Wyly's Estate v. C. I. R., s. 78-1306
| Citation | 610 F.2d 1282 |
| Decision Date | 04 February 1980 |
| Docket Number | Nos. 78-1306,78-1612 and 78-2585,s. 78-1306 |
| Parties | 80-1 USTC P 13,332 ESTATE of Charles J. WYLY, Sr., Flora E. Wyly, Independent Executrix (Charles J. Wyly, Jr. and Samuel Evans Wyly substituted in the place and stead of Flora E. Wyly, Independent Executrix, Deceased), Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ESTATE of Winston C. CASTLEBERRY, Deceased, Republic National Bank of Dallas, Independent Executor, Petitioner-Appellant Cross-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee Cross-Appellant. Russell M. FRANKEL, Donald E. Woodard and Southern National Bank of Houston, as Independent Co-Executors of the Estate of Jules R. Frankel, Deceased, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Gene E. Ford, Dallas, Tex., for petitioner-appellant in No. 78-1306.
M. Carr Ferguson, Asst. Atty. Gen., Tax Div., U. S. Dept. of Justice, Gilbert E. Andrews, Act. Chief, App. Section, Lester Stein, Acting Chief Counsel, IRS, Jonathan S. Cohen, Daniel F. Ross, Attys., Tax Div., Dept. of Justice, Washington, D. C., for C. I. R. and for U. S.
Robert F. Ritchie, Dennis L. Lutes, Dallas, Tex., for petitioner-appellant cross-appellee in No. 78-1612.
Jean Kilpatrick, Atty., Tax Div., Dept. of Justice, for U. S.
Andrews, Kurth, Campbell & Jones, James E. Myers, Houston, Tex., for plaintiffs-appellees.
Appeals from the United States Tax Court.
Appeal from the United States District Court for the Southern District of Texas.
Before MORGAN, RONEY and GARZA, Circuit Judges.
We are squarely confronted in these three federal estate tax cases with a single question of law, a question answered by way of what is alleged to be dicta thirty years ago in Commissioner v. Estate of Hinds, 180 F.2d 930 (5 Cir. 1950). Is 26 U.S.C. § 2036(a)(1), (hereinafter referred to as "the Act"), applicable automatically to any gift of property from a decedent to his or her spouse in Texas, solely because the decedent by unavoidable operation of Texas law is left with a residue of interest in any income generated by such gifted property?
If the answer is affirmative, then it is clear that a portion of the property will by the Act be includable in the gross estate of the decedent. The Government and other parties hereto, and even separate decisions of the Tax Court differ on what fraction of the value of gifted property should be included. 1
We will not answer the collateral question, for we hold today that the Act does not automatically render some portion of the value of property gifted by one Texas spouse to another includable in the giving spouse's gross estate, solely on the basis of Texas community property law. In so holding, we mean to breathe new life into the "dicta" of Hinds, to follow the intention of Congress in enacting this provision, and to accord with the great weight of authority handed down by the courts of Texas.
The cases arrive from different courts and bring different holdings. The facts and disposition of each must be summarized in some detail.
Estate of Wyly v. Commissioner comes to us from the tax court, its decision reported at 69 T.C. 227 (1977). The case involves an irrevocable trust created by Charles J. Wyly and his wife, in March of 1971, funded with shares of stock which were community property of the Wylys. 2 The trustees were to distribute the income to Mrs. Wyly, and upon her death the corpus was to be divided and held in trust for grandchildren. The trustees were given the power to invade the corpus for the benefit of Mrs. Wyly, and she could withdraw up to $5,000 of it annually.
Mr. Wyly died in 1972, and a deficiency was assessed against his estate following an audit of the estate tax return. The Commissioner determined that the Act applied to the trust on a theory that the decedent retained an interest in community property transferred to the trust. The Tax Court sustained this position by its decision under review.
In Estate of Castleberry v. Commissioner, the Tax Court confronted the applicability of the Act to gifts of community property between Texas spouses on facts free of the complicating trust provisions present in Wyly. Prior to Mr. Castleberry's death in 1971, he made gifts to his wife of his one-half community interest in several municipal bonds. 3 On its federal estate tax return, petitioner did not include any portion of the value of these bonds in decedent's gross estate. The Commissioner determined that a portion of their total fair market value was includable, under the Act. The Tax Court ruled in the Commissioner's favor, 68 T.C. 682 (1977).
Frankel v. United States comes not from the Tax Court but from a District Court, and brings a ruling directly contrary to those of the tax court. The decedent, Jules R. Frankel, died in July of 1973. Between 1960 and 1972 he made seven transfers, giving his community property interest in certain assets to his wife. 4 The taxpayer brought this estate tax refund case to avoid inclusion. The District Court granted partial summary judgment for the taxpayer on that issue, without discussion of its reasoning.
The Government's rationale for the applicability of the Act to these transfers is based upon provisions of Texas community property law which will be examined in detail below. The crucial portions of that body of Texas law are those which cause the income from the separate property of a spouse to be the community property of both spouses. The Government contends that the Act applies because it requires inclusion in a decedent's gross estate of the The taxpayers do not dispute that the donors became automatically possessed of a community property interest in the income from their gifts, but contend that the resultant interests were so "limited, contingent, and expectant" that they did not approach the level required to come within the Act. They argue further that these interests were neither "retained" within the Act, or "under" the gift transfers.
value of any property transferred to another if there was retained a "right to the income" from such property. On the facts before us, the Government maintains that a gift from one spouse to another becomes the separate property of the donee, but that any income from the gift automatically becomes the community property of both, the resultant interest in the donor triggering the Act. The Tax Court so held, and further found, as prerequisites to its applicability ruling, that such an interest was "retained" within the meaning of the Act, and that it was retained "under" these transfers.
The checkered history of the Government's position is instructive. § 2036(a) (1) of the Internal Revenue Code of 1954 carried over a portion of the predecessor 26 U.S.C. § 811(c). The precise question presented by these three cases was dealt with under § 811(c) by this Court in Commissioner v. Estate of Hinds, supra. That case arrived by the Commissioner's petition to review a Tax Court decision. Chief Judge Hutcheson stated the issue thus:
(W)hether the Tax Court erred in failing to hold that taxpayer's entire interest in certain community property, irrevocably transferred in trust for the use and benefit of his wife and their children, was, under § 811(c) of the Internal Revenue Code, 26 U.S.C. § 811(c), includable within taxpayer's gross estate because taxpayer retained the possession and enjoyment of, or right to the income from the property during his life.
The Tax Court had approved the Commissioner's determination that though the transfer made the property the separate property of the wife, the income from it became community property, and thus the decedent had within § 811(c) retained the use, possession, and enjoyment of, or the right to, the income. However, the Tax Court included only one-half of the community one-half transferred by the decedent, or one-fourth of the total property transferred. The Commissioner sought a ruling in this Court that a full one-half of the value of the property was includable.
The taxpayer did not appeal, feeling, at the time prerequisite steps were required, that the amount involved was too small to justify further litigation. On argument of the Commissioner's petition for review, the taxpayer stated that the Tax Court should be affirmed, not because it was right, but because the Commissioner had already received more than he was entitled to, No portion being properly includable under § 811(c).
Recognizing, as did the taxpayer, that failure to cross-petition for review had barred the Court from ordering total non-inclusion, it agreed with taxpayer that the Commissioner's petition for review should be denied. The Court's precise language follows:
We agree with the taxpayer. Without, therefore, at all approving the decision of the Tax Court, or deciding the point so much labored here by the commissioner and taxpayer, but unnecessary to the decision of this case, whether the income from the property was, within the decision of Commissioner of Internal Revenue v. Porter, 5 Cir., 148 F.2d 566, community property, we deny the petition for review. We do this upon the authority of the settled law of Texas, that whether the income be regarded as separate property of the wife or as community income from the wife's separate property, the taxpayer retained neither "the possession or enjoyment of, or the right to the income from," the property so as to make applicable Sec. 811(c)(1)(B), invoked by the commissioner and in part applied by the Tax Court. 180 F.2d 930 at 932.
Several of the parties to these cases have argued that the Hinds ruling on our question For at least 25 years following Hinds, the conduct of the Commissioner in maintaining its argument was hardly sufficient to give notice that it retained a contrary viewpoint. In 1951, the Tax Court itself followed the...
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