Mackay v. Commissioner of Internal Revenue

• Decision Date: 07 February 1938
• Docket Number: No. 115.,115.
• Citation: 94 F.2d 558
• Parties: MACKAY et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

94 F.2d 558 (1938)

MACKAY et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 115.

Circuit Court of Appeals, Second Circuit.

February 7, 1938.

Montgomery B. Angell, Walter D. Fletcher, and Marvin Lyons, all of New York City, for petitioners.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Berryman Green, Sp. Assts. to Atty. Gen., for respondent.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

MANTON, Circuit Judge.

This is a petition for review pursuant to sections 1001-1003 of the Revenue Act of 1926, c. 27, 44 Stat. 9, as amended by section 603 of the Revenue Act of 1928, 45 Stat. 873, section 1101 of the Revenue Act of 1932, c. 209, 47 Stat. 169, and section 519 of the Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C.A. § 641, 642, 644, 645.

On May 14, 1919, the decedent, who died September 4, 1928, created eight trusts, six of which are here involved. All the trusts, except for the designation of the initial life beneficiary, were identical in terms. The life beneficiaries named were nieces, nephews, and grandchildren of the decedent. Each trust provided that the named life beneficiary was to receive the income for life, and, upon his or her death, the trust fund was to be divided by the trustees into as many shares as there were lawful children surviving the named life beneficiary who were in being at the time of the creation of the trust. The net annual income derived from each share was to be paid to each child representing such share during the life of such child. The remainder was disposed of as follows:

"Upon the death of each of said children, the principal of the share or portion of the Trust Fund represented by it shall be and become the property of Clarence H. Mackay, or, if he be not then living, it shall be equally divided among his lawful surviving children (the children of any deceased child of his, however, to take, share and share alike, the share which the parent would have taken had he or she survived) and the Trust, as to that portion of the Trust Fund, shall thereupon cease and determine.

"(f) Should the said initial life beneficiary die leaving no lawful children who were in being at the date of this instrument, the principal of the Trust Fund shall, on his death, be and become the property of Clarence H. Mackay or, if he be not then living, it shall be equally divided among his lawful surviving children (the children of any deceased child of his, however, to take, share and share alike, the share or portion which the parent would have taken had he or she survived said initial life beneficiary and Clarence H. Mackay, and this Trust shall thereupon immediately cease and determine."

Two of the eight trusts terminated prior to the death of decedent when the respective life beneficiaries died leaving no children. A third terminated after the death of the grantor, on May 24, 1933, when the life beneficiary died leaving no children. In each of these three instances the trust property was transferred to Clarence H. Mackay, the remainderman, in accordance with the terms of the indenture. In each of the three, the life beneficiary had no children in being on May 14, 1919. On the date of the decedent's death, six of the eight trusts were in existence; each of four of which was limited to one life, and each of two of which was limited to three lives; namely, an initial life beneficiary and two secondary life beneficiaries.

Each indenture provided: "This Trust may, during the lifetime of the Grantor, be amended or revoked on the joint consent of the Grantor and the Trustees."

Mackay, remainderman, is one of the three trustees named in each trust and continued as such throughout their existence.

An additional tax has been imposed resulting from the decision of the Board of Tax Appeals that the value of the life estates should be included in the decedent's gross estate while the value of the remainders should be excluded. The appellant seeks a review of the inclusion of the life estates, but the Commissioner does not contest the exclusion of the remainders.

The sole question presented, therefore, is whether the tax imposed by the Board on the life estates is proper under section 302(c) or section 302(d) of the Revenue Act of 1926. Section 302, 44 Stat. 70, 71, provides:

"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — (a) To the extent of the interest therein of the decedent at the time of his death; * * * "(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death; * * *

"(d) 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; * * *

"(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act."

No provision similar to subdivision (d) of section 302 of the Revenue Act of 1926 appeared in the Revenue Act of 1918 in force when these trusts were made. Section 302(c), however, is substantially identical with section 402(c) of the Revenue Act of 1918, 40 Stat. 1097.

Clause (c) relates to "any interest * * * of which the decedent has * * * made a transfer * * * intended to take effect in possession or enjoyment at or after his death." The six trusts considered do not fall within this class. By the creation of the trusts, the grantor had divested herself of all interest and enjoyment in respect of the property transferred, for she had reserved to herself no interest whatever in the property either by way of life estate or reversion. She retained no interest in the trust property which was or could be the subject of testamentary disposition. The trusts alone operated to transfer the title, economic enjoyment, and benefit of the property. The transfers were in no way conditioned upon or related to the death of the grantor. Upon the authority of Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S.Ct. 123, 73 L.Ed. 410, 66 A. L.R. 397, the Board concluded that the value of the life estate should be included in the decedent's gross estate under section 302(c), stating as its reason that "the transfer of these estates was not complete until the death of the settlor." The Board had failed to take notice of the adverse interest of Clarence H. Mackay, one of the trustees, whose consent was required to exercise the power of revocation. His interest was adverse to a change in the life estates as well as to a change in the remainder. He had vested remainders which were to come into possession on the termination of the life estates. The interests of Clarence H. Mackay would be adverse to any change in the trusts which might involve diminution in the value of the remainders. To preserve the value of the remainder interests, he would be expected to object to any change in the life estates which might tend to postpone the enjoyment of the remainders such as the substitution of different lives or the addition of new lives. A change of the life beneficiaries would be of vital concern to the remainderman, since the value of his interest depended upon the tenure of their interest. Any change in measuring the lives which might increase the term of the estates preceding the enjoyment of the remainder would diminish the value of the remainderman's property. Of course, a change might have been made which would increase the value of the remainder such as substituting for the originally designated life tenants others whose expectancy would be less. Clarence H. Mackay's interests would favor such a change, needless to say. But, however that may be, Clarence H. Mackay's interest was adverse to a change of the trusts within the intendment of that doctrine as laid down in the cases. It cannot be doubted that his interest opposed a change of the remainder however the situation with regard to the life estates be considered. The seventh trust in the Reinecke Case, supra, could have been revoked by a majority of the beneficiaries of five trusts which included the seventh trust. Thus revocation of the seventh trust could have been effected without the consent of anyone beneficially interested therein. Nevertheless, the court refused to hold that the seventh trust should be included in the decedent's gross estate on the ground that the right of revocation could be exercised by the grantor only with the consent of a person adversely interested, hence the transfer was complete when made. The court held that to decide otherwise would raise constitutional doubts. The same analysis is applicable to White v. Poor, 296 U.S. 98, 56 S.Ct. 66, 80 L.Ed. 80. There revocation was provided for by consent of the three trustees one of whom was the Settlor. Only two of the trustees had any interest in the trust. A revocation of the trust complete as to every one except the trustee Arthur Sargent who was beneficially interested could have been had without any one being adversely affected whose consent to revocation was required. Nevertheless, the court held that the consent of an adverse interest was there a prerequisite to revocation and refused on that ground to include the trust in the decedent's gross estate. The doctrine of adverse interest to revocation when attempting to apply section 302(d) retroactively as shown by the above cases would...