Porter v. Commissioner of Internal Revenue, 414.

• Decision Date: 18 July 1932
• Docket Number: No. 414.,414.
• Citation: 60 F.2d 673
• Parties: PORTER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

60 F.2d 673 (1932)

PORTER v. COMMISSIONER OF INTERNAL REVENUE.

No. 414.

Circuit Court of Appeals, Second Circuit.

July 18, 1932.

Milbank, Tweed, Hope & Webb, of New York City (Walter E. Hope, Richard L. Davisson, and Edward N. Perkins, all of New York City, of counsel), for appellant.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Erwin N. Griswold, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Lewis S. Pendleton, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellee.

Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

Porter, the petitioners' testator, in 1918 and 1919, conveyed personal property to a trust company, under two deeds of trust, by which he created interests in specified beneficiaries, not necessary to set forth. Each deed reserved to him a sole power to revoke the appointments and substitute other beneficiaries, expressly excepting himself and his estate. He died in November, 1926, just before his death revoking the earlier deed and substituting another of the same kind. The chief question is whether the funds so conveyed are to be included as a part of his taxable estate under section 302 (d) of the Revenue Act of 1926, 26 USCA § 1094 (d). The pertinent language is as follows: "The value of the gross estate * * * shall be determined by including the value * * * of all property * * * to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power * * * to alter, amend, or revoke." The executors' argument is that as their testator had irrevocably parted with any interest in the property, the fact that he might change the beneficiaries at his pleasure is irrelevant; he had finally put it beyond his control; his reserved power to determine the eventual donees did not affect the definitiveness of his abandonment. There was therefore nothing on which to levy an excise; nothing certainly which could be treated as still a part of his estate.

The Commissioner answers that the power was in effect beneficial, despite its limitation. The donee might revoke the original limitation and select a facile beneficiary; might even make an agreement beforehand that the substitute should unite with him to terminate the trust, as is possible in New York, when all the beneficiaries are in being. Personal Property Law (Consol Laws N. Y. c. 41) § 23. In Meyer v. Bank of Manhattan Trust Co., 232 App. Div. 228, 249 N. Y. S. 640, the deed provided that it should not be revoked, but the settlor had a power to change the beneficiaries. He made his wife sole cestui que trust and with her consent successfully revoked the deed. In Faulkner v. Irving Trust Co., 231 App. Div. 87, 246 N. Y. S. 313, the settlor could not revoke until he was thirty-five years old, but by changing the beneficiary and getting the consent of the substitute, he avoided the limitation. The Court of Appeals of that state has not, however, passed upon the point, and we are not entirely satisfied that the rights of existing beneficiaries can be circumvented by such a device. It may eventually be held that while the donee of the power is at liberty to revoke and reappoint at his pleasure, his choice must not violate the condition upon its exercise, either directly or indirectly. If so, the original interests are defeasible only when the settlor does not profit by the change, and equity will inquire whether this limitation has been observed, or whether the whole contrivance is in violation of the trust. As we think that this part of the order should be affirmed anyway, we pass the point.

The language of section 302 (d) is broad enough to cover the case at bar. United States v. Field, 255 U. S. 257, 41 S. Ct. 256, 65 L. Ed. 617, 18 A. L. R. 1461, arose under the Act of 1916 (39 Stat. 756 as amended 39 Stat. 1000), which did not comprise general powers, and was decided for that reason. Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S. Ct. 123, 124, 73 L. Ed. 410, 66 A. L. R. 397, involved the Act of 1921, where the relevant section (section 402 (c), 42 Stat. 278) read: "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 * * * intended to take effect in possession or enjoyment at or after his death." The settlor had reserved a general beneficial power to revoke, whose termination by his death was treated as a taxable transfer. The theory was that, although the mere falling in of the remainders would not serve as such (a ruling repeated in May v. Heiner, 281 U. S. 238, 50 S. Ct. 286, 74 L. Ed. 826, 67 A. L. R. 1244), the settlor had in substance imposed a condition upon the interests originally limited, which his death removed. His reservation of control left them contingent; only when that ended were they finally confirmed. The settlor's death was therefore an event upon which an excise might be levied; and, since the settlor might at any time resume the property as his own, the funds could be included in his estate. Part of this applies with equal force to subject the funds at bar to an excise, since for that result it is immaterial that the settlor cannot reappropriate the property. Though he has finally denuded himself, he controls the disposition while he lives; the existing limitations are conditional upon his pleasure. A gift is a bilateral transaction and demands a donee as well as a donor; it is incomplete though the donor has parted with his interest, if the donee remains indeterminate, and the beneficiaries are determined only when the power to change them ends. Thus the subject matter of the tax was within the reach of Congress as much as any other transfer by death; the only question is whether the statute has exceeded any constitutional limitations.

However, while there was a proper...