Can it be said, from a reading of the agreement and supplemental agreement, that the settlor retained the right to revoke the trusts?
As the language of the trust instruments does not reserve to the grantor the power to revoke them expressly, the taxpayer contends that the grantor did reserve the substantial equivalent of the power to terminate, which in him amounted to a power to revoke.
True enough, if in the exercise of his discretion the grantor saw fit to distribute not only the entire income but the entire principal to his sons, the effect of such a distribution would be to terminate the trust instruments.
While it may be that the power to revoke includes the power to terminate, it does not follow that, conversely the power to terminate includes the power to revoke. According to Webster's New International Dictionary (2d ed.) unabridged, these words have the following definitions:
Revoke: To recall. To annul by recalling or taking back; to repeal; to take back; to reassume; to recover; to draw back. To restore to use or operation.
Terminate: To put an end to; to make to cease; to end. To come to a limit in time; to end; close; to have its end; final part, or outcome.
The taxpayer places considerable emphasis on the case of Commissioner of Internal Revenue v. Estate of Holmes, 326 U.S. 480, 66 S. Ct. 257, 90 L. Ed. 228, to sustain the view that the power to terminate these trusts should be treated as a power to revoke within the meaning of Section 113(a)(5) In that case the decedent, as trustee, was authorized in his discretion either to distribute or to accumulate the income. He reserved to himself the power to terminate any or all of the trusts and to distribute the principal and accumulated income to the beneficiaries then entitled to receive it. The Supreme Court held that under Section 811(d)(2) of the Internal Revenue Code, 26 U.S.C.A. § 811(d)(2) for the purpose of the federal estate tax, the value of the property so transferred by the decedent was includable in his taxable gross estate, as an interest whereof the enjoyment was subject, at the date of his death, to change through exercise of the power to alter, amend, or revoke.
Whether or not there is any complete correlation between the provisions of the Internal Revenue Code relating to estate tax and the provisions thereof relating to the income tax, it is manifest that the phrase 'alter, amend, or revoke' in Section 811(d)(2) is much broader than the words 'to revoke' in Section 113(a)(5). Porter v. Commissioner of Internal Revenue, 288 U.S. 436, 443, 53 S. Ct. 451, 77 L. Ed. 880.
Thus, where a testator merely changed the time of payment of a bequest, it was not a revocation though it was so called in the will. In re Morrow's Estate, No. 2, 204 Pa. 484, 54 A. 342.
Since Congress by Section 805 of the Revenue Act of 1936 saw fit to add the words 'or terminate' to the language of Section 302(d)(1) of the Revenue Act of 1926, now Section 811(d)(1) of the Internal Revenue Code, 26 U.S.C.A. § 811(d) (1), in respect to transfers made after June 22, 1936, for estate tax purposes, but did not make a corresponding change in the language of the income tax provisions, it follows that the language of Section 113(a)(5) of the Internal Revenue Code relating to income tax should not be read as if the words 'or terminate' were included therein.
Although there may be a limited comparability between the estate and gift tax provisions, Estate of Sanford v. Commissioner of Internal Revenue, 308 U.S. 39, 60 S. Ct. 51, 84 L. Ed. 20; Smith v. Shaughnessy, 318 U.S. 176, 63 S. Ct. 545, 87 L. Ed. 690, there is no such parallel with the income tax title. Estate of Douglass v. Commissioner of Internal Revenue, 2 T.C. 487, affirmed 3 Cir., 143 F.2d 961.
Where Congress has drawn a distinction, however nice, it is not proper for the courts to obliterate it. Helvering v. Wood, 309 U.S. 344, 347, 60 S. Ct. 551, 84 L. Ed. 796.
Since Congress deemed it advisable to make the revision of the estate tax statute, but did not make a similar revision of the income tax statute, it appears that Congress did not consider any revision of the statute relating to the basis for income tax purposes necessary because these two statutes were obviously not intended by Congress to be consistent.
Moreover, when Congress by Section 143 of the Revenue Act of 1942, amended the provisions of Section 113(a)(2) and (3) of the Internal Revenue Code, and by Section 144 of the same Act made a slight change in the provisions of Section 113(a)(5) of the Internal Revenue Code, it did not change the language of Section 113(a)(5) of the Code to conform to its change in Section 811(d)(1) of the Internal Revenue Code so as to add the words 'or terminate' after the words 'to revoke' as appears in Section 113(a)(5) of the Code. It thus again demonstrated that the language of Section 113(a)(5) which the taxpayer believes should be interpreted to include the expression 'or terminate' was sufficiently clear to require no further clarification or modification.
The trust agreements and their supplements are not ambiguous. It is clear to me that the grantor did not reserve the right to revoke either trust, either expressly or by implication. As a result thereof, the gain or loss from the sale of the trust assets must be calculated by reference to the provisions of Section 113(a)(3) of the Internal Revenue Code, basis or value at the date of acquisition by the grantor rather than under the provisions of Section 113(a) (5) of the Internal Revenue Code, basis or value at the time of grantor's death.
The United States Supreme Court has recently enunciated the doctrine of a rigid and literal application of the provisions of the Internal Revenue Code even though the equities may call for a construction of wider latitude. United States v. Lewis, 71 S. Ct. 522. favor of the United States of America.
An appropriate order is entered.
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