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Commissioner of Internal Revenue v. Stokes.

July 31, 1935

COMMISSIONER OF INTERNAL REVENUE
v.
STOKES.



Appeal from the United States Board of Tax Appeals.

Author: Davis

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

DAVIS, Circuit Judge.

This case involves the income tax liabilities of the taxpayer, Francis J. Stokes, for the years 1929 and 1930.

In 1928, the taxpayer executed a trust agreement whereby he transferred certain securities to the trustee to use the income therefrom for the maintenance, education, and support of his several minor children. The agreement directed the trustee, as each child became twenty-one years of age, or died prior to that time, to transfer the equal share of the fund of that child to the wife of the taxpayer, or if she should not be living, to the taxpayer himself, and if neither should be living, to other persons for the purposes therein expressed.

The trust agreement further provided that:

"Third: I direct that Lelia W. Stokes, during the continuation of this trust, may at any time by a written request to the trustee, receive such securities or sums of money under said trust as she may desire.

"Should, however, the said Lelia W. Stokes, die prior to the termination of this trust, then I reserve to myself the right to draw upon the principal of said trust as herein conferred upon her."

The Commissioner determined that the income derived from the trust fund in 1928 and 1930 was taxable to the settlor and not the trustees. The Board of Tax Appeals reversed the assessment, and the Commissioner came here on petition to review the order of the Board.

There must be no misunderstanding of the issue here involved. It is not a question of the power of Congress to provide that under such facts as are before the court the income of the trust is taxable to the settlor (Burnet v. Wells, 289 U.S. 670, 53 S. Ct. 761, 77 L. Ed. 1439; DuPont v. Commissioner, 289 U.S. 685, 53 S. Ct. 766, 77 L. Ed. 1447), but it is a question of whether or not Congress has given statutory authority to tax the income derived from the fund to the settlor.

The Commissioner contends that the income of the trust is taxable to the settlor under sections 166 and 167 of the Revenue Act of 1928 (26 USCA ยงยง 2166, 2167).

These sections provide:

"166. 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."

"167. Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or 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 section 23 (n) [section 2023 (n)], relating to the ...


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