Before GOODRICH and STALEY. Circuit Judges, and STEEL, District Judge.
More than nine years before his death, the decedent purported to convey certain income-producing real estate to his children. Thereafter, pursuant to an oral understanding with his children, the decedent continued to receive the rents from the properties until his death. The Tax Court held that the properties were includable in the decedent's gross estate under § 811(c)(1)(B) of the I.R.C. of 1939.*fn1 29 T.C. 1179. That decision is before us for review.
The following findings by the Tax Court are supported by the record and are accepted as a basis for our decision:
Between 1939 and 1942 the decedent, a Pennsylvania resident, executed general warranty deeds to his children for income-producing real estate, together with the rentals therefrom, which he owned in Pennsylvania. The deeds were recorded. They reserved no interest in the realty or rents to the decedent, and the decedent received no consideration in connection with the transaction. Following the execution of the last deed the grantees, as owners-landlords entitled to the rental income, registered the properties with the O.P.A.
Contemporaneously with and subsequent to the execution of the deeds, it was orally understood between the decedent and his children that the decedent should retain for his lifetime the income from the real estate. In accordance with this understanding the decedent actually received all of such income from the dates of the deeds to the time of his death.
In his federal income tax returns for 1948 to 1950, inclusive, and for the period from January 1, 1951 to the time of his death on June 17, 1951 the decedent reported the rents as his personal income.*fn2 In the same returns the decedent claimed as deductions depreciation, taxes and water rent applicable to the properties.
The petitioners contended before the Tax Court that under Pennsylvania law the deeds conferred upon the children a fee simple title, that the Pennsylvania statute of frauds barred the grantor from enforcing his oral understanding against his children, and that the grantor therefore had retained no "right" to the income "under" the transfer within the meaning of the statute. The Tax Court rejected this argument and held that Pennsylvania law was immaterial, and that the test of gross estate includability under § 811(c)(1)(B) was a factual one; i. e., whether a decedent in reality had retained possession or enjoyment of the property. Finding that the collection of the rents by decedent pursuant to his understanding with his children constituted a factual enjoyment of the properties under the transfer, the Tax Court held that the properties were properly included in decedent's gross estate.
Petitioners argue that § 811(c)(1)(B) is inapplicable to a transfer with a retained income interest unless that interest is reserved in the instrument of transfer. This argument is based upon the statutory provision that the income must be retained "under" the transfer. This is too constricted an interpretation to place on the statute. The statute means only that the life interest must be retained in connection with or as an incident to the transfer. That the reservation need not be expressed in the instrument of transfer is implicitly recognized by the reciprocal trust decisions. Orvis v. Higgins, 2 Cir., 1950, 180 F.2d 537; Cole's Estate v. C.I.R., 8 Cir., 1944, 140 F.2d 636; Moreno's Estate v. C.I.R., 8 Cir., 1958, 260 F.2d 389. They hold that when two persons separately create equivalent trusts simultaneously, with income payable from each trust to the settlor of the other, the property transferred by each settlor is nevertheless subject to § 811 (c)(1)(B) even though neither trust instrument reserves any interest in the income to its settlor or refers to the companion trust.Petitioners' argument is irreconcilable with these holdings. It is also at odds with Harter v. U.S., 48 AFTR 1964, 55-1 USTC 11,503 (N.D. Okla. 1954). Neither Higgs Estate v. C.I.R., 3 Cir., 1950, 184 F.2d 427, nor C.I.R. v. Twogood's Estate, 2 Cir., 1952, 194 F.2d 627, relied upon by petitioners bear upon the problem.
Next, petitioners point out that the statute speaks of the retention of "the right to the income". Emphasizing the word "right", petitioners argue that Congress has decreed that § 811(c)(1)(B) is applicable only if a transferor reserves to himself an enforceable claim to the income. Since, according to petitioners, the statute of frauds of Pennsylvania would foreclose judicial enforcement of the oral understanding between the decedent and his children, petitioners conclude that the decedent had no "right" to the income from the property.*fn3
It is not necessary for us to delve into Pennsylvania law, for the question is not one of local law.Rather, it is whether Congress intended that § 811(c)(1)(B) should subject to an estate tax property conveyed under circumstances which here prevail. While state law creates legal interests and rights, it is the federal law which designates which of these interests and rights shall be taxes. Morgan v. Commissioner, 1940. 309 U.S. 78, 80-81, 60 S. Ct. 424, 84 L. Ed. 585; Helvering v. Stuart, 1942, 317 U.S. 154, 162, 63 S. Ct. 140, 87 L. Ed. 154.
In seeking to discover the type of transfers at which § 811(c)(1)(B) is aimed, the words "right to the income" are not entitled to undue emphasis. Section 811(c)(1)(B) states that property which has been transferred inter vivos is includable in the gross estate of a decedent when the decedent "has retained for his life * * * the possession or enjoyment of, or the right to the income from the property * * *".Thus, the statute deals with two things: retention of "possession or enjoyment" and retention of "the right to the income".
The history of the statute discloses that "the right to the income" clause was not intended to limit the scope of the "possession or enjoyment" clause used in § 811(c)(1)(B).*fn4 Section 811 (c)(1)(B) derives directly from § 302 (c) of the Act of 1926, as amended in 1931 and 1932, 26 U.S.C.A. Int. Rev. Acts, pages 227, 228. The amendment of 1931 included for the first time express language taxing property which had been transferred inter vivos with a lifetime retention of "the possession or enjoyment of, or the income from" the property. This amendment said nothing about the "right to" income.The words "right to" were inserted for the first time by the 1932 amendment, and the language of the 1932 amendment was carried over into § 811(c) of the I.R.C. of 1939. This insertion was to make clear that Congress intended that the statute should apply to cases where a decedent was entitled to income even though he did not actually receive it. H.R. Rep. No. 708, 72d Cong.; 1st Sess. pp. 46-7 (C.B. 1939-1, Part 2, pp. 490-1); Sen. Rep. No. 665, 72d Cong.; 1st Sess. pp. 49-50 (C.B. 1939-1, Part 2, p. 532).*fn5 Hence, the "right to income" clause, instead of circumscribing the "possession or enjoyment" clause in its application to retained income, broadened its sweep.
The conclusion is irresistible that the petitioners' decedent "enjoyed" the properties until he died. If, as was said in Commissioner v. Estate of Church, supra, 335 U.S. at page 645, 69 S. Ct. 322, the most valuable property attribute of stocks is their income, it is no less true that one of the most valuable incidents of income-producing real estate is the rent which it yields. He who receives the rent in fact enjoys the property. Enjoyment as used in the death tax statute is not a term of art, but is synonymous with substantial present economic benefit. Commissioner v. Estate of Holmes, 1945, 326 U.S. 480, 486, 66 S. Ct. 257, 90 L. Ed. 228. Under this realistic point of view the enjoyment of the properties which the decedent ...