Allen v. Trust Co. of Georgia, 11160.

• Decision Date: 03 May 1945
• Docket Number: No. 11160.,11160.
• Parties: ALLEN, Collector of Internal Revenue, v. TRUST CO. OF GEORGIA et al.
• Court: U.S. Court of Appeals — Fifth Circuit

149 F.2d 120 (1945)

ALLEN, Collector of Internal Revenue, v. TRUST CO. OF GEORGIA et al.

No. 11160.

Circuit Court of Appeals, Fifth Circuit.

May 3, 1945.

Carlton Fox, Sewall Key, Mills Kitchen, and Helen R. Carloss, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and Chas. W. Walker, Asst. U. S. Atty., of Macon, Ga., for appellant.

John A. Sibley and Furman Smith, both of Atlanta, Ga., for appellee.

Before WALLER and LEE, Circuit Judges, and LONG, District Judge.

WALLER, Circuit Judge.

When the settlor, Jack J. Spalding, in 1937, at the age of eighty-one and within two years of his death, relinquished the power to amend, change, enlarge, or limit the terms of two trust agreements, made in 1925, irrevocably conveying securities in one instrument to a trustee for his daughter and in the other for one of his sons, was such relinquishment made "in contemplation of death" under Sec. 302, subsections (d) (1) and (d) (3), Revenue Act of 1926, as amended by Sec. 401, Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 229, now Sec. 811(d) of Title 26 U.S.C.A. Int.Rev.Code.¹

In 1925 Mr. Spalding, being a man of considerable means, active, and in good health, discovered that his daughter, Suzanne (Mrs. Schroeder), her husband, and their five children were in impecunious circumstances due to serious financial reverses. They were living in a small garage apartment in Miami where they had gone after the oil mill venture of Mr. and Mrs. Schroeder in Albany, Georgia, had been wrecked by the cancellation of contracts, and the catastrophic fall in prices consequent upon the cessation of hostilities of World War I. The settlor's son, Jack, had also engaged in unwise and improvident business ventures, with the result that he was in hard financial circumstances. To relieve their situations Mr. Spalding created two trusts, of the type usually referred to as "spendthrift trusts", wherein he sought to protect these two children and their children from privation and want, as well as from the results of any repetition of their previous business misadventures. In each of the two trust agreements, which were between him and a trust company, as trustee, he irrevocably conveyed to the trustee corporate stock then having a value of $50,000.00. In 1934 he increased these two trusts by additional gifts of personal property of the value of $50,000.00.

There is not, and there could hardly be, any serious dispute that these two trusts, established in 1925 and increased in 1934, were: (a) to protect the children against want and against their own business mistakes; (b) executed with the intention on the part of their father to make the gifts absolute; and (c) not executed, either in 1925 or 1934, in contemplation of death, either in the actual sense of one who looks over Jordan and sees the sweet chariot swinging low and a band of angels coming after him, or in the synthetic or presumptive sense. The lower Court so found with abundant evidence to support the finding.

But the 1925 trust agreements contained the following provision, which was also brought forward in the 1934 amendment: "During my life, by the unanimous consent of the said trustee, my said daughter and of myself, the terms of this agreement may be amended, changed, enlarged or limited, but in no event shall the conveyance of said stock to the party of the second part be revoked."

The state of the law was such that at the time of the trust agreements the language of sub-paragraph (d) (1) of Sec. 302 relating to a reservation of a power of amendment "either by the decedent alone or in conjunction with any person" was thought to reach situations only where the decedent or trustee or some other person not adversely interested might, by amendment, reduce, or take away from the cestui que trust, the right to the enjoyment of the property of the trust estate.² But the law was not that of the Medes and Persians which altereth not, and in Helvering, Commissioner v. City Bank, 296 U.S. 85, 56 S.Ct. 70, 80 L.Ed. 62, it was held that the term "in conjunction with any person" should be construed to mean any person and that the term included the beneficiary or persons having an adverse interest, regardless of the veto power of the beneficiary in the trust agreement. That decision, rendered November 11, 1935, was called to the attention of Mr. Spalding, Sr., in May, 1937, by his son Hughes, who was an attorney in the settlor's law firm.

Thereupon the elder Spalding relinquished the power to change, alter, or modify³ the trust indenture, but Mr. Spalding died within two years of the date of making the relinquishment, causing the statutory presumption of Sec. 302(d) (3) to arise that the relinquishment was made in contemplation of death.

The tax is "upon the transfer of the net estate of every decedent" and not upon the net estate, the value of the transfer being measured, of course, by the net value of the estate passing from the decedent to his heirs, devisees, or legatees. Secs. 302(d) (1) and 302(d) (3) of the Act also undertake to prescribe certain tests in determining the gross estate of a decedent. For instance, Sec. 302(d) (1) provides, in substance, that any interest of the estate of the decedent of which he has theretofore made a transfer, by trust or otherwise, where the enjoyment of such interest at the time of his death was subject to any power of the decedent, either alone or in conjunction with any other person, to alter, amend, or revoke the transfer or trust, or where the decedent relinquished such power to alter, amend, or revoke in contemplation of his death, shall be included in the gross estate of the decedent.

Sec. 302(d) (3) provides that the relinquishment of any such power, made without consideration and within two years prior to his death, which affects the interest of a transferee or beneficiary of a value at the time of death in excess of $5,000, shall, to the extent of such excess, be deemed to have been made in contemplation of death within the meaning of the Act unless the contrary be shown.

So when Mr. Spalding died within two years from the date of the relinquishment of the power to amend, which could only be done upon the unanimous consent of his daughter, the trustee, and himself, the Commissioner of Internal Revenue, invoking the above-mentioned subsections, required the inclusion in the gross estate of the decedent the amount of the interest which the decedent had theretofore irrevocably transferred to the trusts for the benefit of his son and daughter and their children.

The trustee paid the tax under protest and successfully sued in the District Court of the Middle District of Georgia for the recovery of the tax so charged and collected.

After making the finding of facts shown in the margin,⁴ the District Court then concluded as a matter of law: (1) That an intent to avoid an estate tax, standing alone, is not conclusive that a gift or a release of a power was made in contemplation of death in the statutory sense; (2) That neither the original gifts nor the release of the power in this case was made in contemplation of death within the meaning of the statute; and (3) That judgment should be entered for the recovery of the taxes paid.

All of the finding of facts from 7 through 13, inclusive, have substantial support in the evidence. Finding No. 14 to the effect that the renunciation of the power to amend, executed on May 1, 1937, "was not made in contemplation of death in the statutory sense", is supported by the circumstances and facts in evidence insofar as the actualities are concerned, but in view of the artificialities injected into the case a mixed question of law and fact is involved, which calls for further consideration and for some elaboration.

Much has been written as to what is meant by the phrase "in contemplation of death" in connection with: (a) The contemplation of death of one who is in extremis and who believes that death is imminent; (b) The general expectation of death that all men entertain; (c) The statutory contemplation of death attributable to all who die within two years after making certain gifts, or after relinquishing the powers relating to the management thereof. But now the Appellant urges that there is still another process by which one can think his estate into taxation if he, in making a gift, had in mind the saving of taxes to his heirs or legatees. It seems to be a sort of synthetic contemplation of death attributable to the man who, in the exercise of proper and legal motives, makes a gift or relinquishes a power which he hopes will have the consequence of freeing his estate from the payment of death taxes.

An explanation of the first two of the afore-mentioned types of contemplated dissolutions is hardly necessary because most of us have had contacts with the Grim Reaper, both proximate and remote, and have contemplated death in each of such aspects; but when it is asserted that a person acts in contemplation of death in the relinquishment of a power to alter a transfer previously made for the protection of his children and the equalization of his bounty merely because he wishes the transfer to have the tax consequences that he originally intended, to wit, the freedom from death taxes against his estate and his heirs, a novel concept is projected into the brain of the uninitiate. Perhaps some, to whom the idea seems bizarre, will better understand the development of this concept by considering the analogy of such a mental process to the mental process attributable to one making a will or a testamentary disposition of his property. It is deemed that the making of a will involves a contemplation of what will occur upon the testator's death, as well as the methods whereby his wishes and desires can be carried into effect after his death. So, then, it is not a far step of the taxgatherer from the recognized position that a man in making a testamentary disposition of his property does...