159 F.2d 257 (7th Cir. 1946), 8932, C.I.R. v. Spiegel's Estate

Docket Nº:8932.
Citation:159 F.2d 257
Case Date:December 28, 1946
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 257

159 F.2d 257 (7th Cir. 1946)




No. 8932.

United States Court of Appeals, Seventh Circuit.

December 28, 1946

Rehearing Denied Jan. 23, 1947.

Sewall Key, Acting Asst. Atty. Gen., J. Louis Monarch, Sp. Asst. to Atty. Gen., J. P. Wenchel and John T. Rogers, Bureau of Internal Revenue, both of Washington, D.C., Douglas W. McGregor, Asst. Atty. Gen., and Melva M. Graney, Atty., Department of Justice, of Washington, D.C., for petitioner.

Herbert A. Friedlich, Paul. M. Godehn, Louis A. Kohn and Harry Thom, all of Chicago, Ill. (Mayer, Meyer, Austrian & Platt, of Chicago, Ill., of counsel), for respondent.

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 1 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. 2

The chief question for us is whether the

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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. 3

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 cited certain Illinois cases. 4 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 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

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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 take 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...

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