Walter v. United States
| Decision Date | 09 February 1965 |
| Docket Number | No. 15783.,15783. |
| Citation | 341 F.2d 182 |
| Parties | Mildred E. WALTER et al., Executors de bonis non of the Estate of Gertrude C. Walter, deceased, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Richard G. LaValley, Toledo, Ohio, John W. Bebout, Boxell, Bebout, Torbet & Potter, Toledo, Ohio, on brief, for appellants.
Loring W. Post, Department of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Attorneys, Department of Justice, Washington, D. C., on brief; Merle M. McCurdy, U. S. Atty., John G. Mattimoe, Asst. U. S. Atty., Toledo, Ohio, of counsel, for appellee.
Before WEICK, Chief Judge, PHILLIPS, Circuit Judge, and McALLISTER, Senior Circuit Judge.
This appeal involves the measure of federal estate taxes against the estate of Gertrude C. Walter, deceased, as applied to an inter vivos trust established by the decedent in favor of her granddaughter more than three years prior to her death. As originally filed the case involved three questions: (1) Was the trust a taxable revocable transfer under Section 2038 of the Internal Revenue Code of 1954, 26 U.S.C. § 2038? (2) If so, what is the correct measure of the tax? (3) In the alternative, was the trust taxable as a transfer made in contemplation of death?
On a previous appeal this court held that in establishing this trust the decedent made a taxable revocable transfer, and remanded the case to the district court for determination of the other two issues. Walter v. United States, 295 F.2d 720 (C.A. 6).
Upon remand, the district court held that the transfer was not made in contemplation of death within the meaning of Section 2035 of the Internal Revenue Code of 1954, 26 U.S.C. § 2035. No appeal was perfected from this latter holding, and the contemplation of death issue is not before this court.
The only issue remaining is the proper measure of the tax under Section 2038 of the Internal Revenue Code of 1954, 26 U.S.C. § 2038.1
On December 30, 1952, Mrs. Walter established the inter vivos trust here involved, for the use and benefit of her granddaughter, named two trustees, and transferred to the trustees the sum of $50,000. Under the terms of the trust instrument it was the mandatory duty of the trustees to pay the entire net income to the granddaughter until she attained the age of thirty years. When she reached the age of thirty it was the mandatory duty of the trustees to pay over to her one-half of the corpus of the trust. Thereafter the granddaughter was entitled to receive the entire net income from the balance of the trust until she attained the age of thirty-five, at which time it was the duty of the trustees to pay to her the entire balance of the corpus, whereupon the trust would terminate.
In the event the granddaughter should die prior to receiving the final distribution of the trust property, the trust instrument provided for gifts over to her issue, if any, or to named contingent beneficiaries. If the granddaughter should die without issue, and if all the contingent beneficiaries should predecease the granddaughter, the trust was to go to designated charities.
In addition to the mandatory provisions for payment of the entire income and the entire corpus to the granddaughter, the trustees were authorized to distribute all or any part of the corpus to her at any time upon her written request, to the extent that the trustees deemed it prudent and advisable.
The trust was irrevocable, except that the donor reserved the right, during her lifetime, to remove the trustees and appoint a successor, who possibly could have been herself. Under this reservation, the grandmother could have removed the trustees at any time, could have appointed herself as substitute trustee, and in that capacity could have accelerated payment of the corpus to her granddaughter, or could have terminated the trust altogether and paid over the entire corpus to the granddaughter. It was because of this reservation of power in the donor that this court held, on the previous appeal, that the trust was a revocable transfer under Section 2038. Walter v. United States, supra, 295 F.2d 720 (C.A. 6); Lober v. United States, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed. 15; Commissioner of Internal Revenue v. Holmes, 326 U.S. 480, 66 S.Ct. 257, 90 L.Ed. 228; Du Charme v. Commissioner, 164 F.2d 959, modified 169 F.2d 76 (C.A. 6).
The donor died February 19, 1955, at which time the granddaughter was an adult, twenty-seven and one-half years of age, living with her parents. The granddaughter had never been married, and had never made any written request for distribution of corpus to her. The donor never exercised her right to remove the trustees and appoint a successor. The granddaughter lived to receive the income from the trust under its provisions, together with one-half of the corpus at age thirty and the remainder of the corpus at age thirty-five.
We now turn to the one issue remaining in the case, that is, what is the correct measure of the tax. The district judge, Honorable Frank L. Kloeb, originally held that the entire trust was taxable as a revocable transfer. On the prior appeal to this court the Government conceded that the value of the granddaughter's right to receive the income from the trust until she attained the age of thirty years or sooner died and from fifty per cent of the trust until she attained the age of thirty-five or sooner died should be excluded from the value of the trust property includable in the estate of the decedent for federal estate tax purposes. Upon remand the district judge held that the actuarial value of this interest is $7,682.00 and that, after excluding this amount, all the balance of the trust property should be included in decedent's gross estate for tax purposes.
On this appeal the executors contend: (1) That the only contingency which could have prevented the granddaughter from receiving both the income and the corpus was that she might die before one of the dates specified for payment to her; that the vested rights of the granddaughter were greater than a life estate; and that there should be deducted from the value of the trust the actuarial value of the granddaughter's rights to receive the entire net income of the trust and to receive the entire corpus of the trust upon attaining the stated ages; or (2) In the alternative that the granddaughter was vested with not less than a life estate in the trust and that actuarial value of her life estate should be excluded from the measure of the tax, relying upon In re Inman's Estate, 203 F.2d 679 (C.A. 2), reversing Inman v. Commissioner, 18 T.C. 522. The Government contends, on the other hand, that the district court was correct in its determination that all of the trust is subject to estate taxes except $7,682.00, the actuarial value of the right of the granddaughter to receive the income from the trust until she attained the stated ages or sooner died.
In determining the correct measure of the tax, it must be borne in mind that the estate tax is imposed upon the transfer of property by a decedent, and not the receipt of property by a beneficiary, and is to be measured in this case, not by what the granddaughter received but by what the grandmother relinquished or transferred in possession or enjoyment as of the date of her death. Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S.Ct. 123, 73 L.Ed. 410; Edwards v. Slocum, 264 U.S. 61, 62, 44 S.Ct. 293, 68 L.Ed. 564. The basic question under Section 2038 is not whether the granddaughter was vested with a life estate or even an interest greater than a life estate. The measure of the tax is the extent that the grandmother had the right at her death to control the beneficial enjoyment of the transferred property. Lober v. United States, supra; Commissioner of Internal Revenue v. Holmes, supra; Du Charme v. Commissioner, supra.
As stated in 3 Mertens', Law of Federal Gift and Estate Taxation, § 25.03 (1959):
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