Exchange Bank and Trust Co. of Florida v. U.S.

• Decision Date: 03 December 1982
• Docket Number: No. 291-79,291-79
• Citation: 694 F.2d 1261
• Parties: 82-2 USTC P 13,505 EXCHANGE BANK AND TRUST COMPANY OF FLORIDA (Formerly Known as the Exchange National Bank of Tampa) and Catherine E. Thomas, as Personal Representatives of the Estate of Wayne Thomas, Jr., Appellants, v. The UNITED STATES, Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1261

694 F.2d 1261

82-2 USTC P 13,505

EXCHANGE BANK AND TRUST COMPANY OF FLORIDA (Formerly Known

as the Exchange National Bank of Tampa) and

Catherine E. Thomas, as Personal

Representatives of the Estate

of Wayne Thomas, Jr., Appellants, v. The UNITED STATES, Appellee.

Appeal No. 291-79.

United States Court of Appeals, Federal Circuit.

Dec. 3, 1982.

Michel G. Emmanuel, Tampa, Fla., argued, for appellants. With him on the brief were Nathaniel L. Doliner and Carlton, Fields, Ward, Emmanuel, Smith & Cutler, Tampa, Fla.

Michael Marino, Washington, D.C., argued, for appellee. With him on the brief were Asst. Attys. Gen. Glenn L. Archer, Jr., Theodore D. Peyser, Jr. and Donald H. Olson, Washington, D.C.

Before DAVIS, BENNETT and NIES, Circuit Judges.

BENNETT, Circuit Judge.

This appeal from a final judgment of the United States Claims Court, entered October 8, 1982, which denied the refund of estate taxes, presents an issue of first impression: whether the "reciprocal trust" doctrine should be applied to a series of simultaneous transfers of property by a husband and wife to their children under the Florida Gifts to Minors Act, where each spouse appoints the other spouse as guardian. The United States Claims Court, in an as yet unpublished opinion by Judge Wiese, ¹ applied the reciprocal trust doctrine to "uncross" the transfers, and therefore held for appellee. For the reasons set forth below, we affirm.

I

In 1956, Wayne Thomas, Jr. (decedent) and Catherine E. Thomas (decedent's wife) received a gift of real property from Wayne Thomas, Sr. (decedent's father). In 1959, decedent and his wife purchased real property from decedent's father. The property which was purchased in 1959 was jointly acquired through resources supplied in equal measure by decedent and his wife. As an estate planning measure, the Thomases decided to transfer the property to a newly formed corporation (Fishhawk Ranch, Inc.) in exchange for stock of that corporation, such stock to be given to their then minor children.

On December 30, 1959, decedent delivered to his wife, as custodian under the Florida Gifts to Minors Act, 25 shares of the stock for each of their seven minor children. On this same date, Catherine E. Thomas delivered the same number of shares to her husband, also as custodian for the children under the Florida Gifts to Minors Act. On four different occasions, in the years 1960 through 1962, Mr. and Mrs. Thomas made simultaneous transfers of stock for the benefit of their children, naming each other as custodian. ² The Thomases filed federal gift tax returns for those transfers which exceeded the annual gift tax exclusion. In 1969, all the shares of Fishhawk Ranch, Inc., were exchanged for shares of the Continental Oil Company.

On February 8, 1975, Wayne Thomas, Jr., died in an airplane crash. On the date of his death, all of the Thomas' children except two, Mary Carol and Richard, had reached the age of majority (21 years old) under Florida law. At the time of his death, decedent held 8,605 shares of Continental Oil as custodian for each of his two minor children. On this same date, Mrs. Thomas held an identical number of shares as custodian for Mary Carol and Richard Thomas.

On November 7, 1975, appellants filed a U.S. estate tax return on behalf of the decedent's estate. The return did not include the value of the stock Mr. Thomas held as custodian for his two minor children. On August 16, 1978, the Commissioner of Internal Revenue issued a notice of deficiency to decedent's estate. One of the reasons cited by the Commissioner for the deficiency was the failure to include the value of the assets decedent had transferred to his wife as custodian for Mary Carol Thomas and Richard Thomas under the Florida Gifts to Minors Act. The notice stated that these assets were includable in the gross estate "under the reciprocal trust doctrine for the reason that at the times decedent made transfers, Catherine E. Thomas made similar transfers to the decedent as custodian for Richard Thomas and Mary Carol Thomas * * * and at his death, the decedent was acting as such custodian." ³

On August 21, 1978, appellant Exchange Bank and Trust Company paid the sum of $164,767 to the Internal Revenue Service, representing the total deficiency assessed against the estate. On or about September 7, 1978, appellant paid $31,985 in interest to the I.R.S. On November 30, 1978, appellants filed a claim for refund of the deficiency and interest assessed against the estate. On July 9, 1979, appellants filed their petition.

II

The trial judge first noted that under the Uniform Gifts to Minors Act, and statutes modeled after it such as the Florida act, the custodian is vested with broad discretionary authority over the assets held. The custodian may (1) use income or principal for the minor's support, maintenance, education or benefit; (2) control the timing of the enjoyment of the gift through the power to withhold or advance income and principal; and (3) terminate the relationship by distributing all the assets to the minor. The court then noted that these broad powers held by the custodian have been uniformly held to be includable, under sections 2036 and 2038 of the Internal Revenue Code, ⁴ in the gross estate of a parent-donor who names himself custodian and dies while serving in that capacity. ⁵ From the foregoing, the trial judge concluded that "[t]here can be no question, therefore, that had Wayne Thomas, Jr. been the transferor of the custodial assets that he held at his death, their inclusion in his gross estate would have been required."

The reciprocal trust doctrine was then applied to the transfers. The judge formulated this doctrine as follows:

The so-called reciprocal trust doctrine describes cross transfers of property in trust that are made pursuant to an interrelated scheme and that result, to the extent of like values involved, in leaving the settlors in approximately the same economic position they would have been in had they created trusts naming themselves as beneficiaries. * * * For estate tax purposes, assets or powers traceable to such interrelated transfers are deemed to have originated with the decedent himself and to the extent otherwise taxable, are included as part of the gross estate. United States v. Estate of Grace, 395 U.S. 316 [89 S.Ct. 1730, 23 L.Ed.2d 332] (1969). [Slip op. at 7-8.]

It was found that the concurrent transfers in this case were clearly within the ambit of the reciprocal trust doctrine for the following reasons: (1) the transfers were interrelated, as they resulted from a common plan executed by the donors with mutual awareness; and (2) each spouse gained custodianship over assets equal in value to those assets relinquished, thus each donor was in the same economic position as one who transfers assets to himself as custodian.

Finally, no basis was found for the proposition that the reciprocal trust doctrine should not be applied when dealing with crossed custodianships rather than crossed trusts.

In either case [trust or gift], the only concern is whether, at the time of death, a decedent had an economic interest, within the meaning of sections 2036 and/or 2038, traceable to the reciprocal transfer of assets. To the extent that is so, the law dictates the inclusion of those assets in the gross estate on the premise that their true source was the decedent himself. Estate of Bischoff v. Commissioner, 69 T.C. 32 (1977). [Slip op. at 10.]

Based on the foregoing rationale, it was held that the value of the assets decedent held as custodian on the date of his death was properly includable in his gross estate.

III

As an initial matter, appellants do not dispute the contention that if decedent had been the transferor and custodian of the stock held for his minor children on the date of death, then the value of the stock would be properly included in his gross estate under sections 2036(a)(1) and 2038(a)(1). Under section 2036(a)(1), if the decedent has retained the right to have the transferred property, or the income from that property, applied toward the satisfaction of his legal support obligations, he will be considered to have retained the "possession or enjoyment of, or the right to income from, the property." ⁶ Helvering v. Mercantile Bank & Trust Co., 111 F.2d 224 (8th Cir.), cert. denied, 310 U.S. 654, 60 S.Ct. 1104, 84 L.Ed. 1418 (1940); Estate Tax Regulation Sec. 20.2036-1(b)(2). The decedent here clearly had a legal obligation to support his minor children. The Florida Gifts to Minors Act grants the custodian the power to expend for the minor's benefit "so much of or all the custodial property as the custodian deems advisable for the support, maintenance, education and benefit of the minor * * * in his discretion * * * with or without regard to the duty of himself or of any other person to support the minor or his ability to do so * * *." Fla.Stat. Sec. 710.05(2) (1963) (emphasis added). Whether or not the decedent actually used the property or income held as custodian for the support of his minor children is not determinative, as it is the mere power to so use these resources that invokes the application of section 2036.

Section 2038(a)(1) states that the gross estate shall include the value of any interest where the decedent, as transferor, died possessing the power to "alter, amend, revoke or terminate." ⁷ The Florida Gifts to Minors Act specifically authorizes the custodian to, in effect, terminate the custodial arrangement by exercising the power to "pay over to the minor * * * all of the custodial property." Fla.Stat. Sec. 710.05(2) (1963). As mentioned earlier, all of the courts that have ruled on the issue have uniformly held that the value of the retained interest of a transferor, who is also custodian under the Uniform Gifts to Minors Act and who holds these assets as custodian on the date of his death, is includable in the decedent's gross estate. ⁸

Under the facts...