The opinion of the court was delivered by: KIRKPATRICK
This is an action for the recovery of additional income taxes paid for the years 1932, 1933, and 1934, amounting in all, with interest, to $302,958.17. The trial was to the court without a jury, and the evidence consists of a stipulation covering all relevant facts.
The question involved is whether certain income accumulated by the trustees of three identical trusts, established in 1932 by the plaintiff for members of his family, is taxable to the trustees or is to be included in the grantor's income.
Sec. 167 is incorporated by reference into Sec. 161, 26 U.S.C.A. Int.Rev.Code, § 161, which is as follows:
"(a) Application of tax. The taxes imposed by this title [chapter] upon individuals shall apply to the income of estates or of any kind of property held in trust, including --
"(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
"(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
"(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
"(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
"(b) Computation and Payment. The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). * * *"
Under each of the three trusts involved in this suit, payments of income, up to $10,000 each year (increasing at the rate of $5,000 per year until the rate of $75,000 was reached), are to be made to the life beneficiary. The balance of each year's income is to be held and accumulated by the trustees for two years and then paid to the grantor, if living at that time, the accumulated fund being, however, subject to deductions up to $10,000 which the trustees are directed to make and transfer to the current payments to the life beneficiary in case the income of the current year should be insufficient to meet the authorized current payments to the beneficiary.It is possible, though not likely, that these deductions might exhaust the fund accumulated. If the grantor should not be living at the end of any two-year period, then the accumulations of income are to go to certain other named persons, being the children and the wife of the grantor. The grantor is one of the two trustees, who are given somewhat unusual powers to deal with the trust property in connection with the grantor's business interests. The corpus does not revert to him under any circumstances. The foregoing description of the trusts is not intended to be complete, but is enough to present the question involved.
During the years 1932 to 1934, inclusive, each of the trusts produced income greatly in excess of the current payments required to be made to the beneficiary. These sums were held by the trustees for two years following their accumulation, at the end of which time the accumulated amounts, reduced by income taxes and other minor items, were on the dates designated for distribution paid to the plaintiff. The Commissioner of Internal Revenue treated these payments as income taxable to the plaintiff.The deficiencies resulting from this action were duly assessed and paid. Claims for refund were filed by the plaintiff, and, after rejection by the Commissioner, this suit was begun.
Although our primary concern is whth Sec. 167, that section cannot be properly interpreted without reference to Sec. 161, of which it is expressly made a part. Sec. 161 declares all trust income taxable and enumerates four general categories. The first category -- contained in subsection (a) (1) -- may be generally described as income which the trustee has no discretion to distribute currently, but must, by reason of the restrictions of the trust itself (not merely the normal process of distribution of decedents' estates) hold until some specified time or ...