Commissioner of Internal Revenue v. Hager's Estate
This text of 173 F.2d 613 (Commissioner of Internal Revenue v. Hager's Estate) is published on Counsel Stack Legal Research, covering Court of Appeals for the Third Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
This case involves the liability of the estate of William M. Hager for asserted estate taxes under § 811(d) (2) of the Internal Revenue Code. 1 The Tax Court decided in favor of the taxpayer and the Commissioner’s appeal has asked reversal. This we are going to grant. We held the case after submission because it was indicated to us that the decision of the pending case of Commissioner v. Estate of Church 2 would determine this one. It did not, but its bearing will be noted in the course of the discussion.
The question which we must decide is whether under the provisions of the trusts presently to be described the enjoyment was subject to change at the date of the grantor’s death “through the exercise of a power * * * to alter, amend or revoke * * 3 If it was, the Tax Court was wrong and the Commissioner is entitled to the tax claimed.
The five trusts in question were set up in 1924. The decedent and his wife each contributed one half of the original corpus in certain shares of corporate stock. The children and grandchildren named as beneficiaries were given life estates together with powers to appoint the remainders by will. There were gifts over in default of appointment. The trusts were irrevocable and the trustee retained no power to terminate them prior to the designated period for their expiration, which was the death of the grantor’s son.
The decedent was named trustee under all the trusts, and they were administered as a unit. He retained very wide powers, it quite evidently being the intention to set up the type of trust in which he hoped by the exercise of business judgment to en *615 large the trust estate for members of his family. In particular, he was authorized, hy paragraph 5 of each trust indenture, to determine, as it pleased him, whether gains realized from the sale of securities in the trusts should be treated as income or retained as part of the corpus. 4 By paragraph 8 he could pay out or accumulate income at his sole discretion, and could treat the accumulations as corpus or income. 5 The Commissioner relies upon these paragraphs to show that the decedent, when he died, had in his hands the power to alter or amend.
The corpus of the estate increased in value and at the time of the decedent’s death was considerably greater in do 1 lar value than it was on the date created. The Commissioner, by stipulation, is claiming only half of the total valu'e of the trusts. In other words, he is not claiming estate tax on the portion contributed to the trusts by Mrs. Hager, the decedent’s wife, and the increment on that portion.
Except in one particular, Commissioner v. Holmes’ Estate, 1945, 326 U.S. 480, 66 S.Ct. 257, 260, 90 L.Ed. 228, is precisely in point. The difference between that case and this one is that in the Holmes trust the settlor had the power to terminate the trust before the date stipulated for expiration. The court’s problem was to determine whether the power to “terminate” was a power to “alter or amend.” It was held to be so in language which we think is pretty strongly persuasive in our situation here. The court said: “It seems obvious that one who has the power to terminate contingencies upon which the right of enjoyment is staked, so as to make certain that a beneficiary will have it who may never come into it if the power is not exercised, has power which affects not only the time of enjoyment but also the person or persons who may enjoy the donation.”
In this case our question is whether the power which the settlor retained is enough to be called the power to “alter or amend.” He could allocate gains to income, so the life tenants would get them, or to corpus, so that the remaindermen would get them. This we think is a very substantial power. So, too, is the power to determine whether or not the life tenants are to get anything at all. It is, of course, well settled that the power to alter or amend does not have to extend to everybody in the world. It is sufficient if the power to allocate exists as among those named as beneficiaries or possible beneficiaries of a trust. 6 We think there is no doubt, therefore, that as to the increase in value of the trusts at the date of the settlor’s death, he had the power to alter or amend as to (1) the increments to corpus which had come by the profitable buying and selling of securities, and (2) income of the life tenant which the settlor-tru'stee could withhold or pay over at his discretion.
*616 Is the taxable interest limited to that just stated or does it include the one half the value of the total estates, as the Commissioner claims? This question the court did not have in the Holmes case. There the power to alter or amend by terminating the trust certainly cut across the entire corpus. That is not quite this case, Here the trustee, as explained above, could withhold income from a life tenant, reassign it to corpus and then assign it out again. He could allocate profits from buying and selling trust securities to either corpus or income. He could buy speculative securities if he chose. He was expressly empowered to exercise in dealing with the trust estates “each and every right that might be exercised by one holding the same as his individual property.” But we take it that in spite of this clause he could not wilfully eliminate the interests of the remainder-men.
Our legal question, therefore, is whether such a limitation on the power of a grantor has the effect of limiting the powder of the United States to levy its estate tax based on the value of the whole trust. The First Circuit has assumed so in a recent dictum. Industrial Trust Company v. Commissioner, 1 Cir., 1947, 165 F.2d 142, 146, 1 A.L.R.2d 144. In Commissioner v. Bridgeport City Trust Co., 2 Cir., 1941, 124 F.2d 48, the court upheld a claim by the Commissioner to the inclusion of the income beneficiaries’ interest in a trust where a settlor had reserved to himself the power to reallocate the disposition of the income. It is to be noted, however, that the Commissioner got, by this holding, all that he had claimed. Therefore, the question whether the value of the entire estate could have been subject to the estate tax was not before the court. And in Helvering v. Proctor, 2 Cir., 1944, 140 F.2d 87, 155 A. L.R. 845, the Second Circuit held that where the settlor had reserved an estate for life with remainders over, the principal was not includible in the gross estate for estate tax purposes. The discussion by the court, of course, turned around May v. Heiner, 1930, 281 U.S. 238, 50 S.Ct. 286, 74 L.Ed. 826, 67 A.L.R. 1244, and its children and collateral relatives. Since May v.
Free access — add to your briefcase to read the full text and ask questions with AI
Related
Cite This Page — Counsel Stack
173 F.2d 613, 37 A.F.T.R. (P-H) 1179, 1949 U.S. App. LEXIS 4431, Counsel Stack Legal Research, https://law.counselstack.com/opinion/commissioner-of-internal-revenue-v-hagers-estate-ca3-1949.