(in trust or otherwise), though passing both legal and beneficial title, is still in essence merely formal so long as there remains in the donor a power to cause the revesting of the beneficial title in himself, and the gift, from the standpoint of substance, remains incomplete during the existence of the power. A donor shall be considered as having the power to revest in himself the beneficial title to the property transferred if he has such power in conjunction with any person not having a substantial adverse interest in the disposition of the property or the income therefrom. A trustee, as such, is not a person having a substantial adverse interest in the disposition of the trust property or the income therefrom. The relinquishment or termination of the power, occurring otherwise than by the death of the donor (the statute being confined to transfers by living donors), is regarded as the event which completes the gift and causes the tax to apply.1 The receipt of income or of other enjoyment of the transferred property by the transferee or by the beneficiary (other than by the donor himself) during the interim between the making of the formal transfer and the relinquishment or termination of the power operates to free such income or other enjoyment from the donor's power to receive it himself, and constitutes a gift of such income or of such other enjoyment taxable in the calendar year of its receipt.

If the donor contends that a power retained by him constitutes beneficial dominion and control, and that by reason thereof the transfer is not in substance a gift, the transaction shall be disclosed in the return and evidence showing all relevant facts, including a copy of the instrument by which the transfer was made, should be submitted.

and substituting in lieu thereof the following:

As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change the disposition thereof, whether for his own benefit or for the benefit of another, the gift is complete. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over the disposition thereof, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and their scope determined.

A gift is incomplete in every instance where a donor reserves the power to revest the beneficial title to the property in himself. A gift is also incomplete where and to the extent that a reserved power gives the donor the right to name new beneficiaries or to change the interests of the beneficiaries as between themselves. Thus, the transfer of an estate for life where, by an exercise of the power, the estate may be terminated or cut down to one of less value, and without restriction upon the extent to which the estate may be so cut down, constitutes an incomplete gift. Modifying the example by treating the power as confined to the right to cut down the estate for life to one for a term of five years, the certainty of an estate for not less than that term results in a gift to that extent complete.

A gift shall not be considered incomplete, however, merely because the donor reserves the power to change the manner or time of enjoyment thereof. Thus, the creation of a trust the income of which is to be paid annually to the donee for a period of years, the corpus being distributable to him at the end of the period, and the power reserved by the donor being limited to a right to require that, instead of the income being so payable, it should be accumulated and distributed with the corpus to such donee at the termination of the period, constitutes a completed gift.

1 So held in Burnet v. Guggenheim (288 U. S. 280, 53 S. Ct., 369) of a transfer in trust, made in 1917, with power in the donor to revoke, which power he relinquished in 1925, the relinquishment being treated a gift subject to the tax imposed by the gift tax title of the Revenue Act of 1924.

A donor shall be considered as himself having the power where it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. A trustee, as such, is not a person having an adverse interest in the disposition of the trust property or its income.

The relinquishment or termination of a power to change the disposition of the transferred property, occurring otherwise than by the death of the donor (the statute being confined to transfers by living donors), is regarded as the event which completes the gift and causes the tax to apply. The receipt of income or of other enjoyment of the transferred property by the transferee or by the beneficiary (other than by the donor himself) during the interim between the making of the initial transfer and the relinquishment or termination of the power operates to free such income or other enjoyment from the power, and constitutes a gift of such income or of such other enjoyment taxable as of the calendar year of its receipt.

If the donor contends that the power is of such nature as to render the gift incomplete, and hence not subject to the tax as of the calendar year of the initial transfer, the transaction shall be disclosed in the return and evidence showing all relevant facts, including a copy of the instrument of transfer, should be submitted. If for any calendar year prior to the calendar year 1939 a transfer has been subjected to payment of the tax despite the fact that the donor retained a power to name new beneficiaries or to change the interests of the beneficiaries as between themselves, and if the tax for such calendar year has been finally determined on such basis, and for all gift tax purposes such transfer has been treated, for such calendar year and each subsequent calendar year, as subject to the tax, and the donor agrees, in a closing agreement executed under the provisions of section 3760, that he will continue so to treat such transfer, then the relinquishment or termination of the power so retained by the donor shall not be treated as a gift subject to the tax.

This Treasury decision is issued under the authority contained in the following sections of law: Sections 1000, 1029 and 3791 of the Internal Revenue Code (53 Stat. 144, 157, 467); sections 501 and 530 of the Revenue Act of 1932 (47 Stat. 245, 259, 26 U. S. C. 550, 579); and section 1108 (a) of the Revenue Act of 1926, as amended by section 605 of the Revenue Act of 1928 and by section 506 of the Revenue Act of 1934 (44 Stat. 114, 45 Stat. 874, 48 Stat. 757, 26 U. S. C. 1691 (b)).

Approved September 19, 1940:

JOHN L. SULLIVAN,

GUY T. HELVERING,

Commissioner of Internal Revenue.

Acting Secretary of the Treasury.

[Filed with the Division of the Federal Register September 23, 1940, 3:10 p. m.]

(T. D. 5011)

Income tax

Regulations 103 amended to conform to the Revenue Act of 1940

TREASURY DEPARTMENT,

OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C.

To Collectors of Internal Revenue and Others Concerned:

In order to conform Regulations 103 [part 19, title 26, Code of Federal Regulations, 1940 Sup.] to the Revenue Act of 1940 (Public, No. 656, 76th Cong., 3rd Sess.), approved June 25, 1940, such regulations are amended as follows:

Paragraph 1. Section 19.1-1 is amended by inserting at the end thereof a new paragraph reading as follows:

As used in these regulations to describe a section of the Internal Revenue Code, the term "prior to its amendment" has reference only to amendment by the Revenue Act of 1939, and the term "as amended" has reference to amendment by any act.

Par. 2. The first sentence of section 19.11-1 is amended to read as follows:

Chapter 1 of the Internal Revenue Code, which applies only to taxable years beginning after December 31, 1938 (see section 1), imposes an income tax on individuals, including a normal tax (section 11), a surtax (section 12), and a defense tax for taxable years beginning after December 31, 1939, and before January 1, 1945 (section 15 added by section 201 of the Revenue Act of 1940). Par. 3. The following is inserted immediately preceding section 19.12-1:

SEC. 2. SURTAX ON INDIVIDUALS.

TITLE I.)

(REVENUE ACT OF 1940,

Section 12 (b) of the Internal Revenue Code is amended to read as follows: (b) RATES OF SURTAX.-There shall be levied, collected, and paid for each taxable year upon the surtax net income of every individual a surtax as follows: Upon a surtax net income of $4,000 there shall be no surtax; upon surtax net incomes in excess of $4,000 and not in excess of $6,000, 4 per centum of such

excess.

$80 upon surtax net incomes of $6,000; and upon surtax net incomes in excess of $6,000 and not in excess of $8,000, 6 per centum in addition of such excess. $200 upon surtax net incomes of $8,000; and upon surtax net incomes in excess. of $8,000 and not in excess of $10,000, 8 per centum in addition of such excess. $360 upon surtax net incomes of $10,000; and upon surtax net incomes in excess of $10,000 and not in excess of $12,000, 10 per centum in addition of such excess. $560 upon surtax net incomes of $12,000; and upon surtax net incomes in excess of $12,000 and not in excess of $14,000, 12 per centum in addition of such excess. $800 upon surtax net incomes of $14,000; and upon surtax net incomes in excess of $14,000 and not in excess of $16,000, 15 per centum in addition of such excess. $1,100 upon surtax net incomes of $16,000; and upon surtax net incomes in

excess of $16,000 and not in excess of $18,000, 18 per centum in addition of such

excess.

$1,460 upon surtax net incomes of $18,000; and upon surtax net incomes in excess of $18,000 and not in excess of $20,000, 21 per centum in addition of such

excess.

$1,880 upon surtax net incomes of $20,000; and upon surtax net incomes in excess of $20,000 and not in excess of $22,000, 24 per centum in addition of such

excess.

$2,360 upon surtax net incomes of $22,000; and upon surtax net incomes in excess of $22,000 and not in excess of $26,000, 27 per centum in addition of such

excess.

$3,440 upon surtax net incomes of $26,000; and upon surtax net incomes in excess of $26,000 and not in excess of $32,000, 30 per centum in addition of such

excess.

$5,240 upon surtax net incomes of $32,000; and upon surtax net incomes in excess of $32,000 and not in excess of $38,000, 33 per centum in addition of such

excess.

$7,220 upon surtax net incomes of $38,000; and upon surtax net incomes in excess of $38,000 and not in excess of $44,000, 36 per centum in addition of such

excess.

$9,380 upon surtax net incomes of $44,000; and upon surtax net incomes in excess of $44,000 and not in excess of $50,000, 40 per centum in addition of such

excess.

$11,780 upon surtax net incomes of $50,000; and upon surtax net incomes in excess of $50,000 and not in excess of $60,000, 44 per centum in addition of such excess.

$16,180 upon surtax net incomes of $60,000; and upon surtax net incomes in excess of $60,000 and not in excess of $70,000, 47 per centum in addition of such

excess.

$20,880 upon surtax net incomes of $70,000; and upon surtax net incomes in excess of $70,000 and not in excess of $80,000, 50 per centum in addition of such

excess.

$25,880 upon surtax net incomes of $80,000; and upon surtax net incomes in excess of $80,000 and not in excess of $90,000, 53 per centum in addition of such

excess.

$31,180 upon surtax net incomes of $90,000; and upon surtax net incomes in excess of $90,000 and not in excess of $100,000, 56 per centum in addition of such

excess.

$36,780 upon surtax net incomes of $100,000; and upon surtax net incomes in excess of $100,000 and not in excess of $150,000, 58 per centum in addition of such excess.

$65,780 upon surtax net incomes of $150,000; and upon surtax net incomes in excess of $150,000 and not in excess of $200,000, 60 per centum in addition of

such excess.

$95,780 upon surtax net incomes of $200,000; and upon surtax net incomes in excess of $200,000 and not in excess of $250,000, 62 per centum in addition of such excess.

$126,780 upon surtax net incomes of $250,000; and upon surtax net incomes in excess of $250,000 and not in excess of $300,000, 64 per centum in addition of such excess.

$158,780 upon surtax net incomes of $300,000; and upon surtax net incomes in excess of $300,000 and not in excess of $400,000, 66 per centum in addition of such excess.

$224,780 upon surtax net incomes of $400,000; and upon surtax net incomes in excess of $400,000 and not in excess of $500,000, 68 per centum in addition of such excess.

$292,780 upon surtax net incomes of $500,000; and upon surtax net incomes in excess of $500,000 and not in excess of $750,000, 70 per centum in addition of such excess.

$467,780 upon surtax net incomes of $750,000; and upon surtax net incomes in excess of $750,000 and not in excess of $1,000,000, 72 per centum in addition of such excess.

$647,780 upon surtax net incomes of $1,000,000; and upon surtax net incomes in excess of $1,000,000 and not in excess of $2,000,000, 73 per centum in addition of such excess.

$1,377,780 upon surtax net incomes of $2,000,000; and upon surtax net incomes in excess of $2,000,000 and not in excess of $5,000,000, 74 per centum in addition of such excess.

$3,597,780 upon surtax net incomes of $5,000,000; and upon surtax net incomes in excess of $5,000,000, 75 per centum in addition of such excess.

SEC. 9. TAXABLE YEARS TO WHICH APPLICABLE. (REVENUE ACT OF 1940, TITLE I.)

The amendments made by this title, except the amendments made by section 5, shall be applicable only with respect to taxable years beginning after December 31, 1939.

Par. 4. Section 19.12-1 is amended by inserting at the end thereof the following: "For the defense tax imposed for taxable years beginning after December 31, 1939, and before January 1, 1945, see section 19.15-1."

Par. 5. Section 19.12-2 is amended as follows:

(A) The first sentence is amended to read: "The following tables show the surtax (1) for taxable years beginning after December 31, 1938, and before January 1, 1940, and (2) for taxable years beginning after December 31, 1939, upon certain specified amounts of surtax net income."

(B) The heading of the surtax table following the fourth sentence is changed to read:

TABLE I-TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1938, AND BEFORE JANUARY 1, 1940

(C) There is inserted immediately after the existing table the following additional table:

TABLE II.-TAXABLE YEARS BEGINNING AFTER DECEMBER 31,