Corliss v. Bowers
281 U.S. 376, 1930 U.S. LEXIS 392, 50 S. Ct. 336 (1930)
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Rule of Law:
When a grantor transfers property to a trust but retains the power to revoke, modify, or alter the trust in any manner, the income from that trust remains taxable to the grantor, as they maintain actual command and control over the trust corpus.
Facts:
- In 1922, the petitioner transferred a fund to trustees, creating a trust.
- The trust instrument directed that the income from the fund be paid to his wife for life, with the remainder over to their children.
- The petitioner explicitly reserved the power 'to modify or alter in any manner, or revoke in whole or in part, this indenture and the trusts then existing, and the estates and interests in property hereby created'.
- The petitioner maintained the full power to abolish or change the trust at any moment at his will.
- During the taxable year of 1924, the net income from the trust was paid over to the petitioner’s wife.
Procedural Posture:
- The petitioner filed a lawsuit in District Court to recover an amount of income tax paid under the Revenue Act of 1924.
- The District Court dismissed the petitioner's complaint.
- The judgment of the District Court was affirmed by the Circuit Court of Appeals.
- The Supreme Court of the United States granted a writ of certiorari to review the case.
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Issue:
Does a grantor who transfers funds to a trust, reserving the power to revoke or modify the trust at will, remain taxable on the trust's income, even if that income is paid to another beneficiary, under the Revenue Act of 1924?
Opinions:
Majority - Mr. Justice Holmes
Yes, a grantor who transfers funds to a trust, reserving the power to revoke or modify it, remains taxable on the trust's income, even if that income is paid to another beneficiary. The Court held that taxation is not primarily concerned with the technicalities of legal title, but rather with the 'actual command over the property taxed' and 'the actual benefit for which the tax is paid'. The petitioner's retained power to revoke or modify the trust gave him unfettered command over the trust corpus, essentially making the income subject to his option. This power is equivalent, for tax purposes, to having legal title with the right to stop payment. The acquisition of the income by the wife became complete only because the petitioner failed to exercise his reserved power. The Court cited precedents such as Saltonstall v. Saltonstall, Chase National Bank v. United States, and Reinecke v. Northern Trust Co. to support the principle that retained powers can be determinative for tax liability, overriding formal distinctions in title.
Analysis:
This case significantly solidified the 'substance over form' doctrine in tax law, particularly concerning grantor trusts. It established that merely divesting legal title is insufficient to avoid tax liability if the grantor retains substantial control over the trust assets and income. The ruling prevented taxpayers from using revocable trusts as a mechanism to shift income tax burdens, thereby preserving the integrity of the progressive income tax system. It remains a foundational case for understanding grantor trust rules and the principle that economic reality, rather than mere legal labels, governs tax consequences.
