RRespoondents Brief in Oppositionn — Smith v. Shaughnessy

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"Bomar W. Sacre, PETITIONER “

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FRANK J. didivtinedant: Couininos oF Soraisal ,

' Revenve or THE Uwsirep Srares: 3: 2 eae aa

TWENTY rer Disraior or Raw, Fomk G, Sn a ae

On PETITION FOR A WRIT OF r Cupribkaes To. THR UNITED |

STATES CIRCUE COURT OF APPEALS FOR rat SECOND

CIROUIT .

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BRIEF FOR THE RESPONDENT IN OPPOSITION

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- CITATIONS»

Disclitislsaw Beck’s Estate, 129 F. 24 268... ...: ZARA 4,8

Commissioner v. Hart, 106 F. 2d 269..___, -----.----... a oy

Commissioner v. Marshall, 125 F. 2d 943-.-....-.--- -o-- 45,8

Commissioner ¥. McLean; 127 F. 2d 942... - - CE aoe

* Estate of Sanford v. Commissioner, 308 U. 8, 39. ..... — 3, 4, 6,9

| Helwering v. Blair, 121 F. 24 945_. SLY SEER 8

_Helvering ¥, Bowers, 208... $18 - 26-2. ccna 9

_ © Heleering v. Bullard, 303 U. 8. 297... 20-6 ee -9

~~~ Heleering v. Hallock, 309 U. 8.106... 8,7, 8,9 -

hs “Helvering v. utchings, 312-U. 8, 303. paints

Helvering v. Rabinette, 129 F. 2d 832_- ivvecescdy O00

Herzog v. Commiasioner, 116 F. 24 591_- ae ‘ -. 862,90

- Heaslein v. Hoey, 91 F. 24 964, certiorari denied, 302 U. 8.

Ae aie i 6 |

| Higgins v. Commissioner, 120 F. 2d 287... 4,9

' Hughes v. Commissioner, 104 F. 2d 144. 4

Lilly. Smith, 96 F.2d 341, certiorari denied, 305°. 8.

604___ Sale ar dial epochs mhibd aba Q

Porter v. Commissioher, 60 PF, 2d 673, ‘affirmed, ws U.

436. : 6

Rasquin, y- Humphreys, 308 U. 8. 54. pha ndcoPhepent-« 4

Ryerson'v. United States, 312 U. 8. 405... ol ee oh tas .

Tyler v- United States, 281 U. Ae ave nba Be

s

__. United States v. Pelzer, 312 U. 8. 399... _..

Statutes:

Revenue Act of 1932, 2. 209. 47 Stat. 169: ae

. ie Se. 501_- ties. be arate we pak’ See

Bre See. 506. . 8,1

Sec. 802, aopiankiied be by Hh. Ree. 60, Shack 17, 1941,

e. 21, 55 Stat. 44_. Bee dsipanete. tes

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suey 708, 728-Coog., list Sess., p27 SOA Com

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‘~° Corey Tanne, 1943;

No. 429:

| Hurtaur W. Smirz, PETITIONER —

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Fux J. SHAUGHNESSY, COLLECTOR oF INTERNAL

Revenve or tHe Unrrep Sates FoR 7

_ Twanrr- Pinet Disraict or New Youx

ON PETITION FOR A WRIT. or CBRTIORARI TO THE UNITED 0s

STATES CIRCUIT COURT or mad pager For THE SECOND .

crreuiT. -

.

- : . 4 ts

——EEES

‘The -epiniori of the District Court Rs 36) is

‘reported in 40 F. Supp. 19. The opinion of the |

_ Citeuit Céurt of Appeals (R. 57) is -Feported in

; 128 F. (2a) 742. :

| JURISDICTION | :

_ The judgment off the Circuit: Court of. Appeals |

was efitered on July 6, 1942 (R. 58-59). .The peti- |

tion for a-writ of certiorari was filed September

29, 1942, The jurisdiction of this Court is invoked

under ‘Section 240. (a) of the Judicial -Code, as

amended a the Act of February 13, 1925.

(1). :

4

“Whether. the aay of a \ trust of. sities,

"under which the ineome is to be paid to the

grantor’s wife for life and upon her death the prin-

| cipal is te.be paid to him if living, and, if he should _

~ not then be living, to her legatees or, if she should

die intestate, to her intestate successors, is subject

to gift tax under Sections 501 and 506 of the Reve eS

nue Act of 1932.

*

STATUTE AND REGULATIONS INVOLVED |

‘The statute and regulations involved aré set °

forth in the a infra, pp. 11 et oe: 5

, STATEMENT

On ag at 26, 1937, the en crested an

irrevocable trust the corpus of which consisted of ah

- securities valued at $570,937.50. The trust inden-

ture provided that the income should be paid to his

* wife for life, and upon death the principal to. .

be paid to him if living, or in the event of his prior :

death, the principal to be paid to the persons and

in the amounts directed in her will, but if she

should die intestate, the prineipal'to be paid to the.

persons and in thé amounts provided under New_

York law as though she had owned. outright the .

corpus of the.trust and had died intestate (R. 42-

43, 44).

In_his sits tax return ‘ho 1937 the taxpayer

reported the full amount of $570,937.50 as a tax-

- able gift, and ee a jax of $71, 674.22 thereon.

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_. Thereafter, the taxpayer filed a claim for refund "..

‘of the tax on the ground thatthe transfer did not |

constitute a taxable gift. The Commissioner. -

ie rejected the claim and the taxpayer thereupoti

‘brought suit in the District Court (R. 43-44). )

The District Court held. that the transfer in trust

constituted a complete and absolute gift only to the

extent of the life estate in. the taxpayer’s wife

- (R. 45), and accordingly’ on September 9, 1941,

ntered judgment of refund to the taxpayer in the

ount of $40,109.19. (R. 46-47). The taxpayer

jdid not appeal from the District Court’s decision:

A that the value of the life. , was subject to gift

“tax, On the Commissioner’s appeal the Cireuit -

Court of. Appeals in a memorandum opinion

reversed the judgment of the District Court and.

. vemanded the cause with direetion to dismiss the

complaint, .on the authority of its decision in

Herzog v.. Seracceemens Ret F. (2d) 591 Se

‘ 57-59). :

sae ARGUMENT . Retake

The taxpayer contends that the decision below is:

., apparently in conflict with the decisions of this

- . Court in Estate of Sanford Vv. Commissioner, 308

-U, S; 39, aud Helvering v. Hallock, 309 U.S. 106: -

_ The contention seems to be based on the following

arguments: (1) Under the Sanford case a gift tax —

cannot be imposed unless the inter vivos transfer

-_ is complete, and the transfer in the present case is,

not complete ; (2) in any event since under the Hal-

as -

\\ atoner ¥. Marshall, 125 F. (2d) 943 (C. C. A.

. 4

. look case the corpus of the instant trust will be in-

cluded in the grantor's estate and will be taxed as

ag eye Il ap cH

tax. No conflict among the circuits is amerted. ln-

deed, petitioner's arguments have been uniformly _

rejected by the cireuit courts of appeals. Commuis-

ommissioner ¥. Molean, 127 F. (2d) 942 (©. C.

; Helvertng ¥. Robinette, 129 F. (2d)

(C..C. A. 3d); Mersog v. Commissioner, 116 F.\

(0. C. A. 2d); ef. Higgins v. Commis-

F. (2d) 237 (C. ©. A. Ist); }

"se Betate, 129 F. (2d) B43 (CO) OC. A.

2d), and Huphes v. Commissioner, 104 F. (2d) 144

(C.C.A.9th) >

(1) In Betate of Sanford v. Commissioner, 308

U. 8. 39, and Rasguin v. Humphreys, 308 U. 8. 54,

this Court held that the grantor of an infer viros

trust who reserves the_power te designate new

beneficiaries other than himself, is subject-to a gift

tax at the time he relinquishes thaf power but. not

before then. Those cases are premised on the

proposition that a transfer by which the transferor

retains the power to alter the ‘transferees is 50

incomplete that it does net constitute a gift. Peti-

tioner seeks to expand those decisions to make them

applicable to a transfer by which the grantor purte

completely with control over the property, and its”

5

- interest. The cireuit courts have without exception

dismissed attempts of this sort.

The petitioner's argument overlocks the distine-

tion between a grantor’s retention of 9 continyng

power to alter the distribution of the property and

his retention of a contingent interest, the fruition |

of which depends upon events wholly beyond his

control. Where the grantor retains the power to

shift the enjoyment of the fund, even though he

is excluded as a possible beneficiary of that power,

_ the absence of a complete donation is at once appa-

rent, for the grantor has retained one of the most

significant fagots of the bundle of rights constitut-

ing ownership, ee., the right to dispose of thé“prop-

erty. Stated another way, the grantor in such a

case retains control over the economic benefits of

the property. In that-cjreumstance the reason for

the nonapplieation of the gift tax becomes at once

apparent. The gift ie not effected until the relin-—

quishment of the power because until that time the

sine qua non of a complete donation, wis. the sur-

. render of the grantor’s control over the economic

benefits of the property, does not take place. How-

ever, the grantor in this case retained no control

- over the economid benefits of the property. Com-

missioner v. Marshall, supra. ‘It is this control or

‘command over the property taxed’? which was

said in the Savford case to be the eqence of the.

taxable gift. And- —s¢ erage cae

trol makes the gift

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‘a ‘in “‘aialee that. the; insenatie is’. a present |

_. ineomplete-the ‘petitioner also ‘emphasizes the. in-

de-finitenesy of theidentity of the ultimate donees. :

Relying: upon the. provision of the trust that. the.

"ig! ~ wife may digpose of the: trust estate by ‘her will,

_ hg argues that where the remaindermen are so inde-

terminable there can be no completed | gift of the

entire estate. A taxable gift inter vivos tnust, lie.

~_eontetids, ‘be ‘a complete bilateral transaction

~ iivelving a transfer to a determinable donee.

--Reliahee is placed (Pet. 10) on language appearing

in the decisions of the Second Cireuit in Porter v.

” Commissioner, 60 F. (2d) 673, 674, affirmed, 288.

U. 8, 436; and Hésslein v. Hoey, 91°F. (2d) 954, ,

. G56, certiorari denied, 302 U.S, 756. However, i in

_its later deeision in Hoveog v. Commissioner, supra;

-p, 595, the Second Ciremit said that the ianguage’

__ of its earlier decisions, relied on by the taxpayer |”

“— - here, was used only in respect to a power‘reserved

1 the grantor and, inferentially, was not appli- ”

- cable to a situation where the grantor had parted

with all ‘control over the éppointment: Similarly,

. the Sanford ease, supra, p. 46, which the taxpayer.

‘cites at this point (Pet. 10) was, addressed, as the

Bucceeding language (pp. 46-47) Blows, to the sit-

uation im which the grantor retains- the power to -

alter the donee: The statément ‘in that case’ on

___. — which the taxpayer relies was merély that Congress .

.. Gould not have intended to impose personal liability

upon the donee of a agin of property, so incomplete —

&s°

ng

4

a a

7

+ thathe might be deprived of it by the ‘eas the day

after he had paid the tax.

The same contention was discussed and rejected.

in Herzog v. Commissioner, supra, pp. 594-595,

and Helvering v. Robinette, supra, pp. 834, 835-836,

The test of: thie incidence of the.gift tax is ‘whether

the donor has completely parted with coutrol over —

the property. The language of the statute and

Article 3 of the Regulations makes it plain

that the taxable event i is not the absolute ‘vesting of

rights in particular, beneficiaries but the irrevocable

divestment of the donor’s rights in the property.

The argument (Pet: 9-10) that the interests of the ”

remaindermen are wholly dependent upon the mere

whim or fancy of a human being would have merit

, if the whim were that of the grantor. Buthérethe

grantor has placed the property beyond his con-

trol; “Whether he or.any particular «person ‘will .

. enjoy it is a matter beyond his power to determine.

2. Petitioner's second contention—that the pos-

' sibility that under the Hallock éase the corpus of

_Yhé instant trust will ultimately be included in the

petitioner’ 8 gross estate precludes the aden cre

of a gift tax now-—is | alao not borne out by the -

decisions. = 4

_At the very. outset, it should he observed that the

statute contemplatés a certain amount of overlap-

ping between the gift and estate tax provisions, and .

‘indeed specifies that the gift tax-shall"be credited

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against the estate tax to the extent that the same

. préperty is inelyded in the gross estate.’

As an initial matter, the unglossed text of See-

tions 501 (a) and (b)- and 506 of the Revenue Act

of 1932 (Appendix, infra), the provisions of Arti-

cles 2, 3, 17 and 19 of Treasury Regulations 79

(1936 ed.) (Appetdix, infra), atid the legislative .

history of the gift tax provisions,” all establish that —

the interests here created are subject to the gift tax.

Cf. Commissioner v. Beck’s Estate, supra, p. 244; |

Commissioner Vv. Marshall, supra, p. 945. For gift

tax purposes there may be immediate gifts of

future interests, whether vested or contingent.

Helvering ¥. Hutchings, 312 U. 8. 393; United

States v. Pelzer, 312 U. 8. 399; Ryerson v. United

States, 312 U. 8. 405; Commissioner y. Marshall,

supra, p. 945; Helvering v. Blair, 121 ¥F. (2d) 945

(C. C. A. 2d). But the petitioner contends that

the doctrines of the Hallack and*Sanford cases,

supra, must be read as a gloss upon the generality

of the provisions imposing the gift tax. It is clear

that although the Sanford case discusses the corre-

lation between the gift and estate taxes, it does not

suggest that the ultimate imposition of the latter

preeludes the incidence of the forriier. On the con-

trary, the case contains an explicit indication that

' Section 802, Reventie Act-f 1932, ¢. 200, 47 Stat. 169, as

amended by H. J. Res. 60, March 17, 1941, ¢. 21, SStat: 44,

*H. Rep. No. 708, 72d Cong., ist Seas, p. 27 (1939-1 Cum.”

Bull.,-Part 2, 457, 476-477) : S. Rep. No. 665, 72d Cong., Ist -

Sess. p. 39 (1939-1 Cum, Hull: (Part. 2), 496, 524-525).

-

~

the two taxes are not mutually exclusive. . 308

. U. 8. at 45. And in Herzog v. Commissioner,

_ supra, Commissioner v. Marshall, supra, and Hel-

vering V. Robinette, supra, the courts approved a

gift tax on a transfer such as is here involved not-

_ withstanding the recognized possibility that an —

estate tax would also be imposed. " See also Higgins =

Vv. Commissioner, supra. Nor does the Hallock . -

ease; which dealt solely with ‘estate taxes, contain

any intimation ag to the incidence of gift taxes.

Moreover, instances of overlapping are fre-

quently found in ‘the decided CASES. - Thus, a vested

ease ete-3 eee

is subject to the éstate tax. Helvering v. Bullard,

303 U. 8. 297. ‘Yet it is inconceivable that the gift

tax would not also attach at the time that the

remainder was created. Again, the overlapping of

the two taxes is shown in the case of a tenancy by _

the entirety. Tyler v. United States, 281 U.S. 497;

Helvering v. Bowers, 303 U. 8. 618; ; Lilly v. Smith,

- 96 F. (2d) 341 (C..C. A. 7th), certiorari denied;

™ 305 U. 8. 604; Commissioner vy. Hart, 106 F. (2d)

269 (C. C. A. 3d): The taxpayer’s. contention | :

necessarily assumes.that the Sanford case has

inferentially overruled the foregoing decisions, an

assumption that is unwarranted by the opinion.

In the court below the ‘Collector conceded that

. the-value of the grantor’ s reversionary Auterest

3 khould, be deducted from the entire ‘value of the °

securities transferred in trust. (R. 53; Pet. ae

oe] ,

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10

However, the ‘effect of the decision below was to

tax the entire value of the trust estate without such

reduction. Aithough this result does ‘not ‘accord |

with Commissioner v.. McLean, 127 F. (2d) 942°

(C, C, A+5th), the taxpayer. nevertheless does not .

appear to have made a point of this oo ofthe ~

— botow (Pet. 5). ae | td

CONCLUSION

The ee pl below is in accord with the decisions

_ im other circuits and is not in conflict with appli-

_eable decisions: of this Court. It is respectfully

s@omitted that the petition should be denied: ~

| ea v CHARLES Fauy,

BTR bd ame oF? Solicitor Seainal,

- Save, 0, CarK, Jr., ?

Assisant Attorney General.

Sewa Key,

/ BENJAMIN. M. Bropsky,

Special Assistants to the Attorney General.

OcTOBER 1942. .

a

LLB RPE SSS SEES RE OIA POE AUR ERE NEB it 8h ORION RE ee

i _ APPENDIX

Revenue ‘Act of 1932, ¢, 209, 47 Stat. 169: <s

Src. 501. [Mpostrion OF TAX. a

(a) For the-calendar year 1932 nist aa calen-

dar year thereafter a tax, computed as provided

in section 502, shall be ‘imposed upon the transfer ©

~ during such. calendar year by any vr ndividual, resi-..

dent or-nonresident, of property by gift.

(bb) The tax shalt appiy whether the transfer. i is -

in trust or otherwise, whether the-gift is direct or

indirect, and whether. the SRagea is Teal or per- -

comet tangible or intangible: .

*. Sac ees *

Spe. 506. Giers MADE IN PROPERTY. _

., If the gift is made in property, the value thereof

at the date of the gift shall be- epeeceses: the

amount of the gift.

Treasury Regulations 79 (1936 ed.) :

- Art. 2. Transfers reached. —The statute imposes’ —

_ a tax whether the transfer is in trust or otherwise, _

whether the gift is direct or indirect, and whether

the property is real or personal, tangible or'intan-—

jis, for example, a taxable transfer may

be effected by the declaration of a trust, * * *.

Inasmuch_as the tax also applies. to gifts indirectly

"4 VA made, all transactions whereby property or prop-

rights or interests are donatively passed or’

contigo’ upon another, regardless of the means or

device employed, constitute gifts subject to tax. —

ee a ad amended by T. D. 5010, 1940-2 Cum.

of the property by the donee, nor is it mopereerily

(11)

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4

Cessation of donor’s dominion and

' control._—The tax is not imposed upon the receipt.

determined: by the measure of wists result-_

ing to the donee from the transfer, nor is it con- —

Si ditioned upon ability to identify the donee at the

time of the transfer. Cs Ss comeeey the tax is _~

a primary and personal liability of onor, is an

excise~ u his act. of making the honing is ef

Nie 17. Gifts made in property.—A zift made

ip’ properts a oahites si tie ton ie a contanee |

asa gift of ; ‘amount of-the gift is the

Hees date of the gift. ie Se

Arr. 19. Valuation of pro

The statute provides

| Rie Fonaened the value ‘thereof at‘ the te of the. gift

considered the amount of the gift. Ae. aR

i a Auawitiea: lifé, = and reversionary

tnterests.—For valuation of | annuities pees

from life insurance companies or other

issving annuity con see subdivision (9) of

oa ween coeliaed s ie te beche e =

. der ich & annul e .to

donee, the value of such Should be determined |

-. by using Table 4 or Tale B, whichever is appli-

- yrcste) shown at the ond ot this article. ors 8

*. .

If an annuity is tebe eet durin the life ofan _

‘ individual aiid in any event for a definite number

A

S

= or =

: ! — ded

- rate of income for a period equal to or or pone

the life expect of Z,

is fixed or deftly determinable “ the time of f the

if ‘eee sattthed mofo to the use of camtien :

'. gomne-producing property, a h etical annuity.

at the rate of 4 percent o the value of the property .

-shouid be mele ithe basis of the calculation.

Ri pod on gift is.of 2 remainder or reversionary in-.

es pee to an outstanding life estate, the © .

pop pa lr

Value o pro at the aah

figure in ‘ohn 3 6 Table A e.number _.

of years nearest to the age of. e ife tenant. | In

-- ¢ase the remainder or reversion is subject to an

: estate fora term. of years, Table B should be used.

& : SOVERMEFHT FRIKTING OFFICE: 18yt

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