Commissioner of Internal Revenue v. Allen, 7050.

• Decision Date: 22 December 1939
• Docket Number: No. 7050.,7050.
• Citation: 108 F.2d 961
• Parties: COMMISSIONER OF INTERNAL REVENUE v. ALLEN.
• Court: U.S. Court of Appeals — Third Circuit

108 F.2d 961 (1939)

COMMISSIONER OF INTERNAL REVENUE v. ALLEN.

No. 7050.

Circuit Court of Appeals, Third Circuit.

December 22, 1939.

Edward H. Green, of New York City, Lawrence A. Baker, of Washington, D. C., and John F. Dooling, Jr., of New York City (Sullivan & Cromwell, of New York City, of counsel), for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and Richard H. Demuth, Sp. Atty., of Washington, D. C., for respondent.

Before BIDDLE, JONES, and BUFFINGTON, Circuit Judges.

JONES, Circuit Judge.

The question in this case is whether a minor's transfer of property, without valuable consideration, in trust for others, made prior to the effective date of the Gift Tax Act of 1932, is so inchoate and imperfect, because of the minor's legal right to disaffirm during minority and for a reasonable period thereafter, as to render the transfer not taxable as a gift until the year in which the minor attained majority, having failed to disaffirm.

The Board of Tax Appeals, agreeing with the taxpayer's contention, held that the transfer was complete as an executed gift at the time the trust was created; that the minor settlor's right to disaffirm was not the vested power "to revest in the donor title to such property" contemplated by Section 501(c) of the Revenue Act of 1932, 26 U.S.C.A. § 550 note; and that the gift was, therefore, not subject to tax. It is that decision which we now have for review on the petition of the Commissioner of Internal Revenue.

The material facts in the case are as follows:

On June 4, 1932, Dorothy Anne Dillon (now Dorothy A. D. Allen, the respondent), a resident of New Jersey, made a transfer in trust by executing and delivering an indenture transferring the securities specified therein, and in accordance with its terms, to the trustees named in the indenture. On the same date, the trustees, consisting of the settlor's father, her brother and a certain bank, qualified to act as trustee in New Jersey, accepted the trust. At the time of making the trust, the settlor was a minor and did not attain her majority until October 9, 1933¹.

By the terms of the indenture the entire net income of the trust estate was made payable to the settlor's father for life, then to her mother for life, and then to her brother for life, with remainders over in the income, for a time, and, later, in the corpus to the children and the issue of any deceased children of the brother, and, failing such, then to the children and the issue of any deceased children of the settlor.

The indenture also provides that the trust shall be governed in accordance with the laws of New Jersey.

The transfer appears to be absolute on the face of the indenture which contains no express reservation of power, on the part of the settlor, to revoke or amend the trust.

Under the law of New Jersey, as elsewhere generally in this country, a minor has the legal right to avoid his contracts and conveyances. Such right endures for a reasonable time after the minor has reached his majority. What constitutes a reasonable time after majority for an act of disaffirmance, being ordinarily a question of fact, usually depends on the circumstances of the particular case. For a recent tabulation of the rules in various States, see Spencer v. Lyman Falls Power Co., 109 Vt. 294, 196 A. 276, 278.

The Court of Chancery of New Jersey has held that the time within which the acts of a minor may be disaffirmed after majority may extend for the periods prescribed by the New Jersey statute of limitations for actions real and actions personal, respectively, although the right to disaffirm may be lost earlier by conduct on the part of the emancipated minor amounting to ratification or constituting an estoppel to disaffirmance. Mott v. Iossa, 119 N.J.Eq. 185, 192, 181 A. 689. Unquestionably, the respondent in the instant case, by disaffirming, could have avoided her transfer of June 4, 1932, and thereby have revested in herself title to the trust property, at any time until she attained her majority on October 9, 1933, and for some period of time thereafter.

The Commissioner, deeming that the transfer became consummate as a gift on October 9, 1933, when the settlor attained her majority and failed to disaffirm, and that it was therefore taxable under Section 501² of the Revenue Act of 1932, requested the respondent to file a gift tax return for 1933 reflecting the transfer. This, the respondent did, at the same time denying any liability for tax on account of the gift. The gift tax provisions of the Revenue Act of 1932 did not become effective until June 6, 1932, two days after the execution and delivery of the respondent's trust deed.

The decision in Burnet v. Guggenheim, 288 U.S. 280, 53 S.Ct. 369, 370, 77 L.Ed. 748, controls this case. What was said there, with respect to the unreality and mere formality of a "gift" where a power to revoke is vested in the donor, applies with equal force here. Throughout the donor's minority, her transfer remained "inchoate and imperfect". It was not until she attained her majority and failed to disaffirm that her undeniable and absolute power to nullify the transfer and to revest in herself title to the trust property terminated. When that occurred, the gift became consummate and, at the same time, subject to tax under Section 501(a) of the Revenue Act of 1932.

Because the power to revoke, in the Guggenheim case, was expressly reserved to the settlor by his instruments of grant, while, in the present case, it was reposed by law, the respondent seeks to distinguish the two cases on the difference in the manner in which the powers respectively arose. No such distinction is anywhere suggested in the Guggenheim case; nor are we able to see how it could be validly asserted. The difference in the inception of the powers is merely one of immaterial form and not of substance. The thing that renders the giving in the first instance less than a gift is the power in the donor to nullify his grant. The exercise of the power is equally efficacious in either case in bringing about the defeat of what once had "the quality of a gift", regardless of how the power happened to attend. And, with the extinguishment or termination of the power, however created, comes the "change of legal rights and * * * shifting of economic benefits" (Burnet v. Guggenheim, supra)³, which Congress taxed by Section 501(a) of the Revenue Act of 1932 as a transfer by gift effected at that time.

In addition to Section 501(a), which imposes the tax "upon the transfer * * * of property by gift", Subsection (c) of the same Section provides, in material part, that "The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but the relinquishment or termination of such power (other than by the donor's death) shall be considered to be a transfer by the donor by gift of the property subject to such power", etc. (Italics supplied.)

The meaning of this provision is free from doubt. Yet, the respondent argues that Subsection (c) was intended to embrace only instances where the power vested in the donor to revest in himself title to the trust property is expressly reserved to him by his instrument of transfer. Again, no occasion for the distinction is indicated by the plain and understandable words of the statute. Indeed, it would be difficult to suggest language more expressive of a legislative intent to cover all instances where there was a power in the donor to revest in himself title to the transferred property, regardless of the form or manner by which the power came into being. To conclude that Section 501 (c) does not embrace a power to revoke, imposed by law, would require that we read into the statute something that is not there and place upon it a limitation which could not be justified on any reasonable ground.

However, what Subsection (c) of Section 501 plainly expresses, and therefore means, neither adds to nor takes away from the scope of the tax imposed by Subsection (a). The provision in Subsection (c) is but declaratory of the law applicable to a determination of when a gift becomes consummate. This was pointed out clearly in Burnet v. Guggenheim, supra. There the question arose under the Gift Tax Act of 1924. The taxing clause in the 1924 Revenue Act was substantially carried forward as Section 501(a) of the Act of 1932. The 1924 Gift Tax Act did not, however, contain anything similar to Section 501(c) of the later Act. But a Treasury Regulation (Regulations 67, Art. 1), in substance the same as the provision in Section 501(c) of the Revenue Act of 1932, had been adopted and promulgated by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury prior to the termination of the donor's power to revoke in the Guggenheim case. By the time the latter case came before the Supreme Court, the Revenue Act of 1932 had been enacted, incorporating as Section 501(c) what had been the regulation under the 1924 Revenue Act. This later statutory provision was called to the attention of the Court in the Guggenheim case in support of the asserted validity of the regulation under the Revenue Act of 1924. With respect to both, namely, the prior regulation under the Revenue Act of 1924 and its statutory counterpart (Section 501(c) of the Revenue Act of 1932), Justice Cardozo, speaking for the Supreme Court, said, "We think the regulation, and the later statute continuing it, are declaratory of the law which Congress meant to establish in 1924". Congress, having perceived from the opinion in the Guggenheim case that what Subsection (c) of Section 501 of the Revenue Act of 1932 contained was otherwise "a fundamental part of the law",⁴ thereupon expressly...