Chickering v. Commissioner of Internal Revenue, 3618.

• Decision Date: 13 March 1941
• Docket Number: No. 3618.,3618.
• Citation: 118 F.2d 254
• Parties: CHICKERING v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

118 F.2d 254 (1941)

CHICKERING v. COMMISSIONER OF INTERNAL REVENUE.

No. 3618.

Circuit Court of Appeals, First Circuit.

March 13, 1941.

COPYRIGHT MATERIAL OMITTED

F. H. Nash, of Boston, Mass. (Brooks Potter, of Boston, Mass., on the brief), for petitioner for review.

Louise Foster, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for the Commissioner.

Before MAGRUDER and MAHONEY, Circuit Judges, and HARTIGAN, District Judge.

MAGRUDER, Circuit Judge.

This is an appeal from a decision of the Board of Tax Appeals determining a deficiency in estate taxes of the decedent, Mrs. John Chickering. The sole question presented is whether the decedent's interest in a trust fund should have been included in her gross estate under § 302(d) of the Revenue Act of 1926, 44 Stat. 9, 71, 26 U.S.C.A.Int.Rev.Acts, page 228.

The decedent's father, William A. Russell, died intestate in 1899. In 1901 his widow and five children created the William A. Russell Trust and transferred to it the bulk of Mr. Russell's estate. Each donor became a beneficiary of the trust substantially in proportion as he or she shared in the estate under the Massachusetts laws of intestacy. The trust was to continue for the full period of perpetuities except that at any time the surviving children of William A. Russell, the eldest descendant of any deceased child, and Mrs. William A. Russell if living, might by unanimous consent modify, terminate or revoke the trust. In general, on the death of each of the donors his or her share of the income became payable to the issue of such donor per stirpes, subject to life estates in favor of surviving spouses. Upon termination of the trust, the corpus was to be distributed among the children and more remote issue of William A. Russell in proportion as they were then entitled to share in the income. However, the decedent (in common with the other donors) retained a limited power to depart from this somewhat rigid scheme of devolution by apportioning income and corpus as she saw fit among her children or disinheriting them wholly or partially in favor of the trust. A similar power was retained in regard to her spouse's life estate, which she could cut down, or extinguish altogether, in favor of her children or of the trust. The chief provisions of Section Eighth, granting this power, are set forth in the margin.¹ By amendment in 1910 this power was made exercisable by deed only.

Mrs. Chickering died in 1935, leaving one child, a son. She had survived her husband and therefore at the time of her death her power over the devolution of her interest amounted to a power by deed to cut her son off from the whole or any part of her share of the income and principal; and the amount so cut off would then automatically be subject to distribution among the other beneficiaries in accordance with the other provisions of the trust deed. She had never exercised the power, however, and so her entire beneficial interest passed to the son. In computing her estate tax, the Commissioner included in her gross estate 13 1/3% of the value of the William A. Russell Trust, representing the proportion contributed by Mrs. Chickering in 1901 at the time of the trust's creation. The Board of Tax Appeals upheld this determination on the ground that Mrs. Chickering had retained a power, exercisable by her alone, to "alter, amend, or revoke" within the meaning of § 302(d)² of the Revenue Act of 1926. From this decision the taxpayer appeals on the ground that § 302(d) is inapplicable or, if applicable, unconstitutional in that it attempts retroactively to tax a transfer completed before its passage.

While the power retained by the decedent is phrased in terms of disinheritance, we can see no difference between this and a more conventionally phrased special power of appointment. As a practical matter Mrs. Chickering could choose between two possible objects — her son or the William A. Russell Trust — and could apportion the income and principal between them in any proportion she chose to the extent of complete exclusion of either. In cases involving equally narrow special powers, courts have frequently held that the enjoyment of the property in question was subject to a power in the transferor to "alter, amend, or revoke" within the purview of § 302(d). Commissioner v. Chase National Bank, 2 Cir., 82 F.2d 157, certiorari denied, 299 U.S. 552, 57 S.Ct. 15, 81 L.Ed. 407; Hoblitzelle v. United States, Ct.Cl., 3 F.Supp. 331; Holderness v. Commissioner, 4 Cir., 86 F.2d 137. We have no doubt, therefore, that had the Russell Trust been created after the enactment of § 302(d), the proportion of the trust contributed by Mrs. Chickering would be includable in her gross estate.

The present trust was created in 1901, however, and until 1924 the estate tax contained no provision analogous to § 302(d). It is certainly true that in some circumstances a section of the estate tax may be constitutionally applicable to trusts created after its enactment but not to trusts created prior thereto. Compare, e. g., Helvering v. City Bank Farmers Trust Co., 296 U.S. 85, 56 S.Ct. 70, 80 L.Ed. 62, with Mackay v. Commissioner, 2 Cir., 94 F.2d 558, and Commissioner v. Kaplan, 1 Cir., 102 F.2d 329. It is argued that long before the enactment of § 302(d) Mrs. Chickering had divested herself of all control of the trust property except for a closely circumscribed power of dubious monetary value; and that to tax this power at the full value of the property is in effect retroactively to tax a completed transfer.

But the estate tax is not a direct tax upon the property; nor is it in a strict sense a tax upon a "transfer" of the property by the death of the decedent. It is an excise tax upon the happening of an event, namely, death, where the death brings about certain described changes in legal relationships affecting property. The value of the property so affected is merely used as a factor in the measurement of the excise tax. In the case at bar the death of Mrs. Chickering resulted in an enlargement or ripening of property rights in her son, for the death removed the possibility that the son's interest under the trust deed might be destroyed by an exercise of the reserved power held by his mother. The death was thus "the source of valuable assurance passing from the dead to the living." Porter v. Commissioner, 288 U.S. 436, 444, 53 S.Ct. 451, 454, 77 L.Ed. 880.

The nature of the tax is clearly described in Tyler v. United States, 281 U.S. 497, 502, 503, 50 S.Ct. 356, 358, 74 L.Ed. 991, 69 A.L.R. 758:

"A tax laid upon the happening of an event, as distinguished from its tangible fruits, is an indirect tax which Congress, in respect of some events not necessary now to be described more definitely, undoubtedly may impose. If the event is death and the result which is made the occasion of the tax is the bringing into being or the enlargement of property rights, and Congress chooses to treat the tax imposed upon that result as a death duty, even though, strictly, in the absence of an expression of the legislative will, it might not thus be denominated, there is nothing in the Constitution which stands in the way.

"The question here, then, is, not whether there has been, in the strict sense of that word, a `transfer' of the property by the death of the decedent, or a receipt of it by right of succession, but whether the death has brought into being or ripened for the survivor, property rights of such character as to make appropriate the imposition of a tax upon that result (which Congress may call a transfer tax, a death duty or anything else it sees fit), to be measured, in whole or in part, by the value of such rights."

It cannot be said that the tax here imposed is retroactive in any objectionable sense. While the trust was created in 1901, long before Congress had enacted an estate tax, the tax is an excise upon an event occurring subsequent to the enactment of the tax law. A similar argument about retroactivity was unsuccessfully made in United States v. Jacobs, 306 U.S. 363, 59 S.Ct. 551, 83 L.Ed. 763. There certain real estate was conveyed in 1909 to a husband and wife as joint tenants. The property was acquired wholly by funds of the husband. The joint tenancy continued until the husband's death at which time the wife as survivor became the sole owner in fee. It was held that in calculating the estate tax payable by the deceased husband's estate the full value of the joint property should be included in the gross estate. The court said, at pages 366, 367 and 371 of 306 U.S., at page 553 of 59 S.Ct., 83 L.Ed. 763:

"But the tax was not levied on the 1909 transfer and was not retroactive. At decedent's death in 1924, ownership and beneficial rights in the property which had existed in both tenants jointly changed into the single ownership of the survivor. This change in ownership, attributable to the special character of joint tenancies, was made the occasion for an excise, to be measured by the value of the property in which the change of ownership occurred. Had the tenancy not been created, this survivorship and change of ownership would not have taken place, but the tax does not operate retroactively merely because some of the facts or conditions upon which its application depends came into being prior to the enactment of the tax. * * *

"This termination of a joint tenancy marked by a change in the nature of ownership of property was designated by Congress as an appropriate occasion for the imposition of a tax. Neither the amount of the tax nor its application to the survivor's change of status and ownership, was in any manner dependent upon the date of the joint tenancy's creation, whether before, or after, 1916. It is immaterial that Congress chose to measure the amount of the tax by a percentage of the total value of the property, rather than by a part, or by a set sum for each such...