Commissioner of Internal Revenue v. Flanders

• Decision Date: 15 April 1940
• Docket Number: No. 190.,190.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. FLANDERS et al.
• Court: U.S. Court of Appeals — Second Circuit

111 F.2d 117 (1940)

COMMISSIONER OF INTERNAL REVENUE v. FLANDERS et al.

No. 190.

Circuit Court of Appeals, Second Circuit.

April 15, 1940.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and L. W. Post, Sp. Assts. to Atty. Gen., for petitioner.

Frederic A. Burlingame, Charles J. Nourse, Arthur E. Pettit, and James Hendrick Terry, all of New York City, and Albert L. Hopkins and Anderson A. Owen, both of Chicago, Ill., for respondents.

Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

Edward Severin Clark died on September 19, 1933. Long before his death he had set up two trusts which are known, respectively, as Trust No. 3 and Trust No. 4. Concededly neither trust was made in contemplation of death; but the commissioner ruled that the settlor retained sufficient power and interest with respect to the property of each trust to justify the inclusion of its value as part of the decedent's gross estate under section 302 of the Revenue Act of 1926, 44 Stat. 70, as amended in 1932, 47 Stat. 279, 26 U.S.C.A.Int.Rev.Acts, page 226. The Board reversed the commissioner's ruling, thereby eliminating an estate tax deficiency of more than two and a half million dollars. Whether the Board's decision was correct is the issue presented by this appeal. No question as to the values of the trust properties is before us, issues relating to values having been severed by order of the Board to await determination of the taxability of the trusts.

The trust indenture of Trust No. 3 was delivered on June 9, 1910. The trust was to terminate upon the death of the settlor. The trustees were to pay him the net income for life, and upon his death were to deliver the principal to his surviving issue or, if none, to his surviving brothers and the issue of any deceased brother, in equal shares per stirpes. The property transferred was all stock dividends that might thereafter be declared upon those shares of stock of the Singer Manufacturing Company which were then held in trust for the settlor under the will of his father, Alfred Corning Clark. On June 16, 1910 the Singer Company declared a stock dividend payable forthwith, and on the following day the trustees of Trust No. 3 received 21,283½ shares of Singer stock. On November 14, 1919 Edward Severin Clark conveyed to the trustees an additional one-half share. In December 1920 another stock dividend was declared under which the trustees received 21,284 shares more. At the date of the settlor's death the property of the trust consisted of the aforesaid 42,568 shares of Singer stock. At no time was any other property held by the trustees as principal of Trust No. 3. The settlor was never married, had no issue and was survived by his three brothers. On April 1, 1923, one of the original trustees resigned and Stephen Carlton Clark, one of the settlor's brothers, became a successor trustee in accordance with the provisions of the trust indenture and has since continued as a trustee.

Shares of stock of the Singer Manufacturing Company were also held in trust for each of the other sons of Alfred Corning Clark, and each executed a trust indenture similar to that of the Edward Severin Clark Trust No. 3. Unless all four of the sons had created such trusts no stock dividend would have been declared by the Singer Company in June 1910. The trustees of the trusts created by the will of Alfred Corning Clark were the same persons named as trustees in the Edward Severin Clark Trust No. 3 and the three similar trusts executed by the settlor's three brothers, and the purpose of all parties was to keep the Singer stock in which the four Clark brothers were beneficially interested held together as a voting unit in order to retain in the Clark family and said trustees control of the corporation.

The trust indenture of the Edward Severin Clark Trust No. 4 was executed in May 1914 and delivered on or before August 23, 1916. Trust No. 4 was to continue during the lives of the settlor's younger brothers. Robert Sterling Clark and Frederick Ambrose Clark, and the survivor. The net income was to be paid to the settlor for life, with remainders over. Upon termination of the trust the principal was to be delivered to the settlor, if living; otherwise to his issue or his brothers and their issue, as in Trust No. 3. The property transferred by Trust No. 4 was all dividends in the form of capital stock of subsidiary corporations of the Singer Manufacturing Company that might thereafter be declared upon the shares of Singer stock held in trust for the settlor under his father's will or Trust No. 3. On July 19, 1917, the Singer Company declared a dividend consisting of stock of the Singer Manufacturing Company, Limited, a British corporation, and by reason thereof the trustees of Trust No. 4 received 106,417½ shares of stock of said British subsidiary. In December 1920 the Singer Company distributed as a dividend preferred stock of International Securities Corporation, another subsidiary. Of such preferred stock the trustees of Trust No. 4 received 42,568 shares. No other property was at any time added to said Trust No. 4 and none of the aforesaid shares was at any time disposed of by the trustees. The trustees of Trust No. 4 are the same persons who are trustees of Trust No. 3.

Each of the three brothers of Edward Severin Clark executed a trust indenture similar to his Trust No. 4. Unless they had done so the Singer Company would not have distributed as a dividend stock of its subsidiary corporations.

The trust indenture of Trust No. 3 contained the following provision: "The party of the first part hereto deems it for the best interest of himself and of the other members of his family, that the shares of and interest in the capital stock of The Singer Manufacturing Company that may be held in trust under this agreement should not be sold and disposed of; nevertheless, as emergencies may arise or changes take place in the affairs of that company which may render it advisable that said shares of and interest in said capital stock should be sold, he hereby fully authorizes and empowers said trustees, their survivor and successors, in the exercise of a sound discretion and judgment, to sell and dispose of the whole or any part of said shares and interest, but only after first obtaining the consent of the party of the first part in writing, to make such sale. In case of any such sale or sales, then said trustees shall transfer, pay over and deliver the proceeds thereof to the party of the first part hereto, to be the absolute property of the party of the first part, free from any trusts whatever, anything herein contained to the contrary notwithstanding."

A similar provision was contained in Trust No. 4. It was stipulated that at no time since the creation of either trust has any emergency arisen or change taken place in the affairs of the Singer Company (Trust No. 3), or of its subsidiaries (Trust No. 4), which rendered it advisable for the trustees of Trust No. 3 or No. 4 to sell any part of the property held in trust; that no trustee ever thought it advisable to sell; and that none of the trust property ever was sold.

Section 302(d) of the Revenue Act of 1926, 26 U.S.C.A.Int.Rev.Acts, page 228, set forth in the margin,¹ provides for inclusion in the gross estate of a decedent of property transferred by him in trust where the enjoyment thereof was subject at his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person to alter, amend, or revoke the trust. The provision above quoted respecting sales by the trustees with the written consent of the decedent is claimed by the commissioner to render the value of the corpus of each trust taxable as part of the decedent's gross estate. We agree with the Board's decision that it did not.

Assuming without decision that the settlor's power to consent to a sale by the trustees was a power, exercisable in conjunction with them, "to alter, amend, or revoke" the trust, it was, in the opinion of a majority of the court, conditioned upon the exercise by the trustees of a discretion dependent on the existence of an emergency or change in the affairs of the Singer Company in Trust No. 3, or in the affairs of the subsidiaries in Trust No. 4. The Board found, in accordance with the stipulation, that such conditions never happened. Consequently section 302(d) is inapplicable. See Tait v. Safe Deposit & Trust Co., 4 Cir., 74 F.2d 851, 858; Day v. Commissioner, 3 Cir., 92 F.2d 179; Patterson v. Commissioner, 36 B.T.A. 407. However, decision may be rested upon a ground on which we all agree. At no time after April 1, 1923, could the settlor's power have been exercised except in conjunction with Stephen Carlton Clark, who was not only one of the trustees but also one of the beneficiaries of the trust. As such beneficiary...