Langley v. Commissioner , 24 B.T.A. 1156 ( 1931 )

ELIDA B. LANGLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Langley v. Commissioner

Docket No. 56830.

United States Board of Tax Appeals

24 B.T.A. 1156; 1931 BTA LEXIS 1529;

December 17, 1931, Promulgated

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Where the grantor had, during the taxable year, the right to revest in herself the property of certain revocable trusts, held that under section 166 of the Revenue Act of 1928 the income from such trusts was taxable to the grantor, notwithstanding a provision in the trust agreements that in case she exercised the right of revocation she should give the trustees notice of twelve months and one day.

Henry J. Richardson, Esq., for the petitioner.

James K. Polk, Jr., Esq., and Harold F. Noneman, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income tax of $8,955.59 for 1928. The only question involved is whether the respondent erred in including in the taxable income of the petitioner the income of certain trusts created by her and in which she reserved the power to revoke upon the expiration of twelve months and one day after notice of revocation. The proceeding was submitted on the pleadings and certain documentary evidence.

FINDINGS OF FACT.

The petitioner is a citizen of the United States and resides at Westbury, Long Island, N.Y.

On December 1, 1922, the petitioner entered into a trust agreement whereby she, as party of the first part, assigned to herself and Edward de Rivera, as parties of the second part, certain properties to be held upon trusts in part as follows:

(1) To hold, invest and reinvest the same and to keep the same invested in such income producing stocks, bonds, securities and investments as are hereinafter provided, and to pay in the manner hereinafter provided the income from said trust estate monthly to ELEANOR LANGLEY, daughter of one of the parties hereto, until she reaches the age of twenty-one (21) years or until the death of the party of the first part prior thereto; and upon the death of said ELEANOR LANGLEY, or upon her attaining the age of twenty-one (21) years, or upon the death of the party of the first part prior to that time or upon the revocation hereof as hereinafter determined, to pay the principal of said trust estate to the said party of the first part, or if she shall have died then to pay said principal sum to the executors named in the last Will and Testament of the said party of the first part to be distributed in accordance with the terms of said will, as though said moneys were a part of the estate of the said party of the first part. The income herein provided to be paid to Eleanor Langley may be paid by the said Trustees and their successors in their discretion by applying it to her support, maintenance and education, or to be paid to "Elida B. Langley for the use of Eleanor Langley" to be applied by her in the manner aforesaid; and the balance thereof shall be held and accumulated by said Trustees and their successors for the benefit of said Eleanor Langley until she reaches the age of twenty-one (21) years and then paid to her: the investment of such accumulated income to be made in the same manner and with the same powers as herein provided for the investment of the principal of the said trust estate.

The agreement also contained the following provisions:

FOURTH: The party of the first part hereby reserves the right to revoke this trust estate at any time prior to the determination thereof. Such revocation shall be made by service upon and delivery to the Trustees herein named or their successors, of a notice in writing to them to that effect. Such notice shall be considered delivered if contained in a postpaid envelope or wrapper addressed to the Trustees for the time being at the addresses last known to the party of the first part and mailed, postpaid, to said Trustees at such addresses. Upon such revocation, said Trustees or their successors in the trust shall forthwith deliver to the party of the first part all of the principal of said trust estate by delivering to her the securities, real estate and money in which it is then invested, deducting therefrom any reasonable expenses or charges in the discretion of the Trustees and their successors as they may determine to be necessary to disburse for proper accounting of their acts in the managment of said trust estate.

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SEVENTH: In the event of the death of Edward de Rivera, one of the parties hereto of the second part, prior to the determination of this trust, the party of the first part hereto reserves the right to appoint a successor co-trustee hereunder and at any time hereafter in the event of the death of the co-trustee of Elida B. Langley, to appoint a successor co-trustee of the trusts herein created.

The party hereto of the first part hereby reserves the right to revoke the appointment of Edward de Rivera, as a trustee hereunder and to appoint a successor in his place and stead, such revocation and appointment to be effective immediately upon the service of a written notice to that effect upon Edward de Rivera.

Also on December 1, 1922, the petitioner entered into a trust agreement whereby she assigned to herself and Edward de Rivera, as trustees, certain properties to be held upon like trust, except that the beneficiary was Robert B. Young, designated as nephew of one of the parties thereto. This agreement also contained provisions identical with clauses "Fourth" and "Seventh" quoted above.

On June 16, 1924, both of the aforesaid agreements being in full force and effect, the petitioner by agreement with the parties of the second part modified the provision with respect to revocation by entering into a supplemental agreement in the case of both trust estates whereby the fourth clause was modified to read as follows:

FOURTH: The party of the first part hereby reserves the right to revoke this trust estate prior to the determination thereof, upon and at the expiration of twelve months and one day after notice of revocation as hereinafter set forth. Such revocation shall be made by service upon and delivery to the Trustees herein named or their successors, of a notice in writing to them to that effect. Such notice shall be considered delivered if contained in a postpaid envelope or wrapper addressed to the Trustees for the time being at the addresses last known to the party of the first part and mailed, postpaid, to said Trustees at such addresses. Upon such revocation, said Trustees or their successors in trust shall forthwith deliver to the party of the first part all of the principal of said trust estate by delivering to her the securities, real estate and money in which it is then invested, deducting therefrom any reasonable expenses or charges in the discretion of the Trustees and their successors as they may determine to be necessary to disburse for proper accounting of their acts in the management of said trust estate.

On July 23, 1928, Robert B. Young, for whose benefit during minority one of the aforesaid trusts was created, attained the age of 21 years. On July 24, 1928, the petitioner entered into a further agreement with herself and Edward de Rivera, as trustees, by which they should continue to hold the trust property for the benefit of Robert B. Young until his death or until the death of the petitioner prior thereto. The agreement also provided that upon the death of Robert B. Young or upon the death of the petitioner prior to that time, or upon the revocation of the agreement, as therein provided, the trustees should pay the principal of the trust estate to the petitioner or if she should have died, then to pay the principal to the executors named in her will, to be distributed in accordance with the terms of the will as though a part of her estate. This trust agreement of July 24, 1928, contained the same provisions with respect to revocation as were contained in clause "fourth" of the previous trust as modified by the agreement of June 16, 1924.

On November 14, 1928, Eleanor Langley, for whose benefit during minority one of the aforesaid trusts was created, attained the age of 21 years. On November 15, 1928, the petitioner entered into a further agreement with herself and Edward de Rivera, as trustees, by which they should continue to hold the trust property for the benefit of Eleanor Langley until her death or until the death of the petitioner prior thereto. The agreement also provided that upon the death of Eleanor Langley or upon the death of the petitioner prior to that time, or upon the revocation of the agreement as therein provided, the trustees should pay the principal of the trust estate to the petitioner, or, if she should have died, then to pay the principal to the executors named in her will, to be distributed in accordance with the terms of the will as though a part of her estate. This trust agreement of November 15, 1928, contained the same provisions with respect to revocation as were contained in clause "fourth" of the previous trust as modified by the agreement of June 16, 1924.

No notice of revocation as prescribed by both the instruments in the case of both the trust estates, which were in full force and effect during the calendar year 1928, was given by the petitioner at any time during or before the calendar year 1928.

The entire income received by the petitioner and de Rivera as trustees under the aforesaid agreements was used by them for purposes of the trusts and was reported by them and the beneficiaries of the trust estates for income-tax purposes. None of said income was received by or distributed to petitioner as an individual.

The respondent has added to the income of the petitioner otherwise determined the amount of the entire income of both trust estates, and said addition is the sole basis of the deficiency here involved.

OPINION.

TRAMMELL: The only matter presented for our determination is whether the income for 1928 from the four trusts set out in our findings of fact is taxable to the petitioner.

With respect to revocate trusts, section 166 of the Revenue Act of 1928 provides as follows:

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.

The petitioner contends that the above section of the act includes only such revocable trusts as those in which the grantor may revest in himself, during the taxable year, title to the trust property; that, since she could have revested in herself title to the property of the trusts here involved only upon the expiration of twelve months and a day after notice of revocation, she could not have revested in herself during the taxable year title to the property of the trusts; that the trusts, therefore, do not come within the provisions of the section and consequently the petitioner may not be taxed on the income therefrom. The respondent contends that, since the petitioner had during the taxable year the power to revest in herself title to the trust property, the trusts come within the provisions of the section and that it is immaterial whether the revesting takes place during the taxable year. The petitioner contends that the time limitation relates to the revesting of the title, whereas under the respondent's contention it relates to the existence of the power of revesting of the title.

The provisions of section 166 of the Revenue Act of 1928, are identical with those of section 219(g) of the Revenue Acts of 1924 and 1926.

In sustaining the constitutionality of section 219(g) of the Revenue Act of 1924 of the Supreme Court, in , said:

* * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the incme which it is in the power of the first to appropriate, it does not matter whether the permission is given by assent or by failure to express dissent. The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.

In ; affd., , the court was called upon to decide whether under section 219(g) of the Revenue Act of 1924 the income from a trust revocable by the grantor giving six months notice to revoke was taxable to the grantor. There the court said:

The plaintiff contends that, even if this act is constitutional, it is not applicable to a trust created under the trust instruments involved in this suit, for the reason that by the terms of each instrument, six months' written notice is required for the revocation of the trust. There is nothing to this point. The statute prevails where the grantor of a trust has, at any time during the taxable year, the power to revest himself of the title to any part of the corpus of the trust. That power is not dependent at all upon the notice which must be given before the revocation becomes effective. It deals only with the power of revocation. The power of revocation during both of the taxable years in question fully resided in the plaintiff, and the fact that he had to give to the trustee six months' notice of intention to revest would not withdraw the case from the application of the statute.

The plaintiff contends also that, if this proposition is resolved against him, he would be liable to income tax for one-half of each taxable year. There is nothing to this proposition. The power of revocation rested in the plaintiff. The fact that he had to give six months' notice in order to exercise that power of revocation did not change the status of the income as taxable under this statute for the entire period. Where the settlor of a trust estate reserves in himself the power of revocation, the income of that trust estate is taxable to him, irrespective of the period of notice which he binds himself to give to the trustee in case he exercises the right of revocation.

We think the rules set forth in the above decisions are sound and are applicable here. It is not denied that the petitioner in the instant case had, in 1922, the power to revest in herself of the trusts, but it is contended that she did not have the power to revest it in herself in 1928 since notice of twelve months and a day was prerequisite to revesting. In our opinion it is not necessary under section 166 that the grantor be able actually to revest the trust property in himself during the taxable year, but only that he have during the taxable year the power to revest it in himself. We think that so long as he has, during the taxable year, the power to revest, this is all that is necessary to bring the case within the statute. The fact that the petitioner bound herself to give to the trustees notice of twelve months and one day in case she exercised the right of revocation is immaterial. The contention of the respondent is sustained.

Judgment will be entered for the respondent.