Petitioners Brief — Howe v. United States

-)

BRIEF IN SUPPORT OF PETITION.

Opinions Below.

The memorandum opinion of the District Court (R. 24),

the findings of fact (R. 34), and the conelusions of law

(R. 35) are printed in full in the record, but are not re-

ported.

The opinion of the Cireuit Court of Appeals is printed

in full in the record (R. 54-59) and is reported in 142 Fed.

2nd 310. No opinion was filed upon denial of the petition

for rehearing.

Jurisdiction and Statement of the Case.

The presentation of these in the preceding Petition is

hereby adopted and made a part of this Brief.

Specifications of Errors.

The Cireuit Court of Appeals erred:

1. In holding that a gift must be ‘‘immediate’’ in order

to qualify for the gift tax exclusion.

2. In refusing to give effect to majority control as an

answer to the accumulation argument.

3. In refusing to give effect to the liquidation purpose

on questions of construction.

4. In relying, in its accumulation conclusion, on ob-

stacles to enjoyment that were not created by the trust.

5. In refusing to give effect to the Congressional intent

that future interests be limited to cases involving difficulty

in valuing.

ESE SUD CE

"eS REPRE RIO WE

PE TELE PI PETS Me

6. In holding that the trustees could use income for

building construction.

7. In holding that the trust involved accumulation.

8. In reversing the judgment of the District Court.

Summary of Argument.

The ‘‘immediacy’’ test adopted by the Cireuit Court of

Appeals is unworkable and in conflict with decisions from

other circuits. The definition of future interests in the

Treasury Regulations needs clarification. The holding

that our gifts involve accumulation despite majority power

to prevent accumulation involves misapplication of this

Court’s Ryerson decision. The Circuit Court of Appeals in-

sistence on looking ‘‘at the form’? instead of at the liquida-

tion purpose conflicts with other cases. To the extent that

obstacles to present enjoyment are due to the non- liquidity

of the assets, they have no weight in supporting the Cir-

cuit Court of Appeals’ accumulation conclusion. The

Howe trust does not create a difficulty in valuing which

this Court in the Pelzer case held to be the primary test.

The purpose of our gifts is present. The details are con-

sistent with this purpose. Our Circuit Court of Appeals

is squarely in conflict at all important points with the lat-

est decision in the field. The confusion exhibited by the

meaningless definition of future interests in the Treasury

Regulations and by court adoption of conflicting tests

calls for action by this court.

9

ARGUMENT.

I.

The ‘‘immediate enjoyment’’ test adopted by the court

below is in conflict with all of the decisions in which gifts

in trust have been held to be present.

The opinion of the Cireuit Court of Appeals says (R.

57): ‘The critical question * * * is whether the donees

* * * aequired an interest capable of present and im

mediate enjoyment or whether it was one ‘limited to com-

mence in use, possession, or enjoyment at some future

date or time.’’’ The closing quote within the quote is

from the Treasury Regulations. It amounts to defining

a future interest as an interest that starts in future.

Hence it adds nothing and can be ignored except as it

demonstrates a need for clarification by this Court. It

follows that the test adopted by the Court is that of ‘‘im-

mediate enjoyment.”’

The fact that the adoption of immediacy as a test was

not unimportant, or a mere matter of oversight, is dem-

onstrated by the fact that it was argued pro and con.

Opposing counsel quoted with approval passages seeming

to require that a gift in order to be ‘‘present’’ must be

‘‘immediate,’’ ‘‘unrestricted,’’ ‘‘absolute’’ and ‘‘uncondi-

tional.’’ We demanded (our Brief p. 28) that counsel

either adopt these absolutes or abandon them. We said

at p. 27:

‘‘The reason why counsel do not commit themselves

is that each of these words applied in its ordinary

sense would result in pronouncing all trusts to be

future, contrary to the undeniable fact that if Con-

gress had meant such a result it would have said so

Le So a Se ee———eEeEeeeeee it

LLL IAS SLES ———

PELL ONL RE INE L NNO EL ET

TROT PR

xy PeREX

poo

Ad EPI Cs PONE

SIS at RSP 5 cA RAT CRN AG IT WN DA NIRA I CREE EBA VE POND ” WRIT aM i vn 2 ae

10

and to the fact that many trusts have been held to be

“present.” Consider, for example, the word ‘imme-

diate.’ The primary meaning as given in the Oxford

dictionary i is ‘not separated by any intervening medi-

um.’ This is applied to a person or thing in its rela-

tion to another. In this sense, all gifts in trust are

‘mediate’ in contrast with ordinary direct gifts which

are ‘immediate.’ If we take the derivative meaning

of ‘occurring at once, without delay’ we are again

confronted with the difficulty that no trust can sat-

isfy the word literally. Some delay is inevitable if

only for the manual operations of receiving, making

record entries, and distributing. We must conclude

that what is meant is a Pickwickian immediacy.

Similarly no beneficiary has ‘unrestricted’ rights in

the trust res; he cannot go to the trustee’s office, take

away the securities and sell them. Even more clearly

the rights of the beneficiary of an active trust are

never ‘absolute,’ in fact the trouble with each of these

words is exactly that they are absolute words and

therefore unworkable as tests in a field that is shown

t-bysthe holdings to be non-absolute. Opposing conn-

sel’s thinking would be straighter if they would try

to use in their tests only words that can have general

application.’

Under these circumstances, it can hardly be said that

the Court could have adopted immediacy as a test unless

it was important to the Court’s thinking and to the deci-

sion of the case.

While the word ‘‘immediate’’ was not employed in

formulation of the test in U. 8. v. Pelzer, 312 U. S. 399, it

was employed in Commissioner v. Gardner (C. C. A. 7),

127 Fed. 2nd, 929, 931, and Commissioner v. Lowden (C.

A. 7), 181 Fed. 2nd, 127, 128.

It is a matter of common knowledge of which we ask

that this court take judicial notice that an abnormal pro-

portion of tax cases are decided by the Circuit Court of

TRA NERO TAM ALO IONE! © RET LO BRAT

11

Appeals in favor of the Government, and that the belief

is widely held that this is due to an agreement or under-

standing that the Government will appeal only selected

cases, and the courts will accordingly give the Govern-

ment the benefit of any doubt on cases that are taken up.

We submit that such a procedure would involve a pro tanto

abdication of the judicial function denying due process of

law to the taxpayer. The situation is rendered addition-

ally delicate by the fact that Cireuit Court of Appeals

judges depend for promotion in part on the good will of

Government counsel.

We further submit that meaningless tests like “‘imme-

diacy’’ would facilitate the supposed practice.~ Hence

they encourage the belief above referred to. They con-

tribute nothing to reasoning but lend an air of plausibility

to decisions otherwise difficult to support. It is important

that this court clarify the position that. it took in the

Pelzer case and lay down a workable test or tests that

ean displace these weasel words.

Since no gift in trust is ‘‘immediate’’ in either the

original or the derivative meaning of the expression, it

follows that the decision of our Cireuit Court of Appeals

is in conflict with all of the cases in which gifts in trust

have been held to be present rather than future for gift

tax purposes. See for example, Commissioner v. Bran-

degee (C. C. A. 1), 123 Fed. 2d 58, and Charles v. Hassett

(D. C. Mass.), 43 Fed. Sup. 432. Other cases are cited and

summarized in C. C. H. Gift Tax Service, Sees. 3965.361

to .368, inclusive.

SORES ae

AO RE

1 REA TGS LAER

Il.

The holding that the gifts involve accumulation despite

provisions for majority control involves misconstruction

of and misapplication of Ryerson v. U. 8., 312 U. S. 405.

As we understand it, the Cireuit Court of Appeals ad-

mits that an absolute right of a single beneficiary to ter-

minate a trust would be a complete answer to an accumu-

lation argument. This was expressly conceded in the

Ryerson case. The distinction attempted to be drawn is

that the right to terminate our trust is dependent on ma-

jority action. Our Cireuit Court of Appeals opinion says

‘‘This at once raises a contingency.’’ Surely this betrays

a shocking lack of confidence in the process relied on in a

democracy for getting all kinds of business done.

The Ryerson case does not control ours since it did not

involve majority action, and since there is a suggestion in

the opinion in that case (p. 408) that ‘‘the joint power

was not for the joint benefit of the donees of the power.”’

In our case the power was for the joint benefit. All of the

donees were in the same relationship to the trust and

would have the same motives for desiring termination and

for acting to that end.

In addition to the foregoing point that the majority con-

trol provisions ipso facto negate accumulation, they con-

firm the liquidation purpose of the donor, and thus con-

tradict our Cirenit Court of Appeals’ hint in the ‘‘ear-

marks’’ passage (R. 59) that the trustees’ discretion was

a subterfuge to cover an intent to create an accumulation

trust. If the donor had intended accumulation, she would

not have inserted the majority control provisions.

13

ITI.

The court’s insistence that it must ‘‘look at the form’’

instead of construing the instrument in the light of the

liquidation purpose is in conflict with the decisions in

which the purpose has controlled close questions of

construction.

In all of the cases holding gifts to be future (See C. C. H.

Gift Tax Service, Sec. 3965 and following) there was con-

tingency as to the gift or there was an express direction

to accumulate; the two grounds relied on in U. S. v. Pelzer,

312 U. S. 399. The Howe gifts are vested, not contingent

(R. 8, 9, Par. 13), in seven named beneficiaries (R. 5) and

there is no direction to accumulate. The Circuit Court of

Appeals’ finding of an incidental or implied power to

accumulate (R. 58) runs counter to the liquidation purpose,

and to the authorities summarized below giving effect to

the purpose.

In the typical cases in whieh accumulation has been re-

lied upon to support a “future interest”? conclusion, the

controlling motive of the donor has been to increase the

future estate or to keep unneeded income out of the in-

experienced hands of youthful beneficiaries. The Pelzer

case is a clear cut example. The purpose has operated in

the direction of taking money out of the present and put-

ting it into the future. The liquidation purpose in our

case is not merely distinguishable from all of these cases.

It works in the opposite direction. It operates to trans-

form non-liquid assets (that would normally be available

only in future) into a fund available for present distribu-

tion.

The Cireuit Court of Appeals in our case in no way

meets these obviously sound and controlling points, but

14

tries (R. 57) to avoid them by manufacturing a ‘‘contin-

gency’’. The court refers (R. 57) to the 18 year maximum

life of our trust and assumes that we rely on the majority

control provisions ‘‘to meet this long trust duration.”

Long duration was not the issue presented, It is true that

we drew an analogy to the Thellusson acts in which long

duration is of the essence, but the points of our analogy

were that accumulation is involved in both fields and that

in both the power of a beneficiary to take control demol-

ishes any accumulation argument. No question of ‘‘long

trust duration’’ is involved in our case nor in any of the

gift tax authorities.

The court then mentions the majority power to terminate

and says (R. 57) ‘‘This at once raises a contingency. * * *

Certainly the right of each beneficiary to present enjay-

ment is contingent upon such majority action.’’ This is

an attempt to make a weapon out of a shield. We have

argued that majority control gives us a shield against the

accumulation point. The maximum result of an attack on

majority control would be that we would lose that shield

and the accumulation argument would need to be re-exam-

ined. Such a re-examination should give effect to the

dominant purpose. In Smith v. Commissioner, 131 Fed. 2d

254, it was argued that the trustees had discretionary

power to accumulate instead of educating the beneficiaries,

but the court said ‘‘The discretion vested in the trustee

was merely as to the means of executing the command of

the settlor. It did not give the trustee authority to set

aside the express purpose of the trust.’’ Similarly in

Commissioner v. Lowden, 131 Fed. 2d 127, it was argued

that authority to delay income payments made the gift

future, but the court overruled this argument on the ground

that the purpose of the delay was ‘‘not to postpone vesting

and enjoyment of income but to provide a convenient dis-

tribution procedure.”’

15

In holding (R. 58) that ‘‘there is nothing in the trust

agreement [note that express authority is not claimed]

precluding the trustees * * * from using the trust in-

come’’ the court gives no effect to the fact that par. 10

(R. 8) directs the trustees to distribute income. The two

passages can be harmonized. See our Petition for Rehear-

ing (R. 69).

IV.

In relying on obstacles to enjoyment inherent in the non-

liquid condition of the assets the court fails to apply the

rule that it purports to adopt from Commissioner v. Glos,

123 Fed. 2d 548, 550, which rule limits future interest to

those in which the postponement relates to interests

‘“‘which would be forthwith existent’’ but for the post-

ponement in the trust.

It is our position that, in absence of an issue being raised

on this point, the recital in the trust preamble (R. 5) that

it was ‘‘difficult or impractical to distribute’’ until the

assets had been placed ‘‘in condition for liquidation and

distribution’’ is to be taken at face value. In our Petition

for Rehearing (R. 71) we presented an offer of further

proof.

These difficulties referred to in the instrument mean that

before the creation of the trust there were obstacles to

present enjoyment analogous to the obstacles which, if

created by a trust instrument, might make the interests

future. Clearly such obstacles to enjoyment did not make

the ownership ‘‘future’’ in the donor’s hands. To the

extent that she transferred her difficulties to the trustees,

the boundary between present and future continued as it

had been. Obstacles to enjoyment such as the need to de-

vote the income of productive assets to the carrying of non-

productive assets clearly would not make the gift future

ATT SITE ae

ME PRAT AR DFM TR

Bere Rie TOTS

16

if the trust instrument was silent on these points. Surely

the mere fact that the instrument deals expressly with the

liquidation difficulties does not alter the ease. This is

recognized in the passage quoted by our Circuit Court of

Appeals (R. 56), from Commr. v. Glos, 123 Fed. 2d 548,

290 (emphasis ours) :

‘The sole statutory distinction between present and

future interests lies in the question of whether there

is postponement of enjoyment of specific rights, powers

or privileges which would be forthwith existent if the

interest were present.”’

The present enjoyment of which our Cireuit Court of

Appeals is so tender would not be fully ‘‘forthwith exist-

ent’? no matter what the wording of the trust might be.

7

Since no element of contingency is involved and such post-

ponement as is apparent in the trust is in fact inherent

in the nature of the assets, the trust does not create a

difficulty of valuing such as Congress had in mind in

adopting the future interests wording.

In U. S. v. Pelzer, 312 U. S. 399, 408, this court said as

to the term ‘‘future interests”:

‘In the absence of any statutory definition of the

phrase we look to the purpose of the statute to ascer-

tain what is intended. * * Its purpose was * * *

the protection_of the revenue and the appropriate ad-

ministration of the tax immunity provided by the

statute. It is this purpose which marks the boundaries

of the statutory command. The committee reports

recommending the legistation declared * * * ‘the

denial of the exemption in the case of gifts of future

interests is dictated by the apprehended difficulty, in

many instances, of determining the number of eventual

donees and the values of their respective gifts.’ ’’

17

In our case the gifts are clearly vested (R. 5, 13) so that

there is no difficulty in determining the donees. The value

of the gift to each of the seven children is simply 1/7 of

the total value of the trust assets. Our case does not come

within the purpose that Congress had in mind when it

adopted the ‘‘future interests’? wording.

Our Cireuit Court of Appeals has thus decided a federal

question in conflict with the applicable decision of this

Court. ‘

The confusion evidenced by the definition of future in-

terests in the Regulations as those ‘‘limited to commence

* * * * * *99

at some future date and by widespread

adoption of unworkable words such as ‘‘immediate’’ is

attributable in part to Government tacties illustrated in our

case by the adopting in the Trial Court and in their Circuit

Court of Appeals Brief, of the test of whether the gift is

“limited by discretion’’. Counsel abandoned this test at

the oral argument, but their persistence in adhering to a

test that obviously is meaningless and has no acceptance in

the cases prevented the type of careful analysis that would

have been possible if the problem had been intelligently

'. Our examination of other

Government lower court briefs in this field persuades us

presented in the printed brief

that it is the general poliey to avoid showing the Govern-

ment’s hand. The briefs exhibit a technique of stating

ex cathedra supposed legal principles and following the

statements by groups of eases not separately analyzed.

Where cases are given separate treatment, there is no state-

ment of the facts, but merely a quotation of wording relied

upon, stripped from its context. We respectfully suggest

that these are tactics of confusion. The mere fact that

such tactics have sueceeded in other ‘ases, and have tem-

porarily sueceeded in our case does not vindicate them. Tn

the interest of the proper functioning of the courts, there

should be as early and as complete a showing of the posi-

TO RRR IR ARS MINTS AE TE TOE RATS TE MEIN NE EIA

wy

SS PEARSE NDEI ER OL INE

EASES LT

TRIPE:

sot ge

2 EPS

18

tion of each party as is practicable. We accordingly re-

spectfully suggest that this court take appropriate steps

to discourage this practice.

VI.

Our Circuit Court of Appeals decision is in conflict at

almost every point with the most recent decision in the

field.

In Disston v. Commissioner (C. C. A. 3), 13 L. W. 2049

(decided July 12, 1944 and not yet officially reported) a

trust instrument authorized accumulation during minority.

The court in holding that this did not render the gift

‘‘future’’ said that these facts ‘‘affected neither the iden-

tity of the minor donees nor the value of the gifts. At

most, the provision was but * * * recognition by the

donor of what the law, out of solicitude for safeguarding

the minor’s property, would have interposed in the ab-

sence of the donor’s express direction * * *. The gifts

were the property of the minor donees none the less; and

so was the income which recurrently accrued thereon * * *.

If the donees should die during their minority, the gifts

and all accumulated income would pass as part of their

respective estates. * * * Furthermore, for the purpose

of determining the recipients of the gifts, the possession

of the corpus was in the minor donees within the con-

templation of the relevant provision of the Revenue Act.”’

‘“‘Nor did the authority to the trustees to use, in their

sole discretion, the income from the gifts to the minors for

their support and education during minority make the in-

come from the gifts any less the minors’ property. * * *

The discretion thus reposed neither added to nor took

away from the absoluteness of the gifts. * * *”’

CES REIL ALR REIS Seb 8 pay STDIN GENS ATE AARC CMI | ATLA SAE BEY AO Lng LP i NONI NTE SE Te PARR ry

DISSTON

t Accumulation authorized

» Period during minority

=>

“Identity of donees not

affected”.

‘Value of the gifts” not

“affected” by the acceumu-

lation,

=

The trust “provision was

but recognition by the donor

of what the law * * * would

have inferposed”,

“Gifts were the property of

the * * * donees none the

less”.

“and so was the income”,

On death “gifts and all ae-

cmmulated income * * * part

of * * * estates.”

“Possession of the corpus

"Pes Ie the *.* 9

donees.” for purpose — of

Revenue Act.

—

“Authority * * * to

inome” * * * for the bene-

fciaries did not make the

income any less the minor's

property.

use * * *

in parallel columns.

19

Howr

Our Cireuit Court of Ap-

peals says accumulation.

We deny it.

Period 18 vears unless ma

jority acts.

Gifts vested in seven.

No valuing difficulty. See

our V,

Our trust was but crecogni-

tion by the donor of what

economic law woud have

interposed due to non-

liquidity. ‘ See our TV.

Our provisions similarly de

prived the donees of noth-

ing.

Our Circuit

peals says

Court of Ap-

(and we deny)

that income could be with

held (see our TIT). Even

so, it was the property of

the donees in the Dissten

sense,

Corpus and ineome both

vested.

Howe provisions similar.

Sce 7 above.

This case is so closely in point on several of the head

ings of our brief that we have reserved it to the end. For

comparison we will treat the two cases and our comments

Our COMMENTS

Disston more

than Towe,

Disston more

than Howe.

Causes alike.

Alike.

Alike.

Alike.

Dissten more

than TTowe,

Alike

Alike.

Disston more

than Tlowe

“future”

“future”

“future”

“future”

20

It is interesting and significant that the case confirms our

position that

1. accumulation must be weighed in the light of the

trust purpose,

2. an important test is whether the value of the

gifts,is affected.

3. ‘frecognition’’ by the donor of the existing fact

situation (Disston—minority; |Howe-non-liquidity)

does not make the gift ‘‘future.’’

Our Cireuit Court of Appeals is squarely in conflict with

the Cireuit Court of Appeals for the Third Cireuit on all |

of these points.

Conclusion.

The decision below is in conflict at numerous points

with cases from other Cirenits. The defining of ‘‘future

interest,’’ now in a state of confusion, presents an im-

portant question of federal law which should be settled

by this Court.

Respectfully submitted,

Hersert Bess,

Attorney for Petitioner.