Álvarez Feito v. Secretary of the Treasury

80 P.R. 15

Opinions

ON MOTION FOR RECONSIDERATION

Mr. Chief Justice Snyder

delivered the opinion of the Court.

In 1942 Belarmino Alvarez Feito established a trust of corporate stock in favor of his two minor children. In 1950 the then Treasurer notified Alvarez with income tax deficiencies for 1943, 1944 and 1945 on the ground that the income from the trust was attributable to Alvarez. The latter sued in the former Tax Court to set aside the deficiencies. After a trial on the merits, the former Tax Court upheld the action of the Treasurer and dismissed the complaint.

For the reasons stated in its opinion, the majority of this Court affirmed the judgment of the trial court. Álvarez v. Secretary of the Treasury, 78 P.R.R. 395. Mr. Justice Pérez Pimentel and the writer of this opinion concurred in the result. The taxpayer filed a motion for reconsideration. In addition, several amici curise have appeared urging the Court to change the grounds for its judgment. The Secretary of the Treasury has filed his opposition to the motion of the taxpayer and the motions of the amici curias.

I

Validity of the Trust

We are met at the threshold of the case with the question of whether as here a trust may be validly created by a father with his property for the benefit of his unemancipated minor children.¹

This problem was not presented to the trial court or' decided by it.² Nor was it argued here by the parties in their original briefs. However, since it is examined in detail in the previous majority opinion and in the briefs on reconsideration, we think it advisable to pass on the issue of the validity of the trust herein.

The basic point which must be emphasized at the outset is that in a trust legal title to property and the benefits which flow therefrom are separate. The trustee is the owner of the legal title, whereas the “equitable title” is in the beneficiaries. This division of legal title and equitable ownership is the heart of the trust concept. It is contrary to civil law notions where the trust, as found in Anglo-American law, was formerly unknown.³ But it has Been made part of our Civil Code.⁴

The separation between legal title and equitable interest in a trust was the ratio decidendi of Part I in Belaval v. Court of Eminent Domain, supra. In that case the parents created a trust of certain real property in favor of their two minor and one conceived but unborn child. Subsequently, the land in question was condemned by the People of Puerto Rico. In a unanimous decision we held, reversing the former Condemnation Court, that the money deposited by the People as compensation for the said property should be paid directly to the trustee instead of following the pro cedure provided in § § 614 et seq. of the Code of Civil Procedure, 1933 ed., 32 L.P.R.A. § § 2721-23 — in connection with § § 159 and 212 of the Civil Code, 31 L.P.R.A. § § 616, 786 — for the alienation or encumbrance of property belonging to minors.

We pointed out in the Belaval case at p. 251 that the contrary order of the former Condemnation Court “... is in open conflict with the basic concept of the creation of trusts brought to Puerto Rico by the Act of 1928, which is an adaptation from the one enacted in Panama in 1925 following the Anglo-Saxon system of ‘trusts’.” After quoting § § 834, 849, 864-67 of the Civil Code, 31 L.P.R.A. § § 2541, 2556, 2571-74, relating to trusts, we added at pp. 253-54:

“According to the above provisions the error committed by the lower court is evident in holding that for the investment of the property held in trust the trustee should follow the procedure provided by § § 614 et seq. of the Code of Civil Procedure, wherein, according to the Civil Code, the parents or the tutors of minors or of incapacitated persons need judicial authorization to do anything relative to the keeping of said minors or incapacitated persons or their property. These cases deal with property belonging to minors or incapacitated persons. In trusts the property which belonged to the settlor has been conveyed to the trustee, who has all rights and interest corresponding to the full ownership, with the only restriction that the transfer is made in accordance with the mandate of the settlor for the benefit of the beneficiary. . . . The title to the property transferred in trust is vested [in] the trustee and it is so recorded in the Registry of Property subject to the terms of the trust and not [in] the beneficiary minors in this case. . . . The party actually interested in obtaining the money deposited in the condemnation proceeding is not the minors but the trustee, since he is the person bound to maintain any action arising in consequence of said proceeding. . . (Italics, except “full-ownership”, ours).

As the above quotation shows, we recognized in the Bela-val case that in a trust the property belongs to the trustee, although it is of course administered for the benefit of the cestui que trust. Bearing in mind that the legal title and equitable interest in a trust are separate, we turn to the contention that a trust may not be validly created by a father on behalf of his minor children with property belonging to the father. This contention, which is accepted in the previous majority opinion, can not be reconciled with Belaval v. Court of Eminent Domain, supra, and Clínica Dr. Mario Juliá, Inc. v. Secretary of the Treasury, supra. Prior to the present case, this Court had never specifically discussed the question of the validity of a trust created by a father for his minor children under the Civil Code. But in the Belaval and Julia cases our decisions were necessarily based on the premise that such a trust is valid.⁵

As already noted, we held in the Belaval case that money paid for compensation for condemnation of trust property should be paid directly to the trustee instead of following the procedure provided in § 614 et seq. of the Code of Civil Procedure. Even more significant, on the point now under consideration, is the fact that in the Belaval case the trustee would not have been entitled to the deposit made by the People if the trust had not been valid.

The Belaval case also involved the question of whether property placed in trust for a conceived but unborn child was subject to the gift tax imposed by Act No. 303, Laws of Puerto Rico, 1946, 13 L.P.R.A. § § 881-905. Under § 1 of Act No. 303, 13 L.P.R.A. § 881, a gift “ . . . also includes any transfer in trust (fideicomiso).” In the Belaval case the child was conceived before the effective date of Act No. 303, but was born after that date. We held in Part II of the Belaval opinion that the gift tax need not be paid on this transfer because the trust came into effect when the trust instrument was executed and accepted by the trustee ■prior to the effective date of Act No. 303, and not when the ‘child was born subsequent to the effective date of the said -Act. We also pointed out that the trust would be liable for fhe tax imposed under §20 (a) (1) of the income Tax Act. Here again the significance of Part II of the Belaval opinion is that our discussion of the gift tax question was predicated on the premise that a trust could be validly created by a father for his minor children, both born and unborn. Belaval v. Court of Eminent Domain, supra, pp. 255-61.

In the Juliá case, Dr. Juliá and his wife created a trust of shares of stock of Clínica Dr. Mario Juliá, Inc., in favor of their two minor children. Under the terms of the trust each of the beneficiaries was entitled to receive 25 per cent of the net income from the trust, not in excess of $2,400; the trustee was empowered to reinvest the remainder of the trust income. The trustee loaned the corporation $70,000 at 5 per cent interest annually. The corporation paid the interest to the trustee in 1946, 1947, and 1948. We held, contrary to the contention of the Secretary of the Treasury, that the corporation was entitled to deduct these interest payments. We so held because, unlike the Federal Act, §32 (a) (2) of our Act, as amended by Act No. 107, Laws of 1943, did not prohibit deductions of such interest payments in connection with a trust. Clínica Dr. Mario Juliá, Inc. v. Secretary of the Treasury, supra, pp. 498-506, 510-12. It is important to note that if the trust had not been valid, the stock would have belonged to Dr. Juliá and his wife rather than to the trustees. And our §32 (a) (2) as it then read would have prohibited deduction of interest paid by the corporation to Dr. Juliá and his wife since they owned the majority of the stock of the corporation. Here again the necessary implication of our decision was that the trust created by Dr. Juliá and his wife for their minor children was valid. In fact, our discussion of Helvering v. Clifford, supra, in the Juliá case at pp. 504-05 — and our conclusion therein that the Clifford doctrine did not apply to the facts in the Julia case — would have no meaning unless we were accepting the validity of the trust as such.

We reaffirm the position we implicitly took in the Belaval and Julia cases upholding as valid a trust created by a father on behalf of his minor children with property belonging to the father. Under § 855 of the Civil Code, 1930 ed., 31 L.P.R.A. § 2562, a trust may be created “ ... in any form, for any purpose and upon any terms or conditions, not contravening the law or the public morals or not specifically prohibited by this Code.” We find nothing in the Civil Code which specifically prohibits a father from creating a trust with his property for his minor children. We see no reason for reading such a limitation into § 855. In addition, there arfe analogous cases which persuade us that such a trust is valid. First, a father may under the proper circumstances make a gift to his minor children.⁶ Second, he may create a trust, presumably with his own property, in favor of his future children.⁷ Third, as the previous majority opinion concedes in 78 P.R.R. at 405, a trust may be validly created by a stranger in favor of a minor. The problems with reference to property and income of a minor are substantially the same in these three situations as in the instant 'case. -Our Civil Code permits the trusts and gifts in these three cases; in the same way, the trust herein is valid.

Footnotes

•

7a

We find nothing in § § 155-56 of the Civil Code which 3s incompatible with our conclusion that a trust may be validly created by a father with his property for his minor children. Section 156 plays no role in such a trust as that section does not contemplate the transfer of ownership by the father.⁸ Section 155 has no bearing on the corpus of the trust, since as we have seen the latter is “acquired” by the trustee, not by the child.⁹ Section 155 would come into play if and when income from the trust was received by the minor beneficiaries in accordance with the trust instrument. Such income would be property acquired by the minors by “título lucrativo”.10 And under § 155 the said income would belong as property to the children, but the usufruct of this income would belong to the father herein. We hold in Part II, in view of the administration and control by the father of the right of the minor beneficiaries to receive the income from the trust herein and of other factors, that the said income is taxable to the father-grantor, although such income is property belonging to the children under § 155. But these considerations as to (1) ownership of the corpus of the trust and the income therefrom under § 155 and (2) the taxability of the latter to the father-grantor under our Income Tax Act, do not impair the validity of the trust created under § § 834-74 of the Civil Code.10a On the contrary, they are part of the pattern whereby we harmonize (1) §§ 155-56 and other sections of the Civil Code, with (2) § § 834-74 of the Civil Code, providing for the constitution of trusts, and with (3) the sections of the Income Tax Act relating to trust income.¹¹

We note finally that in this ease we need not pass on the question of whether a father with patria potestas may ever waive or alienate the usufruct of property belonging to his minor children. In the first place, as to the corpus of the trust no problem exists: there is nothing for the father to waive, as the trustee, not the child, acquired the trust property. Second, as to the trust income, it is enough to say in this case that the father has not waived the usufruct from said income in view of the fact that — as set forth in detail in Part II — under the Civil Code the right of the minor beneficiaries to withdraw the income as provided in the trust instrument herein gave the father the right to administer and control the trust income.¹²

We hold that the trust in this case is valid even though it was created by a father with his property for the benefit of his unemancipated minor children.¹³ We turn to the different question of whether the income from the trust in this case is taxable to the grantor.

hH

Although the trust is valid, the income therefrom is taxable to the grantor.

The vital fact here is that the fifth clause of the trust instrument, as set forth in 78 P.R.R. at 403, directs the trustee to invest the income “ . . . which has not been withdrawn . . by the beneficiaries. As noted in Part I, § 156 of the Civil Code never applies to the corpus or income of a trust, see footnote 8 and text preceding it. Also, as we have seen in Part I, under § 155 the corpus of the trust belongs to the trustee, but any income received therefrom by the minor beneficiaries would be property of the minors; on the other hand, the usufruct of this income would belong to the father-grantor.

Here the trust instrument permits the beneficiaries to withdraw the income. But § 154 required the father (1) to determine whether to exercise this right to withdraw the income and (2) to administer it on behalf of the minor beneficiaries if and when it was collected from the trustee.¹⁴ This power to withdraw and to administer the income on the part of the father — together with the ownership by the father of the usufruct from such income under § 156 — are sufficient to make the income from the trust taxable to the father under §§ 22(h) and 15(a) of the Income Tax Act. Helvering v. Stuart, supra, and Helvering v. Clifford, supra.

In the Stuart case the Supreme Court held at pp. 169-71 that under § 167 of the then Federal Internal Revenue Code a father who created a trust containing a provision that the income thereof might, in the discretion of the trustees, be used for the support of his minor children, was taxable on the trust income even though it was not in fact used for such support. In holding the said income taxable to the grantor under § 167, the court said at pp. 170-71: “Under such a provision the possibility of the use of the income to/ relieve the grantor, pro tanto, of his parental obligation [of support] is sufficient to bring the entire income of these trusts for minors within the rule of attribution [to the grantor] laid down in Douglas v. Willcutts [296 U.S. 1].” (Underscoring and matter in brackets ours) ,¹⁵

Section 20(h) of our Income Tax Act — § 20(h), Laws of Puerto Rico, 1925, 13 L.P.R.A. § 699(h) — was substantially copied from § 167 of the Federal Internal Revenue Code of 1924. It provided in its pertinent part that “Where any part of the income of a trust may ... be distributed to the grantor . . . such part of the income of the trust shall be included in computing the net income of the grantor.” ■Section 167 of the Federal Act has been amended from time to time. But the Stuart case arose under § 167 when the latter was virtually identical with our § 20(h). This portion of the Stuart case therefore applies to cases arising under our § 20 (h) ,¹⁶

Here the father had the right to determine both whether the income should be withdrawn and also to administer it under §154 of the Civil Code; in addition, he owned the usufruct therefrom under § 155. Under those circumstances we think the income is attributable to the father-grantor under § 22(h) of the Act. The father here certainly stood to gain as much from the trust as in the Stuart case where the only potential benefit the father had was the possibility, which never occurred,¹⁷ that the income might, in the discretion of the trustee, be used for the support of his minor children. The Stuart case, particularly as reinforced by the Clifford case, operates to make the income from the trust herein taxable to the father-grantor under § 22 (h) ,¹⁸

Helvering v. Clifford, supra, reinforces our conclusion that the trust income herein is taxable to the grantor. In that case the Supreme Court held that the income of a trust was taxable under the then § 22 (a) of the Federal Act — our §15(a), 13 L.P.R.A. § 694 — although not payable to the grantor himself and not to be applied in satisfaction of his legal obligations, if he retained a control of the trust so complete that he was still in practical effect the owner of the corpus of the trust. In Helvering v. Stuart, supra, at pp. 168-69, the court remanded the case as to one of the trusts involved therein for the trier of the facts to determine whether the Federal § 22(a), read together with the Federal § 167, made it necessary to attribute the income from this particular trust to the grantor. The inference was that the interplay of these two Sections “. . . might operate to justify a tax [on the grantor] under . . . sec. 167, even though sec. 167 would not otherwise have applied.” 2 P-H, Federal Taxes, 1955, p. 15,150. See Mallinckrodt v. Nunan, 146 F.2d 1 (C.A. 8, 1945), cert, denied, 324 U.S. 871; Emery v. Commissioner of Internal Revenue, 156 F.2d 728 (C.A. 1, 1946). Cf. Commissioner of Internal Revenue v. Bateman, 127 F.2d 266 (C.A. 1, 1942).¹⁹ It follows that in our case' even if § 20(h) — our equivalent of the Federal § 167 — were not sufficient, standing alone, to make the trust income attributable to the grantor, § 15(a) — copied from the Federal §22 (a) — would, when read together with § 20(h), require that result under the terms of this trust and in the light of § § 154-55 of the Civil Code and the Hernandez case, even as to income not in fact withdrawn by the beneficiaries. Cf. our discussion of the Clifford case as applied to the facts of the Julia case at pp. 504-05 of the latter case, to which we have already adverted in Part I.²⁰

Hernández v. Tax Court, supra, arose under different sections of the Civil Code and did not involve property held in trust. Nevertheless, its holding — that income accruing from property belonging to minors is taxable to the conjugal partnership consisting of their mother and stepfather — is wholly compatible with the conclusion we reach here. Moreover, in the Julia case this Court at p. 499 implicitly accepted the reasoning of the trial court that the 25 per cent of the trust income payable to the minor beneficiaries was taxable to their father, the grantor of the trust.²¹

There remains for consideration Article 225 of Regulations No. 1, substantially copied from the then Federal Regulation, which provides in part: “If a minor has been emancipated by his parent, his earnings are his own income, and such earnings, regardless of amount, are not required to be included in the return of the parent. If the aggregate of the net income of a minor from any property which he possesses, and from any fund held in trust for him by a trustee or guardian, and from his earnings in case he has been emancipated, is at least $1,000, or his gross income is at least $5,000, a return as in the case of any other individual must be made by him or by his guardian, or some other person charged with the care of his person or property for him. See article 231. In the absence of proof to the contrary, a parent will be assumed to have the legal right to the earnings of the minor and must include them in his return.”

The second sentence of the above-quoted portion is invalid in view of the result reached here and in the Hernández case. We should have so stated in the latter case instead of relying as we did at pp. 667-68 on the presumption in the last sentence of Article 225, which applies only to earned and not to unearned income. See 8 Mertens, Law of Federal Income Taxation, §47.12, pp. 560-61; id., 1955 Supp., p. 228. Cf. Articles 201 and 207 of Regulations No. I.²²

In some other case a father may conceivably constitute a valid trust on behalf of his minor children which may result in the reduction of the income taxes the family as a whole is required to pay. Whether that is a wise policy is for the Legislative Assembly, not this Court, to determine.

For the reasons stated, the previous majority opinion found in 78 P.R.R. 395, will be withdrawn and will be replaced by this opinion. The motion for reconsideration of the judgment will be denied.

Mr. Justice Negrón Fernández and Mr. Justice Belaval concurred in the result for the reasons stated in the concurring opinion of Mr. Justice Belaval delivered today. Mr. Justice Marrero, although absent at the time of signing the opinion and this judgment, took part in the discussion of the motion and agrees with the opinion of the Court. Mr. Justice Saldaña took no part in the decision of the case.

1

We assume arguendo, as the previous majority opinion holds, that an irrevocable trust was created in 1942 despite the prior effort of the father in 1941 to make an absolute gift to the beneficiaries of the shares of stock involved herein. We also assume that no problems are presented by the following: (1) the shares of stock were originally issued to the two minor children and were never transferred to the trustees on the books of the corporation; (2) the dividend checks were issued in the name of the children; (3) the said checks were endorsed in the name of each child “by” the trustee and deposited in a bank account. We also have not considered the requirements of law as to the duration of a trust. See $$ 839, 842, 846, and 848 of the Civil Code, 31 L.P.R.A. § § 2546, 2549, 2553, and 2555.

2

The trial court based its decision on two grounds: First, no valid trust exists because the settlor did not own the stock when he attempted to create the trust in 1942 since he had made a gift thereof to his children in 1941. (We have assumed — and the previous majority opinion holds — that the prior “gift” did not in itself impair the validity of the trust, see footnote 1.) Second, even assuming the trust is valid, the potential right of the children to withdraw the trust income makes it taxable to their father-grantor, citing § § 155-56 of the Civil Code, § 20 (h) of our Income Tax Act, Articles 201 and 207(2) of Regulations No. 1, Helvering v. Stuart, 317 U.S. 154, and Helvering v. Clifford, 309 U.S. 331. We discuss this second ground in Part II, infra.

3

Patton, Trust Systems in the Western Hemisphere, XIX Tulane L.Rev. 398; Patton, El Futuro de la Legislación de Fideicomiso, XVII Rev.Jur. U.P.R. 221, 224; Mayda, “Trusts” and “Living Law” in Europe, 103 U.Pa. L.Rev. 1041, and authorities cited therein; Bolgár, Why no Trusts in the Civil Law, 2 Am.J.Comp.L. 204; 1 Restatement, Trusts, Introductory Note; I Scott on Trusts, 2d ed., pp. 3-10; II, id., pp. 962-74.

4

Act No. 41, Laws of Puerto Rico, 1928, providing for the constitution of trusts, was incorporated in the Civil Code as § § 834-74.

Section 834 of the Civil Code, 31 L.P.R.A. 2541, defines a trust as follows: “A trust (fideicomissum) is an irrevocable mandate whereby certain property is transferred to a person, named the trustee (-fiducia-rio), in order that he may dispose of it as directed by the party who transfers the property, named constituent (fideicomitente), for his own benefit or for the benefit of a third party, named the beneficiary (cestui que trust) or (fideicomisario).”

The phrase “irrevocable mandate” was used in an effort to couch the trust concept in terms familiar to civilistas. The wisdom of describing the law of trusts in terms of mandate has been questioned. In any event, the important thing is that $ 8SU goes on to recognize that the “ . . . property is transferred ...” to the trustee. Accordingly, as this Court has recognized, the trustee is the owner of the legal title to the trust property, notwithstanding the characterization in § 834 of a trust as an “irrevocable mandate”. Belaval v. Court of Eminent Domain, 71 P.R.R. 246; Clínica Dr. Mario Juliá, Inc. v. Secretary of the Treasury, 76 P.R.R. 476; Douglas v. Registrar, 55 P.R.R. 644; see Patton, supra, pp. 413, 420-21, particularly footnote 55. See also, § 865 of the Civil Code, 31 L.P.R.A. § 2572.

The separation between legal title and equitable ownership is illustrated by the doctrine that a person may use his own property to create a trust for himself. Section 834 of the Civil Code, 31 L.P.R.A. § 2541; Douglas v. Registrar, supra.

5

Indeed, as already noted, even in the present case the Secretary of the Treasury did not argue in his original brief here that a father may not validly create a trust for his minor children under the Civil Code.

6

A trust is different from an outright gift. Piris v. Registrar, 67 P.R.R. 760. But even in the case of a gift, there is no reason why under the proper circumstances a father may not make a gift to his minor children. II Rodriguez Navarro, Doctrina Civil del Tribunal Supremo 1798-9, commenting on § 625 of the Spanish Civil Code, equivalent to § 567 of our Civil Code, 31 L.P.R.A. §2002; Piris v. Registrar, supra; Federico de Castro, El Autocontrato en el Derecho Privado Espa-ñol, 151 Rev. de Legislación y Jurisprudencia 384, 416 et seq. (1927).

7

Section 845, 31 L.P.R.A. § 2552, reads as follows: “The constitution of a trust in favor of a nonexisting person, excepting only future children of the constituent, is null and void.” Section 20(a)(1) of the Income Tax Act has always recognized a trust for unborn children for tax purposes.

It is difficult to believe that the Legislature meant to permit the establishment of such trusts created by a father for future children but to prohibit them for children already born. See the last paragraph of § 867 of the Civil Code.

Sections 847 and 774 of the Civil Code, 31 L.P.R.A. § § 2554 and 2581, prohibit the use of trusts to bypass our inheritance laws. But that precautionary measure does not per se make the trust herein invalid. The problems of inheritance in the light of the trust herein will be met when they arise. See the second clause of the trust instrument as set forth in 78 P.R.R. at pp. 402-3.

8

The first sentence of § 156 provides: “The father or mother possess the ownership and usufruct of whatever property the child may acquire with the capital of each of his parents.”

See 4 Castán, Derecho Civil Español, Común y Foral, 6th ed., interpreting § 161 of the Spanish Civil Code, equivalent to our § 156, at p. 48: “(a) Property acquired with the capital of his parents, which is under the son’s administration. As already stated, they replace the old pecu-lium profectitium. The children have only the precarious administration over such property transferred to them by the parents (for whom they are true agents); and the parents retain the ownership and the usufruct of the property and of all its fruits, unless they expressly cede to the son the whole or part of the profits obtained, in which case the latter are not subject to collation. (Sec. 161).”

9

Section 155 reads in part as follows: “Property acquired by an unemancipated child by labor or industry, or for any valuable consideration (título lucrativo) belongs to the said child, but the usufruct thereof belongs to the parents having potestas over him whilst he lives in their company . . .”. (Matter in parenthesis ours.)

10

We use this Spanish phrase instead of the English “for a valuable consideration” as the latter is not an adequate translation of “título lucrativo”.

•

On the question of consent to constitution of the trust, $ 849 of the Civil Code, 31 L.P.R.A. § 2556, is controlling. It provides in part: “The legal existence of a trust shall begin at the time when the trustee accepts the mandate and, once accepted, the mandate becomes irrevocable.” Section 849 applies here as well as to charitable trusts and to trusts for unborn children under § 845. As already noted, in Part II of Belaval v. Court of Eminent Domain, supra, pp. 255-61, we specifically held that the trust in that case came into effect when the trustee accepted the trust, and not when the child was subsequently born.

11

It is interesting to note that a trust was recognized for tax purposes in 1925 by § 20 of our Income Tax Act even before trusts were authorized by Act No. 41, Laws of Puerto Rico, 1928.

Also, while it is not controlling in the case before us, the Legislative Assembly apparently thought in 1954 that a trust like that found here was valid. It provided in 5* 167 (c) of the 1954 Act that trust income is not taxable to the grantor merely because it may be applied for the support of a beneficiary whom the grantor is legally obliged to support, except to the extent such income is in fact so applied. In thus catching up with the Federal Act as it read prior to 1954, see footnote 16, the Legislative Assembly apparently assumed that a trust of the type involved herein was valid.

12

Cf. Guerra v. Ortiz, 71 P.R.R. 574, affirmed in 187 F.2d 406 (C.A. 1, 1951); Hernández v. Tax Court, 73 P.R.R. 659; Fournier v. Fournier, 78 P.R.R. 411; and Blanco v. Tax Court, 72 P.R.R. 799, 808, none of which is controlling on this particular question.

If the trust instrument specifically required the trustee to accumulate the trust income or to expend it in some way other than delivering it to the minor beneficiary, a different question might be presented as to waiver of the usufruct by the father. We are not required to face that question in this case and make no comment thereon.

13

Trusts are frequently created for purposes other than income taxation. If this trust were invalid — as indicated in the previous majority opinion — problems involving succession, creditors, and payments to beneficiaries might arise. See Schuyler, Payments under Void Trusts, 65 Harv.L.Rev. 597. Other questions would have also beset the parties in the wake of the previous majority opinion. First, would such a trust, although invalid at its inception, become valid if it remained unmodified and the beneficiaries reached their majority? Second, if the latter question were answered in the affirmative, would the trust income under those circumstances be taxable to the grantor after the beneficiaries came of age? Third, what impact would § 167 (c) of the income Tax Act — see footnotes 16 and 11 — have in this and similar cases as to income earned after its effective date?

14

Section 154 reads in part as follows: “The administration of the property of children under the patria potestas belongs in the first place to, the father ...” Cf. Blanco v. Tax Court, supra, pp. 808-09.

15

The Stuart ease involved revocable trusts. 317 U.S. at pp. 158-59. But this portion of the case also applies to irrevocable trusts because of (1) the broad language used by the Supreme Court and (2) the fact that the trust income was found to be taxable to the grantor under § 167 of the Federal Act rather than the section which dealt with revocable trusts —§ 166, the equivalent of our $ 20 (g). Paul, Trusts and Federal Taxation, 31 Taxes 608. Congress realized that this portion of the Stuart case applied to irrevocable trusts. The House and Senate Committees so stated in their reports recommending an amendment of § 167 which set aside this portion of the Stuart case. II Seidman’s, Legislative History of Federal Income and Excess Profits Tax Laws, pp. 2118 — 21; 6 Mer-tens, Law of Federal Income Taxation, p. 528.

16

In 1943 Congress added a new subsection (c) to § 167 providing that income from a trust shall not be considered taxable to the grantor merely because such income may be applied for the support of a minor beneficiary except to the extent that such income is in fact so used. Section 134(a) of the Internal Revenue Act of 1943, 26 U.S.C.A. Int. Rev. Acts; II Seid-man, supra, pp. 2118-19. But § 20 (h) of our Act remained in effect from 1924 to 1954, when the Legislative Assembly introduced the 1943 Federal amendment into our Act. See § 167 of Act No. 91, Laws of Puerto Rico, 1954, known as the Income Tax Act of 1954. Consequently, this portion of the Stuart case applies under § 20 (h) of our Act wherever pertinent to trust income between 1924 and 1954.

17

As in the Stuart case, no income was in fact withdrawn by the beneficiaries in this case. The trustee withdrew some of the money from the bank account in which the dividend checks had been deposited and invested it pursuant to the terms of the trust in real property mortgages; the remainder of the money was left in the bank account.

18

The problem raised by the holding in the Stuart case at pp. 169-71 disappeared from the Federal Act when Congress “legislatively reversed” it in 1943. See footnote 16. Our Legislative Assembly took no action thereon until 1954, when it replaced 5 20 (h) of our 1924 Act with 5 167 of the Income Tax Act of 1954, Act No. 91, Laws of Puerto Rico, 1954. Our 5167(c) of 1954, couched in language substantially similar to the 1943 federal amendment “reversing” the Stuart case, provides that “income of a trust shall not be considered taxable to the grantor . . . merely because such income, in the discretion of . . . the trustee . . . may be applied or distributed for the support or maintainance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed.” But our 5 167 (e) applies only to income covered by the 1954 Act. We therefore leave for another day the consequences which will flow in this jurisdiction from the “legislative repeal” of the Stuart case. This will have to be considered together with the Clifford problem. As to the present status of the latter, see footnote 20. Cf. 6 Mertens, supra, 5 36.49, pp. 328-30; id., 5 36.57, pp. 339-40. And see footnotes 16 and 11.

19

Cf. San Gerónimo Develop. Co. v. Treasurer of Puerto Rico, 233 F.2d 126 (C.A. 1, 1956), at p. 133: “. . . the Supreme Court of the United States has many times told us, in rejecting- literal interpretations of taxing- acts based upon ‘attenuated subtleties,’ that taxation ‘is a practical matter’ in which the courts should not be too much concerned with the ‘refinements of title.’ See Harrison v. Sohaffner, 312 U.S. 579, 581, 582 (1941). See also Helvering v. Clifford, 309 U.S. 331 (1940).”

See Kennedy, Federal Income Taxation of Trusts and Estates, Chapter 6, pp. 558 et seq.; 1953 Supp., pp. 74 et seq.

20

The Clifford case caused much uncertainty and considerable litigation. See 6 Mertens, supra, § 37.17, p. 472 et seq.; Paul, supra, pp. 613— 15; Note, 60 Yale L.J. 1426. As a result the Federal Commissioner promulgated the so-called Clifford Regulations. 26 Code of Federal Regulations § 29.22 (a)-21, 22 (1949); 6 Mertens, supra, pp. 484-92; Guter-man, Federal Income Taxation of Inter Vivos Trusts, 9th Annual Institute on Federal Taxation, N.Y.U., 183; Cleary, The Clifford Regulations Reexamined, 12 id., p. 741. Thereafter, in 1054 Congress wrote many of these regulations into the Federal Act; and it also provided that § 61 of the Federal Act of 1954, the counterpart of the former Federal §22(a), equivalent to our §15(a), shall no longer play any role on the question before us. Sections 671-78, Federal Internal Revenue Code of 1954; Mertens, Code Commentary, by Zimet et aL, § 5 671 — 78, pp. 58-72; Kamin, Surrey and Warren, The Internal Revenue Code of 1951: Trusts, Estates and Beneficiaries, 54 Col.L.Rev. 1237, 1259-64; Craven, Taxation of Estate and Trust Income under the 1951¡. Code, 103 U.Pa.L.Rev. 602, 621-28; Holland, Kennedy, Surrey and Warren, A Proposed Revision of the Federal Income Tax Treatment of Trusts and Estates — American Law Institute Draft, 53 Col.L.Rev. 316, 358-67; Murray, Income Taxation of Short-Term and Controlled Trusts, 1955 Tax Institute, U.S.C. Law School Tax Institute, 497; Greenberger, Changes in the Income Taxation of Clifford Type Trusts, 13th Annual Institute on Federal Taxation, N.Y.U., 165. See Rice, Judicial Trends in Gratuitous Assignments to Avoid Federal Income Taxes, 64 Yale L.J. 991; Pedriek, Familial Obligations: and Federal Taxation: A Modest Suggestion, 51 N.W.U. L.Rev. 53.

In Puerto Rico we have only the guidance — or uncertainty, according to some — of the Clifford and related cases. We have no regulations or statutory provisions — even in the 1954 Act — as to the effect of the former $ 15(a), which is now $ 22(a), on the question of whether trust income is attributable to the grantor.

21

The government’s contention in the Julia case as to non-deductibility of interest failed because the amendments to our Act prior to 1954 had not kept pace with the Federal amendments making interest payments to trustees under certain circumstances non-deductible. Cf. § § 24(e) (3) and 24(b) (2) (A) of our Income Tax Act of 1954.

22

It is interesting- to note that the Legislative Assembly provided in § 22(m) (1) of the Income Tax Act of 1954 as follows: “Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child.”