UNITED STATE V. BYRUM

• Decision Date: 26 June 1972
• Citation: 408 U. S. 125
• Court: U.S. Supreme Court

United State v. Byrum

No. 71-308

Argued March 1, 1972

Decided June 26, 1972

408 U.S. 125

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Syllabus

Decedent transferred to an irrevocable trust for the benefit of his children (and if they died before the trust ended, their surviving children) stock in three unlisted corporations that he controlled, retaining the right to vote the transferred stock, to veto the transfer by the trustee (a bank) of any of the stock, and to remove the trustee and appoint another corporate trustee as successor. The right to vote the transferred stock, together with the vote of the stock decedent owned at the time of his death, gave him a majority vote in each of the corporations. The Commissioner of Internal Revenue determined that the transferred stock was includable in decedent's gross estate under § 2036(a) of the Internal Revenue Code of 1954, which requires the inclusion in a decedent's gross estate of the value of any property he has transferred by inter vivos gift, if he retained for his lifetime

"(1) the . . . enjoyment of . . . the property transferred, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall . . . enjoy . . . the income therefrom."

The Commissioner claimed that decedent's right to vote the transferred shares and to veto any sale by the trustee, together with the ownership of other shares, made the transferred shares includable under § 2036(a)(2), because decedent retained control over corporate dividend policy and, by regulating the flow of income to the trust, could shift or defer the beneficial enjoyment of trust income between the present beneficiaries and remaindermen, and under § 2036(a)(1) because, by reason of decedent's retained control over the corporations, he had the right to continue to benefit economically from the transferred shares during his lifetime.

Held: 1. Decedent did not retain the "right," within the meaning of § 2036(a)(2), to designate who was to enjoy the trust income. P P. 131-144.

(a) A settlor's retention of broad management powers did not necessarily subject an inter vivos trust to the federal estate tax. P P. 131-135.

Page 408 U. S. 126

(b) In view of legal and business constraints applicable to the payment of dividends, especially where there are minority stockholders, decedent's right to vote a majority of the shares in these corporations did not give him a de facto position tantamount to the power to accumulate income in the trust. P P. 135-144.

2. Decedent's voting control of the stock did not constitute retention of the enjoyment of the transferred stock within the meaning of § 2036(a)(1), since the decedent had transferred irrevocably the title to the stock and right to the income therefrom. P P. 145-150.

440 F.2d 949, affirmed.

POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and DOUGLAS, STEWART, MARSHALL, and REHNQUIST, JJ., joined. WHITE, J., filed a dissenting opinion, in which BRENNAN and BLACKMUN, JJ., joined, post, P. 151.

MR. JUSTICE POWELL delivered the opinion of the Court.

Decedent, Milliken C. Byrum, created in 1958 an irrevocable trust to which he transferred shares of stock in three closely held corporations. Prior to transfer, he owned at least 71% of the outstanding stock of each corporation. The beneficiaries were his children or, in the event of their death before the termination of the trust, their surviving children. The trust instrument specified that there be a corporate trustee. Byrum designated as sole trustee an independent corporation, Huntington National Bank. The trust agreement vested

Page 408 U. S. 127

in the trustee broad and detailed powers with respect to the control and management of the trust property. These powers were exercisable in the trustee's sole discretion, subject to certain rights reserved by Byrum: (i) to vote the shares of unlisted stock held in the trust estate; (ii) to disapprove the sale or transfer of any trust assets, including the shares transferred to the trust; (iii) to approve investments and reinvestments; and (iv) to remove the trustee and "designate another corporate Trustee to serve as successor." Until the youngest living child reached age 21, the trustee was authorized in its "absolute and sole discretion" to pay the income and principal of the trust to or for the benefit of the beneficiaries, "with due regard to their individual needs for education, care, maintenance and support." After the youngest child reached 21, the trust was to be divided into a separate trust for each child, to terminate when the beneficiaries reached 35. The trustee was authorized in its discretion to pay income and principal from these trusts to the beneficiaries for emergency or other "worthy need," including education. [Footnote 1]

Page 408 U. S. 128

When he died in 1964, Byrum owned less than 50% of the common stock in two of the corporations and 59% in the third. The trust had retained the shares

Page 408 U. S. 129

transferred to it, with the result that Byrum had continued to have the right to vote not less than 71% of the common stock in each of the three' corporations. [Footnote 2]

Page 408 U. S. 130

There were minority stockholders, unrelated to Byrum, in each corporation.

Following Byrum's death, the Commissioner of Internal Revenue determined that the transferred stock was properly included within Byrum's gross estate under § 2036(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 2036(a). That section provides for the inclusion in a decedent's gross estate of all property which the decedent has transferred by inter vivos transaction, if he has retained for his lifetime "(1) the possession or enjoyment of, or the right to the income from, the property" transferred, 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

Page 408 U. S. 131

therefrom." [Footnote 3] The Commissioner determined that the stock transferred into the trust should be included in Byrum's gross estate because of the rights reserved by him in the trust agreement. It was asserted that his right to vote the transferred shares and to veto any sale thereof by the trustee, together with the ownership of other shares, enabled Byrum to retain the "enjoyment of . . . the property," and also allowed him to determine the flow of income to the trust, and thereby "designate the persons who shall . . . enjoy . . . the income."

The executrix of Byrum's estate paid an additional tax of ,202.45, and thereafter brought this refund action in District Court. The facts not being in dispute, the court ruled for the executrix on cross-motions for summary judgment. 311 F.Supp. 892 (SD Ohio 1970). The Court of Appeals affirmed, one judge dissenting. 440 F.2d 949 (CA6 1971). We granted the Government's petition for certiorari. 404 U.S. 937 (1971).

I

The Government relies primarily on its claim, made under § 2036(a)(2), that Byrum retained the right to

Page 408 U. S. 132

designate the persons who shall enjoy the income from the transferred property. The argument is a complicated one. By retaining voting control over the corporations whose stock was transferred, Byrum was in a position to select the corporate directors. He could retain this position by not selling the shares he owned and by vetoing any sale by the trustee of the transferred shares. These rights, it is said, gave him control over corporate dividend policy. By increasing, decreasing, or stopping dividends completely, it is argued that Byrum could "regulate the flow of income to the trust," and thereby shift or defer the beneficial enjoyment of trust income between the present beneficiaries and the remaindermen. The sum of this retained power is said to be tantamount to a grantor-trustee's power to accumulate income in the trust, which this Court has recognized constitutes the power to designate the persons who shall enjoy the income from transferred property. [Footnote 4]

At the outset, we observe that this Court has never held that trust property must be included in a settlor's gross estate solely because the settlor retained the power

Page 408 U. S. 133

to manage trust assets. On the contrary, since our decision in Reinecke v. Northern Trust Co., 278 U. S. 339 (1929), it has been recognized that a settlor's retention of broad powers of management does not necessarily subject an inter vivos trust to the federal estate tax. [Footnote 5] Although there was no statutory analogue to § 2036(a)(2) when Northern Trust was decided, several lower court decisions decided after the enactment of the predecessor of § 2036(a)(2) have upheld the settlor's right to exercise managerial powers without incurring estate tax liability. [Footnote 6] In Estate of King v. Commissioner, 37 T.C. 973 (1962), a settlor reserved the power to direct the trustee in the management and investment of trust assets. The Government argued that the settlor was thereby empowered to cause investments to be made in such a manner as to control significantly the flow of income into the trust. The Tax Court rejected this argument, and held for the taxpayer. Although the court recognized that the settlor had reserved "wide latitude in the exercise of his discretion as to the types of investments to be made," id. at 980, it did not find this control over the flow of income to be equivalent

Page 408 U. S. 134

to the power to designate who shall enjoy the income from the transferred property.

Essentially, the power retained by Byrum is the same managerial power retained by the settlors in Northern Trust and in King. Although neither case controls this one -- Northern Trust because it was not decided under § 2036(a)(2) or a predecessor; and King because it is a lower court opinion -- the existence of such precedents carries weight. [Footnote 7] The holding of Northern Trust, that the settlor of a trust may retain broad powers of...