Appeal from the District Court of the United States for the Eastern District of Pennsylvania, George A. Welsh, Judge.
Before BIGGS, MARIS, and CLARK, Circuit Judges.
We rather question the soundness of the Treasury's approach to the case at bar. The problem is one phase of the application of taxation to the "cake and eat it" weakness of our human nature. Congress and the courts have had to draw the line between "devices through which men of substance continued their dominion over property and yet evaded taxes which others with no more substantial dominion over the property had to pay", and cases involving genuine relinquishment of property and dominion over it, Sutter and Owen, Federal Taxation of Settlors of Trusts, 33 Michigan Law Review 1169, 1174; Surrey and Aronson, Inter Vivos Transfers and The Federal Estate Tax, 32 Columbia Law Review 1332. Cases may fall on either side of this line - a particular application of Mr. Justice Holmes' line theory first developed in "The Common Law" (1881), p. 127. See Bullen v. Wisconsin, 240 U.S. 625, 630, 36 S. Ct. 473, 60 L. Ed. 860. As Mr. Randolph E. Paul (incidentally at one time a fellow legal Helot of the writer of this opinion) discussing the case last cited in his stimulating Restatement of Tax Avoidance puts it: "The issue is drawn as one in which legitimate avoidance must be recognized and put on the safe side of the line and in which illegitimate avoidance (or evasion) must be put on the wrong side of the same line. Condemnation is for others than courts, the question being a matter of cold-blooded analysis which places a transaction with reference to a line which shifts to some extent as the policy of the law may dictate." Studies in Federal Taxation First Series, p. 101. The same learned author in footnote 349 on p. 101 observes that the decedent was on the right side of the line in Becker v. St. Louis Union Trust Company, 296 U.S. 48, 56 S. Ct. 78, 80 L. Ed. 35. In that we agree with him and by the same token must disagree with the government in the principal case.
The one "phase" referred to in our opening paragraph has been a matter of much litigation ever since the imposition of the first state inheritance tax. The best discussion we know of is contained in two articles by Professor Rottschaefer (Professor of law, University of Minnesota) in 14 Minnesota Law Review 452 and 613. He entitles both articles in the stock words of the statutes, state and federal (26 U.S.C.A. § 411(c), "Taxation of Transfers Intended to Take Effect in Possession or Enjoyment at (or after) Grantor's Death". He phrases our particular circumstance:
"A donor may dispose of property on such terms that there remains a possibility of its reverting to him. The question arises whether the mere existence of this possibility makes a transfer taxable." P. 482.
"The preceding discussion leads naturally to the cases in which the factor that a remainder interest continued contingent or conditional until the donor's death weighed heavily in holding the succession thereto taxable. The provision most frequently considered in this connection is that which makes the right to succeed depend on the remainderman surviving the donor." P. 484.
In reviewing the cases in the state courts holding the transfer taxable, the Professor says: "The theory in the above cases seems to have been that the remainderman's interest continued contingent in right until the donor's death." P. 485. This view of the state cases and of the learned Professor did not meet with the approval of the majority of the Supreme Court. In the Restatement of Tax Avoidance, above cited, Mr. Paul says: "A remote possibility of reverter does not vary the rule that a complete and final transfer will not result in the imposition of estate tax." Studies in Federal Taxation First Series, above cited, pp. 45-46. He cites Becker v. St. Louis Union Trust Company, above cited; Helvering v. St. Louis Union Trust Co., 296 U.S. 39, 56 S. Ct. 74, 80 L. Ed. 29, 100 A.L.R. 1239; Bingham v. United states, 296 U.S. 211, 56 S. Ct. 180, 80 L. Ed. 160, decisions which had in fact been anticipated by the snuggest possible affirmance of a case arising in this circuit, Helvering, Commissioner of Internal Revenue v. Duke, 3 Cir., 62 F.2d 1057; Duke v. Commissioner, 23 B.T.A. 1103, 1104, affirmed by a divided court, 290 U.S. 591, 54 S. Ct. 95, 78 L. Ed. 521. See also Commissioner of Internal Revenue v. Grosse, 9 Cir., 100 F.2d 37.
We complain of the Treasury counsel's failure to meet this existing state of the law with complete candor. the taxpayer very properly made use of the deadly parallel and compared his trust with that of Becker:
In the Becker Case In the case at bar
"(a) If the said beneficiary should "In trust if the said R.S. shall die
die before my death, then this trust during the lifetime of said G.F.U. to
estate shall thereupon revert to me pay over the principal and all
and become mine immediately and
absolutely, or accumulated income therefore into the
"(b) if I should die before her death "In trust if the said R.S. after the
then this property shall thereupon marriage shall survive the said G.F.U.
become hers immediately and absolutely to pay over the principal and all
and be turned over to her an in either accumulated income unto the said R.S.-
case this trust shall cease." 296 U.S. then R.U. - in fee, free and clear of
48, 56 S. Ct. 79. any trust."
A skeletonization of the diverse expressions used in both trusts is, we think, even more revealing:
In the Becker case In the case at bar
(1) "my daughter" "R.S." (fiancee)
(2) "before my death" "during the life time of the said G.F.U."
(3) "trust estate" "the principal and all accumulated income"
(4) "revert to me" "pay over unto the said G.F.U."
(5) "mine absolutely" "free and clear ...