Jennings v. Smith

• Decision Date: 14 April 1947
• Docket Number: No. 116,Docket 20270.,116
• Citation: 161 F.2d 74
• Parties: JENNINGS et al. v. SMITH.
• Court: U.S. Court of Appeals — Second Circuit

161 F.2d 74 (1947)

JENNINGS et al. v. SMITH.

No. 116, Docket 20270.

Circuit Court of Appeals, Second Circuit.

April 14, 1947.

Marsh, Day & Calhoun, of Bridgeport, Conn. (Satterlee, Green & Sher, of New York City, of counsel), for appellants.

Sewall Key, Acting Asst. Atty. Gen., Helen R. Carloss, Robert N. Anderson and Lester L. Gibson, Sp. Assts. to Atty. Gen. and Adrian W. Maher, U. S. Atty., of Hartford, Conn., for appellee.

Before SWAN, CHASE and FRANK, Circuit Judges.

SWAN, Circuit Judge.

This is an action by the executors of the will of Oliver Gould Jennings, a resident of Connecticut whose death occurred on October 13, 1936, to recover such part of the estate tax paid by them to the defendant collector as had been illegally collected. Their right to a refund of the amount claimed is clear under Maass v. Higgins, 312 U.S. 443, 61 S.Ct. 631, 85 L.Ed. 940, 132 A.L.R. 1035, and was not disputed; but the defendant set up in defense an additional estate tax liability (greater than the alleged overpayment) based on the failure to include in the decedent's gross estate the value of certain property which he had transferred in trust in 1934 and 1935. Although assessment of an additional estate tax was barred by the statute of limitations, the plaintiffs do not contend that they are entitled to a refund unless the tax legally due was overpaid. See Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293. Hence the question presented at the trial, and renewed here, is whether the value of the trust property should have been included in the gross estate. The district court held it includible under § 811(d) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 811(d). Accordingly judgment was given for the defendant, and the plaintiffs have appealed.

In December 1934 the decedent set up two trusts: one for the family of his elder son, B. Brewster Jennings, the other for the family of his younger son, Lawrence K. Jennings. The trust instruments were identical, except for the names of the beneficiaries and the property transferred.¹ In discussing the terms of the trusts it will suffice to refer to the one set up for the elder son's family. The trust was irrevocable and in so far as legally permissible its provisions were to be interpreted and enforced according to Connecticut law. It reserved no beneficial interest to the settlor. He and his two sons were named as the trustees; in case a vacancy should occur provision was made for the appointment of a successor trustee having like powers; there were always to be three trustees and they were authorized to act by majority vote. At the end of each year during the life of the son, the trustees were to accumulate the net income by adding it to the capital of the trust but they were given power, "in their absolute discretion" at any time during the year and prior to the amalgamation of that year's net income into capital, to use all or any part of it for the benefit of the son or his issue provided "the trustees shall determine that such disbursement is reasonably necessary to enable the beneficiary in question to maintain himself and his family, if any, in comfort and in accordance with the station in life to which he belongs."² Upon the death of the son the capital of the trust was to be divided into separate equal trust funds, one for each of his surviving children and one for each deceased child who left issue surviving at the death of the son. The trustees also had power to invade the capital upon the terms set out in paragraph 3(f) of the trust deed.³ In the Lawrence K. Jennings trust all current net income for the years 1935 and 1936 was paid to him, the trustees, of whom the decedent was one, having unanimously determined that such payments were necessary to enable Lawrence to maintain himself and his family in comfort and in accordance with his station in life. No payment or application of income of the B. Brewster Jennings trust, and none of capital of either trust, was made or requested during the life of the decedent.

Gift tax returns covering the transfers in trust were duly filed and taxes paid thereon. The trusts were not created in contemplation of death, nor to reduce estate taxes on the settlor's estate.

Section 811(d) (2) of the Code, which is applicable to transfers made before June 22, 1936, provides for inclusion in the gross estate of all property "To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, * * *".

The appellants contend that this section embraces only powers exercisable by the settlor in his individual capacity and does not include powers exercisable by him in a fiduciary capacity, either alone or as one of several trustees. Under § 811(d) (1), which relates to transfers made after June 22, 1936, the existence of a power to alter, amend or revoke "(in whatever capacity exercisable)" is sufficient. Whether the quoted parenthetical phrase was intended to effect a change or was declaratory of existing law was left open in Commissioner v. Estate of Holmes, 326 U.S. 480, at page 490, 66 S.Ct. 257. But in Commissioner v. Newbold's Estate, 2 Cir., 158 F.2d 694, this court recently held, following the first and third circuits, that the phrase was merely declaratory and its absence from § 811(d) (2) is consequently not significant. Despite the appellants' able argument to the contrary, we adhere to that view.

The next question is whether the powers conferred upon the trustees in the case at bar are powers of the character described in section 811(d) (2), which requires that enjoyment of the trust property must be subject at the date of the decedent's death to change through the exercise of a power. The trustees' power to invade the capital of the trust property was exercisable only if the son or his issue "should suffer prolonged illness or be overtaken by financial misfortune which the trustees deem extraordinary." Neither of these contingencies had occurred before the decedent's death; hence enjoyment of the capital was not "subject at the date of his death to any change through the exercise of a power." In Commissioner v. Flanders, 2 Cir., 111 F.2d 117, although decision was rested on another ground, this court expressed the opinion that a power conditioned upon an event which had not occurred before the settlor's death was not within the section. In support of this view we cited Tait v. Safe Deposit & Trust Co., 4 Cir., 74 F.2d 851, 858; Day v. Commissioner, 3 Cir., 92 F.2d 179; Patterson v. Commissioner, 36 B.T.A. 407. The question has recently been explored by the Tax Court in Estate of Budlong v. Commissioner, 7 T.C. 758. There it was held in a convincing opinion that the power of trustees to invade corpus in case of "sickness or other emergency," which had not occurred before the decedent's death, was not a power to "alter, amend or revoke" within the meaning of the statute. The court reasoned that the trustees had not unlimited discretion to act or withhold action under the power, since the trust instrument provided an external standard which a court of equity would apply to compel compliance by the trustees on the happening of the specified contingency or to restrain threatened action if the condition were not fulfilled. In the case at bar the district judge was of opinion that even if the trustees found that the stated conditions had been fulfilled, "their finding created no enforcible rights in any of the beneficiaries." 63 F.Supp. 834, at page 837. In this view we are unable to concur.⁴ The condition upon which the power to invade capital might arise is sufficiently definite to be capable of determination by a court of equity. As Judge L. Hand said in Stix v. Commissioner, 2 Cir., 152 F.2d 562, 563, "no language, however strong, will entirely remove any power held in trust from the reach of a court of equity." See also Cushman v. Commissioner, 2 Cir., 153 F.2d 510, 514; Commissioner v. Irving Trust Co., 2 Cir., 147 F.2d 946, 949; Greenwich Trust Co. v. Converse, 100 Conn. 15, 26, 122 A. 916; Hooker v. Goodwin, 91 Conn. 463, 99 A. 1059, Ann.Cas. 1918D, 1159; Little v. Geer, 69 Conn. 411, 37 A. 1056. Since the trustees were not free to exercise untrammeled discretion but were to be governed by determinable standards, their power to invade capital, conditioned on contingencies which had not happened, did not in our opinion bring the trust property within the reach of section 811(d) (2).

Similar reasoning leads to the same conclusion with respect to the trustees' power over net income. At the end of each calander year they were to accumulate the net income of that year unless prior to its amalgamation into capital they exercised their power to disburse it to, or for the benefit of, the son or his issue. The power the trustees had with respect to disbursing income was exercisable year by...