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Graff v. Commissioner of Internal Revenue.

January 14, 1941

GRAFF
v.
COMMISSIONER OF INTERNAL REVENUE.



Petition for Review of Decision of the United States Board of Tax Appeals.

Author: Sparks

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

SPARKS, Circuit Judge.

Petitioner seeks to review a decision of the Board of Tax Appeals, which found a deficiency of $4,761.09 in his income tax for the year 1935.

The only question presented is whether the capital gains which were added to the corpus of a trust in 1935 were taxable to the trustees under Section 161,*fn1 or to the settlor under Sections 166 and 167*fn2 of the Revenue Act of 1934, 26 U.S.C.A. Int. Rev. Acts, pages 725, 727. The Board held the latter sections applicable, and from that decision this appeal is prosecuted.

The facts are not disputed. On September 26, 1930, petitioner executed a written instrument creating a trust, naming himself and Verde Clark Graff, his wife, as trustees. By its terms the trustees were to pay the net income of the trust to the wife for her life.Upon her death the trustees were to deliver the trust estate to petitioner, if he was then living; and if he was not then living, they were to divide the estate into funds, equal in value, for the petitioner's children, and eventually to pay the funds to the grantor's children, or their lineal descendants. The original trust was revocable only by the petitioner with the written consent of his wife.

By an amendment of December 28, 1935, which was after the capital gains presently to be mentioned, the trust was made irrevocable, and it was provided that upon the death of the wife, the trust estate should be distributed to the children, rather than to petitioner if living. In that form the trust is still in existence. When the trust was created petitioner was forty-four years of age, his wife was thirty-seven, and they were both in good health. They had three children at that time, ranging from seven to thirteen years of age.

During the year 1934, the trustees received dividends of $3,750 on securities thus held in trust. This income was currently distributed to the wife under the terms of the trust, and was included in her income tax return for the year 1934.

During the year 1935, the trustees received dividends amounting to $3,135, and capital gains derived from the sale of securities, of 14,217. The income from dividends, less a small amount for expenses, was currently distributed to the wife, and was reported in her income tax return for 1935. The capital gains were not distributed, but were retained by the trustees and added to the corpus. The trustees duly reported these gains on their return for that year, and paid income tax thereon.

Respondent added to petitioner's income the ordinary income of the trust for 1934 and 1935, as well as the capital gains of $14,217 in 1935, and on that basis determined deficiencies in petitioner's income tax for the two years, relying on sections 166 and 167 of the Revenue Act of 1934.

On appeal from this determination, the Board held that the petitioner was not taxable on the ordinary income of the trust, but was taxable, under section 167, on the capital gains of $14,217 for 1935. It therefore disallowed the deficiency for the year 1934, and redetermined the deficiency for 1935. The Commissioner acquiesced in the Board's decision.

Under the authority of Klein v. United States, 283 U.S. 231, 51 S. Ct. 398, 75 L. Ed. 996, and Helvering v. Hallock, 309 U.S. 106, 60 S. Ct. 444, 84 L. Ed. 604, 125 A.L.R. 1368, we feel constrained to affirm the Board's ruling. It is quite true that both of these cases involved sections of revenue acts, different from the sections and Act now before us, and did not involve the precise question, or the same facts as here. They also applied to the transfers of real estate rather than to personalty. However, the language of the court is so emphatic in both cases as to leave no doubt in our minds that the analogies to be drawn therefrom would not warrant us in refusing to apply them to the facts here presented.

In the Klein case [283 U.S. 231, 51 S. Ct. 399, 75 L. Ed. 996], the Court said, "Nothing is to be gained by multiplying words in respect of the various niceties of the art of conveyancing or the law of contingent and vested remainders. It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed." The Court in the Hallock case [309 U.S. 106, 60 S. Ct. 448, 84 L. Ed. 604, 125 A.L.R. 1368], said of the Klein case: "It rejected formal distinctions pertaining to the law of real property as irrelevant criteria in this field of taxation." We see no reason for rejecting such distinctions as to transfers of realty and applying the formal distinctions applicable to transfers of personalty.

It is quite true that in the Klein case there was no trust. However, in the Hallock case there was, and the Court apparently thought ...


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