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Commissioner of Internal Revenue v. Spiegel's Estate

December 28, 1946


Author: Minton

Before EVANS, KERNER, and MINTON, Circuit Judges.

MINTON, Circuit Judge.

This is an appeal by the Commissioner of Internal Revenue from a decision of the Tax Court excluding from the provisions of the Estate Tax Law*fn1 the corpus and certain accumulated income thereon of an inter vivos trust executed by one Sidney M. Spiegel. The property conveyed in trust to Spiegel and another as trustees consisted of certain stocks. The trust provisions, as far as material here, are set forth in the margin.*fn2

The chief question for us is whether the transfer in trust, executed in 1920, was intended to take effect in possession or enjoyment at or after the grantor's death within the meaning of Sec. 811(c) of the Internal Revenue Code.*fn3

If the trust provisions in this case had been made by will, the property would have been taxable. Did the settlor of the trust avoid the incidence of such tax by the execution of an inter vivos agreement?

The taxpayer contends that since the beneficiaries took a vested interest as to the corpus by the terms of the trust and had enjoyed the income therefrom during the settlor's life, the latter had completely divested himself of all interest in and to the property comprising the trust, and therefore there was nothing left to be taxed. This, it is claimed, is in accordance with the law of Illinois which the taxpayer contends is controlling. Under the Illinois law, the taxpayer argues, the beneficial interests transferred by this trust were vested and could be divested only by the strict and literal happenings provided in the trust instrument, and in no event could there be any property interest remaining in the settlor, nor could there be any possibility of the property ever reverting to the settlor or his estate, apart from the possibility that he might take by inheritance from the deceased beneficiaries.

To support this proposition the respondent taxpayer cites certain Illinois cases.*fn4 These are cases involving property which was disposed of by will. In such cases the rights of the parties vest and are fixed at the death of the testator. There can be no divesting of such rights except as provided in the will. We think it could not be disputed that if there were no takers under the will at the time of the testator's death, the property would be intestate property. Belleville Bank v. Aneshaensel, 298 Ill. 292, 131 N.E. 682; Dorsey et al. v. Dodson et al., 203 Ill. 32, 67 N.E. 395.

To have a case analogous to the possible case under the instant trust, you would have to have a situation where all takers were dead at the testator's death. In tax cases, we do not necessarily deal with situations as they are, but with situations as they may be. By the express terms of the trust under consideration, the beneficiaries could never take the full possession and enjoyment of the corpus of this trust except upon the condition provided in the trust instrument that some of the beneficiaries survive the settlor. If all of the beneficiaries were dead at the time the settlor died, and that was a possibility, the trust would fail. Thus there was a property interest remaining in the settlor that was terminated only by his death, and this was a sufficient interest for the estate tax to attach, pursuant to Sec. 811(c). We do not think that on the execution of the trust there was such vesting of the interests of the beneficiaries as there would be in the case of a will, which takes effect only as of the death of the testator. The conditions upon which the interests are to vest or not vest are all present at the time a will takes effect - at the death of the testator. But in a trust instrument, the conditions upon which the interests are to vest are not necessarily present at the time the trust instrument is executed. In the instant case the condition upon which the beneficiaries take the corpus is that they survive the settlor.

In considering the taxability of inter vivos transfers, we start with Klein v. United States, 283 U.S. 231, 233, 234, 51 S. Ct. 398, 399, 75 L. Ed. 996. In that case the grantor had by deed conveyed a life estate to his wife, but if she died before the grantor, the property reverted to him. If the wife survived the grantor, she received the fee. The Commissioner included the property in the estate of the grantor for estate tax purposes, and the administratrix of the grantor's estate paid the tax and sued the United States in the Court of Claims to recover. From a judgment against her, she appealed. The Supreme Court, affirming the Court of Claims, said: "It follows that only a life estate immediately was vested. The remainder was retained by the grantor; and whether that ever would become vested in the grantee depended upon the condition precedent that the death of the grantor happen before that of the grantee. The grant of the remainder, therefore, was contingent. * * * The decisions of the Supreme Court of Illinois, the state where the deed was made and the property lies, support this conclusion. Haward v. Peavey, 128 Ill. 430, 439, 21 N.E. 503, 15 Am. St. Rep. 120; Baley v. Strahan, 314 Ill. 213, 217, 145 N.E. 359. * * * Nothing is to be gained by multiplying words in respect of the various niceties of the art of conveyancing or the law of contingent and vested remainders. It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed."

Applying this law to the instant case, we think it follows that the interests under this trust did not vest upon the execution of the trust, as contended by the taxpayer, and could only vest upon the happening of the condition precedent, namely, that the beneficiaries or some of them survive the settlor, and this was the "event which brought the larger estate into being for the" beneficiaries. If none of the beneficiaries survived the settlor, and that was a possibility, then the trust failed, and the trustees would hold the bare naked title to the corpus as resulting trustees for the settlor. Restatement of the Law of Trusts, Sec. 411(b); Bogert, the Law of Trusts and Trustees, Vol. II, Sec. 468; Lill v. Brant, 6 Ill. App. 366, 376. This possibility that the property might return to the settlor was sufficient upon which to fasten the estate tax provisions. That the property might return to the settlor by operation of law rather than by the terms of the instrument is of no significance. Commissioner of Internal Revenue v. Bank of California. 9 Cir., 155 F.2d 1.

In Helvering v. Hallock, 309 U.S. 106, 60 S. Ct. 444, 84 L. Ed. 604, 125 A.L.R. 1368, all of the several trusts involved contained a provision whereby it was possible that the corpus of the property or a part of it might return to the settlor. In that case, the Supreme Court, upholding the tax on the trusts to the estate of the settlor and affirming Klein v. United States, supra, and overruling Becker v. St. Louis Trust Co., 296 U.S. 48, 56 S. Ct. 78, 80 L. Ed. 35, and Helvering v. St. Louis Trust Co., 296 U.S. 39');">296 U. S. 39, 56 S. Ct. 74, 80 L. Ed. 29, 100 A.L.R. 1239, said (309 U.S. p. 118, 60 S. Ct. 450): "The importation of these distinctions and controversies from the law of property into the administration of the estate tax precludes a fair and workable tax system. Essentially the same interests, judged from the point of view of wealth, will be taxable or not, depending upon elusive and subtle casuistries which may have their historic justification but possess no relevance for tax purposes. These unwitty diversities of the law of property derive from medieval concepts as to the necessity of a continuous seisin. Distinctions which originated under a feudal economy when land dominated social relations are peculiarly irrelevant in the application of tax measures now so largely directed toward intangible wealth.

"Our real problem, therefore, is to determine whether we are to adhere to a harmonizing principle in the construction of Sec. 302(c), or whether we are to multiply gossamer distinctions between the present cases and the three earlier ones.Freed from the distinctions introduced by the St. Louis Trust cases, the Klein case furnishes such a harmonizing principle."

It must always be remembered that we are dealing with a tax law that Congress intended should be uniform in its application, and that the provision we are dealing with was one to be used to close the escape mechanism of gifts inter vivos when the same transfer of property if made by will would be taxable. Congress did not intend that the tax liability should depend upon the name given to the piece of paper.

The Supreme Court said at page 112 of the Hallock case, supra, referring to the Klein case:*fn5 "The inescapable rationale of this decision, rendered by a unanimous Court, was that the statute taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property. It also taxes inter vivos transfers ...

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