Latta v. Commissioner of Internal Revenue

HASTIE, Circuit Judge

(dissenting).

The reasoned judgment of this court accords with the position of the Court of Appeals for the First Circuit in the recent case of Camp v. Commissioner, 1952, 195 F.2d 999 . I regret that I am not able to agree with the considered views of so many respected colleagues.

The question here is whether within the meaning of the gift tax statute Mrs. Latta, formerly Mrs. Bissell, made a gift of a remainder in trust to her children in 1930 or in 1947. She actually transferred the property in question to trustees in 1930, when there was no federal gift tax, under an indenture making the children remaindermen after a life es *168 tate for herself. The indenture provided that “This entire agreement may be rescinded or may be modified in any way at any time by the unanimous consent of all the Trustees and the Donor”. What happened in 1947 was that the three trustees and the donor executed a document formally eliminating the quoted provision from the trust instrument. The court says a taxable gift of the remainder occurred when this change was made. I disagree.

For purposes of analysis the starting point and the basic datum is the gift tax statute itself. Its sole relevant provision is this: “For * * * each calendar year * * * a tax * * * shall be imposed upon the transfer during such calendar year by any individual * * * of property by gift. * * * The tax shall apply whether the transfer is in trust or otherwise * * * .” Int. Rev.Code § 1000, 26 U.S.C., 1946 ed., § 1000. It is this language which must be construed and applied to determine when the “gift” was made. I do not find that construction doubtful or difficult.

The trust was duly established, and title and possession of the trust estate transferred to the trustees in 1930. Ever since that time the Bissell children have been the remaindermen under that trust. Of course until the 1947 amendment there was a possibility that the remaindermen be divested of what their mother had given them. But there is nothing in the tax statute or accepted judicial construction of it which says that such a possibility postpones the occurrence of a taxable gift. It has been authoritatively decided that no gift occurs so long as the donor either technically or in practical reality has the power to recall the gift if he so desires. If the donor has reserved to himself such a power of recall it is the established rule that the gift occurs when that power is released. Burnet v. Guggenheim, 1933, 288 U.S. 280 , 53 S.Ct. 369 , 77 L.Ed. 748 ; Cf. Smith v. Shaughnessy, 1943, 318 U.S. 176 , 63 S.Ct. 545 , 87 L.Ed. 690 .

But this is not such a case. The donor could not recall the gift. Only the unanimous action of four persons, the three trustees and the donor, could alter or revoke the trust. To lodge power in the four together is very different from investing one alone. This is demonstrated and emphasized by stating still a third case, that in which the trustees alone have the power. This power does not postpone the taxability of the gift. Herzog v. Commissioner, 2 Cir., 1941, 116 F.2d 591 ; Aldus C. Higgins, 1941, 44 B.T.A. 1123 . What can there be about the additional requirement of the donor’s consent which would make the transfer less complete and postpone gift taxation on any analogy to a power in the donor alone? In logic, nothing. Cf. Orrin G. Wood, 1939, 40 B.T.A. 905 . But there may be a practical consideration. The donor may dominate the group decision. Of course he may also do that without being formally a member of the group which holds the power. But if he formally shares in the exercise of the power it is certainly proper to inquire whether the others are subservient so that the donor in reality is free to shift enjoyment of the ostensible gift as he may see fit. Making such an inquiry here we find it established clearly in the record that Mrs. Latta did not have the power of recall in fact or practical reality any more than she had it in legal theory.

These are the established facts. One of the trustees was Leonard Bissell, who was divorced from the taxpayer in 1932 following a separation which began in 1929 before the trust was executed. A second trustee was Mr. Bissell’s attorney. The third was taxpayer’s attorney. Explaining to her attorney in 1930 when the trust was being planned why she wanted to require the unanimous vote of this group of four for any alteration of the trust, the taxpayer said:

“I think I know myself better than you do, and I know that the time may come when I may wish to undo what I have done in connection *169 with this trust. And that is why I want Leonard and Max and yourself as trustees, so that I cannot change my mind and undo what I have done here.”

Of course Bissell, the estranged husband, had the most obvious interest in using his power as trustee to preserve the gift to his children and to prevent any action which would take property from them and give it to his former wife, soon remarried. Moreover, he received a substantial part of his income as a salaried officer of the General Drop Forge Co., 36% of the stock of which was in the trust estate. Bissell himself and his attorney, who was cotrustee, also had smaller personal stock holdings in the corporation. Therefore, the trust as originally established placed Bissell in better position to protect his own salaried office. Thus he had two impelling reasons to resist any revocation of the trust and none to acquiesce in such a step. Moreover, the evidence shows without dispute that Mrs. Latta did from time to time suggest revocation but the trustees were against such a step. Finally, convinced that the trustees would not revoke the trust, the donor in 1947 agreed with them upon formal elimination of the group power of revocation.

On these facts I believe we all recognize that in practical effect as well as technically the taxpayer surrendered control and dominion over the remainder interest in the trust estate in 1930. Thus, if the language of the gift tax statute is given normal interpretation we are forced to conclude that there was no gift in 1947.

The contrary conclusion of the Tax Court, adopted by the majority here, depends upon something additional which I have not heretofore mentioned. There is a Treasury Regulation which says:

“ * * * A donor shall be considered as himself having the power [to dispose of the trust estate] 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. * * * ” Treasury Regulations 108, Sec. 86.3.

The court regards this provision as controlling. But in my view it is an unwarranted administrative amendment of the statute. It was justified in the early 1930’s because at that time the 1932 tax statute itself contained a provision explicitly postponing gift taxation in cases where power of revocation was shared by the donor and “any person not having a substantial adverse interest in the disposition of such property”. 47 Stat. 169 , 245. But that provision was repealed in 1934. 48 Stat. 680 , 758. Moreover, as the opinion of this court indicates, the legislative history shows that Congress had in mind that after re-pealer the situation would be controlled by the then recently announced doctrine of Burnet v. Guggenheim, 1933, 288 U.S. 280 , 53 S.Ct. 369 , 77 L.Ed. 748 . But that is the landmark decision for judging the time of gift taxation in this area on the basis of the presence or absence of continuing dominion in fact by the donor after the trust is established. As I read the legislative history, that 1933 decision led Congress in 1934 to abandon the 1932 statutory rule of thumb for postponing the gift tax in the conjunctive power cases and leave the courts free to apply a flexible rule of reason. Now the administrative authorities say the courts should not apply the rule of reason because a Treasury Regulation still imposes the repealed rule of thumb. To me this argument is unpersuasive. The regulation is arbitrary. We should disregard it. And, without the regulation, the present gift tax statute, given a normal and reasonable interpretation consistent with the rationale of Burnet v. Guggenheim, and applied in the light of the facts proved in this case, requires a reversal of the decision of the Tax Court.