Decedent transferred to an irrevocable trust for the benefit of
his children (and if they died before the trust ended, their
surviving children) stock in three unlisted corporations that he
controlled, retaining the right to vote the transferred stock, to
veto the transfer by the trustee (a bank) of any of the stock, and
to remove the trustee and appoint another corporate trustee as
successor. The right to vote the transferred stock, together with
the vote of the stock decedent owned at the time of his death, gave
him a majority vote in each of the corporations. The Commissioner
of Internal Revenue determined that the transferred stock was
includable in decedent's gross estate under § 2036(a) of the
Internal Revenue Code of 1954, which requires the inclusion in a
decedent's gross estate of the value of any property he has
transferred by
inter vivos gift, if he retained for his
lifetime
"(1) the . . . enjoyment of . . . the property transferred, or
(2) the right, either alone or in conjunction with any person, to
designate the persons who shall . . . enjoy . . . the income
therefrom."
The Commissioner claimed that decedent's right to vote the
transferred shares and to veto any sale by the trustee, together
with the ownership of other shares, made the transferred shares
includable under § 2036(a)(2), because decedent retained control
over corporate dividend policy and, by regulating the flow of
income to the trust, could shift or defer the beneficial enjoyment
of trust income between the present beneficiaries and remaindermen,
and under § 2036(a)(1) because, by reason of decedent's retained
control over the corporations, he had the right to continue to
benefit economically from the transferred shares during his
lifetime.
Held: 1. Decedent did not retain the "right," within
the meaning of § 2036(a)(2), to designate who was to enjoy the
trust income. Pp.
408 U. S.
131-144.
(a) A settlor's retention of broad management powers did not
necessarily subject an
inter vivos trust to the federal
estate tax. Pp.
408 U. S.
131-135.
Page 408 U. S. 126
(b) In view of legal and business constraints applicable to the
payment of dividends, especially where there are minority
stockholders, decedent's right to vote a majority of the shares in
these corporations did not give him a
de facto position
tantamount to the power to accumulate income in the trust. Pp.
408 U. S.
135-144.
2. Decedent's voting control of the stock did not constitute
retention of the enjoyment of the transferred stock within the
meaning of § 2036(a)(1), since the decedent had transferred
irrevocably the title to the stock and right to the income
therefrom. Pp.
408 U. S.
145-150.
440 F.2d 949, affirmed.
POWELL, J., delivered the opinion of the Court, in which BURGER,
C.J., and DOUGLAS, STEWART, MARSHALL, and REHNQUIST, JJ., joined.
WHITE, J., filed a dissenting opinion, in which BRENNAN and
BLACKMUN, JJ., joined,
post, p.
408 U. S.
151.
MR. JUSTICE POWELL delivered the opinion of the Court.
Decedent, Milliken C. Byrum, created in 1958 an irrevocable
trust to which he transferred shares of stock in three closely held
corporations. Prior to transfer, he owned at least 71% of the
outstanding stock of each corporation. The beneficiaries were his
children or, in the event of their death before the termination of
the trust, their surviving children. The trust instrument specified
that there be a corporate trustee. Byrum designated as sole trustee
an independent corporation, Huntington National Bank. The trust
agreement vested
Page 408 U. S. 127
in the trustee broad and detailed powers with respect to the
control and management of the trust property. These powers were
exercisable in the trustee's sole discretion, subject to certain
rights reserved by Byrum: (i) to vote the shares of unlisted stock
held in the trust estate; (ii) to disapprove the sale or transfer
of any trust assets, including the shares transferred to the trust;
(iii) to approve investments and reinvestments; and (iv) to remove
the trustee and "designate another corporate Trustee to serve as
successor." Until the youngest living child reached age 21, the
trustee was authorized in its "absolute and sole discretion" to pay
the income and principal of the trust to or for the benefit of the
beneficiaries, "with due regard to their individual needs for
education, care, maintenance and support." After the youngest child
reached 21, the trust was to be divided into a separate trust for
each child, to terminate when the beneficiaries reached 35. The
trustee was authorized in its discretion to pay income and
principal from these trusts to the beneficiaries for emergency or
other "worthy need," including education. [
Footnote 1]
Page 408 U. S. 128
When he died in 1964, Byrum owned less than 50% of the common
stock in two of the corporations and 59% in the third. The trust
had retained the shares
Page 408 U. S. 129
transferred to it, with the result that Byrum had continued to
have the right to vote not less than 71% of the common stock in
each of the three' corporations. [
Footnote 2]
Page 408 U. S. 130
There were minority stockholders, unrelated to Byrum, in each
corporation.
Following Byrum's death, the Commissioner of Internal Revenue
determined that the transferred stock was properly included within
Byrum's gross estate under § 2036(a) of the Internal Revenue Code
of 1954, 26 U.S.C. § 2036(a). That section provides for the
inclusion in a decedent's gross estate of all property which the
decedent has transferred by
inter vivos transaction, if he
has retained for his lifetime "(1) the possession or enjoyment of,
or the right to the income from, the property" transferred, or "(2)
the right, either alone or in conjunction with any person, to
designate the persons who shall possess or enjoy the property or
the income
Page 408 U. S. 131
therefrom." [
Footnote 3] The
Commissioner determined that the stock transferred into the trust
should be included in Byrum's gross estate because of the rights
reserved by him in the trust agreement. It was asserted that his
right to vote the transferred shares and to veto any sale thereof
by the trustee, together with the ownership of other shares,
enabled Byrum to retain the "enjoyment of . . . the property," and
also allowed him to determine the flow of income to the trust, and
thereby "designate the persons who shall . . . enjoy . . . the
income."
The executrix of Byrum's estate paid an additional tax of
$13,202.45, and thereafter brought this refund action in District
Court. The facts not being in dispute, the court ruled for the
executrix on cross-motions for summary judgment.
311 F.
Supp. 892 (SD Ohio 1970). The Court of Appeals affirmed, one
judge dissenting. 440 F.2d 949 (CA6 1971). We granted the
Government's petition for certiorari. 404 U.S. 937 (1971).
I
The Government relies primarily on its claim, made under §
2036(a)(2), that Byrum retained the right to
Page 408 U. S. 132
designate the persons who shall enjoy the income from the
transferred property. The argument is a complicated one. By
retaining voting control over the corporations whose stock was
transferred, Byrum was in a position to select the corporate
directors. He could retain this position by not selling the shares
he owned and by vetoing any sale by the trustee of the transferred
shares. These rights, it is said, gave him control over corporate
dividend policy. By increasing, decreasing, or stopping dividends
completely, it is argued that Byrum could "regulate the flow of
income to the trust," and thereby shift or defer the beneficial
enjoyment of trust income between the present beneficiaries and the
remaindermen. The sum of this retained power is said to be
tantamount to a grantor-trustee's power to accumulate income in the
trust, which this Court has recognized constitutes the power to
designate the persons who shall enjoy the income from transferred
property. [
Footnote 4]
At the outset, we observe that this Court has never held that
trust property must be included in a settlor's gross estate solely
because the settlor retained the power
Page 408 U. S. 133
to manage trust assets. On the contrary, since our decision in
Reinecke v. Northern Trust Co., 278 U.
S. 339 (1929), it has been recognized that a settlor's
retention of broad powers of management does not necessarily
subject an
inter vivos trust to the federal estate tax.
[
Footnote 5] Although there was
no statutory analogue to § 2036(a)(2) when
Northern Trust
was decided, several lower court decisions decided after the
enactment of the predecessor of § 2036(a)(2) have upheld the
settlor's right to exercise managerial powers without incurring
estate tax liability. [
Footnote
6] In
Estate of King v. Commissioner, 37 T.C. 973
(1962), a settlor reserved the power to direct the trustee in the
management and investment of trust assets. The Government argued
that the settlor was thereby empowered to cause investments to be
made in such a manner as to control significantly the flow of
income into the trust. The Tax Court rejected this argument, and
held for the taxpayer. Although the court recognized that the
settlor had reserved "wide latitude in the exercise of his
discretion as to the types of investments to be made,"
id.
at 980, it did not find this control over the flow of income to be
equivalent
Page 408 U. S. 134
to the power to designate who shall enjoy the income from the
transferred property.
Essentially, the power retained by Byrum is the same managerial
power retained by the settlors in
Northern Trust and in
King. Although neither case controls this one --
Northern Trust because it was not decided under §
2036(a)(2) or a predecessor; and
King because it is a
lower court opinion -- the existence of such precedents carries
weight. [
Footnote 7] The
holding of
Northern Trust, that the settlor of a trust may
retain broad powers of management without adverse estate tax
consequences, may have been relied upon in the drafting of hundreds
of
inter vivos trusts. [
Footnote 8] The modification of this principle now sought
by the Government could have a seriously adverse impact, especially
upon settlors (and their estates) who happen to have been
"controlling" stockholders
Page 408 U. S. 135
of a closely held corporation. Courts properly have been
reluctant to depart from an interpretation of tax law which has
been generally accepted when the departure could have potentially
far-reaching consequences. When a principle of taxation requires
reexamination, Congress is better equipped than a court to define
precisely the type of conduct which results in tax consequences.
When courts readily undertake such tasks, taxpayers may not rely
with assurance on what appear to be established rules lest they be
subsequently overturned. Legislative enactments, on the other hand,
although not always free from ambiguity, at least afford the
taxpayers advance warning.
The Government argues, however, that our opinion in
United
States v. O'Malley, 383 U. S. 627
(1966), compels the inclusion in Byrum's estate of the stock owned
by the trust. In
O'Malley, the settlor of an
inter
vivos trust named himself as one of the three trustees. The
trust agreement authorized the trustees to pay income to the life
beneficiary or to accumulate it as a part of the principal of the
trust in their "sole discretion." The agreement further provided
that net income retained by the trustees, and not distributed in
any calendar year, "
shall become a part of the principal of the
Trust Estate."' Id. at 383 U. S. 629
n. 2. The Court characterized the effect of the trust as
follows:
"Here Fabrice [the settlor] was empowered, with the other
trustees, to distribute the trust income to the income
beneficiaries or to accumulate it and add it to the principal,
thereby denying to the beneficiaries the privilege of immediate
enjoyment and conditioning their eventual enjoyment upon surviving
the termination of the trust."
Id. at
383 U. S. 631.
As the retention of this legal right by the settlor, acting as a
trustee "in conjunction" with the other trustees,
Page 408 U. S. 136
came squarely within the language and intent of the predecessor
of § 2036(a)(2), the taxpayer conceded that the original assets
transferred into the trust were includable in the decedent's gross
estate.
Id. at
383 U. S. 632.
The issue before the Court was whether the accumulated income,
which had been added to the principal pursuant to the reservation
of right in that respect, was also includable in decedent's estate
for tax purposes. The Court held that it was.
In our view, and for the purposes of this case,
O'Malley adds nothing to the statute itself. The facts in
that case were clearly within the ambit of what is now § 2036(a).
That section requires that the settlor must have "retained for his
life . . . (2) the right . . . to designate the persons who shall
possess or enjoy the property or the income therefrom."
O'Malley was covered precisely by the statute for two
reasons: (1) there, the settlor had reserved a legal right, set
forth in the trust instrument; and (2) this
right
expressly authorized the settlor, "in conjunction" with others, to
accumulate income, and thereby "to designate" the persons to enjoy
it.
It must be conceded that Byrum reserved no such "right" in the
trust instrument or otherwise. The term "right," certainly when
used in a tax statute, must be given its normal and customary
meaning. It connotes an ascertainable and legally enforceable
power, such as that involved in
O'Malley. [
Footnote 9] Here, the right ascribed to Byrum
was the power to use his majority position and influence over the
corporate directors to "regulate the flow of dividends" to the
trust. That "right" was
Page 408 U. S. 137
neither ascertainable nor legally enforceable, and hence was not
a right in any normal sense of that term. [
Footnote 10]
Byrum did retain the legal right to vote shares held by the
trust and to veto investments and reinvestments. But the corporate
trustee alone, not Byrum, had the right to pay out or withhold
income, and thereby to designate who among the beneficiaries
enjoyed such income. Whatever power Byrum may have possessed with
respect to the flow of income into the trust was derived not from
an enforceable legal right specified in the trust instrument, but
from the fact that he could elect a majority of the directors of
the three corporations. The power to elect the directors conferred
no legal right to command them to pay or not to pay dividends. A
majority shareholder has a fiduciary duty not to misuse his power
by promoting his personal interests at the expense of corporate
interests. [
Footnote 11]
Moreover,
Page 408 U. S. 138
the directors also have a fiduciary duty to promote the
interests of the corporation. [
Footnote 12] However great Byrum's influence may have
been with the corporate directors, their responsibilities were to
all stockholders, and were enforceable according to legal standards
entirely unrelated to the needs of the trust or to Byrum's desires
with respect thereto.
The Government seeks to equate the
de facto position of
a controlling stockholder with the legally enforceable "right"
specified by the statute. Retention of corporate control (through
the right to vote the shares) is said to be "tantamount to the
power to accumulate income" in the trust which resulted in estate
tax consequences in
O'Malley. The Government goes on to
assert that,
"[t]hrough exercise of that retained power, [Byrum] could
increase or decrease corporate dividends . . . and thereby shift or
defer the beneficial enjoyment of trust income. [
Footnote 13]"
This approach seems to us
Page 408 U. S. 139
not only to depart from the specific statutory language,
[
Footnote 14] but also to
misconceive the realities of corporate life.
There is no reason to suppose that the three corporations
controlled by Byrum were other than typical small businesses. The
customary vicissitudes of such enterprises -- bad years; product
obsolescence; new competition; disastrous litigation; new,
inhibiting Government regulations; even bankruptcy -- prevent any
certainty or predictability as to earnings or dividends. There is
no assurance that a small corporation will have a flow of net
earnings or that income earned will in fact be available for
dividends. Thus, Byrum's alleged
de facto "power to
Page 408 U. S. 140
control the flow of dividends" to the trust was subject to
business and economic variables over which he had little or no
control.
Even where there are corporate earnings, the legal power to
declare dividends is vested solely in the corporate board. In
making decisions with respect to dividends, the board must consider
a number of factors. It must balance the expectation of
stockholders to reasonable dividends when earned against corporate
needs for retention of earnings. The first responsibility of the
board is to safeguard corporate financial viability for the long
term. This means, among other things, the retention of sufficient
earnings to assure adequate working capital, as well as resources
for retirement of debt, for replacement and modernization of plant
and equipment, and for growth and expansion. The nature of a
corporation's business, as well as the policies and long-range
plans of management, are also relevant to dividend payment
decisions. [
Footnote 15]
Directors of a closely held, small corporation must bear in mind
the relatively limited access of such an enterprise to capital
markets. This may require a more conservative policy with respect
to dividends than would be expected of an established corporation
with securities listed on national exchanges. [
Footnote 16]
Page 408 U. S. 141
Nor do small corporations have the flexibility or the
opportunity available to national concerns in the utilization of
retained earnings. When earnings are substantial, a decision not to
pay dividends may result only in the accumulation of surplus,
rather than growth through internal or external expansion. The
accumulated earnings may result in the imposition of a penalty tax.
[
Footnote 17]
These various economic considerations are ignored at the
directors' peril. Although vested with broad discretion in
determining whether, when, and what amount of dividends shall be
paid, that discretion is subject to legal restraints. If, in
obedience to the will of the majority stockholder, corporate
directors disregard the interests of shareholders by accumulating
earnings to an unreasonable extent, they are vulnerable to a
derivative suit. [
Footnote
18] They are similarly vulnerable if they make an unlawful
payment of dividends in the absence of net earnings or available
surplus, [
Footnote 19] or if
they fail to exercise
Page 408 U. S. 142
the requisite degree of care in discharging their duty to act
only in the best interest of the corporation and its
stockholders.
Byrum was similarly inhibited by a fiduciary duty from abusing
his position as majority shareholder for personal or family
advantage to the detriment of the corporation or other
stockholders. There were a substantial number of minority
stockholders in these corporations who were unrelated to Byrum.
[
Footnote 20] Had Byrum and
the directors violated their duties, the minority shareholders
would have had a cause of action under Ohio law. [
Footnote 21] The Huntington National Bank,
as trustee, was one of the minority stockholders, and it had both
the right and the duty to hold Byrum responsible for any wrongful
or negligent action as a controlling stockholder or as a director
of the corporations. [
Footnote
22] Although Byrum had reserved the right to remove the
trustee, he would have been imprudent to do this when confronted by
the
Page 408 U. S. 143
trustee's complaint against his conduct. A successor trustee
would succeed to the rights of the one removed.
We conclude that Byrum did not have an unconstrained
de
facto power to regulate the flow of dividends to the trust,
much less the "right" to designate who was to enjoy the income from
trust property. His ability to affect, but not control, trust
income was a qualitatively different power from that of the settlor
in
O'Malley, who had a specific and enforceable right to
control the income paid to the beneficiaries. [
Footnote 23] Even had Byrum managed to flood the
trust with income, he had no way of compelling the trustee to pay
it out, rather than accumulate it. Nor could he prevent the trustee
from making payments from other trust assets, [
Footnote 24] although admittedly there were few
of these at the time of Byrum's death. We cannot assume, however,
that no other assets would come into the trust from reinvestments
or other gifts. [
Footnote
25]
Page 408 U. S. 144
We find no merit to the Government's contention that Byrum's
de facto "control," subject as it was to the economic and
legal constraints set forth above, was tantamount to the right to
designate the persons who shall enjoy trust income, specified by §
2036(a)(2). [
Footnote
26]
Page 408 U. S. 145
II
The Government asserts an alternative ground for including the
shares transferred to the trust within Byrum's gross estate. It
argues that, by retaining control, Byrum guaranteed himself
continued employment and remuneration, as well as the right to
determine whether and when the corporations would be liquidated or
merged. Byrum is thus said to have retained "the . . . enjoyment of
. . . the property," making it includable within his gross estate
under § 2036(a)(1). The Government concedes that the retention of
the voting rights of an "unimportant minority interest" would not
require inclusion of the transferred shares under § 2036(a)(1). It
argues, however,
"where the cumulative effect of the retained powers and the
rights flowing from the shares not placed in trust leaves the
grantor in control of a close corporation, and assures that control
for his lifetime, he has retained the 'enjoyment' of the
transferred stock. [
Footnote
27]"
Brief for United States 23.
It is well settled that the terms "enjoy" and "enjoyment," as
used in various estate tax statutes, "are not terms of art, but
connote substantial present economic benefit, rather than technical
vesting of title or estates."
Commissioner v. Estate of
Holmes, 326 U. S. 480,
326 U. S.
486
Page 408 U. S. 146
(1946). [
Footnote 28] For
example, in
Reinecke v. Northern Trust Co., 278 U.
S. 339 (1929), in which the critical inquiry was whether
the decedent had created a trust "intended . . .
to take effect
in possession or enjoyment at or after his death,'" [Footnote 29] id. at 278 U. S. 348,
the Court held that reserved powers of management of trust assets,
similar to Byrum's power over the three corporations, did not
subject an inter vivos trust to the federal estate tax. In
determining whether the settlor had retained the enjoyment of the
transferred property, the Court said:
"Nor did the reserved powers of management of the trusts save to
decedent any control over the economic benefit or the enjoyment of
the property. He would equally have reserved all these powers and
others had he made himself the trustee, but the transfer would not,
for that reason, have been incomplete. The shifting of the economic
interest in the trust property which was the subject of the tax was
thus complete as soon as the trust was made. His power to recall
the property and of control over it for his own benefit then
ceased, and, as the trust were not made in contemplation
Page 408 U. S. 147
of death, the reserved powers do not serve to distinguish them
from any other gift
inter vivos not subject to the
tax."
278 U.S. at
278 U. S.
346-347.
The cases cited by the Government reveal that the terms
"possession" and "enjoyment," used in § 2036(a)(1), were used to
deal with situations in which the owner of property divested
himself of title but retained an income interest or, in the case of
real property, the lifetime use of the property. Mr. Justice
Black's opinion for the Court in
Commissioner v. Estate of
Church, 335 U. S. 632
(1949), traces the history of the concept. In none of the cases
cited by the Government has a court held that a person has retained
possession or enjoyment of the property if he has transferred title
irrevocably, made complete delivery of the property and
relinquished the right to income where the property is
income-producing. [
Footnote
30]
The Government cites only one case,
Estate of Holland v.
Commissioner, 1 T.C. 564 (1943), [
Footnote 31] in which a decedent had retained the
right to vote transferred shares of stock and in which the stock
was included
Page 408 U. S. 148
within the decedent's gross estate. In that case, it was not the
mere power to vote the stock, giving the decedent control of the
corporation, which caused the Tax Court to include the shares. The
court held that,
"'on an inclusive view of the whole arrangement, this
withholding of the income until decedent's death, coupled with the
retention of the certificates under the pledge and the reservation
of the right to vote the stock and to designate the company
officers,'"
subjects the stock to inclusion within the gross estate.
Id. at 565. The settlor in
Holland retained a
considerably greater interest than Byrum retained, including an
income interest. [
Footnote
32]
As the Government concedes, the mere retention of the "right to
vote" shares does not constitute the type of "enjoyment" in the
property itself contemplated by § 2036(a)(1). In addition to being
against the weight of precedent, the Government's argument that
Byrum retained "enjoyment" within the meaning of § 2036(a)(1) is
conceptually unsound. This argument implies, as it must under the
express language of § 2036(a), that Byrum "retained for his life .
. . (1) the possession or enjoyment" of the "
property"
transferred to the trust or the "
income" therefrom. The
only property he transferred was corporate stock. He did not
transfer "control" (in the sense used by the Government) as the
trust never owned as much as 50% of the stock of any corporation.
Byrum never divested himself of control, as he was able to vote a
majority of the shares by virtue of what he owned and the right to
vote those placed in
Page 408 U. S. 149
the trust. Indeed, at the time of his death, he still owned a
majority of the shares in the largest of the corporations, and
probably would have exercised control of the other two by virtue of
being a large stockholder in each. [
Footnote 33] The statutory language plainly contemplates
retention of an attribute of the property transferred -- such as a
right to income, use of the property itself, or a power of
appointment with respect either to income or principal. [
Footnote 34]
Even if Byrum had transferred a majority of the stock, but had
retained voting control, he would not have retained "substantial
present economic benefit," 326 U.S. at
326 U. S. 486.
The Government points to the retention of two "benefits." The first
of these, the power to liquidate or
Page 408 U. S. 150
merge, is not a present benefit; rather, it is a speculative and
contingent benefit which may or may not be realized. Nor is the
probability of continued employment and compensation the
substantial "enjoyment of . . . [the transferred] property" within
the meaning of the statute. The dominant stockholder in a closely
held corporation, if he is active and productive, is likely to hold
a senior position and to enjoy the advantage of a significant voice
in his own compensation. These are inevitable facts of the free
enterprise system, but the influence and capability of a
controlling stockholder to favor himself are not without
constraints. Where there are minority stockholders, as in this
case, directors may be held accountable if their employment,
compensation, and retention of officers violate their duty to act
reasonably in the best interest of the corporation and all of its
stockholders. [
Footnote 35]
Moreover, this duty is policed, albeit indirectly, by the Internal
Revenue Service, which disallows the deduction of unreasonable
compensation paid to a corporate executive as a business expense.
[
Footnote 36] We conclude
that Byrum's retention of voting control was not the retention of
the enjoyment of the transferred property within the meaning of the
statute.
Page 408 U. S. 151
For the reasons set forth above, we hold that this case was
correctly decided by the Court of Appeals, and accordingly the
judgment is
Affirmed.
[
Footnote 1]
The Trust Agreement in pertinent part provided:
"
Article IV. Irrevocable Trust."
"This Trust shall be irrevocable, and Grantor reserves no
rights, powers, privileges or benefits either as to the Trust
estate or the control or management of the trust property, except
as set forth herein."
"
Article V. Powers Of The Trustee."
"The Trustee shall have and possess and may exercise at all
times not only the rights, powers and authorities incident to the
office or required in the discharge of this trust, or impliedly
conferred upon or vested in it, but there is hereby expressly
conferred upon and vested in the Trustee all the rights, powers and
authorities embodied in the following paragraphs in this Article,
which are shown by way of illustration but not by way of
limitation:"
"
* * * *"
"Sell. 5.02 To sell at public or private sale, to grant options
to sell, to exchange, re-exchange or otherwise dispose of all or
part of the property, real or personal, at any time belonging to
the Trust Estate, upon such terms and conditions and for such
consideration as said Trustee shall determine, and to execute and
deliver all instruments of sale or conveyance necessary or
desirable therefor."
"
* * * *"
"Investments. 5.05 To invest any money in the Trust Estate in
stocks, bonds, investment trusts, common trust funds and any other
securities or property, real or personal, secured or unsecured,
whether the obligations of individuals, corporations, trusts,
associations, governments, expressly including shares and/or
obligations of its own corporation, or otherwise, either within or
outside of the State of Ohio, as the Trustee shall deem advisable,
without any limitation whatsoever as to the character of investment
under any statute or rule of law now or hereafter enacted or
existing regarding trust fund or investments by fiduciaries or
otherwise."
"Voting. 5.06 To vote by proxy or in person any stock or
security comprising a part of the Trust Estate, at any meeting,
except that, during Grantor's lifetime, all voting rights of any
stocks which are not listed on a stock exchange, shall be exercised
by Grantor, and after Grantor's death, the voting rights of such
stocks shall be exercised by Grantor's wife during her
lifetime."
"
* * * *"
"Leases. 5.09 To make leases for any length of time, whether
longer or shorter than the duration of this Trust, to commence at
the present time or in the future; to extend any lease; to grant
options to lease or to renew any lease; it being expressly
understood that the Trustee may grant or enter into ninety-nine
year leases, renewable forever."
"
* * * *"
"Income Allocation. 5.13 To determine in its discretion how all
receipts and disbursements, capital gains and losses, shall be
charged, credited or apportioned between income and principal."
"
* * * *"
"Limitation. 5.15 Notwithstanding the powers of the Trustee
granted in paragraphs 5.02, 5.05, 5.09 and 5.11 above, the Trustee
shall not exercise any of the powers granted in said paragraphs
unless (a) during Grantor's lifetime said Grantor shall approve of
the action taken by the Trustee pursuant to said powers, (b) after
the death of the Grantor and as long as his wife, Marian A. Byrum,
shall live, said wife shall approve of the action taken by the
Trustee pursuant to said powers."
"
Article VI. Distribution Prior To Age 21."
"Until my youngest living child reaches the age of twenty-one
(21) years, the Trustee shall exercise absolute and sole discretion
in paying or applying income and/or principal of the Trust to or
for the benefit of Grantor's child or children and their issue,
with due regard to their individual needs for education, care,
maintenance and support and not necessarily in equal shares, per
stirpes. The decision of the Trustee in the dispensing of Trust
funds for such purposes shall be final and binding on all
interested persons."
"
Article VI. Division At Age 21."
"
* * * *"
"Principal Disbursements. 6.02 If prior to attaining the age of
thirty-five (35), any one of the children of Grantor shall have an
emergency such as an extended illness requiring unusual medical or
hospital expenses, or any other worthy need including education of
such child, the Trustee is hereby authorized and empowered to pay
such child or use for his or her benefit such amounts of income and
principal of the Trust as the Trustee in its sole judgment and
discretion shall determine."
"
* * * *"
"
Article VIII. Removal of Trustee."
"If the Trustee, The Huntington National Bank of Columbus,
Columbus, Ohio, shall at any time change its name or combine with
one or more corporations under one or more different names, or if
its assets and business at any time shall be purchased and absorbed
by another trust company or corporation authorized by law to accept
these trusts, the new or successor corporation shall be considered
as the said The Huntington National Bank of Columbus, Ohio, and
shall continue said Trusts and succeed to all the rights,
privileges, duties and obligations herein conferred upon said The
Huntington National Bank of Columbus, Columbus, Ohio, Trustee."
"Grantor, prior to his death, and after the death of the
Grantor, the Grantor's wife, Marian A. Byrum, during her lifetime,
may remove or cause the removal of The Huntington National Bank of
Columbus, Ohio, or any successor Trustee, as Trustee under the
Trusts and may thereupon designate another corporate Trustee to
serve as successor Trustee hereunder."
"
Artlcle IX. Miscellaneous Provisions."
"
* * * *"
"Discretion. 9.02 If in the opinion of the Trustee it shall
appear that the total income of any beneficiary of any Trust fund
created hereunder is insufficient for his or her proper or suitable
support, care and comfort, and education and that of said
beneficiary's children, the Trustee is authorized to pay to or for
such beneficiary or child such additional amounts from the
principal of the Trust Estate as it shall deem advisable in order
to provide suitably and properly for the support, care, comfort,
and education of said beneficiary and of said beneficiary's
children, and the action of the Trustee in making such payments
shall be binding on all persons."
[
Footnote 2]
The actual proportions were:
Total
Percentage
Percentage Percentage Owned by
Owned by Owned by Decedent
Decedent Trust and Trust
Byrum Lithographing
Co.,Inc. 59 12 71
Graphic Realty, Inc. 35 48 83
Bychrome Co. 42 46 88
[
Footnote 3]
926 U.S.C. § 2036 provides:
"(a) General rule."
"The value of the gross estate shall include the value of all
property to the extent of any interest therein of which the
decedent has at any time made a transfer (except in case of a bona
fide sale for an adequate and full consideration in money or
money's worth), by trust or otherwise, under which he has retained
for his life or for any period not ascertainable without reference
to his death or for any period which does not in fact end before
his death --"
"(1) the possession or enjoyment of, or the right to the income
from, the property, or"
"(2) the right, either alone or in conjunction with any person,
to designate the persons who shall possess or enjoy the property or
the income therefrom."
[
Footnote 4]
United State v. O'Malley, 383 U.
S. 627 (1966).
It is irrelevant to this argument how many shares Byrum
transferred to the trust. Had he retained in his own name more than
50% of the shares (as he did with one corporation), rather than
retaining the right to vote the transferred shares, he would still
have had the right to elect the board of directors and the same
power to "control" the flow of dividends. Thus, the Government is
arguing that a majority shareholder's estate must be taxed for
stock transferred to a trust if he owned at least 50% of the voting
stock after the transfer or if he retained the right to vote the
transferred stock and could thus vote more than 50% of the stock.
It would follow also that if a settlor controlled 50% of the voting
stock and similarly transferred some other class of stock for which
the payment of dividends had to be authorized by the directors, his
estate would also be taxed. Query: what would happen if he had the
right to vote less than 50% of the voting stock, but still
"controlled" the corporation?
See n 10,
infra.
[
Footnote 5]
The Court has never overturned this ruling.
See McCormick v.
Burnet, 283 U. S. 784
(1931);
Helvering v. Duke, 290 U.S. 591 (1933) (affirmed
by an equally divided Court). In
Commissioner v. Estate of
Church, 335 U. S. 632
(1949), and
Estate of Spiegel v. Commissioner,
335 U. S. 701
(1949), the Court invited,
sua sponte, argument of this
question, but did not reach the issue in either opinion.
[
Footnote 6]
See, e.g., Old Colony Trust Co. v. United States, 423
F.2d 601 (CA1 1970);
United States v. Powell, 307 F.2d 821
(CA10 1962);
Estate of Ford v. Commissioner, 53 T.C. 114
(1969),
aff'd, 450 F.2d 878 (CA2 1971);
Estate of
Wilson v. Commissioner, 13 T.C. 869 (1949) (en banc),
aff'd, 187 F.2d 145 (CA3 1951);
Estate of Budd v.
Commissioner, 49 T.C. 468 (1968);
Estate of Pardee v.
Commissioner, 49 T.C. 40 (1967);
Estate of King v.
Commissioner, 37 T.C. 973 (1962).
[
Footnote 7]
The dissenting opinion attempts to distinguish the cases,
holding that a settlor-trustee's retained powers of management do
not bring adverse estate tax consequences, on the ground that
management of trust assets is not the same as the power retained by
Byrum because a settlor-trustee is bound by a fiduciary duty to
treat the life tenant beneficiaries and remaindermen as the trust
instrument specifies. But the argument that, in the "reserved power
of management" cases, there was "a judicially enforceable strict
standard capable of invocation by the trust beneficiaries by
reference to the terms of the trust agreement,"
post at
408 U. S. 166,
ignores the fact that trust agreements may and often do provide for
the widest investment discretion.
[
Footnote 8]
Assuming
arguendo that MR. JUSTICE WHITE is correct in
suggesting that, in 1958, when this trust instrument was drawn, the
estate tax consequences of the settlor's retained powers of
management were less certain than they are now, this Court's
failure to overrule
Northern Trust, plus the existence of
recent cases such as
King and the cases cited in
n 6 have undoubtedly been relied on by
the draftsmen of more recent trusts with considerable
justification. Our concern as to this point is not so much with
whether Byrum properly relied on the precedents, but with the
probability that others did rely thereon in good faith.
[
Footnote 9]
Although MR. JUSTICE WHITE's dissent argues that the use of the
word "power" in
O'Malley implies that the Court's concern
was with practical reality, rather than legal form, an examination
of that opinion does not indicate that the term was used other than
in the sense of legally empowered. At any rate, the "power" was a
right reserved to the settlor in the trust instrument itself.
[
Footnote 10]
The "control" rationale, urged by the Government and adopted by
the dissenting opinion, would create a standard -- not specified in
the statute -- so vague and amorphous as to be impossible of
ascertainment in many instances.
See n 13
infra. Neither the Government nor
the dissent sheds light on the absence of an ascertainable
standard. The Government speaks vaguely of drawing the line between
"an unimportant minority interest" (whatever that may be) and
"voting control." The dissenting opinion does not address this
problem at all.
See Comment, Sale of Control Stock and the
Brokers' Transaction Exemption -- Before and After the Wheat
Report, 49 Tex.L.Rev. 475, 479-481 (1971).
[
Footnote 11]
Such a fiduciary relationship would exist in almost every, if
not every, State. Ohio, from which this case arises, is no
exception:
"[I]f the majority undertakes, either directly or indirectly,
through the directors, to conduct, manage, or direct the
corporation's affairs, they must do so in good faith, and with an
eye single to the best interests of the corporation. It is clear
that the interests of the majority are not always identical with
the interests of all the shareholders. The obligation of the
majority or of the dominant group of shareholders acting for, or
through, the corporation is fiduciary in nature. A court of equity
will grant appropriate relief where the majority or dominant group
of shareholders act in their own interest or in the interest of
others so as to oppress the minority or commit a fraud upon their
rights."
13 Ohio Jur.2d, Corporations § 662, pp. 90-91 (footnotes
omitted).
See Overfield v. Pennroad Corp., 42 F. Supp.
586 (ED Pa. 1941),
rev'd on other grounds, 146 F.2d
889 (CA3 1944).
[
Footnote 12]
"The directors of the corporation represent the corporation, not
just one segment of it, but all of it. The fiduciary nature of the
directors' obligation requires that, in the management of the
corporation's affairs, they do not presume to play favorites among
the shareholders or among classes of shareholders."
12 Ohio Jur.2d, Corporations § 497, p. 618.
[
Footnote 13]
The Government uses the terms "control" and "controlling
stockholder" as if they were words of art with a fixed and
ascertainable meaning. In fact, the concept of "control" is a
nebulous one. Although, in this case, Byrum possessed "voting
control" of the three corporations (in view of his being able to
vote more than 50% of the stock in each), the concept is too
variable and imprecise to constitute the basis
per se for
imposing tax liability under § 2036(a). Under most circumstances, a
stockholder who has the right to vote more than 50% of the voting
shares of a corporation "controls it" in the sense that he may
elect the board of directors. But such a stockholder would not
control, under the laws of most States, certain corporate
transactions such as mergers and sales of assets. Moreover, control
-- in terms of effective power to elect the board under normal
circumstances -- may exist where there is a right to vote far less
than 50% of the shares. This will vary with the size of the
corporation, the number of shareholders, and the concentration (or
lack of it) of ownership.
See generally 2 L. Loss,
Securities Regulation 770-783 (1961). Securities law practitioners
recognize that possessing 10% or more of voting power is a factor
on which the Securities and Exchange Commission relies as one of
the indicia of control. SEC, Disclosure to Investors -- The Wheat
Report 245-247 (1969).
[
Footnote 14]
In advocating this
de facto approach, the Government
relies on our opinion in
Commissioner v. Sunnen,
333 U. S. 591
(1948).
Sunnen was a personal income tax case in which the
Court found the taxpayer had made an assignment of income. The
reasoning relied on the
de facto power of a controlling
shareholder to regulate corporate business for his personal
objectives. This case is an estate tax case, not an income tax
case. Moreover, unlike assignment of income cases, in which the
issue is who has the power over income, this case concerns a
statute written in terms of the "right" to designate the recipient
of income. The use of the term "right" implies that restraints on
the exercise of power are to be recognized, and that such
restraints deprive the person exercising the power of a "right" to
do so.
[
Footnote 15]
The spectrum of types of corporate businesses, and of
permissible policies with respect to the retention of earnings, is
broad indeed. It ranges from the public utility with relatively
assured and stable income to the new and speculative corporation
engaged in a cyclical business or organized to exploit a new patent
or unproved technology. Some corporations pay no dividends at all,
as they are organized merely to hold static assets for prolonged
periods (
e.g., land, mineral resources, and the like).
Corporations which emphasize growth tend to low dividend payments,
whereas mature corporations may pursue generous dividend
policies.
[
Footnote 16]
Thomas v. Matthews, 94 Ohio St. 32, 55-56, 113 N.E.
669, 675 (1916):
"[I]t is the duty of the directors, in determining the amount of
net earnings available for the payment of dividends, to take into
account the needs of the company in its business and sums necessary
in the operation of its business until the income from further
operations is available, the amount of its debts, the necessity or
advisability of paying its debts or at least reducing them within
the limits of the company's credit, the preservation of its capital
stock as represented in the assets of the company as a fund for the
protection of its creditors and the character of its surplus
assets, whether cash, credits or merchandise."
[
Footnote 17]
Internal Revenue Code of 1954, Subc. G, pt. I, §§ 531-537, 26
U.S.C. §§ 531-537.
[
Footnote 18]
Had Byrum caused the board to follow a dividend policy, designed
to minimize or cut off income to the trust, which resulted in the
imposition of the penalty for accumulated earnings not distributed
to shareholders, there might have been substantial grounds for a
derivative suit. A derivative suit also would have been a
possibility had dividends been paid imprudently to increase the
trust's income at the expense of corporate liquidity. Minority
shareholders in Ohio may bring derivative suits under Ohio Rule
Civ.Proc. 23.1.
[
Footnote 19]
In most States, the power to declare dividends is vested solely
in the directors. 11 W. Fletcher, Cyclopedia Corporations, c. 58, §
5320. Ohio is no exception, and it limits the authority of
directors to pay dividends depending on available corporate
surplus. Ohio Rev.Code Ann. § 1701.33. Although liability generally
exists irrespective of a statute, nearly all States have statutes
regulating the liability of directors who participate in the
payment of improper dividends. 12 Fletcher,
supra, c. 58,
§ 5432. Again, Ohio is no exception. Ohio Rev.Code Ann. §
1701.95.
[
Footnote 20]
App. 30-32. In Byrum Lithographing Co., Inc., none of the other
11 stockholders appears to be related by name to Byrum. In Bychrome
Co., five of the eight stockholders appear to be unrelated to the
Byrums; and in Graphic Realty Co., 11 of the 14 stockholders appear
to be unrelated.
[
Footnote 21]
See Wilberding v. Miller, 90 Ohio St. 28, 42, 106 N.E.
665, 669 (1914):
"An arbitrary disregard of the rights of stockholders to
dividends or other improper treatment of the assets of the company
would be relieved against."
[
Footnote 22]
The trust instrument explicitly granted the trustee the
power
"[t]o enforce, abandon, defend against, or have adjudicated by
legal proceedings, arbitration or by compromise, any claim or
demand whatsoever arising out of or which may exist against the
Trust Estate."
App. 10-11.
[
Footnote 23]
The Government cites two other opinions of this Court, in
addition to
O'Malley, to support its argument. In both
Commissioner v. Estate of Holmes, 326 U.
S. 480 (1946), and
Lober v. United States,
346 U. S. 335
(1953), the grantor reserved to himself the power to distribute to
the beneficiaries the entire principal and accumulated income of
the trust at any time. This power to terminate the trust, and
thereby designate the beneficiaries at a time selected by the
settlor, is not comparable to the powers reserved by Byrum in this
case.
[
Footnote 24]
While the trustee could not acquire or dispose of investments
without Byrum's approval, he was not subject to Byrum's orders.
Byrum could prevent the acquisition of an asset, but he could not
require the trustee to acquire any investment. Nor could he compel
a sale, although he could prevent one. Thus, if there were other
income-producing assets in the trust, Byrum could not compel the
trustee to dispose of them.
[
Footnote 25]
In purporting to summarize the basis of our distinction of
O'Malley, the dissenting opinion states:
"Now the majority would have us accept the incompatible position
that a settlor seeking tax exemption may keep the power of income
allocation by rendering the trust dependent on an income flow he
controls because the general fiduciary obligations of a director
are sufficient to eliminate the power to designate within the
meaning of § 2036(a)(2)."
Post at
408 U. S. 157.
This statement, which assumes the critical and ultimate conclusion,
incorrectly states the position of the Court. We do not hold that a
settlor "may keep the power of income allocation" in the way MR.
JUSTICE WHITE sets out; we hold, for the reasons stated in this
opinion, that this settlor did not retain the power to allocate
income within the meaning of the statute.
[
Footnote 26]
The dissenting opinion's view of the business world will come as
a surprise to many. The dissent states:
"Thus, by instructing the directors, he elected in the
controlled corporations that he thought dividends should or should
not be declared, Byrum was able to open or close the spigot through
which the income flowed to the trust's life tenants."
Post at
408 U. S. 152.
This appears to assume that all corporations, including the small
family type involved in this case, have a regular and dependable
flow of earnings available for dividends, and that, if there is a
controlling stockholder, he simply turns the "spigot" on or off as
dividends may be desired. For the reasons set forth in this
opinion, no such dream world exists in the life of many
corporations. But whatever the situation may be generally, the
fallacy in the dissenting opinion's position here is that the
record simply does not support it. This case was decided on a
motion for summary judgment. The record does not disclose anything
with respect to the earnings or financial conditions of these
corporations. We simply do not know whether there were any earnings
for the years in question, whether there was an earned surplus in
any of the corporations, or whether -- if some earnings be assumed
-- they were adequate in light of other corporate needs to justify
dividend payments. Nor can we infer from the increase in dividend
payments in the year following Byrum's death that higher dividends
could have been paid previously. The increase could be explained as
easily by insurance held by the corporations on Byrum's life.
[
Footnote 27]
At one point, MR. JUSTICE WHITE seems to imply that Byrum also
retained the enjoyment of the right to the income from the
transferred shares:
"When Byrum closed the spigot by deferring dividends of the
controlled corporations,
thereby perpetuating his own
'enjoyment' of these funds, he also, in effect, transferred
income from the life tenants to the remaindermen."
(Emphasis added.)
Post at
408 U. S. 152.
But, of course, even if dividends were deferred, the funds remained
in the corporation; Byrum could not use them himself.
[
Footnote 28]
See 26 CFR § 20.2036-1(b)(2):
"The 'use, possession, right to the income, or other enjoyment
of the transferred property' is considered as having been retained
by or reserved to the decedent to the extent that the use,
possession, right to the income, or other enjoyment is to be
applied toward the discharge of a legal obligation of the decedent,
or otherwise for his pecuniary benefit."
Although MR. JUSTICE WHITE questions the Court.'s failure to
interpret "possession or enjoyment" with "extreme literalness,"
post at
408 U. S. 154
n. 3, apparently the Commissioner does not do so either. Reflection
on the expansive nature of those words, particularly "enjoyment,"
will demonstrate why interpreting them with "extreme literalness"
is an impossibility.
[
Footnote 29]
Northern Trust was decided under the Revenue Act of
1921, § 402(c), 42 Stat. 278.
[
Footnote 30]
Helvering v. Hallock, 309 U. S. 106
(1940);
Commissioner v. Estate of Church, 335 U.
S. 632 (1949);
Lober v. United States,
346 U. S. 335
(1953);
United States v. Estate of Grace, 395 U.
S. 316 (1969);
Estate of McNichol v.
Commissioner, 265 F.2d 667 (CA3),
cert. denied, 361
U.S. 829 (1959);
Guynn v. United States, 437 F.2d 1148
(CA4 1971). In all of these cases, as in
Church, the
grantor retained either title or an income interest or the right to
use real property for his lifetime.
Despite MR. JUSTICE WHITE'S suggestion,
post at
408 U. S. 154,
we have not "ignore[d] the plain language of the statute which
proscribes
enjoyment' as well as `possession or . . . the right
to income.'" Rather, the cases we have cited clearly establish that
the terms "possession" and "enjoyment" have never been used as the
dissent argues.
[
Footnote 31]
The cited opinion supplemented an earlier opinion of the Board
of Tax Appeals in the same case, 47 B.T.A. 807 (1942).
[
Footnote 32]
A more analogous case is
Yeazel v. Coyle, 68-1 U.S.T.C.
� 12,524 (ND Ill. 1968), in which a settlor-trustee, who
transferred 60% of the shares of a wholly owned corporation to a
trust, was found not to have retained the enjoyment of the property
for her lifetime.
[
Footnote 33]
The Government, for the reasons discussed in
n 4,
supra, makes no distinction between
retention of control by virtue of owning 50% or more of the voting
shares and such retention by a combination of stock owned and that
with respect to which the right to vote was retained.
[
Footnote 34]
The interpretation given § 2036(a) by the Government and by MR.
JUSTICE WHITE's dissenting opinion would seriously disadvantage
settlors in a control posture. If the settlor remained a
controlling stockholder, any transfer of stock would be taxable to
his estate.
See n 4,
supra. The typical closely held corporation is small, has
a checkered earning record, and has no market for its shares. Yet
its shares often have substantial asset value. To prevent the
crippling liquidity problem that would result from the imposition
of estate taxes on such shares, the controlling shareholder's
estate planning often includes an irrevocable trust. The Government
and the dissenting opinion would deny to controlling shareholders
the privilege of using this generally acceptable method of estate
planning without adverse tax consequences. Yet a settlor whose
wealth consisted of listed securities of corporations he did not
control would be permitted the tax advantage of the irrevocable
trust even though his more marketable asset present a far less
serious liquidity problem. The language of the statute does not
support such a result, and we cannot believe Congress intended it
to have such discriminatory and far-reaching impact.
[
Footnote 35]
Directors of Ohio corporations have been held liable for payment
of excessive compensation.
Berkwitz v.
Humphrey, 163 F. Supp.
78 (ND Ohio 1958).
[
Footnote 36]
26 U.S.C. § 162(a)(1) permits corporations to deduct
"reasonable" compensation as business expenses. If the Internal
Revenue Service determines that compensation exceeds the bounds of
reason, it will not permit a deduction.
See, e.g., Botany
Worsted Mills v. United States, 278 U.
S. 282 (1929).
Moreover, there is nothing in the record of this case with
respect to Byrum's compensation. There is no showing that his
control of these corporations gave him an enjoyment with respect to
compensation that he would not have had upon rendering similar
services without owning any stock.
MR. JUSTICE WHITE, with whom MR. JUSTICE BRENNAN and MR. JUSTICE
BLACKMUN join, dissenting.
I think the majority is wrong in all substantial respects.
I
The tax code commands the payment of an estate tax on transfers
effective in name and form during life if the now-deceased settlor
retained during his life either (1) "the possession or enjoyment
of" the property transferred or (2) the right to designate the
persons who would enjoy the transferred property or the income
therefrom. 26 U.S.C. §§ 2036(a)(1) and (2). Our cases explicate
this congressional directive to mean that, if one wishes to avoid a
tax at death, he must be self-abnegating enough to totally
surrender his property interest during life.
"[A]n estate tax cannot be avoided by any trust transfer except
by a bona fide transfer in which the settlor, absolutely,
unequivocally, irrevocably, and without possible reservations,
parts with all of his title and all of his possession and all of
his enjoyment of the transferred property."
Commissioner v. Estate of Church, 335 U.
S. 632,
335 U. S. 645
(1949).
In this case, the taxpayer's asserted alienation does not
measure up to this high standard. Byrum enjoyed the continued
privilege of voting the shares he "gave up" to the trust. By means
of these shares, he enjoyed majority control of two corporations.
He used t
Page 408 U. S. 152
mind, this is enjoyment of property put beyond taxation only on
the pretext that it is not enjoyed.
Byrum's lifelong enjoyment of the voting power of the trust
shares contravenes § 2036(a)(2) as well as § 2036(a)(1) because it
afforded him control over which trust beneficiaries -- the life
tenants or the remaindermen -- would receive the benefit of the
income earned by these shares. He secured this power by making the
trust to all intents and purposes exclusively dependent on shares
it could not sell in corporations he controlled. [
Footnote 2/1] Thus, by instructing the directors he
elected in the controlled corporations that he thought dividends
should or should not be declared, Byrum was able to open or close
the spigot through which income flowed to the trust's life tenants.
When Byrum closed the spigot by deferring dividends of the
controlled corporations, thereby perpetuating his own "enjoyment"
of these funds, he also, in effect, transferred income from the
life tenants to the remaindermen whose share values were swollen by
the retained income. The extent to which such income transfers can
be effected is suggested by the pay-out record of the corporations
here in question, as reflected in the trust's accounts. Over the
first five years of its existence on shares later valued by the
Internal Revenue Service at $89,000, the trust received a total of
only $339 in dividends. In the sixth year, Byrum died. The
corporations raised their dividend rate from 10� a share to $2 per
share, and paid $1,498 into the trust.
See "Income Cash
Ledger," App. 25-26.
Page 408 U. S. 153
Byrum's control over the flow of trust income renders his estate
scheme repugnant to § 2036(a)(2) as well as § 2036(a)(1).
To me, it is thus clear that Byrum's shares were not truly,
totally, "absolutely, unequivocally" alienated during his life.
When it is apparent that, if tolerated, Byrum's scheme will open a
gaping hole in the estate tax laws, on what basis does the majority
nonetheless conclude that Byrum should have his enjoyment, his
control, and his estate free from taxes?
II
I can find nothing in the majority's three arguments purporting
to deal with § 2036(a)(1) that might justify the conclusion that
Byrum did not "enjoy" a benefit from the shares his estate now
asserts are immune from taxation.
1. The majority says that, in
Reinecke v. Northern Trust
Co., 278 U. S. 339
(1929),
"the Court held that reserved powers of management of trust
assets, similar to Byrum's power over the three corporations, did
not subject an
inter vivos trust to the federal estate
tax."
This reading of
Northern Trust is not warranted by the
one paragraph in that antique opinion on the point for which it is
now cited,
see 278 U.S. at
278 U. S.
346-347, nor by the circumstances of that case. No one
has ever suggested that Adolphus Bartlett, the settlor in
Northern Trust, used or could have used the voting power
of the shares he transferred to a trust to control or, indeed,
exercise any significant influence in any company. A mere glance at
the nature of these securities transferred by Bartlett
(
e.g., 1,000 shares of the Northern Trust Co., 784 shares
of the Commonwealth Edison Co., 300 shares of the Illinois Central
R. Co., 200 preferred shares of the Chicago & North Western R.
Co., 300 common shares of the Chicago &
Page 408 U. S. 154
North Western R. Co.) [
Footnote
2/2] shatters any theory that might lead one to believe that
the Court in
Northern Trust was concerned with anything
like the transactions in this case. On what basis, then, does the
majority say that
Northern Trust involved a decision on
facts "similar to Byrum's power over the three corporations"? And
on what basis does it say that the Government's position that
Byrum's use of trust shares to retain control renders those shares
taxable is "against the weight of precedent?"
2. The majority implies that trust securities are taxable only
if the testator retained title or the right to income from the
securities until death. But this ignores the plain language of the
statute which proscribes "enjoyment" as well as "possession or . .
. the right to income."
3. The majority concludes with the assertion that Byrum secured
no "substantial present economic benefits" from his retention of
control. [
Footnote 2/3] It is
suggested that control
Page 408 U. S. 155
is not important, that it either cannot be held by a private
shareholder or that it is of so little use and relevance the
taxpayer can hardly be said to have "enjoyed" it. This view of
corporate life is refuted by the case law; [
Footnote 2/4] by the commentators; [
Footnote 2/5] and by every-day transactions on the
stock exchange, where offers and trades repeatedly demonstrate that
the power to "control" a corporation will fetch a substantial
premium. [
Footnote 2/6] Moreover,
the majority's view is belied by Byrum's own conduct. He obviously
valued control, because he forbade the bank that served as trustee
to sell the trust shares in these corporations without his --
Byrum's -- approval, whatever their return, their prospects, their
value, or the trust's needs. Trust Agreement � 5.15, App. 14.
In sum, the majority's discourse on § 2036(a)(1) is an
unconvincing rationalization for allowing Byrum the tax-free
"enjoyment" of the control privileges he retained through the
voting power of shares he supposedly "absolutely" and
"unequivocally" gave up.
Page 408 U. S. 156
III
I find no greater substance in the greater length of the
majority's discussion of § 2036(a)(2).
A
Approaching the § 2036(a)(2) problem afresh, one would think
United States v. O'Malley, 383 U.
S. 627 (1966), would control this case. In
O'Malley, the settlor "had relinquished all of his rights"
to stock, but he appointed himself one of three trustees for each
of the five trusts he created, and he drafted the trust agreement
so that the trustees had the freedom to allocate trust income to
the life tenant or to accumulate it for the remainderman "in their
sole discretion." The District Court held that the value of
securities transferred was includable in the settlor's gross estate
under § 811(c) and (d) of the Internal Revenue Code of 1939, as
amended, § 811(c)(1)(B) being the similarly worded predecessor of §
2036(a), because the settlor had retained the power to allocate
income between the beneficiaries without being constrained by a
"definite ascertainable standard" according to which the trust
would be administered.
O'Malley v. United
States, 220 F. Supp.
30, 33 (1963). The court noted "plaintiff's contention that the
required external standard is imposed generally by the law of
Illinois," but found this point to be "without merit."
"The cases cited by plaintiff clearly set out fundamental
principles of trust law: that a trust requires a named beneficiary;
that the legal and equitable estates be separated; and, that the
trustees owe a fiduciary duty to the beneficiaries. These
statements of the law are not particular to Illinois. Nor do these
requirements so circumscribe the trustee's powers in an otherwise
unrestricted trust so as to hold such a trust governed by an
external standard,
Page 408 U. S. 157
and thus excludable from the application of § 811 (c) and
(d)."
220 F. Supp. at 33-34.
It was another aspect of that case that brought the matter to
the Court of Appeals, 340 F.2d 930 (CA7 1964), and then here. We
were asked to decide whether the lower court's holding should be
extended and the accumulated income as well as the principal of the
trust included in the settlor's taxable estate because the settlor
had retained excessive power to designate the income beneficiaries
of the shares transferred. We held that, though capable of exercise
only in conjunction with one other trustee, the power to allocate
income without greater constraint than that imposed
"is a significant power . . . of sufficient substance to be
deemed the power to 'designate' within the meaning of [the
predecessor of § 2036(a)(2)]."
383 U.S. at
383 U. S.
631.
O'Malley makes the majority's position in this case
untenable.
O'Malley establishes that a settlor serving as
a trustee is barred from retaining the power to allocate trust
income between a life tenant and a remainderman if he is not
constrained by more than general fiduciary requirements.
See
also Commissioner v. Estate of Holmes, 326 U.
S. 480 (1946), [
Footnote
2/7] and
Lober v. United States, 346 U.
S. 335 (1953). Now the majority would have us accept the
incompatible position that a settlor seeking tax exemption may keep
the power of income allocation by rendering the trust dependent on
an income flow he controls because the general fiduciary
obligations of a director are sufficient to eliminate the power to
designate within the meaning of § 2036(a)(2). [
Footnote 2/8]
Page 408 U. S. 158
B
The majority would prop up its untenable position by suggesting
that a controlling shareholder is constrained in his distribution
or retention of dividends by fear of derivative suits, accumulated
earnings taxes, and "various economic considerations . . . ignored
at the director's peril." I do not deny the existence of such
constraints, but their restraining effect on an otherwise tempting
gross abuse of the corporate dividend power hardly guts the great
power of a controlling director to accelerate or retard, enlarge or
diminish, most dividends. The penalty taxes only take effect when
accumulations exceed $100,000, 26 U.S.C. § 535(c); Byrum was free
to accumulate up to that ceiling. The threat of a derivative suit
is hardly a greater deterrent to accumulation. As Cary puts it:
"The cases in which courts have refused to require declaration
of dividends or larger dividends despite the existence of current
earnings or a substantial surplus or both are numerous; plaintiffs
have won only a small minority of the cases. The labels are
'business judgment;' 'business purpose;' 'non-interference
Page 408 U. S. 159
in internal affairs.' The courts have accepted the general
defense of discretion, supplemented by one or more of a number of
grounds put forward as reasons for not paying dividends or larger
dividends. . . ."
W. Cary, Cases and Materials on Corporations 1587 (4th ed.
1969).
And cf. Commissioner v. Sunnen, 333 U.
S. 591,
333 U. S. 609
(1948).
The ease with which excess taxes, derivative suits, and economic
vicissitudes alike may be circumvented or hurdled if a controlling
shareholder chooses to so arrange his affairs is suggested by the
pay-out record of Byrum's corporations noted above.
C
The majority proposes one other method of distinguishing
O'Malley. Section 2036(a)(2), it is said, speaks of the
right to designate income beneficiaries.
O'Malley
involved the effort of a settlor to maintain a legal right to
allocate income. In the instant case, only the
power to
allocate income is at stake. The Government's argument is thus said
to depart from "the specific statutory language," [
Footnote 2/9] and to stretch the statute beyond
endurance by allocating tax according to the realities of the
situation, rather than by the more rigid yardstick of formal
control. [
Footnote 2/10]
This argument conjures up an image of congressional care in the
articulation of § 2036(a)(2) that is entirely at odds with the
circumstances of its passage. The 1931 legislation, which first
enacted what is now § 2036(a)(2) in language not materially amended
since that date,
Page 408 U. S. 160
passed both Houses of Congress in one day -- the last day of the
session. There was no printed committee report. Substantial
references to the bill appear in only two brief sections of the
Congressional Record. [
Footnote
2/11] Under the circumstances, I see no warrant for reading the
words in a niggardly way.
Moreover, it appears from contemporary evidence that, if the use
of the word "right" was intended to have any special meaning, it
was to expand, rather than to contract, the reach of the restraint
effected by the provision in which it appeared. The House Report
on
Page 408 U. S. 161
the Revenue Act of 1932 notes in relation to amendment of the
predecessor of § 2036(a)(1) that:
"The insertion of the words 'the right to the income' in place
of the words 'the income' is designed to reach a case where
decedent had the right to the income, though he did not actually
receive it. This is also a clarifying change."
H.R.Rep. No. 708, 72d Cong., 1st Sess., 47.
And see
S.Rep. No. 665, 72d Cong., 1st Sess., 50, to the same effect.
I repeat the injunction of Mr. Justice Frankfurter, 25 years
ago: "This is tax language, and should be read in its tax sense."
United States v. Ogilvie Hardware Co., 330 U.
S. 709,
330 U. S. 721
(1947) (dissenting opinion).
Lest this, by itself, not be considered enough to refute the
majority's approach, I must add that it is quite repugnant to the
words and sense of our opinion in
O'Malley to read it as
though it pivoted on an interpretation of "right," rather than
power. The opinion could hardly have been more explicitly concerned
with the realities of a settlor's retained power, rather than the
theoretical legal form of the trust. Thus, we said:
"Here, Fabrice [the settlor] was
empowered. . . . This
is a significant
power . . . of sufficient substance to be
deemed the
power to 'designate' within the meaning of [the
predecessor of § 2036(a)(2)]. . . ."
383 U.S. at
383 U. S. 631
(emphasis supplied). And we said:
"With the creation of the trusts, he relinquished all of his
rights to income except the power to distribute that income to the
income beneficiaries or to accumulate it and hold it for the
remaindermen of the trusts."
383 U.S. at
383 U. S. 632
(emphasis supplied).
Page 408 U. S. 162
And we spoke of:
"This
power he exercised by accumulating and adding
income to principal, and this same
power he held until the
moment of his death. . . ."
383 U.S. at
383 U. S. 634
(emphasis supplied). Other passages could be quoted.
IV
Apparently sensing that considerations of logic, policy, and
recent case law point to the inclusion of Byrum's trust in his
estate, the majority would blunt these considerations by invoking
the principle that courts should refrain from decisions detrimental
to litigants who have taken a position in legitimate reliance on
possibly outdated, but once established, case law. This principle
is said to bring great weight to bear in Byrum's favor.
I need not quarrel with the principle. I think, however, that
its application in this context is inappropriate.
The majority recites these facts: this Court has never held that
retention of power to manage trust assets compels inclusion of a
trust in a settlor's estate. In fact,
Reinecke v. Northern
Trust Co., 278 U. S. 339
(1929), specifically held a trust arrangement immune from taxation
though the settlor retained power to decide how the trust assets
were to be invested. Though
Northern Trust was decided
before the passage of § 2036(a)(2), it has been followed by
"several" more recent lower court decisions. Though most of the
lower court decisions provide only the most oblique reference to
circumstances like those of this case, a 1962 unappealed Tax Court
decision,
Estate of King v. Commissioner, 37 T.C. 973, is
squarely in point.
On the basis of these two authorities, a 1929 Supreme Court
decision and an unreviewed 1962 Tax Court decision, the majority
concludes that there exists a "generally
Page 408 U. S. 163
accepted" rule that Byrum might do what he had done here. It is
said that the hypothesized rule "may" have been relied upon by
"hundreds" of others; if so, its modification "could" have a
serious impact, especially upon settlors who "happen" to have been
controlling shareholders in closely held corporations and who
"happen" to have transferred shares in those corporations to trusts
while forbidding the trustee to sell the shares without approval
and while retaining voting rights in those shares. Therefore the
rule ought not to be "modified" by this Court.
A
The argument, apparently, is that what "appear[s] to be
established" should become established because it has appeared.
Judges can and will properly differ on the questions of what
deference to accord reliance on a well-established rule, but I
doubt that we are precluded from reaching what would otherwise be a
right result simply because, in the minds of some litigants, a
contrary rule had heretofore "appear[ed] to be established." If the
majority's approach were widely accepted, artful claims of past
understanding would consistently suffice to frustrate judicial, as
well as administrative, efforts at present rationalization of the
law, and every precedent -- even at the tax court level -- might
lay claim to such authority that the Government and the tax bar
could afford to leave no case unappealed.
B
Of course, the reliance argument is doubly infirm if the
majority's rule cannot be said to have "appear[ed] to be
established." Did Byrum have a sound basis for calculating that
there was no substantial risk of taxation when he persisted in
retaining the powers and privileges described above?
Page 408 U. S. 164
1. Again the majority turns to
Reinecke v. Northern Trust
Co., but it is no more credible to use
Northern Trust
as a foundation for Byrum's § 2036(a)(2) position than it was to
use it as a basis for the Court's § 2036(a)(1) argument.
Northern Trust was decided on January 2, 1929, two years
and three months before Congress passed the first version of §
2036(a)(2). Section 402(c) of the Act of 1921, the provision under
which
Northern Trust was decided, proscribed only
transfers in which the settlor attempted to retain "possession or
enjoyment" until his death. It is thus not surprising that
Northern Trust focused on the question of the settlor's
"power to recall the property and of control over it
for his
own benefit," 278 U.S. at
278 U. S. 347
(emphasis added), and made no mention of possible tax liability
because of a retained power to designate which beneficiaries would
enjoy the trust income. A holding in this context cannot be
precedent of "weight" for a decision as to the efficacy of a trust
agreement made -- as this trust was -- 27 years after the
predecessor of § 2036(a)(2) was enacted.
I note also that
Northern Trust rests on a conceptual
framework now rejected in modern law. The case is the elder sibling
of
May v. Heiner, 281 U. S. 238, a
three-page 1930 decision which quotes
Northern Trust at
length.
May, in effect, held that, under § 402(c), a
settlor may be considered to have fully alienated property from
himself even if he retains the very substantial string of the right
to income from the property so long as he survives. The logic of
May v. Heiner is the logic of
Northern Trust. As
one authority has written:
"When retention of a life estate was not taxable under the rule
of
May v. Heiner, it followed that mere retention of a
right to designate the persons to receive the income during the
life of the settlor was not taxable. . . ."
1 J. Beveridge, Law of Federal Estate Taxation § 8.06, p. 324
(1956).
Page 408 U. S. 165
That logic no longer survives. When three Supreme Court per
curiams affirmed
May on March 2, 1931, and thus indicated
that this view would not be confined to its facts, the Treasury
Department, on the next morning, wrote Congress imploring it to
promptly and finally reject the Court's lenient view of the estate
tax system. Congress responded by enacting the predecessor of §
2036(a)(2) that very day. The President signed the law that
evening. Thus the holding of
May and the underlying
approach of
Northern Trust have no present life. I note
further that, though Congress has refused to permit pre-1931 trusts
to be liable to a rule other than that of
May, in 1949,
this Court itself came to the conclusion that
May was
wrong, and effected "a complete rejection" of its reasoning.
Commissioner v. Estate of Church, 335 U.
S. 632, [
Footnote
2/12]
335 U. S. 645.
I seriously doubt that one could have confidently relied on
Reinecke v. Northern Trust Co. when Byrum drafted his
trust agreement in 1958. This Court is certainly not bound by its
logic, in 1972. I do not mean any disrespect, but as Mr. Justice
Cardozo said about another case,
Northern Trust is a
decision "as mouldy as the grave from which counsel . . . brought
it forth to face the light of a new age." B. Cardozo, The Growth of
the Law, in Selected Writings 244 (M. Hall ed. 1947).
2. The majority argues that there were several lower court cases
decided after the enactment of § 2036(a)(2)
Page 408 U. S. 166
upon which Byrum was entitled to rely, and it is quite true that
cases exist holding that a settlor's retention of the power to
invest the assets of a trust does not, by itself, render the trust
taxable under § 2036(a)(2). But the majority's emphasis on these
cases as a proper foundation for Byrum's reliance is doubly wrong.
First, it could not have evaded Byrum's attention, and should not
escape the majority that all cited prior cases -- save
King (the tax court case written four years
after
Byrum structured his trust) -- involved retention of power to
invest by the settlor's appointment of himself as a trustee; that
is, they posed instances in which the settlor's retained power was
constrained by a fiduciary obligation to treat the life tenant
beneficiaries and remainderman beneficiaries exactly as specified
in the trust instrument. Thus, the "freedom" to reallocate income
between life tenants and remaindermen by,
e.g., investing
in wasting assets with a high present return and no long-term
value, was limited by a judicially enforceable strict standard
capable of invocation by the trust beneficiaries by reference to
the terms of the trust agreement.
See Jennings v. Smith,
161 F.2d 74 (CA2 1947), the leading case. Byrum must have realized
that the situation he was structuring was quite different. By
according himself power of control over the trust income by an
indirect means, he kept himself quite free of a fiduciary
obligation measured by an ascertainable standard in the trust
agreement. Putting aside the question of whether the situation
described
should be distinguished from Byrum's scheme,
surely it must be acknowledged that there was an apparent risk that
these situations could be distinguished by reviewing courts.
Second, the majority's analysis of the case law skips over the
uncertainty at the time Byrum was drafting his trust agreement
about even the general rule that a settlor could retain control
over a trust's investments
Page 408 U. S. 167
if he bound himself as a trustee to an ascertainable method of
income distribution. While Byrum and his lawyer were pondering the
terms of the trust agreement now in litigation, the Court of
Appeals for the First Circuit was reconsidering whether a settlor
could retain power over his trust's investments even when he bound
himself to a fiduciary's strictest standards of disinterested
obligation to his trust's beneficiaries. Early in 1958, the United
States District Court for the District of Massachusetts had ruled
that a settlor could not maintain powers of management of a trust
even as a trustee without assuming estate tax liability.
State
Street Trust Co. v. United States, 160 F.
Supp. 877. The estate's executor appealed this decision and
argued it before the First Circuit panel on October 7, 1958.
Byrum's trust agreement was made amidst this litigation, on
December 8. On January 23, 1959, the First Circuit affirmed the
District Court. 263 F.2d 635. [
Footnote 2/13]
The point is not simply that Byrum was on notice that he risked
taxability by retaining the powers he retained when he created his
trust -- though that is true. It is also that, within a month of
the trust's creation, it should have been crystal clear that Byrum
ran a substantial risk of taxation by continued retention of
control over the trust's stock. Any retained right can be resigned.
That Byrum persisted in holding these rights can only be viewed as
an indication of the value he placed upon their enjoyment, and of
the tax risk he was willing to assume in order to retain
control.
The perception that a settlor ran substantial risk of estate tax
if he insisted on retaining power over the
Page 408 U. S. 168
flow of trust income is hardly some subtle divination of a
latter-day observer of the 1958-1959 tax landscape. Contemporary
observers saw the same thing. A summary of the field in the 1959
Tax Law Review concluded:
"Until the law is made more definite, a grantor who retains any
management powers is proceeding at his own risk. . . . [T]here is
no certainty. . . ."
Gray & Covey, State Street -- A Case Study of Sections
2036(a)(2) and 2038, 15 Tax L.Rev. 75, 102. The relevant
subcommittee of the American Bar Association Committee on Estate
and Tax Planning hardly thought reliance appropriate. It wrote in
1960 that:
"The tax-wise draftsman must now undertake to review every
living trust in his office intended to be excluded from the
settlor's estate in which the settlor acts as a trustee with
authority to: "
"1. Exercise broad and virtually unlimited investment powers. .
. ."
Tax-Wise Drafting of Fiduciary Powers, 4 Tax Counsellor's
Quarterly 333, 336.
More could be said, but I think it is clear that the majority
should find no solace in its reliance argument.
V
The majority, I repeat, has erred in every substantial respect.
It remains only to note that if it is wrong in any substantial
respect --
i.e., either in its § 2036(a)(1) or (a)(2)
arguments -- Byrum's trust is by law liable to taxation.
[
Footnote 2/1]
The trust held $89,000 worth of stock in Byrum-controlled
corporations, and only one other asset: three Series E United
States Savings Bonds worth a total of $300 at maturity.
See "Yearly List of [Trust] Assets," App. 27-29.
Consequently, I do not accord much weight to the majority's point
that Byrum could not prevent the trustee from making payments "from
other trust assets."
[
Footnote 2/2]
Transcript of Record 3, in No. 90, O.T. 1928,
Reinecke v.
Northern Trust Co., 278 U. S. 339
(1929).
[
Footnote 2/3]
I am constrained to note that nowhere in the statute (which the
majority elsewhere in its argument would read with extreme
literalness) do the words "substantial" and "present" -- or
suggestions to that effect -- appear. The phrase "substantial
present economic benefit" does appear in
Commissioner v. Estate
of Holmes, 326 U. S. 480,
326 U. S. 486
(1946), from which it is quoted by the majority. But there the
Court held Holmes' estate liable to taxation on the corpus of an
irrevocable trust because the settlor (Holmes) had kept the power
for himself as trustee to distribute or retain trust income at his
discretion. The Court held that this power enabled the settlor to
retard or accelerate the beneficiaries' "enjoyment" at his whim.
The donor had thus kept "so strong a hold over the actual and
immediate enjoyment of what he [allegedly had put] beyond his own
power" that he could not be said to have "divested himself of that
degree of control which [a provision analogous to § 2036(a)(2)]
requires in order to avoid the tax." 326 U.S. at
326 U. S. 487.
Holmes is thus strong precedent contrary to the majority's
§ 2036(a)(2) argument.
See also Lober v. United States,
346 U. S. 335
(1953); it certainly is not a case in which the Court intended or
attempted to narrow the meaning of § 2036(a)(1).
[
Footnote 2/4]
See, e.g., Honigman v. Green Giant Co., 208 F.
Supp. 754,
aff'd, 309 F.2d 667 (CA8 1962),
cert.
denied, 372 U.S. 941 (1963);
Essex Universal Corp. v.
Yates, 305 F.2d 572 (CA2 1962);
Perlman v. Feldmann,
219 F.2d 173 (CA2 1955).
[
Footnote 2/5]
"[S]hareholders in a close corporation are usually vitally
interested in maintaining their proportionate control. . . ." 1 F.
O'Neal, Close Corporations § 3.39, p. 43 (1971). At least since
Perlman v. Feldmann, supra, the academic dispute has not
been over the existence of control or its value, but, rather, over
who is to benefit from the premium received upon its sale.
See Leech, Transactions in Corporate Control, 104 U.
Pa.L.Rev. 725 (1956); Hill, The Sale of Controlling Shares, 70
Harv.L.Rev. 986 (1957); Bayne, The Sale of Control Premium: The
Disposition, 57 Calif.L.Rev. 615 (1969); Bayne, The Noninvestment
Value of Control Stock, 45 Ind.L.J. 317 (1970).
[
Footnote 2/6]
See, e.g., the transactions described in Bayne,
supra, 408
U.S. 125fn2/5|>n. 5, at 617.
[
Footnote 2/7]
See 408
U.S. 125fn2/3|>n. 3,
supra.
[
Footnote 2/8]
This incompatibility was readily perceived by the Internal
Revenue Service. Shortly after
O'Malley was handed down,
it promulgated Rev.Rul. 67-54 (1967) which concluded:
"Where a decedent transfers nonvoting stock in trust and holds
for the remainder of his life voting stock giving him control over
the dividend policy of the corporation, he has retained, for a
period which did not in fact end before his death, the right to
determine the income from the nonvoting stock. If he also retains
control over the disposition of the nonvoting stock, whether as
trustee, by restriction upon the trustee, or alone or in
conjunction with another, he has, in fact, made a transfer whereby
he has retained for his life the right to designate the persons who
shall possess or enjoy the transferred property or the income
therefrom. Since, under section 20.2036-1(b)(3) of the Estate Tax
Regulations, it is immaterial in what capacity a power was
exercisable by the decedent, it is sufficient that the power was
exercisable in the capacity of controlling stockholder. Under the
facts of this case, therefore, the decedent has made a transfer
with a reserved power within the meaning of section 2036(a) of the
Code."
[
Footnote 2/9]
This call for literalness strongly contrasts with the majority's
§ 2036(a)(2) analysis,
see 408
U.S. 125fn2/3|>n. 3,
supra.
[
Footnote 2/10]
The majority's argument ignores the fact that, within a wide
area of discretion, Byrum had the "right" to allocate corporate
income to purposes other than payment of dividends, and thus the
"right" to shut off income to the trust's life tenants.
[
Footnote 2/11]
The intent of Congressmen and the care with which they measured
the language which the majority thinks was carefully limited is
suggested by the following:
"Mr. HAWLEY. Mr. Speaker, I ask unanimous consent for the
present consideration of a joint resolution (H.J.Res. 529) relating
to the revenue, reported from the Committee on Ways and Means. [The
resolution, § 2036(a)(1) and (2) substantially as they appear
today, was read.]"
"The SPEAKER. Is there objection?"
"Mr. SCHAFER of Wisconsin. Reserving the right to object, I
shall object unless the gentleman explains just what the bill
is."
"Mr. HAWLEY. Mr. Speaker and gentlemen, the Supreme Court
yesterday handed down a decision to the effect that, if a person
creates a trust of his property and provides that, during his
lifetime, he shall enjoy the benefits of it, and when it is
distributed after his death, it goes to his heirs -- the Supreme
Court held that it goes to his heirs free of any estate tax."
"Mr. SCHAFER of Wisconsin. This is a bill to tax the rich man. I
shall not object."
"Mr. COLLINS. I would like to have a little more
explanation."
"Mr. SABATH. Reserving the right to object, all the resolution
purports to do is to place a tax on these trusts that have been in
vogue for the last few years for the purpose of evading the
inheritance tax on the part of some of these rich estates?"
"Mr. HAWLEY. It provides that, hereafter, no such method shall
be used to evade the tax."
"Mr. SABATH. That is good legislation."
74 Cong.Rec. 7198.
[
Footnote 2/12]
In considering this and its companion case,
Estate of
Spiegel v. Commissioner, 335 U. S. 701
(1949), the Court in effect invited argument on whether
Northern Trust itself should be overruled. Journal of the
Supreme Court, O.T. 1947, pp. 296-297. Though the Court held for
the Government without having to reach this issue, I note that, in
the 23 years since
Church and
Spiegel, no opinion
of this Court has once cited, much less relied upon,
Northern
Trust. Mr. Justice Reed, dissenting in
Church and
concurring in
Spiegel, announced at the time that he
thought these cases overruled
Northern Trust.
[
Footnote 2/13]
The First Circuit again shifted its position on this question in
Old Colony Trust Co. v. United States, 423 F.2d 601
(1970), but this change is obviously irrelevant to the majority's
argument as to the legitimacy of Byrum's reliance from 1958 to
1964.