Power v. Commissioner

*428 These three proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax of $1,788.61 for 1924, $10,256.78 for 1926, and $3,792.07 for 1927, and the petitioner assigns as error the inclusion in her gross income for said years of that portion of the income from a trust estate which would have been receivable by her under the terms of her mother's will but for the assignment thereof by her to her husband.

*429 FINDINGS OF FACT.

The petitioner, a resident of Center City, Minn., is named Hazel Thompson Power, but she sometimes signs her name as Hazel E. Power.

Abigail I. Thompson, a resident of St. Paul, Minn., died in 1923, leaving a last will and testament which was duly admitted to probate in the probate court of the County of Ramsey, Minnesota. The said will provides, inter alia, that the residue of her estate, consisting*1877 of personal property, shall be held in trust and further that:

(b) The trust property shall be held by the Trustees undivided during the joint life of my daughters, said Hazel E. Power and said Florence Wheeler Jefferson, and the life of the survivor of them. So long as they both live, the income thereof, first deducting the sums, if any, paid Mary E. Stewart as above provided, shall be paid over to them annually, or at such shorter intervals as the Trustees shall find convenient, in equal shares. In case the one first dying leaves her surviving any lawful issue, whether of the first or succeeding generations, then thereafter so long as any such issue and the remaining daughter shall live, such issue shall receive one-half of the income and the remaining daughter the other one-half. But, in the event such issue of the deceased daughter shall die during the life of the remaining daughter, then thereafter the whole income shall be paid to such remaining daughter until her death. Upon the death of the remaining daughter, the property shall be divided and turned over one-half thereof to the living issue of each daughter, if there then be such issue of each, whether of the first or*1878 succeeding generations. But, if there then be such issue of one daughter only, that issue shall take the whole of the Trust Estate.

The terms of the said will placed no limitations or restrictions on alienation of the right to receive the income from the trust estate, by the life beneficiaries.

On or about September 27, 1923, the petitioner executed before a notary public a written document which makes reference to the provisions of the said will as to the creation of the trust and the distribution of the income therefrom and then provides as follows:

NOW, THEREFORE, For Value Received and in consideration of the natural love and affection I bear unto my husband, Charles E. Power, the undersigned, Hazel E. Power, does hereby assign, transfer and set over unto said Charles E. Power, one-third of the income of the trust estate of said Abigail I. Thompson to which the undersigned, Hazel E. Power, may be or may become entitled to under and by virtue of the terms of the Last Will and Testament of Abigail I. Thompson and the Codicils thereto, and the trust therein created.

This assignment of income is expressly made subject to the following conditions subsequent, namely:

That*1879 should the said Charles E. Power, alienate or dispose of any anticipated income or income payable in the future, to which he may be entitled under this assignment, if any, or if by reason of insolvency or any other means whatsoever said income can no longer be personally enjoyed by the said Charles E. Power, either in whole or in part, but because of such fact or facts the same would, if this assignment were to be permitted to continue, become vested in or payable *430 to some other person, then this assignment of said income so to become payable in the future after the happening of such event shall be deemed terminated and the interest of said Charles E. Power therein shall immediately cease and determine, and the said income shall revert to and belong to the undersigned, Hazel E. Power.

The interest of the assignee hereunder in future and undistributed income shall not be assignable.

On the same date the petitioner served upon the trustees of the said trust estate the following written instrument, executed before a notary public:

To - C. K. Blandin,

Watson P. Davidson,

Ira C. Oehler,

W. H. Oppenheimer, Trustees under the Last Will and Testament of Abigail I. *1880 Thompson, Late of Saint Paul, Minnesota.

The undersigned, Hazel E. Power, has this day executed and delivered to her husband, Charles E. Power, an assignment of a one-third interest in the income to which she will become entitled under the terms of the trust estate created by her mother. A duplicate original of said assignment is hereto attached and made a part hereof.

The undersigned hereby requests that in distributing the income to which the undersigned may become entitled to receive under the terms of said will and the trust thereby created, that at the time of distribution, you distribute the same in two checks, one for two-thirds of the amount to the undersigned, Hazel E. Power, and one for one-third of the amount to my husband, Charles E. Power.

You are authorized to continue making such payments irrespective of the conditions subsequent contained in said assignment until written notice from me of the happening of any fact putting into operation the said conditions subsequent and the termination of said assignment. That is to say, you are not charged or to be charged with the duty of investigating whether or not any facts have arisen putting said conditions subsequent*1881 into operation, but may rely upon such condition not having arisen until I serve written notice upon you to the contrary.

In consideration of your recognizing said assignment of a one-third interest in said income to my husband, I hereby agree to protect and save you harmless from any costs, damages, liability or expense of any kind, character or description, which you may be put to by reason of making payments to my husband, Charles E. Power, in accordance with said assignment and this notice.

IN WITNESS WHEREOF, I have hereunto set my hand and seal this 27th day of September, 1923.

HAZEL E. POWER.

In Presence of:

FLORENCE T. JEFFERSON.

Subsequently the following written instrument was executed by petitioner and her husband:

WHEREAS, under date of September 27th, 1923, the undersigned, Hazel E. Power, did assign, transfer and set over unto her husband, Charles E. Power, *431 one-third of the income of the trust estate created for the undersigned, Hazel E. Power, under the terms of the will of her mother, Abigail I. Thompson:

NOW, THEREFORE, this document evidences the fact that subsequent to the date of such agreement, and at a date*1882 which can be fixed by checks passing from the undersigned, Hazel E. Power, and by the bank accounts of the respective parties, the interest of said Charles E. Power in said income was increased from one-third to one-half, it being the intent hereof to evidence by this writing that previous verbal understanding between the parties that the agreement above referred to was, has been and is modified so that the interest of Charles E. Power in the income of said trust estate has been and is one-half instead of one-third.

April 13, 1927.

HAZEL E. POWER.

Throughout the years in question the said instruments have remained in full force and effect, have been recognized by the trustees of the said trust estate and have not been revoked at any time up to the date of the hearing on these proceedings. The said trustees acted upon the instructions of both the petitioner and her husband and paid over to them one-half of the net income of the trust by issuing checks to a designated bank as payee for deposit to their joint bank account.

In her income-tax return for the year 1924, the petitioner reported two-thirds of her share, under the terms of the will, of the income*1883 from the trust estate and her husband reported the other one-third. For the years 1926 and 1927 the petitioner and her husband each reported one-half of the said income. In each of the said years the tax was paid accordingly, but the respondent proposes to include in petitioner's gross income for each of the said years the total amounts constituting her share, under the terms of the will, of the income from the trust estate, thus giving rise to the deficiencies in controversy.

OPINION.

MORRIS: The petitioner alleges and contends that that portion of the income here in controversy which would have been received by her from the estate of Abigail I. Thompson had it not been previously assigned by her to her husband, is not taxable to her.

The rule is well established that notwithstanding the document of grant or assignment itself may be perfectly valid and enforceable between the parties thereto, the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the grant or assignment of such income or profits to another. *1884 ; affd., ; ; certiorari denied, ; ; petition for review *432 dismissed, ; ; ; ; and , holding the assigned income taxable to the assignor or grantor. The same general rule was announced and followed in ; affd., , although a different conclusion was reached, because something more than the mere assignment of future income was accomplished - namely, an assignment of an interest in the property itself from which the income flowed; also, in , reversed at , the Board held that "what was assigned was a right to profits after they had arisen rather than any principal or asset which gave rise to the profits;" but the Circuit Court*1885 of Appeals reversed the decision of the Board on the ground that the instrument not only assigned the right to receive future income, but it also carried with it the right, title and interest in and to the property itself, i.e., a certain syndicate agreement.

The rule stated seems to be perfectly reasonable and sound. If it were possible for a taxpayer to assign his future taxable income (assuming, of course, that he accomplishes nothing more), and by such assignment indirectly effect an assignment of his tax liability thereon, thus permitting him to plead the assignment and compel the Government to seek redress from the assignee, there would be nothing to prevent the original assignee from dividing a portion of his right to receive by further assignment to others, and so on ad infinitum, until the individual liabilities for the tax would be so multiplied and scattered that collection of the tax would be rendered absolutely impossible in a vast majority of cases. Under such circumstances income, as such, would cease to be an object of taxation. *1886 To absolve the assignor of complete liability for tax upon assigned income would, as the dissenting opinion in Marshall Field, infra, states, "distort the income tax by making it depend upon the disposition of income," or, as the court said in :

To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would be indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt.

In , sustaining the decision of the Board that notwithstanding an agreement between the taxpayer and his wife to create a joint tenancy in future income the income was taxable to the husband, the court said:

*433 But this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction*1887 of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.

We have held in a very similar line of cases that the assignment of dividends upon capital stock, interest upon promissory notes, and rents from properties, etc., does not relieve the assignor or grantor of liability for payment of the tax upon such dividends, interest, or rents where the ownership of said stock, promissory notes, or other properties remained in the assignor. ; ; affirmed in these respects, *1888 ; certiorari denied, ; ; ; ; , certiorari denied, . Also see ; ; ; ; ; .

Counsel for the petitioner cites , as controlling of the issue here and states that the instant case "is far stronger" than that, but he does not indicate why he so believes. We are of the opinion that the two cases are clearly distinguishable. In the instant case the petitioner revocably assigned, with a restraint upon alienation, *1889 "one-third of the income of the trust estate" which she "may be or may become entitled to," while in the Clark case there was an absolute irrevocable assignment to the assignee "and to his heirs and assigns forever," of "one-half interest in all income, rents, interest, reversion, remainder and remainders which may from time to time be payable to me or to which I may be hereafter entitled." In other words, the assignor there was completely divested of every right in and to a portion of the trust property and the income therefrom, while here there was a mere revocable assignment of income, with a restraint upon alienation, which, as the assignment states, was "to become payable in the future."

The petitioner also cites ; affirmed upon the point in question in . In that case Field, having an interest in income of a certain trust, executed in instrument to his wife assigning to her "an undivided two-thirds (2/3rds) interest in all the net *434 income of the two-fifths (2/5ths) of the residuary estate of Marshall Field, deceased, * * * intending*1890 hereby to convey to and vest in the said party of the second part [his wife] an undivided two-thirds (2/3rds) interest in all the net income adjudicated to belong" to him. The Board said, holding the assignor nontaxable with respect to the income so assigned, that, "The petitioner by such assignment completely divested himself of any interest in the right to receive such income and it follows that he may not be taxed therefor." In the instant case there was no complete divestiture upon the part of the petitioner as to the one-third of the income assigned, for the reason that the assignee was deprived of the most important attribute of ownership, namely, his right of alienation and complete personal enjoyment. Furthermore, in the Field case there is a clear intention to pass an immediate irrevocable property right in and to the trust income, whereas here the assignment is revocable and is predicated upon "anticipated income or income payable in the future."

For the same reasons just given with respect to the Field case, we are of the opinion that *1891 ; petition for review to Circuit Court of Appeals, First Circuit, dismissed January 17, 1930, can not be followed.

Not that we question the motives impelling the assignor to make this assignment, but we must satisfy ourselves from the evidence in each of these cases, where husband and wife are concerned, each enjoying and sharing in the properties of the other without material distinctions of ownership (it will be observed from the findings of fact that the assigned income was deposited in a joint bank account), that there has been a really bona fide assignment of a property right in praesenti and not a mere assignment of future income in the guise of a property right designed for the purpose of defeating taxes justly due. To adopt a less stringent policy would permit the shifting of income from husband to wife and vice versa to suit the convenience of the individual taxpayer. As the Circuit Court said in , "If such indefinite transactions are approved, it will open wide the door by which men, without the high purposes that the government admits actuated petitioner, may enter and*1892 defraud the government of its taxes."

The instrument in question can not be construed as an attempt on the part of the assignor to completely divest herself of one-third of her property right in the trust, when considered in the light of the conditions imposed upon the assignment. That the assignment constituted nothing more than an attempt to assign future income, as, if, and when earned and payable by the trust, is borne out by such language in the instrument as "anticipated income or income payable *435 in the future, to which he may be entitle * * * if any." Furthermore, there could have been no absolute divestiture of a property right by reason of the condition that "If by reason of insolvency or any other means whatsoever said income can no longer be personally enjoyed by the said Charles E. Power" the assignment should cease and determine, the said income reverting to the assignor.

For the above and foregoing reasons the respondent's determination is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

TRUSSELL dissents.