The Commissioner of Internal Revenue assessed a deficiency against petitioner for failure to include in his 1934 and 1935 tax returns the income of three separate trusts declared by him in 1934. Each of the declarations of trust recited that the beneficiaries were 'Jay C. Hormel (petitioner himself), and Germaine D. Hormel, his wife, as guardian for their son,' a different son being designated by each trust instrument. Each trust estate consisted of shares of stock in Geo. A. Hormel & Co., of which petitioner was an officer. Petitioner named himself and another as co-trustees; all dividends from each trust estate, up to $2,000 a year, were to be paid to petitioner's wife as guardian for the son named in the particular trust instrument, and any excess over $2,000 was to be paid to petitioner; the trusts were to expire automatically after three years, or upon the death of petitioner, or upon the death of the named son, whichever event should occur first; upon expiration of each trust, the entire principal should be the property of petitioner, his legatees, devisees, or heirs; petitioner and his wife (as guardian) had the power to remove petitioner's co-trustee at any time, and to choose a successor; the co-trustees could appoint proxies to exercise voting rights over the shares of stock making up the trust estates, and could sell the securities deposited and substitute others; it was provided that no title to the trust estates should vest in petitioner's wife, as guardian, or in his sons, and it was further provided that the wife and sons should have no power 'to sell, transfer, encumber or in any manner anticipate or dispose of any interest in the trust estate'; and, finally, the trust instruments stated that the co-trustees were to be responsible for loss only upon wilful and deliberate violations of their duties.
All of the trust income for the years in question was distributed to petitioner's wife as guardian, who reported it to the federal government as guardianship income. Petitioner, in his individual returns, did not include it. The Commissioner, taking the position that petitioner should have included the trust income in his individual returns, assessed a deficiency against him, asserting that the trusts were 'revocable' and the income therefore petitioner's within in the meaning of section 166 of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Code, § 166. The Board of Tax Appeals decided against the Commissioner, holding that the income in question was taxable to petitioner neither under section 166 nor 167, 26 U.S.C.A. Int.Rev.Code, §§ 166, 167, the two sections expressly relied on by the Commissioner before the Board. In the Circuit Court of Appeals, the Commissioner abandoned reliance on section 166, urged that the Board was in error as to taxability under section 167, and argued that in any event the income was taxable to petitioner under section 22(a), 26 U.S.C.A. Int.Rev.Acts, page 669. The taxpayer argued that the applicability of section 22(a) was not open for consideration, inasmuch as that section had not been relied on before the Board. The Circuit Court of Appeals, though agreeing with the Board as to non-taxability under sections 166 and 167, nevertheless ruled that section 22(a) could properly be considered, and held the income taxable to petitioner under that section. Because of a conflict among the Circuit Courts of Appeals on the propriety of considering section 22(a) under these circumstances, we granted certiorari. 311 U.S. 626, 61 S.Ct. 35, 85 L.Ed. --. Two questions are presented for our decision: First, Was the court below correct in holding that section 22(a) should be considered? Second, If so, was the court below justified in determining that the income of these trusts was taxable to petitioner under section 22(a)?
First. Petitioner in effect challenges the power of the Circuit Court of Appeals to pass upon any questions other than those which were directly and squarely presented in the proceedings before the Board of Tax Appeals. That court's authority to review decisions of the Board rests on statutes, which provide in part that the Circuit Courts of Appeals 'have power to affirm or, if the decision of the Board is not in accordance with law, to modify or to reverse the decision of the Board, with or without remanding the case for a rehearing, as justice may require.' 26 U.S.C. § 1141(c)(1) (Supp.1939), 26 U.S.C.A. Int.Rev.Code, § 1141(c)(1). In general, it is the function of the Board to determine the facts of a tax controversy on issues raised before it and to apply the law to those facts; and it is the function of the reviewing court to decide whether the Board has applied the correct rule of law.