Opinion
No. 46037.
May 7, 1945.
James O. Wynn, of New York City (Robert N. Montgomery and J. Marvin Haynes, both of Washington, D.C., on the brief), for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (J. Louis Monarch and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Proceedings on the claim of A. Atwater Kent against the United States to recover income taxes it paid on income of certain trust created by claimant, assessed against the claimant.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the stipulation of the parties, makes the following special findings of fact:
1. Plaintiff was born December 3, 1873. At all times herein mentioned prior to 1942, he was a resident of Pennsylvania. He is now a resident of California.
2. May 20, 1932, plaintiff, as grantor, and plaintiff and Provident Trust Company of Philadelphia, as grantees and trustees, duly executed a deed of trust creating the Elizabeth Kent Van Alen Trust, a copy of that deed of trust being marked Exhibit 1 and made a part hereof by reference.
3. On the same day, May 20, 1932, plaintiff, as grantor, and plaintiff and Fidelity-Philadelphia Trust Company, as grantees and trustees, duly executed a deed of trust creating the Virginia Tucker Kent Trust, a copy of that deed of trust being marked Exhibit 2 and made a part hereof by reference.
4. Also on the same day, May 20, 1932, plaintiff, as grantor, and plaintiff and The Pennsylvania Company for Insurances on Lives and Granting Annuities, as grantees and trustees, duly executed a deed of trust creating the A. Atwater Kent, Jr. Trust, a copy of that deed of trust being marked Exhibit 3 and made a part hereof by reference.
5. Elizabeth Kent Van Alen, Virginia Tucker Kent and A. Atwater Kent, Jr., are now living.
6. A copy of the "General Family Trust" referred to in each of the trusts described in findings 2, 3, and 4, is marked Exhibit 4 and made a part hereof by reference.
7. The trust instruments referred to in findings 2, 3, and 4 were identical except as to names and the schedules of payments. The Elizabeth Kent Van Alen Trust contained the following provisions which were similar to corresponding provisions in the other trust instruments:
"A. Atwater Kent hereby transfers to the trustees twenty-eight thousand seven hundred sixty-two (28,762) shares of the no par value preferred dividend stock of the Atwater Kent Manufacturing Company, the receipt of which is acknowledged, to be held by the trustees under the following trusts:
I. The Beneficiaries
"(A) To hold the trust fund in trust until the death of the last survivor of grantor, the wife Mabel Lucas Kent and the daughter; and out of the net income to pay —
"(1) To the daughter during her life the yearly sums stated in the annexed schedule;
"(2) After the death of the daughter, to apply a maximum of ten thousand dollars ($10,000.00) a year to the maintenance and education of each of the daughter's children during minority, after majority to pay each the maximum of ten thousand dollars ($10,000.00) a year for life; should the total payments of this paragraph exceed one half the net income for the year, the payments shall be reduced so as to bring the total to the one half;
"(3) After making the payments to the daughter or her children, provided in paragraphs I (A)(1) and I (A)(2):
"(a) During the life of the grantor each remaining item of income received by the trustees shall be accumulated and held by the trustees for two years after its receipt; the items after being held two years shall then be paid as follows
"(aa) The items whose two-year accumulation matures January to June, inclusive, shall be distributed June thirtieth; so much of the June thirtieth distribution (but not exceeding five thousand dollars ($5,000) shall be paid to the daughter or her children as may be needed to bring the payments of the last preceding calendar year up to the maximum amount stated for that year. The items whose two-year accumulation matures July to December, inclusive, shall be distributed December thirty-first, so much of that distribution (but not exceeding five thousand dollars ($5,000)) shall be paid to the daughter or her children as may further be needed to bring the payments of the last preceding calendar year up to the maximum amount stated for that year.
"(bb) The balances of the June thirtieth distribution and of the December thirty-first distribution shall be paid the grantor, if living at those respective dates (which will necessarily be two years or more after the trustees receive any item of income included in the distribution).
"(cc) At the death of the grantor any item which is being accumulated and held and as to which the two years have not expired, shall not be used to bring payments to the daughter or her children to maximum amounts but shall be paid at once to the wife, Mabel Lucas Kent, if living; if the wife, Mabel Lucas Kent, is not living, it shall be paid at once to the daughter, if living; if neither is living, it shall be paid to those who will receive the principal under paragraph I (B) and in the proportions of paragraph I (B).
"(dd) Under no circumstances or method of accounting shall the grantor, or his estate, his heirs, next of kin, or assigns become entitled to any interest on accumulated items or to any income of the trust fund, received, earned, or accrued subsequent to the day which proves to be two years before the death of the grantor. And the two years' accumulation and holding of items of income shall continue during the entire life of the grantor irrespective of the previous deaths of the wife, Mabel Lucas Kent, and/or the daughter, and and/or the daughter's children.
"(b) After the death of the grantor the income remaining after the payments to the daughter or her children shall not be accumulated or used to bring payments to the daughter or her children to maximum amounts but shall be paid currently to the wife, Mabel Lucas Kent, during her life.
"(c) After the death of the survivor of the grantor and the wife, Mabel Lucas Kent, the payment to the daughter of the yearly sums under I (A)(1) shall end and the trustees shall pay the entire net income currently to the daughter during her life.
"(B) After the death of the last survivor of the grantor, the wife Mabel Lucas Kent and the daughter, the trustees shall transfer the principal:
"(1) Three quarters thereof to the then living issue of the daughter in such proportions as the daughter shall appoint by will; in default of appointment, to such issue per stirpes;
"(2) One quarter thereof to the daughter's husband if then living and/or the then living issue of the daughter in such proportions as the daughter shall appoint by will; in default of appointment to such issue per stirpes;
"(3) If there is no such issue the three quarters of paragraph I (B)(1) and the one quarter of I (B)(2), or so much thereof as has not been appointed to the daughter's husband, shall be transferred to the trustees under a deed of trust, dated today, between A. Atwater Kent, grantor, and the Fidelity-Philadelphia Trust Company and A. Atwater Kent, grantees and trustees, entitled `General Family Trust,' and the principal of the present trust shall form part of that trust.
"(4) The shares of a minor shall continue to be held in trust until majority, the trustees applying so much of the income thereof as they deem advisable to the support and maintenance of the minor.
"(C) Any principal or income not disposed of hereby or through the `General Family Trust' shall be transferred and paid for benevolent or philanthropic purposes to the Atwater Kent Foundation, Inc., a Delaware corporation.
"(D) If Mabel Lucas Kent should not remain the wife of the grantor to the time of his death, she shall receive nothing from this trust; and, her life shall not be considered in determining the duration of the trust or any period of payment; in applying the language of this trust she shall be regarded as having died on the day she ceased to be the wife of the grantor."
The "annexed schedule" referred to in (A)(1) above reads as follows:
One-half the income of the trust fund for the year, but not exceeding the following maximum amounts:
In 1932 ............................ Nothing to be paid 1933 ....................................... $10,000 1934 ....................................... 15,000 1935 ....................................... 20,000 1936 ....................................... 25,000 1937 ....................................... 30,000 1938 ....................................... 35,000 1939 ....................................... 40,000 1940 ....................................... 45,000 1941 ....................................... 50,000 1942 ....................................... 55,000 1943 ....................................... 60,000 1944 ....................................... 65,000 1945 ....................................... 70,000 1946 and any year thereafter ............... 75,000
8. Of the taxable income received during the period from May 20, 1932, to December 31, 1932, and during the calendar years 1933 and 1934, respectively, by each of the trusts described in findings 2, 3, and 4, the trustees had on December 31, 1932, December 31, 1933, and December 31, 1934, pursuant to the terms of those trusts accumulated and held for future distribution the following respective amounts:
----------------------------------------------------------------------- Trust Described | December | December | December in — | 31, 1932 | 31, 1933 | 31, 1934 ----------------------|------------|-----------------|----------------- Finding 2 (Elizabeth | | | Kent Van | | | Alen) .............. | $84,604.58 | $46,486.55 | $41,573.94 Finding 3 (Virginia | | | Tucker Kent) | 85,442.41 | 56,994.63 | 56,056.98 Finding 4 (A. Atwater | | | Kent, Jr.) | 85,445.91 | 56,045.33 | 56,056.98 |____________|_________________|_________________ Total ............. | 255,492.90 | 159,526.51 | 154,564.42 -----------------------------------------------------------------------
After the payment of $10,000 to Elizabeth Kent Van Alen, pursuant to the terms of the trust referred to in finding 2.
After the payment of $15,000 to Elizabeth Kent Van Alen, pursuant to the terms of the trust referred to in finding 2.
9. The trustees of each of the trusts invested the sums accumulated and held as stated in finding 8, together with the nontaxable income received by them, respectively, during the period mentioned in finding 8 (as stated in Exhibit 5 which is incorporated herein by reference), and continued to hold the accumulated income for the two-year period provided in the trust instruments. On June 30 and December 31, in each of the years 1934, 1935, and 1936, the trustees of each of those trusts paid the accumulations, reduced by the deductions of proper trust expenses set forth in Exhibit 5, to plaintiff in the following amounts:
----------------------------------------------------------------------------------------------------- | From Income Received | | | Date Paid to Plaintiff | and Accumulated | Elizabeth Kent | Virginia Tucker | A. Atwater Kent, | During Period | Van Alen Trust | Kent Trust | Jr., Trust ------------------------|----------------------|----------------|-----------------|----------------- 6/30/34 ............... | 5/20/32-6/30/32 .... | $34,374.49 | $34,643.10 | $34,093.14 12/31/34 .............. | 7/1/32-12/31/32 .... | 35,038.48 | 35,288.53 | 34,628.65 | |________________|_________________|_________________ Total for 1934 .... | .................... | 69,412.97 | 69,931.63 | 68,721.79 | |================|=================|================= 6/30/35 ............... | 1/1/33-6/30/33 ..... | 17,512.99 | 26,018.19 | 25,993.94 12/31/35 .............. | 7/1/33-12/31/33 .... | 26,856.74 | 26,688.28 | 26,393.61 | |________________|_________________|_________________ Total for 1935 .... | .................... | 44,369.73 | 52,706.47 | 52,387.55 | |================|=================|================= 6/30/36 ............... | 1/1/34-6/30/34 ..... | 9,810.01 | 25,586.27 | 20,552.24 12/31/36 .............. | 7/1/34-12/31/34 .... | 19,963.58 | 24,868.83 | 19,609.44 | |________________|_________________|_________________ Total for 1936 .... | .................... | 29,773.59 | 50,455.10 | 40,161.68 ---------------------------------------------------------------------------------------------------- 10. During the calendar year 1935, the trustees of the trusts described in findings 2, 3, and 4 had no net taxable income and no payments were made pursuant to the terms of those trusts to Elizabeth Kent Van Alen, Virginia Tucker Kent, or A. Atwater Kent, Jr.11. On or about March 15, 1933, 1934, and 1935, plaintiff duly filed his individual income tax returns for the calendar years 1932, 1933, and 1934, respectively, and paid the tax shown due on those returns in quarterly installments. Plaintiff did not include in his taxable income for those years any part of the income received and accumulated by the trustees during those years as set out in finding 8. Thereafter, the Commissioner of Internal Revenue duly made additional assessments against plaintiff by including in plaintiff's income for those years the income described in finding 8 as having been accumulated by the trustees on December 31, 1932, 1933, and 1934. After payment of the additional taxes so assessed, plaintiff duly filed claims for refund of those payments which were rejected by the Commissioner. Plaintiff then instituted suit against the appropriate collector in the District Court of the United States for the Eastern District of Pennsylvania, which court found the facts as stipulated by the parties and concluded as a matter of law that the income from the trusts in suit was taxable to the trustees and no part of it was taxable to plaintiff. Kent v. Rothensies, Collector, D.C., 35 F. Supp. 291. On appeal the decision of the District Court was reversed. Kent v. Rothensies, Collector, 3 Cir., 120 F.2d 476. Thereafter, the Supreme Court denied a petition for a writ of certiorari, 314 U.S. 659, 62 S.Ct. 113, 86 L.Ed. 528.
12. Of the taxable income received during the calendar years 1936 and 1937, respectively, by each of the trusts described in findings 2, 3, and 4, the trustees had on December 31, 1936, and December 31, 1937, pursuant to the terms of those trusts, accumulated and held for future distribution the following respective amounts:
----------------------------------------------------------- | December 31, | December 31, Trust Described in — | 1936 | 1937 ----------------------|------------------|----------------- Finding 2 (Elizabeth | | Kent Van Alen) .... | $14,079.44 | $28,180.81 Finding 3 (Virginia | | Tucker Kent) ...... | 28,462.44 | 46,944.35 Finding 4 (A. Atwater | | Kent, Jr.) ........ | 14,117.55 | 36,370.02 |__________________|_________________ Total ........... | 56,659.43 | 111,495.18 -----------------------------------------------------------
After the payment of $14,092.13 to Elizabeth Kent Van Alen, pursuant to the terms of the trust referred to in finding 2.
After the payment of $28,186.46 to Elizabeth Kent Van Alen, pursuant to the terms of the trust referred to in finding 2.
After the payment of $10,000 to Virginia Tucker Kent, pursuant to the terms of the trust referred to in finding 3.
The plaintiff was taxed on only $14,117.55 after the payment of $14,093.38 to A. Atwater Kent, Jr., pursuant to the terms of the trust referred to in finding 4.
After the payment of $20,000 to A. Atwater Kent, Jr., pursuant to the terms of the trust referred to in finding 4.
13. The trustees of each of the trusts invested the sums accumulated and held, as stated in finding 12, together with the nontaxable income received by them respectively during the period mentioned in finding 12 (as stated in "Exhibit 9" which is incorporated herein by reference), and continued to hold the accumulated income for the two-year period provided in the trust instruments. On June 30 and December 31 in each of the years 1938 and 1939, the trustees of each of the trusts paid the accumulations, reduced by the deductions of proper trust expenses, set forth in Exhibit 9, to the plaintiff in the following amounts:
----------------------------------------------------------------------------------------------------- | From Income Received | | | Date Paid to | and Accumulated | Elizabeth Kent | Virginia Tucker | A. Atwater Kent, Plaintiff | During Period | Van Alen Trust | Kent Trust | Jr., Trust ----------------------|----------------------|----------------|-------------------|------------------ 6/30/38 ............. | 1/1/36-6/30/36 ..... | $5,113.77 | $13,455.43 | $7,509.64 12/31/38 ............ | 7/1/36-12/31/36 .... | 6,875.16 | 12,850.87 | 6,929.83 | |________________|___________________|__________________ Total for 1938 .. | .................... | 11,988.93 | 26,306.30 | 14,439.47 | |================|===================|================== 6/30/39 ............. | 1/1/37-6/30/37 ..... | 7,317.27 | 9,986.79 | 6,863.79 12/31/39 ............ | 7/1/37-12/31/37 .... | 7,532.41 | 18,407.08 | 13,666.01 | |________________|___________________|__________________ Total for 1939 .. | .................... | 14,849.68 | 28,393.87 | 20,529.80 ----------------------------------------------------------------------------------------------------- No part of the accumulations paid to the plaintiff, as set out above, was included by plaintiff in his taxable income for the years 1938 or 1939.14. On or about February 27, 1937, plaintiff filed his individual income tax return for the calendar year 1936. He did not include in his taxable income for that year any part of the income received and accumulated by the respective trustees during the calendar year 1936, as stated in finding 12. He duly paid the tax shown due on that return, $52,898.93, in approximately equal installments on or about March 13, June 9, September 11, and December 13, 1937.
Thereafter, and prior to November 23, 1937, the Commissioner made an additional assessment of income taxes against plaintiff for the year 1936 in the amount of $33,909.34, which plaintiff paid November 27, 1937, with interest thereon of $1,342.90.
15. On or about March 2, 1938, plaintiff filed his individual income tax return for the calendar year 1937. He did not include in his taxable income for that year any part of the income received and accumulated by the respective trustees during the calendar year 1937, as stated in finding 12. He duly paid the tax shown due on that return, $57,419.51, in equal installments on March 19, June 15, August 9, and December 14, 1938.
Thereafter, and prior to April 25, 1939, the Commissioner made an additional assessment of income taxes against plaintiff for the year 1937 in the amount of $72,101.37, which plaintiff paid April 28, 1939, with interest thereon of $4,681.65.
16. The additional income taxes assessed and collected, as stated in findings 14 and 15, resulted in part from the inclusion in plaintiff's gross income for the calendar years 1936 and 1937, respectively, of the amounts of income described in finding 12 as having been accumulated and held by the trustees on December 31, 1936, and December 31, 1937. In arriving at those additional assessments for 1936 and 1937, the Commissioner added to plaintiff's gross income for those years the amounts of $56,659.43 and $111,495.15, respectively, as having been accumulated and held by the trustees on December 31, 1936, and December 31, 1937. Those assessments were made within the time allowed by the statute of limitations for making assessments, or within such time as extended by waivers executed by plaintiff.
17. On or about February 7, 1940, and April 15, 1941, plaintiff filed claims for the refund of income taxes and interest for the years 1936 and 1937 in the respective amounts of $37,155 and $76,783.02. The Commissioner rejected those claims December 31, 1941.
18. The trustees of the trusts described in findings 2, 3, and 4 duly filed Federal income tax returns for the calendar years 1936 and 1937 and duly paid Federal income taxes for those years at the times and in the amounts and manner prescribed by law on the total amount of taxable income received and accumulated by the respective trustees. The defendant does not admit that that income was taxable to the trustees. The trustees thereafter filed claims for the refund of the taxes so paid in order to protect the interest of each of the trusts in the event it should be held that that income was properly taxable to plaintiff. Those claims for refund have been allowed by the Commissioner and the taxes refunded to the trustees. The dates and amounts of such refunds are as follows:
----------------------------------------------------------------------------------------- Name of Trust | Amount | Date -----------------------------|-------------------------------------------------|--------- Elizabeth Kent Van Alen .... | $909.49, with interest of $271.44 for 1936. | 3/16/42 | $3,551.58, with interest of $845.71 for 1937. | 3/16/42 Virginia Tucker Kent ....... | $3,348.18, with interest of $937.51 for 1936. | 4/16/42 | $8,758.95, with interest of $1,925.22 for 1937. | 4/16/42 A. Atwater Kent, Jr. ....... | $9,616.47, with interest of $268.78 for 1936. | 3/16/42 | $5,752.50, with interest of $1,244.73 for 1937. | 3/16/42 ----------------------------------------------------------------------------------------- Similar claims for refund which were filed by the trustees for 1932, 1933, and 1934 were allowed by the Commissioner and refunds on account thereof made to the trustees.19. At all times mentioned herein the books of account and the income tax returns of plaintiff and each of the trusts described in findings 2, 3, and 4 were kept and were prepared on the cash receipts and disbursements basis.
The plaintiff claims that he was required to pay $113,938.02 more than he owed for income taxes and interest thereon for the years 1936 and 1937. The Commissioner of Internal Revenue assessed to and collected from the plaintiff taxes on the income of three trusts which the plaintiff had set up on May 20, 1932. The plaintiff was made a trustee of each of the trusts, and a trust company, a different one for each trust, was named as the other trustee. Since the trusts were similar in their provisions, except that each named a different child of the plaintiff and a different corporate trustee, a description of one of the trusts will bring out the tax question presented by each of them. We therefore describe the Elizabeth Kent Van Alen Trust.
By the trust deed the plaintiff transferred 28,762 shares of stock of the Atwater Kent Manufacturing Company to be held in trust until the death of the survivor of the grantor and his wife and his daughter Elizabeth Kent Van Alen. Out of the net income the trustees were to pay the daughter during her life the yearly sums named in an annexed schedule, which sums began at zero for 1932 and increased $5,000 each year to $75,000 for the year 1946 at which amount they were to remain from that time on. After the death of the daughter they were to pay $10,000 a year for the maintenance and education of, during minority, and thereafter to, each of the daughter's children for life, provided that the total of these payments to the daughter's children in any year should not exceed one-half the net income of the trust for that year. After making the directed payments to the daughter or her children the trustees were, during the life of the grantor, to retain any remaining income of the trust for two years after its receipt, and then disburse the retained amounts on the June 30th or the December 31st which came first after the end of the two-year period of retention of any income (1) not to exceed $5,000 to the daughter or her children as needed to bring the payments to them for the preceding calendar year up to the maximum amounts stated for them for that year; (2) the balance to the plaintiff, if living.
The Commissioner of Internal Revenue, in assessing the disputed tax, and the Government, in this suit, urge that Section 167(a) (1) of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev. Code, § 167(a) (1) made the retained income taxable to the plaintiff. It provides:
"Sec. 167. Income for Benefit of Grantor
"(a) Where any part of the income of a trust —
"(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor;
* * * * *
then such part of the income of the trust shall be included in computing the net income of the grantor."
The statute seems to fit the provision in the trust deed for the retention of the income and its payment to the plaintiff. The plaintiff urges, however, that it was uncertain whether retained income was being "held or accumulated for future distribution to the grantor" since, under the trust deed, it would not be distributed to him unless he was living at the end of the two year period of retention, and some or possibly all of it might not be distributed to him even if he was alive at the end of the period, since it might have to be used, to the extent of possibly $10,000 in any year, to make up a deficit in the share of the daughter or her children for the preceding year.
These are, without doubt, substantial uncertainties. They present the question whether Section 167(a)(1) is applicable, in the kind of situation here involved, only when the terms of the trust make it certain that the income whose taxation is in question will be paid to the grantor.
Treasury Regulation 94, promulgated under the Revenue Act of 1936, provides:
"Art. 167-1 Trusts in the income of which the grantor retains an interest.
* * * * *
"(b) Test of taxability to the grantor. — The test of the sufficiency of the grantor's retained interest in the trust income, resulting in the taxation of such income to the grantor, is whether the grantor has failed to divest himself, permanently and definitively, of every right which might, by any possibility, enable him to have the income, at some time, distributed to him, actually or constructively."
This is strong language, and would carry much farther than it is necessary to go to decide this case. But we think that at least the direction in which it points is correct, as an interpretation of the intent of Section 167(a)(1). In the taxation of incomes, the rate bracket in which they are placed for tax purposes is vital to the revenues. For one to unburden himself of much of his income tax, by ridding himself, pro tanto, of his income, is permissible. But a device by which one seeks to rid himself of much of the tax, by placing the income producing property in several separate trusts, thereby attempting to diminish almost geometrically, because of the elimination of higher surtax rates, the aggregate of income taxes payable on the same amount of income, while at the same time the income finds its way into the same pocket as before, deserves the careful scrutiny of any intelligent taxing system. As the plaintiff set up his trusts, he was, except for the possible deduction of $10,000 noted above, to get the income by surviving the two year period of retention. If, by failing to survive, he did not get it, it was, by the terms of the trust, to go to his wife, or to other natural objects of his bounty, in substantially the manner, when the several concurrently created trusts are considered, that other property which he owned outright would normally go, upon his death. He had, then, as to the income of the property which he had owned completely before he put it in trust, the substance of continued ownership of the income, which substance consisted of (a) the primary right and the probability that the income would actually come into his possession and (2) the arrangement whereby, upon his death, which would keep the income from coming into his possession, it would go largely if not entirely to persons who would, normally, take by inheritance or devise what he owned when he died.
We think that Section 167(a)(1) intended to tax such income to the grantor. If, as the plaintiff urges, we read into the statute words requiring that the income be held unconditionally for future distribution to the grantor, we open the way to the insertion, in trust conveyances, of conditions, of various degrees of likelihood of occurrence, which would have the intent, and frequently the effect, of leaving in a grantor the income which he had before he made the grant, while requiring his less ingenious contemporaries to make up the taxes which he escaped. We do not think that Congress intended that the statute should receive any such construction. If it had so intended, it must have known that the statute was hardly worth its space in the books.
The plaintiff cites Commissioner of Internal Revenue v. Dean, 10 Cir. 102 F.2d 699, in which it was held that trust income, paid to a beneficiary on January 3 of a given year, was not taxable to him, but to the trust, because during the preceding year in which it was collected by the trustee, the beneficiary had no right to have it paid to him currently, and had no right that it should ever be paid to him unless he was alive on January 3, the end of the administrative year of the trust. That decision followed the express terms of the applicable statute. The beneficiary there was not the grantor, and the income was not, when received, currently payable to him. It was, therefore, taxable to the trust. The different treatment given by the statutes to the grantor as beneficiary of his own trust, and other persons as beneficiaries, is natural. The status quo, when the grantor sets out to create a trust, is that he owns the property, is entitled to its income, and is liable for taxes on that income. The trust device has been used for centuries not only for proper purposes, but, on occasion, to create appearances which do not correspond with the substance of ownership, in order to defeat some policy of the state. When, therefore, the grantor makes himself a beneficiary of a trust of his own creation, the law must be astute to see whether not only the appearance of things, but their substance, has been changed by the creation of the trust. It takes note of the status quo ante the trust, i.e., that the now beneficiary was then the complete owner. If, as in our case, it finds that after the creation of the trust he is still the one who has the primary right to enjoy the fruits of ownership, it may think it necessary to disregard the change in legal title in order to prevent some policy of the law from being nullified by a legal device. For example, one can, in most states, create a spendthrift trust for one other than himself. But when one attempts to put his own property in trust so that he may have its income to enjoy, but not to pay his debts with, the law forbids, and allows the creditors to take the property in spite of the trust. We think that Section 167(a)(1) has something of the same purpose; that one should not, by means of a trust, succeed in ridding himself of his income taxes while keeping his income. We see nothing in this statutory purpose which should cause us to give the statute a narrow construction.
The Government has urged other reasons why the plaintiff should not recover on the merits of the case, but we do not find it necessary to discuss them. The Government also vigorously contends that because, as shown in the findings, the Circuit Court of Appeals for the Third Circuit in the case of Kent v. Rothensies, 3 Cir., 120 F.2d 476, held that the plaintiff was liable, under the same trusts here involved, for the retained income of the trusts for the years 1932, 1933, and 1934, the question is now res adjudicata and we are bound to decide the case for the Government, regardless of our views as to its merits. However, since we agree with the cited decision on its merits, we prefer not to consider the res adjudicata question. Cf. Engineers' Club of Philadelphia v. United States, 42 F. Supp. 182, 95 Ct.Cl. 42, certiorari denied, 316 U.S. 700, 62 S.Ct. 1294, 86 L.Ed. 1769.
The petition will be dismissed. It is so ordered.
WHALEY, Chief Justice, and LITTLETON, Judge, concur.
I concur both for the reasons stated and for the reason that in my opinion the decision of the 3rd Circuit Court of Appeals in Kent v. Rothensies, 3 Cir., 120 F.2d 476, is res adjudicata.
JONES, Judge, took no part in the decision of this case.