U.S. Supreme Court HELVERING v. CITY BANK FARMERS TRUST CO., 296 U.S. 85 (1935)

[Page 296 U.S. 85, 87]

income was to be paid to her until her death, or until the termination of the trust, whichever should first occur. After her death, her husband surviving, the income was to be paid to him. If he did not outlive her, or upon his death, the income was to be distributed amongst their issue per stirpes. At the termination of the trust, the corpus was to be delivered to the husband, if he were alive; if not, to the settlor, if living, or, if she were dead, to the beneficiaries at that time entitled to receive the income; if there were none such, to the heirs at law of the husband. The trust was irrevocable save that the settlor reserved the right to modify, alter, or revoke it, in whole or in part, or to change any beneficial interest; any such revocation or alteration to be effected with the written consent of the trustee and her husband, or, if the husband were dead, of the trustee and her husband's brother. If they could not agree, the decision of the husband or of the brother, as the case might be, was to be final. Samuel James, the husband, survived the grantor, whose death occurred before the termination of the trust, and he is in receipt of the income.

The petitioner included the value of the corpus of the trust in Mr. James' gross estate and determined a deficiency of tax. The Board of Tax Appeals reversed, holding that section 302(d) did not apply. [Footnote 2] The Circuit Court of Appeals affirmed the Board's decision. [Footnote 3] We granted the writ of certiorari because the decision below conflicts with that in another circuit. [Footnote 4] We hold that the section covers this case, and, as so applied, is valid.

[Page 296 U.S. 85, 88]

in conjunction 'with any person not a beneficiary.' So limited, it is inapplicable to the trust in question. [Footnote 5]

[Page 296 U.S. 85, 89]

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 two sections have a cognate purpose, but they exhibit marked differences of substance. The one speaks of a power to be exercised with one not a beneficiary; the other of a power to be exercised with any person. The one refers to a power to revest the corpus in the donor; the other has no such limitation. [Footnote 8] It is true, the Report of the Ways and Means Committee on section 302(d) said: 'this provision is in accord with the principle of section 219(g) of the bill which taxes to the grantor the income of a revocable trust.' [Footnote 9] But to credit the assertion that the difference in phraseology is without significance, and in both sections Congress meant to express the same thought, would be to disregard the clear intent of the phrase 'any person' employed in section 302(d). We are not at liberty to construe language so plain as to need no construction,10 or to refer to committee reports where there can be no doubt of the meaning of the words used. [Footnote 11] The section applies to this transfer.

[Page 296 U.S. 85, 91]

Illustrations are not lacking of cases falling on either side of the line.

Congress may require that property transferred in contemplation of death, although the transfer is so remote in time as not to comply with the requirements of a gift causa mortis, shall nevertheless be treated as part of the estate for purposes of taxation; this for the prevention of evasion and the giving of practical effect to the exercise of admitted power. [Footnote 12] This is true despite the fact that the statutory prescription embraces gifts inter vivos which are in fact fully executed, irrevocable, and cannot be defeated. 13

Although property received by gift from another is capital in the hands of the donee, the gain upon a sale may be measured by the cost to the donor rather than the value at the time of acquisition by the donee. [Footnote 14]

It is competent for Congress, in order to avoid the evasion of tax, to declare that when one has placed his property in trust subject to a right of revocation in himself and another who is not the beneficiary he shall, nevertheless, be deemed to control the property in such sense that the income therefrom shall be treated as his income for the levying of a tax. [Footnote 15] So, also, where an irrevocable trust is established to pay for insurance on the settlor's life, to collect the policy upon his death, and to hold or apply the proceeds for the benefit of his dependents, Congress may declare the income of the trust fund taxable to the settlor as part of his own income. [Footnote 16]

[Page 296 U.S. 85, 92]

To effectuate the exercise of this admitted power and to prevent evasion Congress was held to have acted reasonably in including within the sweep of the statute a status or an act not normally within its reach.

There are, however, limits to the power of Congress to create a fictitious status under the guise of supposed necessity. Thus it has been held that an act creating a conclusive presumption that a gift made within two years prior to death was made by the donor in contemplation of death, and requiring the value of the gift to be included in computing the estate of the decedent subject to transfer tax, is so grossly unreasonable as to violate the due process clause of the Fifth Amendment. [Footnote 17] In the same category falls a statute seeking to tax the separate income of a wife as income of her husband. 18

In view of the evident purpose of Congress we find nothing unreasonable or arbitrary in the provisions of section 302(d) of the Revenue Act of 1926 as applied in the circumstances of this case. It was appropriate for Congress to prescribe that if, subsequent to the passage of that act, the creator of a trust estate saw fit to reserve to himself jointly with any other person the power of revocation or alteration, the transaction should be deemed to be testamentary in character, that is, treated for the purposes of the law as intended to take effect in possession or enjoyment at the death of the settlor.

The judgment is reversed.

Mr. Justice VAN DEVANTER, Mr. Justice McREYNOLDS, Mr. Justice SUTHERLAND, and Mr. Justice BUTLER are of opinion that the judgment should be affirmed. Footnotes

[Footnote *] Rehearing denied 296 U.S. 664, 56 S.Ct. 303.

Footnote 1 Chapter 27, 44 Stat. 9, 70; U.S.C.App., tit. 26, 1094(d), 26 USCA 1094(d).

Footnote 2 29 B.T.A. 1141.

Footnote 3 74 F.(2d) 242.

Footnote 4 Commissioner v. Strauss (C.C.A.) 77 F.(2d) 401, 404.

Footnote 5 Compare White v. Poor (C.C.A.) 75 F.(2d) 35; Id., 296 U.S. 98, 56 S. Ct. 66, and Helvering v. Helmholz, 64 App.D.C. 114, 75 F.(2d) 245; Id., 296 U.S. 93, 56 S.Ct. 68; Lit v. Commissioner (C.C. A.) 72 F.(2d) 551; Commissioner v. Stevens (C.C.A. 3, Sept. 17, 1935) 79 F.( 2d) 490, Commerce Clearing House Federal Tax Service, p. 10425.

Footnote 6 Chapter 136, 42 Stat. 227, 278.

Footnote 7 Chapter 27, 44 Stat. 9, 32, 34; U.S.C. App., tit. 26, 960(g), 26 USCA 960(g).

Footnote 8 Compare Porter v. Commissioner, 288 U.S. 436, 53 S.Ct. 451.

Footnote 9 H.R. No. 179, 68th Cong., 1st Sess., p. 28.

Footnote 10 Hamilton v. Rathbone, 175 U.S. 414, 419, 20 S.Ct. 155; Thompson v. United States, 246 U.S. 547, 551, 38 S.Ct. 349.

Footnote 11 Wilbur v. United States, 284 U.S. 231, 237, 52 S.Ct. 113.

Footnote 12 Nichols v. Coolidge, 274 U.S. 531, 542, 47 S.Ct. 710, 52 A.L.R. 1081; Milliken v. United States, 283 U.S. 15, 20, 51 S.Ct. 324; United States v. Wells, 283 U.S. 102, 116, 51 S.Ct. 446.

Footnote 13 United States v. Wells, supra.

Footnote 14 Taft v. Bowers, 278 U.S. 470, 483, 49 S.Ct. 199, 64 A.L.R. 362.

Footnote 15 Reinecke v. Smith, 289 U.S. 172, 177, 53 S.Ct. 570.

Footnote 16 Burnet v. Wells, , 53 S.Ct. 761.

Footnote 17 Heiner v. Donnan, 285 U.S. 312, 52 S.Ct. 358. Compare Schlesinger v. State of Wisconsin, 270 U.S. 230, 46 S.Ct. 260, 43 A.L.R. 1224.

Footnote 18 Hoeper v. Tax Commission, 284 U.S. 206, 52 S.Ct. 120.