United States v. Cooke, 14339-14342.

• Decision Date: 20 December 1955
• Docket Number: No. 14339-14342.,14339-14342.
• Citation: 228 F.2d 667
• Parties: UNITED STATES of America, Appellant, v. Dagmar S. COOKE, Appellee. UNITED STATES of America, Appellant, v. Philip E. SPALDING, Appellee. UNITED STATES of America, Appellant, v. Sophie Judd COOKE, Appellee. UNITED STATES of America, Appellant, v. Muriel Howatt COOKE, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

228 F.2d 667 (1955)

UNITED STATES of America, Appellant, v. Dagmar S. COOKE, Appellee.

UNITED STATES of America, Appellant, v. Philip E. SPALDING, Appellee.

UNITED STATES of America, Appellant, v. Sophie Judd COOKE, Appellee.

UNITED STATES of America, Appellant, v. Muriel Howatt COOKE, Appellee.

Nos. 14339-14342.

United States Court of Appeals Ninth Circuit.

December 20, 1955.

II. Brian Holland, Asst. Atty. Gen., Edward W. Rothe, Ellis N. Slack, Hilbert P. Zarky, David O. Walter, Sp. Assts. to Atty. Gen., Louis B. Blissard, U. S. Atty., Abbott M. Sellers, Sp. Asst. to Atty. Gen., Honolulu, Hawaii, for appellant.

Anderson, Wrenn & Jenks, Heaton L. Wrenn, Marshall M. Goodsill, Honolulu, Hawaii, for appellees.

Before DENMAN, Chief Judge, and ORR and LEMMON, Circuit Judges.

DENMAN, Chief Judge.

The United States appeals from a judgment of the United States District Court for the District of Hawaii, holding Mrs. Dagmar Cooke entitled to recover capital gains tax paid by her on the difference in value of 2,000 shares in a corporation, Charles M. Cooke Ltd., when she received them, and the greater value of the property she received on the dissolution and distribution of the property of that corporation. The 2,000 shares she held under a conveyance of the shares to her as life tenant with other persons as remaindermen, the terms of which are later considered.

The United States contends that under the federal law Mrs. Cooke's holding of the property as life tenant creates a trust in her¹ and that she is liable for the tax on the capital gain in the shares. It relies upon 26 U.S.C. § 161(a) as follows:

"§ 161. Imposition of tax

"(a) Application of tax. The taxes imposed by this chapter upon individuals shall apply to the income of estates or of any kind of property held in trust, including —

"(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust".

Strangely the United States, in discussing the word "trust", ignores the limitation of the tax laws to a particular kind of trust covered by the regulations under Sec. 3791 of the Internal Revenue Code, 26 U.S.C. § 3791, a limitation relied upon by appellee. Regulation 118, Sec. 39.3797 limits the term "trust" as follows:

"The term `trust\', as used in the Internal Revenue Code, refers to an ordinary trust, namely, one created by will or by declaration of the trustees or the grantor, the trustees of which take title to the property for the purpose of protecting or conserving it as customarily required under ordinary rules applied in chancery and probate courts".

(Emphasis added.)

Assuming but not deciding that Mrs. Cooke took title to the property in which she is a life tenant she did not do so for the purpose of "conserving it as customarily required under ordinary rules applied in chancery and probate courts."

The extraordinary difference between the conveyance of property of which she became life tenant and the above "ordinary trust" appear in the italicized portions of the conveyance as follows:

"Know All Men by These Presents: That I, Richard A. Cooke, of Honolulu, Hawaii, in consideration of natural love and affection, hereby transfer and assign all of the following described property — 2,000 shares of the capital stock of Charles M. Cooke, Limited, to my wife, Dagmar S. Cooke, to have and to hold the same to my wife for the term of her natural life, with the right to use all income therefrom, and after her death the remainder in equal shares to those who shall survive my wife of our children and of the issue of any of our children who shall predecease my wife, such issue taking per stirpes by right of representation, their heirs and assigns forever.

"My said wife shall have full authority to sell, transfer, and exchange said property and to reinvest the proceeds and to manage and control said property, reinvestments and proceeds, and to exercise all rights and power of ownership with respect thereto. The proceeds and all reinvestments shall likewise be subject to a life interest in my said wife with remainder over as aforesaid. My said wife shall hold said property during her life without impeachment for waste and shall not be required to give any security for the safekeeping or preservation of the same. No person purchasing from or otherwise dealing with my wife shall be liable to see to the application by my wife of the proceeds of any sale or to the propriety of any other action taken by my wife.²

That is to say, assuming Mrs. Cooke is a trustee, the first italicized clause provides that if she "wastes" the property which she holds for others by, say, selling it for an inadequate consideration, she cannot be impeached therefor by the other members of the Cooke family, as she would be impeached "under the ordinary rules applied in chancery."

Again, assuming Mrs. Cooke is a trustee, the second italicized clause, "no person purchasing from * * * my wife shall be liable to see to the application by my wife of the proceeds of any sale," in effect provides that if any person, including the other members of the Cooke family, buys shares from Mrs. Cooke knowing she is to appropriate all the proceeds to her own use, there are not the customary remedies applied in chancery courts of obtaining a return of the stock from the knowing buyer.

Likewise the provision that "no person * * * dealing with my wife shall be liable to see * * * to the propriety of any other action taken by my wife" in effect provides that if Mrs. Cooke conveyed by way of gift all the stock to a corporation, say, for a charitable use, the corporation could not be compelled to return it.

Finally the conveyance was designed to give Mrs. Cooke, the donor's wife, most of the beneficial rights to the property with the remaindermen taking what was left at her death. The ordinary trust is a device whereby the holder of the legal interest protects, conserves or manages property not for his own benefit but for the benefit of others. Under some...