Petition for Writ of Certiorari — Mahoney v. United States
Supreme Court brief1988
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| Supreme Coutt, U.S,
-ILED
S- 152k vn 14 1988
JOSEPH F. SPANIOL, JRe
eel
Se
IN THE
Supreme Court of the United States
OCTOBER TERM, 1987
DANIEL J. MAHONEY, JR.
EXECUTOR OF THE ESTATE OF JAMES M. Cox, JR.,
Petitioner,
Vi
UNITED STATES OF AMERICA,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
ALBERT H. TURKUS *
JUDITH A. MATHER
TIMOTHY J. O’ROURKE
DAVID E. MILLS
Dow, LOHNES & ALBERTSON
1255 23rd Street, N.W.
Washington, D.C. 20037
(202) 857-2500
CHESTER FE. FINN
PORTER, WRIGHT, MORRIS &
ARTHUR
2100 First National Bank Building
Dayton, Ohio 45401
(513) 228-2411
Counsel for Petitioners
* Counsel of Record
March 14, 1988
WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON- D.C. 20001
QUESTIONS PRESENTED
1. Whether the Sixth Cirecuit’s decision precluding ap-
plication of the estate tax exception in Section 2036(a)
of the Internal Revenue Code to an integrated transac-
tion that enhanced rather than depleted Decedent’s gross
estate must be reversed because it conflicts with decisions
of this Court and the other circuits requiring application
of the statutory exception to such transactions.
2. Whether the Sixth Circuit so departed from the ac-
cepted and usual course of judicial proceedings as to call
for supervision by this Court when, in reversing the dis-
trict court judgment, it decided an issue presented to but
not adjudicated by the district court (viz., whether the
Section 2036(a) exception applies where Decedent re-
ceived property in an integrated transaction worth at
least as much as the property transferred) .*
“The names of the parties to the proceedings below are all
contained in the caption of the case.
(i)
TABLE OF
QUESTIONS PRESENTED
TABLE OF CONTENTS
TABLE OF AUTHORITIES
OPINIONS BELOW
JURISDICTION
STATUTE INVOLVED
STATEMENT OF THE CASE
REASONS FOR GRANTING THE WRIT
I. The Decision Below
sions of This Court
state Tax Administra
solved by This Court.
Il. The Sixth Circuit’s
Conflicts
With
and Other
Raises an Important Question of Federal Es-
tion That
Reversal
Should
of
CONTENTS
the
the Deci-
Circuits and
Be Re-
District
Court Deciding an issue Not Passed Upon Below
so Far Departs From the Accepted and Usual
Course of Judicial Proceedings as to Call for
Supervision by This C
CONCLUSION
APPENDIX
ourt.
~
lo
iv
TABLE OF AUTHORITIES
Cases Page
Abhott Laboratories v. Gardner, 387 U.S. 136
(1967), overruled on other grounds, Califano v.
Sanders, 130 U.S. 99 (1977) 14
Actna Casualty & Surety Co. v. Flowers, 350 U.S.
161 (1917) 16
Blair v. Oesterlein Machine Co.. 275 U.S. 220
(1927) 16
Commissioner v. Bristol, 121 F.2d 129 (1st Cir.
19-141) 8, 11
Commissioner v. Estate of Nelson, 396 F.2d 519
(2d Cir. 1968) 17
Commiss Oile , Gs Met "O"” LOS S. Ct. 217 ( 1987)
(per curiam) 15
Council v. United States, 302 F. Supp. 1315 (N.D.
Miss. 1969) 10
Estate of Christ v. Commissioner, 480 F.2d 171
(9th Cir. 1975) 6, 7
E’state of Friedman v. Commissioner, 10 T.C. 714
(1963) _. : a 10)
Estate of Gregory v. Commissioner, 39 T.C. 1012
(1963) &
Estate of Guenzel v. Commissioner, 258 F.2d 2418
(Sth Cir. 1958) 15
Estate of Kitchin v. Commissioner. 532 T.C.M.
(CCH) 1275 (1987) 9
Estate of MeCou v. Commissioner, 20 T.C.M.
(CCH) 224 (1961) 10
Estate of Vardell v. Comm issioner, 307 F.2d 688
(5th Cir. 1962) SER 7,11
(rradow v. United States, 11 Cl. Ct. 808 (1987) 9
Guste v. Jackson, 429 U.S. 399 (1977) (per
| PRC, Se none Mee aee Bets kh 13, 16
Helvering v. Gowran, 302 U.S. 288 (1937 15, 16
Helvering v. Le Gierse, 312 U.S. 531 (1911) 6,8
Helvering v. Tex-Penn Oil Co.. 300 U.S. 481
(1937) 13, 15, 17
Helvering v. United States Trust Co.. 111 F.2d
576 (2d Cir.), cert. denied, 311 U.S. 678
(1940) ; - u ye
v
TABLE OF AUTHORITIES—Continued
Page
Helvering v. Wood, 309 U.S. 344 (19403 17
Hormel v. Helvering, 312 U.S. 552 (1941). 13, 15, 16, 17
Hughes v. Dempsey-Tegeler & Co., 554 F.2d 156
(9th Cir.), cert. denied, 429 U.S. 896 (1976) 11
In re Estate of Davis, 440 F.2d 896 (5d Cir.
1971) ; . 7, 8,9
Jimenez v. Weinberger, 417 U.S. 628 (1°71) 14
Laney v. Commissioner, 674 F.2d 342 (5th Cir.
Unit A 1982) 16
Lazarus v. Commissioner, 513 F.2d 824 (9th Cir.
1975) econd Cee ae z 6,%
Massachusetts Mutual Life Juanwnnde Co. v. Lud-
wig, 426 U.S. 479 (1976) (per curiam) 13,16
Morrow v. Greyhound Lines, Inc., 511 F.2d 713
(8th Cir. 1976) 16
Nourse v. Riddell, 143 F. Supp. 759 (S.D. Cal.
1956) _. 10
Peoria Tribe of Indians of Oklahoma v. United
States, 390 U.S. 168 (1968) 16
Pharo v. Smith, 625 F.2d 1226 (Sth Cir. 1980)
(per curiam)
Puchner v. United States, 274 F. Supp. 704 (E.D.
Wis. 1967) . =a 10
Sanders v. International yer n a Bridge, Striue-
tural and Ornamental Iron Workers, AFL-CIO,
546 F.2d 879 (10th Cir. $976) ..00000000.... 17
Securities and Exchange Commission v. Chenery
Corp., 318 U.S. 80 (1943) 16, 17
Singleton v. Wulff, 428 U.S. 106 (1976) 13, 15, 16, 17
Stern v. United States Gypsum, Inc., 547 F.2d
1329 (7th Cir.), cert. denied, 434 U.S. 975
Eg | Seeasererer renovate: Beles 16
Sullivan's Estate v. Commissioner, 175 F.2d 657
(9th Cir. 1919) ae | . 29
Turner v. City of Me mphis, 369 U.S. 350 (1962)
(per curiam) | Sih 16
United States v. Allen, 295 F.2d 916 (10th Cir.),
cert. denied, 368 U.S. 944 (1961) ...................... 11
Othe
vi
TABLE OF AUTHORITIES—Continued
United States v. Estate of Grace, 395 U.S. 316
(1960)
United States rv. Gordon, 106 F.2d 332 (Sth Cir.
1969)
United States v. Past, 317 F.2d 7 (9th Cir. 1965)
lnited States v. Shelbu lron Co. of New Jerse “4,
273 U.S. 571 (1927)
Walke, Manufacturing Co. v. Dicks rson, Ine., 560
F.2d 11814 (4th Cir. 1977)
Whitels y iv. United States. 211 F. Supp. Iko (W.LD.
Wash, 1963)
Wilson v. St. Louis-San Francisco Railway Co..
675 F.2d 1152 (10th Cir. 1982)
Youckim vr. Mille r 425 U.S. 231 (1976) (per
curiam)
Zenith Radio Corp. v. Hazeltine Re search, Tne.,
595 U.S. 100 (1969)
26 USA 2055 (L987)
?6 US. 2035 (L9OTA)
"6 US 2O560a) (1974)
2057 (1974)
2038 (1974)
I254(1) (1987)
Is46(ad (1) (1987)
Revenue Act of 1916, Pub. L. No. 271, §$ 202(b),
o9 Stat. 756
Revenue Act of 1926, Pub. L. No. 20, $ 302(d),
11 Stat. 970
Revenue Act of 1959, §811(@). 58 Stat 1
Tax Reform Act of 1986, Pub. L. No. 99-514, 100
Stat. 2085
ped
2S
I
I
l
eo U.S.C.
[
[
l
YS She Thi Sle The Ge
28 ULS.C,
r Authorities
(. Lowndes, Federal Estat and Gift Tares (2d ed.
i962)
I. Steph ns, Federal Estate and Gift Taxation
(Sth ed. 1983)
Page
6,8, 11
13, 16
pa S88 ’ mn
te
—_—
IN THE
Suprenwe Court of the United States
OCTOBER TERM, 1987
as
DANIEL J. MAHONEY, JR.
EXECUTOR OF THE ESTATE OF JAMES M. Cox, JR.,
Petitioner,
We
UNITED STATES OF AMERICA,
Re sponde nt.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
Petitioner Daniel J. Mahoney, Jr., executor of the Es-
tate of James M. Cox, Jr. ‘the “Estate”), respectfully
petitions for a writ of certiorari to review the judgment
and opinion of the United States Court of Appeals for
the Sixth Cireuit in this case.
OPINIONS BELOW
The Sixth Cireuit’s opinion is reported at 831 F.2d
641 and is reprinted in the Appendix at pages la-l6a.
The decision of the United States District Court for the
Southern District of Ohio is reported at 628 F. Supp.
273 and is reprinted in the Appendix at pages 17a-36a.
On December 30, 1987, petitioner filed a motion to modify
seeking a clarification of the Sixth Circuit’s opinion, and
subsequently the Attorney General of the State of Ohio
filed a brief amicus curiae in support of that motion.
»
—
The Sixth Circuit denied the request for clarification,
without accompanying explanation, on March 8, 1988; this
Order is reprinted in the Appendix at page 37a.’
JURISDICTION
The Estate brought this action in the United States
District Court for the Southern District of Ohio for a
refund of estate tax and deficiency interest paid. The
district court ruled in favor of the Estate and ordered a
refund. On appeal, the Sixth Circuit reversed the dis-
trict court in a decision entered on October 16, 1987.
The Sixth Circuit subsequently stayed its mandate.
On January 4, 1988, Justice Antonin Sealia granted an
extension of time for filing this petition to and includ-
ing March 14, 1988. The jurisdiction of this Court is
invoked pursuant to 28 U.S.C. § 1254/1).
STATUTE INVOLVED
26 U.S.C. $ 2036 (1974)?
(a) GENERAL RULE.—The value of the gross
estate shall include the value of all property to the
extent of any interest therein of which the decedent
has at any time made a transfer (except in case of
a bona fide sale for an adequate and full considera-
tion in money or money’s worth), by trust or other-
wise, under which he has retained for his life or for
any period not ascertainable without reference to
' Specifically, the motion requested that the Sixth Circuit clarify
its opinion by adding the following sentence to the end of footnote
12: “We express no opinion on whether the transfer falls within the
scope of the bona fide sale exception to Section 2026.” The Sixth
Circuit’s denial of the motion is in substance a ruling that the
exception does not apply. See infra pp. 14-15.
* Ail references to sections of the Internal Revenue Code are to
the Code as in effect at Decedent’s death in 1971, unless otherwise
noted.
3
his death or for any period which does not in fact
end before his death—
(1) the possession or enjoyment of, or the right
to the income from, the property, or
(2) the right, either alone or in conjunction with
any person, to designate the persons who shall pos-
sess or enjoy the property or the income therefrom.
STATEMENT OF THE CASE
This case involves a trust established by the former
Governor of Ohio, James M. Cox, Sr., in February 1941
(the “Trust”). Governor Cox funded the Trust with 750
shares of stock in The Atlanta Journal Company (“At-
lanta Journal”) that he had purchased in December 1939
for $6.2225 per share.* Governor Cox named his personal
legal advisor as Trustee and designated his son, James
M. Cox, Jr. (“Decedent’”), as income beneficiary for life,
with remainder to Decedent’s then-wife ana Decedent’s
issue, and in default of any such issue, to other trusts
established by Governor Cox for his descendants.
in connection with the Governor’s creation of the Trust,
Decedent executed a promissory note payable to his father
in the amount of $4,666.88, equal to Governor Cox’s
basis in the stock. Both the note and the Trust instru-
ment explicitly stated that Decedent’s note was in pay-
ment for the 750 shares of stock transferred to the Trust
and that the note was to be satisfied from dividends
from the stock placed in the Trust by Governor Cox. Sub-
sequently, the Internal Revenue Service (the ‘‘Service”)
and Governor Cox agreed that the 750 shares of Atlanta
Journal stock had a value in February 1941 of $41,250.
Thus, Decedent’s $4,666.88 note represented 11.3136 per-
cent of the value of the stock transferred to the Trust.
* The Trust was one of five substantially similar trusts established
by Governor Cox in 1941 for his wife, children and a close personal
friend.
4
The Estate did not report the value of any of the
stock in the Trust on its federal estate tax return upon
Decedent’s death in 1974. The Estate took the position
that only Governor Cox had made a transfer to the Trust
because he had created and funded it and arranged the
transuction so that he would be paid for the stock from
the dividends on the 750 shares he transferred, and not
from any assets of Decedent. Decedent had only a life
estate in the stock that terminated upon his death. There-
fore, there was nothing to include in the Estate under
Section 2036(a)! of the Internal Revenue Code of 1954
ithe Code”) .4
The Service audited Decedent’s estate tax return and
assessed a deficiency. The Service took the position that
Decedent, in essence, had purchased an undivided inter-
est in 11.3136 percent of the 750 shares of stock from
Governor Cox and had simultaneously transferred that
interest into the Trust retaining a life interest in the
income from that portion of the stock. The Service con-
cluded that Decedent therefore had “made a transfer”
within the meaning of Section 2036/a) and was required
to pay estate tax on the date-of-death value of the
11.3136 percent interest “transferred” to the Trust. The
Estate paid the deficiency assessed and filed suit for a
refund, invoking jurisdiction in the district court pur-
suant to 28 U.S.C. § 1846(a) (1).
4 Section 2036(a) is designed to prevent avoidance of federal
estate tax through the inter vivos transfer of legal title to property
with the retention of the benefit of the property for life. In such
cases, Section 2036(a) requires that the transferred property be
included in the transferor’s estate for purposes of computing the
federal estate tax. There is a statutory exception, however, that
recognizes that where the transferor receives in a transaction other
property having a value at least equal to the property transferred,
the estate is not diminished and there is no tax avoidance; in those
circumstances, the transferred property is not brought back into
the transferor’s gross estate.
2)
In determining whether a portion of the Trust was
includable in Decedent’s gross estate under Section
2036(a), the district court focused on two issues: (1)
whether Decedent had furnished consideration to Gover-
nor Cox; and ‘2) if so, whether he had received an un-
divided interest in 11.3136 percent of the 750 shares of
Atlanta Journal stock and then “transferred” it to the
Trust or whether he had merely purchased a life estate
in the stock. 628 F. Supp. at 274; Appendix at 18a. On
the first issue, the court found that Decedent had paid
the $4,666.88 consideration to Governor Cox, notwith-
standing that Decedent’s note was in fact satisfied from
the dividends on the stock transferred in trust by Gover-
nor Cox. 628 F. Supp. at 280; Appendix at 30a. On
the second issue, the court found that Decedent had pur-
chased only a life estate that had terminated upon his
death. Therefore, the court held, Decedent had not “trans-
ferred” property to the Trust within the meaning of Sec-
tion 2036(a). 628 F. Supp. at 281; Appendix at 32a.
Although the Estate argued that Decedent’s gross estate
was not diminished in the transaction taken as a whole,
the court had no reason to, and did not, address the
exception to Section 2036/a). The court concluded that
no part of the Trust was includable in Decedent’s gross
estate and ordered a refund of taxes paid. 628 F. Supp.
at 282; Appendix at 35a. The Service appealed.
On appeal, the Sixth Circuit upheld the district court’s
finding that Decedent had provided consideration to Gov-
ernor Cox, 831 F.2d at 644-46; Appendix at 5a-7a, and
reversed the lower court’s decision that Decedent had
not ‘made a transfer’ to the Trust, 831 F.2d at 646-50;
Appendix at 7a-l6a. The Sixth Circuit held that the
Trust documents established that Decedent had paid for
the funding of the Trust, and had not simply purchased
a life interest, and concluded that ‘decedent must be
considered the effective grantor of the Trust to the ex-
tent of his contribution.” 831 F.2d at 648-49 (footnote
and citations omitted) ; Appendix at 12a-14a. The Sixth
Circuit also stated that Decedent in substance had pur-
6
chased 11.3136 percent of the 750 shares of stock, or
approximately 85 shares, from his father and had trans-
ferred the 85 shares to the Trust, retaining a life inter-
est in the income from those shares. 831 F.2d at 649-
50; Appendix at 15a.
The Sixth Circuit concluded its analysis at this point,
but, instead of remanding the case for the district court
to determine the applicability of the statutory exception,
it went on to hold that the value of the 85 shares of
stock “must be included in decedent’s gross estate under
Section 2036(a).” 831 F.2d at 649 (footnote omitted) ;
Appendix at 14a-l5a. This holding, coupled with the
Sixth Circuit’s perfunctory denial of petitioner’s motion
seeking clarification of the opinion, is in substance a de-
termination that the Section 2036(a) exception does not
apply in this case, and that determination should be
reviewed by this Court.
REASONS FOR GRANTING THE WRIT
I. The Decision Below Conflicts With the Decisions of
This Court and Other Circuits and Raises an Important
Question of Federal Estate Tax Administration That
Should Be Resolved by This Court.
In analyzing an integrated transaction, the entire trans-
action must be considered objectively to determine its ulti-
mate economic impact. United States v. Estate of Grace,
395 U.S. 316, 325 (1969) ; see Helvering v. Le Gierse, 312
U.S. 531, 540 (1941).° Until the Sixth Circuit’s decision
in this case, this principle had been applied uniformly
by the circuit courts in cases under Section 2036(a).
See, e.g., Estate of Christ v. Commissioner, 480 F.2d 171
° An “integrated” transaction involves multiple, interrelated steps.
See Estate of Grace, 395 U.S. at 325; Le Gierse, 312 U.S. at 540.
The transaction involved here is an example: Governor Cox estab-
lished the Trust and funded it with 750 shares of stock: Decedent
transferred to the Governor a note in the principal amount of
$4,666.88; and Decedent received a life interest in the income from
the Trust created and funded by Governor Cox. See Lazarus v.
Commissioner, 513 F.2d 824, 829 (9th Cir. 1975).
7
(9th Cir. 1973); In re Estate of Davis, 440 F.2d 896
(3d Cir. 1971); United States v. Gordon, 406 F.2d 332
(5th Cir. 1969); United States v. Past, 347 F.2d 7 (9th
Cir. 1965); Estate of Vardell v. Commissioner, 307 F.2d
688 (5th Cir. 1962); Sullivan’s Estate v. Commissioner,
175 F.2d 657 (9th Cir. 1949) ; Helvering v. United States
Trust Co., 111 F.2d 576 (2d Cir.), cert denied, 311 U.S.
678 (1940).
Section 2036(a) requires inclusion in the gross estate
of the value of property transferred by a decedent during
his life in which the decedent retains a life estate, unless
the property is transferred in “a bona fide sale for an
adequate and full consideration in money or money’s
worth.” Estate of Christ, 480 F.2d at 172; accord In re
Estate of Davis, 440 F.2d at 897; Past, 347 F.2d at 12;
Sullivan’s Estate, 175 F.2d at 659. Section 2036(a) is
one of several estate tax provisions of the Code designed
to tax inter vivos transfers that are, in essence, substi-
tutes for testamentary dispositions. See generally C.
Lowndes, Federal Estate and Gift Taxes 295-97 (2d ed.
1962).° These statutory provisions, however, ‘are not
intended to penalize bona fide sales and exchanges which
do not deplete the transferor’s estate.” Jd. at 295. Each
provision dealing with such transfers contains an ex-
plicit exception for transfers from a decedent’s gross
estate that are exchanged for an adequate and full con-
sideration. See id. at 295-97.
The rationale for the statutory exception is that, when
property transferred is replaced with property of equal
or greater value, the estate has not been depleted, and
the property transferred should not be taxed. “If, in
connection with a transfer, the decedent receives full
consideration in money or money’s worth, then the trans-
® The other provisions of the Code that tax inter vivos transfers
include Section 2035 (transfers in contemplation of death) ; Section
2037 (transfers taking effect at death); and Section 2038 (revoca-
ble transfers).
8
fer amounts only to a substitution or exchange of assets,
the gross estate is not reduced, and no estate tax is
avoided.”’ R. Stephens, Federal Estate and Gift Taxation
14.07(2]/e], at 4-121 (5th ed. 1983); see also Commis-
sioner v. Bristol, 121 F.2d 129, 133-34 (1st Cir. 1941)
(consideration is received if transferor gives something
away and replaces it with something of equal value in
money’s worth); R. Stephens, supra, § 4.08[1], at 4-130.
In cases involving integrated transactions in which
the transferor receives a life interest in income from a
trust, E’state of Grace requires that the transaction be
viewed in its entirety to determine whether “an adequate
and full consideration” is received.’ 395 U.S. at 325: see
also Le Gierse, 312 U.S. at 540. As the Ninth Circuit
succinetly stated in Past: “The value of what the dece-
dent received under the trust must be measured against
the value of the property she transferred to the trust.”
347 F.2d at 12 (citing Estate of Gregory v. Commis-
sioner, 39 T.C. 1012 (1963)). Simply, the value of the
estate before the transaction is compared with its value
after the transaction. Cf. Lazarus v. Commissioner, 513
F.2d 824, 829 (9th Cir. 1975). (all instruments involved
in transaction must be considered together).
For example, in In re Estate of Davis, 440 F.2d 896,
the Third Circuit found that the decedent’s funding of a
trust was an integral part of a larger transaction in-
‘In Estate of Grace, this Court considered the net effect of
reciprocal trust agreements executed by a husband and wife. There.
each party, as part of a larger transaction, transferred property to
a trust and directed that a life interest go to the other spouse. The
Court held that each party, in effect, had created a trust and retained
a life interest because that was the net economic effect of the entire
transaction. As a result, the estate of each spouse was depleted,
and the transferred property was taxed under the predecessor to
Section 2036(a). See 395 U.S. at 325. The same analysis applies
in this case but with a different result. Here, Decedent’s estate
almost certainly was not depleted as the net result of the transaction.
9
tended to satisfy his obligation to support his wife.* Jd.
at 898. The Third Circuit held that the discharge of the
decedent’s support obligation was the consideration re-
ceived by him in exchange for funding the trust. Be-
cause the annuity value of this consideration was at least
as much as the value of the property transferred by the
decedent to the trust, the exception applied and the trust
corpus was not included in the decedent’s estate. Jd. at
900.
Further, in Sullivan’s Estate, 175 F.2d 657, the Ninth
Circuit held that the exception applied to a contract sever-
ing a joint tenancy and transferring the decedent’s one-
half interest to his wife in exchange for her one-half in-
terest. The transaction appeared to be testamentary in
nature, accomplished less than two weeks before the ail-
ing decedent’s death at age 77, and was found to have
been executed in contemplation of death. J/d. at 658.
Nonetheless, the court looked at the substance of the
transaction and its overall effect on the decedent’s estate
and held that the statutory exception applied. /d. at 659-
60."
SIt was undisputed that, because the decedent had retained sig-
nificant control over the trust, the corpus must be included in his
estate under Section 2036(a) unless the bona fide sale exception
applied. In re Estate of Davis, 440 F.2d at 897.
® Numerous other lower courts have applied the principles estab-
lished by this Court and the courts of appeals in determining the
applicability of the Section 2036(a) exception. For example, in its
recent decision in Gradow v. United States, 11 Cl. Ct. 808, 810-16
(1987), the Claims Court recognized that the ultimate effect of a
transaction controls its estate tax treatment. The court concluded
that the decedent’s ‘‘transfer” of her half interest in the community
property was an integral part of the creation and funding of the
trust involved, and that a life estate which the decedent received
in the exchange was consideration for her transfer. Jd. at 810.
Similarly, in Estate of Kitchin v. Commissioner, 53 T.C.M. (CCH)
1275, 1278-79 (1987), the Tax Court applied the Section 2036(a)
exception to a transaction involving several instruments. The court,
considering the transaction in its entirety, conciuded that the
10
In this case, the Sixth Circuit ignored this principle.
In holding that Decedent “purchased” 85 shares of stock
from Governor Cox and “transferred” them to the Trust,
the Sixth Circuit, of necessity, considered the Governor’s
establishment of the Trust, Decedent’s issuance of his
promissory note, and Decedent’s receipt of a life interest
as an integrated transaction. But to then conclude that
the 85 shares are includable in Decedent’s gross estate,
the Sixth Circuit must have regarded Decedent’s “trans-
fer’ of those shares and Governor Cox’s transfer of the
remaining 665 shares (and Decedent’s receipt of a life
interest in those shares) as separate and independent
transactions. Having considered the net effect of the
entire transaction for the purpose of finding a “trans-
fer” by Decedent to the Trust, it was error for the
Sixth Circuit then to separate the transaction into its
constituent parts, as though each took place in isolation,
for the purpose of applying the statutory exception.
As a result, the court failed to focus consistently on the
economic impact of the transaction as a whole. This im-
proper analysis resulted in the Sixth Circuit’s overbroad
holding that the value of the stock was “includable.”
Focusing on the entire transaction, it is clear that the
“transfer” by Decedent almost certainly enhanced rather
than diminished his gross estate since Decedent trans-
ferred $4,666.88 in value and received a life interest in
750 shares.'® Unfortunately, the Sixth Circuit, without
decedent ultimately received as much as he had transferred. Jd. at
1276-79; accord Council v. United States, 302 F. Supp. 1315, 1324-26
(N.D. Miss. 1969); Nourse v. Riddell, 143 F. Supp. 759, 762 (S.D.
Cal. 1956); Estate of McCoy v. Commissioner, 20 T.C.M. (CCH)
224, 228 (1961); see also Puchner v. United States, 274 F. Supp.
704, 708 (E.D. Wis. 1967); Whiteley v. United States, 214 F. Supp.
489, 494-95 (W.D. Wash. 1963); Estate of Friedman v. Commis-
sioner, 40 T.C. 714 (1963).
10 Although Decedent received a life interest in the entire Trust
corpus (750 shares), the life interest in the 85 shares deemed to
have been transferred by Decedent does not constitute part of the
consideration received by Decedent. Gordon, 406 F.2d at 343-44;
11
the benefit of any factual determinations or legal analysis
by the district court on the issue, effectively decided that
Decedent did not receive in the exchange property of at
least equal value.
The Sixth Cireuit’s ruling undermines the legisla-
tive purpose of the statutory exception. Since the statute
was first enacted in 1916, Congress has purposefully ex-
cluded exchanges that do not deplete an estate and, there-
fore, do not result in any avoidance of estate taxation."
See generally C. Lowndes, supra, at 295, 312; R. Step-
hens, supra, {| 4.07 [2] [c], at 4-121.
The Sixth Cireuit’s decision also undercuts the fair,
efficient and uniform administration of federal estate
taxation. See Estate of Grace, 395 U.S. at 318. The de-
Estate of Vardell, 307 F.2d at 690. Nonetheless, the life interest in
the remaining 665 shares, regardless of how received, was consider-
ation. As explained in Bristol, under both the gift tax and estate
tax provisions of the Code:
“Consideration” ... is not the same as common law considera-
tion; it means that when the transferor gives something away
and does not at the same time replace it with money of equal
value or some goods or services capable of being evaluated in
money, he is deemed to have made a gift within the taxing law.
121 F.2d at 133. Therefore, it makes no difference that the district
court found that Governor Cox funded the Trust in part through a
gift. See 628 F. Supp. 278; Appendix at 27a. The determinative
factor under the statutory exception is not the characterization of
the transaction in which the transferor receives property (e.g., by
vift or otherwise), but rather whether the property received is of
equal or greater value than the property transferred.
1! See Section 202(b) of the Revenue Act of 1916, Pub. L. No. 271,
39 Stat. 756, 777-78 (1916). At that time, the statute excluded
transfers for “a fair consideration in money or money’s worth.”
This was changed to the present wording in the Revenue Act of
1926. See Section 302(c) of the Revenue Act of 1926, Pub. L. No.
20, 44 Stat. 970 (1926) (applied in United States Trust Co., 111
F.2d at 577); see also Section 811(c) of the Revenue Act of 1939,
53 Stat. 1 (applied in United States v. Allen, 293 F.2d 916. 918
(10th Cir.), cert. denied, 368 U.S. 944 (1961) ).
12
cision greatly diminishes the predictability of estate tax
liability whenever a decedent has transferred property as
part of an integrated transaction. Moreover, tax liabil-
ity in such situations may vary, depending upon the fed-
eral cireuit in which the decedent was a resident.'* It is
patently unfair to treat similar transactions ditverently
according to the federal jurisdiction involved.
Further, the effect of the Sixth Circuit’s decision would
be the double taxation of a transferor’s property: the
property transferred would be taxed under the Sixth
Circuit’s interpretation of Section 2036(a), and the prop-
erty of equal value received in exchange would be taxed
under the general inclusion rule of Section 2033 of the
1986 Code."* Indeed, it is conceivable that, if the Sixth
Cireuit’s decision is allowed to stand, the tax imposed on
a decedent’s estate could well exceed the value of the
assets in the estate. This unreasonable result would im-
pact all taxpayers in situations involving integrated
transactions in the Sixth Circuit.
Il. The Sixth Circuit’s Reversal of the District Court
Deciding an Issue Not Passed Upon Below so Far
Departs From the Accepted and Usual Course of Ju-
dicial Proceedings as to Call for Supervision by This
Court.
The Sixth Cireuit reversed the district court deciding
the applicability of the statutory exception, an issue not
12 The confusion created by the Sixth Circuit’s decision will
persist under the Tax Reform Act of 1986. Section 2036(a) and
the statutory exception for exchanges fer “an adequate and full
consideration in money or money’s worth” remain intact under the
new law. See 26 U.S.C. §2036(a). Therefore, it is extremely
important that the conflict and confusion created by the Sixth Cir-
cuit be resolved by this Court.
13 Section 20323 of the Internal Revenue Code of 1986 provides:
“The value of the gross estate shall include the value of all property
to the extent of the interest therein of the decedent at the time
of his death.”
; 13
passed upon below. This substantially departs from the
accepted and usual course of judicial proceedings and the
principles established by this Court regarding the proper
disposition of federal litigation. See Guste v. Jackson,
429 U.S. 399, 399-400 (1977) (per curiam) (vacating
overbroad injunction and remanding on issues not ad-
dressed below); Singleton v. Wulff, 428 U.S. 106, 120-
21 (1976) (federal appellate court should not consider
issue not passed upon below); Helvering v. Tex-Penn Oil
Co., 300 U.S. 481, 498 (1937) ‘(absence of lower court
ruling deprives appellate court of assistance of decision
below) ; United States v. Shelby Iron Co. of New Jersey,
273 U.S. 571, 581-82 (1927) (proper to remand on issue
neither considered by nor fully presented to lower court) :
see also Massachusetts Mutual Life Insurance Co. v.
Ludwig, 426 U.S. 479, 480-81 (1976) (per curiam) (re-
manded on issue not reached or decided by lower court;
inappropriate to reach merits in appellate court);
Hormel v. Helvering, 312 U.S. 552, 556-59 (1941) (ap-
pellate court ordinarily does not consider issues not ad-
dressed below).
The district court ruled on only two issues in this
case: (1) whether Decedent had paid consideration to
Governor Cox; and (2) if so, whether Decedent received
an undivided interest in 11.3136 percent of the 750 shares
of Atlanta Journal stock and then transferred it to the
Trust or whether he had purchased a life estate in the
stock. The court held that Decedent had paid considera-
tion but that he had purchased only a life estate that
terminated at his death; therefore, he could not have
made a “transfer” to the Trust. 628 F. Supp. at 274;
Appendix at 18a-19a. The district court, having ruled
in favor of the Estate on the transfer issue, did not ad-
dress any other substantive issues. The court concluded:
In the absence of the transfer of an interest in prop-
erty, § 2036(a) does not require the inclusion of the
value of that property in a gross estate.
14
628 F. Supp. at 282 ‘Conclusion of Law 4); Appendix at
35a. In the absence of a transfer, the statute simply
does not apply, and the applicability of the exception is
not at issue.
It was entirely proper for the district court to end its
legal analysis after concluding that there had been no
transfer under the statute. See, ¢.g., Jimenez v. Wein-
berger, 417 U.S. 628, 637-38 (1974) (three-judge dis-
trict court upheld statute without addressing claimant’s
assertion that exception would apply; reversed on other
grounds and remanded for consideration of exception is-
sue); cf. Abbott Laboratories v. Gardner, 387 U.S. 136
(1967) ‘(Third Circuit reversed district court without
reaching merits; Supreme Court reversed on other
grounds and remanded to consider merits), overruled on
other grounds, Califano v. Sanders, 430 U.S. 99, 105
- (1977). Given its ruling on the transfer issue, it was un-
necessary for the district court to reach, much less re-
solve, the statutory exception issue. See Hughes v. Demp-
sey-Tegeler & Co., 534 F.2d 156, 174 (9th Cir.), cert.
denied, 429 U.S. 896 (1976). Thus, although the issue
plainly was recognized by the court,’* the court had no
reason to, and did not, pass upon whether the transfer
was for an adequate and full consideration under Section
2036/a).
On appeal, the Sixth Circuit upheld the finding that
Decedent had paid consideration to Governor Cox, 831
F.2d at 644-46; Appendix at 5a-7a, but reversed the dis-
trict court on the transfer issue, 831 F.2d at 646-50;
Appendix at 7a-l6a. The Sixth Circuit’s ruling that
Decedent had made a transfer to the trust of, in effect,
14 The district court referred directly to the exception, indicating
clearly its view that it was relevant only if Decedent had made a
“transfer”: “[T]here must be an inter vivos transfer by decedent
..., in trust or otherwise, other than a bon[a] fide sale for full and
adequate consideration in money or money’s worth... .” 628
F. Supp. at 278; Appendix at 26a.
15
85 shares of stock necessitates consideration of whether
that transfer was in exchange for an adequate and full
consideration in money or money’s worth.
Instead of remanding the exception issue for consid-
eration by the district court, the Sixth Circuit, without
any discussion of the issue, held that the value of the 85
shares transferred to the Trust was “includable” in the
Estate under Section 2036(a). In so holding, and in
denying the Estate’s motion seeking clarification of the
opinion, the Sixth Circuit effectively ruled on the ap-
plicability of the statutory exception, an issue not resolved
or relied upon below. See Estate of Guenzel v. Commis-
sioner, 258 F.2d 248, 252 (8th Cir. 1958) (Tax Court,
in finding that trust was includable in gross estate,
“necessarily determined that [decedent] did not make a
bona fide sale of his trust assets”).
The Sixth Circuit plainly erred in reversing without
remanding on the exception issue. As this Court has
stated, “!i]t is the general rule, of course, that a federal
appellate court does not consider an issue not passed
upon below.” Singleton, 428 U.S. at 120; Hormel, 312
U.S. at 556-57; see Zenith Radio Corp. v. Hazeltine Re-
search, Ine., 395 U.S. 100, 141 (1969) (refusing to de-
cide issue not passed upon by appellate court); cf. Com-
missioner v. McCoy, 108 S. Ct. 217, 219 (1987) ‘per
curiam! (appellate court lacked jurisdiction to decide
questions that were not and could not have been presented
below); Youakim v. Miller, 425 U.S. 231, 235-37 (1976)
(per curiam) (Court remanded to district court rather
than decide question not raised or resolved below). It is
also well established by this Court that an appellate court
cannot base a reversal on a theory not relied upon by the
district court.“ Tex-Penn Oil Co., 300 U.S. at 497-98:
'S This rule contrasts with the general rule allowing an appellate
court to affirm a judgment below on a ground not considered or
decided by a district court. See Helvering v. Gowran, 302 U.S. 238,
16
see also Stern v. United States Gypsum, Inc., 547 F.2d
1329, 1333-34 (7th Cir.), cert. denied, 434 U.S. 975
(1977); Hormel, 312 U.S. at 556; see also Morrow v.
Greyhound Lines, Inc., 541 F.2d 713 (8th Cir. 1976).
The proper procedure to follow in the event an issue
arises that was not passed upon below is to remand that
issue to the district court for its consideration in the
first instance. See Guste, 429 U.S. at 399-400; Massachu-
setts Mutual Life Insurance Co., 426 U.S. at 480-81;
Peoria Tribe of Indians of Oklahoma v. United States,
390 U.S. 468, 473 (1968) ; Securities and Exchange Com-
mission v. Chenery Corp., 318 U.S. 80, 88, 95 (1943);
Helvering v. Gowran, 302 U.S. 2388, 245-47 (1987):
Shelby Iron Co. of New Jersey, 273 U.S. at 581-82: ef.
Singleton, 428 U.S. at 121 (remand from Supreme Court
to court of appeals) .'*
245 (1937). The reason for the latter rule is that it would be
wasteful to remand a case simply to reinstate a decision on grounds
which the appellate court believes are correct and has the authority
to decide. Securities and Exchange Commission v. Chenery Corp.,
318 U.S. 80, 88 (1943). This principle does not apply, and a remand
is appropriate, when issues of fact must be determined or when
the other grounds were not fully presented to the higher court.
Actna Casualty & Surety Co. v. Flowers, 330 U.S. 464, 468 (1947):
see Chenery Corp., 318 U.S. at 88.
There are limited exceptions to the rule against an appellate
court reversing on issues not passed upon below. Where the proper
resolution of the issue as a matter of law is beyond any doubt,
where injustice might otherwise result, or where jurisdictional ques-
tions are presented, a circuit court may address such issues.
Singleton, 428 U.S. at 121 (citing Turner v. City of Memphis, 369
U.S. 350 (1962) (per curiam) and quoting Hormel, 312 U.S. at
557); see also Blair v. Oesterlein Machine Co., 275 U.S. 220, 225
(1927); Stern v. United States Gupsum, Inc., 547 F.2d 1329, 1223-
54 (7th Cir.), cert. denied, 434 U.S. 975 (1977). None of these
exceptions applies here. They apply only in unusual cases, and
never where issues of fact must be resolved by the district court.
See Chenery Corp., 318 U.S. at 88.
'® This procedure has been followed in numerous cases by the
circuit courts. See e.g., Laney v. Commissioner, 674 F.2d 342, 351
17
The principal reasons for this procedural scheme are
those of fairness and efficiency. Allowing the district
court to consider the issues in the first instance permits
both parties to participate in the factual inquiry by intro-
ducing the evidence, if any, they believe relevant, Hormel,
312 U.S. at 556, and by presenting legal arguments on
each issue to be resolved by the district court. Singleton,
428 U.S. at 120; see Tex-Penn Ou Co., 300 U.S. at 498;
Helvering v. Wood, 309 U.S. 344, 349 (1940). This
process also gives the appellate court the benefit of a
ruling below, Chenery Corp., 318 U.S. at 88-89; Wood,
309 U.S. at 349, and, depending on the outcome in the
district court, may obviate the need for an appellate
court to address the issues, see Sanders v. International
Ass'n of Bridge, Structural and Ornamental Iron Work-
ers, AFL-CIO, 546 F.2d 879, 882-83 (10th Cir. 1976).
This case demonstrates the reasons for the rule. The
Sixth Circuit’s ruling that Decedent in substance made
a transfer of 85 shares of stock to the Trust necessitates
a finding by the district court as to the consideration
received by Decedent as part of the overall transaction.
The parties are entitled to be heard on the applicability
of the statutory exception. The failure of the Sixth
(5th Cir. 1982) (remanded for Tax Court to consider whether
parties may offer additional evidence, whether there was valid
assignment, and whether recapture of portion of sale price was
required) ; Wilson v. St. Louis-San Francisco Railway Co., 673 F.2d
1152, 1155 (10th Cir. 1982) (remanded for consideration of rele-
vance of evidence on issue not previously considered by trial court) ;
Walker Manufacturing Co. v. Dickerson, Inc., 560 F.2d 1184, 1186-87
(4th Cir. 1977) (remanded for determination of applicability of
statute of limitations not previously raised in or considered by lower
court); Commissioner v. Estate of Nelson, 396 F.2d 519, 524 (2d
Cir. 1968) (remanded for Tax Court to determine whether value
of marital support rights was “adequate and full consideration in
money or money’s worth” for total assets transferred to trust);
see also Pharo v. Smith, 625 F.2d 1226, 1227 (5th Cir. 1980) (per
curiam) (remanded for district court to consider whether to dismiss
pendant state claims when federal claims already resolved).
18
Circuit to remand the case is a significant departure
from the settled course of appellate procedure, requiring
supervision by this Court. The Sixth Circuit should be
reversed and the case remanded for the district court
to consider the Section 2036(a) exception.
CONCLUSION
For the reasons stated above, this Court should grant
the Estate’s Petition for a Writ of Certiorari to review
the issues presented herein.
March 14, 1988
Respectfully submitted,
ALBERT H. TURKUS *
JUDITH A. MATHER
TIMOTHY J. O’ROURKE
DAVID E. MILLS
Dow, LOHNES & ALBERTSON
1255 23rd Street, N.W.
Washington, D.C. 20037
(202) 857-2500
CHESTER E. FINN
PORTER, WRIGHT, MORRIS &
ARTHUR
2100 First National Bank Building
Dayton, Ohio 45401
(513) 228-2411
Counsel for Petitioners
* Counsel of Record
APPENDIX
la
UNITED STATES COURT OF APPEALS
SIXTH CIRCUIT
No. 86-3086
DANIEL J. MAHONEY, JR., EXECUTOR OF THE ESTATE OF
JAMES M. Cox JR.,
Plaintiff-A ppellee,
Va
UNITED STATES OF AMERICA,
Defendant-A ppellant.
Argued Jan. 27, 1987
Decided Oct. 16, 1987
Michael L. Paup, D. Patrick Mullarkey, Tax Div.,
Dept. of Justice, Roger M. Olsen, Washington, D.C., Dale
Goldberg, Asst. U.S. Atty., Cincinnati, Ohio, Robert S.
Pomerance (argued), Washington, D.C., Steven W.
Parks, for defendant-appellant.
Robert P. Bartlett, Jr., Dayton, Ohio, Albert H. Tur-
kus (argued), Dow, Lohnes & Albertson, Washington,
D.C., Bernard J. Long, Jr., for plaintiff-appellee.
Before KENNEDY and NORRIS, Circuit Judges, and
CELEBREZZE, Senior Circuit Judge.
CELEBREZZE, Senior Circuit Judge.
Defendant United States of America appeals the dis-
trict court judgment granting a refund of estate taxes to
plaintiff Daniel J. Mahoney, Jr., executor of the estate of
James M. Cox, Jr. (“estate”). The district court ordered
2a
the refund based on its determination that James M. Cox
Jy., the decedent, had not “made a transfer” under I.R.C.
s 2036(a) (1982) when he paid consideration to his
father in conjunction with the father’s transfer of stock
into a trust naming the decedent as life beneficiary.
Mahoney v. United States, 628 F.Supp. 273 (S.D. Ohio
1985). The government argues on appeal, and we agree,
that the district court erred in interpreting the term
“transfer” in section 2036(a). Accordingly, we reverse.
he
In December, 1939, James M. Cox Sr. (“Governor
Cox’’'), decedent’s father, purchased all of the outstand-
ing stock in the Atlanta Journal Company (“Atlanta
Journal’). As a result of the purchase and a subsequent
recapitalization, Governor Cox received all 4,000 shares
of Atlanta Journal common stock, which had a cost basis
of $6.2225 per share. Governor Cox used the Atlanta
Journal common stock in 1941 to fund five trusts.
The “James M. Cox Jr, Trust” (“Trust”)? named the
decedent as the income beneficiary for life and named as
remaindermen decedent’s wife and his lineal decendants.
The Trustee was Governor Cox’s attorney. Governor Cox
funded the Trust with 750 shares of the Atlanta Journal!
common stock. In exchange, the decedent executed an in-
terest-bearing promissory note payable to his father in an
amount equal to Governor Cox’s basis in the 750 shares,
$4,666.88. Decedent’s promissory note stated that it was
executed “in payment for 750 shares of common stock of
the Atlanta Journal Company.” The Trust instrument
likewise acknowledged that on the day the Trust was
1 James M. Cox Sr. was a former Governor of the State of Ohio
and Democratic Party nominee for President of the United States
in 1920. See Appellee’s Brief at 3.
- The other four trusts were for the benefit of Governor Cox’s
wife, his two daughters (decedent’s half-sisters), and his former
son-in-law
3a
established, decedent “executed and delivered [a note] in
payment for the stock which is the subject matter of this
trust.”
The Trust further provided that the Trustee was to pay
the principal and interest on the note with the income
from the 750 shares. The stock generated dividends of
$4,500 in 1941, and of $7,500 annually from 1942 to 1944.
During those four years, the dividends were applied to
discharge the note (principal and interest) in full. How-
ever,the annual payments on the loan were not made by
the Trustee as the Trust instrument directed, but were
withheld by the Atlanta Journal and paid directly to Gov-
ernor Cox. Regardiess of the actual payment procedure,
however, the decedent treated the dividends used to pay
off the note as constructively received by him for income
tax purposes: he reported those dividends as his income
and claimed deductions for the amounts used to satisfy
interest on the note.
Several years after the Trust was created, the Internal
Revenue Service (IRS) reviewed the transaction and re-
quested that Governor Cox file a gift tax return. Gover-
nor Cox complied, but reported no taxable gift, maintain-
ing that the $4,666.88 paid by decedent for the 750 shares
represented the fair market value of Atlanta Journal
stock in 1941. After an audit, the IRS challenged Gov-
ernor Cox’s valuation of the stock. The parties settled
the dispute in 1952, however, agreeing that the fair mar-
ket value of Atlanta Journal common stock in 1941 was
$55 per share, or $41,250 for 750 shares. Governor Cox
thereafter reported a taxable gift of $36,583, the agreed
value of the stock in 1941 less the consideration received
in discharge of decedent’s note.
The decedent died in 1974. On his estate’s federal tax
return, none of the property from the “James M. Cox Jr.
Trust” was included in decedent’s gross estate. The estate
took the position that decedent had not “made a transfer”
of property to the Trust, but that any transfer had been
4a
made by Governor Cox. The estate therefore contended
that the “Transfers with retained life estate’ provision
of I.R.C. § 2036(a) (1982) was inapplicable.
The IRS audited the return and assessed an estate tax
deficiency. The IRS found irrelevant the fact that Gover-
nor Cox, not the decedent, made the actual transfer of
stock into the Trust. The IRS reasoned that the transac-
tion left the decedent in the same economic position as if
he had purchased $4,666.88 worth of stock (the equivalent
of 85 shares at $55 per share) outright from his father,
transferred those shares to the Trust for the benefit of
his heirs, and reserved for himself an equitable life estate
in the stock. Under this theory, the government concluded
that in substance the decedent had “made a transfer”
under section 2036(a) and, therefore, that 11.3136 per-
cent * of the date-of-death value of the trust property, or
$5.5 million, was includable in decedent’s gross estate.
The estate paid the asserted deficiency, filed an adminis-
trative claim for refund, which was denied, and then
brought this action in district court.
After conducting a bench trial, the district ‘court
granted the estate a refund. The court initially found
that Governor Cox had funded the Trust through a partial
sale and partial gift, Mahoney, 628 F.Supp. at 278, and
that the decedent, not the Trust, had paid the $4,666.88
in consideration to Governor Cox for the sale portion of
the stock transfer, id. at 279-80. The court further con-
cluded, however, that the decedent purchased only a life
estate in the Trust corpus, essentially because Governor
Cox exclusively controlled the creation and funding of
the Trust. /d. at 280-82. On this basis, the district court
held that the decedent did not make a “transfer” into the
3 The amount paid for the stock by the decedent in 1941, $6.2225
per share, was 11.3136% of the fair market value in 1941, $55 per
share. The remaining 88.6864%, or $48.7775 per share, represents
the value of Governor Cox’s gift to the trust in 1941, for which
Governor Cox paid the gift tax in 1952, and is not relevant to the
instant case.
5a
Trust under section 2036(a) and, therefore, that no part
of the Trust should be included in decedent’s gross estate.
id. at 281. The court ordered a refund of $7.9 million
paid to the estate. This timely appeal ensued.
II.
Before addressing the district court’s interpretation of
the term “transfer,” the estate asserts an independent
ground for affirming the court’s decision. The estate con-
tends that the district court erred in holding that the de-
cedent paid the $4,666.88 in consideration to Governor
Cox. In support of this argument, the estate asserts sev-
eral alternative views of the evidence: that Governor Cox
retained an income interest in the stock dividends to the
extent of his basis in the transferred stock; that the
Trust, not the decedent, discharged the note; that the de-
cedent was a surety for the Trust’s debt; or that the debt
created by the note was not a “real” debt in view of the
family relationship and the decedent’s healthy financial
status in 1941. Because the decedent did not pay the con-
sideration, the argument concludes, he could not have
“made a transfer” under section 2036 (a).
The district court’s conclusion that the decedent paid
the consideration to Governor Cox, however, is a finding
of fact that a reviewing court may not reverse unless
“clearly erroneous.” Fed.R.Civ.P. 52(a).4 A finding of
* The estate also argues that the decedent paid no consideration
to Governor Cox, as a matter of law, because Governor Cox re-
tained an interest income in the stock under the Trust terms, citing
Greene v. United States, 237 F.2d 848 (7th Cir. 1956), and Estate
of Fry v. Commissioner, 9 T.C. 503 (1947), aeqg., 1948-2 C.B. 2,
and because decedent’s note did not represent a valid indebtedness
of the decedent, citing Deal v. Commissioner, 29 T.C. 730 (1958).
None of these cases, however, addresses the question of whether
an individual has paid consideration to the grantor of a trust
when he executes an interest-bearing note payable to the grantor,
the note is in fact discharged in full, and the individual treats the
amounts used to discharge the note as his constructive income.
6a
fact will only be clearly erroneous “when although there
is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that
a mistake has been committed.” Anderson v. City of Bes-
semer City, N.C., 470 U.S. 564, 578, 105 S.Ct. 1504, 1511,
84 L.Ed.2d 518 (1985) (quoting United States v. United
States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542,
92 L.Ed. 746 (1948)). In addition, the clearly erroneous
standard is applicable “even when the district court’s
findings do not rest on credibility determinations, but are
based instead on physical or documentary evidence or in-
ferences from other facts.” /d. 470 U.S. at 574, 105 S.Ct.
at 1512; see Fed.R.Civ.P. 52(a), advisory committee
notes, 1985 amendment. Under this deferential standard,
the appellate court must vigilantly refrain from conduct-
ing a de novo review of the evidence. Bessemer City, 470
U.S. at 573-74, 105 S.Ct. at 1511-12. Viewing this record
in its entirety, id. at 574, 105 S.Ct. at 1512, we conclude
that the district court did not clearly err.
The Trust instrument itself declared that the 750
shares of Atlanta Journal stock were transferred into the
Trust in exchange for consideration paid by the Trustee
and the decedent. The Trustee, however, never made a
payment to Governor Cox. Rather, the decedent executed
a note, payable to Governor Cox, that was “in payment
for” the 750 shares. The execution of the note “in pay-
ment” for the stock and the corresponding provision in
the Trust document require the conclusion that, in form,
the transaction was arranged so that the decedent would
pay the consideration. Although the note was discharged
by the corporation withholding a portion of the dividend
payments each year over a four year period, the decedent
treated the funds used to discharge the note as his con-
structive income and claimed deductions for the interest
paid. The decedent’s income tax treatment of the pay-
ments confirmed that the transaction was completed in
We therefore conclude that the cited cases do not control the resolu-
tion of the unique factual situation that this case presents.
rt
ia
substance consistent with what it purported to be in
form: a payment from the decedent to his father. The
estate’s alternative constructions of the evidence, although
perhaps plausible, do not mandate a finding of clear error.”
“Where there are two permissible views of the evidence,
the factfinder’s choice between them cannot be clearly
erroneous.” Bessemer City, 470 U.S. at 574, 105 S.Ct. at
1512. Accordingly, we hold that the district court did not
clearly err in holding that the decedent paid consideration
to Governor Cox at the time the stock was transferred to
the Trust.
ITI.
We now turn to the district court’s application of sec-
tion 2036(a). In determining whether the decedent’s pay-
ment of consideration to Governor Cox in conjunction with
5In support of its argument that the district court clearly erred,
the estate points out: that by 1941, the earnings prospects of the
Atlanta Journal were so good that the dividends from the common
stock would certainly be sufficient to discharge the note; that Gov-
ernor Cox’s control over the Atlanta Journal ensured that such
dividend payments would be forthcoming; and that in 1941, the
decedent was financially well off and could have paid the $4,666.88
in cash, if the parties intended him to pay the consideration. From
these facts, and considering the parties’ family relationship, the
estate concludes that the parties did not intend that the decedent
pay the consideration, and that decedent’s note did not represent a
valid debt. Finally, the estate asserts that the withholding of the
dividends by the Atlanta Journal precludes the finding that the
decedent discharged the note.
The estate’s contention that this intrafamily debt was not “real”
and, therefore, that the decedent did not discharge the debt is not
compelling on the facts of this case. The decedent executed an
interest-bearing promissory note in payment for the stock. While
this formality itself is not conclusive as to the validity of the debt,
the fact that the note was discharged in full, including the interest
due, renders immaterial whether the discharged debt was ever
legally binding. It was paid off; the question becomes who made
the payments on the debt. In our view, the decedent’s tax treatment
of the payments as his constructive income is more than sufficient
to support the district court’s conclusion that the decedent in sub-
stance discharged the note.
Sa
the creation of the Trust was a transfer under the stat-
ute, the court posed the following question:
Did James M. Cox, Jr., purchase an undivided or
full ownership interest in [11.3136] percent of the
750 transferred shares, or did he purchase only an
equitable life estate in the transferred stock?
Mahoney, 628 F.Supp. at 279. In answering this question,
the court found important that Governor Cox owned the
stock before the transfer, and that he transferred the
stock directly to the Trustee without issuing stock certif-
icates to the decedent. /d. at 280-81. The dispositive fac-
tors in the district court’s analysis, however, were that
Governor Cox alone created the Trust, funded it, and
named the remaindermen, consulting only with his attor-
ney, and that the decedent had no control over, or input
into, the terms of the Trust. /d. The conclusion concern-
ing the defendant’s lack of control, however, did not arise
from the transaction itself or the parties’ characterization
of it, but from the testimony adduced at trial of business
associates and relatives to the effect that Governor Cox
was “the boss” in virtually all affairs under his domain.
Thus, viewing what it termed “the reality of the creation
and funding of the . . . Trust,” id. at 280, the court con-
cluded that “|a|ll James M. Cox received in exchange for
the consideration he furnished was the right to receive
income for his life.” /d. at 281. On this basis, the court
held that the decedent had not “made a transfer” under
section 2036\a). For the following reasons, we reverse.
Under section 2036(a) (1), LR.C. § 2036(a) (1) (1982),°
the decedent’s gross estate will include the date-of-death
® Section 2036(a) states in pertinent part:
The value of the gross estate shall include the value of all property
to the extent of any interest therein of which the decedent has at
any time made a transfer (except in case of a bona fide sale for an
adequate and full consideration in money or money’s worth), by
trust or otherwise, under which he has retained for his life or for
9a
value of property if three conditions are met: (1) the
decedent must have made an inter vivos transfer of the
property; (2) the decedent must have retained the right
to the income from the property; and (3) this retention
must have been for the decedent’s life. National City
Bank of Cleveland v. United States, 371 F.2d 13, 15 (6th
Cir. 1966). In the instant case, there is no dispute that
the decedent “retained” the right to the Trust income for
his life. Mahoney, 628 F.Supp. at 278. The only issue,
therefore, is whether the decedent “made a transfer’
within the meaning of the statute.
This court has emphasize’ that the term “transfer” is
not to be interpreted in a restrictive manner and should
be interpreted to effectuate the purposes of section 2036
(a). See Estate of Shafer v. Commissioner, 749 F.2d 1216,
1221-22 (6th Cir. 1984). “The general purpose of the
statute was to include in a decedent’s gross estate trans-
fers that are essentially testamentary—i.e., transfers
which leave the transferor a significant interest in or con-
trol over the property transferred during his lifetime.”
United States v. Estate of Grace, 395 U.S. 316, 320, 89
S.Ct. 1730, 1733, 23 L.Ed.2d 552 (1969); see also Estate
of Wyly v. Commissioner, 610 F.2d 1282, 1290-91 (5th
Cir. 1980). By taxing essentially testamentary transac-
tions, section 2036(a) prevents “circumvention of federal
estate tax by use of schemes which do not significantly
alter lifetime beneficial enjoyment of property supposedly
transferred by a decedent.” /d. at 1290; see also Estate
of Shafer, 749 F.2d at 1222. The applicability of section
2036(a), therefore, is not controlled by the “various nice-
ties of the art of conveyancing,” Commissioner v. Estate
of Church, 335 U.S. 632, 642, 69 S.Ct. 322, 327, 93 L.Ed.
any period not ascertainable without reference to his death or for
any period which does not in fact end before his death
(1) the possession or enjoyment of, or the right to the
income from, the property ... .
26 U.S.C. § 2026(a)(1) (1982).
10a
288 (1949) (quoting Klein v. United States, 283 U.S.
931. 234. 51 S.Ct. 398, 399, 75 L.Ed. 996 (1931)), but is
instead dependent upon “the nature and operative effect
of the transfer,” Estate of Grace, 395 U.S. at 328, 89
S.Ct. at 1735 (quoting Estate of Spiegel v. Commissioner,
235 U.S. 701, 705, 69 S.Ct. 301, 303, 93 L.Ed. 330
(1949)). As such, the statute operates to tax transfers
of property “that are too much akin to testamentary dis-
positions not to be subjected to the same excise.”” Helver-
ing v. Hallock, 309 U.S. 106, 112, 60 S.Ct. 444, 448, 84
L.Ed. 604 (1940).
Moreover, the purposes of section 2036'a) and_ the
Supreme Court’s opinion in Estate of Grace counsel
against the utilization of evidence that is extrinsic to
the transaction and unrelated to the parties’ understand-
ing of it in an attempt to reconstruct the creation of
a forty year old trust, especially when the only parties
to the transfer have long been deceased. See Estate of
Grace, 395 U.S. at 320, 322-24, 89 S.Ct. at 1734-35.
Reliance on such inquiries, based usually on faults
memories and self-serving testimony from family mem-
bers. can serve only to undermine the consistent and
proper application of the statute.’ Cf. id. at 823, 89
S.Ct. at 1734 (inquiries into subjective intent in intra-
family transfers create “substantial obstacles to the
7In the instant case, for example, none of the witnesses could
claim knowledge of the circumstances surrounding the creation
of the James M. Cox Jr. Trust. Decedent’s two half-sisters, who
offered the testimony most probative of what actually occurred in
1941, had no specific memory of the creation of this Trust and
had only hazy recollections of conversations with the decedent
cecurring many years later concerning the Trust. Moreover, under
the Trust terms. if the decedent were to die without any lineal
decendants, which he did, that portion of the Trust corpus which
was to devolve to decedent’s lineal descendents would instead de-
volve to the trusts ereated in 1941 for the benefit of decedent’s
half-sisters, see supra note 2. As life beneficiaries of those trusts,
therefore, the half-sisters have a financial stake in the outcome of
this case.
lla
proper application of the federal estate tax iaws.’’).
Thus, the includability of a trust corpus under section
2036(a) should, as a general rule, be determined from
the trust documents, the timing of the transfers, the
value of property transferred, verifiable contemporary
characterizations of the transaction, and its objective
economic effects. See, ¢.g., Estate of Sinclaire v. Com-
misstoner, 13 T.C. 742, 745-46 (1949) (“true nature of
the transfers’ not dependent on trust terms alone, but
was determined from the timing of two transactions, the
nature of the property involved, and other “facts and
circumstances attendant” to the transfers, none of which
was based on extrinsic evidence); cf. Estate of Grace,
395 U.S. at 323-24, 89 S.Ct. at 1734-35 (applicability of
reciprocal trust doctrine depends on terms of trust, tim-
ing of the transactions, and their objective economic ef-
fects, not on inquiries into the parties’ subjective intent) ;
Estate of Whitt v. Commissioner, 751 F.2d 1548, 1558-59
(11th Cir. 1985) (whether decedent retained a life estate
determined from “the surrounding circumstances, par-
ticularly the manner in which the parties have dealt
with the property’). Only if this evidence is insufficient
to disclose the “nature and operative effect” of the trans-
action, see, e.g., Estate of Shafer, 749 F.2d at 1218-20
(extrinsic evidence admitted to resolve ambiguity in deed
of sale concerning who purchased the land); cf. Estate
of Grace, 395 U.S. at 324 n. 10, 89 S.Ct. at 1735 n. 10,
or if the parties’ characterization of it appears calculated
to circumvent the estate tax laws, see Estate of Wyly,
610 F.2d at 1290-91, should a court need to resort to
extrinsic evidence to find the “reality” of the trust’s
creation.
With these principles in mind, we proceed to analyze
the trust transfer at issue here. The Trust instrument
stated that Governor Cox transferred the 750 shares of
Atlanta Journal common stock to the Trust in exchange
for consideration paid by the Trustee and the decedent.
As we affirmed above, the decedent alone paid the con-
12a
sideration by executing and discharging a promissory
note, which stated: “This note is given in payment for
750 shares of common stock of The Atlanta Journal
Company” (emphasis added). Similarly, the Trust pro-
vision delineating the method of repayment on the note
stated that the decedent’s note was “executed and de-
livered to [Governor Cox] in payment for the stock
which is the subject matter of this trust” (‘emphasis
added). These provisions show that the Trust was ar-
ranged by the parties so that the decedent would pay
consideration to Governor Cox for all 750 shares of stock.
Accordingly, the decedent’s note was executed in an
amount determined by Governor Cox’s basis in all 750
shares, again evidencing that the decedent paid for the
stock which was then transferred to the Trust. During
the pendency of his gift tax dispute with the IRS, Gover-
nor Cox likewise maintained that the decedent had paid
the fair market value of the stock in 1941. Under the
Trust documents and the other objectively verifiable cir-
cumstances surrounding the 1941 transaction, therefore,
the manifest intention of the parties was that the dece-
dent would pay for the stock, which would then be trans-
ferred into the Trust.
Under these circumstances, we conclude that it was
unnecessary for the district court to consider evidence
extrinsic to the transaction in an attempt to ascertain
the “reality” of the trust transfer... The Trust docu-
8 The estate asserts that control over the trust terms is an
essential element to finding a “transfer” under section 2036(a). No
explicit authority supporting the assertion, however, has been cited
or found. In addition, the cases on which the estate relies do not
purport to establish an absolute “control” requirement and are
explainable on other grounds. See Fidelity—Philadelphia Trust Co.
v. Smith, 356 U.S. 274, 78 S.Ct. 730, 2 L.Ed.2d 765 (1958); Estate
of Becklenberg v. Commissioner, 273 F.2d 297 (7th Cir. 1959);
Estate of Cain v. Commissioner, 37 T.C. 185 (1961); Estate of
Bergan v. Commissioner, 1 T.C. 543 (1943), aeq., 1943 C.B. 2. To
be sure, the courts have held that such control is a sufficient basis
on which to include a trust corpus under section 2036(a), see, e.g.,
13a
ments are unambiguous,’ cf. Estate of Shafer, 749 F.2d
at 1218 (IRS unable to determine from documents who
paid for the property), and in any event, lend no sup-
port to the district court’s revisionist assertion that the
decedent purchased only a life estate in the Trust corpus.
Nothing in the form or execution of the transaction sug-
gests that the parties intended that decedent’s considera-
tion was in payment for anything less than the total
“bundle” of rights inherent in owning property. The
“nature and operative effect of the transfer,” as the
parties themselves arranged it and characterized it at
the time, disclose that in substance the decedent paid
Governor Cox for 750 shares of Atlanta Journal common
stock, which were then transferred to the James M. Cox
Jr. Trust. Consequently, we conclude that although
Governor Cox nominally created the Trust, the decedent
must be considered the effective grantor of the Trust to
the extent of his contribution.” See Estate of Marshall
Estate of Shafer, 749 F.2d at 1221-22, but to our knowledge none
has held it to be a necessary condition to includability. Indeed,
imposition of a “control” requirement would seemingly transgress
this court’s admonitions that “transfer” is to be given its usual
meaning, National City Bank of Cleveland v. United States, 371
F.2d 13, 16 (6th Cir. 1966), and is not to be restrictively inter-
preted, Estate of Shafer, 749 F.2d at 1221. We further note that
in other contexts, courts have included trust property in a decedent’s
gross estate under section 2036(a) even though the transferor
apparently had no control over the terms of the trust into which
the property was transferred. See, e.g., Estate of Kinney v. Com-
missioner, 39 T.C. 728 (1963) (property transferred by life bene-
ficiary into existing trust she did not create included in gross
estate). We accordingly decline to put this gloss on the definition
of transfer under the statute. .
® Any ambiguity in this transaction concerned only who paid the
consideration, not what the consideration was “in payment for.”
The district court, therefore, properly considered extrinsic evidence,
including individual tax returns and other related correspondence,
to resolve this ambiguity. See Estate of Shafer, 749 F.2d at 1218.
10 The estate disputes the characterization-of the transaction on
the ground that the decedent could not have used Governor Cox as a
l4da
». Commissioner. 51 T.C. 696 (1969): Estate of Sin-
claire v. Commissioner, 13 T.C. 742 (1949); Estate of
Schwartz v. Commissioner, 9 T.C. 229 (1947).
Since the named remaindermen were the decedent’s
wife and lineal descendants, the natural objects of his
bounty, we have no difficulty in concluding that the dece-
dent’s contribution to the Trust was “essentially testa-
mentary,” Estate of Grace, 395 U.S. at 316, 89 S.Ct. at
1730, and therefore includable under section 2036(a)."
A transfer into trust, in which the effective transferor
retains a life estate, remaind to the effective trans-
feror’s heirs, is a transaction that is “too much akin to
testamentary dispositions not to be subjected to the same
excise,” Hallock, 209 U.S. at 112, 60 S.Ct. at 448. Cf.
Estate of Shafer, 749 F.2d at 1221-22. The later reval-
uation of the Trust corpus in resolution of Governor
Cox’s gift tax dispute with the IRS cannot change the
“nature and operative effect of the transfer,” although
it does affect what portion of the Trust is ineludable in
the decedent’s gross estate. Accordingly, we hold that
because the $4.666.88 paid by the decedent represented
11.3136 percent of the value of the stock transferred
“conduit” to establish the Trust. Two observations are pertinent.
First, from a legal standpoint, this argument is just a variation on
the estate’s assertion that the decedent must have “controlled” the
Trust terms to have made a transfer under section 2036(a), an
assertion we have rejected. See supra note 7. Second, as a factual
matter, the estate’s argument relies exclusively on the extrinsic
evidence taken by the district court to the effect that Governor
Cox was “the boss.” We have already ruled, however, that this
evidence was unnecessary to discover the “nature and operative
effect” of the transaction. Accordingly, we reject the estate’s con-
tention.
11“'T)}he taxing authorities need do no more than apply con-
sidered and accepted doctrine of the law of trusts to reach the con-
clusion that he who pays another for the creation of a trust wherein
the payor shall be granted a beneficial interest .. . which he desires
may be taxed as one who has transferred the property retaining
an interest therein.” Newberry'’s Estate v. Commissioner, 201 F.2d
874, 876-77 (3d Cir. 1953) (footnote omitted).
15a
into the Trust in 1941, the same portion of the date-of-
death value of the Trust must be included in decedent’s
gross estate under section 20361a).'"
This holding is consistent with the mandate that the
term “transfer” should be interpreted to effectuate the
purposes of section 2036!a!. See Estale of Shafer, 749
F.2d at 1221-22. By paying the consideration to Gover-
nor Cox “in payment for” the stock, the decedent in sub-
stance purchased 11.3136 percent of the 750 shares of
Atlanta Journal stock, or approximately 85 shares, which
were then transferred into the Trust, with the remainder
to his wife and children. Since the decedent was the only
life beneficiary, he received the income from the 8&5
shares for the rest of his life. The conclusion readily fol-
lows, therefore, that the transfer did “not significantly
alter |[the decedent’s] lifetime beneficial enjoyment” in
the $4,666.88 that he purported to transfer during his
12 Moreover, even if we were disposed to consider the district
court’s findings that arose from the irrelevant extrinsic evidence, we
would still find the Trust corpus includable under section 2306 [sic]
(a) to the extent of the decedent’s contribution. Initially, it is clear
that Governor Cox's transfer of the stock directly into the Trust
without issuing certificates to the decedent is not dispositive. See
E’state of Shafer, 749 F.2d at 1221 (irrelevant that the effective
grantor never held legal title to property transferred into trust):
see also Commissioner v. Estate of Church, 325 U.S. 632, 642, 69
S.Ct. 322, 327, 93 L.Ed. 288 (1949) (application of section 2036(a)
not dependent on “various niceties of the art of conveyancing”
(quoting Klein v. United States, 283 U.S. 231, 234, 51 S.Ct. 398,
399, 75 L.Ed. 996 (1931))). In addition, we would not find signifi-
cant that the creation and funding of the Trust was the “sole act”
of Governor Cox. In National City Bank, this court held that, in
order to make a transfer under section 2036(a), the decedent’s life
estate must arise from some “affirmative” or “positive” action on
the decedent’s part. 371 F.2d at 16-17; Estate of Shafer, 749 F.2d
at 1221 n. 9. As our disposition of this case indicates, we believe
this requirement is satisfied by a life beneficiary’s execution and
discharge of a note payable to the nominal grantor in establishing
a trust, at least where the remaindermen are decedent’s wife and
lineal descendants. Accordingly, the decedent’s contribution to the
Trust would still constitute a “transfer” under the statute.
l6a
lifetime. Estate of Wyly, 610 F.2d at 1290. The trans-
fer is thus taxable upon decedent’s death as an “essen-
tially testamentary” transaction under section 2036(a).
Estate of Grace, 395 U.S. at 320, 89 S.Ct. at 1733 (dece-
dent retained a “significant interest in” the transferred
property).
IV.
For the foregoing reasons, the judgment of the district
court is REVERSED.
17a
UNITED STATES DISTRICT COURT
S.D. OHIO, W.D.
No. C-3-81-041
DANIEL J. MAHONEY, JR.,
Plaintiff,
Vi
UNITED STATES OF AMERICA,
Defendant.
Aug. 12, 1985
Robert P. Bartlett, Jr., Dayton, Ohio, for plaintiff.
Albert H. Turkus, D. Patrick Mullarkey, Vicki Cheikes,
Tax Div., Dept. of Justice, Washington, D.C., Christopher
Barnes, U.S. Atty., Cincinnati, Ohio, for defendant.
EXPANDED OPINION: FINDINGS OF FACT AND
CONCLUSIONS OF LAW, SUPPORTING BRIEF
OPINION FILED JUNE 21, 1985; CONFERENCE
CALL SET
RICE, District Judge.
In this case, the Plaintiff, Daniel J. Mahoney, Jr., the
executor of the estate of the decedent, James M. Cox, Jr.,
seeks a refund of federal estate taxes and deficiency in-
terest paid by the estate, as well as interest on the
amount paid. The dispute arises out of a decision by the
Defendant that a portion of the value of a certain trust,
created by the decedent’s father, was includable in the
18a
estate of James M. Cox, Jr., by virtue of $ 2036/a) of
the Internal Revenue Code of 1954. The Plaintiff paid
both the tax assessed by the Defendant and the deficiency
interest. and then initiated this action for a refund of
said payment. Pursuant to the agreement of the parties,
this Court ordered this case bifurcated. See Doe. +25.
As a result, at the trial of this case, the Court heard evi-
dence relating only to the includability of any portion of
the trust in the estate of James M. Cox, Jr.
In this Court’s brief Opinion of June 21, 1985 (Doce.
+55). this Court stated as follows:
As a starting point of analysis, the Court has con-
cluded that the transfer of 750 shares of Atlanta
Journal Company common stock by Governor Cox to
the trust he created for the benefit of his son, James
M. Cox. Jrv.. was in part a sale (11+ percent) and
in part a gift (88-- percent). This case deals only
with the 11— percent that has been deemed a sale.
This conclusion raised two major questions for the
Court:
1. Was the sale of stock to the trust, or was it to the
decedent. James M. Cox, Jr.? For reasons that will
be set forth in the expanded opinion to follow, the
Court has found that the decedent, James M. Cox,
Jv.. furnished consideration for the transfer of the
stock and. therefore, has concluded that the sale was
to him rather than to the trust.
2 Did James M. Cox, Jr. purchase an undivided or
full ownership interest in 11-- percent of the 754
transferred shares, or did he purchase only a life es-
tate in the transferred stock? Once again. for rea-
sons which will be set forth in the expanded opinion.
the Court has concluded that James M. Cox, Jr. pur-
chased a life estate only.
Therefore. based on the foregoing conclusions, the
Court has determined that the decedent did not
19a
transfer to the trust that property in which he re-
tained a life estate (the 11+ percent of the 750
shares of Atlanta Journal Company common stock),
and, therefore § 2036 of the Internal Revenue Code
does not require the inclusion of that portion of the
trust in the estate of James M. Cox, Jr. Moreover,
in the Court’s opinion, the principles of estoppel re-
lied upon by Defendant do not* require the inclusion
of said portion of the trust in decedent’s estate. Ac-
cordingly, assuming there exist no further issues to
be resolved prior to judgment ', the Court, following
the telephone conference between Court and counsel,
will enter judgment for Plaintiff and against De-
fendant in the amount of Seven Million, Nine Hun-
dred Forty-two Thousand, Three Hundred Forty-two
and 94/100 Dollars ($7,942,342.94) plus interest as
provided by 28 U.S.C. § 2411 and 26 U.S.C. § 6621.
The Court now sets forth its findings of fact and its
conclusions of law.
I. Findings of Fact
(1) In December, 1939, James Middleton Cox, Sr.
(“Governor Cox”), the former Governor of Ohio and in
1920 the nominee of the Democratic Party for President
of the United States, and two corporations controlled by
him, The Evening News Publishing Company and Spring-
field Newspapers, Inc., purchased all of the outstanding
stock of the Atlanta Journal Company. At the time of
the purchase, the Atlanta Journal Company published a
newspaper, The Atlanta Herald, and operated Radio Sta-
tion WSB in Atlanta.
(2) After purchasing the stock of the Atlanta Journal
Company, Governor Cox and his co-purchasers recapital-
ized the company. As a result, the two corporate, co-
purchasers and another corporation, affiliated with Gov-
ernor Cox, received 4,950 shares of preferred stock. Af-
ter a stock split, Governor Cox received all 4,000 shares
20a
of Atlanta Journal Company common stock. Governor
Cox’s cost basis in these shares was $6.2225 per share.
(3) In 1941, Governor Cox created five trusts, each
of which named an income beneficiary and remainder-
men. The income beneficiaries of the five trusts were
Margaretta Blair Cox, wife of Governor Cox; James M.
Cox, Jr., Barbara Cox Anthony' and Anne Cox Cham-
bers,? Governor Cox’s three children; and Daniel J. Ma-
honey,? former son-in-law of Governor Cox. James M.
Cox, Jr., was appointed trustee of the trusts created for
the benefit of Margaretta Blair Cox, his step-mother
and those created for the benefit of his half-sisters, Anne
Cox Chambers and Barbara Cox Anthony. Robert K.
Landis, Governor Cox’s attorney, was appointed trustee
of the trust created for the benefit of James Cox, Jr.
Daniel J. Mahoney was named trustee of the trust created
for his benefit and that of his children. It is the trust
created for the benefit of James M. Cox, Jr. (“the James
M. Cox, Jr. Trust”), which is at the center of this con-
troversy.
(4) Governor Cox was the sole creator of these five
trusts. He consulted only with his attorney, Robert K.
Landis, before creating them. He alone decided who
would be the remaindermen for each trust. He did not
consult with the members of his family in making this
decision or any other decision relating to the trusts.
(5) Governor Cox transferred 3,000 of the 4,000 shares
of the Atlanta Journal common to the five trusts. The
stock certificates evidencing the transferred shares of
stock were issued in the following manner:
1 At the time of the creation of the trust, Barbara Cox Anthony’s
legal name was Barbara Cox.
2 At the time of the creation of the trust, Anne Cox Chambers’
legal name was Anne Cox Johnson.
3 Daniel J. Mahoney was the father of the present Plaintiff,
Daniel J. Mahoney, Jr.
2la
Stock NUMBER OF
CERTIFICATE ae SHARES | Saeee _ TRANSFEREE ae
1 600 James M. Cox, Jr., Trustee for
Margaretta Blair Cox
2 675 James M. Cox, Jr., Trustee for
Ann Cox Chambers
3 675 James M. Cox, Jr., Trustee for
Barbara Cox Anthony
4 750 Robert K. Landis, Trustee for
James M. Cox, Jr.
5 300 Daniel J. Mahoney, Trustee for
the Mahoney Family
No stock certificates were issued to the income bene-
ficiaries.
(6) Governor Cox considered his transfer of stock a
sale for the fair market value of the stock, rather than
a gift. Consequently, Governor Cox did not file a gift
tax return for the transaction. Moreover, he did not
report a capital gain for the sale. Rather, the amount
that Governor Cox received from the sale, $6.2225 per
share, was equal to Governor Cox’s adjusted basis for the
stock. Thus, there was no gain from the sale.
(7) In 1943, Governor Cox created another trust (“the
Dayton Trust”) for the benefit of his wife, his children
and the family of his former son-in-law, to which he
gave his shares of stock in The Evening News Publishing
Company. Governor Cox considered this transaction a
gift, and as a result, he filed a gift tax return for 2943.
During the audit of this gift tax return, the Internal
Revenue Service (“IRS”) discovered the creation and
funding of the 1941 trusts and insisted that Governer
Cox file a gift tax return for 1941.
(8) On September 23, 1946, Governor Cox filed a gift
tax return at the insistence of the IRS, in which he
showed the creation and funding of the 1941 trusts: how-
ever, Governer Cox disclaimed any gift tax liability.
99a
Governor Cox asserted that he had sold the shares of
stock to the trusts rather than making a gift of same.
Moreover, he contended that the sale was for fair mar-
ket value.
(9) When the IRS audited this gift tax return, it con-
cluded that the fair market value of the stock at the time
of transfer was between $200 and $300 per share rather
than $6.2225 per share as Governor Cox had contended.
Accordingly, the IRS assessed Governor Cox for gift
taxes. Subsequently, Governor Cox challenged the IRS
assessment by petitioning the Tax Court. While the case
was pending in the Tax Court, the parties reached a
compromise in their dispute, whereby they agreed that the
fair market value of the stock was $55 per share. There-
fore, on November 24, i952, Governer Cox filed an
amended gift tax return, reporting the fair market value
of the 3,000 shares of Atlanta Journal common which he
transferred to the five trusts in 1941 at $55 per share.
Therefore, Governor Cox paid the gift tax on a net gift
of $146,332.50, which was arrived at by subtracting the
amount Governor Cox received for the stock, $6,2225 [sic]
per share, from its fair market value of the stock, $55 per
share, and then multiplying the result by the number of
shares involved. Governor Cox did not claim a per donee
exclusion.*
(10) The trust that Governor Cox created for the
benefit of his son, James M. Cox, Jr. (“James M. Cox,
Jr., Trust”) provided that:
In consideration of $1.00 and other valuable consid-
eration paid to the grantor by the Trustee and by
James M. Cox, Jr., the grantor has sold and does
hereby assign and transfer to Robert K. Landes [sic],
as Trustee for James M. Cox, Jr., hereunder, 750
shares of common stock of The Atlanta Journal
Company.
4The amount paid, $6.2225 per share is 11.3136 percent of the
the total value of the stock, $55 per share.
ai
23a
(11) At the time that Governer Cox transferred the
stock to the James M. Cox, Jr., Trust, James M. Cox,
Jr., executed a note in the amount of $4,666.88, payable
to his father as consideration for the funding of the
trust. The amount of the note was fixed by multiplying
the number of shares of Atlanta Journal Company com-
mon stock transferred to the James M. Cox, Jr., Trust,
750, by the sale price, $6.2225 per share. Additionally,
the note bore an interest rate of 4% per annum.
(12) At the time he executed the note in 1941, James
Cox, Jr., was thirty-eight years of age and had sufficient
assets to have paid the debt evidenced by the note imme-
diately.
(13) A provision of the James M. Cox, Jr., Trust
directed the Trustee, after paying reasonable expenses,
to apply all cash dividends and other cash distributions
received on the stock, to the payment of principal and
interest “on the note of James M. Cox, Jr., this day
executed and delivered to the grantor in payment for the
stock which is the subject matter of this trust, until the
note is discnarged.” *
(14) The indebtedness evidenced by the note, as well
as the interest upon it, were discharged by withholding
dividends, which would have been paid to the trust from
the Atlanta Journal Company. Nonetheless, James Cox,
Jr., treated these amounts as constructively received by
him. He reported as income, on his income tax returns
for the relevant years, the amounts of dividends so with-
5In its entirety, the relevant portion of the trust agreement
provided:
All cash dividends and other cash distributions received on
said stock, less any costs and expenses which may be properly
incurred by the Trustee in the discharge of his duties as
Trustee, shall be applied by the Trustee to the payment of
interest or principal (or both) on the note of James M. Cox,
Jr., this day executed and delivered to the grantor in payment
for the stock which is the subject matter of this trust, until
the note is discharged.
— aaa aia
24a
held. In addition, he claimed, as deductions, that por-
tion of the withheld dividends that went to pay the in-
terest on the note.
(15) In 1941, the James M. Cox, Jr., Trust’s share
of the dividends declared by the Atlanta Journal Com-
pany was $4,500. In the years 1942 through 1944, the
Trust’s share of dividends was $7,500 annually. The
note and interest thereon were paid off in these years.
(16) In the Cox family hierarchy, Governor Cox was
the “‘boss.”’ He did not consult with his son about the
establishment of the James M. Cox, Jr., Trust or any of
the other trusts which Governor Cox created in 1941.
Throughout his life, James M. Cox, Jr., expressed dis-
satisfaction at the fact that his father put the Atlanta
Journal Company common stock in trust rather than
giving it to him outright.
(17) The 1941 transfer by which Governor Cox funded
the James M. Cox, Jr., Trust was a partial gift (88+
percent of the value of the stock) and a partial sale (11+-
percent of the value of the stock). Governor Cox sold to
his son, James M. Cox, Jr., only the right to receive for
his life the income generated by the trust. The remainder
of the transfer was a gift. James M. Cox, Jr., received
nothing more than the right to receive income from the
trust. He did not receive an undivided or full ownership
interest in the transferred shares. James M. Cox, Jr.,
transferred nothing to the trust.
II. Discussion
In an action such as the present one where a taxpayer
seeks a refund of federal taxes, the burden of persuasion
is imposed upon the taxpayer ‘o establish by a preponder-
ance of the evidence that there was an overpayment of
taxes. Sinder v. United States, 655 F.2d 729 (6th Cir.
1981). With this standard of proof in mind, the Court
turns to the discussion of the issues herein.
25a
In this case, the Court is called upon to decide whether
a portion of the value of James M. Cox, Jr., Trust must
be included in the estate of James M. Cox, Jr. The Gov-
ernment argues that § 2036(a)(1) of the Internal Reve-
nue Code of 1954, 26 U.S.C. § 2036(a) (1) requires the
inclusion of a portion of that trust in the estate. Section
2036 (a) (1) provides:
(a) General Rule.-—The value of the gross estate
shall include the value of all property to the extent
of any interest therein of which the decendent has at
any time made a transfer (except in case of a bona
fide sale for an adequate and full consideration in
money or money’s worth), by trust or otherwise,
under which he has retained for his life or for any
period not ascertainable without reference to his
death or for any period which does not in fact end
before his death—
(1) the possession or enjoyment of, or the right
to the income from, the property, or, [... .|
In Estate of Wyly v. Commissioner, 610 F.2d 1282 (5th
Cir. 1980), the Fifth Circuit explained the purpose of
§ 2036 (a) (1):
The purpose of this provision is to prevent circum-
vention of federal estate tax by use of inter vivos
schemes which do not significantly alter lifetime
beneficial enjoyment of property supposedly trans-
ferred by a decedent. See 74 Cong.Rec. 7078-79,
7198-99 (1931); H.R.Rep. No. 708, 72nd Cong.,
1939-1 C.B. (Part 2) 457, 490-91; S.Rep. No. 665,
72nd Cong., 1939-1 C.B. (Part 2) 496, 5382. The
Supreme Court has recognized this purpose on sev-
eral occasions. In United States v. O'Malley, 383
U.S. 627, 631, 86 S.Ct. 1128, 1126, 16 L.Ed.2d 145
(1966), it was stated that the section shows the
intent of Congress to subject “to tax all property
which has been the subject of an incomplete inter
vivos transfer.” In United States v. Estate of Grace,
26a
395 U.S. 316, 320, 89 S.Ct. 1730, 1733, 23 L.Ed.2d
332 (1969), the Court noted:
The general purpose of the statute was to in-
clude in a decedent’s gross estate transfers that
are essentially testamentary—i.e., transfers
which leave the transferor a significant interest
in or a control over the property transferred
during his lifetime.
In accord with that authority, this Court has stated:
[§ 2036 is] part of a Congressional scheme to
tax the value of property transferred at death,
whether the decedent accomplishes the transfer
by will, by intestacy, or by allowing his sub-
stantial control over the property to remain un-
exercised until death so that the shifting of its
economic benefits to the beneficiary only then be-
comes complete. In Re Estate of Lumpkin, 474
F.2d 1092, 1097 (5th Cir. 1973).
The classic ease of the intended application of the
Act would be a purported gift with a retained life
estate in the donor.
610 F.2d at 1290-91.
There are three basic elements in § 2086(a) (1) which,
if met, would require the inclusion of a portion of the
James M. Cox, Jr., Trust in the estate of James M. Cox,
Jr.: (1) there must be an inter vivos transfer by dece-
dent (James M. Cox, Jr.), in trust or otherwise, other than
a bone [sic] fide sale for full and adequate consideration
in money or money’s worth; (2) decedent (James M.
Cox, Jr.) must have retained the possession, enjoyment
or right to income from the property; (3) this reservation
must have been for the life of James M. Cox, Jr., for a
period that is not ascertainable without reference to his
death or for any period which does not in fact end before
his death. 3 Mertens, Law of Federal Gift and Estate
Taxation, § 24.07. -
27a
Herein, the parties do not disagree on the second and
third elements. There is no question that James M. Cox,
Jr., “retained” the right to income from the James M.
Cox, Jr., Trust. Moreover, there is no question that James
M. Cox, Jr.’s, right to receive the income was for his life.
Thus, the only question for the Court is whether the fund-
ing of the trust in question involved a transfer of prop-
erty by James M. Cox, Jr., to the James M. Cox, Jr.,
Trust.
As a starting point for the Court’s resolution of this
question, the Court accepts the Government’s assertion
that Governor Cox funded the James Cox Trust through
a partial sale and a partial gift. Indeed, the Court has
reached this conclusion as a matter of fact. (See +17,
supra). The transfer by Governor Cox of 750 shares of
Atlanta Journal Company common stock to the James
Cox Trust was in part a sale (11-+- percent of the value
of the stock) and in part a gift (88+. percent of the value
of the stock). Plaintiff does not seriously question this
proposition; however, to the extent that Plaintiff argues
to the contrary, the Court rejects same. The evidence
overwhelmingly supports the Defendant’s proposition.
Indeed, this is how everyone treated the transaction dur-
ing Governor Cox’s gift tax return dispute. This conclu-
sion raises two major questions for the Court:
(1) Was the sale of the 11+ percent of the stock to
the James M. Cox, Jr., Trust, or was it to James
M. Cox, Jr.?
(2) Did James M. Cox, Jr., purchase an undivided
or full ownership interest in 11— percent of the
750 transferred shares, or did he purchase only
an equitable life estate in the transferred stock?
These questions arise because of the parties’ disparate
views of the underlying transaction which is the genesis
of this lawsuit, the funding of the James M. Cox, af.
Trust. As stated above, Defendant views this underlying
transaction as having been accomplished through a par-
28a
tial sale and a partial gift. Defendant contends that Gov-
ernor Cox sold slightly in excess of 11 percent of the 750
shares of the Atlanta Journal Company common stock to
his son,® following which, the Defendant argues, James
M. Cox, Jr., made a gift to the James M. Cox, Jr., Trust
of the 11+ percent of the stock that he had purchased.
Therefore, the argument concludes, James M. Cox, Jr.,
transferred an interest in property to the trust, within
the meaning of § 2036(a), and a portion (that percentage
of the initial transfer that was a sale (11-++ percent) )* of
the trust must be included in his estate.*
Plaintiff, on the other hand, argues that if there was
a sale of stock, it was to the James M. Cox, Jr., Trust
rather than to the decedent, James M. Cox, Jr. Under
this theory, Plaintiff argues that James M. Cox, Jr.,
never owned any of the 750 shares of stock, and, as a
consequence, could not have transferred an interest in
that property to the trust. In the alternative, Plaintiff
contends that if there was a sale to the decedent of 11-~
percent of the value of the 750 shares of stock trans-
ferred to the trust, James M. Cox, Jr., purchased nothing
more than the right to receive income from the trust
over the direction of his lifetime. rather than an un-
6 The remaining 88+ percent of the transferred stock is treated
as a gift by Governor Cox to the James M. Cox, Jr., Trust and is not
a subject of this litigation.
7In the deficiency notice that it issued, the IRS asserted that
&5,520,296.00 of the James M. Cox, Jr., Trust was includable in the
estate of James M. Cox, Jr. The IRS arrived at this figure by
excluding from the value of the trust-at the time of Cox’s death
that portion of the trust which was attributable to the distribution
from the Margaretta Cox Trust. The resulting figure was multi-
plied by 11.3136 percent, which is the percentage of the initial fund-
ing of the trust which was a “sale” rather than a *eert.”
8 Alternatively, Defendant argues that the Plaintiff is estopped
to deny that James J. [sic] Cox, Jr., transferred 11+ percent of the
750 shares of Atlanta Journal Company common stock to the trust.
The Court will discuss the Defendant’s estoppel argument after its
discussion of the two questions set forth above.
29a
divided or full ownership interest in the 11+ percent of
the transferred shares. Under this theory, as with Plain-
tiff’s alternative theory, the decedent could not have
transferred any property to the trust since all he had
received for his consideration was the right to receive
income from the shares so transferred throughout his
lifetime.
For reasons that follow, and based upon the Court’s
findings of fact, this Court concludes that the sale that
occurred in 1941 was to James M. Cox, Jr., and not to
the James M. Cox, Jr., Trust. However, the Court con-
cludes that James M. Cox, Jr., received nothing more
from his father than the right to receive the income gen-
erated by the trust, and the stock transferred thereto,
for his life. James M. Cox, Jr., did not purchase an un-
divided or fuil ownership interest in 11+ percent of the
750 shares of Atlanta Journal Company common stock
which he then transferred to the trust by gift. Rather,
he purchased an equitable life estate in the transferred
shares. As a consequence, the Court concludes that
James M. Cox, Jr., did not transfer an interest in prop-
erty to the trust and that § 2036(a) does not require the
inclusion of a portion (11+ percent) of the value of the
James M. Cox, Jr., Trust in his estate.
The Plaintiff contends that the 1941 sale was to the
trust rather than to James M. Cox, Jr., because the trust
was primarily responsible for furnishing consideration
in exchange for the transferred stock. Plaintiff would
‘have the Court conclude that the decedent acted as
merely a surety to guarantee the debt to Governor Cox,
which the trust had incurred in exchange for the trans-
fer of the stock. The trust agreement itself recites that
the consideration was paid to the grantor, Governor Cox,
by the trustee and James M. Cox, Jr., See Jt. Ex. I.
Moreover, the trust agreement provided that dividends
received by the trust would initiaily be used to retire
the note that James M. Cox, Jr., had executed and de-
livered to the grantor. See, id. Additionally, Plaintiff
|
30a
points to the fact that the note that the decedent signed,
or a copy thereof, is not available. Hence, it is not pos-
sible to determine whether the decedent signed the note
as a maker, evidencing his own personal debt, or as a
surety, guaranteeing the trust’s debt.
If this were the only evidence before this Court, a
plausible inference to be drawn would be that the trust
furnished the consideration for the sale of the stock and
the decedent was merely a guarantor of its debt. None-
theless, an equally plausible inference is that the dece-
dent furnished the consideration and that the provision
requiring that dividends initially be paid to retire the
decedent’s note was placed in the trust to guarantee the
debt incurred by the decedent. Under those circum-
stances, the Court would be compelled to conclude that
the Plaintiff had not met his burden of proving by a
preponderance of the evidence that there was an over-
payment of taxes and that he is entitled to a refund.
However, that is not all of the evidence. There is
strong circumstantial evidence, in the form of letters to
and from the decedent (Defendant’s Exs. D, E and F)
and from the fiduciary tax returns for the trust (De-
fendant’s Exs. J, K and L) which supports the Court’s
finding of fact that the decedent reported all dividends
that went to pay the principal and interest of the note
as income and that he took a deduction for the interest
that was paid. Simply stated, the decedent treated the
amounts that were retained to discharge his indebtedness
as constructively received by him. Under these circum-
stances, the Court concludes that James M. Cox, Jr.,
rather than the trust, furnished the consideration for
that part of the transfer of 750 shares of Atlanta Jour-
nal common stock which was a sale.
This conclusion leads to the second question posited by
the Court: Did James M. Cox, Jr., purchase an un-
divided or full ownership interest of 11+ percent of the
transferred stock or did he purchase merely the right to
3la
receive income from the trust? Implicit in the Defend-
ant’s theory of the case is the assertion that James M.
Cox, Jr., purchased an undivided or full ownership inter-
est of 11+ percent of the stock of which he made a gift
to the trust, which would, therefore, be includable in his
estate. To the contrary, Plaintiff argues that James M.
Cox, Jr., purchased only an equitable life estate in the
trust, the right to receive income from it, and _ that,
therefore, that portion of the trust need not have been
included in his estate.
In this Court’s opinion, the Defendant’s position
ignores the reality of the creation and funding of the
James Cox Trust. The reality is that the creation and
funding of the trust was the act of Governor Cox,
not his son. An examination of the language of the trust
agreement leads, among other things, to this conclusion.
The agreement provided that the grantor, Governor Cox,
transferred 750 shares of Atlanta Journal Company com-
mon stock to the trustee who was to hold legal title to
same and all incidents of ownership thereto. The stock
was transferred directly to the trust; no stock certificates
were issued to the decedent.” Furthermore, Governor
Cox was “the boss.” He dominated his family and the
conduct of his business affairs. If not domineering, he
was at least the dominating figure in the lives of his
family. Governor Cox consulted only with his attorney
when he established the James M. Cox, Jr., Trust and
the other four trusts in 1941. He did not consult with
the decedent or with other members of his family before
creating the trusts. The remaindermen of the James Cox
Trust were chosen by Governor Cox without input from
® This is not to suggest that a two-step transaction, with the
issuance of stock certificates to the decedent which he, in turn,
issued to the trust, is necessary before there is a transfer within
the meaning of § 2036(a). Estate of Shafer v..Commission[er], 749
F.2d 1216 (6th Cir. 1984), precludes such a suggestion. Rather,
this is merely further evidence to the Court that Governor Cox,
rather than the decedent was the sole creator of the trust.
32a
the decedent. The remaindermen of the James Cox trust
are the same as those of the trust created in 1943, the
Dayton Trust. Finally, it must be remembered that the
property that funded the trust was that of Governor
Cox, and the decedent had no legal claim to it.
In short, Governor Cox created the James Cox Trust;
he funded it; and named the remaindermen. All that
James M. Cox, Jr., received in exchange for the con-
sideration he furnished was the right to receive income
for his life. He did not receive an undivided-or full
ownership interest in the 11+ percent of the stock in
question. James M. Cox did not transfer an interest in
property to the trust because he had not received any-
thing other than the right to receive income for his life-
time. Accordingly, the Court concludes that James M.
Cox, Jr., did not transfer property to the trust, as that
term is used in § 2036(a).
In reaching this conclusion, the Court has not applied
the term “transfer” in a restrictive manner, nor has it
violated the Supreme Court’s directive that § 2036 “taxes
not merely those interests which are deemed to pass at
death according to refined technicalities of the law of
property.” Helvering v. Halleck, 309 U.S. 106, 112, 60
S.Ct. 444, 448, 84 L.Ed. 604 (1940). Nonetheless, where
ownership of an interest in property is never acquired,
it cannot be transferred. See, e.g., 2 Mertens, supra, at
§$§ 20.11-20.12. Herein, the Court has held that the dece-
dent acquired nothing more than an equitable life estate;
therefore, he had nothing to transfer.
Additionally, the present dispute is distinguishable
from those decisions in which courts have held that a per-
son who furnishes consideration in exchange for the
creation of a trust by another makes a transfer within
the meaning of § 2306(a). See, e.g., Estate of Dora
Marshall, 51 T.C. 696 (1969).'° In this case, this Court
10 In Estate of Dora Marshall, the court concluded that there was
a § 2036(a) transfer because the nominal settlor created the trust
33a
has concluded that James M. Cox, Jr., furnished con-
sideration only for right to receive income from the
trust, not for the creation of the trust itself.
Similarly, Estate of Shafer v. Commissioner, 749 F.2d
1216 (6th Cir. 1984), is not contrary to the conclusion
reached herein. In Estate of Shafer, the decedent was
found to have furnished the entire consideration for a
lot. The lot was transferred by deed for life to the dece-
dent and his wife with the remainder to the decedent’s
children. The Sixth Cireuit concluded that the decedent
had made a § 2036 transfer even though he did not make
a transfer as that term is defined by property law con-
cepts. The Sixth Circuit accepted the Tax Court’s find-
ing that the decedent directed the grantors of the lot to
execute the deed so as to convey the remainder interest
to his children. Therefore, an application of the familiar
rule that the substance of a transaction shall control its
form led to the conclusion that there had been an [sic|
§ 2036(a) transfer. Herein, the decedent had no role in
the creation of the James M. Cox, Jr., Trust. He did not
tell his father how the trust should be set up or who
should be its beneficiaries. He merely furnished a note
in the amount of $4,666.88 in exchange for the right to
receive income from the trust for his life. If this Court
had found that the decedent furnished consideration for
funding the entire trust, or that portion of the trust
which represents 11+- percent of its value, the Court
in exchange for the decedent relinquishing a debt owed to her by
the settlor. 51 T.C. at 701. The court therein pointed out that
this was the type of transfer that § 2036 was intended to reach
because the decedent’s estate was depleted by the amount of the
debt that was relinquished. Jd. at 702. In this case, two factors
distinguish the present case from Estate of Dora Marshall. There-
in, the decedent relinquished a debt in exchange for the creation
of the trust; whereas, herein, the Court has concluded that the
decedent furnished consideration, the note, for the right to receive
income rather than furnishing consideration of the creation of
the trust. Moreover, the transaction herein did not diminish James
M. Cox’s estate. On the contrary, it greatly enhanced it.
34a
would conclude that a portion of the trust would have
been includable in the estate of James M. Cox, Jr.
The Defendant also raises an estoppel argument, the
parameters of which are set out below. The doctrine
of equitable estoppel applies in tax cases when “|t|he
taxpayer, by his conduct which includes language, acts
or silence knowingly makes a representation or conceals
material facts which he intends or expects will be acted
upon by taxing officials in determining his tax.” Robin-
son v. Commissioner, 100 F.2d 847, 849 (6th Cir. 1939).
Moreover, the facts which the taxpayer represents or
conceals by his conduct to the taxing officials must be
either unknown to those officials or such that the taxing
officials do not have the same access to the facts as the
taxpayer. Jd. Furthermore, the facts so represented or
concealed must have caused the loss of taxes to the
government. Id.
Specifically, Defendant argues that Plaintiff is es-
topped from arguing that the 1941 transaction, by which
the James M. Cox, Jr., Trust was funded, was a gift from
Governor Cox to the trust rather than a bone {sic| fide
sale to his son, the decedent. See Doc. =37 at 17-18.
In deciding this case, the Court has found that there was
a sale of 11-} percent of the value of the 750 shares of
Atlanta Journal Company common stock to the decedent.
James M. Cox, Jr. The Defendant does not argue that
Plaintiff is estopped from arguing that James M. Cox,
Jr.. purchased the right to receive income generated by
the James M. Cox, Jr., Trust from his father. The De-
fendant has presented the Court with no reason why the
question of whether James M. Cox, Jr., purchased an
undivided or full ownership interest in 11-— percent of
the 750 shares of stock that were transferred to the
trust. rather than the right to receive the income gen-
erated by the trust, was relevant to the gift tax con-
troversy between Governor Cox and the IRS. In other
words, even assuming, arquendo, that the decedent con-
cealed from the IRS the fact that he purchased nothing
more than the right to receive income generated by the
35a
trust, there is absolutely no indication that the decedent
intended or expected the IRS to act upon his concealment
or that the IRS did in fact act upon same. Under these
circumstances, the Court concludes that Plaintiff is not
estopped from arguing that James M. Cox, Jr., pur-
chased nothing more than the right to receive income
generated by the James M. Cox, Jr., Trust.
III. Conclusions of Law
(1) This Court has jurisdiction over the subject mat-
ter of this dispute under 28 U.S.C. § 1346(a) (1).
(2) The decedent James M. Cox, Jr., furnished con-
sideration in the form of a note for $4,666.88 with an
annual interest rate of 4 percent, to Governor Cox in
exchange for the right to receive for life the income gen-
erated by the James M. Cox, Jr., Trust.
(3) James M. Cox, Jr., did not make a transfer. as
that term is used in § 20361a) of the 1954 Internal
Revenue Code, of an interest of property.
(4) In the absence of the transfer of an interest in
property, $ 2036(a) does not require the inclusion of the
value of that property in a gross estate.
(5) Plaintiff has met his burden of proving by the
preponderance of the evidence that he overpaid the estate
taxes for the estate of James M. Cox, Jr.
(6) Plaintiff is entitled to a refund of $7,942,342.94 ™
of which $6,250,009.01 is tax, and the balance deficiency
interest, together with interest on the amount paid, as
provided by 28 U.S.C. § 2411 and 26 U.S.C. § 6621.
IV. Further Procedures
(1) Counsel for the Plaintiff will have ten (10) calen-
dar days following receipt of this Opinion, ete., within
'! This amount was arrived at by adding the amount of the estate
tax assessed, $6,250,009.01, to the deficiency interest, $1,692,333.92.
See Uncontroverted Fact #19, Doc. =41 at 6.
a ie
36a
which to propose additione! findings of fact and or con-
clusions of law or to suggest any deletions of same from
this opinion, etc. Counsel for Defendant shall have five
(5) calendar days, after receipt of such suggested addi-
tions or deletions, in which to object to same.
(2) In its Opinion of June 21, 1985 (Doe. *55), as
well as in the Opinion herein, this Court has referred to
the bifurcation order entered on February 5, 1982. The
Court is convinced that there are no further issues tc
resolve, notwithstanding the bifurcation order. None-
theless, the Court has scheduled a telephone conference
call at 4:30 p.m. on Wednesday, August 28, 1985, for
the sole purpose of eliciting the opinions of counsel re-
garding any outstanding issues. Assuming no such issues
remain, the Court will thereafter enter final judgment
in conformity with its Findings of Fact and Conclusions
of Law, to wit: in favor of the Plaintiff, and against the
Defendant herein, in the amount of $7,942,342.94, plus
interest at the prevailing rate authorized by law (28
U.S.C. § 2411 and 26 U.S.C. $ 6621).
37a
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
No. 86-3086
DANIEL J. MAHONEY, JR., Executor of the
Estate of James M. Cox, Jr..
Plaintiff-A ppellee,
UNITED STATES OF AMERICA,
Defendant-A ppellant.
ORDER
| Filed March 8, 1988]
BEFORE: KENNEDY and NORRIS, Circuit Judge.*
Appellee has moved the Court to modify its opinion
and the mandate issued pursuant thereto. he Attorney
General for the State of Ohio and Betty Cox Holland
have filed motions to be permitted to file briefs amicus
curiae in support of appellee. The motions to file briefs
amicus curiae are GRANTED. -
Upon consideration of the motion to modify the panel’s
opinion and the mandate and of all briefs filed in con-
nection with said motion, it is hereby DENIED.
ENTERED BY ORDER
OF THE COURT
s/ John P. Hehman
Clerk
* Judge Celebrezze, the author of the Court’s opinion in this
case, did not participate in the consideration of any of the motions
which are the subject of this order.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.