Petition by Irenee Du Pont to review an order of the Board of Tax Appeals approving a determination of the Commissioner of Internal Revenue.
Before DAVIS, Circuit Judge, and DICKINSON and McVICAR, District Judges.
This is a petition for review from an order of redetermination of the Board of Tax Appeals involving income taxes for 1924, 1925, and 1926.20 B.T.A. 482.
On September 18, 1923, the petitioner executed nine trust agreements for the benefit of his family. According to the terms of the agreements, he transferred thirty-two policies insuring his life, and certain shares of stock, to the trustee. The trustee agreed to apply the income from the stock to the payment of the premiums on the insurance policies and to defray the expenses of carrying the trusts, which were irrevocable for their term of duration with a provision for further extension, on notice by the grantor to the trustee, but it was optional whether or not the grantor would extend the term. The trusts expired, for the first time, on December 18, 1926, and since that date he has twice ordered their renewal. The last extension expired on December 18, 1932.
If the trusts terminate before the death of the petitioner, all interest in the insurance policies will vest in certain beneficiaries, of whom the petitioner is not one, but the stock will be returned to him. If the petitioner dies before the trusts terminate, the proceeds of the insurance policies will become a trust fund to be distributed under the terms of the agreement, and the stock likewise distributed to beneficiaries, other than the petitioner's estate, named in the agreement.
The Commissioner of Internal Revenue, in accordance with his construction of section 219 (h) of the Revenue Acts of 1924 and 1926 (see 26 USCA § 960 note), treated the income of the trusts for the years 1924, 1925, and 1926 as taxable to the petitioner for those years. The Board of Tax Appeals approved the determination of the Commissioner and entered its decision accordingly.
Section 219, which is the same in both acts, provides that the tax shall be computed on the net income of an estate or trust and shall be paid by the fiduciary with certain exceptions. One of these in subdivision (h) controls this case, and is as follows: "* * * Where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 955 [214 referring to charitable and philanthropic gifts] such part of the income of the trust shall be included in computing the net income of the grantor."
The petitioner contends that section 219 (h) is not applicable where the grantor of an irrevocable life insurance trust has parted with all rights and benefits under the trust prior to the act; but that, if Congress did intend it to apply, then section 219 (h) is unconstitutional under the facts of this case.
The petitioner, as above stated, executed trusts and assigned to the trustee a large amount of personal property, the income from which the trustee was to use to pay the premiums on policies of insurance on the life of the grantor. The petitioner asserts that the statute does not apply because he divested himself of all interest in the trust funds and the insurance policies (for a period of three years). But "a trust" as used in the statute includes both revocable and irrevocable trusts with or without reserved powers in the grantor; and so any "trust" created by the grantor, if the income from it is or may be used to pay for insurance on his life, comes within the terms of the statute.
Section 219 (h) in full provides: "Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 955 ), such part of the income of the trust shall be included in computing the net income of the grantor."
The first part of the paragraph explicitly applies to the reservation of some power in the grantor of the trust; and, in the disjunctive, the second part has no limitation or reservation. Paragraph (g) of this section provides that income must be taxable to the grantor when he retains the power to revoke the trust at any time during the year and revest title in himself. In view of paragraph (g), the second part of paragraph (h) would have no purpose if it applies to revocable trusts only.
The intention of Congress as expressed in the exception in paragraph (h) concerning policies of insurance irrevocable payable for the purposes of charity or philanthropy is clear and unambiguous.
This intention may further be gathered from the following report of the Senate Committee on Finance ...