Helvering v. United States Trust Co., 266.

• Decision Date: 29 April 1940
• Docket Number: No. 266.,266.
• Citation: 111 F.2d 576
• Parties: HELVERING, Com'r of Internal Revenue, v. UNITED STATES TRUST CO. et al.
• Court: U.S. Court of Appeals — Second Circuit

111 F.2d 576 (1940)

HELVERING, Com'r of Internal Revenue, v. UNITED STATES TRUST CO. et al.

No. 266.

Circuit Court of Appeals, Second Circuit.

April 29, 1940.

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

Harry J. Ahlheim and Reeves, Todd, Ely & Biaty, all of New York City (Harry J. Ahlheim, and Ambrose G. Todd, both of New York City, of counsel), for respondents.

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

L. HAND, Circuit Judge.

The question in this case is whether any part of a trust fund, set up by the testator during his life, shall be included as part of his gross estate under section 302 (d) of the Revenue Act of 1926, 26 U.S.C.A.Int. Rev.Acts, page 228. He had become estranged from his wife some years before he died, and in contemplation of a divorce which followed within a few months, he made an agreement with her on January 31, 1929, by which he agreed to pay her $2,500 a month during her life, out of which she was to support herself without further recourse to him, and in addition to "support and maintain her daughter during the time the said daughter resides with her". The child was to spend half her time with her father and half with her mother, and the testator agreed to assume certain of her expenses while she was with her mother. The agreement also provided that the testator might at any time commute the annuity by setting up a trust for $425,000, the income from which was to be paid to his wife for life, and which she should accept in satisfaction of any claims against him under the agreement. The parties were divorced in May, 1929, by a decree which ratified the provisions made for the wife and child, subject however to later modification as to the child. In the following June the testator exercised his option to discharge his obligations by setting up a trust, and transferred to two trustees securities, valued at about $414,000, the income from which was to be paid to the wife for life; she to have also a power to appoint $200,000 of the principal by will. He reserved a joint power in himself and his wife at any time to revoke the trust, in which event the property should pass as he and she directed. He died in May, 1935, and the taxpayers are his executors. The Commissioner included the corpus of the trust in the gross estate because it fell within section 302(d) of the Act of 1926, not having been made for a consideration in "money or money's worth". The Board on the other hand excluded it on the ground that the release by the wife was such a consideration, and was of greater value than the whole trust fund.

We decided in Meyer v. Helvering, 2 Cir., 110 F.2d 367, that such payments as the testator promised to make by the agreement of January, 1929, were not deductible from his gross estate. Our reason was that, although the wife's release of her right to alimony during their joint lives was a consideration "in money or money's worth" under section 303(a) (1) of the Revenue Act of 1926, 26 U.S.C.A.Int.Rev. Acts, page 232, it was also a "relinquishment * * * of * * * marital rights in the decedent's property or estate" under section 804 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 642. The wife's annuity under the agreement was itself as much a "marital right in the decedent's property or estate", as the claim which it superseded, and the trust, set up in consideration of the "relinquishment" of the annuity, was therefore within section 302(d) of the Act of 1926, as amended by section 804 of the Act of 1932. The taxpayers answer that in 1929, when the trust was set up, section 302(d) of the Act of 1926 did not exclude from the phrase, "money's worth", the release of a "marital right"; that the definitory amendment, being introduced by section 804 of the Act of 1932, ought not to be construed retroactively; and that if it be, it is unconstitutional. There can be no doubt that as matter of mere interpretation this argument is wrong. Section 302(d) first applied to the testator's estate at all only when he died in 1935; not until then did it command the Commissioner to include the trust in the gross estate; and before 1935 section 804 of the Act of 1932 had given it its new meaning. Whether it was constitutional to include within the section so amended a trust set up in 1929 is another matter, and depends upon the extent to which the result disappoints reasonable expectations. Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081; Helvering v. Helmholz, 296 U.S. 93, 98, 56 S.Ct. 68, 80 L.Ed. 76; Frew v. Bowers, 2 Cir., 12 F.2d 625, 630; Commissioner v. Flanders, 2 Cir., 111 F.2d 117. The argument must be that in effect the...