Appeal from the District Court of the United States for the Western District of Pennsylvania; Nelson McVicar, Judge.
Before BIGGS, MARIS and CLARK, Circuit Judges.
This case is another*fn1 illustration of the dual and therefore confusing procedure still permissible in contests between the taxpayer and his government. It happens (used advisedly) to come to use from the United States District Court. In 1917 the father of the present appellants executed two deeds of trust for the benefit of his two minor children, a son Thomas, and a daughter Lucille. Each of these instruments gave them the income from 150 $1,000 par value bonds for life with power of appointment by will. The trusts contained two clauses relevant to the present controversy. They read:
"Neither the principal of the said trust estate nor the income thereof shall in any manner be liable to the control or answerable for the debts, contracts, engagements or torts of the said cestui que trust, or liable to any charge, assignment, conveyance or anticipation by him.
"The party of the first part hereby reserves the right after six months written notice of his intention so to do, served on the party of the second part, to revoke this trust, whereupon the principal of the trust fund shall be distributed to Thomas Mellon, S. Lucille Mellon Grange, and the trust shall end." Deed of Trust Exhibits Nos. 3 and 4 Appendix to Appellants' brief, pp. 69, 70, 72, 73.
In these provisions we perceive the usual form of a spendthrift*fn2 trust. This type of trust has received the approval of the Pennsylvania courts.*fn3 From the logic of its purpose termination must depend on the settlor. It cannot be accomplished by compulsion of the beneficiaries,*fn4 even under a statute favoring charitable organizations.*fn5 So here the father expressly provided for such termination upon notice. He died in 1934 without exercising this right to indicate that in his opinion his children could look after themselves. The Commissioner of Internal Revenue included the value ($184,629.40) of the property held in the two trusts in the estate taxable under the appropriate statute.*fn6
We think this inclusion proper and are surprised at its being questioned.The theory of the tax is both old and familiar.*fn7 The settlor's death,*fn8 or in the case of the gift tax, his release,*fn9 ends his power and so passes a valuable assurance of title. The statute has been given a liberal interpretation and taxability thereunder found in many different sets of circumstances. A shifting of economic benefits has been stressed.*fn10 The grantor need not be able to exercise the power for his own benefit and in fact may expressly exclude any alteration in favor of himself.*fn11 A change of beneficiaries*fn12 or a change in the amounts they are to take*fn13 is sufficient. The statute applies even though parties with adverse interests share the power with the settlor.*fn14 In fact the only qualifications permitted go to a power of fecting trivial and unimportant matters*fn15 and to the retroactive application of the statute if the power is exercisable by the grantor in conjunction with another person.*fn16
Appellants' counsel contends that the settlor's reservation was a power of termination, which power, it is averred, is not included in the statutory words "to alter, amend, or revoke." This argument appears to be derived from a part of a Treasury Regulation of 1940. Appellants' counsel quotes it in his brief: "A power to terminate capable of being so exercised as to revest in the decedent the ownership of the transferred property or an interest therein, or as otherwise to enure to his benefit or the benefit of his estate, is, to that extent, the equivalent of a power to 'revoke', * * * ". Estate Tax Regulations 80, Article 20, Appellants' brief, p. 20.
We say a part advisedly because for some and, as we think futile reason, he has omitted the first two sentences and the last phrase. The entire section reads: "A third change * * * consisted of the addition of the words 'or terminate' following the words 'to alter, amend, revoke'. Such addition is considered but declaratory of the meaning of the subdivision prior to the amendment. A power to terminate capable of being so exercised as to reinvest in the decedent the ownership of the transferred property or an interest therein, or as otherwise to inure to his benefit or the benefit of his estate, is, to that extent, the equivalent of a power to 'revoke', and when otherwise so exercisable as to effect a change in enjoyment, is the equivalent of a power to 'alter'". Estate Tax Regulations 80, Article 20, 3 C.C.H. Fed. Tax. Serv. (1940) para. 3440.
The Treasury was moved to the promulgation of this Regulation by decisions of the United States Supreme Court*fn17 and by the action of Congress thereon.*fn18 In these cases a ground suggested for the defeat of the tax was a failure of the statutory trio "revoke, alter and amend" to include "terminate" in their meaning. The trusts there litigated were expressed to be at end or terminated upon action taken according to an instrument other than and subsequent to the creating document. The Supreme Court refused to pass upon the relation between the four words and found as their ratio decidendi the omission in the original declaration of trust. As the contention had been made, however, Congress to make assurance doubly sure added the "terminate" of the litigated instruments to the previously included "revoke, alter and amend". In doing so, the relevant Committee made the precautionary character of their purpose quite plain. Their Report reads: "Another change made in * * * (Section 302(d)) has been to expressly include a power to terminate along with the powers to alter, amend, or revoke. In the case of White v. Poor, supra, the Supreme Court did not pass on the question of whether the power to terminate was included in the language relating to a power 'to alter, amend, or revoke'. Since in substance a power to terminate is the equivalent of a power to revoke, this question should be set at rest. Express provision to that effect has been made and it is believed that it is declaratory of existing law." H. Rep. No. 2818, 74th Cong., 2d Sess. p. 10, 3 C.C.H. Fed. Tax. Serv. (1940) para. 2412.*fn19
The Treasury Regulation is in explanation of this amendment and the reason thought to be underlying it. No inference of a change and therefore of a different rule can be drawn.
We suggest that the Congress exceeded the Treasury in its knowledge of the law of trusts. The text books on and Restatement*fn20 of that branch all include chapters entitled Termination and Modification of the Trust. In those chapters are discussed the several methods of terminating a trust, and included among them is, of course, the revocation of the trust by the settlor. Professor Scott outlines the general principles: "Ordinarily the terms of the trust fix the period of its duration, and it will not be terminated until the expiration of that period. In certain situations, however, the trust may be terminated at an earlier date. Thus, for example, where the creation of the trust was induced by fraud, duress or undue influence or the trust was created as a result of a mistake the settlor or his successors in interest may have the trust rescinded. This is true whether the trust was created inter vivos or by will. Where it is created inter vivos the settlor may terminate it by revoking it if he reserved a power of revocation. If, however, he did not expressly or impliedly reserve a power of revocation and if his failure to reserve a power of revocation was not due to a mistake, he cannot revoke the trust, unless all of the beneficiaries are ascertained and are under no incapacity and consent to the revocation. Similarly the settlor cannot modify the terms of the trust if he did not reserve power to do so at the time of the creation of the trust." 3 Scott on Trusts, § 329A.
It is clear that revocation is but a method of bringing a trust to an untimely end and has no relation to the consequent and subsequent fate of its corpus. The "calling back" is of time rather than of space. It seems unnecessary to be troubled by the Treasury's doubts as to the kind of termination or to ...