Reinecke v. Smith

delivered the opinion of the Court.

In 1922 Douglas Smith, by five instruments, created as many trusts for the benefit, of his wife and four children. The trustees named were the grantor; a son who was a direct beneficiary of one of the trusts and a contingent beneficiary of the others; and a banking company, possessed of trust powers. Neither the grantor nor the corporate trustee was a cestui que trust under any of the writings. In each agreement it was stipulated:

“Anything herein contained to the contrary notwithstanding, this Trust may be modified or revoked at any time by an instrument in writing signed by Douglas Smith [the grantor] and either one of the other two trustees or their successors.”

October 22, 1924, each of the agreements was modified by striking out the quoted clause, and the grantpr resigned as trustee. He did not report any of the income’which accrued in the year 1924 upon the trust property. The Revenue Act of 1924, § 219 (g) ( 43 Stat. 253 , ,277) directs:

“ 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.”

Petitioner maintains the section in terms applies in the circumstances disclosed; as the lax is laid only upon income accruing after January 1, 1924, the statute, is nob retroactive; and, as the grantor retained a measure of control, to tax him upon the income is not arbitrary or unreasonable though the trusts were created before any statute had laid a tax upon the settlor measured by the income of such a trust.

The respondents argue in support-of the. judgment that the trustee is a beneficiary of the trust as the phrase is used in the section, and the income in question is- therefore exempt from taxation to the settlor; and that if this view be rejected the provision offends the Fifth Amendment.

. The unambiguous phraseology of the Act precludes the suggested construction. A trustee is not subsumed under the désignation beneficiary. Both words have a common and accepted meaning; the former signifies the person who holds title to' the res and administers it for the benefit of others; the latter the cestui que trust who enjoys the

We have not heretofore had occasion to pass-upon the question thus presented. In Corliss v. Bowers, 281 U.S. 376 , the section of the Revenue -Act of 1924 now Under consideration was held to justify assessment of income tax to the settlor with respect to the income of a trust revocable by him alone. Reinecke v. Northern Trust Co., 278 U.S. 339 , construed- § 402 (c) of the Revenue Act of 1921, which included within the sweep of .a transfér tax any interest of which a decedent had at any time piade a transfer, or with respect to which he had created a trust intended to take effect in possession or enjoyment at or after his death. - The tax was upheld as applied to the corpus of trusts over which the grantor had sole power of revocation. It was, however, condemned as to those where revocation was dependent upon joint .aetion of the grantor and the beneficiary, for the reason that the interest of the beneficiary was adverse and the grantor unable at will to alter or destroy the trust. In the latter casé the transfer was said to be effective when made, not at death. As pointed out in Burnet v. Guggenheim, 288 U.S. 280 , the samé considerations as to ownership and control affect the power to impose a tax on the transfer of the corpus and upon the income.

In. approaching the decision of the question before us it is to be borne in mind that the trustee is not a trustee of the power of revocation and owes no duty to the beneficiary to resist alteration or revocation of the trust. Of course hé owes a duty to the beneficiary to protect the trust res, faithfully to administer it, and to distribute the

Decisions of this court declare that where taxing acts are challenged we look nbt to the refinements of title but to' the actual command over the property taxed, — the actual benefit for which the tax is paid. Corliss v. Bowers, supra, at p. 378 ; Tyler v. United States, 281 U.S. 497 , 503; Burnet v. Guggenheim, supra. A settlor who at every moment retains the power to repossess the corpus and enjoy the income has such a measure of control as justifies the imposition of- the tax upon him. Corliss v. Bowers, supra. We think, Congress may with reason declare that where one has placed his property in trust subject' to a right of revocation in himself and another, riot a beneficiary, he shall be deemed to be in' control of the property. We cannot Say that this enactment is so arbitrary and capricious as tó amount to a deprivation of property without due process of law. As declared by the Committee reporting the section in question, a revocable trust amounts, in its practical aspects, to no more than an assignment of income.' This court has ■ repeatedly said that such an assignment, where the assignor continued to own the corpus, does not immunize him from taxation upon the income. Burnet v. Leininger, 285 U.S. 136 ; Lucas v. Earl, 281 U.S. 111 . It cannot therefore be successfully urged that as the legal title was held by the trustees the income necessarily must for income taxation be

A contrary decision would make evasion of the tax a simple matter. There being no legally significant distinction between the trustee and a stranger to the trust as joint-holder with the grantor of a power to revoke, if the contention of the respondents were accepted it would be easy to select a friend or relative as co-holder of such a power and so place large amounts of principal and income accruing therefrom beyond the reach of taxation upon the grantor while- he retained to all intents and purposes control of both. Congress had power, in order to make the system of income taxation complete and consistent and to prevent facile evasion of the law, to make provision by § 219 (g) for taxation of trust income to the grantor in the circumstances here disclosed. Compare Taft v. Bowers, 278 U.S. 470 , 482, 483; Tyler v. United States, supra, at p. 505.

Judgment reversed.