Block v. U.S., 74-1178

Decision Date03 February 1975
Docket NumberNo. 74-1178,74-1178
Parties75-1 USTC P 13,048 Nicholas M. BLOCK, II, Executor, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Tax Div., Dept. of Justice, Washington, D.C., William J. Schloth, U.S. Atty., Ronald T. Knight, Asst. U.S. Atty., Macon, Ga., Dennis M. Donohue, Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Benjamin M. Garland, J. Patrick Meyer, Jr., Macon, Ga., for plaintiff-appellee.

Appeal from the United States District Court for the Middle District of Georgia.

Before THORNBERRY, MORGAN and CLARK, Circuit Jduges.

LEWIS R. MORGAN, Circuit Judge:

Nicholas M. Block, as executor of the estate of Earle Henry Block, brought a claim for a refund of estate taxes assessed by the Commissioner of Internal Revenue and paid by the estate. A jury in the Middle District of Georgia returned a special verdict in favor of the estate, finding that a trust established by the decedent within three years of his death to benefit members of his family was not primarily motivated by his contemplation of death. Judgment in the amount of $91,752.04 was entered for the estate, and the United States appeals. We affirm.

I.

Approximately 28 months before his death, Earle H. Block established an irrevocable inter vivos trust with himself as trustee. The trust instrument provided that the trust income was to be paid to the settlor's sister-in-law Elizabeth Block for her life, and upon her death, to her two sons, Nicholas and Herbert, Jr., for their lives, with the remainder to their lineal descendants. The corpus of the trust consisted of income-producing securities valuded at $400,153.14. The assets of this trust were not included in the decedent's gross estate on the estate tax return filed by the executor.

The Commissioner assessed a deficiency based on section 2035 of the Internal Revenue Code of 1954, 26 U.S.C.A. 2035, which provides for the inclusion in a decedent's gross estate of property gratuitously transferred by him within three years of his death and 'in contemplation of death.' 1 The deficiency was assessed against only the actuarial value of the secondary life estates and remainder interest, or 65% Of the trust's total value; the Commissioner did not contest the life motives of the decedent in establishing a life estate for Elizabeth. Rather, the Commissioner asserted that the decedent had separate and distinct motives for establishing the interests for his nephews and their descendants, that they were gifts 'in contemplation of death,' and that the death motives should govern the estate tax consequences of that actuarially determined portion of the trust.

Pursuant to its 'split-gift' theory, the Government requested the trial court to rule that any evidence regarding the decedent's life motives for establishing Elizabeth's interest was irrelevant to the case and therefore inadmissible. The court declined to do so, but did allow the Government to introduce into evidence testimony and exhibits which related to the decedent's motives for establishing his nephews' life interests and the remainder. The Government also requested that the jury be instructed to disregard evidence related to the decedent's motivations for establishing Elizabeth's life estate. The trial court did not accept the Government's theory of the case and instructed the jury to look at the trust as a whole and to determine the dominant motive for establishing it. On appeal, the Government urges that the introduction of evidence regarding the motivation for Elizabeth's life estate and the instruction to determine the decedent's dominant motive for the entire trust, as opposed to the secondary life estates and remainder only, were prejudicial error.

II.

The determination of whether any particular transfer of property was made 'in contemplation of death,' within in the meaning of section 2035, is rarely a clear-cut question, for it necessarily involves deciding the state of mind of a person who is not available to testify. In addition, there are often competing or ambiguous motives which must be balanced and weighed against each other. The task is perhaps most complicated in the case of gifts made in trust. They frequently represent a comprehensive and complex plan benefitting multiple parties over a period of years. As Chief Justice Hughes noted in United States v. Wells, 283 U.S. 102, 119, 51 S.Ct. 446, 452, 75 L.Ed. 867 (1931), 'There is no escape from the necessity of carefully scrutinizing the circumstances of each case to detect the dominant motive of the donor in the light of his bodily and mental condition, and thus to give effect to the manifest purpose of the statute.' That purpose, of course, is to tax in the estate gifts made during life which are intended to be substitutes for testamentary dispositions, thereby preventing evasion of the estate tax. United States v. Wells, 283 U.S. 102, 116-117, 51 S.Ct. 446 (1931); Bel v. United States, 452 F.2d 683, 687 (5th Cir. 1971), cert. denied, 406 U.S. 919, 92 S.Ct. 1770, 32 L.Ed.2d 118.

In all of the varying factual circumstances which have presented contemplation of death questions, only a few have dealt with the split-gift theory whereby a gift which was on the surface a single transfer may be considered as two gifts (or more) and the dominant motive determined for each separate gift thus broken down.

In Garrett's Estate v. Commissioner, 180 F.2d 955 (2d Cir. 1950), the court approved the splitting of a single trust for estate tax purposes where the corpus of the trust consisted of income-producing securities and thirty life insurance policies. The deed of trust directed the trustees to pay the premiums on the policies out of the income produced by the securities in the trust; the remainder of the income was paid out to the beneficiaries. Three-tenths of the income had been used to maintain the life insurance policies. The court affirmed a holding by the Tax Court that the life insurance policies and three-tenths of the securities had been transferred in contemplation of death. Under the provisions of the trust, it was sufficiently clear that...

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2 cases
  • Rosenberg v. Comm'r of Internal Revenue (In re Estate of Rosenberg), Docket No. 20654-84.
    • United States
    • U.S. Tax Court
    • May 19, 1986
    ...Allen v. Trust Co. of Georgia, 326 U.S. 630, 636 (1946); United States v. Wells, 283 U.S. 102, 119 (1931); Block v. United States, 507 F.2d 603, 605 (5th Cir. 1975); Estate of Lidbury v. Commissioner, 84 T.C. 146, 157 (1985); Estate of Himmelstein v. Commissioner, 73 T.C. 868, 871 (1980); E......
  • Brown v. U.S.
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • May 1, 2003
    ...cognizant of impending mortality, transfers property out of her estate in order to reduce estate tax liability. See Block v. United States, 507 F.2d 603, 605 (5th Cir.1975) (discussing predecessor of the current § 2035). Although these inter vivos transfers incur gift tax liability, opting ......

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