Opinion
No. L-436.
June 19, 1933.
A.L. Lisenby, of Washington, D.C. (Weill, Satterlee, Spence Blakely and Hugh Satterlee, all of Washington, D.C., and Walter C. Blakely, of Philadelphia, Pa., on the brief), for plaintiff.
J.W. Hussey, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and WHALEY, WILLIAMS, LITTLETON, and GREEN, Judges.
Action by Frank W. Thacher against the United States.
Petition dismissed.
This case having been heard by the Court of Claims upon an agreed statement of facts signed on behalf of the plaintiff by Weill, Satterlee, Spence Blakely, and on behalf of the defendant by Assistant Attorney General Charles B. Rugg, the court makes the following special findings of fact:
1. At all of the times herein mentioned the plaintiff was and is a citizen of the United States and a resident of Edgewater Park, in the state of New Jersey.
2. On May 10, 1922, the plaintiff created five trusts, and on January 8, 1924, he created a sixth trust. The corpus of each of the five May 10, 1922, trusts consisted of a one-fifth interest in certain policies of insurance on the life of the plaintiff or any policies which thereafter might be issued by the companies to represent said interest, and, in addition, certain securities, all as more particularly shown in the schedules annexed to the said deeds of trust. The corpus of the sixth trust, the one created January 8, 1924, consisted of other policies of insurance on the plaintiff's life and certain securities, all as more particularly shown in the schedule annexed to said deed of trust.
By these trusts the plaintiff assigned and transferred to Provident Trust Company of Philadelphia, as trustee, all of the said securities and policies of insurance on his life.
A copy of one of the said deeds of trust dated May 10, 1922, is attached to and made part of the petition herein marked Exhibit I. Each of the other deeds of trust dated May 10, 1922, and the trust deed dated January 8, 1924, are identical in content in every respect with said deed of trust, Exhibit I to the petition herein, except as to subparagraphs (b) and (c) of paragraph second thereof, and except, also, that the schedule annexed to and made part of the trust deed dated January 8, 1924, is different from the schedule annexed to each of the other trust deeds. There are annexed to and made part of the petition herein, marked, respectively, Exhibits II, III, IV, V, and VI, a copy of subparagraphs (b) and (c) of paragraph second of each of the remaining trust deeds dated May 10, 1922, and of the trust deed dated January 8, 1924, respectively, and there is also annexed to and made part of said petition, marked Exhibit VII, a copy of the schedule annexed to and forming part of the trust deed dated January 8, 1924. The said Exhibits I, II, III, IV, V, VI, and VII, annexed to and forming part of the petition herein, are hereby made part of these findings of fact by reference.
3. The trust dated January 8, 1924, was created subsequently to the five trusts created May 10, 1922, for the reason that the plaintiff's child, Helen Thacher, for whom it was created, was born subsequently to the date when the five prior trusts were created.
4. Each of the said six deeds of trust provides that so much of the net income thereof as may be necessary shall be applied to the payment of premiums on insurance policies on the life of the plaintiff forming part of the principal of said trust, and that the balance of the income shall be applied to the use of the beneficiary or beneficiaries thereof — all as more particularly stated in said deeds of trust.
5. In view of the fact that part of the corpus of each of the five trusts created May 10, 1922, consisted of a one-fifth interest in the same insurance policies, that is, the policies listed in the schedule annexed to and forming a part of the trust deed, Exhibit I to the petition herein, the said policies were canceled, and in place of each of the said policies there were issued by the same insurance companies five new policies, each five new policies being for one-fifth of the amount of the policies which they replaced, one policy for each of the said five trusts, in each of which policies Provident Trust Company of Philadelphia, as trustee, is named as beneficiary.
6. Each of the above referred to policies which was issued in substitution was issued and was duly assigned by the insured, the plaintiff herein, to Provident Trust Company, as trustee under said deeds of trust, concurrently with the creation of the respective trusts, each bore the date of issue of, and, except for the principal amount, was identical in terms with the original policy for which it was substituted.
Policy No. 184755 for $5,000 issued by Mutual Benefit Life Insurance Company, being the last policy listed in Exhibit I of the petition herein, matured on October 25, 1922. On November 13, 1922, said $5,000 was paid to the trustee, Provident Trust Company of Philadelphia, and the trustee added $1,000 in cash to the principal of each of the five trusts dated May 10, 1922.
At the times when the said trusts were created no premiums on any of the aforesaid policies of insurance forming part of the principals of the said six trusts were due and unpaid, all premiums which theretofore became payable on said policies having been theretofore paid by the plaintiff.
Any and all requirements and conditions concerning the assignment of the aforesaid policies forming part of the principals of the said six trusts, upon creation of the respective trusts, were duly complied with, and each of said policies was duly assigned by the insured, the plaintiff herein, to Provident Trust Company, of Philadelphia, as trustee under the said six trusts, respectively, by written assignments.
7. During the year 1926 and at all times since May 10, 1922, the date of creation by the plaintiff herein of the trust (Exhibit I of the petition herein), in which the plaintiff's wife, Catharine Levin Thacher, is named beneficiary, the plaintiff and his said wife, Catharine Levin Thacher, have lived together as man and wife, and they have never been legally separated or divorced.
8. The trustee kept the books of the said trusts on a cash receipts and disbursements basis. The following table shows the amount of income received by each of the said trusts during the year 1926 and the amount of income, subdivided into ordinary income and dividends, applied from each of said trusts to the payment of premiums on policies of insurance on the life of the plaintiff forming part of the corpus of said trusts, and the amount of tax paid at the source:
------------------------------------------------------------------------------------------------- | | Income applied to payment of | | | premiums | Amount | Total income |--------------------------------------------| of tax Trust | of trust | Ordinary | | | paid at | | income | Dividends | Total | source -------------------------|----------------|--------------|---------------|-------------|--------- Exhibit no. 1 .......... | $7,670.54 | $ 2,360.26 | ............. | $2,360.26 | $ 36.78 Exhibit no. 2 .......... | 7,677.40 | 2,360.26 | ............. | 2,360.26 | 38.45 Exhibit no. 3 .......... | 7,677.24 | 2,360.26 | ............. | 2,360.26 | 38.45 Exhibit no. 4 .......... | 7,676.26 | 2,360.26 | ............. | 2,360.26 | 38.46 Exhibit no. 5 .......... | 7,685.37 | 2,360.26 | ............. | 2,360.26 | 38.40 Exhibit no. 6 .......... | 4,998.46 | 564.14 | $847.72 | 1,411.86 | 1.61 |----------------|--------------|---------------|-------------|--------- Total ............... | .............. | $12,365.44 | $847.72 | $13,213.16 | $192.15 ------------------------------------------------------------------------------------------------- 9. Under the provisions of the Act of Congress approved February 26, 1926, entitled, "An Act To reduce and equalize taxation, to provide revenue, and for other purposes," and known as the Revenue Act of 1926 ( 44 Stat. 9), the plaintiff on or about March 15, 1927, duly filed with the collector of internal revenue at Camden, N.J., his individual income tax return for the calendar year 1926.10. In his said income tax return for 1926, the plaintiff reported taxable net income of $62,431.81. This sum included no part of the above-mentioned $13,213.16 collected by said trustee and applied to the payment of premiums on said insurance policies as aforesaid. Said return showed a tax liability of $6,891.05, which was assessed and was paid by the plaintiff to the said collector of internal revenue in quarterly installments, the fourth installment in the sum of $1,772.76 having been paid on December 16, 1927.
11. Thereafter the Commissioner of Internal Revenue determined that the plaintiff's net income for the year 1926, as reported by him as aforesaid, should be increased by the sum of $13,213.16, representing that part of the income of the aforesaid trusts received in 1926 by said trustee which was applied to the payment of premiums upon the aforesaid policies of insurance, and assessed an additional tax of $2,801.02 against the plaintiff for that year. The basis of the Commissioner's determination, as set forth in his 60-day letter to the plaintiff dated September 11, 1929, bearing the letters and symbols "IT:AR:B-1 TWH-60D," was as follows:
"Careful consideration has been given to your protest in connection with the findings of the examining officer, to the report on the conference held with your representatives on September 14, 1928, in the office of the internal revenue agent in charge, and to the report of the conferee on the conference held with your representative on June 28, 1929, in this office. The adjustments recommended by the conferee, as the result of the latter conference, have been approved.
"In the protest you contend that the examining officer in adjusting net income erroneously included therein the portion of the income from certain trusts created by you, which income, under the declaration of trust, was used to pay premiums upon policies of insurance on your life.
"The information submitted shows that in 1922 you created five trust funds, one for your wife and one for each of your children then living; that in 1924, you created another trust fund for a newly born child; that these trusts are substantially identical, such differences as exist being only in the character of the securities held in trust; that all six trusts are irrevocable; that each trust provides that the income shall first be applied to the payment of premiums on life insurance policies upon your life; and that the balance of the income, if any, shall be paid to the respective beneficiaries for their maintenance, education and support.
"Section 219(h) of the Revenue Act of 1926 [ 26 USCA § 960 note], concerning estates and trusts, reads in part as follows:
"`Where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.'
"It is admitted by you that no portion of the income from these trusts had been reported in your return and, in view of the above-quoted portion of the Revenue Act of 1926, your contention has been denied."
12. On December 16, 1929, plaintiff, under protest, paid said additional assessment of $2,801.02, together with interest thereon in the amount of $451.85, to the said collector of internal revenue.
13. Of the $10,143.92, paid by the plaintiff as aforesaid, that is, $6,891.05 tax originally paid, $2,801.02 additional tax, and $451.85 interest on the additional tax, the sum of $3,357.45, representing $2,905.60 tax and $451.85 interest, was paid because of the inclusion by the Commissioner of Internal Revenue in the plaintiff's taxable income for said year of the said sum of $13,213.16 received in 1926 by the trustee under the aforesaid trusts and applied by it to the payment of premiums upon the aforesaid policies of insurance.
14. On or about January 23, 1930, and April 13, 1930, respectively, the plaintiff, in accordance with law, filed with the said collector of internal revenue, for transmission to the Commissioner of Internal Revenue, his original and supplemental claims for refund of the sum of $3,357.45, representing the additional tax and interest thereon which had been assessed against and collected from him as aforesaid. The grounds set forth by the plaintiff in his claim for refund filed January 23, 1930, were as follows:
"* * * All of claimant's interest in the principal and income of said trusts and in the policies of insurance therein referred to was irrevocably conveyed by him to said trustee at the time said deeds of trust were respectively executed and delivered, and prior to February 26, 1926, the effective date of the Revenue Act of 1926; the question is not affected by the provisions of section 219(h) of the Revenue Act of 1926 in that the provisions of that section are not to be given retrospective effect and, if given such effect, they deprive claimant of his property without due process of law in violation of the fifth amendment to the Constitution of the United States.
"Claimant avers that, for the reasons set forth above, his 1926 taxable net income $75,661.29, as determined by the Bureau in its above referred to letter, dated September 11, 1929, was excessive by $13,213.16 ($12,365.44 ordinary income plus $847.72 dividends), that no part of such sum was taxable to claimant under the pertinent provisions of any of the revenue acts, and that, by reason of such overstatement of claimant's 1926 taxable net income, $2,905.60 tax and $451.85 interest thereon was excessive and erroneously and illegally assessed and collected. Wherefore, claim for refund of said $2,905.60 tax and $451.85 interest thereon, or such greater amount as is found to be legally refundable, is hereby made."
In his supplemental claim for refund filed April 13, 1930, the plaintiff set forth the following additional grounds in support of his claim for refund: "Claimant avers, in addition to the matters set forth in said claim heretofore filed by him, that during the taxable year 1926 claimant kept his accounts and filed his returns of income on a cash receipts and disbursements basis; that during the taxable year 1926 he received no income, and no income accrued to him, actually or constructively, or directly or indirectly from the six trusts created by him on May 10, 1922, and January 8, 1924, referred to in the claim heretofore filed, the inclusion of the income of which in taxpayer's 1926 income resulted in the tax sought to be refunded; that, prior to February 26, 1926, claimant had irrevocably conveyed to the trustee named in said deeds of trust all of his interest in the principal and income of said trusts, and that the inclusion of the 1926 income of said trusts in claimant's 1926 income and the assessment of income tax thereon against the claimant was illegal and in violation of the Sixteenth Amendment to the Constitution, in that the assessment was made upon income of another taxpayer that neither accrued to, nor was received by, claimant, and that the collection of the tax thereon from the claimant deprived claimant of his property without due process of law in violation of the 5th amendment of the Constitution."
15. On a schedule dated July 11, 1930, the Commissioner of Internal Revenue wholly rejected and disallowed the said claims for refund.
16. In his letter dated May 15, 1930, bearing the symbols "IT:AR:F-3 BH," addressed to the plaintiff, the Deputy Commissioner of Internal Revenue, stated the reasons for rejecting the aforesaid claims as follows:
"Your claims for the refund of $3,357.45, individual income tax and interest for the year 1926, have been examined.
"The basis of your claims is the statement that the five trusts created by you are irrevocable and the income of said trusts is not taxable to you; also that the inclusion of the income of said trusts in your income and the assessment of income tax thereon is illegal and in violation of the Sixteenth Amendment to the Constitution.
"Section 219(h) of the Revenue Act of 1926 provides in part as follows:
"`* * * Where any part of the income of a trust is or may be applied to the payment of premiums upon the policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph 10 of subdivision A of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.'
"Inasmuch as you provided for the payment of the premiums of your life insurance policies out of the income of the trusts, the income of the trusts is taxable to you as grantor.
"Relative to the statement that the treating of section 219(h) of the Revenue Acts of 1924 and 1926 [ 26 USCA § 960 note] as retroactive is unconstitutional, you are advised that the Supreme Court ruled in the case of Charles A. Corliss v. Frank K. Bowers, 281 U.S. 376, 50 S. Ct. 336, 74 L. Ed. 916, April 28, 1930, that the provision of section 219(h) of the Revenue Act of 1924 is constitutional.
"Your claims are, therefore, rejected."
The letter of the Deputy Commissioner of Internal Revenue, dated July 11, 1930, bearing the symbols "IT:C:CC," sent to plaintiff, contained no additional statement of the reasons for the rejection of said claims, but merely informed plaintiff that the claims had been disallowed by the Commissioner on a schedule dated July 11, 1930.
On May 10, 1922, plaintiff created five irrevocable trusts, and on January 8, 1924, he created a sixth irrevocable trust. The trust respectively set over certain policies of insurance on the life of plaintiff, and, in addition, certain securities. The beneficiaries of the first five trusts were plaintiff's children and his wife, and the beneficiary of the sixth trust was a subsequently born child. All of the trusts were set up before the date of the enactment of the Revenue Act of 1924 (Act June 2, 1924, 43 Stat. 253). Each trust provided that as much of the income from the securities vested therein as should be necessary for the payment of premiums on the life insurance policies in the trust should be employed for the payment of said premiums on said policies, and that the balance, if any, should accumulate for stated distributions to the beneficiaries.
The facts have been stipulated. The issues presented are:
First. Whether Congress intended section 219(h) of the Revenue Act of 1926 ( 26 US CA § 960 note), in so far as it requires that there be included in the net income of the grantor any part of the income of a trust which is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor, should apply to trusts such as those here involved.
Second. If it did, whether the statute was unconstitutional.
In the recent case of Burnet, Commissioner, v. Wells, 53 S. Ct. 761, 77 L. Ed. 1439, decided by the Supreme Court on May 29, 1933, the court upheld the validity of the contested statute and held that the act applied to irrevocable as well as revocable trusts. In our opinion, the Wells Case is decisive of this case.
The petition is dismissed. It is so ordered.
BOOTH, Chief Justice, did not hear this case on account of illness, and took no part in its decision.