Commissioner of Internal Revenue v. McCormick

• Decision Date: 20 September 1930
• Docket Number: No. 4211.,4211.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. McCORMICK et al.
• Court: U.S. Court of Appeals — Seventh Circuit

43 F.2d 277 (1930)

COMMISSIONER OF INTERNAL REVENUE v. McCORMICK et al.

No. 4211.

Circuit Court of Appeals, Seventh Circuit.

September 20, 1930.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and A. H. Conner, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Prew Savoy, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.

Horace Kent Tenney, George T. Rogers, and Henry F. Tenney, all of Chicago, Ill., and Robert N. Miller, of Washington, D. C., for respondents.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

EVANS, Circuit Judge.

This is an appeal from a determination of the Board of Tax Appeals in regard to an asserted deficiency in estate taxes. The facts are quite free of dispute.

Mrs. Nettie Fowler McCormick died July 5, 1923. Respondents herein are the executors of her estate. On July 27, 1918, decedent executed a trust agreement conveying certain securities to the United States Trust Company of New York as Trustee, under a trust agreement, the material portions of which are herewith set forth.¹

The Board found that the transfer was not made in contemplation of death, nor intended to take effect in possession or enjoyment at or after death; that it was not testamentary in character and bore no relation to the privilege taxed, and that the value of the property in the trust at decedent's death should not be included in decedent's gross estate for purposes of the federal estate tax.

The pertinent provisions of the Revenue Act of 1921 (42 Stat. 278) read:

"Sec. 402. That 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 * * *

"(c) 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 at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money's worth."

Asserted reasons for including the property covered by this trust within the statute are:

(1) The conveyance in trust was revocable.

(2) Mrs. McCormick's retention of the life use of the estate transferred negatived any alleged intent to transfer the use and enjoyment of the economic benefits before her death.

(3) The transfer of the corpus of the trust was not complete until Mrs. McCormick's death because of the provision in the trust agreement which necessitated the transfer of the trust property to the decedent in case she survived her three children.

The statute called for the imposition of a tax on the corpus of a trust executed in contemplation of death or which was "intended to take effect in possession or enjoyment at or after" the settlor's death. Either contingency invoked its levy.

The Board found that the trust was not executed in contemplation of death. There is some evidence tending to support this finding. Petitioner does not challenge its soundness.

The attack is therefore centered on the Board's conclusion that the trust was not executed with the intention that it take effect in possession or enjoyment at or after settlor's death. Petitioner's brief was prepared before the decision in May v. Heiner, 281 U. S. 238, 50 S. Ct. 286, 74 L. Ed. 826, was announced. The law as there stated definitely rejected some of the arguments advanced by the government. There remain, however, several questions which arise because of the differences in the provisions of the trust agreement in the May v. Heiner Case and those here under consideration.

In the May Case the trust agreement was clearly irrevocable. Here the provision indicative of irrevocability is more doubtful. While much might be written in an attempt to define, for purposes of taxation, a revocable trust, it is hardly necessary to go into an extended discussion in this opinion. The two broad classifications — revocable and irrevocable — are hardly sufficient to test the application of the statute involved, for trusts may be revocable upon conditions. These conditions may make settlor's power to revoke dependent upon the consent of outside parties whose interests are adverse to those of settlor. Such was the case of Farmers' Loan & Trust Co. v. Bowers (C. C. A.) 29 F.(2d) 14, where the trust agreement provided that the settlor could revoke only in case the trustee consented. Likewise it has been held that a provision of the trust agreement which gave settlor the right to revoke in case the majority of the beneficiaries consent is an irrevocable one. Reinecke v. Northern Trust Company, 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410. Generally speaking, it would seem that a trust agreement is revocable only when the settlor's power is absolute and unconditional.

But we are here dealing with a most practical problem, taxation (Tyler v. U. S., 281 U. S. 497, 50 S. Ct. 356, 359, 74 L. Ed. 991), and the irrevocable character of the trust is not the determinative issue of the controversy, but is important only as it helps illuminate the settlor's intention. So, approaching the question of irrevocability, a case can be easily conceived where a trust agreement might be defined as legally irrevocable, and yet the estate thus conveyed be subject to the federal inheritance tax. To illustrate, A, the settlor, transfers a large sum to B, trustee, for the benefit of C, V, W, X, Y, and Z, reserving the use of the income during the life of A to A. The trust agreement provides that the trust might be revoked by A at any time, provided C, the beneficiary, consents. The beneficiaries other than C are the recipients of the corpus after A's death, save $1 to C. The case becomes stronger if it appears that C was one who occupied an intimate relation to A, such as banker or lawyer. Under such circumstances a court would have little difficulty in finding that the estate was subject to a tax.

In the case before us, Mrs. McCormick reserved or controlled the life use of the fund transferred. She provided for the termination of the trust at any time upon the election of the settlor and the consent of one of the three equal beneficiaries. Notwithstanding the possibility of tax evasion lurking in such an agreement, we are inclined to the view that the trust agreement here under consideration is, so far as the revocable clause is concerned, within the class considered in May v. Heiner. In other words, the condition upon which revocation might take place did not of itself...