was improperly included in the gross estate. Furthermore, the applicability of § 2036 precludes taxation under 2038.
In their brief and argument plaintiffs rely on a number of cases but principally on C.I.R. v. Ridgway's Estate, 291 F.2d 257 (1961), from our Third Circuit opinion by Circuit Judge Staley, and C.I.R. v. Canfield's Estate, 306 F.2d 1 (1962), opinion by Circuit Judge Marshall for the Second Circuit. We hold that these cases are authority for the general proposition that 2036, as presently enacted and which was in effect at the time of the decedent's death, avoids taxation of the trust fund as a part of the gross estate when the 'transfer' of legal title took place prior to 1931.
The Government's reply brief attempts to distinguish these cases and says that the plaintiffs have ignored facts which appear in the case. With this we completely disagree. The Government would have us believe that in the Ridgway case the legal conclusions reached by Circuit Judge Staley were determined by the fact that the settlor in that case had in 1944 relinquished his power to alter or amend the trust. As we read the opinion, this had no bearing on the outcome whatsoever. Also, in reply to the argument based on Canfield's Estate, they would have us believe that to reach his result Circuit Judge Marshall was influenced by the fact that the decedent therein had relinquished her power to alter or amend in 1942, having died in 1945, and we find that argument equally fallacious.
It would serve no purpose here to repeat legislative history of this enactment and the Supreme Court decisions
so ably and comprehensively set forth in both of the above opinions. In the Ridgway case, decedent executed a deed of trust on December 25, 1930. The trust was irrevocable except for power he expressed in reserve to make changes with respect to the distribution of principal or income but not so as to favor himself or his estate. Precisely the same facts appear in our case. The decedent Ridgway died in 1953, having relinquished the above power in 1944. In the Canfield case, decedent executed a trust agreement on March 24, 1919, reserving to the settlor a testamentary power of appointment. In December of 1942 the decedent released the testamentary power of appointment, but, as we have said, in neither Ridgway nor Canfield does it appear that the later release of the original power had any bearing on the ultimate result. In both cases the liability for tax was determined by the 'transfer' prior to 1931.
In the Canfield case Judge Marshall says, referring to Ridgway and agreeing with Circuit Judge Staley:
'* * * The power was exercisable both during his lifetime and by testamentary instrument. The decedent relinquished this power in 1944. The Court held, nevertheless, that the 'transfer' was made in 1930 upon execution of the deed of trust. It noted that a contrary ruling would attribute a different meaning to 'transfer' than it had in other parts of the same statute and that the May v. Heiner line of cases was principally concerned with placing formal legal title beyond the settlor's unilateral control. * * *' (306 F.2d p. 7).
In both cases the Commissioner held that the trust fund was taxable. In both cases the Tax Court overruled the Commissioner and in both cases the Circuit Court upheld the decision of the Tax Court. As stated 291 F.2d at page 259 in the Ridgway case:
'The Commissioner advances an elaborate argument in which he intertwines judicial decisions with statutory enactments and legislative history.'
The same could be applied here and in the Canfield case.
As to the relationship from a taxing standpoint of § 2036 and § 2038, we find it clearly expressed by Circuit Judge Marshall on page 6 and 7 of 306 F.2d at follows:
'Petitioner's contentions, moreover, are not supported by the statutory language. Presumptively, we should think, 'transfer' must be read to mean the transfer of legal title to a trust without regard to the reservation of certain powers over the corpus. It was so interpreted prior to the Joint Resolution of 1931, and we believe it must be presumed, in the absence of any language in that enactment to the contrary, that meaning was retained.
'Furthermore, if we were to read in 'complete and irrevocable' before the word 'transfer' we would make nonsense of the Code. Thus, we would have 'complete and irrevocable' transfers under which the settlor retains possession or enjoyment of, or the right to, the income from the property, Section 2036; 'complete and irrevocable' transfers under which the settlor retains the right to designate those who shall possess or enjoy the property or income, Section 2036; 'complete and irrevocable' transfers in which the settlor retains a reversionary interest, Section 2037; and, finally, 'complete and irrevocable' transfers in which the settlor retains the right to alter, amend, revoke, or terminate the trust, Section 2038. Were we to read in the words 'complete and irrevocable' before 'transfer,' therefore, each of these sections would become a contradiction in terms. These provisions were not drafted merely as general statements of policy, the courts being left to fill in the gaps interstitially. They were, in fact, drafted in a relatively precise fashion, and the language employed is based on several decades of experience made meaningful through the continual interplay of judicial interpretation and legislative revision. When Congress drafted Section 2036, it was aware of powers of appointment and the fact that settlors often surrendered them; and when it chose to refer to such transactions it employed specific language. See e.g., Section 2035 '* * * exercised or released a general power of appointment * * *.' Under such circumstances, we feel constrained to follow the apparent meaning of the statutory language absent a determination of a conscious legislative policy to the contrary.' (306 F.2d 1)
Accordingly, we find that the plaintiffs are entitled to a refund and direct that a proper order be submitted.