Guenzel's Estate v. Commissioner of Internal Revenue, 15956.

• Decision Date: 22 July 1958
• Docket Number: No. 15956.,15956.
• Citation: 258 F.2d 248
• Parties: ESTATE OF Carl J. GUENZEL, Deceased, Ernest Usher Guenzel and Carl Stanley Guenzel, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

258 F.2d 248 (1958)

ESTATE OF Carl J. GUENZEL, Deceased, Ernest Usher Guenzel and Carl Stanley Guenzel, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15956.

United States Court of Appeals Eighth Circuit.

July 22, 1958.

Robert C. Guenzel, Lincoln, Neb., for petitioners.

James P. Turner, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson and A. F. Prescott, Attys., Washington, D. C., were with him on the brief), for respondent.

Before GARDNER, Chief Judge, and WOODROUGH and VAN OOSTERHOUT, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

This is a petition to review the decision of the Tax Court (opinion reported 28 T.C. 59) which upheld a deficiency assessment of estate tax against the executors of the Estate of Carl J. Guenzel, who will hereinafter be referred to as taxpayers. The assessment was based upon the inclusion of the corpus of the Carl J. Guenzel Trust in the gross estate of Carl J. Guenzel.

Carl J. Guenzel died on March 18, 1951, a resident of Nebraska. An estate tax return was filed and all estate tax due was paid, except on the value of the corpus of the Carl J. Guenzel Trust. Taxpayers have at all times taken the position that the value of this trust was not taxable as part of decedent's gross estate and did not include the value of the trust in the estate tax return. Whether or not the value of the trust created by Carl J. Guenzel constituted part of his gross estate for estate tax purposes is the primary issue for our consideration. An alternate issue, in the event the trust is considered part of decedent's taxable estate, is whether taxpayers are entitled to a deduction under section 812(c) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 812(c), for the value of the Carl J. Guenzel Trust, upon the basis that such assets were previously taxed in the Letitia Guenzel estate.

The undisputed pertinent facts are summarized by the Tax Court as follows:

"On March 14, 1936, Carl J. Guenzel executed an irrevocable trust, known as the Carl J. Guenzel Trust, and on the same date Letitia Guenzel, his wife, executed a similar irrevocable trust known as the Letitia Guenzel Trust. Carl transferred securities and property having a value of $85,068.75 to the trustee named in his trust, The First Trust Company of Lincoln, Nebraska. Letitia transferred securities and property to the same named trustee, having a value of $85,016.75. Both trust agreements are identical as to form, wording, provisions for the continuance thereof, and disposition of income to a primary life income beneficiary, and to the grantors as secondary life income beneficiaries, and to the same named ultimate beneficiaries.

"The Carl J. Guenzel Trust provided, in part, as follows:

"The Trustee shall dispose of the Trust Estate as follows:

"A. The net income from all property constituting said Trust shall be paid to the Grantor\'s wife, Letitia Guenzel, during her lifetime, in such installments not less than quarterly that she desires.

"B. Upon the death of Grantor\'s said wife, if the Grantor is then deceased, the trust estate shall be divided equally between and paid over Outright to the Grantor\'s sons, C. Stanley Guenzel and Ernest U. Guenzel.

"1. If either of the Grantor\'s said sons dies before becoming entitled to receive his share of the trust under the foregoing provisions, such share shall be divided equally among and vest in his surviving children, including by right of representation the issue of any deceased child of his. Each such share, however, shall be retained by the Trustee and the principal thereof paid to the beneficiary when he or she attains the age of twenty-five (25) years, with net income to be paid in the meantime to such beneficiary.

"C. Should the Grantor\'s wife, Letitia Guenzel, predecease the Grantor from and after her death the net income from the trust estate shall be paid to the Grantor during his lifetime in such installments, not less than quarterly, that he desires.

"1. If paragraph `C\' becomes operative then upon the death of the Grantor (his said wife also being then deceased) the trust estate shall be disposed of as provided in paragraph `B\' and subparagraph `B-1\', whichever is applicable.

"The Letitia Guenzel Trust contained the same provisions except that it named Carl J. Guenzel as the primary life income beneficiary and the corpus was to go to the sons on Letitia\'s death if she survived her husband. Gift tax returns for the calendar year 1936 were filed by both grantors covering the transfers in trust and the gift tax paid on the return filed by Carl Guenzel was $1,573.16.

"Letitia Guenzel died February 8, 1947, and the executors of her estate filed the estate tax return. The return was audited by the Commissioner\'s agents, which resulted in the inclusion in her gross estate the sum of $99,278.43 with this explanation by the acting internal revenue agent in charge:

"Value of C. J. Guenzel Trust created March 14, 1936 $99,278.43

"The decedent and her husband on March 14, 1936 created reciprocal trusts and in effect the property of decedent was exchanged for that of the husband. It is our view that the decedent be regarded as the creator of the trust created by the husband and was the nominal grantor and the same included in the gross estate as a transfer under Section 811(c) the decedent had the right to the income.

"The executors of Letitia\'s estate paid the tax with the $99,278.43 included as a part of the gross estate. After Letitia\'s death Carl received the income from the Carl Guenzel Trust and it was stipulated that he was entitled to receive the same until his death.

"On November 5, 1949, Carl executed a release, relinquishment, and renunciation of all of his right, title, power and interest in and to the Letitia Guenzel Trust. No part of the corpus of that trust is sought to be included in the estate of the present decedent."

From the foregoing facts it is perfectly clear that under the trust Carl J. Guenzel created he reserved the income from the trust for himself for life in the event he survived his wife, the primary life beneficiary. The reservation of such life income from the trust made the value of the property transferred to the trust includible in decedent's gross estate by virtue of the provisions of section 811(c) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 811(c), which provides that there shall be included in the gross estate of a decedent property of which the decedent "has at any time made a transfer * * * by trust or otherwise — (B) under which he has retained for his life * * * (i) the possession or enjoyment of, or the right to the income from, the property * * *."

The trusts here involved were created in 1936. In 1935, the Supreme Court, by five-four decisions, in Helvering v. St. Louis Union Trust Co., 296 U.S. 39, 56 S.Ct. 74, 80 L.Ed. 29, and Becker v. St. Louis Union Trust Co., 296 U.S. 48, 56 S.Ct. 78, 80 L.Ed. 35, held that a trust, such as here involved, reserving a contingent life estate in the grantor, was not taxable as a transfer intended to take effect in possession or enjoyment after the creator's death. Thus, under the law as interpreted at the time the Guenzel trusts were created, the value of the trust was not includible in the gross estate of either creator. However, in Helvering v. Hallock, 309 U.S. 106, 60 S.Ct. 444, 84 L.Ed. 604, decided in 1940, the St. Louis Trust Co. cases were overruled. The Court held that the reservation of a contingent or secondary life estate makes the value of the transferred property taxable to the estate of the grantor as a transfer intended to take effect in possession or enjoyment at or after the grantor's death. The rule announced in the Hallock case was in effect at the time of the death of both Mr. and Mrs. Guenzel, and such rule has been consistently followed. Commissioner of Internal Revenue v. Estate of Church, 335 U.S. 632, 69 S.Ct. 322, 337, 93 L.Ed. 288; Marks v. Higgins, 2 Cir., 213 F.2d 884; Commissioner of Internal Revenue v. Nathan's Estate, 7 Cir., 159 F.2d 546.

In Estate of Church, supra, 335 U.S., at pages 645-646, 69 S.Ct. at page 329, the Court states:

"* * * Hallock thereby returned to the interpretation of the `possession or enjoyment\' section under which an estate tax cannot be avoided by any trust transfer except by a bona fide transfer in which the settlor, absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property. After such a transfer has been made, the settlor must be left with no present legal title in the property, no possible reversionary interest in that title, and no right to possess or to enjoy the property then or thereafter. In other words such a transfer must be immediate and out and out, and must be unaffected by whether the grantor lives

or dies. * * *"

In our present case, under the authorities just cited, the value of the Carl J. Guenzel Trust on the date of Carl J. Guenzel's death constitutes a part of his gross estate. In Newberry's Estate v. Commissioner, 3 Cir., 201 F.2d 874, 876, 38 A.L.R.2d 514, the court states:

"Normally taxing authorities and courts administering or applying a statute which taxes to a transferor\'s estate property he has transferred in trust reserving certain powers to himself have no occasion to go beyond the trust instrument in order to identify the transferor. * * *"

We agree with the foregoing statement.

Taxpayers assert that their decedent is not the transferor of the Carl J. Guenzel Trust as Carl J. Guenzel made a bona fide sale of his trust assets to Letitia Guenzel for an adequate and full consideration. Section 811(c) does not tax transfers "in case of a bona fide sale for an adequate and full consideration in money or money's worth." The Tax Court, in finding that the value of the Carl J. Guenzel Trust constituted...