"

May 2, 1932, the Supreme Court dismissed the certificate on the ground that the questions were not properly framed and that the statement of facts therein was inadequate. Wells v. Commissioner of Internal Revenue, 286 U. S. 529, 52 S. Ct. 503, 76 L. Ed. 1271.

We shall therefore attempt to answer our own questions duly impressed with the realization that it is more difficult to answer questions than to ask them.

After the return of the certificate to this court, a motion by respondent for reargument was granted, and it was directed that a supplemental record be submitted showing the five trusts and the insurance policies involved. This was done and respondent filed supplemental argument raising additional questions, viz., that Trusts 2 and 3 were invalid and could be revoked at any time by petitioner, and that he retained substantial interest in Trusts 2, 3, 4, and 5. It will make for clarity we think first to discuss fully the law with reference to Trust No. 1, concerning which the supplemental argument raises no new question, and then determine whether the other four trusts are assimilable on their facts and the law to Trust No. 1.

This trust was executed December 30, 1922, and is designated "Frederick B. Wells Trust For the Benefit of: Mary Wright Peavey Wells." She was his daughter. It was duly accepted by the trustee, Minneapolis Trust Company. By the trust instrument petitioner assigned, transferred, and conveyed to the Minneapolis Trust Company, of Minneapolis, Minn., as trustee, "Certificate No. 8 for 1000 shares of the six per cent cumulative preferred stock of the Wells Securities Company, a Delaware corporation, said stock being of the par value of $100.00 per share," to "take possession of, manage and control the trust estate, and demand, receive and collect the income and dividends therefrom, and invest and reinvest the trust estate, and * * * retain the corporate stock herein conveyed as long as it deems best, or * * * sell and convey the same, at such prices, in such parcels, and upon such terms as it may deem best." Reinvestments were to be made only in such securities "as are now authorized by the laws of the state of Minnesota for the investment of funds by trust companies."

The income of the trust estate, and as much of the principal as should be necessary, was to be used to pay the net annual premiums on ordinary life policy No. 472778 of the Connecticut Mutual Life Insurance Company of Hartford, Conn., issued December 30, 1922, for $100,000, on the life of petitioner and payable to the "Minneapolis Trust Company, Trustee," or its successors or assigns, as beneficiary. By the terms of the trust the trustee was given full power and authority "to deal with the said Insurance Company and with the said insurance in any manner that it may deem for the best interests of such Minneapolis Trust Company, as Trustee, and may borrow money thereon, or may avail itself of any of the conditions, privileges or benefits provided by the terms of the said policy of life insurance."

The policy itself contained the usual provisions for dividends to be either (1) paid in cash, (2) left with the company to mature the policy as an endowment, (3) applied on premiums, or (4) converted into paid-up additional insurance; for nonforfeiture benefits in the form of cash value payable on surrender or convertible into paid-up or extended insurance; for policy and premium loans; and for optional settlements at maturity. Dividends were expressly made payable to the "Minneapolis Trust Company, Trustee." In the event of the dividends being left to mature the policy as an endowment, the face value thereof was payable to the "payee," which was, of course, the Minneapolis Trust Company, as trustee. The plan of the policy could be changed "upon written request by the insured with the beneficiary," * * * and the mode of settlement could be changed upon "application by the insured with the beneficiary, * * * or upon application by the payee at the maturity of this policy." In his application petitioner specifically renounced all power to change the beneficiary, and designated the Minneapolis Trust Company, trustee, as the party to whom all life or death benefits should be made payable and who should exercise the options granted for change in plan, for paid-up or extended insurance, and for premium loans.

Any excess of the income of the trust estate over the amount needed to pay the first and successive net annual premiums upon the above policy of life insurance was to be accumulated until sufficient to pay one additional net annual premium and after that was to be paid, in the discretion of the trustee, at the end of each year, to Mary Wright Peavey Wells, daughter of petitioner.

Upon the death of petitioner the trustee was to collect the proceeds of the policy and purchase therewith from the...