Higgins v. Commissioner of Internal Revenue

• Decision Date: 02 June 1942
• Docket Number: No. 3755.,3755.
• Citation: 129 F.2d 237
• Parties: HIGGINS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

129 F.2d 237 (1942)

HIGGINS v. COMMISSIONER OF INTERNAL REVENUE.

No. 3755.

Circuit Court of Appeals, First Circuit.

June 2, 1942.

Lawrence E. Green, of Boston, Mass. (Raymond B. Roberts and George E. Ray, both of Boston, Mass., of counsel), for petitioner for review.

Helen R. Carloss, Sp. Asst. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and J. Louis Monarch, Sp. Asst. Attys. Gen., and J. P. Wenchel and John M. Morawski, both of Washington, D. C., for Commissioner.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

MAGRUDER, Circuit Judge.

Aldus C. Higgins, the taxpayer herein, created two trusts in 1920, one for the benefit of his daughter Elizabeth and her issue, the other for the benefit of his son Milton and his issue. On March 10, 1938, the taxpayer by formal instrument relinquished certain powers reserved to himself as settlor in each trust. The Commissioner ruled that the relinquishment of these powers in 1938 constituted gifts of the whole corpus of each trust fund. The Board of Tax Appeals sustained the Commissioner, and determined a deficiency in gift tax for the year 1938 in the sum of $283,362.65. The taxpayer now petitions for review of this decision of the Board.

We shall set forth the facts only with relation to the trust for Elizabeth since, in the view we take, there is no material variation between the two trusts.

The taxpayer declared himself trustee of 662 shares of the capital stock of the Norton Company for the benefit of his daughter Elizabeth, her children and the issue of any such child or children. The trust was to continue until the death of Elizabeth, and thereafter until every child of Elizabeth should have reached the age of 21 years or died. At the termination of the trust the principal was to be distributed pro rata among the then surviving children of Elizabeth and the then surviving issue of any deceased child or children by right of representation.¹ There was, however, the possibility of an earlier final distribution of the whole or any part of the trust fund pursuant to certain powers enumerated in the trust instrument and hereinafter to be described.

Mr. Higgins reserved to himself as settlor "full power and authority to appoint to any beneficiary the whole or any part of the principal of the trust fund". This power could be exercised by will or by deed inter vivos and might be so employed as to effectuate immediate "payment and delivery of that portion of the trust fund" so appointed. The settlor also reserved to himself power by will or by deed "to modify the terms of this instrument either as to the powers of the trustees with respect to investments or as to their powers with respect to the distribution of income or principal among the beneficiaries herein named or described prior to the termination of the trust". Also the settlor reserved power to appoint additional trustees, to remove any trustee or trustees, to fill vacancies among the trustees, "or he may refrain from appointing trustees to such places, and the number of trustees shall be augmented or reduced accordingly". In his capacity as trustee Mr. Higgins was given by the trust instrument sweeping powers of management of the trust funds. The trustees were empowered either (a) to accumulate the income, (b) to "apply the same in any way for the support, comfort and education, either in my own household or elsewhere, or otherwise to the benefit of the beneficiaries or any of them", or (c) to "pay over the same either in money or otherwise to the beneficiaries or any of them". The trustees were also given full power and authority to apply to the care, support, education, or otherwise to the benefit of any beneficiary, so much of the principal as they should deem necessary to the health, comfort, education or otherwise to the best interests of any such beneficiary.

Such in substance was the situation just prior to March 10, 1938. On that day Mr. Higgins resigned as trustee and appointed Katharine H. Riley to act as trustee in his stead. On the same day, by virtue of his reserved powers, Mr. Higgins executed a formal instrument amending the provisions of the trust so as to broaden somewhat the discretionary powers of the trustees with reference to the disposition of income and principal;² and by the same instrument he released and relinquished "all powers reserved or given to me by any and all the provisions of said trust instrument".

As we noted in Commissioner v. Prouty, 1 Cir., 1940, 115 F.2d 331, 133 A.L.R. 977, the interrelation of the income, estate and gift taxes presents many perplexities; without further aid from Congress it is perhaps impossible for the courts to work out a complete integration of the three taxes.

When a trust is created the first tax problem in point of time is whether the transfer is subject to the gift tax. It might have been logical for Congress in the gift tax provisions to describe with particularity those factors determinative of the question whether a completed gift has been made. If the transfer in trust were determined to be incomplete at that stage and not subject to the gift tax then the settlor would remain subject to an income tax on the net income from the trust fund, and the trust property, upon the settlor's death, would still be subject to the estate tax. If on the other hand the transfer in trust were determined to be a completed gift, the gift tax would then be payable, the income from the trust fund would not thereafter be taxable to the settlor, nor would the trust property be included in the settlor's gross estate at his death. In this way there would have been an integration of the three taxes, with no overlapping.

The statutory development took quite a different course, however. The income and estate taxes appeared on the books first, and their complete integration is negatived by express statutory provisions. In other words, certain types of transfer result in relieving the transferor from the income tax, yet at his death the property which had been transferred during his lifetime is nevertheless included in his gross estate for estate tax purposes; and vice versa. For instance, when property is transferred by outright gift in contemplation of death, the donor no longer pays an income tax thereon, but such property is included in the donor's gross estate upon his death. Likewise if a donor conveys property to trustees for the benefit of others, reserving a power to revoke in conjunction with one having a substantial adverse interest in the trust, the income is not thereafter taxable to the donor under I.R.C. § 166, 26 U.S.C.A.Int.Rev.Code, § 166, but upon his death the corpus will be included in his gross estate. Helvering v. City Bank Farmers Trust Co., 1935, 296 U. S. 85, 56 S.Ct. 70, 80 L.Ed. 62. On the other hand, where the settlor of a trust created for the benefit of others reserves in himself no power of revocation but vests such power in some other person who has no adverse interest, the grantor remains subject to the income tax (I.R.C. § 166), but apparently escapes the estate tax.³ Helvering v. Eubank, 1940, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81, is another instance of a transfer where the donor must continue paying an income tax, but where the value of the property transferred will not be included in the donor's gross estate at his death.

The gift tax enactment, which came later, broadly imposed a tax upon "the transfer * * * of property by gift". Revenue Act of 1932, § 501(a), 47 Stat. 169, I.R.C. § 1000, 26 U.S.C.A.Int.Rev.Code, § 1000. This tax was conceived of by Congress as supplementary in character, designed to buttress both the estate tax and the income tax. The committee reports of both House and Senate stated:

"The gift tax will supplement both the estate tax and the income tax. It will tend to reduce the incentive to make gifts in order that distribution of future income from the donated property may be to a number of persons with the result that the taxes imposed by the higher brackets of the income tax law are avoided. It will also tend to discourage transfers for the purpose of avoiding the estate tax."⁴

It has been suggested that "the gift tax should be imposed as soon as the donor or grantor ceases to bear the burden of the income tax on the income derived from the property transferred". Warren, "Correlation of Gift and Estate Taxes", 55 Harv.L. Rev. 1, 23. It would then result that in many instances an estate tax would be payable on property which had theretofore borne a gift tax when transferred by the decedent during his lifetime. But this overlapping had been contemplated by Congress, and any resulting hardship has at least been partially mitigated by the provision allowing a credit for gift taxes paid in computing the estate tax. I.R.C. § 813, 26 U.S.C.A.Int. Rev.Code, § 813. This suggested approach emphasizes the gift tax as supplementary to the income tax. The gift tax was also designed to discourage transfers for the purpose of avoiding the estate tax; hence with equal force it could be argued that the gift tax should be imposed upon any donative transfer of such nature that the affected property will thereafter not be included in the donor's gross estate for estate tax purposes. It would then result that in many instances a gift tax would be imposed though the donor still bears the burden of the income tax on the income derived from the property transferred.⁵ Since the estate tax lacks complete integration with the income tax, it is obvious that the courts in construing the gift tax so as to achieve a dual purpose of supplementing the estate and the income tax cannot achieve a complete integration of the three taxes.

In Sanford's Estate v. Commissioner, 1939, 308 U.S. 39, page 47, 60 S.Ct. 51, page 57, 84 L.Ed. 20, the Supreme Court recognized that "One purpose of the gift tax was to prevent or compensate for the loss of surtax upon income where large estates are split up by...