thereto. The trustees thereof were empowered by the terms of the trust instrument to hold, manage, invest, and reinvest the property as a trust fund until the death of the petitioner and to pay to her, during her lifetime, so much of the net income as they in their absolute discretion should deem to be to her best interest. Any income not distributed could be added to principal at any time. Provisions were made for remainders over to the issue of petitioner, or in failure thereof, to her sister or brother or their issue. Subsequent to the transfer here involved, petitioner filed a gift tax return in which she reported as a taxable gift only the value of the remainder after a life estate of one then of her age.

Respondent has determined and here maintains that such transfer was a complete gift of the entire amount of the property so transferred, inasmuch as petitioner reserved no interest in and control over any beneficial interest therein, susceptible of valuation by actuarial methods; that, at most, she had but an expectancy, which expectancy is not the equivalent of a life estate; and that, therefore, no amount is to be deducted from the value of the property transferred for purposes of computing the gift tax pursuant to section 501 of the Revenue Act of 1932.1

Petitioner, on the other hand, argues that under the law of Massachusetts, by which the trust is governed, petitioner's creditors, both prior and subsequent, could reach the maximum amount, which, under the trust, the trustees could, in the exercise of their discretion, pay to her or apply for her benefit. Therefore, petitioner reasons that she could and can at any time realize all of the economic benefit of the income accruing to the trust during her lifetime by the simple expedient of borrowing money or otherwise becoming indebted, and then relegating the creditor to the trust income for reimbursement.

Petitioner's interpretation of current Massachusetts law on the point appears correct. See Ware v. Gulda, 331 Mass. 68, 117 N. E. 2d 137 (1954), wherein the Supreme Judicial Court of Massachusetts, Suffolk, held that a creditor of a settlor beneficiary of a discretionary trust, the terms of which are for all practical purposes indistinguishable from those of the trust at hand, could reach for satisfaction of a claim the maximum amount which the trustee could pay to the beneficiary or apply for the benefit thereof. The fact that the trustee had not exercised the discretionary power would not preclude such creditor from looking to the trust and obtaining therefrom

1 SEC. 501. IMPOSITION OF TAX.

(a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or non-resident, of property by gift.

(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible;

payment out of the trust property to which the debtor, but for such failure, was entitled. In so ruling, the court said, inter alia:

"The established policy of this Commonwealth long has been that a settlor cannot place property in trust for his own benefit and keep it beyond the reach of creditors. Pacific National Bank v. Windram, 133 Mass. 175; Jackson v. Von Zedlitz, 136 Mass. 342; Taylor v. Buttrick, 165 Mass. 547, 551, 43 N. E. 507; Forbes v. Snow, 245 Mass. 85, 89, 140 N. E. 418."

The rule we apply is found in Restatement: Trusts § 156 (2): "Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit." It has substantial support in authority. Greenwich Trust Co. v. Tyson, 129 Conn. 211, 224, 27 A. 2d 166; Warner v. Rice, 66 Md. 436, 8 A. 84; Hay v. Price, 15 Pa. Dist. R. 144; Menken Co. v. Brinkley, 94 Tenn. 721, 728-729, 31 S. W. 92; Petty v. Moores Brook Sanitarium, 110 Va. 815, 817, 67 S. E. 355; 27 L. R. A., N. S., 800; Scott, Trusts, § 156.2; Griswold, Spendthrift Trusts (2d ed.) § 481. *

But cf. Herzog, Trustee v. Commissioner, 116 F. 2d 591, affirming 41 B. T. A. 509, criticizing Restatement, Trusts (1935), sec. 156 and 1 Scott, The Law of Trusts (1939), sec. 156.2. See further 1 Scott, supra, 1954 supplement, sec. 156.2, n. 3, and 6 American Law of Property, sec. 26.123, n. 3. However, Herzog, Trustee v. Commissioner, supra, aside from being otherwise distinguishable, is interpretative of New York law and is, therefore, not controlling here.

In view of the clear exposition of Massachusetts law set out in Ware v. Gulda, supra, it cannot be gainsaid that petitioner's creditors could at any time look to the trust of which she was settlor-beneficiary for settlement of their claims to the full extent of the income thereof. This being true, it follows that petitioner, as she points out, could at any time obtain the enjoyment and economic benefit of the full amount of the trust income. Under the circumstances, therefore, we answer the question posed in the affirmative, and hold that petitioner correctly returned the transfer for gift tax purposes. Respondent's determination to the contrary is reversed.

Decision will be entered for the petitioner.

PERCY S. LYON AND ELIZABETH J. LYON, PETITIONERS, v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 41203. Filed October 29, 1954.

EMPLOYEES' TRUST-DISTRIBUTION OF ANNUITY CONTRACT IN YEAR TRUST NOT EXEMPT UNDER SEC. 165 (a)-REGS. 111, SEC. 29.165-6.The fair market value of an annuity contract, distributed by the trustee of an employees' trust to a former employee during a year in which the trust was not exempt under section 165 (a), which annuity contract was retained by the employee, was taxable income under section 22 (a). Regulations 111, section 29.165-6, does not relieve the distribution from tax.

Harold S. Lyon, Esq., for the petitioners.

Stanley W. Herzfeld, Esq., for the respondent.

OPINION.

MURDOCK, Judge: The Commissioner determined a deficiency of $6,222.98 in the income tax of the petitioners for 1947. The only issue is whether $11,213, representing the value of an annuity contract distributed to the petitioner Percy S. Lyon in 1947 was taxable as income. The parties have presented the facts by a stipulation which is adopted as the findings of fact.

The petitioners, husband and wife, filed a joint income tax return for 1947 with the collector of internal revenue for the first district of Pennsylvania.

Percy was president of the Cochrane Company on December 30, 1941, and continued in that position until he resigned on October 1, 1945.

Cochrane entered into an incentive trust agreement with the Fidelity-Philadelphia Trust Company, as trustee, on December 30, 1941. Percy was one of the employees selected to benefit under the agreement, and Cochrane paid to the trustee under the agreement $72,475 in 1941, of which $18,845 was allocated for the benefit of Percy. No other contribution was ever made to the trust for the benefit of Percy. There were but 14 beneficiaries of the incentive retirement trust, all of whom were officers or highly compensated employees of Cochrane which had approximately 350 employees.

The trustee of the incentive trust, on January 30, 1943, used $11,213 of the amount deposited with it in 1941 for the benefit of Percy, to purchase a single premium annuity contract, and on or about May 20, 1947, it assigned the annuity contract to Percy, following notice by the corporation of the discontinuance of the trust. Percy retained that contract throughout the taxable year and in later years received annuity payments under it. He did not report any amount to represent the receipt by him of the annuity contract in his joint income tax return for 1947. The Commissioner, in determining the deficiency, added $11,213 to the income reported and explained that it represented the fair market value of the annuity contract received by Percy in 1947.

The Commissioner's argument, that the value of the contract which Percy received in 1947 is income to him under section 22 (a), unless some other section of the Internal Revenue Code limits or defers its taxability, is sound. The petitioners make an argument based upon section 29.165-6 of Regulations 111 which provides that the cash surrender value of an annuity contract purchased by a trust exempt under section 165 (a) will not be considered income to the employee in the year it is distributed to him if distributed "in a year for which the

trust is exempt." Both parties hereto agree that this trust was exempt under section 165 (a) of the Internal Revenue Code as it applied to the year 1941. However, that provision was amended by section 162 (a) of the Revenue Act of 1942 and the petitioners do not contend that the trust satisfied the new requirements of section 165 (a). Cochrane gave notice at the end of 1942 that it would not make any further contributions to this trust and it gave notice in 1945 that the trust was to terminate. The petitioners argue from these circumstances, and from the fact that the trust was exempt when it was created in 1941, that its exempt character continued for the purpose of the above regulation. There is no occasion to pass upon the validity of the regulation because obviously it refers only to trusts exempt under the law applicable to the year in which the distribution is made, and this was not such a trust. No other provision of law or of the regulations has been cited or has come to the attention of the Court which would in any way affect the taxability of this distribution under section 22 (a).

Decision will be entered for the respondent.

ALUMINUM COMPANY OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 41037. Filed October 29, 1954.

VINSON ACT-SUBCONTRACTS-SEC. 401, SECOND REVENUE ACT OF 1940.-Subcontracts were made in 1946 with respect to a prime contract entered into in 1945 for the manufacture of engines for naval aircraft. The prime contract was exempt from the profitlimiting provisions of the Vinson Act under section 401 of the Second Revenue Act of 1940 since it was entered into in a taxable year to which the excess profits tax was applicable. Held, the subcontracts are also exempt from the Vinson Act, even though they were entered into after the expiration of the excess profits tax, since section 3 of the Vinson Act does not apply to subcontracts unless they are under prime contracts to which that section applies.

Paul G. Rodewald, Esq., and Carl Cherin, Esq., for the petitioner. Albert J. O'Connor, Esq., for the respondent.

OPINION.

MURDOCK, Judge: The Commissioner has determined that the petitioner owes $2,692.05 of excess profits on a Navy contract under section 3 of chapter 95 of the Act of March 27, 1934, the Vinson Act, as amended, 48 Stat. 503,505. The jurisdiction of this Court arises by reason of provisions in the Vinson Act making all provisions of law

applicable with respect to taxes applicable to the assessment, collection, or payment of amounts due under the Vinson Act. The facts have been submitted by a stipulation which is adopted as the findings of fact. The only question for decision is whether subcontracts entered into by the petitioner in 1946 are subject to the profit-limiting provisions of the Vinson Act.

The Vinson Act authorized new naval construction to bring the United States Navy up to the strength permitted under prior agreements with foreign powers. H. Rept. No. 338, 73d Cong., 2d Sess. The purpose of section 3 of that act was to limit the profits that might be made from the anticipated construction by contractors and subcontractors. H. Rept. No. 1024, 73d Cong., 2d Sess., p. 5; 78 Cong. Rec. 5174 (1934). Section 3 provided "that no contract shall be made by the Secretary of the Navy for the construction and/or manufacture of any complete naval vessel or aircraft, or any portion thereof, herein, heretofore, or hereafter authorized unless the contractor agrees" to various conditions set forth in subparagraphs (a) through (e). Only (b) and (e) need be mentioned here. Subparagraph (b) required that the prime contractor would agree to pay into the Treasury all of his profits in excess of a certain per cent on contracts covered by the section which were completed by the particular contracting party within any income taxable year. Subparagraph (e) required that the prime contractor would agree "to make no subcontract unless the subcontractor agrees to the foregoing conditions." Section 401 of the Second Revenue Act of 1940 provided that the portions of section 3 of the Vinson Act, to which reference has been made, "shall not apply to contracts or subcontracts *** which are entered into in any taxable year to which the excess profits tax provided in subchapter E of Chapter 2 of the Internal Revenue Code is applicable Congress felt that the special provisions of the Vinson Act should not apply while the excess profits tax, applying to all corporations, was in effect. H. Rept. No. 2894, 76th Cong., 3d Sess., p. 15, 1940-2 C. B. 496, 507.

*** ""

Pratt & Whitney Aircraft Division of United Aircraft Corporation entered into a prime contract with the Government of the United States on February 8, 1945, for the manufacture of aircraft engines for naval aircraft. Subchapter E of chapter 2 of the Internal Revenue Code was then in effect but was repealed by section 122 (a) of the Revenue Act of 1945 with respect to taxable years beginning after December 31, 1945. The petitioner entered into certain subcontracts in 1946 under the prime contract just mentioned and completed them in that year.

The petitioner argues that the subcontracts here in question are not subject to section 3 of the Vinson Act under the wording of that