Helvering v. Clifford

309 U.S. 331, 60 S. Ct. 554, 84 L. Ed. 788, 1940 U.S. LEXIS 1252, 1 C.B. 105, 23 A.F.T.R. (P-H) 1077

• Court: Supreme Court of the United States
• Decided: February 26, 1940
• Docket: 383
• Status: Published

Opinions

Mr. Justice Douglas

delivered the opinion of the Court.

In 1934 respondent declared himself trustee of certain securities which he owned. All net income from the trust was to be held for the “exclusive benefit” of respondent’s wife. The trust was for a term of five years, except that it would terminate earlier on the death of either respondent or his wife. On termination of the trust the entire corpus was to go to respondent, while all “accrued or undistributed net income” and “any proceeds from the investment of such net income” was to be treated as property owned absolutely by the wife. During the continuance of the trust respondent was to pay over to his wife the whole or such part of the net income as he in his “absolute discretion” might determine. And during that period he had full power (a) to exercise all voting powers incident to the trusteed shares of stock; (b) to “sell, exchange, mortgage, or pledge” any of the securities under the declaration of trust “whether as part of the corpus or principal thereof or as investments or proceeds and any income therefrom, upon such terms and for such consideration” as respondent in his “absolute discretion may deem fitting”; (c) to invest “any cash or money in the trust estate or any income therefrom” by loans, secured or unsecured, by deposits in banka, or by purchase of securities or other personal property “without restriction'’ because of their “speculative character” or “rate of return” or any “laws pertaining to the investment of trust funds”; (d) to collect all income; (e) to compromise, etc., any claims held by him as trustee; (f) to hold any property in the trust estate in the names of “other persons or in my own name as an individual” • except as otherwise provided.. Extraordinary cash dividends, stock dividends, proceeds from the. sale of unexercised subscription rights, or any enhancement, realized or not, in the value of the securities were to be treated as principal, not income. An exculpatory clause, purported to protect him from all losses except those occasioned by his “own wilful and deliberate” breach of duties as trustee. And finally it was provided that neither the principal nor any future or accrued income should be liable for the debts of the wife; and that the wife could not transfer, encumber, or anticipate any interest in the trust or any income therefrom prior to actual payment thereof to her.

It was stipulated, that while the “tax effects” of this trust were considered by respondent they were not the “sole consideration” involved in his decision to set it up, as by this and other gifts he intended to give “security and economic independence” to his wife and children. It was also stipulated that respondent’s wife had substantial income of her own from other sources; that there was no restriction on her use of the trust income, all of which income was . placed in her personal checking account, intermingled with her other funds, and expended by her on' herself, her children and relatives; that the trust was not designed to relieve respondent from liability for family or household expenses and that after execution^of the trust he paid darge sums from his personal funds for such purposes.

Respondent, paid a federal gift tax on this transfer. During the year 1934 all income from the trust was distributed to the wife who included it in' her' individual return for that year. The Commissioner, however, determined a deficiency in respondent’s return for that year on the theory that income from the trust was taxable to him. The Board of Tax Appeals sustained that rede-termination. 38 B. T. A. 1532. The Circuit Court of Appeals reversed. 105 F. 2d 586. We granted certiorari because of the importance to-the revenue of the use of such short term trusts in- the reduction of surtaxes.

Sec. 22 (a) of the Revenue Act of 1934, 48 Stat. 680, includes- among “gross income” all “gains, profits, and income derived . . . from professions, vocations, trades, businesses, commerce, or sales, or dealings, in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, of the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.” The broad sweep of this language indicates the purpose of Congress to use the full measure of its taxing power within those definable categories. Cf. Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216. Hence our construction of the statute should be consonant with that purpose. Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue. That issue is whether the grantor after the "trust has been established may still be treated, under this statutory scheme, as the owner of the corpus. See Blair v. Commissioner, 300 U. S. 5, 12. In absence of more precise standards or guides supplied by statute or appropriate regulations,¹ the answer to that question must depend on an analysis of, the terms of the trust and all the circumstances attendant on its creation and operation. And where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary lest what is in reality but one economic unit be multiplied into two or more² by devices-which, though valid under state law, are not conclusive so far as § 22 (a) is concerned.

In this case we cannot conclude as a matter of law that respondent ceased to be the owner of the corpus after the trust was created. Rather, the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent continued to be the owner for purposes of § 22 (a).

So far as his dominion and control were concerned it seems clear that the trust did not effect any substantial change. In substance his control over the corpus was in all essential respects the same after the trust was created, as before. The wide powers which he retained included for all practical purposes most of the control which he as an individual would have. There were, we may assume, exceptions, such as his disability to make a gift of the corpus to others during the term of the trust and to make loans to himself. But this dilution in his control would seem to be insignificant and immaterial, since control over investment remained. If it be said' that such control is the type of dominion exercised by any trustee, the answer is simple. We have at best a temporary reallocation of income within an intimate family group. Since the income remains in the family and since the husband retains control over the investment, he has rather complete assurance that the trust will not effect any substantial change in his economic position. It .is hard to imagine that respondent felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact. For as a result of the terms of the- trust and the intimacy of the familial relationship respondent retained the substance of full enjoyment of all the rights which previously he had in the property. That might not be true if only strictly legal rights were considered. But when the benefits flowing to him indirectly through the wife are added to the legal rights he retained, the aggregate may be said to be a fair equivalent of what he previously had. To exclude from the aggregate those indirect benefits would be to deprive § 22 (a) of considerable vitality and to treat as immaterial what may be highly relevant considerations in the creation of such family trusts. For where the head of the household has income -in excess of normal needs, it may well make but little difference to him (except income-tax-wise) where portions of that income are routed — so long as it stays in the family group. In those circumstances the all-important factor might be retention by him of control over the principal. With that control in his .hands he would keep direct command over all that he needed to remain in substantially the same financial situation as before. ' Our point here is that no one fact is normally decisive but that all considerations and circumstances of the kind we have mentioned are relevant to the question of ownership and are appropriate foundations for findings on that issue. Thus, where, as in this case, the Denefits directly or indirectly retained blend so imperceptibly with the normal concepts of full ownership, we cannot say that the triers of fact committed reversible error when they found that the husband was the owner of the corpus for the purposes of § 22 (a). To hold otherwise would be to treat the wife as a complete stranger; to let mere formalism obscure the normal consequences of family solidarity; and to force concepts of ownership to be fashioned out of legal niceties which may have little or no significance in such household arrangements.

The bundle of rights which he retained was so substantial that respondent cannot be heard, to complain that he is the “victim of despotic power when for the purpose of taxation he is treated as owner altogether.” See DuPont v. Commissioner, 289 U. S. 685, 689.

We should add that liability under § 22 (a) is not foreclosed by reason of the fact that Congress made specific provision in § 166 for revocable trusts, but failed to adopt the Treasury recommendation in 1934, Helvering v. Wood, post, p. 344, that similar specific treatment should be accorded income from short term trusts. Such choice, while relevant to the scope of § 166, Helvering v. Wood, supra, cannot be said to have subtracted from § 22 (a) what was already there. Rather, on this evidence it must be assumed that the choice was between a generalized treatment under § 22 (a) or specific treatment under a separate provision³ (such as was accorded revocable trusts under § 166); not between taxing or not taxing grantors of short term trusts. In view of the broad and sweeping language of § 22 (a), a specific provision covering short term, trusts might well do no more than to carve out of § 22 (a) a defined group of cases to which a rule of thumb would be applied. The failure of Congress to adopt any such rule of thumb for that type of trust must be taken to do no more than to leave to the triers of fact the initial determination of whether or not on the facts of each case the grantor remains the owner for purposes of § 22 (a).

In view of this result we need not examine the contention that the trust device falls within the rule of Lucas v. Earl, 281 U. S. 111 and Burnet v. Leininger, 285 U. S. 136, relating to the assignment of future income; or that respondent is liable' under § 166, taxing grantors on the income of revocable trusts.

The judgment of the Circuit Court of Appeals is reversed and that of the Board of Tax Appeals is affirmed.

Reversed.

1 We have not considered here Art. 166—1 of Treasury Regulations 86 promulgated under § 166 of the 1934 Act and in 1936 amended (T. D. 4629) so as to rest on § 22 (a) also, since the tax in question arose prior to that amendment.

2 See Paul, The Background of the Revenue Act of 1937, 5 Univ. Chic. L. Rev. 41.

3 As to the disadvantage of a specific statutory formula over more generalized treatment see Vol. I, Report, Income Tax Codification Committee (1936), a committee appointed by the Chancellor of the Exchequer in 1927. In discussing revocable settlements the Committee stated, p. 298:

“This and the three following clauses reproduce section 20 of the Finance Act, 1922, an enactment which has been the subject of much litigation, is unsatisfactory in many respects, and is plainly inadequate to fulfil the apparent intention to prevent avoidance of liability to tax by revocable dispositions of income or other devices. We think the matter one which is worthy of the attention of- Parliament.”