# Brief for theRespondent — Helvering v. Hallock > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0248%3A5 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for theRespondent - **Published:** January 1, 1940 - **Citation:** 309 U.S. 106 ## Text ’ \ ° E * %? > . 7 a ' « ‘ ° = * ° ; . ? — » * . 3 ee . uy ae é - ‘ e ° . * , ; ry . @- . . , : E , e . . = . z . * y . e . : : “WES ' ~ \ > ‘ ‘ Sy . F ’ e _ : . “ = . . ° se ~ ye . ’ ; . a? ~ Cd Ww 2 / ¢ ; ae id e 7 ’ - . ‘ . . ° ° s . . . ° . . € . . ? $ . . G ; . - » c ‘° z . . ‘ re oo : 5 VT = + a e . si a 7 ° . . ° . J e . ° ‘ » . . . $ * - v . ° . . : es . , . . . . had ° . A ‘ . rs ° r : ig - ‘ > *. > - ~~ A e f ‘ . * « : : . . « ‘ ‘ A ° “ pie ww ww erst fica - Saprens Sout e.” Case No. 112. a. ; Tue Gates LecaL Pvsiisnina Co., OLEVELAXD, OHIO - Nature of Cases..... Lacie sede Bike keea te een ‘anaes Opinions in Case................0.c0e0ee. ivicasaeew es Question Presented.............:..... aie os ie ‘Statement ‘of ee eG a lode wa 0's oe en ; YC aN —— ( Summary of Argument. Pie ces loos éobes Argument ......... al ceceeharaek Lobes cueeennewes oI. These. Cases Are Governed by Helvering v. St. Il. cee, © - Louis Union Trust Company‘and Becker v. St. Louis Union. Trust Company. Those. Decisions Are Sound and Do Not Conflict with Klein 0. United hs Vee ee kee The Doctrine That Transfers Like Those in the — St. Louis Union Trust Co. Cases Are Not Testa- mentary as a Matter of Statutory Interpretation Accords With the Principles Settled by All Other — Decisions of This Court..............eeccecses (a) All decisions of this Court and the prior deci- sions of other courts and the Board of Tax Appeals in cases where there was a possibil- ity of reverter accord with the decisions in ‘the St. Louis Union. Trust Company; cases. (b) The basie principles of the other decisions of this Court interpreting Section. 302(c)’ sup- port the St. Louis Trust Company decisions, ‘and the overruling of the latter would mean . the disapproval of the settled doctrines of those other decisions.............. aa ale bie 6 (c) Where the interpretation and not the cunt tutionality of the statute is involved, the ‘death of the grantor may effect some change in'the quality of the remainder interests with- out resulting in a testamentary transfer with- in the scope of the statute..... eeeena ores ; o 10° 18 18 I. A Possibility of Reverter Is Not Such a Property Interest that Its Obliteration by the Death of the Grantor Effects that Transfer of Property or of Economie Benefits W hich i is the. Subject of the. the Setatlie Dae... «ces vcckvce ss Sache seseeusdes? 31 IV. Whether the Effective Administration of the Es- © tate Tax Law Requires the Application of Sec- ‘ tion 302(c) Advocated by the Government is a Matter for Congressional Action Exclusively, and (Congress Has Indicated its Satisfaction with the » ‘Section as Heretofore Construed........ Ae BE V. This Court’s Decisions ‘Applying the Doctrine of - Stare Decisis Are Persuasive in Favor of Ad-. | herence to the St. Louis Trust Company Cases.. “41 — Congress has power to amend Section 302(c). 47 TABLE OF AUTHORITIES. Amoskeag Trust Co. v. Field, 10 Fed. Sup. 635...... 21. Bailéy v. Us 8s, 27 F. Sup. 617.00. 6 cc. cece eee cee MOAT Matter of Barstow, 230 App. Div. (N. Y.) 371; 244. N. YS. 588; affirmed 256 N. Y. 647................ « 2 Becker v. St. Louis Union Trust Co., ose ie tree | We pars caesar rue eme cua 3, 4, 11, 12 Bingham v. United States, 296 U.S. 211........., 19, 20, 46 | Blakeslee v. Smith, 26 F. Supp. 28......-. Bene 46 » Bonney v. Commissioner, 29 B. T. A. 45.... hae 21,33 Boston Store v. American Gramaphone Co., 246 U.S.8 4. Branch v. Cemetery Assn., 11 0. C. SEREESS. See 32 Brenham v. German American Bank, 144 U. 8.173... 45 _ Bryant v. Commissioner, 36 B. T. A. 669..... Wamcies 47, 5) Burnet v. Chicago Portrait Co., 285 U.S.1........++5. 39 i) * Burnet v. Coronado Oil de: Gas Co., 285 U.S. 393. .... 41, 44 Burnet v: : Guggenheim, | 288 U.S. 280............... . 40 Burnet. v. Northern Prust Company, 41 F. (2d) 732, 283 U.S . 782. ; Cee nciuud de Uaaee easy eaeeNtaen 6, 26, 36 Burnet v. Wells, 289 U, S. G70. 2... cece cece ewecces 29 Chase National Bank v. United waits 278 U. s, 327. Si cde aUhaehs cone cakauneenaeareceeea 1s 00 eddy DO, 31 CLE. 1. Railroad v. Industrial iain 28 U.S. . MU Seed cueoceddnecncsen cee cieceucseessuens 1. 40 Commissioner v. Svea. 87 F.. (2ay Eee _ 47 * Commissioner v. Grosse, 100 F. (2d) 37...... Serre 33, 46 - Commissioner v. Kaplan, 102 F. (2d) 329.....:..... 46. Commissioner v. Schwarz, 74 Fed. (2d) 712....6.. 6.6 50 ‘oolidge v. Long, 262.0. 8. 56Z....:. ctswelieneues 14, 30 Copper Queen Consolidated esined Co. v. Aries, — US ATE cece eee eee oped aesecccecesees 38 ~ Corliss v. Bowers, 981 U.S. 376. 2...6000. a Corning v. Commissioner, 104 F, (2d) 329.....4...+6- 46. Duke v. Commissioner, 23 B. T. A. 1104 (affirmed 62 F. _ (2d) 1057 and by equally divided’ court, 290 U. S. ce, eee ern arte error r veveneiies 21 Dunham v. Cnnmndaias 26 B. ee Serre re Erie R. Co. v. Tompkins, 304 U.S. "SERRE ior ot aeRO 44 Fairfield v. Gallatin County, 100 U. S. 47.. se eeees . oe Gazzam. v. Lessee of Phillips, 20 Howard 372. piace ae Gilpin &, Williams, 25 O. S. 288. ....2...000cce reece es 32 Harley v. Commissioner, 295 U. S. 216.'...... Chesca ae Hasset vr.’ Welch, 308 U.S. 303... 0.0.2... 000000 20, 36, 38 Hecht v. Malley, 265 U. 8. 144.0... 6.000200 0 Peers 39 ~ Leiner v. Donnan, 285 U. 5 :) Veo 23. Helvering v. Bullard, 303 U.S. 297......6.c00.00. oe Helvering v. Duke, 290 U. 8. 591.2... 0.005005 ie Helvering v. Producers Corp., 303 U. 8. 387........ Helv ering v, St. Louis Union Trust Co., 296 U. S. 39 7 a CANT SEs ARS SSE Url eS ee 3, 4, 10, 12 » 16,2 22 ovuecite: v. Toombs, 18 Wall. 648............. booae ae Industrial Trust Co. v. United States, 296 U. s. 220..... . Petitioner, Wie’ MARY Q. HALLOCK, EXECUTRIX, Estate of Henry Hallock, deceased, Respondent. GUY T. HELVERING, Commissioner of Internal Revenue, , Petitioner, Vs. : as S. H. SQUIRE, Superintendent of Banks of the State of Ohio in Charge of Liquidation of .The Union Trust Company, Successor of The First Trust and Savings Company, Trustee, Cleveland, Ohio, Respondent. Ox Ww RITS OF CERTIORARI TO THE UNITED States CIRCUIT Cour RT OF APPEALS FOR THE E Sixt Circuit. — FOR RESPONDENTS. NATURE OF CASES. These cases, which for practical purposes may be.con- sidered as one, involve the question -of the taxability, under - ‘Section a02(c) of the Revenue Act of 1926 as amended, of. 4 2° “the remainder interest! in an alimony trust created 1 oy Henry Hallock on September 3, 1919. The cases originated by appeals to the-Board of Tax | Appeals from deficiency estate tax assessments. The Com- * ~ missioner had levied the assessment not only against Mary _Q. Hallock, the. Executrix, Case No: 111, but also against. the Trustees of an insurance trust as transferees, Case No. - 110, and against the trustee of the alimony trust as trans- feree, Case No. 112 (R. 13, 7, 19). The basic legal question is fully presented in case No. 111, in which the Executrix is Respondent.and no separate ' . discussion of the other two cases is necessary. The Board of 'fax Appeals determined that no tax was due and accordingly set the deficiencies aside (R. 37, 46- ‘. 47). Upon petition for review the Cireuit Court of-Ap- peals affirmed. Petitions for writs of certiorari filed by _ the Commissioner were granted on October 9, 1939. OPINIONS IN CASE. The opinion of the Board of Tax Appeals (R. 37) is reported in 34 B. T. A. 575. The opinion of the Cireuit ~ Court. of Appeals (R. 70) is reported in 102 F. (2d) 1. ° 4 — » Both “decisions were unanimous. & QUESTION PRESENTED. The sole question presented ? is whether the remainder . interest (or some lesser interest) in the alimony : trust, Nt ° 1In the Cireuit Court of Appeals the Commissioner aban- doned the claim, earlier. asserted, that the, life interest created by the trust was to be included in the gro¥s estate. * Both before the. Board of Tax Appeals and in his brief in the Cireuit Court of Appeals the petitioner also élaimed that the Executrix was not entitled to deduct certain indebtedness of the decedent in exeess of the appraised value of the probated assets of the estate. This assertion is now abandoned. 3 similar in all essential respects to the trusts involved in Helvering v. St. Louis Union Trust Co., 296 U. S. 39, and " Becker v. St. Louis Union Trust Co., 296 U. S. 48, ghould — now be held taxable as part of the grantor’s gross é¢state © _ under Section 302(c) merely because of the existence of a possibility of reverter such as existed in those cases. STATEMENT OF CASE. The facts, as stipulated and as found by the Board of _ Tax Appeals (R. 28 et seq., 37 et seq.), are as follows: - Henry Hallock died testate on October 10, 1932, a resi- | dent of Cleveland, Ohio. His widow, Mary Q. Hallock, was appointed Executrix of his estaté by the appropriate pro- bate court. a ee ais : On September 3, 1919,-decedent entered into a separa- tion agreement with his then wife, Anne Lamson Hallock, which provided for the payment to-her of $500.00 per month as alimony and for the creation of a trust to produce and sécure this sum -(Ex. B-to Stipulation, R. 33-35). On the same day he created a trust of 884 shares of 7% preferred - stock of The Ohio Rubber Company, of which trust the Su- * perintent of Banks of Ohio: had become trustee. at the gran- ‘ tor’s death as successor to the original trustee (Ex. A to Stipulation, R. 30-33). The total preferred dividend called for by the stock amounts to $6,188.00 annually, which would he sufficient to meet the- payment of $6,000.00 per year to the wife and leave $188.00 per year for the expenses and com- —pensation of the Trustee (R» 29, 39). The trust agreement provided..that the net income of the trust, not exceeding $6,000.00 per annuni, should be paid to Anne Lamson Hal- lock for life and that when she should die the trust should * terminate and the fund be delivered to the settlor Henry Hallock if then living, but that if he should not then be living, the fund should be paid and delivered to the children of Henry and Anne Lamson Hallock. The trust was subject 4 | to termination or alteration only by the written consent of the settlor and the life beneficiary. Clause “ 3 ~ When a state court, hoWever, holds a transfer subject to a possibility of reverter not to be one intended to take effect at death under a succession tax law, this very differ- - ence betw een a transfer tax and a succession tax lends great strength to such a decision. It was so’ held in Matter of _ Barstow, 230 App. Diy. (N. Y.) 371; 244 N. Y. S. 588; af: ‘firmed 256 N. Y. 647. ‘This.case is particularly noticed in _the opinion. of the court in Helvering v.. St. Louis Union Trust Company, and no further comment is made upon it, _except to quote the foltowing from the opinion: | “As stated by Chief Justice Cardozo in the Schmid. . ‘lapp ease, supra: ‘In Matter of Craig (97 App. Div. 289, 89 N. Y. S. 971, affirmed 181 N. Y. 551, 74 N. FE. *1116) the remainder was contingent, but the contin- geney was not dependent on the will of the donor, and the right as against him was already perfect’and‘ | complete.’ ”’ e _(b); The basic principles of the dther decisions of this Court | Satonpenting Section 302(c) support the St. Louis Trust ' Company decisions, and the overruling of the latter would mean the Genpyreral of the settled doctrines of those other decisions. All of the other decisions of this Court ary ae the statutory phrase “intended to take effect in possession or enjoyment at or after his death,’’ support the principle of the S#. Louis Trust Company cases, some of. them, we submit, to such an extent that if’ those cases were over- ruled, this would virtually amount to the disapproval of the accepted and well-founded doctrines of these other cases, and the complete overturn of present qommenpess of the statute. | In general these cases all rest en thé concept that what is taxed by the estate tax law is the transmission of or power to transmit property from the dead to the living; 23 that death is the generating source from which the taxing power takes its being, and that in order to sustain the tax the death must have brought about the completioncef the . shifting of the economic benefits of property which is the ~ real subject of the tax. Heiner v. Donnan, 285 U. 8. 312; Chase National Bank v. United States, 278 U. S. 327; Knowl- ton v. Moore, 178 U. S. 41. The earliest ease involving solely the interpretation of the words ‘‘intended to take effect in possession or enjoy- _ ment at or after his deatir’’-is Shukert v. Allen, 273 U. S. 545, in. which the effect of Section 402 (c) of the Revenue Act of 1918 was under consideration. It was there held . that a conveyance of securities made before the decedent’s death in trust to accumulate the income until a distant date - specified and then to divide the fund among his children, vested the interests of the children when executed and did not fall within the statutory language. ‘The Court said that the transfer ‘was immediate and out and out, leaving no interest remaining in the grantor, and that the interests “of the children were vested as soon as the instrument was executed,-even though those interests might have been divested as to any one of them in‘favor of his issue, if any, or of the surviving beneficiaries, if he died before the termi- nation of the trust. The effect of the statutory language next ¢ came before | the Court in Reinecke v. Northern Trust Company, 278 U. S. 339.- Two. of the seven trusts in that case were revoeable by the settlor alone and were held subject to the estate tax upon the grounds set forth in Chase National Bank «. United States, 278 U. S. 327, decided on the same date. In the other five trusts there was no power of revoca- tion in the settlor acting alone, but life interests in the in- come were created in beneficiaries other than the settlor, _ terminable, as to one trust, five years after the settlor’s death or upon the death of the designated beneficiary, should ~ 24 she survive that date, and as to the other four trusts, five years after the settlor’s death or on the death of the respective life tenants, whichever should first happen. In all five trusts there were remainders over upon the deaths of the life beneficiaries. The opinion of the Court, after citing Shukert v. Allen, supra, goes on to say, at page 347: - “There the gift of a remainder interest, having been made without reference to the donor’s death, although it did in fact vest in possession and enjoyment after his | death, was held not to be a transfer intended to take ‘ effect in possession or enjoyment at or after the donor’s death, and for that reason not to ‘be subject to the tax. But here the gift was intended to ‘so take. effect, al- though the transfer which effected it preceded the death of the settlor and was itself not subject to the tax unless —made so by the circumstances that the possession or enjoyment passed as indicated. ‘*In-its plan and scope the tax is one imposed on transfers at death or made in contemplation of death and is measured by the value at death of the interest which is transferred. Cf. Y. M. C. A. v. Davis, 2 U.S. 47, 50; Edwards v. Slocum, 264 U. S. 61, 62; N. Trust Co. v. Eisner, 256 U. S. 345, 349. It is not a tax, and the tax on gifts once imposed by the Reve Art of 1924, ec. 234, 43 Stat. 313, has been repealed, 44 Stat. 126. One may freely give his property to another by absolute gift without subjecting himself or his estate toa tax, but we are asked to say that this statute means ~~. -that he may not make a gift inter vivos, equally abso- - lute and complete, without subjecting it to a tax if the. gift takes the form of a life estate in one with remainder | - over to another at or after the donor’s death. 1t would require plain and compelling language to justify sO incongruous a result and we think it is’ wanting in the | present statute. es . Clearly the time wher’ the remaindermen in that case would come into actual possession. or enjoyment of the trust properties was directly dependent upon the death of - 25 the grantor and in that sense the transfer of the remainders might have been said to be testamentary or intended to take effect in possession or enjoyment at or after death. But | the remainders were vested by the trust instruments and nothing passed from the possession, enjoyment or control of the settlor at his death. The case, therefore, very im- portantly limits the scope of the statute. The next interpretative decision is May v. He einer, 281 U.S. 238. There the decedent had made a transfer in trust, “under which the income was payable to her husband during his lifetime and after his death to the decedent during _her lifetime, with remainder over to her children. Revers- ing the lowef-courts, the Court held that the trust was not - | . subject to the estate tax as a transfer intended to take effect in possession or enjoyment at or after death. ‘The Court said at page 243: e ‘The transfer of October 1, 1917, was not made i in contemplation of death within the-legal significance of those words. It was not testamentary,in character and was beyond recall by the decedent. At the death of -.Mrs. May no interest in the property held under, the trust deed passed from her to the living; title thereto .--had ‘been definitely fixed by the trust deed. The inter- . est therein which she possessed immediately prior ‘to her death.was obliterated by that event.’’ _ The Court went on to quote from that part of the opin- ion in Reinecke v. Northern Trust Company, supra, which indicates that the statute only reaches trusts or interests © Passing from the possession, enjoyment or control of the donor at his death aud that any doubts about the matter must be-resolved in favor of the taxpayer. It was argued for the Government in May v. Heiner that the decedent ’s death terminated her life estate and that the termination of this right to receiye the trust income for . life if she should survive her husband, which freed the re- mainder of the possibility of its exercise, was a transfer within the meaning of the statute.: No real difference with | respect to the. question being diseussed ean be seen be- tween the right or interest retained by the grantor in May . -v. Heiner and the possibilities of reverter in the St. Louis Trust Company cases. In: the former case the grantor’s. death obliterated her life estate; in the latter two cases the , deaths of the grantors obliterated their contingent rever- stqnary interests—the possibilities of reverter. , Although May v., Heiner was but a logical saslinitins - of the principles of Shukert v. Allen and Reinecke v. North- ern Trust Company, its full implications were not évery- where perceived until the decisions in Burnet v. Northern | Truft ompany, 283.U. S. 782;! Morsman:v. Burnet, 283 “ia 3? and McCormick v. Burnet, 283. U. S. 784.8 These cases all involved trusts where the decedent og ugrantors had retained life income interests or ah with. remainders over. By per curiam decisions the t all held not to be subject to the estate tax upon the authority : of May v. Heiner, supra. In each of these three cases the death of the. aoe had - far greater practical consequences than the obliteration of - mere contingent interests or possibilities of reverter; death terminated the grantor’s life estate, which was vested in ‘ possession and enjoyment. Viewing the right to the income ° from property as equivalent to the possession of the prop- erty itself, each grantor, enjoyed his property. until. his death and that event. enerets the enjoyment: of it to others. ils 2 “| At page 30 of his brief petitioner states, that, while of apart from the shifting of econontic benefits at death, the *, remainder i in the Hallock trust is taxable because it was a i Reported pelow,. 41 F. (24) 732: _ 2 Reported below; 44 F. (2d) 902. Beported“below, 43 F. (2a) 277. Ss were . a ee . rete VA, substitute: for a toatauisiitery disposition and was “liter- . ally’’ intended to take effect in possession or enjoyment at or after death. The argument seems "to be that although ‘nothing passes at the grantor’s death, nevertheless if that — death in any manner affects the coming into possession or enjoyment of the property, it is’ taxable. Stated another way, it is that no matter how complete the transfer when -madé and even though nothing passes frdim.the grantor at . his death, if that- death marks the time at which possession - or enjoyment of some part of the transfer commences or in any other manner affeets the character, quality or ex- istence of a beneficiary’ s -riglits, the transfer _is- taxable. . This must’ be based upon the broad premise that sinegtes-, tamentary dispositions’ speak. as' of the date of death, any- thing which a grantor: does which affects rights at or after his death is necessarily a substitute for.a testamentary dis- position. To support this novel view, the Court’ s attention is called to the fact. that Congress has included in the gross — estate ‘gifts i in contemplation: of death (petitioner’s brief,. p..30) and has taxed income to a grantor who has nothing ‘more than the power to control -that income (petitioner’ S- brief, p. 31). But the fact™hat Congress may cohstitu- 6 tionally prevent avoidance of taxes by making a gift in a contemplation -of death the legal equivalent - of a testa- _ Inentary disposition and by making control over income in® certain circumstances the equivalent of the receipt of the in-” - come does not: warrant the concliision that where Congress. is not attempting. so to do butvis merely. taxing a‘ defined type of transfer, i.e.. one. to take effect at or after death, _ the statute by: which this is done must be interpreted to _ include-transfers in which there is no shifting. of | economic benefits at death. Ale ke” oer In the case of gifts j in ielemigtinilon of death, we pi »»dealing with substitutes for property passing at death. In wD, € 28 a | © , the case of gifts to take effect at or after death under. Sec- tion 302(c);, we are dealing not with substitutes for property _ passing at death but with email aroaae passing at \ death.” _ All of the cases ‘last above discussed Wegiitning with . Shukert v. Allény 273 U. S. 545, and ending with the St. . so Lous Trust Company cases depend basically upon the - transfer of property, i.e. the shifting of economic benefits _at death. That this Court’s approach.to estate tax problems: . | _ based upon the necessity of the passage of economic benefits « | _ (save where Congress has constitutionally made something the equivalent thereof) is not to be criticized, is fairly in- ferable from MryJustice Stone’s discussion in Sanford v. Commissioner, ease No. 34, October, 1939 Term, decided . November .6, 1939, where it is said:: ~ “Tn. -ascertaining the correct construction of the stat- utes ‘taxing gifts, it is necessary to read them in the # light of the closely related provisions of the revenue ‘» laws taxing transfers.at death, as they have been inter- preted by our decisions. Section 319 of the Revenue fe _ Act of 1924, 43 Stat. 253; reenacted as Section 501 of the — 1932 Act, 47 Stat. 169, imposed a graduated tax upon FF gifts. It supplemented that om transfers at death, which had long been a feature of the revenue laws. When the Gitt Tax was enacted Congress was aware that .the essence of a transfer is the passage ¢ of control over the eeonomiec benefits of property rather- an any technical changes i in its title.’” Similarly i in United States v. Jacobs, 306°U. 8S. 363, in diseussing the inclusion of the entire value of property held under joint tenancy in. Illinois where upon déath of one ae 4oint tenant the other —— Mr. Justice snared said, at “Ss page 368: De. : ‘*Thus the death of one of the parties to the tenaney became the ‘generating source’ of important and defi- “mite accessions to the property rights of the other.”’ 29 . (c) Whack tho interpevtstion and 4 wot ths constitutionality” of the statute is involved, the death ofthe grantor may effect some change in the quality of.the remainder interests without resulting in a testamentary transfer © “within the scope of the statute. . It is. true that the obliteration ” death of a possibility ‘of reverter of the type under discussion méy effect some technical or limited change. in the quality of a remainder i in- terest. In the Hallock trust, for example, the termination fet the possibility had the. effect. of converting the re- mainders of the Hallock children, which prior to their father’s death were ‘vested subject to defeasance, into in- * - defeasibly yested remainders. ~ ~*~. It is equally true that, _ broadly speaking, “taxation is - not so much concerned with: Ahe refinements of title as it is 1 with‘actual command over the property taxed. a Corliss v. Bowers, 281 U. S. 376, 378. ‘But, in Bocnet >. Wells, 289 U.S. 670, after refatvine to the above quotation from Corliss v. Bowers, it-is said at page 678 of the opinion by Mr. J ustice Cardozo: ‘‘Refinements of title have at times supplied the vile when the question has beer? one of construction and. - nothing more, a question as to the meaning of a taxing -act to be read in favor of the taxpayer. Refinements of title are without controlling force when a statute, un- mistakable in meaning, is assailed by a taxpay er as overpassing ‘the bounds of reason, an exercise’ by the Jaw makers of arbitrary power.’’ : The prineiple thus expressed is iil in the instant’. case. If Section'302 (c) were amended so as expressly to tax transfers with possibilities of reverter and the con- stitutionality of the amendment. were under’ attack, then the legal or equitable nature of the reversionary interests or remainders would be subordinated to the question ‘of | whether the act is 80 arbitrary or capricious as to amount — x. 30 to confiscation. And in‘ determining the presence or ab-. sence of these attributes the inquiry would be directed to whether the amendment has any relation fo the prevention of tax avoidance and whether ‘the death of the grantor: brought into. being or ripened for a survivor property, — rights of such character as to’ make appropriate the im-' position of a tax upon that result. igor v. United Stales,. 281 U.S. 497. ; Sees ieee But .where the question is fierely one of jnterpreting language-which Congress has selécted and could have made as broad or as narrow.as it might have desired, it is quite proper that a greater effect be given to the legal meaning of the Congressional words. The doctrine of Corliss v. : Bow ers, supra, has found its greatest expression in con- ; ‘stitutional cases. ee The proposition now under discussion is, we submit, © implicit in‘cases decided by this Court in which the consti- ~ tutionality of State or Federal laws taxing various kinds of transfers was under consideration. See Nichols v. Coolidge, 274 U. S. 531; Coolidge v. Long, 282 U. S. 582; Saltonstall v. Saltonstall, 276 U. S. 260; Chase National Bank v. United States, 278 U. S. 327; Tyler v. United States, 281 U.S., 497; Porter v. Commissioner, 288 Ux S. 436; Helvering v. Bullard, 303 U. S. 297; United States v.-Jacobs, 306 U.S 1368. : re a eee \ | Taken as a group these cases imply quite strongly that transfers may be deemed to have testamentary attri- butes to the extent. necessary to sustain the constitution-: — ality of a statute explicitly taxing them, even though, as a matter of interpretation, they would not be considered testamentary in the absence:of such an express provision. If -Congfess should amend Section 302 to include trans- fers in which there is a possibility of reverter, these cases * would . unquestionably sustain the validity of such an amendment, prospectively applied. But the implication = 31 | . all of them, read in connection with cases like Reinecke . Northern Trust Co.. and May v. Heiner, supra, is . ae it is in the constitutional field: that the reluctance of the Court ‘to be governed by niéeties and legalistic « con- . cepts finds its greatest expression. ‘This, it ‘is submitted, is perfectly sound in principle. Where Congress can choose the words, the taxpayer is in all fairness entitled to a lib- . eral measure of reliance upon the at meaning. of pases “words. —————$—_, —____,__ * : ot - OT. A POSSIBILITY or REVERTER IS NOT SUCH A PROPERTY INTEREST THAT ITS OBLITERATION BY THE DEATH OF . THE GRANTOR EFFECTS THAT TRANSFER OF PROPERTY ’ OR OF ECONOMIC BENEFITS WHICH IS THE ee 3 AS) \ OF THE ESTATE TAX. | - The cases above cited and discussed show that mn Section 302(c) to tax a transfer there must be some real . element of property or of economic benefit of property passing from the possession, enjoyment @r control of the grantor at his ‘death. It is submitted that’ the termination | by death of a possibility of reverter does not meef that test. & : Obv iously the Aeitviitien of such a . possibility ae death is very différent from the termination.by death of a power — of revocation or to designate beneficiaries. (Cf. Reimeke v. Northern Trust Co., yk U. S. 339; Sanford v. ‘Commr., No. _ 34, present term; and asquin v. Humphreys, No. 37, pres- _ ent term.) Not only isa power of revocation a substantial cineident of ownership of the property (Chase National. . Bank v. United States, 278 U.S. 327), but whether the prop- erty will revert depends solely upon the will of the grantor. | The. happening of the condition upon which a possibility of reverter based upon some person’s death may be ful- 5 filled becomes entirely beyond the control of the grantor i! ” momert the peas dente is executed. : hy an & ' nothing is shifted or transmitted when a posaibility of re- a | . 39 @. 2+ @ " Tt is plain that in any realistic sense a possibility of rev verter ‘such as in the. St.-Louis Trust Company cages is not property or an ‘estate in property ,atd to regard it as — such would be founding a tax upon a refinement which ap- . proaches a fiction. _Furthermore, the extinguishment of the possibility, whife “terminating any versionary inter- est of the grantor afd thus indirectly causing some change in the technical nature of the remainder, does not in atSelf transmit the grantor’ s retained interest or any interest to RT ee re, 8 ec Prior to the specific amendment of Section 302(d) a remainder was not ineludable in the gross. estate even . though dependent upon the terminatiqn of a preceding life (> estate retained by the grantor.. Tf in this situation the © _ death of the grantor does not cause a ‘shifting of the pos- - session and enjoyment of the property -to the remainder: man and thus bring about a taxable’ afisaction, a fortiart- a verter comes to an end. : These views as to the true nature of a possibility of ’ reverter are in harmony with what petitioner characterizes “ as_ technical principles of the early common law and with | such expressions ‘as there have been by the Ohio courts.’ 1In Gilpin v. “Williams, 25 O. S, oft. 397, in which was in- volved the question of whether the legi iture could pass an act _ affecting estates created before its passage, the court said: "4 “There isa clear distinction between contingent estates which may vest, and vested estates which may be defeated, ‘upon the happening of a future event. ° There are also other rights {so called) which do not rise to the dignity 6f estates at-all, but are mere expectancies or possibilities, such as those. of heirs apparent, possibilities ‘of .reverter, .ete.. It may be ~ admitted that the legislature may control these at‘its pleasure; 7 . but the question before us‘¥elates to vested estates: in expéct- ancy, although subject to be divested on the ee of an uncertain future event.’’> * See also Needles vs. Needles, 7 0. S. 482; Branch v. i ie Assn., 11 O. C. si 185. nd US % "Assuming a case where ‘a young wife creates a trust, the property’ to ‘reye ert to her“if she suryives her elderly) | husband, her possibility of reverter becomes in practical”) effect a probability. -But in most: trusts the probability is against the happening of the condition upon which reverter _ wilbtake place and in many.the possibility i is remote indeed. For example, a very usual type of transfer is where a grantor. transfers propert by a trust instrument giving . the income to his wife for life-and upon her death the prin-. . “cipal to his his three children or the eurvivd: of them; with the proviso that if he shall survive his wife and children the . property shall revert to hi.’ Here the possibility is. SO" remote as to be almost non- existent and ‘the imposition of ~a tax-would be ‘an extremely. unjust ignoring of realities: But manifestly the degree of remoteness of the possibility - cannot judicially be made a test. of ' taxability —_—__——_~ Kindred difficulties : surround the application of the > “judicial process. tothe ascertainment of the value of the _ possibility of reverter. The Government claims that it is® the value of the remainder interest’in ‘the trust property Cwhich is to be included‘in the gross estate under Section 302(¢), but this, it is submitted, is viewing. the taxing law asa succéasion rather _than as a transfer tax. If the tax is upon the transmission of property from the dead-to the _living, then it is in no sense to be measured by the value of the remainder. If there is to be any tax at all it must be on __ _ what the grantor retained. ‘This would require an attempt . to value the e possibility of reverter itself. 1 Tilustrations of trusts of this general nafure are found Jn Trust Company v. Field, 10 F. Supp. 635, Bonney v. Commissioner, _ 29 B.. T. A. 45, Nichols v. Bradley, 27 Fed. (2d) 47, Tait v. Trust Co. 74 F, (24). 851, Wheeler v. Commissioner, 20 B. T. A. 695, Commissioner v. Grosse, 100 F..(2d) 37. This list is by no means exhaustive, but only. illustrative of the extreme remoteness of the * pomuibility of reverter in many trusts. CE eae EN ar a - ot : 2 , E ‘ : = - Any actuarial formulae from which such a valuation _ _may be arrived at would give the most artificial: results. Common sense and experience tell us: that ordinarily the - value of a possibility of reverter depending upon a father: surv iving his dayghter_ is more imaginary than real. It . satisfactory method of valuation. This difficulty does not . restrict the’ right of Congress to amend the statute, tax the 4 transfers and adopt some rule which it regards’ as appro- priate fog measuring the value of the reverter; but it does, “we submit, inhibit the judicial construction of the general - language of Section’ 302(c) as _imposing any’ tax in | this case. Pal _— ! Od e | . WHETHER THE EFFECTIVE ‘ADMINISYRATION or. THE ESTATE TAX LAW REQUIRES THE APPLICATION OF SEC. TIQN .302(c) ADVOCATED BY THE GOVERNMENT ISA | MATTER FOR CONGRESSIONAL ACTION’ EXCLUSIVELY, : AND CONGRESS HAS INDICATED ITS SATISFACTION | WITH THE SECTION AS HERETOFORE CONSTRUED. The position of the administrative branch of the Gov:, * ernment in urging a new construction of Section 302(c) is based at least in part upon considerations of policy and’ expediency in the administration-of the law. It is sub-. mitted that the result advocated is one to be reached, if at all, by the legislative process and not by judicial construe- 7 ? tion; especially where such construction would retrospec- tively overturn an established rule. Laying aside technical questions of. statutory inter- pretation, it isnot to be presumed that Congress desires or at any time has desired that transfers subject to possibili- ties of reverter be taxed, or feels:that they are essentially _ testamentary, or that their taxation is necessary to prevent *- tax avoidance. On the contrary, the evidence points the other way. : | | On November 11, 1935, the any the Seiden’ in the St. ‘Louis-Trust Com pany cases were announced, White v. ‘head | 296 U. ‘S$. 98, was afso decided. The trust involved i in that ease was terminable by the joint action of three tr stees, _ of whom the decedent was originally one. She resigned as’ trustee, but later, upon the ‘resignation of OT was reappointed under a clause in the trust instrument pro-: viding for the filling of such vacancy. It was held that the’: power thus acquired to participate in terminating the trust, ‘not being in any sense a power resery@d by the decedent — _ in the trust instrument, was not a peer to ‘‘alter, amend _ _ or revoke’. within the’ meaning opSection 302 (d) of the - Revenue Act of 1926, Just as soon’ as possible, in Section. 805. of ihe Revenue Act of 1936, Congress indicated its dissatisfaction with this result by amending Secti tien. -802 (d)‘so as to prevent the application of the decision in White v. Poor; the amendment being’ expressly made’ prospective in operation.’ It.would be difficult to imagine a ‘stronger case of legis- lative acquiescence in the judicial construetion of a statute — 7 _than this. shows as to the attitude. of Congress toward the es i. . 1The House ‘Committee Report on Section 805 of "the ities Aét of 1936 as contained in the original bill was in part as: follows: rely changes made by. this. section are made necessary - largely by reason of the decision of the United States Supreme Court in the ease of White v. Poor, 296 U. S..98.° Although in that case ‘the decedent had created a trust which was at her death subject to a power to terininite, existing in thealecedent as trustee in conjunction with two other trustees, nevertheless the Supreme Court held that Section 302 (d) did not require the inclusion im the gross. estate of the decedent of the prop- erty subject to such power of termination. * * * It is, therefore, provided that Section 302 (d) covers a powet whether created at the time of transfer or thereafter arising from any source “and whether exercisable. in an “individual or representative capacity. " : G3 House Committee Report on H. R: 12793, part of which was later adopted with changes i in the Revenue Act of 1936. - i) / e : . P / a “The construction of the act of Congress thus given has been acted upon by: the national banks’ throughout the country.ever since it was published. It is not unrea- sonable to suppose that they have conducted their busi- ness and made loans to a large amount in reliance upon ° it, and that in many cases great injury would follow a departure from it.. Judicial decisions affecting the business interests of. the country should not be dis- turbed: except for the most cogent reasons, gertainly not because of subsequent doubts as to their soundness. The prosperity of a commercial community depends, in a great degree, upon the stability of thé rules by _which ifs transactions are governed. If there should be a change, the legislature can make-it with infinitely less derangement of those interests than would follow — a new ruling of the court, for statutory regulations would operate only in the future.’” + b . e St. Louis Trust Company cases ought to be adhered’ to because widespread reliance thereon, that it be shown that Mr. Hallock lied upon that rule. * Manifestly he did not rely on it, because his ath preceded the decision of those cases. That the considerations . relianee. are of a general nature and that its presence is not sential in any given ease is shown by National Bank v: Whitney. lat case was decided at the October, 1880 term. The case by lich the Court regarded itself as bound, National Bank »v. Mat- ews, was decided at the October, 1878 term. The Court’s as- mption that national banks had conducted their business and ide loans-in reliance upon the rule had chief reference therefore the period.between 1878 and 1880. The mortgage loan involved the Whitney case, however, had been made i in 1872. (Continued from p. 42.) d its action in so doing was against the revenue interests of the ited States) ; Fairfield v. Gallatin County, 100 U. S. 47, (over- ling an earlier decision that a county in Illinois had no power issue bonds under the Illinois: constitution. A new Illinois deci- n had intervened favorable to the. validity of the bonds. The- ‘ision sanctioned: the rights of- investors and did -not disturb ‘m) ; Brenham v. German American Bank, 144 U.S. 173, (the © ver to issue negotiable-bonds held not to be implied from power _ borrow money. The overruled cases were held to have. been eady overruled in effect by later cases. The Court suggests — sible recovery if the action. not brought ‘‘directly’’ on the | ids) ; U.S. v. Nice, 241 U. S. 591, (upholding.the Congressional as). to prohibit or regulate sale of ‘intoxicating liquor to In- 8 we It is not essential in order to validly argue that the rule of - iF) 44 The view expressed in the dissent in Burnet v. Coro- nado Oil & Gas Co:, supra,-i.e. that which favors a quite rigid appli¢ation of the rule of stare decisis: where mere statutory construction is involved, as contrasted with a - flexible approach where constitutionality i is concerned and Congress can afford no remedy, is the prevailing rule. Thus in Erie R. Co. v. Tompkins, 304 U. S. 64, in which the doc. trine of Swift xv. Tyson, 16 Peters 1, namely, that insofar as general law is concerned, federal courts will apply their own common law, was held unconstitutional and | overruled, the majority opinion states, p. 77: * x | ‘‘The injustice and confusion incident to the doctrin of Swift v. Tyson have been repeatedly urged as ‘rea- sons for abolishing or limiting diversity of citizenship _ jurisdiction. Other legislative relief has been pro- : posed. If only a question of statutory construction were involved, we should not be prepared to abandon the doctrine so widely applied throughout nearly & (eM - tury. But the unconstitutionality of the course parsual _has now been made clear’ and compels us % do so.” ( CounsdPs emphasis.) oe ) In: Boston Store v. American Gramaphone Co., ‘O46 U. S. 8, deciding that stipylations in a contract of sale of a patented article fixing/the price on resale are void u- der the. general law and not within the monopoly conferred’ or the,remedies afforded by the patent law, the majority. ~ leaned heavily upon certain earlier decisions. Although ap parently in doubt as to their soundness Mr. Justice Brandeis concurred in a separate opinion, saying at p. 2°: ‘‘T concur, however, in the answers given herein 0 all the questions certified; because-I consider that the series of cases referred to in the opinion settles the la¥ for this court. If the rule.so declared is believed to & harmful in its operation, the remedy may be found, a it has been sought, through application to the Congres or relief. may possibly be given by the Federal Trade Commission which has algo been appealed le 45 the views of Mr. Justice Sutherland, concurred in“by ’ . Justice McReynolds and Mr. J ustice Butler, in the dis- t in United States v. Raynor, 302 U.S. 540, at p. 552. The Nature of Judicial Process (Cardozo) states at re 146; Ee eas ‘“‘T say, therefore, that i in the vast majority of cases the retrospective effect of judge-made law is felt either to involve no hardship or only*such.hardship as is in- ‘evitable ‘where no-rule has beén declared. I think itis — 7 gels that when-the hardship is felt to be too great to be unnecessary, retrospective sain is. 3. with- held.’’ And on np. 149 we find:. “T think adherence to secubiias aual be the rule and not the exception. I have already had occasion to dwell’ upon some of the considerations that sustain it. To these I may add that the labor of judges would be increased almost to the breaking point if every past decision could be reopened in every case, and one could not lay one’s own course of bricks on the secure founda- * = . % tion of the courses laid by dthers who had: ~ before — him.’?’ is latter eomatderition is important. Granted that the se division of the Court in the St. Louis Trust Company es indicates sharp conflict in judicial thought, the an- incement of another rule might he similarly conditioned. t inevitably, but very possibly, the Court a few brief irs hence might again be besought for reconsideration. In speaking of the wisdom of rulés which lead to cer- ity and repose in our judicial system, Judge Robert von schzisker in XXXVII Harvard Law Review, page 409,. [ article entitled “‘Stare Decisis in Courts of Last Re- ’ said on page 413: . “For the purpose of ieeniia: the. ne standartiond so it may be knowable to all, the doctrine of stare deci sig is dictates that decisions formally reduced-to judg: ws te ment shall thereafter be followed as precedents; that is to say, the. law of such decisions,—even though thought to be wrong in principle or to have been in- correctly applied,—shall not be departed froni in sub- sequent cases where a departure is apt to do more harm than would occur should the decision be allowed to stand until the legislature: might see fit to change the rules of-conduct there laid down or ‘acted upon ~~ But if, after. thorough examination and deep ‘thought, a prior judicial decision seems wrong in principle or _ manifestly out of accord with-modern conditions of life. it: ‘should. not be followed as a controlling precedent, w here departure therefrom can be made without u- duly affecting contract rights or other interests calling for. consideration.’’ : . The question here before the Court i is one of. statutory -- gonstruction and involves no question of constitutionalitt 5 ‘ ’ ¥ . F --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0248%3A5. Public record. Not legal advice.