Smith v. United States, 6432.

• Decision Date: 03 August 1936
• Docket Number: No. 6432.,6432.
• Citation: 16 F. Supp. 397
• Parties: SMITH et al. v. UNITED STATES.
• Court: U.S. District Court — District of Massachusetts

16 F. Supp. 397

SMITH et al. v. UNITED STATES.

No. 6432.

District Court, D. Massachusetts.

August 3, 1936.

Nichols, Boyer & Morton, of Boston, Mass., for petitioners.

Francis J. W. Ford, U. S. Atty., and Arthur L. Murray, Sp. Asst. to U. S. Atty., both of Boston, Mass., and Robert H. Jackson, Asst. Atty. Gen., and Andrew D. Sharpe and Julian G. Gibbs, Sp. Assts. to the Atty. Gen., for the United States.

BREWSTER, District Judge.

This action is brought to recover an estate tax, claimed to have been illegally exacted from the estate of Charles H. Farnsworth, late of Brookline, Mass.

The controversy arises over the act of the Commissioner in including in the gross estate of the decedent the value of personal property transferred by irrevocable deed of trust, and over the refusal of the Commissioner to make certain deductions for claims against the estate and certain expenses of administration.

The liability of the estate for the tax and the measure of it are to be determined with reference to the Revenue Act of 1926 as amended by the Revenue Act of 1932.

The applicable provisions of these acts are sections 803 and 805 of the Revenue Act of 1932, amending sections 302 (c) and 303 (a) (1) of the Revenue Act of 1926.

The provisions of section 803 are as follows:

"Sec. 803. Future Interests.

"(a) Section 302 (c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows:

"`(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, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.'" U.S.C., title 26, § 411 (c), 26 U.S. C.A. § 411 (c).

The provisions of section 805, so far as material, follow:

"Sec. 805. Deductions.

"Section 303 (a) (1) of the Revenue Act of 1926, as amended, is amended to read as follows:

"`(1) Such amounts — * * *

"`(B) for administration expenses,

"`(C) for claims against the estate, * * * as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.'" 47 Stat. 280, U.S.C., title 26, § 412 (26 U.S.C.A. § 412 and note).

Several questions are presented for decision. These are:

1. Was the Commissioner of Internal Revenue justified in adding to the gross estate of decedent the value of securities transferred by the decedent to trustees on November 24, 1930, either (a) as a transfer in trust under which the decedent reserved the income for his life, or (b) a transfer made in contemplation of death?

2. Whether there should be allowed as a deduction from the gross estate (a) the amount paid by the executors in compromise of an action brought against them on account of alleged acts of misfeasance and nonfeasance of the decedent as a director of the Atlantic National Bank; (b) an amount necessary to meet an assessment upon 10,448 shares of stock in the Atlantic National Bank, owned by the decedent at the time of his death; (c) legal expenses incurred in connection with the suit and with proceedings in the probate court relative to said assessment, and other legal expenses incurred by the estate in connection with the settlement of the estate tax liability?

These issues were presented upon a stipulation of facts, supplemented by oral testimony and depositions of witnesses.

First. Was the value of the property transferred in trust properly included in the gross estate?

It appears that on November 24, 1930, the plaintiffs' testator transferred to himself and two others, as trustees, certain securities which, for the purposes of the case, it is agreed were worth at the time of his death $1,149,443.27, to hold and manage the trust fund, and to pay over the net income to the testator during his life; and upon his death one-half to go to his wife and one-half to his daughter. On the death of the survivor, the trustees were to apply the funds to charitable purposes, set out in the deed of trust, and supplemental written instructions given by the donor in accordance with the provisions of the trust. This charitable purpose was the establishment and endowment of a home for aged men and women resident in Boston or vicinity. The trust was, by its terms, irrevocable, paragraph 6 of the instrument providing as follows: "The donor shall have no right to alter, amend or revoke this trust. * * *"

The trust deed provided for the substitution of the Atlantic National Bank as trustee, in the event of the death of the donor.

The property transferred by this deed of trust represented about 60 per cent. of his total wealth.

When the trust was created, under the statutes then in force, the trust being irrevocable, the value of the property would not have been included in the gross estate as a gift to take effect in possession or enjoyment after death. Reinecke, Coll., v. Northern Trust Co., 278 U.S. 339, 49 S. Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397; Becker, Coll., v. St. Louis Union Tr. Co., 296 U.S. 48, 56 S.Ct. 78, 80 L.Ed. 35; Helvering, Com'r, v. St. Louis Union Tr. Co., 296 U.S. 39, 56 S.Ct. 74, 80 L.Ed. 29, 100 A.L.R. 1239; Helvering, Com'r, v. Helmholz, 296 U.S. 93, 56 S.Ct. 68, 80 L.Ed. 76.

The amendment of 1932, however, if applicable to this transfer, would have brought it clearly within its reach as a trust under which the donor had retained for life the enjoyment of the income from the property. The sole question presented on this aspect of the case is whether the amendment of 1932 can be given retroactive effect so as to bring within its scope a transfer made prior to the enactment of the statute.

It is the contention of the defendant that since the transfer was subsequent to the Revenue Act of 1916, the transfer may be included (Regulation 80, article 15). This contention cannot prevail in the face of the recent decisions of the United States Supreme Court in Helvering v. Helmholz, 296 U.S. 93, 56 S.Ct. 68, 70, 80 L.Ed. 76, and White v. Poor, 296 U.S. 98, 56 S.Ct. 66, 80 L.Ed. 80.

Both of these cases arose under section 302 (d) of the Revenue Act of 1926, which contained in section 302 (h) retroactive provisions as follows: "Except as otherwise specifically provided therein subdivisions * * * (c), (d) * * * of this section shall apply to the transfers, trusts * * * whether made, created, arising existing, * * * before or after the enactment of this Act." 44 Stat. 70.

The transfers there in question had all been completed before the effective date of the 1926 act.

Referring to the retroactive operation of section 302 (d) of the 1926 act, Mr. Justice Roberts said, in the Helmholz Case: "The transfer was complete at the time of the creation of the trust. There remained no interest in the grantor. She reserved no power in herself alone to revoke, to alter, or to amend. Under the revenue act then in force, the transfer was not taxable as intended to take effect in possession or in enjoyment at her death. Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S. Ct. 123, 73 L.Ed. 410, 66 A.L.R. 397. If section 302 (d) of the Act of 1926 could fairly be considered as intended to apply in the instant case, its operation would violate the Fifth Amendment. Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081."

In the case of White v. Poor, supra, the trust was created in 1919 and, while the court found in that case that the trust did not come within the statute, nevertheless it added that, if held to apply, the act would offend the due process clause of the Fifth Amendment. See, also, Lewellyn v. Frick, 268 U.S. 238, 45 S.Ct. 487, 69 L.Ed. 934; Bingham v. United States, 296 U.S. 211, 56 S.Ct. 180, 80 L.Ed. 160; Industrial Trust Co. v. United States, 296 U.S. 220, 56 S.Ct. 182, 80 L.Ed. 191.

This conclusion is foreshadowed in per curiam opinions in Burnet v. Northern Trust Co., 283 U.S. 782, 51 S.Ct. 342, 75 L.Ed. 1412; Morsman v. Burnet, 283 U.S. 783, 51 S.Ct. 343, 75 L.Ed. 1412, and McCormick v. Burnet, 283 U.S. 784, 51 S.Ct. 343, 75 L.Ed. 1413, in which it was noted that there was "no question of the constitutional authority of the Congress to impose prospectively a tax with respect" to the transfers or trusts involved in the cases. (Italics supplied.)

Also, in Helvering v. City Bank Farmers Trust Co., 296 U.S. 85, 56 S.Ct. 70, 74, 80 L.Ed. 62, it is said that Congress might appropriately prescribe that a transaction should be treated as one to take effect in enjoyment at death of the donor "if, subsequent to the passage of that act, the creator of a trust estate saw fit to reserve to himself jointly with any other person the power of revocation or alteration." (Italics supplied.)

That an irrevocable trust, in which the donor has reserved the right to enjoy the income, is nevertheless a completed transfer is well settled. May v. Heiner, 281 U. S. 238, 50 S.Ct. 286, 74 L.Ed. 826, 67 A.L.R. 1244; Helvering v. Helmholz, supra; Burnet, Commissioner v. Northern Trust Co. (C.C.A.) 41 F.(2d) 732, affirmed 283 U.S. 782, 51 S.Ct. 342, 75 L.Ed. 1412; Morsman v....