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Lloyd's Estate v. Commissioner of Internal Revenue.

March 31, 1944


On Petition to Review the Decision of the United States Board of Tax Appeals.

Author: Jones

Before MARIS, JONES, and GOODRICH, Circuit Judges.

JONES, Circuit Judge.

H. G. Lloyd, the decedent, created a separate inter vivos trust for each of his two sons for life with certain respective trust powers and provisions as to the remainders. The question here involved is shether the settlor thereby transferred interests in property "intended to take effect in possession or enjoyment at or after his death" within the meaning of Sec. 302(c) of the Revenue Act of 1926.*fn1 The Commissioner of Internal Revenue held that the transfers were so intended and, accordingly, included the value of the trust properties in the decedent's gross estate for tax purposes. The decedent's executors seek review of the decision of the Board of Tax Appeals which sustained the Commissioner's deficiency determination to the extent of including in the gross estate the value of the remainders in the trust properties after the expiration of the life estates.

The material facts, as stipulated by the parties, were so found by the Board member who heard and decided this case.

The decedent, who died testate on January 21, 1937, left to survive him his wife and two sons. At the time of his death, his elder son was married and had three children, a fourth child having since been born. The younger son was unmarried but married later and has one child.

On April 2, 1919, the decedent had executed two trust indentures which were identical in their terms except that in the one he named his elder son as the beneficiary, while in the other the younger son was the beneficiary. By each instrument he transferred to his wife, as trustee, certain securities, in trust, to accumulate the income until the respective beneficiary reached the age of twenty-five, and thereafter to pay the income to him. The trustee was further directed to pay the respective beneficiary one-half of the trust principal and accumulated income when he reached the age of thirty and the balance of the trust principal when he reached the age of thirty-five. The trust indentures conferred on the respective beneficiaries certain powers of appointment by will, as to the trust properties, and made provision for the disposition of the remainders, should the life beneficiaries not exercise their powers, which it is unnecessary for us now to detail because of the controlling and conclusive substitute provisions made by supplemental indentures to which we shall immediately refer.

In each of the original trust instruments there was reserved to the settlor the power (1) to name a successor trustee in the event of his wife's death, resignation or incapacity, (2) to approve all changes in investment or reinvestment, and (3) to modify or amend the settlements in trust as originally made but not to revoke the same in whole or in part.

On December 27, 1926, the settlor exercised the reserved power last above mentioned, shortly after his younger son became of age. On that date, he executed two instruments, again identical except for the difference in the named beneficiaries. After reciting the reserved power under the original deeds of trust and his intention presently to exercise it, the settlor thereupon substituted for the dispositive clauses of the original deeds provision that thenceforth the income should be payable to the respective beneficiary for life regardless of his age, that the son should have a general power of appointment by will both as to trust principal and as to income and that upon the son's failure to exercise the power of appointment, the trust principal was to be paid to the son's wife and his descendants according to the Pennsylvania intestate laws and, if none such survived the son, then the trustee was to pay over the corpus or principal to the settlor or to his legal representatives in the event of his prior decease.

Mrs. Lloyd, the trustee, died, and shortly thereafter, on January 24, 1935, the settlor executed two more identical instruments modifying the original deeds of trust to the extent of substituting the present trustees to succeed the deceased trustee.

It was stipulated by the parties that neither the original nor the supplemental trust instruments were made in contemplation of death.

At the hearing on the taxpayers' petition before the Board of Tax Appeals, the Commissioner had also contended that the trust estates were includible in the decedent's gross estate under Sec. 302(d)(1) of the Revenue Act of 1926 because of the power reserved by the settlor in the original deeds to modify or amend, although not revoke, the trust settlements. However, the Board member who heard the matter held, on the authority of Day v. Commissioner, 3 Cir., 92 F.2d 179, that the settlor's exercise of the reserved power by the two supplemental instruments of December 27, 1926, had exhausted the power and that it was thenceforth extinct. The Commissioner accepted that ruling and formally published his acquiescence therein. I.R.B. 1942 No. 41. Nor has he petitioned for a review of the Board's decision in such regard. Cf. Helvering v. Pfeiffer, 302 U.S. 247, 58 S. Ct. 159, 82 L. Ed. 231.

The question remaining is whether the possibility of reverter in the settlor or his estate upon a failure of the trusts through the deaths of the life beneficiaries without leaving respective wives or descendants to survive them and without having exercised their general powers of appointment constituted a transfer of interests in property intended to take effect in possession or enjoyment at or after the settlor's death.

From the controlling decisions, it would seem that the criterion for determining whether the transfer of an interest is intended to take effect in possession or enjoyment at or after the transferor's death is whether he retains a string or tie whereby he can reclaim the transferred property or whether he has otherwise reserved an interest whose passing to others is determinable by his death. Helvering v. Hallock, 309 U.S. 106, 60 S. Ct. 444, 84 L. Ed. 604, 125 A.L.R. 1368, the dissenting opinion in Helvering v. St. Louis Union Trust Company, 296 U.S. 39, 56 S. Ct. 74, 80 L. Ed. 29, 100 A.L.R. 1239, and Becker v. St. Louis Union Trust Co., 296 U.S. 48, 56 S. Ct. 78, 80 L. Ed. 35, which was expressly approved and followed in the Hallock case, supra; Klein v. United States, 283 U.S. 231, 51 S. Ct. 398, 75 L. Ed. 996; May v. Heiner, 281 U.S. 238, 50 S. Ct. 286, 74 L. Ed. 826, 67 A.L.R. 1244 (still pertinent to the question here ...

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