Commissioner of Internal Rev. v. Hofheimer's Estate

• Citation: 149 F.2d 733
• Decision Date: 25 May 1945
• Docket Number: No. 113.,113.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. HOFHEIMER'S ESTATE et al. HOFHEIMER'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

149 F.2d 733 (1945)

COMMISSIONER OF INTERNAL REVENUE v. HOFHEIMER'S ESTATE et al. HOFHEIMER'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 113.

Circuit Court of Appeals, Second Circuit.

May 25, 1945.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Robert Koerner, Sp. Assts. to Atty. Gen., for the Commissioner.

Joseph M. Proskauer, Norman S. Goetz, Wilbur H. Friedman, and Charles Looker, all of New York City, for Corinne Hofheimer et al.

Before EVANS and CHASE, Circuit Judges, and HINCKS, District Judge.

CHASE, Circuit Judge.

These petitions by the Commissioner and by the executors of the will of Lester Hofheimer both present related issues as to the includibility in the gross estate of the decedent under § 302(d) of the Revenue Act of 1926, as amended, 26 U.S.C.A. Int.Rev. Acts page 229 et seq. of the value, the corpus being limited to his own contribution thereto, of the life estates and that of the remainder interests in two inter vivos trusts, one of which was created by the decedent and his brother and one by the decedent alone.

He was a resident of the City of New York when he died on November 30, 1936, at the age of fifty-six. His executors elected to have the estate valued for tax purposes as of one year following his death as they might do under § 302(j) of the above statute as amplified by § 202(a) of the Revenue Act of 1935, 26 U.S.C.A. Int.Rev.Acts, page 805. They omitted from the estate tax return which they filed all income received during the year after decedent's death, but the Commissioner included it and determined a deficiency accordingly. While proceedings for the review of that determination were pending in the Tax Court the case of Maass v. Higgins, 312 U.S. 443, 61 S.Ct. 631, 85 L.Ed. 940, 132 A.L.R. 1035, was decided and left the Commissioner without support in law for his determination. He then, however, amended his answer in those proceedings and raised for the first time the issues now before us. The Tax Court held that the value of each life estate was taxable but that the value of the remainder interests was not and these cross petitions to review that decision followed. 2 T.C. 773.

The First Trust

On October 5, 1922, the decedent and his brother Arthur each contributed one half of the corpus of a trust they then established, with themselves and the Empire Trust Company as trustees, the net income of which was to be paid to their cousin Clara Hofheimer for life. She was born in 1887. At her death the principal was to be divided into two equal shares, one of which was to be paid to the children of each settlor, if living, otherwise to their issue, per stirpes. The settlors reserved the right to remove the third trustee and to appoint another and also reserved "to themselves during the lifetime of both or either of them, the right by instrument in writing executed and duly acknowledged by them, if both be living, or if only one be living, then by the survivor, of terminating this trust or from time to time amending its terms in respect to the payment of income to the beneficiary and of imposing any terms and conditions whatsoever in respect to the amount of income thereafter to be paid or the circumstances under which any income shall be payable; and upon the termination of the trust as aforesaid, the principal of said fund shall be distributed as hereinbefore provided." Arthur died in 1927 and thereafter the decedent could have exercised the reserved power of amendment or termination alone but did not do so.

The Second Trust

The decedent established a trust on October 31, 1923, with himself and his wife, Corinne, as trustees to hold the corpus, all of which he contributed, and to pay the income thereof to his father-in-law and to his mother-in-law in equal shares while both lived and, upon the decease of one of them, to pay the entire income to the survivor for life. Upon the death of the survivor the corpus was to be paid to decedent's daughter Marion, if living, and if she were dead, to her surviving issue in equal shares. The power to alter, modify or revoke in whole or in part was reserved to the settlor, but it was exercisable during the lifetime of himself and his wife only by their joint action.

On March 17, 1928, the decedent and his wife, acting in accordance with the reserved power, executed a new indenture which changed the date of the termination of the trust and of the distribution of the remainder from the date of the death of the survivor of the two life beneficiaries by including also the date of the death of the settlor so that the trust would terminate upon the death of the survivor of the life beneficiaries or upon the death of the settlor, "whichever shall first occur." The power of amendment and revocation was also altered to provide that the trust instrument could be modified or altered in any manner or revoked in whole or in part by the joint action of the decedent and his wife while both were living or by the survivor of them. In the event of revocation the entire principal and any accumulation of income was to be delivered immediately to the daughter Marion and was to become her absolute property, if she were then living, otherwise to her then surviving issue per stirpes, if any, and if none to the then surviving issue of the settlor in equal shares per stirpes.

On July 27, 1936, the decedent, without receiving any consideration in money or money's worth, acting jointly with his wife pursuant to the reserved power, executed a second amendment. His death was eliminated as an event of termination, and the death of the survivor of the life beneficiaries was left as one termination date when the principal was to become distributable to Marion, "if she be then living." The remainders distributable contingently upon her death before the decease of the surviving life beneficiary remained limited as they had been. It was provided, however, that upon the attainment by Marion of the age of twenty-one years, the trust should terminate and the principal should be paid to her to become her absolute property. No power to amend or revoke was reserved by the settlor but thereafter the trust instrument could "be modified or altered at any time and from time to time by instrument in writing executed by Corinne Hofheimer, provided however that such modification or alteration may be made only in favor of issue of the marriage of Corinne Hofheimer and Lester Hofheimer, and the foregoing right and power of modification and alteration given to said Corinne shall include the right and power to terminate the trust in all or in part and vest the principal, as to which the trust is so terminated, absolutely in any of said issue."

The power of alteration and termination remained as just stated unchanged at the date of the decedent's death. His father-in-law, mother-in-law and daughter Marion survived him and were respectively 83, 73 and 18 years of age when he died. He was in good health when the amendment of 1936 was made. The Tax Court found that the decedent's relinquishment in 1936 of the power to revoke the interests of the life beneficiaries was made in contemplation of death and that the value of them and that of the remainder was over $5000 at the date of his death.

On January 24, 1940, the petitioners paid a gift tax of $3111.74 plus interest of $525.71 which had been assessed upon the transfer by the decedent when he executed the amendment of 1936.

Section 302(d) of the Revenue Act of 1926, c. 27, 44 Stat. 9, 26 U.S.C.A. Int. Rev.Acts, page 229, is controlling as to the issues in respect to the first trust. The changes made by the addition of subdivision (2) in § 401 of the Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C.A. Int.Rev. Acts, page 759, are not applicable, and § 805 of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 957, was limited by subsection (b) to transfers made after its enactment and provided that "no interest of the decedent of which he has made a transfer shall be included in the gross estate under such section 302(d) (1) unless it was includible under such section before its amendment by this section."

The inclusion of the value of the life estate was clearly right. The petitioners are mistaken in their assertion that the power to amend the terms of the trust instrument in respect to the payment of income to the beneficiary and of imposing any terms and conditions whatsoever in respect to the amount of income thereafter to be paid or the circumstances under which any income should be payable was only a power exercisable in favor of the life beneficiary and did "not include the power to take any income away from her." It plainly gave the settlors the power to reduce the amount at least to a mere nominal sum, if not to zero, and make that payable only as they saw fit. It is immaterial under the statute that during the life of Arthur the decedent could act only in concert with him; and, moreover, during the period between Arthur's death in 1927 and that of the decedent in 1936 the latter could have exercised the power alone. His death ended the possibility of the exercise of that power to deprive the life beneficiary of the value of her interest and made its then value includible in the decedent's gross estate. Commissioner of Internal Revenue v. Bridgeport City Trust Co., 2 Cir., 124 F. 2d 48, certiorari denied, 316 U.S. 672, 62 S.Ct. 1042, 86 L.Ed. 1747; Commissioner of Internal Revenue v. Chase National Bank, 2 Cir., 82 F.2d 157, certiorari denied 299 U.S. 552, 57 S.Ct. 15, 81 L.Ed. 407. See also Porter v. Commissioner of Internal Revenue, 288 U.S. 436, 53 S.Ct. 451, 77 L.Ed. 880; Helvering v. City Bank Farmers Trust Co., 296 U.S. 85, 56 S.Ct. 70, 80 L.Ed. 62.

The Tax Court held, however, that the remainder interests were not includible because no power to alter the remaindermen was reserved. It is true that they could not directly be changed and that in...