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MCLAIN v. JARECKI

January 7, 1955

HAROLD O. MCLAIN, EXECUTOR OF THE LAST WILL AND TESTAMENT OF ALBERT O. MCLAIN, DECEASED, PLAINTIFF,
v.
JOHN T. JARECKI, INDIVIDUALLY AND AS COLLECTOR OF INTERNAL REVENUE FOR THE FIRST COLLECTION DISTRICT OF ILLINOIS, DEFENDANT.



The opinion of the court was delivered by: Campbell, District Judge.

This is a suit to recover federal estate taxes which the plaintiff alleges were erroneously assessed and collected. The taxes were levied upon the corpus of a trust created, at least nominally, by the decedent's wife, Minnie A. McLain. The sole question of law presented is whether that trust, and a substantially similar trust created at the same time by the decedent, are "reciprocal" or "crossed" trusts within the doctrine first announced in Lehman v. Commissioner, 2 Cir., 1940, 109 F.2d 99, so that the trust created by Minnie A. McLain might be included in the decedent's gross estate for tax purposes. The parties filed a stipulation which embraces all of the relevant facts; the following stipulated facts are hereby adopted as Findings of Fact under the provisions of Federal Rules of Civil Procedure, rule 52(a), 28 U.S.C.A.:

1. Albert O. McLain, hereinafter referred to as the decedent, died on May 29, 1947, leaving a last will and testament and codicil thereto which were duly admitted to probate in and by the Probate Court of Lake County, Illinois, on July 7, 1949; letters testamentary were issued to the plaintiff, Harold O. McLain, as executor of the will of the decedent. Plaintiff resides in Highland Park, Illinois, within the jurisdiction of this court. At the time this suit was filed, the defendant was Collector of Internal Revenue for the First Collection District of Illinois, within the jurisdiction of this court. (Stip., Pars. 1 and 2; Ex. A and B.)

2. Plaintiff's claim is for the recovery of $60,000 of federal estate taxes paid by plaintiff on behalf of the estate of the decedent, and collected by defendant, together with interest as provided by law. Plaintiff is the sole and absolute owner of said claim and has made no assignment of said claim or any part thereof; and no other suit or process by plaintiff or any assignee is pending against any other person or against the United States of America for or in respect of said claim. No part of said $60,000 nor any interest thereon has been refunded to plaintiff or credited to any tax deficiency of plaintiff. (Stip., Par. 3.)

3. On December 27, 1934, the decedent created the Dorothy McLain Cole Trust, hereinafter referred to as the Dorothy Trust, and transferred to the trustees named therein certain property. On December 18, 1935, the Dorothy Trust was amended. The property transferred by the decedent to the Dorothy Trust was his property at the date of the transfer. Dorothy McLain Cole is the daughter of the decedent and Minnie A. McLain. (Stip., Par. 4, Ex. C and D.)

4. On December 27, 1934, Minnie A. McLain, wife of the decedent, created the Harold O. McLain Trust, hereinafter referred to as the Harold Trust, and transferred to the trustees named therein certain property. On December 18, 1935, the Harold Trust was amended. The property transferred by Minnie A. McLain to the Harold Trust was her property at the date of the transfer. Harold O. McLain is the son of the decedent and Minnie A. McLain. (Stip., Par. 5, Ex. E and F.)

5. Under the provisions of the Dorothy Trust, the net income of the trust was to be accumulated and added to the principal of the trust until the death of the grantor (the decedent). Upon the death of the grantor, if Minnie A. McLain survived him, the net income of the trust was to be paid to her during her lifetime. After the death of the survivor of the grantor and Minnie A. McLain, the income was to be paid to Dorothy McLain Cole or to her issue. Under Article XI of the Dorothy Trust, it was provided that the trust could be revoked or modified during the lifetime of the grantor, and while either Minnie A. McLain or Harold O. McLain (their son) was living, by an instrument in writing signed by such of Minnie A. McLain, Harold O. McLain and Dorothy McLain Cole as were at the time living, and in the case of a modification, also by all persons affected thereby. By an amendment dated December 18, 1935, Article XI of the Dorothy Trust was modified so that thereafter Harold O. McLain and Minnie A. McLain were given the power to terminate the trust during the lifetime of Dorothy McLain Cole, or one or more of her issue, by an instrument in writing to that effect. Upon such termination, the trust estate would be distributed to Dorothy McLain Cole, if living, and if not, to her issue, per stirpes. (Stip., Ex. C and D.)

6. Under the provisions of the Harold Trust, the net income of the trust was to be accumulated and added to the principal of the trust until the death of the grantor (Minnie A. McLain). Upon the death of the grantor, if her husband (the decedent) survived her, the net income of the trust was to be paid to him during his lifetime. After the death of the survivor of the grantor and her husband, the income was to be paid to the wife and issue of Harold O. McLain, their son. Under Article X of the Harold Trust, it was provided that the trust could be revoked or modified during the lifetime of the grantor, and while either her husband (the decedent) or Harold O. McLain was living, by an instrument in writing signed by such of her husband, Harold O. McLain and Dorothy McLain Cole as were at the time living, and in the case of a modification, also by all persons affected thereby. By an amendment dated December 18, 1935, Article X of the Harold Trust was modified so that thereafter the decedent and Dorothy McLain Cole were given the power to terminate the trust during the lifetime of Harold O. McLain, or one or more of his issue, by an instrument in writing to that effect. Upon such termination, the trust estate would be distributed to Harold O. McLain, if living, and if not, to his issue. (Stip., Ex. E and F.)

7. The decedent and his wife each filed a separate federal gift tax return for 1934, reporting as a gift made by him or her, respectively, his or her transfer of his or her property to the respective trust so established by him or her, and paid the gift taxes shown to be due by such return. (Stip., Par. 7.)

8. On December 20, 1941, Minnie A. McLain died and after that date under the terms of the Harold Trust the net income from the Harold Trust was paid to Albert O. McLain until his death on May 27, 1947. (Stip., Par. 9.)

9. On September 16, 1947, plaintiff filed the federal estate tax return for the estate of the decedent with defendant, and on August 27, 1948, plaintiff paid to the defendant the sum of $78,682.09, the amount of federal estate tax shown to be due by said return, and on May 31, 1949, plaintiff paid to defendant the further sum of $72,302.98, representing a deficiency in federal estate taxes assessed against the estate of the decedent, together with interest thereon in the amount of $3,224.91. No refund of any sort has been made of the amounts so paid. (Stip., Par. 10.)

10. In connection with the audit of the federal estate tax return filed for the estate of the decedent, and in computing the deficiency referred to in Finding 9, the Commissioner of Internal Revenue included in the assets of the gross estate of the decedent the value of the Harold Trust at the time of the death of the decedent.

The government contends, on the basis of the stipulated facts, that the Harold Trust is includable in the decedent's estate under the provisions of Section 811 of the Internal Revenue Code, 26 U.S.C.A. § 811, as property in which he had a contingent life interest, or as transferred property in which he retained power to alter, amend, or revoke. However, since the Harold Trust was created by a person other than the decedent, by a transfer of property not owned by the decedent, it cannot be taxable to the decedent's estate unless it was in fact one of two reciprocal trusts, as that term is defined by the cases which followed Lehman v. Commissioner, supra.

In the Lehman case, the decedent and his brother had owned equal shares in stocks and bonds which were held for them in certain bank accounts. The decedent agreed to transfer his share in trust for his brother and his brother's issue, in consideration of his brother's transfer of the other share in trust for the decedent and the decedent's issue. The two trust agreements were identical; each brother granted a life interest to the other, with remainder to the other's issue. Each life tenant had power to withdraw a large part of the principal, although the decedent never exercised his right of withdrawal. On these facts, the Court of Appeals for the Second Circuit held that that part of the trust created by the decedent's brother which the decedent had a right to withdraw was includable in the decedent's estate. (Under former Section 302(d) of the Act of 1926, the entire corpus was not taxable. Under present law, the entire corpus would be taxable.) This is the rationale of the Lehman opinion:

    "X transfers property in trust for himself for
  life, with power of revocation. Y goes about it in a
  slightly different way; he pays cash or transfers
  property to another who in consideration of the cash
  or property sets aside or transfers securities in
  trust for Y for life, with power in Y to terminate
  the trust and take the principal. Does anyone suppose
  that X's estate is taxable under section 302(d) but
  that Y's estate is not? Here the transfer by the
  decedent's brother, having been paid for and brought
  about by the decedent, was in substance a `transfer'
  by the decedent, and the property so transferred
  formed part of ...

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