Commissioner of Internal Revenue v. Walston

• Decision Date: 06 May 1948
• Docket Number: No 5715.,5715.
• Citation: 168 F.2d 211
• Parties: COMMISSIONER OF INTERNAL REVENUE v. WALSTON.
• Court: U.S. Court of Appeals — Fourth Circuit

168 F.2d 211 (1948)

COMMISSIONER OF INTERNAL REVENUE v. WALSTON.

No 5715.

Circuit Court of Appeals, Fourth Circuit.

May 6, 1948.

Helen Goodner, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen. and Sewall Key and Lee A. Jackson, Sp. Asst. to Atty. Gen., on the brief) for petitioner.

Orwill V. W. Hawkins, of New York City, for respondent.

Before PARKER and SOPER, Circuit Judges, and BRYAN, District Judge.

SOPER, Circuit Judge.

This is a petition to review a decision of the Tax Court which reversed deficiencies in gift tax assessed by the Commissioner of Internal Revenue for the years 1932 to 1938 inclusive. The taxpayer, Lady Florence Walston, is a citizen of Great Britain and a resident of London. She was the daughter of David L. Einstein who died testate on May 8, 1909, a resident of the State of New York. Einstein was survived by his widow, Caroline, and three children: two daughters, Amy and Florence (the taxpayer), and a son, Lewis.

Einstein's will was probated in New York. By this instrument (executed in 1907) he divided his residual estate into three equal portions, which he designated as shares A, B and C. Each share was placed in trust, and one-half of the income from each share was bequeathed to his wife for life. Subject to this outstanding bequest, Florence was given the income for life from share A, remainder to her children. Similarly Amy was designated as the beneficiary for her life of the income from share B, remainder to her children. With respect to share C, from which this controversy stems, Einstein made a different and somewhat unusual disposition. The pertinent provisions of the will read:¹

"* * * I give the net income of the whole (of) * * * Share C to my daughter Florence during her natural life, and on her death I give, devise and bequeath the capital fund of this share * * * to such person or persons, in such proportions, and if she please upon such trusts not being contrary to law as she may by her will appoint. I authorize and empower her, anything herein to the contrary notwithstanding, by deed or other act taking effect in her lifetime * * * to not only to retain to her own use, but also to appoint any person or persons being of my blood she shall think fit to receive the whole or any part of the income of this share during her life and to the extent that she lawfully may during the life of my son Lewis, or for any shorter time, and such appointment or appointments to revoke and other or different appointments thereafter from time to time to make and to revoke. I further authorize and empower her, anything to the contrary herein notwithstanding, by deed or other act taking effect in her lifetime * * * to appoint any person or persons being of my blood she shall think fit to receive any part or parts of the capital of this share; and in the event of such appointment being made, I authorize and empower my trustees to transfer and pay over the amount or amounts of capital so appointed to the person or persons in that behalf designated by my said daughter."

The remaining provisions of this paragraph concern themselves with the disposition of the corpus in the event that Florence should fail to exercise her power of appointment.

This bequest was made by Einstein as the result of the marriage of his son Lewis to a divorced woman sixteen years his senior. Einstein disapproved of this marriage both because he thought it would injure Lewis' career in the Diplomatic Service, and because he entertained the suspicion that Lewis' wife had married him in the expectation that Lewis would inherit a portion of Einstein's fortune. As a consequence he decided not to leave a share of his estate to Lewis outright.

At the time Einstein executed this will he told Florence that he hoped each of his children would eventually inherit an equal share; that he intended that share C should be turned over to Lewis if everything turned out all right; that he wanted Florence to watch over Lewis and that she should have unfettered control to decide when and how Lewis should inherit his share; that he had given her broad powers of appointment with respect to the income and principal of share C because she knew his wishes in the matter and he knew that he could trust her; and that he wanted her to turn over share C to Lewis when and if she thought it right that he should have it.

On April 25, 1911, Florence appointed herself to receive the whole of the capital of share C. It was her intention to carry out her father's wishes by then disposing of share C in a trust deed to be executed by her. While an application was pending before the surrogate of the County of New York for approval of this appointment, Florence and Lewis entered into an agreement on February 2, 1912, whereby Florence agreed that, in the event it was determined that she could not appoint herself to receive the capital of share C, she would pay Lewis out of the income from this share the sum of $1,666.66 per month during their joint lives, and would execute an appointment by will of a sufficient part of share C to pay Lewis the same amount per month during his life. Florence did not reserve to herself any power of revocation with respect to this agreement.

In 1913 the trustees under Einstein's will brought a suit in the Supreme Court of the State of New York, New York County, to determine whether Florence could appoint herself to receive the corpus of share C, and also whether share C was impressed with a secret trust in favor of Lewis. Both these questions were answered in the negative. N. Y. Law Journal, April 14, 1914, p 198. The court observed that while Florence came within the literal description of the class to whom the corpus of share C might be appointed, it was satisfied that Einstein did not intend that Florence should have the power to appoint the capital to herself.

On January 1, 1920, Florence and Lewis executed an agreement whereby Florence appointed Lewis to receive the entire income from share C for his life, but limited to the joint lives of Lewis and Florence. This appointment was expressly declared to be subject to Florence's power of revocation. Lewis agreed to waive payment of the $1,666.66 per month provided in the agreement of February 2, 1912, as long as the 1920 appointment remained in effect. Pursuant to the 1920 appointment, the income from share C was paid to Lewis periodically until August 23, 1938.

On May 3, 1938, Florence appointed Lewis to receive forthwith and absolutely, one-half of the corpus of share C and the income from the remaining half of share C for his life, whether or not he should survive Florence. These appointments were declared to be irrevocable and Florence, after revoking all previous appointments, expressly relinquished her power of revocation with respect to them. They became effective on August 24, 1938.

The Commissioner, upon these facts, took the position that Florence had made taxable gifts to Lewis. With respect to the payments to Lewis under the 1920 appointment prior to August 24, 1938, he was of the view that, by reason of the power of revocation reserved to Florence, taxable gifts were made in each year following the enactment of the gift tax on July 6, 1932, 47 Stat. 169, (including the latter part of 1932), minus the amount of $20,000 per year as to which he determined that Florence had irrevocably committed herself by the 1912 agreement. As to the irrevocable appointments in 1938, the Commissioner was of the opinion that Florence had made a gift of her right to receive the income for the rest of her life, again minus the value of Lewis' right to receive $20,000 annually for his life. In other words, the Commissioner restricted himself to income to which Florence would have been entitled during her life had she made no appointments, but he did not attempt to tax the appointments as gifts insofar as they related to transfers of interests after her death. The Tax Court, six members dissenting, disallowed the assessments.

The position of the Commissioner is two-fold. He contends (1) that a transfer of property in the exercise of a power of appointment after June 6, 1932, although not expressly mentioned in the Gift Tax Act of that date, 47 Stat. 168, 26 U.S.C.A. Int.Rev.Code, § 1000 et seq., is nevertheless a taxable gift covered thereby; and (2) that the transfers by Florence to her brother of income from share C did not actually involve the exercise of powers of appointment but constituted gifts of an interest in the life estate in share C bequeathed to her by her father and given by her in turn to her brother.

If the exercise of a power of appointment is a gift taxable under the 1932 act, it is clear that the Commissioner's assessments should be sustained both as to the 1938 and 1920 appointments. As to the 1938 appointment, there could be no question, since it occurred after the passage of the act. As to the 1920 appointment, it is equally certain that tax liability would attach for the period June 7, 1932, to August 23, 1938, despite the fact that the appointment was made prior to the enactment of the gift tax. This would be true because Florence reserved to herself a power of revocation in the 1920 appointment, and it is settled that where a donor reserves such a power, the gift is not perfected and tax liability does not attach until the donor surrenders this power; and if money is paid out periodically prior to the surrender of the power of revocation, then tax liability arises with respect to each payment at the time it is made. Burnet v. Guggenheim, 288 U.S. 280, 53 S.Ct. 369, 77 L.Ed. 748; see Estate of Sanford v. Commissioner, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20. We are thus squarely confronted with the question whether the exercise of a general power of appointment is a gift under the 1932 act.

Section 501 of the Revenue Act of 1932, 47 Stat. 169, 26 U.S.C.A.Int.Rev.Code, § 1000, provided:

"(a) For the calendar year 1932 and each...