335 U.S. 632 (1949), 5, Commissioner v. Estate of Church
|Docket Nº:||No. 5|
|Citation:||335 U.S. 632, 69 S.Ct. 322, 93 L.Ed. 288|
|Party Name:||Commissioner v. Estate of Church|
|Case Date:||January 17, 1949|
|Court:||United States Supreme Court|
Argued October 24, 1947
Reargued October 12, 1948
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
1. In 1924, decedent, then 21 years old, unmarried and childless, made a transfer in trust in New York in accordance with state law, naming himself and two of his brothers as co-trustees. Certain corporate stocks were transferred to the trustees, who were empowered to hold and sell them and to reinvest the proceeds. Decedent reserved no power to alter, amend, or revoke, but required the trustees to pay to him the income for life. The trust was to terminate at decedent's death, which occurred in 1939. Some provision was made for distribution of the trust assets at decedent's death, but no provision was made for distribution if decedent died without issue, and none of his brothers or sisters, or their children, survived him.
Held: the decedent having reserved the income from the trust property for life, the transfer was one "intended to take effect in possession or enjoyment at or after his death" within the meaning of § 811(c) of the Internal Revenue Code, and the value of the corpus of the trust was properly included in the gross estate of decedent for purposes of the federal estate tax. Pp. 633-651.
2. A trust transaction cannot be held to alienate all of a settlor's "possession or enjoyment" under § 811(c) unless it effects a bona fide transfer in which the settlor, absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property. After such a transfer has been made, the settlor must be left with no present legal title in the property, no possible reversionary interest in that title, and no right to possess or to enjoy the property then or thereafter. P. 645.
4. Reaffirmance of May v. Heiner is not required by the doctrine of stare decisis nor by the Joint Resolution of March 3, 1931, nor by the decisions of this Court in Hassett v. Welch and Helvering v. Marshall, 303 U.S. 303. Pp. 646-651.
161 F.2d 11 reversed.
The Commissioner determined that the corpus of the trust in question was includible in the decedent's gross estate as a transfer intended to take effect in possession or enjoyment at or after decedent's death. The Tax Court overruled that determination. The Court of Appeals affirmed. 161 F.2d 11. This Court granted certiorari. 331 U.S. 803. Reversed, p. 651.
BLACK, J., lead opinion
MR. JUSTICE BLACK delivered the opinion of the Court.
This case raises questions concerning the interpretation of that part of § 811(c) of the Internal Revenue Code which, for estate tax purposes, requires including in a decedent's gross estate the value of all the property the decedent had transferred by trust or otherwise before his death which was "intended to take effect in possession or enjoyment at or after his death. . . ." Estate of Spiegel v. Commissioner, 335 U.S. 701, involves questions which also depend upon interpretation of that provision of § 811(c). After argument and consideration of the cases at the October, 1947, Term, an order was entered restoring them to the docket and requesting counsel, upon reargument, particularly to discuss certain questions
broader in scope than those originally presented and argued. Journal Supreme Court, 297-298, June 21, 1948. Those additional questions have now been fully treated in briefs and oral arguments.
This case involves a trust executed in 1924 by Francois Church, then twenty-one years of age, unmarried, and childless. He executed the trust in New York in accordance with state law. Church and two brothers were named co-trustees. Certain corporate stocks were transferred to the trust with grant of power to the trustees to hold and sell the stocks and to reinvest the proceeds. Church reserved no power to alter, amend, or revoke, but required the trustees to pay him the income for life. This reservation of life income is the decisive factor here.
At Church's death (which occurred in 1939), the trust was to terminate, and the trust agreement contained some directions for distribution of the trust assets when he died. These directions as to final distribution did not, however, provide for all possible contingencies. If Church died without children and without any of his brothers or sisters, or their children, surviving him, the trust instrument made no provision for disposal of the trust assets. Had this unlikely possibility come to pass (at his death, there were living five brothers, one sister, and ten of their children), the distribution of the trust assets would have been controlled by New York law. It has been the government's contention that, under New York law, had there been no such surviving trust beneficiaries, the corpus would have reverted to the decedent's estate. This possibility of reverter, plus the retention by the settlor of the trust income for life, the Government has argued, requires inclusion of the value of the trust property in the decedent's gross estate under our holding in Helvering v. Hallock, 309 U.S. 106.
The Hallock case held that, where a person, while living, makes a transfer of property which provides for a reversion of the corpus to the donor upon a contingency terminable at death, the value of the corpus should be included in the decedent's gross estate under the "possession or enjoyment" provision of § 811(c) of the Internal Revenue Code.1 In this case, the Tax Court, relying upon its former holdings,2 declared that
The mere possibility of reverter by operation of law upon a failure of the trust, due to the death of all the remaindermen prior to the death of decedent, is not such a possibility as to come within the Hallock case.
This holding made it unnecessary for the Tax Court to decide the disputed question as to whether New York law operated to create such a reversionary interest. The United States Court of Appeals for the Third Circuit, one judge dissenting, affirmed on the ground that it could not identify a clear-cut mistake of law in the Tax Court's decision. 161 F.2d 11. The United States Court of Appeals for the Seventh Circuit in the Spiegel case found that, under Illinois law, there was a possibility of reverter, and reversed the Tax Court, holding that possible reversion by operation of law required inclusion of a trust corpus in a decedent's estate. Commissioner v. Spiegel's Estate, 159 F.2d 257. Other United States courts of appeal have held the same.3
Because of this conflict, we granted certiorari in this and the Spiegel case.
Counsel for the two estates have strongly contended in both arguments of these cases that the law of neither New York nor Illinois provides for a possibility of reverter under the circumstances presented. They argue further that, even if, under the law of those states, a possibility of reverter did exist, it would be an unjustifiable extension of the Hallock rule to hold that such a possibility requires inclusion of the value of a trust corpus in a decedent's estate. The respondent in this case pointed out the extreme improbability that the decedent would have outlived all his brothers, his sister, and their ten children. He argues that the happening of such a contingency was so remote, the money value of such a reversionary interest was so infinitesimal, that it would be entirely unreasonable to hold that the Hallock rule requires an estate tax because of such a contingency. But see Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108, 112.
Arguments and consideration of this and the Spiegel case brought prominently into focus sharp divisions among courts, judges and legal commentators as to the intended scope and effect of our Hallock decision, particularly whether our holding and opinion in that case are so incompatible with the holding and opinion in May v. Heiner, 281 U.S. 238, that the latter can no longer be accepted as a controlling interpretation of the "possession or enjoyment" provision of § 811(c).4 May v. Heiner held that the corpus of a trust transfer need not
be included in a settlor's estate, even though the settlor had retained for himself a life income from the corpus. We have concluded that confusion and doubt as to the effect of our Hallock case on May v. Heiner should be set at rest in the interest of sound tax and judicial administration. Furthermore, if May v. Heiner is no longer controlling, the value of the Church trust corpus was properly included in the gross estate, without regard to the much discussed state law question, since Church reserved a life estate for himself. For reasons which follow, we conclude that the Hallock and May v. Heiner holdings and opinions are irreconcilable. Since we adhere to Hallock, the May v. Heiner interpretation of the "possession or enjoyment" provisions of § 811(c) can no longer be accepted as correct.
The "possession or enjoyment" provision appearing in § 811(c) seems to have originated in a Pennsylvania inheritance tax law in 1826.5 As early as 1884, the Supreme Court of Pennsylvania held that, where a legal transfer of property was made which carried with it a right of possession with a reservation by the grantor of income and profits from the property for his life, the transfer was not intended to take effect in enjoyment until the grantor's death:
One certainly cannot be...
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