Smith v. United States

LARAMORE, Judge

(dissenting).

I am unable to agree with the majority opinion. The majority opinion ignores (1) the plaintiffs’ primary contention based on the statutory use of the word transfer in estate tax law; (2) the usual approach of determining estate tax consequences at the date of decedent’s death rather than at the time of the transfer, except for transfers made in contemplation of death; and (3) the fact that the only effective power to revoke was vested in the trustee and was extinguished long before decedent’s death. Further, it fails to cite any authority for assuming that Congress meant, when it used the phrase “transfer made prior to March 4, 1931”, that the transfer must have been completely irrevocable on March 4, 1931, rather than a transfer of property as that term is ordinarily understood and used in the rest of the estate tax provisions. I also believe that the reliance of the majority opinion on the gift tax cases is ill-founded.

First, I believe it should be pointed out that the definition of transfer contained in the gift tax cases is not controlling or even relevant to the consideration of the issue in this case. The estate and gift taxes are in pari materia in that they are closely related, and the gift tax serves to supplement the estate tax. However, this does not mean that a term used in both laws has the same meaning. A transfer considered complete for gift tax purposes may or may not be considered complete for estate tax purposes, Smith v. Shaughnessy, 318 U.S. 176 , 63 S.Ct. 545 , 87 L.Ed. 690 , or income tax purposes, Commissioner of Internal Revenue v. Beck’s Estate, 2 Cir., 129 F.2d 243 , and the cases there cited. A sufficient example for present purposes is a transfer of property in trust before March 4, 1931, with a reservation of the right to designate the persons who shall possess or enjoy the property or the income therefrom. The reserved power makes the transfer incomplete for gift tax purposes but nevertheless the property is not included in the gross estate since the transfer was made prior to March 4, 1931.

The word transfer does not play as important a role in the estate tax law as it does in the gift tax law. Under the statutory scheme of the estate tax sections, emphasis is placed on the rights, powers, and interests of decedent in property at the date of his death, on dispositions made in contemplation of death, and dispositions intended to take effect in possession and enjoyment at or after death. Property is included in the gross estate notwithstanding its actual legal transfer to someone else. This is accomplished by express subsections, paragraphs and subparagraphs. Attention, under the present law, is directed to determining whether the transfer falls within one of these provisions and not on the “completeness” of the transfer.

It appears that the statutory use of the word transfer throughout section *311 811, aside from its use designating time of transfer such as its use in the phrase here in controversy, has reference to the actual transfer of the property as it is •ordinarily understood, the conveyance of legal title. See for example section 811 (d) which taxes a transfer that is revocable at date of death.

The question thus shaped is whether Congress intended to use the word transfer in its ordinary sense when used in reference to time of transfer such as its use in the phrase here in controversy, “transfer made prior to March 4, 1931”, or whether Congress intended to use it in the sense of a completed irrevocable transfer that would not have subjected the property to inclusion in the gross -estate under the revocable transfer section 811(d), its predecessors or the rule of Reinecke v. Northern Trust Co., 278 U.S. 339 , 49 S.Ct. 123 , 73 L.Ed. 410 , if the decedent had died on March 4, 1931.

We agree with the plaintiffs that identical words in different parts of the same statute, here the same section and subsection, should be construed to mean the same thing, unless a contrary legislative intent is clearly shown. See Helvering v. Stockholms Enskilda Bank, 293 U.S. 84 , 55 S.Ct. 50 , 79 L.Ed. 211 , and United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 236 , 75 S.Ct. 733 , 99 L.Ed. 1024 , which amply support this proposition.

The legislative history and purpose of the Technical Changes Act of 1949 leads me to believe that Congress intended the word transfer in the phrase here in controversy to mean the actual transfer of the property regardless of the interest retained by the transferor at the time of "the transfer. Reference in the congressional debates was always to the date that the property was transferred in trust and to the date of creation of the trust and the interest retained at date of -death. See the Senate debate on amendments to the bill and clarification of language used in the S. Rept. 831, 81st Cong., 1st sess.; 95 Cong.Rec. 12990-12994 (1949). See also the Conference Report, H. Rept. 1412, 81st Cong., 1st sess., and the Statement of the Managers on the part of the House, 96 Cong.Rec. 14444-14446 (1949). The majority can find no support in the statute, legislative history, or case law for its conclusion that a trust created prior to March 4, 1931, must be irrevocable in order to be a transfer before March 4, 1931. I see no need to impose such a requirement where Congress has not seen fit to do so.

It also may be noted that section 8 of the Technical Changes Act of 1949, 26 U.S.C.A. § 811 note, supra, permitted the release without the payment of a gift tax of certain life estates and income interest retained in property transferred prior to June 7, 1932, if the release was made in 1949 or 1950. This section also provided that the release of such interest, if made before 1951, would not be considered made in contemplation of death. This section did not apply “if the property transferred would have been includible in the grantor’s gross estate under section 811(d) [power of revocation section] of the Internal Revenue Code (1939) had he died on October 7, 1949.” This proviso indicates that Congress was aware of the fact that a transfer made before March 4, 1931, may have been revocable. . What did Congress do ? It did not say that the property is automatically included in the gross estate because the transfer was revocable on March 4, 1931. Rather, it provided that if the transfer was still revocable on October 7, 1949, the release of the power of revocation would be subject to a gift tax and may be considered made in contemplation of death. Thus, if the power was released and was not released in contemplation of death, and no other ground existed for inclusion, the property would clearly be excluded from the gross estate. This proviso has no meaning under the majority opinion, because the property could be included in the gross estate regardless of whether the power was released in contemplation of death.

I believe that the decedent falls within one of the purposes of this act, which *312 was designed, inter alia, to give relief to those taxpayers who relied on May v. Heiner, supra, and did not release their life estates. The trust in question was created in 1923. Section 302(d) of the Revenue Act of 1924, 43 Stat. 253 , 304, 26 U.S.C.A. Int.Rev.Acts, page 67, for the first time specifically provided that a transfer under which the settlor had the power either alone or in conjunction with any person to alter, amend, or revoke would result in the property being included in his gross estate. This provision was not retroactive. Cf. Helvering v. City Bank Farmers Trust Co., 296 U.S. 85 , 56 S.Ct. 70 , 80 L.Ed. 62 ; Helvering v. Helmholz, 296 U.S. 93 , 56 S.Ct. 68 , 80 L.Ed. 76 ; White v. Poor, 296 U.S. 98 , 56 S.Ct. 66 , 80 L.Ed. 80 .

The Supreme Court decided Reinecke v. Northern Trust Co., supra, in 1929. In that case the Court held a transfer under which the settlor retained a life estate and an absolute power to revoke until the date of his death was taxable as one intended to take effect in possession or enjoyment at or after death, and and that the Revenue Act of 1921, 42 Stat. 227 , was not retroactively applied because the transfer was incomplete since the settlor reserved the sole power to revoke until his death, which was after the passage of the act. That case also involved five other trusts wherein the settlor gave a life estate to the beneficiaries with remainders over at or after settlor’s death. In four of the trusts he reserved the power to revoke in conjunction with the individual beneficiary of each of the four trusts. In the fifth trust he reserved the power to revoke in conjunction with a majority of the beneficiaries. The Court held as to these five trusts that since the power to revoke was dependent on the consent of the one or ones having beneficial and therefore adverse interest, the trusts had passed from his control and were complete. The Court stated that the clause “to take effect in possession or enjoyment at or after death” did not include property or interest therein unless such property or interest passed from the possession or enjoyment or control of the donor at his death. This laid the ground work for the May v. Heiner, supra, decision.

The Supreme Court decided May v. Heiner, supra, in 1930. In that case the settlor had transferred property in trust under which the income was payable to her husband during his life and upon his decease to herself for life with remainder over to her children. The trust was irrevocable at time of transfer and date of death. The Court held that the retention of a contingent life estate until the date of death did not result in the inclusion of the corpus in her gross estate under section 402(c) of the Revenue Act of 1918, 40 Stat. 1057 , because title to the property was fixed by the trust deed and passed under that deed and therefore did not pass from her possession at her death.

On March 2, 1931, the Supreme Court rendered three Per Curiam, opinions affirming May v. Heiner, supra. Two of the cases, Burnet v. Northern Trust Co., 283 U.S. 782 , 51 S.Ct. 342 , 75 L.Ed. 1412 , and Morsman v. Burnet, 283 U.S. 783 , 51 S.Ct. 343 , 75 L.Ed. 1412 , involved irrevocable trusts where the settlor retained an immediate life estate. The third case, McCormick v. Burnet, 283 U.S. 784 , 51 S.Ct. 343 , 75 L.Ed. 1413 , involved a trust where the settlor retained until the date of his death an immediate life estate and a power to revoke in conjunction with one of the beneficiaries.

On March 3, 1931, Congress passed a Joint Resolution, 46 Stat. 1516 , amending section 302(c) of the Revenue Act of 1926, 44 Stat. 9 , 70, to include in the gross estate “ * * * a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property * * *.” This amendment was prospective only. 71st Cong., 3d sess., 74 Cong.Rec. 7199 (1931). The Supreme Court held that it was not retroactive “in respect of past irrevocable transfers with reservation of a life inter *313 est.” Hassett v. Welch, 303 U.S. 303, 307 , 58 S.Ct. 559, 562 , 82 L.Ed. 858 .

Thus it is seen from the above-cited cases that at or about the time of the passage of the 1931 Joint Resolution a transfer subject to the absolute power in the settlor to revoke was considered an incomplete transfer for estate tax purposes. It is also seen that a transfer made before 1924 subject to a power to revoke in conjunction with a beneficiary, a person having an adverse interest, was considered complete for estate tax purposes. In the instant case the trustee who had the power to revoke had a beneficial interest in the trust although it was remote. Also, in order to be taxable under “possession and enjoyment” clause the interest had to pass from decedent’s possession or enjoyment at his death, thus giving emphasis to transfer of legal title before death.

The trustee had the sole power to revoke, and the decedent’s power to revoke, terminate, or modify in conjunction with the trustee, was superfluous. Cf. Helvering v. Helmholz, supra. In Commissioner of Internal Revenue v. Irving Trust Co., 2 Cir., 147 F.2d 946 , decided in 1945, the trustee, who did not have an adverse interest, had the power in its sole unrestricted discretion to return the corpus of trusts created prior to March 1, 1931, to the settlor. The settlor reserved a life interest in part of the income. The court held that the transfer was governed by pre-1931 law and that since the settlor could not enforce the return of any of the corpus it was not includible in his gross estate. In Denniston v. Commissioner, 3 Cir., 106 F.2d 925 , decided in 1939, the decedent had reserved a life estate and a power of appointment by will in a pre-1931 trust. The power of appointment was released in 1932. The court held the pre-1931 law applicable since the transfer in trust under which decedent reserved her life estate and power of appointment was before March 4, 1931.

Thus is it seen that there would be considerable doubt as to whether the corpus of the trust in the instant case would have been included in decedent’s gross estate had she died on March 4, 1931.

There is no indication in the Technical Changes Act of 1949 or its history to indicate that Congress intended to affix a different meaning to the word transfer than its ordinary meaning. Had Congress intended to restrict the relief of this act to irrevocable transfers made prior to March 4, 1931, I believe that they would have specifically done so and furnished some guide as to how irrevocable a transfer had to be. On the contrary, Congress reinstated the May v. Heiner rule with respect to trusts created prior to March 4, 1931. That is, decedents dying possessed of a life estate in property transferred prior to March 4, 1931, should not have the property included in their gross estate unless the property is otherwise includible. At the date of decedent’s death and for 17 years before that time, she only had a life estate and the right to have the corpus invaded to provide a minimum income of $40,000 a year. This interest was insufficient to include the entire corpus in the gross estate.

It seems to me that decedent could have reasonably relied on May v. Heiner and did not release her life estate because of that decision. Since 1933, and at the date of her death, she only possessed a life estate in property transferred prior to March 4,1931. This falls squarely within the May v. Heiner decision. The majority seems to find comfort in the fact that the trust in May v. Heiner was irrevocable when created. This, of course, is irrevelant. The trust could have been completely revocable on creation. The important fact is that it was irrevocable at the time of decedent’s death as was the trust in the instant case.

The defendant’s alternative contention with respect to the inclusion of $280,-563.61 of the corpus in the gross estate because of the decedent’s right to a minimum annual yield of $40,000 is without merit. See Blakeslee v. Smith, D.C., 26 *314 F.Supp. 28 , affirmed, 2 Cir., 110 F.2d 364 ; Brown v. Routzahn, 6 Cir., 63 F.2d 914 ; Estate of Eleanor Hughes Beggs v. Commissioner, 13 T.C. 131 . The value as of decedent’s death of her right to a minimum annual yield of $40,000, computed by use of actuarial tables, could be included in her gross estate under Helvering v. Hallock, 309 U.S. 106 , 60 S.Ct. 444 , 84 L.Ed. 604 , as applied in Bankers Trust Co. v. Higgins, 2 Cir., 158 F.2d 957 . The defendant, however, does not contend that this value, if any, should be included in decedent’s gross estate.

I would allow the plaintiffs to recover.

LITTLETON, Judge, joins in the foregoing dissent.