1. Respondent's testator in his lifetime conveyed property in
trust to pay the income to himself and, on his death, to pay it
to
Page 278 U. S. 340
designated persons until termination of the respective trusts,
with remainders over. Each trust instrument reserved to the settlor
alone the power to revoke the trust created by it, and provided
that, upon the exercise of that power, the corpus of the trust must
be returned to him by the trustee. The trusts were not in
contemplation of death, and were created before the date of the
Revenue Act of 1921, but the settlor died after that date without
having revoked them.
Held: subject to transfer tax under
the Act. P.
278 U. S.
345.
2. A transfer in trust subject to a power of revocation in the
transferor alone, terminable at his death, is not complete until
his death, and hence a transfer tax applied to it, as in Revenue
Act, 1921, § 422, is not retroactive where his death follows
the date of the taxing statute, though the creation of the trust
preceded that date.
Chase Nat'l Bank v. United States,
ante, p.
278 U. S. 327.
Saltonstall v. Saltonstall, 276 U.
S. 260. P.
278 U. S.
345.
3. The testator in his lifetime established several other trusts
by deeds, creating life interests in income. In one, the life
interest was to terminate five years after his death, or on the
death of the designated beneficiary should she survive that date,
with remainder over. In the others, the life interests were to
terminate five years after his death or on the death of the
respective life tenants, whichever should happen first, with
remainders over. He reserved to himself power to supervise
reinvestment of trust funds, to require the trustee to execute
proxies to his nominee, to vote shares of stock held by the
trustee, and to control leases executed by the trustee, and he also
reserved power to "alter, change or modify" each trust, which was
to be exercised, in the case of some of them, by himself and the
single beneficiary of each trust, acting jointly, and, in the case
of the remaining trust, by himself and a majority of the
beneficiaries, acting jointly. The trusts were not in contemplation
of death, and were created before the passage of the Revenue Act of
1921, but after the passage of the Revenue Act of 1918, which
contained similar estate tax provisions, and the settlor died after
the date of the 1921 Act without having modified any of them in any
manner here material.
Held not subject to the transfer
tax, because:
(1) Section 402(c) of the Revenue Act of 1921 is inapplicable to
a trust created by a decedent in his lifetime, not in contemplation
of death, which vested beneficial interests in others and which he
was without power to modify or revoke except with the consent of
all or a majority of the beneficiaries. P.
278 U. S.
346.
Page 278 U. S. 341
(2) Since the shifting of the economic interest under such a
trust was complete when the trust was made, a reservation to the
settlor of power to manage the trust will not render the transfer
taxable under the statute upon his death. P.
278 U. S.
346.
(3) The donor having parted with the possession and his entire
beneficial interest in the property when the trusts were created,
the mere passing of possession and enjoyment from the life tenants
to the remaindermen after his death, as directed, and after the
enactment of the statute, was not within the taxing provision. The
clause of § 402(c) respecting trusts intended to take effect
in possession and enjoyment at or after the donor's death should be
construed as limited to interests passing from his possession,
enjoyment, or control at his death and so taxable as transfers at
death under § 401. P.
278 U. S. 347.
(4) The statute should be construed in favor of the taxpayer,
and to avoid doubts as to constitutionality. P.
278 U. S.
348.
24 F.2d 91 reversed in part; affirmed in part.
Certiorari, 277 U.S. 579, to a judgment of the circuit court of
appeals which affirmed the district court in dismissing a suit to
recover the amount of an estate tax alleged to have been illegally
assessed and collected.
Page 278 U. S. 343
MR. JUSTICE STONE delivered the opinion of the Court.
Respondent executor brought suit in the district court for
Northern Illinois to recover from petitioner, a collector of
internal revenue, the amount of a tax alleged to have been
illegally assessed and collected upon the estate of respondent's
testator under the Revenue Act of 1921, c. 136, 42 Stat. 227.
Judgment of the district court for the executor, upon an overruled
demurrer, was affirmed by the Circuit Court of Appeals for the
Seventh Circuit. 24 F.2d 91. This Court granted certiorari April
23, 1928, 277 U.S. 579.
Respondent's testator died May 30, 1922. On various dates
between 1903 and 1919, he established seven trusts by deed which
are conceded not to have been in contemplation of death. Two of
them were created, respectively, in 1903 and 1910. They are
identified in the record as trusts No. 1831 and No. 3048, and
referred to here as the "two trusts." By them, the income from the
trusts was reserved to the settlor for life, and, on his death, the
income of each trust was to be paid to a designated person until
the termination of the trust as provided in the trust instrument,
with remainders over. By the terms of each trust, there was
reserved to the settlor alone a power of revocation of the trusts,
upon the exercise of which the trustee was required to return the
corpus of the trust to him.
The remaining five trusts, designated in the record as trusts
Nos. 4477, 4478, 4479, 4480 and 4481, referred to here as the "five
trusts," were created in 1919, before the passage of the Revenue
Act of 1921, but after the enactment
Page 278 U. S. 344
of the similar provisions of the estate tax of the Revenue Act
of 1918. 40 Stat. 1096, 1097. By each, life interests in the
income, on terms not now important were created. In one, the life
interest was terminable five years after the death of the settlor
or on the death of the designated life beneficiary should she
survive that date, with a remainder over. In the other four, life
interests in the income were created, terminable five years after
the settlor's death or on the death of the respective life tenants,
whichever should first happen, with remainders over. The settlor
reserved to himself power to supervise the reinvestment of trust
funds, to require the trustee to execute proxies, to his nominee,
to vote any shares of stock held by the trustee, to control all
leases executed by the trustee, and to appoint successor trustees.
With respect to each of these five trusts, a power was also
reserved "to alter, change or modify the trust," which was to be
exercised in the case of four of them by the settlor and the single
beneficiary of each trust, acting jointly, and, in the case of one
of the trusts, by the settlor and a majority of the beneficiaries
named, acting jointly.
The settlor died without having revoked either of the two trusts
and with the beneficiaries and life tenants designated in the
trusts surviving him, and without having modified any of the five
trusts except one, and that in a manner not now material.
The commissioner, in fixing the amount of the estate for tax
purposes, included the corpus of all seven trusts. Section 401 of
the statute imposes a tax at a graduated rate "upon the transfer of
the net estate of every decedent" dying after the passage of the
act. By § 402, it is provided that, in calculating the tax,
there shall be included in the gross estate all property, tangible
and intangible,
"(c) to the extent of any interest therein of which the decedent
has at any time made a transfer, or with respect to which he has at
any time created a trust, in contemplation
Page 278 U. S. 345
of or intended to take effect in possession or enjoyment at or
after his death (whether such transfer or trust is made or created
before or after the passage of this act). . . ."
As to the two trusts, it is argued that, since they were created
long before the passage of any statute imposing an estate tax, the
taxing statute, if applied to them, is unconstitutional and void
because retroactive within the ruling of
Nichols v.
Coolidge, 274 U. S. 531. In
that case, it was held that the provisions of the similar §
402 of the 1918 act, 40 Stat. 1097, making it applicable to trusts
created before the passage of the act was in conflict with the
Fifth Amendment of the federal Constitution, and void as respects
transfers completed before any such statute was enacted. But, in
Chase National Bank v. United States, ante, p.
278 U. S. 327, the
decision is rested on the ground, earlier suggested with respect to
the Fourteenth Amendment in
Saltonstall v. Saltonstall,
276 U. S. 260,
276 U. S. 271,
that a transfer made subject to a power of revocation in the
transferor, terminable at his death, is not complete until his
death. Hence, § 402, as applied to the present transfers, is
not retroactive, since his death follows the passage of the
statute. For that reason, stated more at length in our opinion in
Chase National Bank v. United States, supra, we hold that
the tax was rightly imposed on the transfers of the corpus of the
two trusts, and, as to them, the judgment of the court of appeals
should be reversed.
It is argued by respondent that § 402, by its terms, does
not impose any tax on the transfers involved in the five trusts,
and that, even if subject to the provisions of that section, they
antedated the passage of the 1921 act, and the section as to them
is retroactive and void, although they were created after the
enactment of the corresponding sections of the 1918 act. The
government argues that § 402 applies to all these transfers,
and is not retroactive
Page 278 U. S. 346
as to them because of the reserved powers to manage and to
modify the trusts, which did not terminate until the death of the
decedent after the passage of the statute, and that, even without
such reserved powers, the transfers of the remainder interests were
all subject to the tax because, within the language of § 402,
they were "intended to take effect in possession or enjoyment at or
after his death."
As the tax cannot be supported unless the statute applies in one
of the two ways suggested by the government, we must necessarily
determine the effect of the reserved powers and the meaning and
application of the phrase quoted from § 402. If it be assumed
that the power to modify the trust was broad enough to authorize
disposition of the trust property among new beneficiaries or to
revoke the trusts, still it was not one vested in the settlor
alone, as were the reserved powers in the case of the two trusts.
He could not effect any change in the beneficial interest in the
trusts without the consent, in the case of four of the trusts, of
the person entitled to that interest, and, in the case of one
trust, without the consent of a majority of those so entitled.
Since the power to revoke or alter was dependent on the consent of
the one entitled to the beneficial, and consequently adverse,
interest, the trust, for all practical purposes, had passed as
completely from any control by decedent which might inure to his
own benefit as if the gift had been absolute.
Nor did the reserved powers of management of the trusts save to
decedent any control over the economic benefits 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
Page 278 U. S. 347
made. His power to recall the property and of control over it
for his own benefit then ceased, and, as the trusts were not made
in contemplation of death, the reserved powers do not serve to
distinguish them from any other gift
inter vivos not
subject to the tax.
But the question much pressed upon us remains whether, the donor
having parted both with the possession and his entire beneficial
interest in the property when the trust was created, the mere
passing of possession or enjoyment of the trust fund from the life
tenants to the remaindermen after the testator's death, as
directed, and after the enactment of the statute, is included
within its taxing provisions. That question, not necessarily
involved, was left unanswered in
Shukert v. Allen,
273 U. S. 545.
There, the gift of a remainder interest, having been made without
reference to the donor's death, although it did in fact vest in
possession and enjoyment after his death, was held not to be a
transfer intended to take effect in possession or enjoyment at or
after the donor's death, and for that reason not to be subject to
the tax. But here, the gift was intended to so take effect although
the transfer which effected it preceded the death of the settlor
and was itself not subject to the tax unless made so by the
circumstance that the possession or enjoyment passed as
indicated.
In its plan and scope, the tax is one imposed on transfers at
death or made in contemplation of death and is measured by the
value at death of the interest which is transferred.
Cf. YMCA
v. Davis, 264 U. S. 47,
264 U. S. 50;
Edwards v. Slocum, 264 U. S. 61,
264 U. S. 62;
N.Y. Trust Co. v. Eisner, 256 U.
S. 345,
256 U. S. 349.
It is not a gift tax, and the tax on gifts once imposed by the
Revenue Act of 1924, c. 234, 43 Stat. 313, has been repealed, 44
Stat. 126. One may freely give his property to another by absolute
gift without subjecting himself or his estate to a tax, but we
Page 278 U. S. 348
are asked to say that this statute means that he may not make a
gift
inter vivos, equally absolute and complete, without
subjecting it to a tax if the gift takes the form of a life estate
in one with remainder over to another at or after the donor's
death. It would require plain and compelling language to justify so
incongruous a result, and we think it is wanting in the present
statute.
It is of significance, although not conclusive, that the only
section imposing the tax, § 401, does so on the net estate of
decedents, and that the miscellaneous items of property required by
§ 402 to be brought into the gross estate for the purpose of
computing the tax, unless the present remainders be an exception,
are either property transferred in contemplation of death or
property passing out of the control, possession, or enjoyment of
the decedent at his death. They are property held by the decedent
in joint tenancy or by the entirety, property of another subject to
the decedent's power of appointment, and insurance policies
effected by the decedent on his own life, payable to his estate or
to others at his death. The two sections, read together, indicate
no purpose to tax completed gifts made by the donor in his lifetime
not in contemplation of death, where he has retained no such
control, possession or enjoyment. In the light of the general
purpose of the statute and the language of § 401 explicitly
imposing the tax on net estates of decedents, we think it at least
doubtful whether the trusts or interests in a trust intended to be
reached by the phrase in § 402(c) "to take effect in
possession or enjoyment at or after his death," include any others
than those passing from the possession, enjoyment or control of the
donor at his death and so taxable as transfers at death under
§ 401. That doubt must be resolved in favor of the taxpayer.
Gould v. Gould, 245 U. S. 151,
245 U. S. 153;
United States v. Merriam, 263 U.
S. 179,
263 U. S. 187.
Doubts of the constitutionality of the statute, if construed as
contended by the government,
Page 278 U. S. 349
would require us to adopt the construction at least reasonably
possible here, which would uphold the act.
United States v.
Delaware & Hudson Co., 213 U. S. 366,
213 U. S. 407;
United States v. Standard Brewery, 251 U.
S. 210,
251 U. S. 220;
United States v. Jin Fuey Moy, 241 U.
S. 394,
241 U. S.
401-402;
Panama Railroad Co. v. Johnson,
264 U. S. 375,
264 U. S. 390.
The judgment below.
As to the two trusts, Nos. 1831, 3048, reversed.
As to the five trusts, Nos. 4477, 4478, 4479, 4480, and 4481,
affirmed.
