259 F.2d 231 (5th Cir. 1958), 16488, C.I.R. v. Chase Manhattan Bank
|Citation:||259 F.2d 231|
|Party Name:||COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The CHASE MANHATTAN BANK, Successor of The Chase National Bank of The City of New York, Trustee and Alleged Transferee of Marie Elizabeth Moran, Respondent. The CHASE MANHATTAN BANK, Sucessor of The Chase National Bank of The City of New York, Trustee and Alleged Transferee of Marie Elizabeth Moran,|
|Case Date:||August 19, 1958|
|Court:||United States Courts of Appeals, Court of Appeals for the Fifth Circuit|
Rehearing Denied Oct. 23, 1958.
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L. W. Post, Ellis N. Slack, Attys., Dept. of Justice, Washington, D.C., Herman T. Reiling, Asst. Chief Counsel, Charles O. Johnson, Sp. Atty., Internal Revenue Service, Washington, D.C., Charles K. Rice, Lee A. Jackson, Asst. Attys. Gen., for petitioner.
C. W. Wellen, Whitfield H. Marshall, M. S. McCorquodale, Fulbright, Crooker, Freeman, Bates & Jaworski, Charles W. Hall, Houston, Tex., for taxpayer, The Chase Manhattan Bank.
Before CAMERON, JONES, and WISDOM, Circuit Judges.
WISDOM, Circuit Judge.
This case turns on the community property law of Texas. 1 Stated broadly, the question before us is the gift tax effects of trusts and insurance in a community property state where the wife has a present, vested ownership of half the marital community in her own right.
The proceedings are brought to this Court by a petition and a cross-petition for review of a Tax Court decision concerning the transferee liability of the taxpayer, Chase Manhattan Bank, successor to Chase National Bank of New York, for gift taxes for the year 1948. 25 T.C. 617 (1955). The alleged transferor is Mrs. Marie Elizabeth Moran, widow of Daniel J. Moran. 2 Marie is alleged to have made gifts of her share of her community property by 'acquiescing' in the benefits of three trusts-- an insurance trust, a living trust, and a testamentary trust-- established by her husband. 3
The Three Trusts.
Daniel James Moran and Marie Elizabeth Moran were married before 1922 and remained husband and wife until Daniel died April 3, 1948. Their legal domicile was Texas during their entire married life. Daniel had no separate property.
November 2, 1928, in New York, Daniel created a living trust, naming as trustee, The Equitable Trust Company, a predecessor to Chase. The trust estate consisted of securities belonging to the community. Income was payable to Daniel for life, then to Marie for life, with the remainder to the settlor's descendants. Daniel reserved the right to modify or revoke the trust. He reserved no powers of control over the administration of the trust.
November 2, 1928 Daniel also created an insurance trust with the same trustee. The trust estate consisted of insurance policies on Daniel's life. Daniel paid the insurance premiums with community funds. He reserved the right to modify or revoke the trust; and under the policies he had the right to change the beneficiaries. Upon Daniel's death the insurance proceeds were payable to the trustee. Income was payable to Marie for life, with the remainder to the settlor's descendants. The insurance trust agreement provides that the validity and effect of the trust shall be governed by the law of New York; the living trust instrument contains a similar provision.
Daniel's will provided for a testamentary trust of his residuary estate, Marie to receive the income for life, the remainder to be divided among Daniel's descendants. Chase, the trustee, was given broad discretionary power to distribute principal to any beneficiary.
II. Conflicting Contentions.
A. The Commissioner held that on Daniel's death the living trust and insurance trust became irrevocable and the testamentary trust came into being. (1) As to the testamentary trust, the Commissioner took the position that Marie was put to an election under Daniel's will and that she elected to take under the will, relinquishing her half of the community for a life estate in that half. (2) As to the living trust, the Commissioner held that it became a completed gift by husband and wife when Daniel died without having exercised his right of revocation. (3) Section 86.2(a) of Treasury Regulations 108 Specifically covers insurance payable revocably to a third person and purchased with community funds. The Commissioner held that on the husband's death there was a gift by the wife of one-half the amount of the proceeds of the insurance.
The Commissioner valued the gift to each trust as the difference between what he concluded that Marie gave up (her community one-half share of the trust estate) and what she retained (a life estate in her one-half). The resulting deficiency for the three trusts amounted to $133, 378.88. 4 This was assessed against Chase as trustee and transferee under Section 1025 of the Internal Revenue Code of 1939.
B. Chase, represented by the same New York lawyers who drew the trusts and the will, 5 filed a petition in the Tax
Court contending that Marie had made no taxable gifts; but, if she had, that the Commissioner's measure of each gift should be reduced by the value of the life estate she received in her husband's one-half of each trust. (1) Chase's petition, filed May 22, 1953, stated that the estate was still under administration and that 'no determination has yet been made as to whether or not the said Marie Elizabeth Moran has elected to take under the will.' The petition alleges however, 'upon information and belief', that Marie's motive 'in not taking against the will was to benefit herself' and that her 'failure to take against the will * * * was an arms length transaction * * * entered into by Marie upon the advice of her attorney * * * as economically advantageous'. (2) As to the living trust and (3) insurance trust, Chase insisted that Marie had no community interest at the time of Daniel's death; her community interest was transferred when the trusts were created in 1928. As in the case of the testamentary trust, Chase claimed that Marie's transfers were 'business transactions * * * for her own benefit'.
Marie did not join in the petition. Marie did not testify. There is no testimony in the record as to Marie's alleged 'motives'. There is none as to any 'arms length' negotiations between Marie and the trustee. There is no evidence as to any affirmative act by Marie showing an intention to transfer any interest to Chase. The stipulation of facts was between Chase and the Commissioner. It has one short unenlightening paragraph referring to Marie's receipt of income from the trusts:
'Marie Elizabeth Moran has, since the date of decedent's death received income from each of the three trusts referred to above in accordance with the provisions of the said trust agreements and of the will of Daniel J. Moran.'
One witness testified, briefly. Charles A. Perlitz, Executor, stated: he informed Marie that he would collect the properties in the estate and turn them over to Chase; 'Mrs. Moran had had no experience in business matters whatever'; she knew nothing about the trusts; she had never asked if she had a right to move against the trusts or the will; he did not 'volunteer that she might have some right to bring suit against the trustees'; 'somewhere down the line when I told her that she ought to make a will or someone, I think the lawyers probating the will, told her she ought to make a will, and then there was some reference there to her community interest and whether she should take on the will or not-- under the will-- but that was long subsequent to the time when the will had been probated'.
At the trial the Commissioner and Chase agreed in assuming that Daniel's will put Marie to an election. Apparently, they agreed also that Marie's receipt of income from the trust was sufficient to show that she had elected to take under the will. They differed only as to whether the effect of the election was that she had made a taxable gift.
Chase, in its petition and at the trial, alleged that Daniel provided a trust for his wife 'of his entire residuary estate, including the property that Marie Elizabeth Moran owned with him in community'. This, we must point out now, is a contradiction in terms. Daniel Moran could put his wife to an election. But Daniel Moran's residuary estate could no more include his wife's one-half of the community property than it could include Chase Manhattan's properties on Pine Street in the city of New York.
C. A majority of the Tax Court, held that Daniel's will put Marie to an election and that Marie's 'acquiescence' in the testamentary trust constituted a taxable gift. The Court held that the living trust was testamentary, that Daniel gave away nothing while he lived, and the principal remained community property. When, however, Marie acquiesced in the trust by accepting the income, she thereby elected to surrender her community property interest in the principal. This, said the Court, was a taxable gift. The Tax Court agreed with Chase that
the value of each gift was one-half of the value of the principal less the life estate in the whole. The tax deficiency was fixed at $27, 426.06, plus interest amounting to $12, 189.20.
As for the insurance trust, the Tax Court held that, under the law of Texas, a surviving wife has no community property interest in the proceeds of policies payable to a third party beneficiary. Marie's failure, therefore, to assert such rights could not be treated as constituting a taxable gift. The logically necessary extension of this holding would require that the entire amount of insurance proceeds be included in the gross estate of a deceased husband in Texas (and perhaps in other community property states)-- when a husband insures his life in favor of a trustee or other third person beneficiary, using community funds to...
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