Bullard v. Commissioner of Internal Revenue

• Decision Date: 25 May 1937
• Docket Number: No. 6120.,6120.
• Citation: 90 F.2d 144
• Parties: BULLARD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

90 F.2d 144 (1937)

BULLARD v. COMMISSIONER OF INTERNAL REVENUE.

No. 6120.

Circuit Court of Appeals, Seventh Circuit.

May 25, 1937.

Samuel S. Holmes and Lorentz B. Knouff, both of Chicago, Ill., for petitioner.

James W. Morris, Sewall Key, Norman D. Keller, and Arnold Raum, all of Washington, D. C., for respondent.

Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

Petitioner, as executor of the last will and testament of Clara R. Smith, deceased, asks this court to reverse a decision of the Board of Tax Appeals affirming an assessment of deficiency in a federal estate tax in the sum of $17,271.46, assessed by the Commissioner against the estate of the deceased. The deficiency arose out of the action of the Commissioner in including in the gross value of the estate the corpus of a certain inter vivos trust agreement dated February 17, 1932. Mrs. Smith died testate on May 24, 1933.

On March 3, 1927 the decedent created an irrevocable trust of certain securities under which the income from the property was reserved to the donor during her lifetime; upon her death the trust estate was to be divided into three separate funds. The income therefrom was to be paid thereafter to the decedent's three children during their lives and after their deaths to her grandchildren until the youngest should attain the age of twenty-six, whereupon the funds were to be divided equally among the grandchildren. One of her children was a son, Edward A. Smith. The income from his representative portion of the trust fund was to be paid, in case of his death, to his widow during her lifetime, unless a child or children survived him, in which event income and principal were to go to such children. If no child survived Edward, upon his death and that of his widow, the principal of the trust funds of which he was beneficiary was to be paid one-half to the children of each of the decedent's two daughters. The son died on December 16, 1926, leaving a widow but no children, and upon his death, under the terms of the trust, his widow became entitled to the income from the trust fund of $100,000, subject to the life estate of the decedent.

In 1931 the decedent became dissatisfied with the trust arrangement; learned, as she said, for the first time, that the trust was irrevocable, but was advised by an attorney that it probably violated the rule against perpetuities and was, therefore, void, but that it was possible, because of the interest of minors, to dissolve the trust only by court decree. At first the widow of Edward refused to consent to termination or modification of the trust, but finally assented to a decree of dissolution, provided her rights should be preserved precisely as provided in the original trust agreement.

Thereupon, in order to avoid family controversy, unpleasant litigation, and consequent undesirable notoriety, the interested parties entered into a parol agreement providing that, upon entry of a decree terminating the old trust, a new one would be created and that the corpus thereof would be the portion of the securities of which Edward and his widow were the beneficiaries under the old trust. As to that, she was to have the rights she possessed under the old trust, under which the income was to be payable to decedent during her life. It was agreed that the remainder of the original trust should be dissolved and that, in lieu thereof, the decedent would make a new will devising and bequeathing unto the minor beneficiaries larger property rights and that the new trust should be created prior to the entry of a decree dissolving the old one.

Accordingly a second trust indenture was executed on February 17, 1932 and the new will prepared. On the same date, the decedent wrote to the Continental Illinois Bank & Trust Company, trustee under both trusts, stating that she had filed her bill to cancel the original trust and to have it declared void, inoperative, and ineffective because in violation of the rule against perpetuities, saying that in her bill she was seeking a decree dissolving the trust because of its invalidity, adjudging that the trust agreement be destroyed, rendered void, and terminated in toto, ordering the trustee to account for, assign, transfer, and set-off to her all the property held in trust and decreeing that she hold and possess the same as her own and absolute property, free and clear of any right or claim in any other person. She further advised the trustee that she was creating a new trust; that she was selling and conveying to the trustee, acting as such under the new trust, the securities then held, representing the son's interest in the old trust, to hold under the new agreement; that she would pay the cost of the transfer; and that her rights to receive the income from the new trust and the rights of her son's widow therein should arise immediately upon extinguishment of the old trust.

On February 27, 1932, the court, with jurisdiction of the parties, found that the trust agreement, by reason of the violation of the rule against perpetuities, was wholly inoperative and ineffective as to one-third of the fund; that the decedent had intended and conceived the disposition of the whole of said trust fund as a single and connected distributive scheme and would not have created the trust had she known that any part thereof was void and that by reason of such facts the whole of the trust arrangement was destroyed and rendered void; that all assets and property held by the trustee were the decedent's own absolute property, free and clear of any trust and of any right, claim, or demand of any other party. The court directed the trustee to assign to the decedent all the trust funds.

The new trust provided that trustor "has sold, assigned, transferred, conveyed and delivered and by these presents does sell and assign the securities and property described in the schedules" to the trustee as such; that during the lifetime of the trustor, but only after the death of the son's widow, the trustor might alter the trust, change the beneficiaries, withdraw and receive all of the corpus of the trust, and wholly or partially revoke the trust. Mrs. Smith was to receive the income from the new trust during her lifetime, and upon her death same was to be paid to the son's widow during her lifetime, and upon the death of both the decedent and the son's widow the trustee was directed to pay over all the principal of the estate to the decedent's two daughters.

All of the corpus of the old trust other than that included in the new trust was surrendered and delivered to the decedent or to her nominees.

The petitioner contends that under these facts no property of the decedent passed to the new trust; that under it she retained no interest not already vested in her under the first trust; that the creation of the second trust amounted to a bona fide and adequate sale for full consideration exempt under the statute. It becomes material, therefore, at the outset to determine the effect of the facts above stated.

It is to be observed that by the terms of the decree, the first trust was set aside and terminated and the corpus thereof adjudged to be the property of the decedent. True, she never received from the trustee the specific securities constituting the corpus of the second trust, but that was because she directed the trustee to transfer the same directly to the new trust. Under the decree of the court, the title of the corpus of the new trust, upon dissolution of the old trust, rested in her free of right, title, or claim of any other person. She was the absolute owner thereof, and it was her property that passed into the corpus of the new estate. Consequently there was no bona fide sale but rather a creation of a new trust out of her own estate.

But it is said that the decree was merely a consent decree based upon a family settlement. In Freeman on Judgments vol. 3 (5th Ed.) § 1350, it is said: "It is difficult to conceive upon what theory the action of the court in rendering judgment upon the agreement of the parties may be treated as not judicial and conclusive." In volume 3, (5th Ed.) § 1361, the writer says: "So a consent decree, conclusive where rendered, is conclusive in other states." In volume 2 (5th Ed.) § 663, it is said: "The same general rules which govern judgments generally apply to a judgment by consent or upon stipulation. It is an estoppel, merger or bar under the same circumstances and to same extent as any other judgment." In Harding v. Harding, 198 U.S. 317, 25 S.Ct. 679, 684, 49 L.Ed. 1066, the court said: "The general rule in Illinois undoubtedly is that a consent decree has the same force and effect as a decree in invitum. Knobloch v. Mueller, 123 Ill. 554, 17 N.E. 696; O'Connell v. Chicago Terminal Transfer R. Co., 184 Ill. 308, 325, 56 N.E. 355." In Swift & Co. v. United States, 276 U.S. 311, 48 S. Ct. 311, 314, 72 L.Ed. 587, the court adhered to the rule in the following language: "But `a decree, which appears by the record to have been rendered by consent is always affirmed, without considering the merits of the cause.' Nashville, Chattanooga & St. Louis Ry. Co. v. United States, 113 U.S. 261, 266, 5 S.Ct. 460, 28 L.Ed. 971. Compare United States v. Babbitt, 104 U.S. 767, 26 L.Ed. 921; McGowan v. Parish, 237 U.S. 285, 295, 35 S.Ct. 543, 59 L.Ed. 955. Where, as here, the attack is not by appeal or by bill of review, but by a motion to vacate, filed more than four years after the entry of the decree, the scope of the inquiry may be even narrower."

Accordingly we conclude that under the decree of the circuit court of Cook county Mrs. Smith became entitled to the corpus of the trust and that thereafter neither she nor any of the parties to that suit could deny the binding effect of the decree. Accordingly the new trust must rest upon its own ground and the rights of the petitioner must be determined thereunder.

The petitioner contends,...