Bank of New York v. United States

• Decision Date: 09 July 1970
• Docket Number: No. 67 Civ. 622.,67 Civ. 622.
• Citation: 314 F. Supp. 1167
• Parties: The BANK OF NEW YORK, as Executor of the Will of Grace A. Sedgwick, deceased, Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

314 F. Supp. 1167

The BANK OF NEW YORK, as Executor of the Will of Grace A. Sedgwick, deceased, Plaintiff, v. The UNITED STATES of America, Defendant.

No. 67 Civ. 622.

United States District Court, S. D. New York.

July 9, 1970.

Emmet, Marvin & Martin, New York City, for plaintiff.

Robert M. Morgenthau, U. S. Atty., S. D. New York, New York City, for the United States; Richard S. Rudick, Alan B. Morrison, Asst. U. S. Attys., of counsel.

OPINION

EDWARD WEINFELD, District Judge.

These are cross-motions for summary judgment in an action brought by the executor of the estate of Grace A. Sedgwick for a refund of federal estate taxes. The parties agree that no factual issue exists and that the matter is ripe for summary judgment.

In 1907, Grace A. Sedgwick created a trust under which she transferred certain property to her trustee, she to receive the income for life. She retained a general testamentary power to appoint one equal half part of the trust. She also retained a limited testamentary power to appoint the balance of the trust fund to her issue or, in default of issue, to her surviving next of kin by blood under New York law, in such proportions and under such conditions as she saw fit, with express power to exclude some, but not all, of such surviving issue or next of kin. Provision was also made for disposition of the corpus or any part thereof in the event the powers of appointment were not effectively exercised. Additional transfers of property into the trust were made in subsequent years.

From December, 1920, until her death on June 23, 1961, decedent was confined to a hospital; she was adjudged an incompetent in the Supreme Court, New York County, on February 8, 1923. The adjudication was in effect at the date of her death. Decedent had no issue; her sole surviving next of kin was her sister, Susan, who is still alive and has two children. Accordingly, absent an effective exercise of the power of appointment, Susan, under applicable New York law, would be the sole distributee. The decedent's will, dated June 2, 1920, was admitted to probate and plaintiff, Bank of New York, qualified as executor in August, 1961. Under the will, decedent did exercise the power of appointment, and after making certain specific bequests, appointed the remainder to her sister Susan. An estate tax return was filed, in which the corpus of the trust was included in the gross estate. The parties agree that, as filed, this was error, since included therein were transfers made prior to September 7, 1916.¹ However, they disagree as to what was includable in the gross estate beyond that date. The Commissioner contends that the full amount of all additions to the corpus of the trust after September 7, 1916 is includable pursuant to section 2037(a) of the Internal Revenue Code, and made an assessment accordingly. The plaintiff contends that the entire corpus of the trust is excludable by virtue of section 2038(c) of the Code.

At issue is a narrow question as to the interrelationship of two inter vivos transfer sections of the gross estate provisions of the Internal Revenue Code of 1954. Section 2037,² entitled "Transfers taking effect at death," insofar as herein applicable, provides for inclusion in the gross estate for estate tax purposes of the value of property transferred, in trust or otherwise after September 7, 1916, if (1) "possession or enjoyment of the property can, through ownership * * * be obtained only by surviving the decedent," and (2) the decedent, by the express terms of the instrument of transfer, has retained a reversionary interest of a value, immediately before his death greater than five percent of the value of the property. "Reversionary interest" as defined "includes a possibility that the property transferred by the decedent — (1) may return to him or his estate, or (2) may be subject to a power of disposition by him. * * *" Section 2038,³ entitled "Revocable transfers," provides for inclusion in the gross estate of the value of all property transferred, by trust or otherwise, for which enjoyment was subject, at the date of the decedent's death, "to any change through the exercise of a sole or joint power of the decedent * * * to alter, amend, or revoke" the trust. However, section 2038(c) excludes from the operation of section 2038 certain retained powers with respect to the distribution of corpus or income only where the decedent was under a continuous mental disability to relinquish those powers from at least October, 1947, until the time of his death.

The statutes herein involved are derived from section 202(b) of the Revenue Act of 1916⁴ which provided:

"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated:

* * * * * *

(b) 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 created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death * * *."⁵

Section 202(b) and kindred provisions in subsequent acts are designed to "sweep into the gross estate all property the ultimate possession or enjoyment of which is held in suspense until the moment of the decedent's death or thereafter."⁶

I.

The parties are agreed that the testamentary powers of appointment retained by decedent constitute powers to "alter, amend, or revoke" within the meaning of section 2038,⁷ but that decedent's mental disability brings her within the terms of section 2038(c), thereby preventing inclusion under the revocable transfer section. Nonetheless, the government's submission is that section 2038(c) does not apply to section 2037 — that the two provisions, despite overlapping, are distinct and separate, with different tests for determining inclusion or exclusion. The substance of the government's position is that the post-1916 transfers to the trust are includable in the gross estate on the authority of section 2037, upon the view that the testamentary powers of appointment constitute "reversionary interests" within the broad meaning of that section. These powers clearly do constitute reversionary interests under any traditional definition;⁸ they also fit squarely within the expansive definition of section 2037(b). Because decedent had the power, with certain limitations, to control the disposition of the corpus in her will, there was not just a "possibility" but a certainty that the "property transferred by the decedent * * may be subject to a power of disposition by" her. Plaintiff, without seriously disputing this, contends, however, that the reversionary interests subject to section 2037 are not such "actual" reversions but only "possibilities of reverter" and other such remote or contingent interests. Such a construction is untenable. The language of section 2037(b) does not purport to provide a limiting definition; to the contrary, it is expansive in stating that "`reversionary interest' includes" more remote or contingent interests.⁹ To read "includes" to mean "limited to," as plaintiff would, is to give the words of that section a strained and unnatural construction. To accept plaintiff's thesis would do violence to plain language by reading "includes" to mean "excludes." The statutory history of section 2037 bears out what the words in any event dictate. Under the original 1939 Internal Revenue Code and earlier Revenue Acts there was no express reference to "reversionary interest." Inclusion of the transferred property in the gross estate on the basis of such a retained interest was required under the generic "possession or enjoyment" language.¹⁰ In Commissioner of Internal Revenue v. Estate of Church¹¹ and Estate of Spiegel v. Commissioner of Internal Revenue,¹² the Supreme Court gave to that language an extremely expansive reading:¹³

"An estate tax cannot be avoided by any trust transfer except by 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."

It was argued to the Court that where the monetary value of a contingent reversionary interest was small in comparison with the total value of the corpus, the transfer should not be included. But the Court rejected that argument:¹⁴

"The question is not how much is the value of a reservation, but whether after a trust transfer * * * some present or contingent right or interest in the property still remains in the settlor so that full and complete title, possession or enjoyment does not absolutely pass to the beneficiaries until at or after the settlor's death."

In 1949 Congress amended the Code, providing that a transfer intended to take effect in possession or enjoyment at or after death should not be included in the gross estate unless the decedent retained, by the express terms of the instrument of transfer, a reversionary interest of a value, immediately before the death of a grantor, in excess of five percent of the value of the property. "Reversionary interest" was further defined, as in the present section 2037(b), to include the more remote possibilities that the property might return to the grantor or his estate or be subject to the grantor's disposition.¹⁵ The committee reports accompanying the amendments, wherein explicit reference to the Church and Spiegel decisions was made, show that the purpose was to relieve taxpayers of large estate taxes incurred solely on account of retained interests whose actual values were insignificant.¹⁶ To achieve that purpose, Congress fashioned additional requirements to...