One vested with the right to receive income does not escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another, because by the exercise of his power to command the income, he enjoys the benefit of the income on which the tax is laid.
In December, 1929, respondent, the life beneficiary of a testamentary trust, "assigned" to certain of her children specified amounts in dollars from the income of the trust for the year following the assignment. She made a similar assignment to her children and a son-in-law in November, 1930. The Commissioner posited that the income was that of the life beneficiary and assessed a deficiency against her for the calendar years 1930 and 1931, which she paid. Petitioner United States brought an action against the respondent to recover taxes illegally assessed under 26 U.S.C.S. §§ 161(a),162(b). Both the district court and the appellate court ruled in favor of the respondent taxpayer.
Did the lower courts err in their decision to grant judgment in favor of the respondent taxpayer?
The Court noted that 26 U.S.C.S. §§ 161(a), 162(b), taxed income of any kind of property held in trust, and that income of a trust for the taxable year which was to be distributed to the beneficiaries was to be taxed to them whether distributed to them or not. The Court stressed that income taxation was a practical matter, the substance of which should not be obscured by form. The Court held that, in this respect, trust income was no different from other forms of unearned or earned income. One vested with the right to receive it did not escape the tax by any kind of anticipatory arrangement by which he procured payment of it to another, since, by the exercise of his power to command the income, he enjoyed the benefit of the income on which the tax was laid. Hence, the Court reversed the judgment for the taxpayer.