COMMISSIONER OF INTERNAL REVENUE v. HOLMES'ESTATE, 11206.

• Decision Date: 14 April 1945
• Docket Number: No. 11206.,11206.
• Citation: 148 F.2d 740
• Parties: COMMISSIONER OF INTERNAL REVENUE v. HOLMES' ESTATE et al.
• Court: U.S. Court of Appeals — Fifth Circuit

148 F.2d 740 (1945)

COMMISSIONER OF INTERNAL REVENUE v. HOLMES' ESTATE et al.

No. 11206.

Circuit Court of Appeals, Fifth Circuit.

April 14, 1945.

Hilbert P. Zarky, Sewall Key, and A. F. Prescott, Sp. Assts. to the Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John T. Rogers, Sp. Atty., Bureau of Internal Revenue, both of Washington, D.C., for petitioner.

J. E. Price, of Houston, Tex., for respondent.

Before HUTCHESON, HOLMES, and McCORD, Circuit Judges.

HOLMES, Circuit Judge.

This is an estate tax case involving the question whether the settlor of an irrevocable trust reserved powers enabling him to change in enjoyment the interests created thereby, so that, upon his death without having exercised such powers, a taxable interest passed from him.

On January 20, 1935, Harry Holmes transferred 30 shares of stock to himself, as trustee, for the benefit of his three sons. The instrument set up three trusts, which were identical in terms. They were for a period of 15 years, unless terminated earlier by the trustee or trustees. The settlor was the trustee of each trust, with provision that, upon his death or resignation prior to the termination of the trusts, such of his sons as had then attained their majority or had their disabilities of minority removed should become joint trustees.

Each trust named as beneficiary one son, who was to receive the income therefrom during the life of the trust and the corpus upon termination thereof. If any son should die during the continuance of the trust, the beneficial interests would pass to his surviving issue, share and share alike, subject to distribution when such beneficiary or beneficiaries became 21 years of age. If any son died leaving no issue, or if his surviving issue died before becoming 21 years of age, his interest passed to his surviving brother or brothers or, if they were both dead, to their surviving issue per stirpes. If all three sons died without issue prior to termination, the whole of the trust properties then remaining passed to the settlor's wife, if living, or to her heirs at law.

The trusts provided that the trustee should distribute the net income from each trust to the beneficiary in convenient monthly installments, but that the trustee, if he deemed it to the best interest of the beneficiary, could without distribution of any portion of the net income, accumulate it, and turn it over to the beneficiary with the corpus upon termination of the trust. The trustee was empowered to use trust corpus when necessary or advisable for the maintenance, welfare, or happiness of the beneficiary; he could distribute said principal in whole or in part whenever he deemed it advisable, or could terminate the trusts, in which event the corpus would be distributed to the persons entitled thereto on the date of termination.

Harry Holmes acted as trustee of the trusts, and did not terminate them prior to his death on October 5, 1940. His executrix did not include in the estate tax return any of the property that had been transferred to the trusts. The Commissioner, claiming that the trust property should have been included in the trust estate, assessed a deficiency. The Tax Court held that the property was not includible in the gross estate of the decedent, and the Commissioner appealed. His contention is that the reservation by the decedent of the power to terminate the trusts at will enabled him to give to the then existing beneficiaries complete ownership of the trust corpus, and thereby to extinguish all contingent interests; and that the relinquishment of this power by the decedent at death was the first complete transfer of the grantor's control over the enjoyment of the trust benefits.

The applicable statute is Section 811(d) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 811(d), which relates to revocable transfers. Subsection (1) thereof provides that the value of the gross estate of a decedent for estate tax purposes shall include the value of all property to the extent of any interest therein of which the decedent has made a transfer in trust after June 22, 1936 (except bona fide sales for an adequate consideration), where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent to alter, amend, revoke, or terminate. Subsection (2) thereof provides that with respect to transfers on or prior to June 22, 1936, any interest so transferred is includible where the enjoyment thereof was subject, at the date of decedent's death, to any change through the exercise of a power by the decedent to alter, amend, or revoke. As the present trusts were created prior to June 22, 1936, Subsection (2) of the statute, which does not expressly mention a power to terminate, is controlling in this case.

This portion of the statute was included in the Revenue Act of 1924 and each succeeding act as Section 302(d) thereof, and has been frequently before the courts. Fifteen years after its first enactment, Mr. Justice Stone, in the case of Estate of Sanford v. Commissioner of Internal Revenue, 308 U.S. 39, 60 S.Ct. 51, 56, 84 L. Ed. 20, reviewed the decisions of the court involving the statute, and summarized as follows: "The rule was thus established, and has ever since been consistently followed by the Court, that a transfer of property upon trust, with power reserved to the donor either to revoke it and recapture the trust property or to modify its terms so as to designate new beneficiaries other than himself is incomplete, and becomes complete so as to subject the transfer to death taxes only on relinquishment of the power at death." Since the reservation in the present case did not empower the donor either to revoke the trust instrument and recapture the trust property, or to modify the terms of that instrument so as to designate new beneficiaries or in any other manner change the fixed provisions thereof, it is patent that the Commissioner is now seeking to extend the rule beyond the bounds long established.

The Commissioner argues that the words "alter, amend, or revoke" should always have been construed to include the power to terminate, and that the addition of the word "terminate" in the 1936 act added nothing of substance to the statute, but was only declaratory of the existing law. This view is based upon the report issued by the Ways and Means Committee in connection with the enactment of the 1936 law, which report read in part as follows: "In the case of White v. Poor, 296 U.S. 98, 56 S.Ct. 66, 80 L.Ed. 80, the Supreme Court did not pass on the question whether the power to terminate was included in the language relating to a power `to alter, amend, or revoke.' Since in substance a power to terminate is the equivalent of a power to revoke, this question should be set at rest. Express provision to that effect has been made and it is believed to be declaratory of existing law."

We do not consider this report helpful to the Commissioner here. It is at once apparent that the word "terminate," if used to mean the same thing as "revoke," adds nothing of substance to the statute. In any case where the grantor retains a power called a power to terminate, but where the power when exercised is the equivalent of a...