The decedent died March 26, 1926, and the government attempted to tax the trust fund as a transfer in contemplation of death (Section 302 (c), Act of 1926, 26 U.S.C.A. Int.Rev.Acts, page 227), because of the reservation contained in the instrument, and for the same reason it attempted to tax under Section 302 (d). See same section of Revenue Act of 1924, supra. The court disallowed this tax, and stated: "We do not agree with this claim, for it is expressly stipulated in the reservation that the grantor shall have no right thereafter to withdraw any part of the principal from the trust. In other words, the grantor reserved no power to repossess himself at any time of any part of the principal of the fund, nor to withdraw the same from the beneficiaries who were to receive it under the terms of the trust instrument." 53 F.2d 915, 916.
In the case of Brady v. Ham, 1 Cir., 45 F.2d 454, 455, the decedent in 1911 set up a trust fund reserving to herself power "to change and alter any or all of the trusts * * * set forth, [and] to name any beneficiaries other than those above named except herself * * *". The government asserted its right to tax under the Revenue Act of 1924, Section 302 (d), supra. The court pointed out that this was an estate tax and not a succession tax, and that Congress could not impose a death tax upon property absolutely transferred prior to the death of the decedent. The court concluded that there could be no such tax if the economic benefits passed under the trust deed from the decedent's control beyond recall, and hence, disallowed the tax, since the decedent had irrevocably dissociated herself from the economic benefits of the property in question; this, notwithstanding the fact that the beneficiaries could not have been definitely ascertain until her death.
In conflict with the above cases is Porter v. Commissioner, 2 Cir., 60 F.2d 673, certiorari granted, 287 U.S. 591, 53 S. Ct. 121, 77 L. Ed. 516. Therein petitioner's testator in 1918 and 1919 conveyed property in trust, and on November 27, 1926 in order to provide for after-born beneficiaries under the trust of 1918 made certain alterations without superseding that trust. The testator reserved power to alter or modify the indenture and any or all of the trusts in any manner, but expressly excepted any change in favor of himself or his estate. The testator died November 30, 1926 and the government included in his gross estate the corpus of all the trusts under Section 302(d) of the Revenue Act of 1926 (similar to Section 302(d), Revenue Act of 1924, supra). Petitioner argued that since the testator had expressly excluded himself as a beneficiary there was nothing on which to levy an excise. The court rejected this contention and concluded that the termination of the control over the final disposition of the estate upon the testator's death constitutes the subject matter of the tax. The court also held that the application of the statute to these transfers did not exceed constitutional limitations because the testator was on notice of this statute prior to his death and could have abandoned his right to change the beneficiaries and avoid the tax.
The Supreme Court affirmed the above decision, Porter v. Commissioner, 288 U.S. 436, 443, 53 S. Ct. 451, 453, 77 L. Ed. 880, and stated, "The net estate upon the transfer of which the tax is imposed is not limited to property that passes from decedent at death. * * * Here the donor retained until his death power enough to enable him to make a complete revision of all that he had done in respect of the creation of the trusts even to the extent of taking the property from the trustees and beneficiaries named and transferring it absolutely or in trust for the benefit of others. So far as concerns the tax here involved, there is no difference in principle between a transfer subject to such changes and one that is revocable. The transfers under consideration are undoubtedly covered by subdivision (d)."
In answer to the contention that this construction of section 302(d) is repugnant to the due process clause of the Fifth Amendment the Court said: "But the reservation here may not be ignored for, while subject to the specified limitation, it made the settlor dominant in respect of other dispositions of both corpus and income. His death terminated that control, ended the possibility of any change by him, and was, in respect of title to the property in question, the source of valuable assurance passing from the dead to the living. That is the event on which Congress based the inclusion of property so transferred in the gross estate as a step in the calculation to ascertain the amount of what in section 301 [26 U.S.C.A. Int.Rev.Acts, page 225] is called the net estate. Thus was reached what it reasonably might deem a substitute for testamentary disposition. United States v. Wells, 283 U.S. 102, 116, 51 S. Ct. 446, 75 L. Ed. 867. There is no doubt as to the power of Congress so to do." 288 U.S. 436, 444, 53 S. Ct. 451, 454, 77 L. Ed. 880.
The holding of the above case has since been followed by Holderness v. Commissioner, 4 Cir., 86 F.2d 137; Commissioner v. Chase National Bank, 2 Cir., 82 F.2d 157, certiorari denied 299 U.S. 552, 55 S. Ct. 15, 81 L. Ed. 407; Witherbee v. Commissioner, 2 Cir., 70 F.2d 696, and Cook v. Commissioner, 3 Cir., 66 F.2d 995.
The plaintiff, however, argues that these cases mistakenly assume that Porter v. Commissioner held that the statute in question could be applied retroactively without constitutional objections. The cases of Helvering v. Helmholz, 296 U.S. 93, 56 S. Ct. 68, 80 L. Ed. 76; White v. Poor, 296 U.S. 98, 56 S. Ct. 66, 80 L. Ed. 80; Mackay v. Commissioner, 2 Cir., 94 F.2d 558, and Commissioner v. Flanders, 2 Cir., 111 F.2d 117, are offered to demonstrate that whatever doubt formerly existed in the interpretation of Porter v. Commissioner has been clarified, and that it is now definitely established that the statute cannot be applied retroactively.
Each of these cases holds that such an application of the statute would offend the Fifth Amendment to the Constitution. The facts in these cases, however, are distinguishable. In Helvering v. Helmholz and White v. Poor, supra, there was no reserved power to alter, amend, or revoke but only a power to terminate. Hence, the Court held that the transfers were complete at the time of the creation of the trusts, and that the statute could not be applied retroactively. In addition, the Court indicated that the statute was inapplicable because of the absence of the reserved powers. In Mackay v. Commissioner and Commissioner v. Flanders, supra, such a reservation was expressed in the trust deed, but it was to be exercised by the grantor in conjunction with persons holding adverse interests, a doctrine recognized in the case of Porter v. Commissioner, 288 U.S. 436, 442, 53 S. Ct. 451, 77 L. Ed. 880. In such a case, the settlor has in effect put the property beyond his recall.
Constitutional objections cannot be made unless the settlor has irrevocably parted with his property, and all dominion over it prior to the effective date of the statute. No case has been found in which a constitutional objection was sustained where the settlor had reserved to himself the power to alter, amend or revoke.
Brady v. Ham has been overruled. It is clear that the theory of taxation expressed by the court there was different from that of the Court in Porter v. Commissioner. In the former case the court was of the opinion that if the settlor had parted with the economic benefits of the property, even though the ultimate beneficiaries thereof were indeterminate until his death, there could be no retroactive application of the statute. The latter case, however, held that the subject matter of the tax was not limited to property passing at death, but included the termination of control over the final disposition of that property -- that was the "source of valuable assurance passing from the dead to the living". This theory is similarly opposed to the theory expressed in the case of Cover v. Burnet, 60 App.D.C. 303, 53 F.2d 915, 916. See excerpt supra.
Under the holding of the Court in Porter v. Commissioner it is unnecessary to discuss constitutional objections to retroactive legislation. In fact, there is no retroactive application of the statute, because the "valuable assurance passing from the dead to the living" is not crystallized until death. Herein, that occurred subsequent to the effective date of the statute.
With reference to the issue arising out of the inclusion of the decedent's interest in the value of his grandfather's estate as determined by the Supreme Court of New York on May 31, 1927 in the case of Gould v. Gould, it appears that the plaintiff as executor has collected these annual payments and has placed them in the general funds of the decedent's estate.
The government contends that this money is includible in the gross estate under either of the following subsections of the Revenue Act of 1926:
"Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated --
"(a) To the extent of the interest therein of the decedent at the time of his death;
* * *
"(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *." 26 U.S.C.A. Int.Rev.Acts, pages 227, 230.
The plaintiff contends that Jay Gould II had only a life interest in the proceeds of the New York judgment, and that after his death the funds belonged to another person as if by remainder, namely, his executor. The cases of Chemical Bank & Trust Co. v. Com'r, 37 B.T.A. 535, and Dimock v. Corwin, D.C., 19 F.Supp. 56, are offered as relevant.
In the first of these cases the decedent in his lifetime purchased an annuity for a lump sum payable to him for life and upon his death to his wife for life if she survived him. She did survive him and the government sought to include in the decedent's estate the value at the date of the decedent's death of the annuities that were payable to his wife. It was held that this value was improperly included because the wife had the absolute right if she survived to receive the annuities which vested at the time the contracts were made. Hence, nothing passed from the dead to the living.
In the latter case the decedent received a retirement benefit fund for life, and under a death benefit plan of his employer he could designate at his option a beneficiary who would receive certain payments for one year following his death. He designated his wife. It was held that the commuted value at the date of his death of the payments his wife would receive was improperly included in his gross estate. This case likewise held that nothing passed from the dead to the living, since the right to make this designation was not attachable or assignable by him during his life. It was no part of his estate.
The plaintiff mistakenly assumes that the New York judgment providing that "Jay Gould * * * and [his] respective executors and administrators" should receive annual payments so long as the payors lived, creates a life estate in Jay Gould II with a remainder interest in some other person. The limitation over still confines the proceeds to Jay Gould II, and is wholly dissimilar to a limitation over in favor of some third person. We conclude that it constituted part of his estate under Section 302(a), supra, and that it is unnecessary to consider the application of Section 302(f), supra.
Accordingly, the claim for refund of money paid as taxes on the inclusion of the property involved herein is denied.
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