CIR v. Canfield's Estate, 145

• Decision Date: 25 June 1962
• Docket Number: Docket 26870.,No. 145,145
• Citation: 306 F.2d 1
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Ellie G. CANFIELD, Deceased, Karl B. Smith, Jr., Administrator, C.T.A., Respondent.
• Court: U.S. Court of Appeals — Second Circuit

306 F.2d 1 (1962)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Ellie G. CANFIELD, Deceased, Karl B. Smith, Jr., Administrator, C.T.A., Respondent.

No. 145, Docket 26870.

United States Court of Appeals Second Circuit.

Argued March 7, 1962.

Decided June 25, 1962.

L. W. Post, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Melva M. Graney, Attys., Dept. of Justice, Washington, D. C., on the brief), for petitioner.

Ewing Everett, New York City (Stanley M. Moffat, New York City, on the brief) (Michael Loening, New York City, of counsel), for respondent.

Before LUMBARD, Chief Judge, and KAUFMAN and MARSHALL, Circuit Judges.

MARSHALL, Circuit Judge.

This is a petition for review of a Tax Court decision upholding the respondent estate's challenge to certain estate tax deficiencies asserted by petitioner.¹

The material facts were stipulated and the Tax Court summarized them as follows:

"Ellie G. Canfield, deceased, herein referred to as decedent, was born on August 2, 1863, and died on January 24, 1955. At the time of her death and at all other times material to this case she was domiciled in and a resident of the State of New York.

"Decedent\'s husband, Francis D. Canfield, died on October 8, 1917. Decedent never remarried.

"On March 24, 1919, decedent, as grantor, and the Central Union Trust Company of New York and decedent, as trustees, executed a trust agreement whereby decedent transferred to the trustees certain securities described in a schedule attached to the trust instrument. The first clause of the trust instrument directed the trustee to invest and reinvest all corpus of the trust and to pay the income, after deducting proper charges incident to the execution of the trust, to decedent during her life.

"The second clause of the trust instrument gave to decedent a testamentary power of appointment of the corpus of the trust as follows:

"Upon the death of the party of the first part, to pay over the whole of the said trust fund to, or to hold the same in trust and for the benefit of, such person or persons and in such proportions and shares and upon such terms as the party of the first part, by her Last Will and Testament in writing, shall have appointed and directed.

"The third through the eighth clauses of the trust instrument provided for the disposition of the trust estate at decedent\'s death in the event she failed to exercise the power of appointment in her will. Generally, they provided for distribution of one-half of the trust estate outright to decedent\'s children surviving her and the issue of any deceased child, per stirpes, with the other one-half to be held in trust for the same beneficiaries during the lives of decedent\'s children surviving her. In the event decedent died without issue the trust estate was to be distributed to her brother and his issue.

"With the exception of the reserved testamentary power of appointment the instrument contained no provision authorizing or permitting decedent to alter or amend its terms in any manner and no provision authorized decedent or any other person to remove the trustees. The trust provided that upon the resignation, removal, or incapacity of the trustees, the beneficiaries at such time had the right to nominate and appoint a successor trustee.

"On December 15, 1942, decedent executed and delivered to the Central Hanover Bank and Trust Company, a New York corporation, which was the corporate successor trustee to the Central Union Trust Company of New York, a written release of the testamentary power of appointment. The release provided that decedent irrevocably released, surrendered, and renounced the power of appointment granted to her under the aforesaid trust deed of March 24, 1919, including `all of my right, title and interest whatsoever in said power of appointment.\'

"The executors filed an estate tax return for the estate of Ellie G. Canfield on January 10, 1956, with the district director of internal revenue for the Upper Manhattan District of New York. * * *

"It is stipulated that if State law is applicable in any respect in these cases, such State law is that of New York.

"* * * In his notice of deficiency in estate tax liability respondent determined that —

"the corpus of the trust created by the decedent on March 24, 1919, reserving the income for her life and a general testamentary power of appointment, which power of appointment was released on December 15, 1942, forms a part of decedent\'s gross estate within the provisions of section 2036 of the Internal Revenue Code of 1954."

The ultimate legal issue raised by the petition is whether the corpus of the trust created by decedent is includable in her gross estate for estate tax purposes under Section 2036 of the 1954 Internal Revenue Code. 26 U.S.C.A. § 2036. Because that provision exempts "transfers" made prior to March 4, 1931, we are called upon to decide whether the "transfer" here was made upon execution of the trust instrument in 1919 or in 1942 upon decedent's release of her general testamentary power of appointment over the corpus. Petitioner concedes decedent irrevocably surrendered legal title to the corpus when she executed the trust instrument. Nevertheless, he contends the "transfer" exempted by Section 2036 must be "completed" prior to March 4, 1931, an event which, in his view, did not occur until surrender of the testamentary power of appointment in 1942. Petitioner further contends that, prior to 1942, the power of appointment could have been exercised in favor of her estate or her creditors and left the entire corpus subject to the claims of creditors during decedent's lifetime.² This, petitioner asserts, is sufficient to establish the "incompleteness" of the "transfer" prior to 1942.

Respondent contends, on the other hand, the use of the word "transfer" in Section 2036 refers merely to the execution of the trust instrument and transfer of legal title, regardless of how "incomplete" it may be or what powers over corpus may have been reserved. The Tax Court followed its prior decisions³ on this issue and held "the transfer to which the exemption provision refers is the transfer of legal title to the trust upon creation of the trust. * * *"⁴ We affirm.

The present Section 2036 is the result of a series of Congressional enactments and judicial interpretations thereof which were followed almost immediately by further legislative revisions. Section 402(c) of the Revenue Act of 1918, 40 Stat. 1097, and Section 302(c) of the Act of 1926, 44 Stat. 70, provided that the value of a decedent's gross estate should be determined by including the value at the time of death of all property to the extent of any interest therein of which the decedent had made a transfer "in contemplation of or intended to take effect in possession or enjoyment at or after his death." Although it held a trust which the grantor could unilaterally revoke, thereby returning legal title to himself, was subject to the estate tax, Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S. Ct. 123, 73 L.Ed. 410 (1929), the Supreme Court construed these provisions narrowly. In May v. Heiner, 281 U.S. 238, 50 S.Ct. 286, 74 L.Ed. 826 (1930), a trust was created which provided that the income was to be distributed to the settlor's husband for his life, then to the settlor for life, after which the corpus was to be distributed to the children. The Supreme Court held this not to be subject to the estate tax on the grounds that legal title was fixed by the trust and had passed from the settlor upon execution of the trust instrument. Since the settlor had transferred legal title, the Court reasoned, her estate did not have to account, for tax purposes, for the value of the corpus. The next year, on March 2, 1931, the Court handed down three per curiam decisions "upon the authority of May v. Heiner." Burnet v. Northern Trust Co., 283 U.S. 782, 51 S. Ct. 342, 75 L.Ed. 1412 (1931) affirming per curiam Commissioner of Internal Revenue v. Northern Trust Co., 41 F.2d 732 (7 Cir. 1930); McCormick v. Burnet, 283 U.S. 784, 51 S.Ct. 343, 75 L.Ed. 1413 (1931) reversing per curiam, Commissioner of Internal Revenue v. McCormick, 43 F.2d 277 (7 Cir. 1930); Morsman v. Burnet, 283 U.S. 783, 51 S.Ct. 343, 75 L.Ed. 1412 (1931) reversing per curiam Commissioner of Internal Revenue v. Morsman, 44 F.2d 902 (8 Cir. 1930).

The significance of these decisions was twofold. First, the retention of income for life by the settlor of a trust was not sufficient to classify it as a transfer intended to take effect in possession or enjoyment at or after death. Second, this held true even though there was a possibility of a reverter to the settlor or he retained a power to revoke in conjunction with any one of several beneficiaries.⁵ The net effect, then, was that unless the settlor retained the power to return legal title to himself unilaterally, the formal transfer of title by the trust instrument was sufficient to avoid the estate tax laws even though a life interest in the income was retained.

The "bombshell"⁶ effect of the per curiam decisions of March 2, 1931, was immediately apparent. The next day, March 3, Congress enacted a Joint Resolution, 46 Stat. 1516, amending Section

302(c) of the Act of 1926. As amended, that section provided in part:

"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 * * * wherever situated * * *

"(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy

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