O'MALLEY v. United States

• Decision Date: 08 February 1965
• Docket Number: No. 14556.,14556.
• Parties: Charles E. O'MALLEY, Claude C. Alexander and Peter G. Farrow, as Executors of the Will of Edward H. Fabrice, Deceased, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

340 F.2d 930 (1964)

Charles E. O'MALLEY, Claude C. Alexander and Peter G. Farrow, as Executors of the Will of Edward H. Fabrice, Deceased, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 14556.

United States Court of Appeals Seventh Circuit.

October 27, 1964.

Rehearing Denied February 8, 1965.

Louis F. Oberdorfer, Asst. Atty. Gen., Ralph A. Muoio, Atty., Tax Div., Dept. of Justice, Lee A. Jackson, Melva M. Graney, Attys., Dept. of Justice, Washington, D. C., John Peter Lulinski, Asst. U. S. Atty., Chicago, Ill., Edward V. Hanrahan, U. S. Atty., of counsel, for appellant.

Leon Fieldman, Walter F. Cunningham, Addis E. Hull, Chicago, Ill., Raymond, Mayer, Jenner & Block, Chicago, Ill., of counsel, for appellees.

Before DUFFY, SCHNACKENBERG and KILEY, Circuit Judges.

Rehearing Denied February 8, 1965, en Banc.

SCHNACKENBERG, Circuit Judge.

United States of America, defendant, appeals from a judgment of the district court for $76,841.77 with interest, against it and in favor of plaintiffs, Charles E. O'Malley, Claude C. Alexander and Peter G. Farrow, as executors of the will of Edward H. Fabrice, deceased.

The stipulated facts reveal that this action is for refund of federal estate tax paid to defendant by plaintiffs, and arises under the Internal Revenue Code of 1939, 26 U.S.C.A. § 1 et seq.

Edward H. Fabrice, a resident of Illinois, died on October 13, 1949. In December, 1936, and January, 1937, Fabrice created five irrevocable trusts naming himself and two other persons as co-trustees. The trust instruments were substantially identical except for the names of the beneficiaries and the property transferred. Fabrice's daughter Janet was the beneficiary of two of the trusts, his daughter Lorraine was beneficiary of two other trusts and his wife was to receive the benefit of the fifth trust.

Under each of the five trusts, the co-trustees retained the right to distribute or accumulate the income of the trusts and the income accumulated was to become part of the principal.

Fabrice retained no power to revoke, change or modify the terms of the trusts for his benefit or in any way by which he could ever acquire any interest in the corpus or income of the trusts.

When Fabrice died in 1949, the total assets in the trusts had a value of $276,741.16. Shares of stock originally transferred to the trusts had a value of $90,600. The difference of $186,141.16 represented the value of accumulated income and stock purchased for the trust with such income. The Commissioner included the total amount of $276,741.16 in Fabrice's gross estate, on the ground that Fabrice's power to distribute or accumulate the income of the trusts constituted a power to designate the persons who would possess or enjoy the income and to alter the trusts, within the meaning of §§ 811(c) (1) (B) (ii) and 811(d) (1) of the 1939 Code.

The district court determined that the aforesaid parts of the 1939 Code were applicable, but held that the amount includible in the gross estate was only the value of the stock originally transferred by Fabrice to the trusts ($90,600) and did not include accumulated income and property purchased with accumulated income ($186,141.16). It relied on our decision in Commissioner of Internal Revenue v. McDermott's Estate, 7 Cir., 222 F.2d 665, 55 A.L.R.2d 410 (1955).¹

The parties in this case agree that the judgment entered by the district court conforms with our holding in McDermott's Estate. However, defendant asks us to reject McDermott's Estate on the authority of Reinecke v. Northern Trust Co., 278 U.S. 339, 345, 49 S.Ct. 123, 73 L.Ed. 410; Commissioner of Internal Revenue v. Estate of Church, 335 U.S. 632, 644-646, 69 S.Ct. 322, 93 L.Ed. 288, and other cases.

After citing our holding in Commissioner of Internal Revenue v. Gidwitz' Estate, 7 Cir., 196 F.2d 813, we said, in McDermott's Estate, 222 F.2d at 667-668:

"* * * The accumulations there involved, as in the instant case, were not part of the property transferred and were, therefore, not includible. The Commissioner in his attempt to escape our holding in Gidwitz argues that here `the transfers were not complete until taxpayer\'s decedent\'s death since the property transferred is includible in his estate by reason of retained powers to designate who shall enjoy, under Code Section 811(c) (1) (B), and to change the enjoyment of the trust estate through a power to alter, amend or revoke, under Code Section 811(d) (1).\' We think this attempted distinction is without merit. The transfer in the instant case was as complete as it was in the Gidwitz case. The trusts were irrevocable, with no power reserved in the settlor or trustee to revoke, change or modify the terms of the trusts for his benefit or in a manner by which he could ever acquire any interest in either the corpus or the income therefrom. He received the dividends (accumulations) on the trust corpus (corporate stock) solely in his capacity as a trustee. He was without power or right to receive such dividends in any other capacity. The fact that the trustee retained some control over the manner of handling the accumulations and their distribution does not militate against the fact that the transfer of the trust corpus was complete when made. Such control or power as was retained did not or could not result in any financial benefit to the trustee, and neither could it affect the rights of the beneficiaries in the aggregate. It could result in nothing more than the shifting of benefits and a determination as to the time of their enjoyment by the beneficiaries. It is thus our view that the Tax Court properly relied upon the Gidwitz case as authority for its position."

We discern that Commissioner of Internal Revenue v. Estate of Church is not inconsistent with McDermott's Estate. Church created an irrevocable trust but required the trustees to pay him the income for life and, under those facts, the Supreme Court held the transfer incomplete until Church's death. In the case at bar, Fabrice had no right to receive the income or corpus during his lifetime or at his death. Nor is Reinecke applicable, because the trusts in that case were revocable. Industrial Trust Co. v. Commissioner, 1 Cir., 165 F.2d 142, 1 A.L.R.2d 144 (1947) and other cases relied on by defendant are not inconsistent with the disposition which we make of this appeal. The one exception seems to be Estate of Round v. Commissioner, 40 T.C. 970, where the decision does not cite McDermott's Estate or the Tax Court's contrary decision in McDermott's Estate, 12 TCM 481, 489, or its contrary dictum in McGehee v. Commissioner, 28 T.C. 412. These latter decisions cast some doubt upon the authority of Round, which was affirmed, 1 Cir., 332 F.2d 590 (1964), in an opinion in which the court admitted, at 595, that it was unable to agree with the Seventh Circuit.

On...