Reinecke v. Northern Trust Co

Decision Date02 January 1929
Docket NumberNo. 90,90
Citation66 A. L. R. 397,49 S.Ct. 123,73 L.Ed. 410,278 U.S. 339
PartiesREINECKE, Collector of Internal Revenue for First District of Illinois, v. NORTHERN TRUST CO
CourtU.S. Supreme Court

[Syllabus from pages 339-341 intentionally omitted] The Attorney General and Mr. T. H. Lewis, of Washington, D. C., for petitioner.

Messrs. J. F. Dammann, Jr., and Wm. B. McIlvaine, both of Chicago, Ill., for respondent.

[Argument of Counsel from page 342 intentionally omitted] Mr. Justice STONE delivered the opinion of the Court.

Respondent executor brought suit in the District Court for Northern Illinois to recover from petitioner, a collector of internal revenue, the amount of a tax alleged to have been illegally assessed and collected upon the estate of respondent's testator under the Revenue Act of 1921, c. 136, 42 Stat. 227. Judgment of the district court for the executor, upon an overruled demurrer, was affirmed by the Circuit Court of Appeals for the Seventh Circuit. 24 F. (2d) 91. This court granted certiorari April 23, 1928, 277 U. S. 579, 48 S. Ct. 436, 72 L. Ed. 997.

Respondent's testator died May 30, 1922. On various dates between 1903 and 1919 he established seven trusts by deed which are conceded not to have been in contemplation of death. Two of them were created respectively in 1903 and 1910. They are identified in the record as trusts No. 1831 and No. 3048, and referred to here as the 'two trusts.' By them the income from the trusts was reserved to the settlor for life and on his death the income of each trust was to be paid to a designated person until the termination of the trust as provided in the trust instrument, with remainders over. By the terms of each trust there was reserved to the settlor alone a power of revocation of the trusts, upon the exercise of which the trustee was required to return the corpus of the trust to him.

The remaining five trusts, designated in the record as trusts Nos. 4477, 4478, 4479, 4480 and 4481, referred to here as the 'five trusts,' were created in 1919 before the passage of the Revenue Act of 1921, but after the enact- ment of the similar provisions of the estate tax of the Revenue Act of 1918. 40 Stat. 1096, 1097. By each, life interests in the income, on terms not now important were created. In one the life interest was terminable five years after the death of the settlor or on the death of the designated life beneficiary should she survive that date, with a remainder over. In the other four, life interests in the income were created, terminable five years after the settlor's death or on the death of the respective life tenants, whichever should first happen, with remainders over. The settlor reserved to himself power to supervise the reinvestment of trust funds, to require the trustee to execute proxies, to his nominee, to vote any shares of stock held by the trustee, to control all leases executed by the trustee, and to appoint successor trustees. With respect to each of these five trusts a power was also reserved 'to alter, change or modify the trust,' which was to be exercised in the case of four of them by the settlor and the single beneficiary of each trust, acting jointly, and in the case of one of the trusts, by the settlor and a majority of the beneficiaries named, acting jointly.

The settlor died without having revoked either of the two trusts and with the beneficiaries and life tenants designated in the trusts surviving him, and without having modified any of the five trusts except one, and that in a manner not now material.

The commissioner, in fixing the amount of the estate for tax purposes included the corpus of all seven trusts. Section 401 of the statute imposes a tax at a graduated rate 'upon the transfer of the net estate of every decedent' dying after the passage of the act. By section 402 it is provided that in calculating the tax there shall be included in the gross estate all property, tangible and intangible, '(c) to the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contem- plation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this act). * * *'

As to the two trusts, it is argued that since they were created long before the passage of any statute imposing an estate tax the taxing statute if applied to them is unconstitutional and void, because retroactive, within the ruling of Nichols v. Coolidge, 274 U. S. 531, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A. L. R. 1081. In that case it was held that the provisions of the similar section 402 of the 1918 act, 40 Stat. 1097, making it applicable to trusts created before the passage of the act was in conflict with the Fifth Amendment of the Federal Constitution and void as respects transfers completed before any such statute was enacted. But in No. 77, Chase National Bank v. United States, 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. —, decided this day, the decision is rested on the ground, earlier suggested with respect to the Fourteenth Amendment in Saltonstall v. Saltonstall, 276 U. S. 260, 271, 48 S. Ct. 225, 72 L. Ed. 565, that a transfer made subject to a power of revocation in the transferor, terminable at his death, is not complete until his death. Hence section 402, as applied to the present transfers, is not retroactive since his death follows the passage of the statute. For that reason, stated more at length in our opinion in Chase National Bank v. United States, supra, we hold that the tax was rightly imposed on the transfers of the corpus of the two trusts and as to them the judgment of the court of appeals should be reversed.

It is argued by respondent that section 402 by its terms does not impose any tax on the transfers involved in the five trusts and that, even if subject to the provisions of that section, they antedated the passage of the 1921 act, and the section as to them is retroactive and void, although they were created after the enactment of the corresponding sections of the 1918 act. The government argues that section 402 applies to all these transfers and is not retroactive as to them because of the reserved powers to manage and to modify the trusts, which did not terminate until the death of the decedent after the passage of the statute, and that even without such reserved powers the transfers of the remainder interests were all subject to the tax because, within the language of section 402, they were 'intended to take effect in possession or enjoyment at or after his death.'

As the tax cannot be supported unless the statute applies in one of the two ways suggested by the government we must necessarily determine the effect of the reserved powers and the meaning and application of the phrase...

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