# Amicus Curiae Brief — United States v. Byrum > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0058%3A05 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1972 - **Citation:** 408 U.S. 125 ## Text nee ~ — a | FER CLERK _ IN THE © - Supreme Court of the Anited States a OCTOBER TERM, 1971 - No 0. 71-308 e . Unitep States oF AMERICA, ; . | Petitioner, - | tiene A. Braun, Executrix Under the Last Will and Testament of: MILLIKEN C. Byrvum, Deceased, Respondent. ON WRIT OF CERTIORARI TO THE: UNITED STATES. ° ' _ GOURT OF APPEALS FOR THE SIXTH CIRCUIT BRIEF OF HOWARD GILMAN, CHARLES GILMAN, JR. ‘AND SYLVIA P. GILMAN, EXECUTORS OF THE WILL, 7 OF CHARLES GILMAN, ‘DECEASED, AS AMICI CURIAE — _ Srmon, H. RirKrnp, Aprian W. DeWrnp, _ James, B. Leyis, . ‘ 345 Park \Avenue, New York,\N. Y.: 10022. PauL, Weiss, RirKrxp, | Wuarton & GaRbisoN, Maurice Austin, Of Counsel: : January 21, 1972 | PRAQS ONY War ARS ane Wage dy ida: a Interest of the Amici Curiae .... . Summary of Argument a: - Argunient: ° | "INDEX I. Reserved managerial o or administrative powers ~ _b. The rule developed in the court decisions © over property transferred in trust during life, including power to vote trustéed stock, do not . Subject the transferred property to estate tax a. This rule is established by a long line of decisions of this Court and the lower courts applies in. the instant case _ The decedent did not reserve the enjoyment of ‘the. transferred stock . oe income tax decision of Commissioner: v. PAGE ao) Sunnen, 333. U. S. 591 (1948), on which the - Government Felies, ° is legally and factually inapposite ........... oon Conelusion .......--.-. mat sachets 19° . This case calls for applieation of the Abetrine | of stare decisis =e lecoane 11, CITATIONS |- sidered; 1) TC. 564 (1943) . 17 | Jones. v. Missouri-Edison Flee. Co:, 144 Fed. ee a (8th Cir. 1906) . ca : 8B . Kavanaugh v. Kavanaugh Knitting Co., 226, N.Y. 185, 123 N.E..148 (Ct. App. 1919). -...... oe ae Kullgren v. Navy Gas & Supply Co., 110 Colo: 454, , 1% P.2d 1007 (S. et. 1943) ........ pig “18 Lusthaus y. Cémmissioner, 327 U. S. 293 (1946) . eM 19 | McCormick v. Burnet, 283. US: 784 orca Re 6, 10, 24, 26 . ere : ‘ id . . ie 4 . . ‘ ; : McNab v. McNab & Harlin inhoc Co., 62 Hun 18, 16 N.Y.S. 448 (S. Ct. 1st Dept. 1891), aff’d, 133 N-Y. _- 687, 31 N.E. 627 (Ct. App. 1892) 14 Michigan Trust Co. v. Kavanagh, 137 F. Supp. (E.D, Mich. 1955) .. 2 . Morsman y..Burnet, 283 U.S. 783 (1931) ni 24, 26” ; ‘ Nauss v. Nauss Bros. Co., 195 App. Div. 318, 187 , NYS. 158 (App. Div. Ist Deer ial Beromt a ee : ‘Old Colony Trust Co. ve United States, 493 F. 1 601 ate. "(Ist Cir..1970): 2 cd 8,10 _ Patton v. Nicholas, 154 Tex. 385, 279 Sw. 2d 848 . - ($. Ct. 1955) “ . te _ Pepper v. Litton, 308 U.S. 295 (1939) ‘ a Oe : Reinecke v. Northern Trust Co., 278 U. S. 339 (1929). 4, 5; i cbs ee 7,10, 11, 12, 20, la mi 22,98, 24, 25 - Soins Vv. Hill, 289 US. 582. (1933) . mimo ye Yj Selama: ‘Dindings Plantations, Ltd. v. Dishes: 216 _F.Supp.,104 (S.D. Ohio 1963), aff'd, 337 F.2d 949 “(6th Cir. 1964) .... ae State v. Witmore, 126 Ohio St. 381, 185 NE. 547. git (S. Ct. 1933) . 13° ‘State Street Trust Co. v. United States, 263 F.2d PAGE * 635 (1st Cir. 1959) Se Thomas v. Matthews: 94. Ohio St - 113 NE. 669 ae (S. Ct, 1916) -.. : 13 * ‘Veited States x. oe 376 F.2d 65.(10th Cir. 1967) rae United States vi Powell, 307 F.2d 821 (10th 3 > 4962): = i ie 8,10 Lillian M. Wheeler, 20 B.T.A. 695 (1930) 242 310 ~ Feazel v. Coyle, 68-1 USL. 12,624 (ND. TL. : 1968) . | ; iB, 10, 16 aaa vi * \ / Jt ee ‘ a | 0 #/ Pade es \Unteh nal Rev enue Code of 1954, section 61 sienareosint j. - +A Mai ha rrnal Revensé Cogle of 1954, section 2036 . om aa er 4 : ae 25, 26 A } ee ternal Rev enue Code of. 1954, ea 2036(a) (1). . ee n . Internal Revenite Code “of. 1954, — 2036(a)(2) - +o SS .. 3,7,9,10 h ai Revenue Code of 1954, section 2037 (a), ie 26. : Interna Revenue Code of 1954, section 2038 |... - 10. 2 Sata Revenue Code of 1939, section-22(a) ..._ | 19 . Internal Rev enue Code. of 1939, section Sl1fe) . si co Joint. Resolution 529 of March 3, 1981 -......: ea ae _ Revenue Act of 1932, section 803(a) vee AONE 24 _ Revenue,Act of 1924, section 302d). And (hy. adie oe a ben Rea i Technical Chaniges Act of 1943; section 207 :..... ree, ae : ee ges “tpedhnieal Changes Act of 1949, sections 7 and 8 224, 26 | ‘Technical Changes Act of 1953, section 207 . oe ‘Baker ‘and ies: Cases: sod Materials on | Corpora — “tions (3d ed. 1959) atoy. ee a (rev. ed. 1946) . sul a ~ Brief’ on reargument for Commissioner of Internal © - Revenue in. Commissioner v. Estate. of Chava and Estate of ‘Spiegel v. Commissioner, Supreme 3 ~ Court, Oct. ‘Term, 1948 ......... ‘ 7: ma 7,20 . eee Dewind, The Approaching Shinkai m Federal Bstate sg i and Gift, Taxation, 38 Calif. L. Rev, 79 (1950). Couseen os e Federal Estate and Gift. Taxes, A Proposal for Inte-. gration and for Corrdation with the Income Taz, ’ ~ United States ‘Goverment ‘cei ‘Cee, sis ' s PAGE Fletcher, Cyclopedia Corporations (perm. ed. 1967, 1971). ‘ pale ‘ Journal Suprashe Court, Oct. ‘Term, 1947 vocenepnnenee ee * ON eal, Close Cor porations (1958 ed. + 13,18 O’Neal’ and’ Derwin,. Expulsion or Oppression of . Business, a | “Squeeze Outs” in leemeae _ Enterprises. (1961) .. ei ence Ag 18 er Rev. Rul..67-54, 19671 CB. IP shinrcndiaicuieicicne FSS -— The Tax: nee (1968) See aA 93 i IN. THE, | | Suen Court nf the United States OCTOBER TERM, 1971. No. 71-308 UNITED STATES OF AMERICA, © “4 wa - Petitioner, vu. Manta A. Bree, Executrix Under the Last Will and Testament of MILLIKEN C. Byrum, Deceased, . Respondent. a + ON WRIT ‘OF CERTIORARI. TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT _ BRIEF OF HOWARD GILMAN, CHARLES GILMAN; JR. AND SYLVIA P. GILMAN, EXECUTORS OF THE WILL - ; . OF CHARLES GILMAN, DECEASED, AS AMICI CURIAE This brief in support of Respondent’ s position is sub-_ mitted with the written consent of counsel to both parties | _. filed with the ee of the Court. Interest of the Amici Curiae Rs The amici curiae are the executors of the will of Charles | Gilman (the “Decedent”), a New York resident who died — in 1967. The Commissioner of Internal Revenue (the “Com- missioner”), has proposed a deficiency of several million - & iia PRP RR aeRO SENT AThin, ROE SS Sa Ss SPOR nee 2 . . : . . CARON ASC NPR SOT Ds EN AMR CN OA aie ene : 4 , se perkoyry teneacteoen ‘@ 2. ; | . + dollars in the estate tax liability of the Decedent’s estate by including in the gross estate the alleged value ofthe assets _ of an inter vivos trust (the “Trust”) created by the Dece- dent in 1948. The Executors having protested the proposed deficiency, the Commissioner i is preparing to issue a statu-— ‘tory notice of deéficiency...“The Executors intend, upon receipt ‘of the notice, to petition the* United States ‘Tax Court for review of the deficiency. ‘The relevant facts with respect to the Trust as of the time . of the Decedent’s death may be briefly summarized. The - Decedent had no beneficial interest in the Trist; his ‘two © adult sons were to receive the income for life and, upon the ‘death of. the survivor of them, the remainder was distrib: utable to their issue. The Trust was irrev ocable; moreover, _ it fixed beyond amendment the disposition of its inconie and - - €orpus and the time of its termination. The Trustees (the _ Decedent and two other individuals) could act by majority aed vote. They were authorized to sell any assets of the Trust ‘ and- to reinvest the proceeds, without being confined’ to investments of the kind prescribed by law.. The Trust assets consisted -of: six shares of common stock of” Gilman Paper Campany (the “Company”), a New Hampshire corporation, re " which were the only outstanding shares of that class and the only voting shares. The Company also had outstanding - 5,262 shares of nonvoting participating preferred stock, of | which 5,000 were owned by the Decedent. The Decedent -was President and one of the three directors of the Com- The Commissioner aaett that the stock of the Company . held by the Trust i is includible i in the Deeedent’s gross estate solely because the Decedent, as one of the three Trustees, could abn ea in the oe. of that stock. . * 3) ‘Saees of Kegan ee ‘managerial and administrative powers’ over property transferred in trust during life, including power . to vote trusteed stock, do not subject the transferred prop-. _ erty to estate tax. That rule is established by 28 decisions — ‘of this Court and the lower courts spanning a period of. over 40 years; no court holds to the contrary. These - decisions uniformly distinguish managerial and admini- - strative powers over transferred property from the power. “to designate the persons who shall possess or enjoy the property or the income therefrom” embraced by. section . -2036(a) (2) of the Internal Reveriue Code. These decisions apply irrespective of whether the deceased settlor reserved — the power as trustee or in his individual capacity. The principles of those decisions apply to the transfer by a controlling stockholder of shares of his stock in trust with reservation of power to vote the trusteed shares and fo prevent their sale. “7 The Government’s arguinent that estate ne liability j is ere- ated by the decedent’s allered power to make the trusteed . ° _ stock dividend- paying or non-dividend-paying. proves too ‘much, By the same token, all of the 28 decisions we have - mentioned were wrongly decided, since each settlor could | have designated who should enjoy income by arbitrarily investing in inecome- producing or mies saeeinae-Dregecing 2 ‘- stocks or other property. | + he decedent’s control over the corporations coupled did not give him a power over enjoyment of the trusteed prop. erty or income within the meaning of section 2036( a)(2), for a controlling stockholder or a director is a fiduciary. While directors ppssess a range of business discretion in setting dividends; courts will intervene if’ dividend policy is dictated by non-corporate considerations, As a corpo- - Tate fiduciary, the decedent's discretion was subject to. . i SAA IE . GE LRRD rere Svar a a eer . external standinnde cntorecabin’ in a court of acai, so that _. his powers were no greater than the managerial or admin- » istrative powers that a settlor-trustee may reserve without ———— estate taxati 2 ' The .decedent’s: AE COE through: in board: of direbtuts, to maintain himself in corporate employment and to be compensated therefor was not a reservation of enjoy- * ment of the ‘stock transferred i in triist. As the Tax Court has held, the right or opportunity to draw a reasonable sal- ary from a corporation does. not amount to retained. enjoy: ment -of transferred stock within ‘the meaning, of section 2036(a)(1) of the Internal Revenue. Code. A. reasonable salary is earned; its quid pro quo is the services rendered. The siendends of fiduciary obligation that cireumscribe © -. corporate dividend policies also cireumscribe corporate sal- . ary policies.“ A controlling stockholder may not vote him- : self, or cause himself to be voted, an excessive salary. The: enjoyment of a minority stock interest in a corporation is the prerogative of its owner, and may not legally be usurped ° _ by the a stockholder desc oe abuse of a “e office. ~. ! + The income tax destin of Comthissiones- v. Sunnen; 333° U.S. 591 (1948), on which the Government relies, is legally . _inapposite to the estate tax. Decisions of this Court and *’ the lower courts clearly establish the lack of correlation he- tween the income-and estate taxes in the field of incomplete .transfers. Sunnen is also factually irrelevant, since the — taxpayer i in that case retained important controls arene to his status as edntrolling stockholder. . - This case calls ‘for. application of the doetrine of stare “ decisis. The principle the Government here seeks to over- ‘turn was established in’ a 1929 decision: of this -Court, © . Reinecke v. Northern Trust Co., 278 U.S. 339 ( 1929), which | the Government has not satisfactorily distinguished. The . 4 5. i ‘erosion of that principle oer by the, Govurtiunaeet here would open to taxation an indeterminate—perhaps broad © ' .—eategory of trusts: long regarded as nontaxable. If the. _Governrftent is discontented with the present long-estab- . lished rule, it should address itself to the Congress. a ee should not succeed in its request ‘to this Court for retro- active reversal in disregard of stare decisis at this late date. ARGUMENT -— | S. | Reserved ‘managerial or ndihinisibaiive powers over — property transferred in trust during life, including power to vote trusteed stock, do not ne the trans- “s ferred property to estate tax. : The Federal estate tax statute has, fron the date of its a : original enactment in 1916, , attetnpted. to forestall tax avoid- ance “by including in the measure of the gross estate cer- - tain incomplete lifetime. transférs of property that are regarded as substitutes for testamentary dispositions. For Me ks 55 ‘years interpretation. of the incomplete lifetime transfer _ provisions has vexed the administrators and ‘the courts. However, within: the kaleidoscopic pattern of the court decisions; on one proposition there is accord: Reserved * ‘managerial or administrative powers over pfoperty trans- ferred i in trust during life, inelnding power to vote trusteed stock, do not subject ~ transferred: pisicated to estate’ tax. ’ a. This rule is clita by a long line of deci- * _ sions of this Court and the lower courts, — ce The story begins. with Reinecke v. NV. orthern Trust Co. , 208 U.S. 339 (1929), in which one question was whether the. 7 assets of five inter vivos trusts. should be included in the © ro 6 gross estate of the deceased settlor, who was not a trustee, . because of his reservation in his- individual capacity of - powers “to supervise the reiny estment of trust funds, to Tequire the trustee to execute proxies to his nominee, to v ote | any shares of stock held by the trustee, to contre all leases executed by the trustee, and to appoint successor trustees, 278 U.S. at 344. Holding that the five trusts were not sub- ies ject to estate t ax, this Court said: as “Nor- ‘did the, viskrved powers of management of the trusts save to decedent: any~-.control over the -economic benefits or. the enjoyment of the property. - He would equally have réserved all these powers and others had he made himself tlie trustee, but the trans- ' fer-would not for that reason have been incomplete. . The shifting of the economie interest ii the trust property which was the subject of the tax was thus: complete as soon as the trust was made... . [T]he _Teserved powers do not serve to distinguish {the _ trusts] from any other sift infer vir os not subject to. : the tax.” Id. at 346-347. a . . In 19: 1 and again in 1933 3 this Court aes to the above- — ‘ deseri ed holding.' Still later, in 1948, this Court sya sponte/.- invited: reargument of the question, Commissioner ee Estate of Church; 335 U.S. 632 (1949) ; Estate of Spiegel v. 2 Commissioner, 339 U.S. 701 (1949). The decedent in each -of those two cases had niade a lifetime transfer of property . to himself and’ ‘another- person or persons as trustees and . had conferred on the trustees broad managerial and ‘ad- 1. (1) McCormick v. Burnet, 283 U.S. 784 (1931), a per curiam reversal of a decision of the Seventh Circuit that had found support - for taxability of an inter vivos trust in the deceased settlor’ reserva- tion of power to make investment decisions. 43 F.2d ( 2). Helvering Duke, 290 U. C391 (1933), a per curiam affir- mance by arr ually divided Court of a Third Circuit decision for © the taxpayer, in which this Court received extensive argument from _the Government, that the trust was taxable because the deceased set- - ’ tlor had retained. managerial pores as trustee. . “2 : . - gerial powers. “age ‘s oe eee | ' Understandably, therefore, every lower court: that has ° _ considered the estate tax classification of mariager(al or ministrative powers ; moreover, the decedent in Church had reserved in his individual capacity the power to control in- _ vestment of thé trust assets. 335 U.S. at 691-692, note 1; 736, ; After argument and consideration of the. two cases at the. October 1947 Term, this Court entered an order: réstoring them to the docket ‘and requesting. counsel upon reargument to diseuss particularly nine questions, including the. follow- ing: * sd : ee fee eee oe . .- -“6.° Under — section ‘811(e) [of .the- -Internal | Revenue Code of 1939, the predecessor: of section 2036 of the Intérnal Revenue Code of 1954] is the ‘possession and enjoyment? of the corpus of an inter _vivos trust ‘intended to take effect * * * at or after’ the settlor’s death, where he names’ himself. as co- .trustee with the bread control and administrative . ‘powers over the corpus and income here vested, and where the corpus is-withheld from the beneficiaries ‘until the -settlor’s death?” Journal ‘Supreme Court, Oct. Term, 1947, pp. 297-298; 335 U.S. at 717, note 5. n its Church and Spiegel decisions, this Court answered the : s ae take / « riage Se ay . . -¢ above question negatively by not, overruling or modifying its Northern Trust holding- with respect to‘ reserved mana- ; . a ° | te i admfnistrative powers in recent years holds them not to be classifiable with the taxable powers over beneficial enjoy- - “ment ‘described in- section 2036(a)(2) of the Internal 2 2.. The Government, responded in its brief on ‘reargument : by- "conceding that the Northern Trust case.had rejected as immaterial the settlor’s resetvell powers of management and by stating: “While we hesitate to suggest that the Northern Trust case should be disapproved ‘--on this ground alone, we’ think that this. ground, coupled with the general basic considerations discussed above [i.¢., that the decedent’s - _ life measured the duration of the trust and-that there was a remote 4 MB ee possibility that the property would reyert to him] may-appropriately __. call for reexamination of that case.” Gov’t brief on reargument, pp. - t : rex \ \ \ Revenue Code. : Particularly ‘noteworthy ‘is: Old Colony’ Trust Co. v. United States, 423 F.2d 601 (1st Cir. 1970), in which the First Circuit expressly rejected the Goyernment’s argument: that the settlor-trustee’s broad a istrative and management poweTs were a ground for estate taxation and, in doing so, expressly repudiated | its much-criticized a >. dedision in State Street Trust Co..v. United States, 263 F.2d 635 (1st Cir. 1959). The First Cireuit said in Old ‘Colon, y: : : “We hold: that no aggregation of purely administrative powers can meet the gov ernment’s amorphous test of “suf- ficient dominion and control’ so as to be equated. with owner: ship.” 423 F. 2d at 603, oes gore eS Four other Cireuits, a District: Court ind the-Tax Court a - concur in this view: (1) The Sécond and Third: Circuits i in \ - per. curtam: affirmances. of Tax Court decisions; F the Sixth. - 4 5 Cireuit in the decision below; the Tenth Circuit in United States v. Powell, 307 F.2d 821 (10th Cir. 1962), i in which the : “court said “We conclude the inv estment power given to the ' trustees [the deceased settlor and a: trust company] by the ‘trust instrument. w as subject to and limited by a judicially ‘established and judicially enforceable. external and ascer- tainable standard and, hence, was no; imore than a manage- ment or administrative power” (307 F.2d at 826) ; the Dis- - ". triet Court for the Northern District of Tilinois in ‘Yeazet v. Coyle, 68-1 U.S.T.C. 912,524 (N.D. Ti. 1968), involving a deceased president: and sole shareholder of: a corporation -who had transferred approximately 60 percent of the stock to herself ‘as trustee, retaining the remaining 40. percent; and the Tax Court in an unbroken series of 19 decisions.* 3. - Estate of: Ford v.'C ommissioner,.450.F.2d 878, (2d Cir. 1971), "-- aff’g: per curiam 53 T.C. 114 (1969}> Commissioner v. Wilson's _ Estate, 187 F.2d 145 (3d Cir. 30), aff'g per curiam 13 TAC. 869 (1949). | ‘The two dudsicts chiet | in note 3, supra, and the Silke: state of Ralph Budd, 49 T.C, ‘468 (1968); Estate of Marvin L. ie es 49 T.C: 140. (1967 ); Estate of James H.. Graham, 46 °T.C. - 415 (1966); Co of ——? V. King, 37 T.C. 973 (B62); Estate ae ee the most fully-reasoned ‘of the 19 Tax Court ieee. es " Estate of Willard V. King, the.trust. indenture made by the decedent provided, that trust principal might be invested in: P ne . any type of property, even though. speculative, extrahaz- \ardous or unproductive, and that the trustee should exer- cise the - rights of management and investment only in.ac- cordance with the decedent’s ‘directions. "Fhe Tax Court concluded as follows: — “—Wle think that althougt the dioeduak; SP ible broad discretionary powers with respect to inv est- . ment, might invest in properties producing either a . high o? a low return of income, such powers would. have to be exercised in good faith in accordance with his. fiduciary responsibility‘and could: not be psed for. the purpose of attempting to favor any beneficiary | . of class of beneficiaries to the detriment of the other a ‘beneficiaries. It is our conclusion that the right re- _ tained by the grantor was not the right to designate, ae * -the persons who should possess-or ‘enjoy the prop-\, f erty or the income therefrom within the intendment ; of Section. 2036 (a) (2).” ” FF iy! C. at 980. - Analysis. of the 28 ‘eating cited ‘and discussed pe ‘demonstrates the breadth and vitality of the. principle the ' Government here seeks to overthrow. The decisions are by | eight courts, spanning a period of 42 years, and no court holds. to the contrary. The trusts in these cases involved vo George. W.- Hall, 6 T:C. 933 (1946); “Estate of William F. Hof: -- 1° ford, 4 T.C. 790 (1945), modifying 4 T.C. 542; Estate of Henry S. Downe, 2 T.C: 967 (1943); Lilkan M: Wheeler, 20 B.T.A. 695 . (1930); Estate of Aline Peters Peters, T.C. Memo 1964-67; Estate of Pierre Jay Wurts, T.C..Memo. 1960-102; Estate of Benjamin Paschal’ ‘O’Neéal, 6. CCH T.C.M. 713 (1947); Estate of George F. Fiske, 5 COC T.C.M. ‘42 (1946); Estate of Bayard Dominick, 4 CCH ~, TCM} 226’ (1945) (su gm opinion), aff'd as to other i issues, ee 843 (2d Cir. 1946); Estate of Maurice Markson, 3:CCH T.C.M. 309 (1944); Estate of Laura B: Alexander,.2 CGH. T cM. 1156 (1943); Estate of B:.H. Kroger, 2 CCH T.C.M. 644 (1943), - aff'd as to other issues, .145-F.2d 901 (6th Cir. 1944); mad of . ne eres pi — 2 CCH T.C.M. Cite (1943). ‘ aia . 4 A ' - ” Varied~ypes , of pecipnorty, beckoding mailiolohle securities, -Feal estate alte tocks. of closely-held corporations. “Tn all> ‘ powers.over the trust prope - vestment powers in 8 of the eases a e trustee® and in Fie ‘of the, eases as cotrustee with ‘another perso r_perso sf 3 of the 28 cases the’ ceased settlor had ‘broad investment TR decedent held the in- wy In the: remaining 14 eases the decedent was nota trustee; but a had: reserved in his indiv idual capacity the right'to make — the investment decisions ' for the trust.” -In 20-of the’ oS > with another person, to vote any stocks held by the trust.*- — eases thes decedent had the’ rights: ‘alone or in conjunction We have dealt at considerable length with this unfform and ; massive body of decisions because of the Government’s E : ox attempt to dispose of the Northern Trust holding with re-- speet to‘ managerial pow ers on the ground that. the: case antedated the 1931-32 reeasting of what is now section 2036 Ree - of the Intern: al Revente Code? Pet. Br. 18-19. That hold- ing has received too much post-1932. reaffirmance .and sup- : port to be vulnerablé to the Gov. ernment’s charge. 5. Duke,. Ford, Yeasd, Pardee, W heeler, Peters,. Fiske ( there - waga cotrustee, but-the settlor’s decisions, were to prev ail i in the ev ent tee * of disagreement) ahd Markson. ; 6. Spiegel, Old Colony, Powell, Budd vo to ‘one > trust: as to-the | . other trust the settlor reserved the power. to remove -_ replace the: trustee), Graham and Hofford. . 7. Northern Trust, McCormick, Church (who, ditcouate a — ‘ trustee, reserved.the investment powers in his individual capacity), Wilson, King, Hall,. Downe, Wurts, O’Neal, Dominick, Alexander, Kroger, Fapnston. and the.case below “(hereinafter Byrum). ‘es 8. Cases cited in — 5 and 6, supra, and Northern Trust, McCormick, Church, Byrum, King-and Downe, . ie Government also says that Northern Trust: arose before : the 1924 enactment: of the “predecessor of the present section 2038. - -°The Government’s statement is irrelevant, since itis not relying on — section 2038 in seeking reversal of:the decision below.~ Moreover, its statement is inaccurate, since the 1924 enactment was made five years ~ before the Northern Trust. decision and was expressly made retro-- ~ . active. ; Seven Act of 1924, section 302(4) and (h). P o.*. ¢ . . ’ . . D. - aon ‘ e- ‘ «“s : - ae - a aA ; nee Le. Thee vals diiunias in the éourt lal ‘applies ; ‘. in the instant « nae ake ate The Government, while acknow ledging. the existeas ar the: general rule requiring, impartiality. in fhe exercise of be managerial powers by a fiduciary, argues that the rulé does ie not apply’ to trusts of closely-held stock where, as here, the . déceased: settlor was the controlling stockholder and could — ~>prevent sale of the trusteed stock. \ Pet. Br. 15-16, 19- 20. .The Government urges" that stich a settlor could, being - “+ - unconfined by” fiduciary: restraints, exercise control of divi- ‘dend policy through ‘the board of directors and thus eae oe ‘ : | late the. flow of i income to the trust. Pét. Br. 14-15,. 19. . 25 Undér' that argument, ‘the trust: in each of. “the. other 27°. estate tax cases we have vited (pp. 5-10; supra) was taxable The Government’s argument that the trust is ‘cebenbel = by section 2036 (a) (2) beeguse of the: decedent's. alleged ‘power to make: the. trusteed stock’ div idend- -pay ing or non- dividend-paying (Pet.. Br. 15-16, 19- 20) proves: too much. * becansé the-settlor could. have invested, or directed the . | 4 trustee to invest, the trust Corpus in dividend- -paying. stocks : wae oF in non-dividend-paying ‘stocks or in.other jncome-produe- fo ‘ing or non-income producing property. The Government’s ‘ analysis obviously carnot be squared with. Northern Trust " and its numerous progeny, thé teaching of which clearly i is © - that the power to vary the flow of income thngagh mana- gerial.or administrative’ decisions is just not the type of . - power reached by. section 2036(a) (2). In arguing that the - - -rule of law developed i in the-cases involving individually ° . _.Tetained investment powers over security portfolios does not eontrol here, the. Governmént is creating a semantic dis- ; tinction Without a real differ&ce. : a he Government also asserts that “the ‘chet not bs - _ ing a trustee, the general rule requiring impartiality Y no application. ‘Pet. Br. 19. However, as we have shown ° me he aw . : o. . 2 : . ° - a ee et x , che: Yt “ We now turn to-the principal vice of the Gov itenent! = _ argument—its assertion that controlling stockholders and ‘directors are not confined by: fiduciary obligations. Pet. Br. 14-20. As* this Court said in Pepper -v. Litton, 308 U-S. ~ . 295; 306 (1939); “A director is a fiduciary. .... So isa _ dominant’ ‘or controlling | stockholder or wroag “of stock- ‘holders... - Their. powers are powers in trust. » The same : principle lias ‘been stated often, for example, i in K ullgren v. stockholders of -a _ corporation, and the ce ereen itself, law governing the obligations of fiduciaries i ap applicable we them. 999. : These are ainka: -principles of sifted common Taw, not turning on the construction “of a particular corporate _- ‘Navy Gas & Supply Co., 110 Colo. 454, 135 P. 2d 1007; 1010 - - (S$. Ct. 1943), “The relation which directors bear to the -— as ‘universally conceded... i8 a fiduciary one;’ and ‘ ‘The . ’ statute” nor dependent on the presence of, pub ¢ securit _ holders... O’Neal, ‘tlie leading ‘commentator-Sn_ the. law of » ~~ dosél -held.-corporations, in. his. treatise Close Corpora- / tions (1958 ed.) summarizes the applieable law as follows: ;| A See te _ “As was said by: the Courtof Appeals of New York * _ - [Kavanaugh v. Kavanaugh Knitting Co., 2267 Mud. = 185, 123 N.E: 148 (1919) at pp. 151-152], wheneyer a number of stockholders ‘constitute themsely: Lk _-are by the law constituted, the managers of ¢or oi . affairs or interests, they stand in. much the. ? _*. tude toward the other or quinority stockholders that | the directors sustain generally-toward all, the stock. - holders, and the law requires of them the utmost _, 800d ‘faith’, arid .a- court of equity ‘will protect a | " minority: stockholder against the acts-or. threatened .. . acts’of the board of directors ‘or.managing stock- _ holders of the corporation which violate the fiduciary — +s.’ «relation and are directly injurious .to the stock- _. .. * holders’. And; as a federal court has said, [Jones v. ; Missouri-Edison Elec. Co,, 144 Fed. 765, 771 ( 8th Cir. - ee - 1906)], majority ‘shareholders ‘owe to the minority the duty to exercise good’ faith, care and diligence to make the property of the corporation in their _-. @harge produce the largest possible amount, to pro-. - tpet-the: interests of. the holders of the minority of | __ the stock and to secure and deliver to them their just proportion of the income and of the proceeds of the rr eee 3 3 7 a WORD etp 4646 ks There is no doubt that corppeate direetors possess a 7 ¢ — wide range of business discretion in setting dividends and that courts are consistently and properly reluctant to sub- — ee ee . its ao 1963), aff'd, 337 F.2d 949 (6th Cir. 1964): State v, Witmore, 126°0 ° + Qhio-St.°381, 185 N-E. 547 -(S. Ct. 1933); Thomas v. Matthews, 94 * _—'s Ohio St. 32, 113 N.E. 669°(S: Ct. 1916). ae ae - . pee ig s - . ; . ra 4 - . “i ~ ———e \ e . é ae . = pe 5 . : ° . es Be. ‘ 3 hoon ’ e¥ yer ‘ . Z . fare.” Gottfried v. sa ii 73 N YS. 2d 692, 695 (S. Ct. | : “ | . ae, — stitute their. pores jen for that. of the directors stemming from non-corporate considerations, for example, iiaindermen, lacks the business basis which. can alone justify ee desire. to prefer. income apeorng baad at sce epee " ‘Fletcher ‘summarizes jase ale | as. follows: § iwesier: the S: ments and improvements of the company’s plant. ‘The dis-,- unlimited, and it must be honestly exercised for the benefit — of the corporation and all its shareholders.” Fletcher, Cyclopedia Corporations (perm. ed. 1971) § 5325 at p. 633... - : sheers ance of goed faith on the part of the directors... tb MeNab-& Harti N.Y. Co. 1947). : 3 7 11. siNiahe © Macss Drink Ca. 195 An ‘Div. 318, 187 N.YS. - 158 (App. Div. Ist’ Dept. 1921); In re Barrows’ Will, 123: NYS. - . 2d 501 (Surr. Ct. Monroe Co. 1953); City Bank Farmers Trust Co. . ooh Bo Ballantine, Corporations § 231 ( rev. ed. _ v. Hewitt Realty Co., 257 N.Y. 62,.117.N. E. 309 (Ct. App. aay: . ™~ \ oo di gh . ‘ a 4 $ i 1 * Abe v4 ‘ . a y . . . \ ‘ ‘ bere ey — , ] . = ‘ “When ¢ the yeiuinite beiedeiaie justification is absent and . bad faith is present, the courts ha e been resolute. in the -_reinedies whieh they will i impose. . These include injunctiv ee” * relief compelling the declaration: of a dividend in-a Teason- _-able amount, and a retention of jurisdiction to assure that’ . “reasonable dividends will be. paid in following years. Pat- - ton v. Nicholas, 154 Tex. 385, 279 S.W. 2d 848\(S. Ct. 1955)... . (deeree to’ declare” dividend. at earliest practical date ~ tnd thereafter to deélare ‘reasonable dividends. annually , _from future profits and aecumulated surplus); Lesnik v. . * Public Industrials Corp. .. 144 F.2d 968 (2d Cir. 1944) | (question for jury avhether directors’ failure to declare divi-_ ! dends was pursuant to a conspiracy: to acquire a. share. - holder’ s stock) ; Dodge v. Ford Motor Co., 204 Mich. 459, : i 170 N.W. 668 (S. Ct: 1919) (directors ordered to distribute; substantial additional dividends when reason for non- _Sedlaration was non-business purpose of providing more . -cars at lower price to benefit public): ~ What the Government argues is that th ‘board of dives: tors could, under applicable corporate law, improperly + dividends for the pu -of shifting income among trust “beneficiaries and then build a.record through minutes and. otherwise of the spurious exercise of business judgment. . The ‘circumstances envisaged. by. the Government are the | _ circumstances which, because they are pregnant with abuse, — : have induced courts of equity to apply standards of good -. faith and business: reasonableness.’ What the Gevernment __ . "describes i is not a rule of law; one -who embarks _._ upon a-ea of fraud and bad faith, whether he be - trustee or corporate fiduciary, may: seek to get away with. : Sach is not the test of whether aijeliee fiduciary Pecrcs exist... iia aN is In summary, under. applicable trindiples of corporate law, the. discretion of the decedent was — to Judicial 3 : . 4 - . - » .” ° ” . a - ri - . ° r . ‘ pee - eet 7 j ° . y Fs : . ~ 5 as ° - ® . , tres, . . » y >, “ s — est . —— a ct eR cea ea * . . : - . —s SN 5 , ‘ e. é q : / ci. & matin at ‘the: behest of affected eiehibdows: its range : ; of. permissible exervise: was circumscribed . by. standards . of. fiduciaty obligation that- controlled his ability to shape . dividend policy ; and p rsuit of a dividend policy motivated by non-business considerations would have violated such standards. As a epfporate fiduciary, the decedent’s discre- tion was subject to ascertainable, external standards enforce- * able against him in a court of equity, so that his powers ' were no* greater ‘than the administrative or managerial ‘powers that a settlor-trustee. may.reserve withoit i ingerring . estate taxation. ; | ae _The-docsdck did not: reserve ‘the enjoyment of the ft ~ transferred stock, 7 Pls se The Government makes the alternative e€. argument that. the _ ‘decedent’s: > exercisable through the board of directors, — . to maintain: meee corporate employment and tebe con. . -pensated therefor constitutes a reservation of enjoyment > | of the stock transferted"it in trust. Pet: Br. 21- 5.. ‘The. Government’ S. arg nt. has been: rejected by ‘the cburis,. not only i in the decis ion below, but also’ in Y eazel, supra, in Hofford, supra; and other Tax Court decisions = . hereinafter cited. -No court has sustained it. _ ea offord a sole stockholder, immediately after entering “into a contract with his,corporation for a fixed salary for . Jife, transferred thé complete ‘stock ownership. to himself . and others as trustees, : reserving in his individual capacity " the right to veto sale of. the trusteed stock. The Tax Court © ‘held, after intensive analysis of the fagts upon ‘the tax- . “payer” 8 motion for reconsideration, that the decedent had “* not’ “reserved enjoyment of the ‘stock ‘and, ‘therefore, that Oe - : At id - Pes ; om i : : . F ‘ ee Bere ee . _ 4 - ost 2 : F > : : wus ° . as ‘ > _ oe ie ; ae . . ° ; 22 i RNP ie | diverting aeiiiied ‘from his wife. All of these’ ‘ eonsidera- » tions, and not merely the taxpayér’s role as controlling ~ _stockholder, caused this Court to conclude that the taxpayer ._ “had ‘not’ effectively shifted’ the incidence of income — S. lability. ode ge nk : oe : ‘his case calls for application of the doctrine a oe stare decisis. : : ae = ee we : The Goverriment - here asks this Court to take an. initial — step in wndermining with retroactive effect the ‘ well- - established rules with respect to managerial and adminis- . trative - powers founded —_ the:: fS-yoer old Northern Trust decision: | The Government beguilingly tries to white that initial step look as short ard harmless as possible. In the process — . it attempts to distinguish case after case,. saying: Northern — - Trust, swpra, was decided under prior law (Pet. Br. 18-19) ; the investment powers in King, supra, were not over stocks of controlled corporations (Pet . Br. 11, note 5).; powers held as trustee‘are different because they are governed by rules requiring impartiality (Pet.-Br. 17-18 and 19- 20); the. income tax decision of United States v. Gates, 376 F.2d 69 | “(10th | Cir. 1967), is distinguishable becatise the settlor in "| that case could not prevent sale of the trusteed stock (Rete > _ * Br. 18, note 8). The Government’s modest: ahenieih of its goals oad not déeeive anyone. who is. familiar with its often-played role in the drama of camel’s nose and tent. There are many - ominous: signs. that the Government’s objectives are much more ambitious: (1) the Government’s stubborn relitigation of the Northern Trust holding in -27 subsequent cases ; (2). cl ‘ .? F ‘ , : . @ . . . e ; 4 oad m - . ® - e ra ey apse 2 OB , ce) aig eer ~ 3 . y “s fs out o ‘ rege Pm ‘ ‘ "> the Commissioner’ S outstanding nonacquiescence in the Tax .Court’s King decision, involving investment ‘and voting powers ver a securities portfolio (1963-1 C.B. 5); (3) the Commissioner’s publication.in*1967 of a raling that defines, the taxable area to include the situation in which the settlor is a trustee (Rey. Rul. 67-54, 1967-1 C.B. 269; see ‘comment : thereon -in. 21 The. Tax Lawyer 444 (1968)) ; (4). the ‘con- tinuing refusal of the Commissioner to accept -the Tax —Court’s decision in Hofford that the stock transferred in ~~ trust was not ineludible in the gross estate (nonacqui- escence on that issue, 1945 CB. 4); and $5) the assertion of tax in the estate of which the amici curtae are executors, _- despite the fact, that the decedent, as one of. three trustees . . of whom a majority could act, was powerless to prevent ~ sale of the stock by the other, two trustees. - ' These indicia show that it matters not to the Government ' whether the deceased’ settlor was trustee, whether: thie © ' property involved is stock in a controlled : corporation. or. - liquid secarities, or whether the, deceased settlor could have - blocked sale of the trust il . . Schuck, supra. ‘stock. If so, what*prevents — - taxation of outright gifts ment has attempted to tax stock given outright during life. Estate of George H. BurzAd CCH T.O.M, 1055. (1945) ;, Estate: of William L. Belk P, eae ‘George C. Doer- * Tt will not suffice for the’ Scand to answer that the gift here was not outright, that the decedent was not trus- . tee, that’ the trust assets were not portfolio securities, and that the decedent-could veto sale of the stock. In an area . ' so filled with long- established precedent, this. Court should ‘ . not be asked to embark on a new course without some indi- _ eation of ‘where it leads. There - should be some reliable answer to: whether ‘the Government's goal here and the Northern Trust line of decisions can harmoniously survive | ¢ ° : ; : ; | stock? ‘In fact, the. Govern-:. ’ and; if so, where the line can be dtawn. . We respectfully _ -e-. submit that the only place a logical line can be drawn is. where the court below. has drawn i. ea, _ During the 42 years ,that ‘the. Treasury has fruitlessly : challenged the Northern Trust doctrine in 27 litigations, it has worked with the Congress on five legislative restructur- ‘ings of-section 2036 and its predecessors: In 1931,” 1932,8 “eounseled. the Congress in overturning nine. decisions of this Conrt relating to what is now section 2036. 2 Whatever . _ discontent: the Treasury had with the NV orthern Trust hold- - © ing could have been taken up with the ‘Congress: on any of —«. those or other occasions. Having failed to utilize those opportunities, the Treasury should be foreclosed from seek- _ , ing a remedy in.this Court at this late date.” ’ For the 55 years that Americans have lived and died under the regime of the-Federal estate tax, apparently. no, trust has been taxed—certainly none willing to litigate has * been taxed—because of reserved managerial or adminjstra- _ tive powers. - The-Court is being asked here to subject to - tax an indeterminate—perhaps broad—category of trusts. 1 pean ib Sula i eo ~s AMe e ti R CI e sic AN ALD a asl caoseanal . . . ” . 4 off wf, ; b ° ‘ Welt 4 “7. "Joint Resolution 529 of March 3; 1931. q 18. Revenue Act of 1932, section 803(a). 19. Technical Changes Act of 1949, sega and 8. _. 20. Technical Changes Act of 1953, on 207. . 21. Internal Revenue Code of 1954, section 2036. -- 22. The 1931 and 1932 legislation overturned Mey Vv: Heiner, 281 . U.S. 238 (1930), Burnet v. Northern Trust Co., 283 U‘S. 282 (1931), Morsman v. Barnet, 283 U.S..783 (1931), ‘and McCormick v. Burnet, supra. The 1949 and 1953 legislation overturned Fidelity- » Philadelphia Trust Co. v. Rothensies, 324 U.S. 108 (1945), Commis- sioner v. Estate of Field, 324 U.S. 113 (1945), Goldstone v. United . States, 325 U-S. 687 ( 1945), and Estate of Spiegel v. Commissioner, . > supra@. -The 1949 and 1954 legislation pong cml C ommissioner V. — of Church; supra... 1949," 1953,” and 1954. . In this process the Treasury has i ‘that have for decades been regarded as nontaxable. The * Federal estate tax is a capital levy with rates ranging i ' ‘upward to 77 percent. The unexpected aggregation of an. inter vivos trust. with the testamentary estate can wreak ° havoc with estate planning and even leave the testamentary . beneficiaries penniless. If the long-established Northern Trust holding is -to be changed, this responsibility should ee be left to Congress, which can, give notice of the proposed — _. change, hold hearings, make the change ‘prospective only, create graee periods for relinquishment of taxable powers, ? and provide other relief. Under. any reasonable. view of — the situation, the Government is asking the wrong body to ' make the wrong decisioh at the wrongtime. = = The Government shas twice persuaded this Court to dis-. regard stare decisis in construing whatvis now section 2036 of the Internal. Revenue Code. The Government here in- _vites the court to embark on a third such departure. Review of these other two instances and‘the Congressional . _ - overriding that: followed ‘further indicates ‘the undesira- » bility of the Government’s present proposal. (1) Ini 1940 in— _ Helvering v. Hallock, 309 U. S. 106, this Court, at the urging . of the Government, expressly overruled its 1935 decisions - , - s in Helvering v. St. Louis Union Trust Co., 296 U. 8. 39,and oc. gl _ Becker v. St. Louis Union Trust Cé., 296 U.S. 48 Heed:.°-. E 7 ing criticism of the Court’s action, Congress amended section, 3 - 811(¢): of the Internal Revenue Code of. 1939 (now. section .& - 23. The trusts in. those three cases all provided for reversion of the ‘trust properties to the settlors if _they should outlive the bene- ficiaries. - Having: decided in the two St. Louis Union Trust cases that passage of title to the trust properties was enough to ‘render the predecessor of section:2036 inapplicable, the court shifted" to the’ -.. Opposite view in Hallock,’ Over the dissenting opinion of Justice . Roberts in support of stare decisis, this Court introduced in Hallock - - the first of a line of decisions that based the estate tax on the reten- —- tion of. more and more remote Teversionary interests. Fidelity-— Philadelphia Trust, supra;- Field, supra; Goldstone, supra; and, : ly, the controversial “gossamer. thread” arising by operation of law in Spiegel, supra, 335 U.S. at 667-674, 703-708, 718-735. ° - ° . ; | “ 26 . 2036 of the Internal Revenue Code of 1954) to erode the dectsions' and to authorize the filing of claimis for refund -, ee without regard to the doctrine of res judicata.” (2) In 1949 in Church, supra, this Court, upon the request ‘of the Gov- ernment following the setting of the case for reargument, | explicitly overruled its 18-year: old ‘decision in May vy. Heiner, supra, three 1931 per curiam decisions that followed ° and extended the rule of the May case,* and its 1938. deci- sion in Hassett v* Welch, 303 U. S. 303. Inthe face of - spirited dissents sdinctating the wisdom of stare decisis, this Court overturned 18-years of estate tax history. ‘Heed- ing the resulting criticism, Congress re aes the rule that Church had overturned.” ; | Pe. Even. if the question presented here were one of first impression, the rule of law the Governnient. seeks to estab- __,-lish would represent highly. questionable tax policy. When _-the question is éxamined in the light of the long. judicial and legislative history, the Government’s request, if it _ should be made at.all, shonld be made to Congress. From — the standpoints of both history and logic, the Sereuaeer® | plea to this Court should fail. 74. "Public Law 378, 81st Cong. ( Technical Senet Act of. £1949), _ section 7; Int. Rev: Code of 1954, section 2037-(a)..: 25. Burnet v. Northern st Co., supra; “Morsman v. Burnet, : supra; McCormick v. Burnet, Supra. "26. In May ‘and the three _per curiam decisions, this Court held that retention of a life estate in transferred property did not attract ' the estate tax if transfer of title was effective. After Congress had enacted remedial legislation on the day following the three per curiam — decisions, this Court decided ‘in Welch that’ the remedial legislation * applied prospectively only. ~ ' '27. Public Law 378, 81st Cong. (Technical Changes Act of 1949), sections’ 7 and 8; Public Law. 287, 83d Cong. (Technical Changes Act of 1953), ‘section 207... 3 CONCLUSION i | ‘The decision below should be affirmed. | at | : ; : Respectfully ‘submitted, ee Soeom Ririsp, Teel New York, 1 N. © 10022. ; Pavt, Weiss, Rrrkry, | . 7 Waarton & Garrison, 4 Maurice: AusTIn,/ Of. Counsel. : >. January 21, 1972 a 7 ‘e 4, * “\ \y PH Be. uf as Sac com _ ” Ate SaeeteRe es ee io ? --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0058%3A05. Public record. Not legal advice.