author: SteRnhagen :

text:
    Detroit Trust Company, Jeanie M. Low and Frank C. Paine, Executors of the Will of Alfred M. Low, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70415.
    Promulgated May 19, 1936.

      Raymond H. Berry, Esq., and Arthwr L. Evely, Esq., for the petitioners.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

SteRnhagen :

In determining the deficiency, the Commissioner included in the decedent’s gross income for the period of 1930 ending with the date of death, $46,431.14, called “profit on the installment basis”, citing section 44 (d), Revenue Act of 1928. For a consideration of this statutory provision, see Nuckolls v. United States, 76 Fed. (2d) 357; Moore v. United States, 10 Fed. Supp. 143; Crane v. Helvering, 76 Fed. (2d) 99. The petitioners assail this determination, contending that section 44 (d) is not applicable since the decedent did not own installment obligations at the time of his death and no such obligations were therefore transmitted or otherwise disposed of by him. Petitioners say that the installment obligations which respondent attributes to decedent were in fact and in law owned by the five trusts, and that decedent’s property was only his interest as a cestui gue trusty which interest was legally distinct from the property owned by the trusts, whether it be land, land contracts or installment obligations. The respondent would identify the trust with the beneficiary, thus treat the ownership of the installment obligations as directly in the decedent beneficiary, and upon this conception apply the logical theory that the installment obligations were transmitted and disposed of by the decedent’s death. This view is wholly theoretical, for the evidence shows without doubt that at decedent’s death no installment obligations were transmitted to his executors directly or received by them from the trustee.

The respondent’s determination is, we think, clearly unfounded. By the five instruments in evidence, express and active trusts were established in which was held the legal title to the lands and the obligations resulting from their sale, and to which were charged the duties of administration in accordance with fiduciary standards. In each instance, including those in which decedent was trustee before his death, there were beneficiaries other than himself to whom as trustee he owed substantial obligations sufficient to preclude control of the properties by himself. He was but one of several persons whose relation to the properties was limited to that of trust beneficiary. Without the consent of the other beneficiaries, he, as an individual, could take none of the installment obligations or direct their sale or other use or disposition, except by agreeing with the others to terminate the trust. There was more than a mere agency. The instruments themselves expressly characterized the organizations as trusts, the Wayne County Circuit Court recognized them as such, in practice they were administered as such, and we can find no justification for treating them otherwise or ignoring them entirely with the result of taxing to the decedent amounts which were not in fact income or profits to him.

These installment obligations were, as shown by this record, continuously owned by the trusts from the time that the land contracts were made, and their ownership was not affected by the death of this beneficiary. When the installments were received, they were income of the trusts and taxable when thus received in accordance with the proper provision of supplement E of the statute. To the extent that they were within the taxable income of the decedent and his successors, it was because they were distributable to them as trust beneficiaries and not as owners of the obligations or direct recipients of the installments. The trust was a “fiduciary to insulate the owners from direct taxation.” Wild v. Commissioner, 62 Fed. (2d) 777; Lucian S. Moore, Jr., Trustee, 21 B. T. A. 1362; William S. Gordon, Trustee, 33 B. T. A. 460; Harold G. Ferguson, 34 B. T. A. 522.

Judgment will be entered under Rule 50.

       SEC. 44. INSTALLMENT BASIS.
      # ⅜ * * ⅜ * *
      (d) Gain or loss upon disposition of installment obligations. — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income Which would he returnable were the obligation satisfied in full.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    DeWitt Page, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78907.
    Promulgated May 19, 1936.

      Benedict M. Holden, Esq., and Daniel G. Flynn, Esq., for the petitioner.

      Paul E. Waring, Esq., and A. H. Fast, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1932 in the amount of $28,167.89. During the year the petitioner sold certain securities which he had held for a period of more than two years at a large loss. The principal question presented by this proceeding is whether the securities were acquired and held by the petitioner primarily for sale in the course of his trade or business so as to be excluded from the definition of “capital assets” within the meaning of section 101 (c) (8) of the Revenue Act of 1932, and, therefore, when computing petitioner’s net income for that year the loss so resulting from the sale of those securities should be allowed only to the extent of the gains from such sales as is stated in section 23 (r) (1) of the Revenue Act of 1932.

If the loss sustained upon the sale of the securities was a capital net loss, then the amount of the charitable contributions of petitioner deducted from gross income is to be limited to an amount not exceeding 15 percent of the correct net income under the provisions of section 23 (n) of the Revenue Act of 1932.

The petitioner is an individual who has been connected with the New Departure Manufacturing Co. for 40 years, 20 years of which he was president and general manager. He resigned his position as general manager on January 6, 1933, but continued on as president. He was, and still is, a vice president and director of General Motors Corporation, of which company the New Departure Manufacturing Co. is a subsidiary. The last named company manufactures ball bearings, coaster brakes, bells, and cyclometers. In 1931 and 1932 it employed about 2,000 men and did a net business of millions of dollars. In 1932 the petitioner was worth, based on the market value of securities owned, in excess of $5,000,000, 60 percent of which was invested in General Motors stock. The petitioner’s fortune in 1927 through 1934 was, with the exception of cash on hand, invested in common and preferred stocks of manufacturing, public utility, bank, and insurance companies.

At the beginning of 1932 the petitioner’s health was very poor. He was suffering from prostate gland trouble and gallstones. On his doctor’s orders he went to Florida on January 18, 1932, and returned about April 1, 1932. He was in very poor health on his return. From that date until October he devoted as much time as he was physically able to devote to his business as general manager of the New Departure Manufacturing Co. Some days he would be at his office only a short time. On other days he was unable to be at his office at all. Whereas prior to 1932 he had devoted some time to the purchase and sale of securities, in 1932 he was unable to devote any substantial time to such an activity. He carried no marginal accounts or any outside accounts. During 1932 the total time spent by the petitioner in connection with his investments was not more than about one day. In October 1932 he was obliged to go to a hospital, where he remained until December 27, 1932. While in the hospital he underwent major operations. About the middle of December, while in the hospital and after a discussion with his attorney, he advised his secretary that he desired to accumulate cash for the purpose of paying estate and inheritance taxes which would be payable in case of his death. Upon his order the secretary sold a large number of his shares in December. Upon the sale of these securities the petitioner suffered a loss of $601,178.73. As a result of the sale of securities the petitioner had on hand at the end of 1932 cash in the amount of $1,255,623.52.

In his income and profits tax return for 1928 the petitioner claimed a capital net gain. In his income and profits tax returns for 1929, 1930, and 1931 he claimed capital net losses. The respondent determined deficiencies due from the petitioner for certain of the years 1928 to 1931. These claims were settled by compromise, the respondent holding that the petitioner was a trader in securities during those years.

In 1932 the petitioner purchased small amounts of securities, among which were shares of stock of the Aetna Casualty & Surety Co., New Departure Manufacturing Co., Miami Jockey Club preferred, Young Spring & Wire Co., Connecticut Power Co., Springfield Gas Light Co., Connecticut General Insurance Co., Torrington Co., General Motors preferred and common stock, and Timken Roller Bearing Co. All of the shares of stock purchased by the petitioner in 1932, with the exception of 200 shares of Springfield Gas Light Co. which were sold in 1934, and the New Departure preferred stock which was redeemed by that company, is still owned by petitioner. During his convalescence in the years 1933 and 1934 his purchases of securities were principally of bonds.

On the facts above stated the respondent contends that the petitioner was engaged in a business of buying and selling securities and that the losses sustained by him upon the sale of shares of stock in 1932 were not capital losses but were ordinary losses.

The pertinent provisions of the Revenue Act of 1932 are quoted as follows:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* ⅝ .⅞ ⅛ ⅜ ⅞ *
(r) Limitation on Stock Losses.—
(1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).
SEC. 101. CAPITAL NET GAINS AND LOSSES.
⅛ ⅛ ⅜ ⅛ •}{ * $
(c) Definitions. — For the purposes of this title—
•⅛ ⅜ A ⅜ ⅜ ⅜ ⅝
(8) “Capital assets” means property held by the taxpayer for more than' two years (whether or not connected with his trade or business), but does not include stoclsj in trade of the taxpayer or other property of a kind which, would properly be included in the inventory of the taxpayer if on hand at. the close of the taxable year, or property held by the taxpayer primarily for-sale in the course of his trade or business. * * *

The real question in issue here is whether the securities which were sold by the petitioner in 1932 were held by him “primarily for sale in the course of his trade or business.” If they were, then the losses sustained upon the sales of the securities were ordinary losses and not capital losses.

Although the petitioner had large holdings of shares of stock in many corporations, the evidence all indicates that he was not, so far as the year 1932 is concerned, an active trader in the market. He did no trading on margin in 1932. The principal reason for making sales of securities during the taxable year was to accumulate cash for the payment of taxes that he knew would be payable by his estate after his death. There is no evidence that the petitioner carried on a business of buying and selling securities during the taxable year. He devoted almost no time during the year to a consideration of the purchase and sale of securities. 'Both purchases and sales of securities were through brokers. The petitioner had no clientele. He did not hold any securities out for sale to the public. In Francis M. Weld, 31 B. T. A. 600, it appeared that the taxpayer was a member of a stock brokerage firm engaged in the business of buying and selling securities. Independently of such business he bought and sold securities on his own account. In 1930 he sold securities which he had owned and held for more than two years. In that case we held that such securities were not held “primarily for sale in the course of his trade or business”, within the meaning of section 101 of the Bevenue Act of 1928, and that the gain from the sale constituted capital net gain. In the course of our opinion we said:

We are of opinion that a professional man, such as a lawyer or a doctor, who invests his surplus income in the purchase of stocks or other property with an idea of sale at a future date at a profit is not ordinarily to be regarded as holding such shares primarily for sale in the course of his trade or business. We think that the same observation applies to the petitioner at bar. He was not engaged as an individual in a trade or business of buying and selling securities; consequently, he could not be regarded as holding them primarily for sale in the course of his trade or business.

The facts in the proceeding at bar are even more favorable to the contentions of the petitioner. He had no brokerage business such as Weld had. This petitioner was an industrialist. He had a large estate which it was necessary for him to keep invested for income purposes. The investment of his money was not the carrying on of a trade or business within the contemplation of the statute. Cf. Roger v. United States, 41 Fed. (2d) 65: Taylor v. Commissioner, 76 Fed. (2d) 904.

During the year 1932 the petitioner made charitable contributions in the amount of $8,150. At the hearing of this proceeding counsel for the respondent moved:

* * * that if the Board holds that the losses from the sale of securities in the amount of $601,178.72 is [sic] deductible in computing net income for 1932, then in that event such amount should be excluded from net income for purposes of determining the amount allowable as a deduction for charitable contributions. The result would be that the whole amount of $8,150.00, allowed as charitable contribution deductions, should be eliminated as a deductible item.

In view of the ruling of the Board upon the main point in issue the claimed deduction for charitable contributions will be limited to 15 percent of the corrected net income of the petitioner.

Judgment will be entered under Rule 50.


author: Arundell:

text:
    John Jacobs and Per Lee Hunt, Executors of the Will of Carrie Jacobs Brown, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76478.
    Promulgated May 19, 1936.

      David B. Day., Esq., and H. A. Mihills, O. P. A., for the petitioner.

      W. F. Gibbs, Esq., and B. D. Daniels, Esq., for the respondent.
   OPINION.

Arundell:

This proceeding was instituted to test the correctness -of the Commissioner’s determination of a deficiency in Federal estate taxes in the amount of $99,734.23. Two questions are raised in the petition: (1) the fair market value of various securities as of the date of decedent’s death, and (2) the deductibility of an item of $385,518.21 covering an assessment for omitted local taxes for the years 1926 to 1930, inclusive, which was made by the county auditor of Stark County, Ohio. The parties have reached an agreement as to the fair market value of the securities of the estate, which is to accept the values determined by the Commissioner, reduced, however, in the total sum of $46,057.50 as more particularly shown in an exhibit filed by the parties. The adjustment made necessary by this agreement will be given effect under Rule 50. There remains for decision the matter of the deductibility of the item of $385,518.21. The parties have stipulated the facts relating to this issue and have called attention to the various provisions of the Ohio law bearing thereon.

The decedent died on April 7, 1931, in the city of Massillon, Stark County, Ohio. On April 11, 1931, the present executors qualified and were appointed, and on April 6, 1932, they filed with the collector of internal revenue for the eighteenth district of Ohio the required Federal estate tax return. In computing the net estate of decedent on the return there was claimed as a deduction under “Debts of Decedent” an item of $385,518.21, described as “Assessment for alleged omitted taxes for the years 1926 to 1930, inclusive.” The deduction as claimed was disallowed bjr the Commissioner in computing the net estate of the decedent. The item in question relates to personal property taxes and penalties assessed by the auditor of Stark County, Ohio, on December 19,1931, and on the same day certified by him to the county treasurer of Stark County for collection.

It appears that upon the death of the decedent it came to the attention of the county auditor that decedent was in her lifetime possessed of a large amount of personal property on which she had not been paying the personal property tax imposed by the state. The auditor thereupon, on June 20, 1931, made an assessment in the sum of $785,040, covering the years 1921 to 1930, and certified this assessment to the county treasurer for collection. This assessment was made under section 5398 of the Tax Laws of Ohio of 1929. When notice of this assessment was brought to the attention of counsel for the executors, objections were entered on the ground that the assessment was illegal and void since it was made without notice to the legal representatives of the estate and without giving them an opportunity to be heard. Objection was also made to the assessment on the ground that it covered years that were clearly outlawed. These objections were sustained and the assessment was canceled.

Shortly after the first assessment the tax laws of Ohio were amended under a law which became effective on June 29, 1931. Pursuant to sections 5398, 5398 (1) and (5) of the act as amended, ami after notice and hearing, the legal representatives of the estate delivered to the auditor of Stark County a true list of taxable personal property, money, credits, and investments of the decedent for the years 1926 to 1930, inclusive, together with the value thereof on the annual tax-listing dates. Accompanying the list was a letter from the executors giving notice that they would avail themselves of the benefits of section 5398, 5398 (1) and (5) of the amended laws, about which we will have more to say later on. On December 19, 1931, the auditor of Stark County, based on the information furnished by the executors, made a determination and assessed the sum of $385,-518.21 of personal property taxes and penalties for the years 1926 to 1930, inclusive, against the estate and the same day certified the assessment to the county treasurer for collection.

On March 25, 1932, the executors filed a tax return with the auditor of Stark County and listed therein all property required by law to be listed for taxation, and thereafter, pursuant to the provisions of law heretofore mentioned, applied to the Tax Commission of Ohio for a certificate of immunity from the collection of all back taxes and penalties, which certificate was on August 30, 1932, issued to petitioners.

It appears that prior to the passage of the Act- of June 29, 1931, which very materially reduced the rate of tax on personal property, there had been in existence for a long time a law which carried a tax rate of 2 percent. During the period when this high rate prevailed there grew up in Ohio the practice of returning only a small portion of the personal property actually held by a property owner. In order to get a true list of the holdings of taxpayers the Act of June 29, 1931, provided that upon the making of a full and honest listing of property in 1932 a certificate of immunity would issue which would be a defense against any claim for back taxes, and it was such a certificate which the petitioners in this case received.

It is petitioners’ position that the assessment of $385,518.21 constituted a valid claim against the estate of the decedent within the meaning of section 303 (a) (1) of the Revenue Act of 1926 and as such constitutes a proper deduction in determining the value of decedent’s net estate. This contention is made although petitioners freely admit that the tax as assessed has not been paid, that no demand for its payment is being made by the State of Ohio, that there is no intention on the part of the estate to pay this assessment, and the estate holds in its hand a certificate of immunity which completely protects it from any demand, in or out of the court.

We agree with the Commissioner in his disallowance of the claimed deduction. Section 303 (a) (1), in allowing as a deduction “such amounts * * * for claims against the estate, * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered * * *” had in mind actual, valid claims. Jacobs v. Commissioner, 34 Fed. (2d) 233. The very act under which the assessment sought to be deducted was made provided a defense to its collection, and at the same time that the information was furnished by the executors to the auditor of Stark County he was advised that petitioners would avail themselves of section 5398 (1) by making a full and complete disclosure in 1932 and would then seek the certificate of immunity provided for. as a bar against the collection of this very assessment. The purpose of the revenue act in allowing deductions is to see that the tax is imposed on the net estate, which is really what of value passes from the dead to the living. To treat this assessment as a valid claim against the estate is to exalt the form and forget the substance. As said by the court in Jacobs v. Commissioner, supra, “a claim without a claimant was not in the minds or purpose of Congress when the words ‘claims against the estate’ were written into the revenue statutes * * *. It was, in our opinion, claims presented and allowed or otherwise determined as valid against the estate and actually paid or to be paid that Congress had in mind * * The tax laws are interested in practical results and deal with substance. There is not now and never has been a real subsisting valid claim against this estate that the petitioners had any intention of paying or the State of Ohio had any intention of collecting. The argument of petitioners’ counsel, while interesting as pure technical discussion, is not persuasive. It is the duty of executors to pay the valid debts and claims against an estate, and if they had recognized this claim and discharged the indebtedness a different question would be presented. The claim is not real, it is a pure fiction. The claimed deduction was properly disallowed by the Commissioner.

Decision will be entered under Rule 50.


author: Seawell:

text:
    Stewart W. Bowers, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79209.
    Promulgated May 22, 1936.

      Spotswood D. Bowers, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Seawell:

The trust instrument involved in this proceeding was executed nine years before the settlor’s first child was born. The proceeds of the trust property, less expenses, were to be paid to the settlor during his life, and upon his death the trust property was to be conveyed to such of his children as survived him, and to the descendants of his children then dead, as he should by his will direct and appoint; and, if he died intestate, the property should be conveyed to his children him surviving and the descendants o,f his children who were dead, taking by representation of the parents’ share only.

Being without children at the time, it would have been strange if the settlor had not lodged a power somewhere to provide a taker of the estate at his death. He did lodge such power by retaining it for himself. Children were born and he never exercised the power which he had reserved or resigned it as he might have done. The children received no more property under the trust instrument than they would have received if it had not been written. So far as the trust instrument is concerned, the gift which he intended for his children was not a completed gift until his death, at which time the law would have given them the property without the trust. With the power to fix and determine the ultimate disposition of the property of the trust remaining as it was in the settlor, the children took not by inheritance, but under the instrument. What the law taxes is not the property belonging to the decedent at his death, but the transmission of that property from the dead to the living. Saltonstall v. Saltonstall, 276 U. S. 260. As otherwise expressed, the law taxes “not the interest to which some person succeeds on a death but the interest which ceased by reason of death.” Knowlton v. Moore, 178 U. S. 41; Edwards v. Slocum, 264 U. S. 61. The tax is an excise measured by the net value of the estate, that is, the gross estate from which deductions allowed by law have been taken. Y. M. C. A. v. Davis, 264 U. S. 47. The criteria by which gross values of an estate of a decedent are ascertained are found in section 802 and subsections thereof (a) to (i), inclusive, of the 1926 Kevenue Act, as amended. The amendments are here unimportant. We are not here concerned with deductions by which we arrive at the net estate. They are not in dispute. The sole issue in this case is whether the language of the trust requires placing the corpus thereof in the gross estate as provided by section 302 (c) or section 302 (d). Petitioner in his brief has expended some effort to show that the case does not fall within the provisions of section 302 (f). As respondent makes no contention that it does so fall, we may omit discussion of the question. Section 302 (c) and (d) are copied in the margin.

The existence of the power mentioned in subsection (d) of the law does not vest the estate in the donee. United States v. Field, 255 U. S. 257. It is the power not exercised, but remaining in the donor at death, which simulates the trust estate to an undevised estate of the donor and renders it taxable. The Supreme Court, in Reinecke v. Northern Trust Co., 278 U. S. 339, at page 345, said “A transfer made subject to a power of revocation in the transferrer, terminable at his death, is not complete until his death.” The Court had reference to trusts in that case designated in the opinion as the “two trusts”, in each of which there was reserved to the settlor alone a power to revoke, and not to the other five trusts in which no such power was reserved. The value of the estate embraced in the “two trusts” was held includable in the gross estate for reasons first suggested in Saltonstall v. Saltonstall, supra, and adopted by the Court in Chase National Bank v. United States, 278 U. S. 327, at page 336, as follows:

So long as the privilege of succession has not been fully exercised, it may be reached by the tax. * * * And in determining whether it has been so exercised technical distinctions between vested remainders and other interests are of little avail, for the shifting of the economic benefits and burdens of property, which is the subject of a succession tax, may even in the case of a vested remainder be restricted or suspended by other legal devices. A power of appointment reserved by the donor leaves the transfer, as to him, incomplete and subject to tax. * * *

In the instant case it is argued that, unlike the case of Reinecke v. Northern Trust Co., supra, and Chase National Bank v. United States, supra, there was no power in the settlor to revoke the trust, for the power herein reserved was limited to the change of beneficiaries among the class, to wit, the settlor’s children and certain descendants, and the change of proportions among them. But conceding this point would be doubtful value to petitioner’s cause. The words “alter, amend, or revoke” contained in the statute, as pointed out by the Supreme Court in Porter v. Commissioner, 288 U. S. 436, 443, are separated by the disjunctive; and the Court said:

* * * We find nothing in the context or in the policy evidenced by this and prior estate tax laws or in the legislative history of subdivision (d) to suggest that conjunctive use of these words was intended, or that “alter” and “modify” were used as equivalents of “revoke” or are to be understood in other than their usual meanings.

In that case the donor had reserved the power to “alter or modify” the indenture in any way “except any change in favor of himself or his estate.” deferring to this situation, the Court further said:

* ⅜ * So far as concerns the tax here involved, there is no difference in principle between a transfer subject to such changes and one that is revocable. The transfers under consideration are undoubtedly covered by subdivision (d).

It would seem also that an interest passing at death, under the circumstances herein present, would be one “intended to take effect in possession or enjoyment at or after death” and includable under subsection (c). Cf. Reinecke v. Northern Trust Co., supra; Guaranty Trust Co. v. Blodgett, 287 U. S. 509; W. H. Holderness, Administrator, 33 B. T. A. 155.

Petitioner presses upon our consideration the reasoning, as applied to the instant case, of several cases cited in his brief wherein the donor had provided in the trust that the trust property should revert to himself in case the donee should predecease him. The cases cited have no reference to a situation such as is before us. In those cases cited there was no power in the donor at the time of his death to change the enjoyment of the estate. The gifts were completed inter vivos, with a mere possibility of reversion. The death of the donor, occurring before that of the donee, passed no title or economic benefit to anyone, but only obliterated the possibility of title returning to the donor. Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Becker v. St. Louis Union Trust Co., 296 U. S. 48; Old National Bank in Evansville, Executor, 31 B. T. A. 379; (reversed by the Seventh Circuit Court of Appeals, 82 Fed. (2d) 157, to conform to Helvering v. City Bank Farmers Trust Co., 296 U. S. 85). In the case of Klein v. United States, 283 U. S. 231, also cited in petitioner’s brief, there was a gift of a life estate with an express reservation to the donor of the fee. When the donor died the fee, subject to the life estate, was left as part of his estate and properly taxed. Petitioner also cites Helvering v. Helmholz, 296 U. S. 93, and White v. Poor, 296 U. S. 98, but in neither of these cases was there any power to alter, amend, or revoke the trust within the meaning of section 302 (d). Commissioner v. Chase National Bank of New York, 83 Fed. (2d) 1007.

Petitioner contends, however, that the power of appointment retained by Matthew H. Morgan, the settlor here, was merely a limited power permitting him to go no further than to designate the proportions his children, and descendants of his children who had died, would take in the trust principal at his death. Petitioner says and contends that such limited power of appointment fails to bring the case within the provisions of section 302 (d). For this position he relies upon the case of Equitable Trust Co. of New York, Administrador, 31 B. T. A. 329, a case wherein the decedent retained the right to designate the proportions in which her descendants should share the corpus. The Board held that the corpus was not includable in the gross estate because the settlor had only the power to appoint by will the proportions of the corpus distributable to her lawful descendants, “a power to supplement, amplify or make more specific” which was not a power to alter or amend the trust within the meaning of subdivision (d). Since petitioner’s brief was filed herein the Equitable Trust Co. case (title changed upon substitution of trustees to Chase National Bank of New York) has been reversed by the United States Circuit Court of Appeals for the Second Circuit. In the opinion of the court (ubi supra) it is said:

We think subdivision (d) authority for the inclusion of the trust corpus in the decedent’s gross estate. Up to the time she died she had the power to alter the proportions in which her descendants should take the property in accordance with the original terms of the trust instrument. * * * Such a power to alter or amend the substance of the transfer by trust brought it within the scope of the decision m Porter v. Commissioner, 288 U. S. 436, and justified the inclusion of the property in the gross estate of the decedent. * * *

In its facts, the case of Commissioner v. Chase National Bank of New York, supra, differs but slightly from the facts present in. W. H. Holderness, Administrator, supra, in which the Board held the same view as now expressed by the Circuit Court of Appeals and adjudged the trust corpus includable in decedent’s gross estate for Federal estate tax purposes. See also Kate Allerton Johnstone, Executrix, 29 B. T. A. 957; Day Kimball et al., Administrators, 29 B. T. A. 60; Dort v. Helvering, 69 Fed. (2d) 836; Mead v. Welch, 13 Fed. Supp. 981.

Finally, petitioner says and contends that since the deed of trust in question was created prior to the 1926 Revenue Act, the trust res can not be included in gross estate, for to do so would be in violation of the Constitution. This contention can not be sustained. Decedent lived after the enactment of the law and until July 17, 1932, retaining the reserved power which he might have given up to rid his estate of this tax liability. He was denied no right under the Fifth Amendment. Porter v. Commissioner, supra; Helvering v. City Bank Farmers Trust Co., supra; Witherbee v. Commissioner, 70 Fed. (2d) 696.

We, accordingly, sustain the Commissioner and hold that the value of the trust principal should be included in decedent’s gross estate.

Reviewed by the Board.

Judgment will be entered wnder Bule 50.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      * * * * * * *
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, * * * intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend or revoke * * *,


author: Aiujndell : McMahoN,

text:
    Robert A. Taft, Trustee Under Last Will and Testament of Charles Phelps Taft, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76813.
    Promulgated May 27, 1936.

      John H. More, Esq., and Robert A. Taft, Esq., for the petitioner.

      C. A. Rap, Esq., for the respondent.
   OPINION.

Aiujndell :

The parties are agreed that the basis for computation of gain on the sale of the Columbia Gas & Electric common stock is the “fair market value of the property at the time of the distribution to the taxpayer.” Sec. 113 (a)(5), Kevenue Act of 1928. Their dispute is as to the “time of distribution.” The respondent says it was March 26, 1930, when the order of partial distribution was obtained, on which date the stock was worth $97"⅞ per share; the petitioner says it was March 31, 1930, when it was endorsed over to Mrs. Taft as trustee, when it was worth $102⅞ per share.

Distribution means the separation or segregation from the corpus of the estate so that the property distributed no longer forms any part of the estate. Willcuts v. Ordway, 19 Fed. (2d) 917. There have been before us several cases with facts similar to this one. In Arthur E. Brawn, Trustee, 29 B. T. A. 1161, the Orphans’ Court of Pennsylvania directed a partial distribution unless exceptions were filed within ten days or an appeal taken within three weeks. We held that the time of distribution was not the date of the decree, but three weeks later, when the appeal period expired. In William R. Huntley, 30 B. T. A. 931, the decree directing distribution was issued by the surrogate of a New York court on May 22,1929, and the transfers of stock certificates were made on June 20, 1929. We there held the earlier date, May 22,1929, to be “the effective date of the decree of distribution” and the basic date for determining gain or loss. In Emmia R. Davis, 32 B. T. A. 943, a probate court in Missouri entered an order on March 26, 1927, directing distribution of an estate including certain stock. The corporation whose stock was involved refused to make the transfer until certain state tax matters were settled and the transfer was not actually made until June 29, 1928. We held the decree of the probate court “effected a distribution of the stock” and that the date of the decree was the basic date for gain or loss purposes. In Harwood Robbins, 33 B. T. A. 880, in a suit in a common pleas court in Ohio to quiet title, it was held that the taxpayer became the “owner absolutely and in fee simple” of shares of stock in trust on September 23, 1928, the date of death of the grandson of the testatrix. The decree was entered on November 23, 1929, and thereafter the property, or the proceeds of that which had been sold, was distributed to the taxpayer. We held the basic date to be November 23, 1929, saying:

The phrase “the time of the distribution” as used in the 1928 Act must necessarily relate to the time at which the property is actually delivered to or made available for the use of the distributee or someone acting for him by the executors, administrators, or others having lawful possession or control thereof. See Haskell v. Commissioner (C. C. A., 3rd Cir.), 78 Fed. (2) 869; certiorari denied, - U. S. -, December 16, 1935. Otherwise, it is difficult to see how any effect could be given to the change enacted in the 1928 Act. This time may occur immediately upon the death of the prior owner or at some later date during the process of administration of the estate. Brewster v. Gage, 280 U. S. 327. It is a question to be determined from the facts in each case.

The question here is whether, under the rule of the above cases, the probate decree or the endorsement of the certificates over to the trustee effected a “separation or segregation” of the shares from the estate (Willcuts v. Ordway, supra) and made them “available for the use of the distributee” (Harwood Robbins, supra). We are of the opinion that the decree of the Ohio probate court did not in and of itself effect a distribution of the property. Probate courts in some jurisdictions have plenary powers over estates o,f decedents and may determine fully all matters connected with administration of decedents’ estates. Thus the surrogates’ courts in New York have jurisdiction “to enforce the payment of debts and legacies; the distribution of estates of decedents; and the payment or delivery, by executors, * * * of money or other property * * * belonging to the estate * * Sec. 40, New York Surrogate’s Court Act; sec. 2510, Bliss’ New York Code. In California the rights of a distributee “are fully adjudicated by the decree of distribution.” St. Mary's Hospital v. Perry, 152 Cal. 338; 92 Pac. 864. But in Ohio the probate courts have very limited powers in the matter of directing the distribution of estates. Section 10840, Page’s Annotated Code of Ohio, under which Mrs. Taft acted in securing the order of March 26, provides that, after an executor has paid all debts and claims or set aside sufficient funds for their payment to the satisfaction of the court:

* * * he may distribute and pay over in cash, or in kind, all or any part of tbe assets in his hands * * * to such of the distributees, including * * * trustees * * ⅜ as are willing to receive them.

The petitioner stresses the merely permissive — as distinguished from mandatory — character of the distribution which may be authorized under this section, and in this he is fully supported by Ohio decisions. Moreover, the only valid order of distribution that may be issued by the probate court is general in character, and the court has no power to designate the distributees. In Armstrong v. Grandin, 39 Ohio St. 368, it was held:

It has been settled in Swearingen v. Morris, 14 O. S. 132, and Cox v. Johns, 32 O. S. 532, that the only order of distribution here authorized to be made is a general order to the executor or administrator to distribute the funds remaining in his hands according to law. It thus appears that an order designating or naming the distributees is not authorized by law, and therefore would not disbar any one interested in the distribution from asserting his or her interest thereon.

Similarly, in First National Bank of Cadiz v. Beebe, 62 Ohio St. 41; 56 N. E. 485, it was said:

But it is to be specially noted that the only power here given with respect to the distribution of estates is to order distribution. This does not mean that the Probate Court may find and direct the persons to whom distribution is to be made, and the amounts to each, but means simply that, as a result of the settlement of accounts of executors and administrators, and as a step necessary to a final distribution of the trust fund, a general order of distribution is to be made. The rights of the parties where there is conflict, are to be worked out in other tribunals, and by process and pleadings adapted to that end.

In Henry v. Doyle, 82 Ohio St. 113; 91 N. E. 990, it was held:

A general -finding of a balance in the hands of an executor or administrator, and an order to distribute it according to law, does not determine either the persons entitled under the law, nor the amount to which each is entitled.

The views of the Ohio Supreme Court were followed by the Federal District Court in Brown v. Routzahn, 58 Fed. (2d) 329 (reversed 63 Fed. (2d) 914, without discussion of this point) in the following language:

In Ohio the power of a probate court is exhausted in making an order of distribution, and the court has no authority to determine the persons who will receive the assets or the amount to be paid to each. Gen. Code, § 10492 (3) ; First Nat. Bank of Cadiz v. Beebe, 62 Ohio St. 41, 56 N. E. 485; Swearingen v. Morris, 14 Ohio St. 424; Cox v. John, 32 Ohio St. 532; Armstrong v. Grandin, 39 Ohio St. 368.
The presence of the testamentary trustees did not enlarge the court’s jurisdiction. In administering the distribution statute, a probate court assumes no responsibility and makes no finding that those whose assent the executor has procured or proposes to procure are in fact entitled to the estate.

In view of the above, it would seem that the order of March 26 did not effect a segregation of the shares of stock and was not a distribution within the meaning of the taxing statute.

The executrix, at the time of the court order and for several days thereafter, had the property in her possession and under her control, as executrix, with the right to make distribution. When she decided to distribute to herself as trustee the decision was made with full knowledge of the several steps necessary to complete the transfer so as to put the property in condition to be salable by the trustee. Sale by the trustee before April 13, 1930, was the object in view. As the executrix was aware of the necessity of compliance with formal preliminaries before the property could be sold, it can not be said that she intended to distribute before compliance. The several steps necessary to meet the requirements for sale by the trustee, including permission of the probate court to make partial distribution, procuring certified copies of documents authorizing her acts, and a tax release by the State Tax Commission, were all taken by the executrix with due dispatch, as set out in the findings of fact.

Bearing in mind the purpose of the distribution, and the fact of the executrix and trustee being the same person and that she was aware of the formalities to be complied with before her object could be accomplished, we are of the opinion that it was not until March 31, 1930, that there was any segregation of the stock from the corpus of the estate. On that date, and not before, the requirements of the situation had been met and the certificates were taken over by the trustee in that capacity, and that date we hold is the time of the distribution.

Reviewed by the Board.

Decision will be entered under Rule 50.

McMahoN,

dissenting: The order of the Probate Court of Hamilton County Ohio, as set forth in the majority opinion, entered on March 26, 1930, pursuant to section 10840, Page’s Annotated Code o,f Ohio, as set forth in the majority opinion, is a valid adjudication in partial distribution in kind and is binding and conclusive upon us in this proceeding. This order, like all similar orders, rulings, decrees, and judgments of probate courts or other courts of record o.f similar character having jurisdiction of the subject matter, the administration and settlement of an estate, or any other matter involving property rights, and of the parties, can not be impeached collaterally. Herron v. Dater, 120 U. S. 464; Magruder v. Drury, 235 U. S. 106; Freuler v. Helvering, 291 U. S. 35; Edward T. Blair, 31 B. T. A. 1192; Commissioner v. Blair, 83 Fed. (2d) 655, reversing Edward T. Blair, supra, on another ground; and Cincinnati, S. & C. R. Co. v. Village of Belle Centre, 27 N. E. (Ohio) 464.

The principles of the above cases which deal with orders, ruling, judgments, or decrees of probate or similar courts are, in this respect, in consonance with the well settled rule of law governing the adjudications of courts of record having other jurisdiction; a collateral attack can be successful only to the extent that it discloses a lack of power, jurisdiction, or fraud as distinguished from mere error in the exercise of power, Johnson v. Manhattan Railway Co., 289 U. S. 479; Commissioner v. Blair, supra; and Cincinnati S. & C. R. Co. v. Village of Belle Centre, supra; in Ohio, under the rule of the latter case, “their records import absolute verity” to the jurisdiction of its probate courts; and, there as elsewhere, a judicial act performed in the exercise of a jurisdiction conferred by law, even if erroneous, can be corrected only upon review on appeal or otherwise and is not void or open to collateral impeachment. Ex parte Roe, 234 U. S. 70; and Cincinnati S. & C. R. Co. v. Village of Belle Centre, supra.

There is no showing in the instant proceeding that the Probate Court of Hamilton County, Ohio, did not have jurisdiction of the subject matter, the estate, the executrix or the trustee (the distrib-utee) ; there is ample showing to the contrary; and there is no showing that collusion or fraud was committed in procuring the order of the Ohio probate court. It may be added that, while the order or decree of the probate court “was not unlike a consent decree”, it is binding here. Commissioner v. Blair, supra. This order of that court has never been reversed upon review or otherwise by any other court, nor has it been attacked in any other way in any court of competent jurisdiction, so far as this record shows; and no presumption to this effect can be indulged in. On the contrary, the parties before that court have procured and acquiesced in the adjudication of that court and have acted upon it and in pursuance of it, have benefited by it and, hence, are estopped to question its validity. Sanborn v. Sanborn, 140 N. E. (Ohio) 407,

and 34 C. J. 510, sec. 814. The ruling laid down by these authorities, in this respect is analogous to the rule that he who avails himself of the benefits of a legislative act can not thereafter successfully challenge the power of the legislative body to enact the legislation invoked. F. L. Bateman, 34 B. T. A. 347, and cases cited therein at page 21, footnote 29. Hence, the adjudication of that court can not be attacked collaterally1 in any court, or in a proceeding before this Board. This is true even if the court committed an error in designating the distributee, which it is not necessary to here decide. There is no occasion, much less justification, for here speculating as to whether another Ohio court would have reversed the probate court upon review, under all of the peculiar facts and circumstances of the procuring of, issuing of, acquiescence in and compliance with, the order of the probate court, as here disclosed. However, we may say, in passing, that if the probate court did commit an error it was a harmless error, and it has been held that a harmless error is not a ground for reversal. Chicago & N. W. Ry. v. Gray, 237 U. S. 399. It may be further added that the error, if any, is harmless because even if the court’s designation of the distributee was erroneous, it does not detract from the validity of the remaining provisions of the order, those remaining provisions being sufficient to constitute a valid order of partial distribution. If the words “to herself as trustee under the Will of Charles P. Taft, deceased”, the inclusion of which is at most a mere irregularity, were stricken from the order its remaining provisions would be valid and constitute an adequate order of distribution. To the extent of its jurisdiction over the subject matter a court’s adjudications are partially valid. 34 C. J. 510, sec. 812; Dreyer v. Bigney, 8 Ohio Dec. (Reprint) 562; and Audas v. Highland Land & Bldg. Co., 205 Fed. 862. This is akin to the rule in Ohio and elsewhere that a judgment may be valid as to some even though notl as to all defendants. 33 C. J. 1130, sec. 11. Such words are, at most, mere surplusage, since the trustee was the only distributee. Too, she is not even named in this quoted language of the order. The majority opinion, in effect, recognizes the partial validity of the order in reaching the conclusion there reached, since it does not hold that there was no valid distribution.

Since we should accept the order of the Probate Court of Hamilton County, Ohio, as conclusive and binding upon us, the instant proceeding is governed by Harwood Robbins, 33 B. T. A. 880; Emma W. Davis, 32 B. T. A. 943; and William R. Huntley, 30 B. T. A. 931. In each of those cases we were concerned with the identical provision of the statute here involved, namely, section 113 (a) (5) of the Revenue Act of 1928. In those cases we held that the effective date of the order of distribution of the court having jurisdiction of the subject matter was “the time of the distribution” within the meaning of that section. In the interests of brevity we forego restating here the reasons there set .forth in support of those decisions. They establish well a sound, .fair, workable rule and should be adhered to. In the instant proceeding the order of the probate court was effective forthwith, immediately.

As correctly pointed out in the majority opinion, “distribution” means the separation and segregation from the corpus of the estate so that the property distributed no longer forms any part of the estate, citing and relying upon Willcuts v. Ordway, 19 Fed. (2d) 217, also cited and relied upon in Emma W. Davis, supra. Furthermore, the phrase “the time of the distribution” has reference to the time at which the property is delivered to or made available for the use of the distributee. Harwood Robbins, supra. Here the order Oif the Probate Court of Hamilton County, Ohio, effected a separation or segregation of the shares of stock in question from the corpus and made such shares available to the trustee, the only distrib-utee entitled to them. The order of March 26, 1930, removed all restraint on the executrix and trustee in the matter of distributing this stock. Thereafter she, as executrix, had the power and duty to deliver and she, as trustee and distributee, had the right to immediately demand, receive, and receipt for the stock in question. In short, the stock then became available to her as distributee. The stock was even more readily mailable to her as distributee than was the property involved in Harwood Robbins, supra, Emma W. Davis, supra, and William R. Huntley, supra, because here she was executrix, trustee, and distributee; and since she, as executrix, already had possession of the stock, another delivery to herself, as trustee or distributee, was not necessary. Any other delivery would have been futile; and it is elementary that the law does not require that which is futile. What was thereafter done by her either as executrix, trustee, or distributee was only by way of getting the certificates in form to evidence, upon the books of the corporation, the passing of title. After the entry of the order of the court there was nothing to prevent her as trustee and distributee from selling the stock on the exchange, receiving the purchase price, and delivering the certificates endorsed in blank. What was done after the entry of the order was done to enable the purchaser to have transfer made on the books of the company and was done after there had been a segregation or distribution. Mere delay occasioned by effectuating the transfer on the books of the corporation should not be permitted to operate to give the distributee a more advantageous time for the fixing of the basis of the cost on a subsequent sale.

There is no valid escape from the final conclusion that in the instant proceeding “the time of the distribution” within the meaning of section 113 (a) (o) of the Revenue Act of 1928 was March 26, 1930, the date on which the Probate Court of Hamilton County, Ohio, entered its order of distribution.

In the instant proceeding the real controversy involves a limited question, which is that of “the time of the distribution” under the Revenue Act of 1928; and this arises in connection with a broader question, which is that of the determination of the basis of the stock in question for purposes of establishing gain or loss upon a sale made subsequent to the time, or date, of distribution. We are not here even concerned with the litigation of the title to the stock as between two or more alleged distributees or others. No such limited question was presented in any of the Ohio cases cited in the majority opinion. These cases are, for this and other reasons, not in point in the instant proceeding. These cases are further distinguishable in that here, and not there, the order was procured, acquiesced in, and complied with by the only parties interested, the executor, trustee, and distributee so far as the record shows, and, in fact, the same person acted in all these capacities; there is no showing of harm to anyone, and the order operated to the advantage of the trustee, whose successor is now before us as petitioner.

Aenold and Tyson agree with this dissent.

       In Herron v. Dater the Supreme Court stated in part:
      “* * * It is scarcely necessary to cite authority in support oí the proposition that the orders, judgments and! decrees of the Orphans’ Court, in a ease where it had jurisdiction of the subject-matter, camiot be impeached collaterally; * * *. In Dreishner v. Allentown Water Co., 52 Penn St. 225, 229, Mr. Justice Strong said: ‘Orphans’ Court decrees are doubtless conclusive. They cannot he impeached collaterally. * * ”
      [Emphasis supplied.]

       In Magruder v. Drury, the Supreme Court stated in part:
      “It is well settled that the decree of the court which has acquired jurisdiction of an estate and settled an account cannot he collaterally attacked, Jonison v. Hapgood, 7 Pickering, 1, 7. * * *” [Emphasis supplied.]

       In Edward T. Blair we stated in part:
      “In Freuler v. Helvering, 291 U. S. 35, the Supreme Court held that * * * the decision of a court of the State of California haying jurisdiction of the trust in an action brought by the trustee for approval of his account is binding. * * * it also held that it constituted am adjudication of the property rights of the beneficiaries wMeh must be considered in determining the Federal income taw liability of the beneficiaries. The Supreme Court stated in part:
      “Moreover, the decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the state because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable, is, we think, to be so considered in applying section 219 of the Revenue Act of 1921.

        “It is well settled that the decision of a state court of competent jurisdiction upon property rights as between the parties to the proceeding in the state court is conclusive upon the Federal courts until it is reversed or overruled. Freuler v. Helvering, supra; Utterhart v. United States, 240 U. S. 598; Hubbell v. Helvering, supra; and Commissioner v. Field, 42 Fed. (2d) 820, affirming Marshall Field, 15 B. T. A. 718, * *
      [Emphasis supplied.]

       In Commissioner v. Blair the Circuit Court stated in part:
      “Although there are these distinctions between the Freuler case and the instant one, we accept it as authority for holding that a final decree of a state court, supreme or inferior, entered in a specific matter such as the interpretation of rights under a testamentary trust, is binding upon a Federal court in determining the character of a trust, the income from which is the subject of a Federal tax.
      “The logic supporting the adoption of such a rule is the same as that which furnishes the basis of res judicata. We are adopting the ruling of a court homing jurisdiction of the subject matter and of the person. The orderly administration of justice and final settlement of property rights will be promoted by so doing. It is true that this court has previously reached a contrary conclusion — that the trust was a spendthrift one— but our decision was before the Illinois court had declared itself in reference to a matter to which its jurisdiction extended. Moreover, the previous proceeding in this court was one to which the beneficiaries were not a party, whereas they were the parties to the state court proceeding.
      * ⅝ * * * ⅜ *
      <⅛ * * The gnaj aeciSi0n 0f guCh a court, which is not appealed from, is binding upon the Federal court for the purpose of determining the character of the trust which in turn may be determinative of a Federal income tax assessment. * * *” [Emphasis supplied.]

       In Cincinnati, S. & C. R. Co. v. Village of Bell Centre, the Supreme Court of Ohio stated in part:
      “The probate court is empowered by the constitution, in addition to its jurisdiction in probate and testamentary matters, and others expressly enumerated, to take such other jurisdiction as may be provided by law. * * * It is clear, therefore, that if the probate court had jurisdiction of the parties, and of the property involved, its judgment established the right of the village to enter upon and hold the property thus appropriated, and to subject it to the proposed uses, and must necessarily operate to defeat the plaintiff’s action; for such a judgment, until reversed, is final and conclusive between the parties, and cannot be collaterally impeached. This we do not understand to be seriously controverted. The contention of the plaintiff here is that the probate court, in the appropriation proceedings, acquired no jurisdiction, either over it or its property, * * *
      “* * * u Seems well settled that the probate courts of the state are courts of record, competent to decide on their own jurisdiction, and exercise it to final judgment, and that their records import absolute verity. Shroyer v. Richmond, 16 Ohio St. 455. The class of tribunals to ’which they belong, and the character of their jurisdiction, are aptly pointed out in the opinion of the court in the case just cited, in the following language: ‘True, it [ the probate court] is a court of limited jurisdiction, and it is equally true that the jurisdiction of each of the courts of the state is expressly limited, either by the constitution or by statute. But, as was said in the case of Sheldon v. Newton, 3 Ohio St. 500, “the distinction is not between courts of general and those of limited jurisdiction, but between courts of record, that are so constituted as to be competent to decide on their own jurisdiction, and exercise it to final judgment, * *

       In Johnson v. Manhattan Ry. Co. the Supreme Court stated in part:
      “» * * In these circumstances it is plain that the attack was collateral. And, this oeing so, there was need for heeding the familiar rule that such an attack can be successful only where anú, to the extent that it discloses a want of power as distinguished from error in the exertion of power that was possessed.” [Citing Dowell v. Applegate, 152 U. S. 327, 337-340; Fauntleroy v. Lum, 210 U. S. 230, 237; Ex parte Roe, 234 U. S. 70, 72, Marin v. Augedahl, 247 U. S. 142, 149, 152.] [Emphasis supplied.]

       In Commissioner v. Blair the Circuit Court stated in part:
      “* * ⅜ in other words it was not unlike a consent decree. But consent decrees are binding if entered by a court of competent jurisdiction with the pai-ties properly before it, in the absence of a showing of collusion between the parties or fraud upon the court. * * *” [Emphasis supplied.]

       In Ex parte Roe the Supreme Court stated in part:
      “Whether the ruling was right or wrong, it was a judicial act, done in the exercise of a jurisdiction conferred by law, and even if erroneous, was not void or open to collateral attach, but only subject to correction in an appropriate appellate proceeding. Chesapeake & Ohio Railway Co. v. McCabe, 213 U. S. 207; In re Metropolitan Trust Co., 218 U. S. 312. * * *” [Emphasis supplied.]

       In Sanborn v. Sanborn, the Supreme Court of Ohio stated in part:
      “The latest and most authoritative declaration of principles upon facts which find a striking parallel is the case of Hopper v. Ficholas, 140 N. E. 186, just decided by this court and reported concurrently herewith, in which it was decided that proceedings in New York state, though unauthorined, in which parties participated to their substantial advantage, create an estoppel which will be a bar to subsequent proceedings, in which a different conclusion is sought in the State of Ohio.” [Emphasis supplied.]

       In 34 C. J. at p. 510, sec. 814, it is stated:
      “* * * the generally accepted doctrine is that the party who would have a right to avoid the judgment may give it validity by his acceptance and ratification of it, or be estopped by his conduct to impeach its validity. [Citing, among other cases, Blanchard v. Gregory, 14 Oh. 413.] And this he does by accepting or sharing in the fruits or benefits of the judgment * * [Citing, among other cases, Dreyer v. Bigney, 8 Oh. Dec. (Reprint) 562.]

       In Chicago & N. W. Ry. v. Gray, the Supreme Court stated in part:
      “* * * But we find it unnecessary to express an opinion upon the argument since if there was an error it seems to have done the railway company no harm.”

       In 34 C. J. at p. 510, see. 812, it is stated:
      “* * * to jurisdiction of the subject matter, it seems that, although the judgment may go beyond the issues and grant relief not asked for, or not within the competence of the court, yet it may be good for so much as the court had power and authority to include in it.”

       In Dreyer v. Bigney, the Ohio court stated in part:
      o* * * if it [the decree] was irregular as to the amount found in favor of Mrs. McGill, it did not invalidate the other portions. * *

       In 33 C. J. at p. 1130, sec. 77, it is stated:
      “⅜ * * a judgment may Be valid and enforceable as to one or some of defendants, although voidable or void as to others. * * *” [Citing, among other cases, Johnson v. Pomeroy, 31 Oh. St. 247; Newburg v. Munshower, 29 Oh. St. 617, 23 Am. R. 769; Ash v. McCabe, 21 Oh. St. 181; Douglass v. Massie, 16 Oh. 271, 47 Am. D. 376.]

       In Harwood Bobbins we stated in part:
      “The phrase ‘the time of the distribution’ as used in the 1928 Act must necessarily relate to the time at which the property is actually delivered to or made available for the use of the distributee or someone acting for him by the executors, administrators, or others having lawful possession or control thereof. See Haskell v. Commissioner (C. C. A., 3rd Cir.), 78 Fed. (2d) 869 ; certiorari denied - U. S. -, December 16, 1935. * * *” [Emphasis supplied.]


author: Arnold:

text:
    Fidelity-Philadelphia Trust Company, Trustee, Estate of Rebecca K. Moon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75320.
    Promulgated May 27, 1936.

      /Simon Fleishman, Esq., for the petitioner.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Arnold:

This proceeding is for the redetermination of a deficiency in estate tax in the amount of $221.53. The sole issue is whether or not respondent erred in including in the gross estate the value of certain property transferred in trust by decedent under the facts and circumstances herein below indicated.

Petitioner is the successor trustee under a certain trust agreement dated April 29, 1885, between Rebecca K. Miller (afterwards Rebecca K. Moon), party of the first part, James Thomas Moon, party of the second part, and the Fidelity Insurance Trust & Safe Deposit Co., Philadelphia, Pennsylvania, predecessor of petitioner, party of the third part. The instrument was executed in contemplation of the approaching marriage of the parties of the first and second parts.

Ey the said instrument, Rebecca K. Moon, the decedent, transferred property having a value at the date of her death of $22,152.49, to the above named trustee, with. instructions to pay the net income therefrom to the settlor for life and subject to the following additional provisions:

In tkust further at and after the death of the said party of the first part to pay over, deliver, assign and convey the principal of the trust estate hereby conveyed to such person or persons. and for such uses and purposes as the said party of the first part shall, by her last will and testament made at least thirty days before her death, have designated and appointed. And In Tbu¡3t further if the said party of the first part shall die without making any will as aforesaid then to assign and transfer the said trust estate and securities to such person or persons as under the Intestate Laws of the state of Pennsylvania shall be entitled to succeed to and inherit the said trust 'estate.

The decedent died on December 23,1931, and, by reason of the fact that she had failed to execute her will at least 30 days prior to her death, those persons entitled to succeed to and inherit said trust estate under the intestate laws of Pennsylvania took the principal of the fund as provided in the trust agreement.

In determining the deficiency respondent included the value of the entire corpus or principal of the trust as a part of the decedent’s' gross estate.

The statute applicable here is the Revenue Act of 1926, the material parts of which are set out in the margin. Under the original provisions of the 1926 Act, in order for the corpus of a trust to be taxable as a part of the decedent’s gross estate, it must appear (1) that the transfer was made in contemplation of death, or (2) was intended to take effect in possession or enjoyment at or after the decedent’s death, or (3) that the enjoyment thereof was subject at the date of death to any change through the exercise of a power,, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or (4) that the decedent relinquished any such power in contemplation of death. By the amendment of March 3, 1931, the statute was expanded to embrace a transfer under which the transferor retained for his life the possession or enjoyment of or income from the property, or the right to designate the persons who should possess or enjoy the property.

It is not contended in the present case that decedent transferred her property to the trustee in contemplation of death, and the facts would plainly refute such a conclusion. Kor did the decedent relinquish any power to alter, amend, or revoke, in contemplation of death. Hence, the property involved here is not taxable under those provisions of the statute. Also, the fact that decedent reserved the income from the property for her life does not render the corpus taxable, under the original provisions of the statute. May v. Heiner, 281 U. S. 238; Burnet v. Northern Trust Co., 41 Fed. (2d) 732; aff'd. (per curiam on authority of May v. Heiner), 283 U. S. 782. The trust deed, admittedly irrevocable, was executed by decedent prior to the Joint Resolution of March 3, 1931, and, while that amendment taxes transfers under which the transferor retained the income for life, it may not be construed as applying to transfers made in good faith and without contemplation of death prior to its enactment. Nichols v. Coolidge, 274 U. S. 531.

It follows that the corpus of the trust here in question can be included in the decedent’s gross estate, if at all, only because of the retained power of appointment.

Petitioner contends that the trust estate was not subject to any change, at the death of the decedent, through the exercise of a power by reason of the fact that, decedent having failed to make a will at least 30 days prior to her death, no right to appoint remained in her at the date of her death, and, the attempted exercise of power being ineffective, the trust property should not be included in the gross estate of the decedent. Citing Grinnell v. Commissioner, 70 Fed. (2d) 705; affd., Helvering v. Grinnell, 294 U. S. 153.

The Grinnell case, which is distinguishable from the case before us, arose under section 302(f) (1) of the Revenue Act of 1926. The decedent died in 1927, before the amendment of March 3, 1931, to subdivision (c) of section 302, and the question there was whether the property passed under the exercise by decedent of the power of appointment, or under the will of decedent’s father. In its opinion the Supreme Court said:

The tax here does not fall upon the mere shifting of the economic benefits in property, but upon the shifting of those benefits by a particular method, namely, by their “passing under a general power of appointment,” and not otherwise.

In the instant case there was no question as to whether the property passed under an exercise of the power of appointment, the decedent having failed to exercise the power within 30 days of her death. The question is whether under these facts the trust property should be included in her gross estate.

In Katherine B. Albrecht et al., Executrices, 27 B. T. A. 1091, the decedent had created a trust in favor of his wife. The trust was irrevocable during 1924 and each calendar year thereafter, “unless between the 1st and 31st days of December in 1924, or any subsequent year the same shall by the trustor, by written notice to the trustee, be revoked, such revocation to be effective on or after the 1st day of January next succeeding * * *; but whenever any calendar year shall have commenced without any such notice of revocation, alteration or modification having been given as aforesaid, this trust and all its terms and provisions shall continue irrevocably in force throughout the calendar year so commenced.” The trustor died January 5, 1926, without having served any notice of revocation according to the provisions of the trust instrument. It was there contended that when the decedent died in 1926, he was without any power of revocation. In holding that the value of the corpus should be included in the gross estate of the decedent the Board quoted the language of the Supreme Court in Chase National Bank v. United States, 278 U. S. 327, as follows:

* * ⅜ we think the power to tax the privilege oí transfer at death cannot be controlled by the mere choice of the formalities which may attend the donor’s bestowal of benefits on another at death, or of the particular methods-by which his purpose is effected, so long as he retains control over those benefits with power to direct their future enjoyment until his death. Termination of the power of control at the time of death inures to the benefit of him. who owns the property subject to the power and thus brings about, at death, the completion of that shifting of the economic benefits of property which is-the real subject of the tax, just as effectively as would its exercise, which latter may be subjected to a privilege tax, Chandler v. Kelsey, 205 U. S. 466. * * *

The Board further said:

Had the decedent lived throughout the year 1926 and into 1927, he could have revoked the trust in December of 1926, and such revocation would have been effective January 1, 1927. It was his death in 1926 which cut off this power of revocation. This constituted a shifting of economic benefits with respect to the trust fund and in our opinion constituted a transfer at death which was the appropriate subject of the estate tax.

In H. T. Cook et al., Executors, 23 B. T. A. 335; aff'd., Cook v. Commissioner, 66 Fed. (2d) 995; certiorari denied, 291 U. S. 660, we held that where the settlor of a trust reserves to himself alone the power to change the ultimate beneficiaries of the trust, such reservation constitutes a power to alter or amend and renders the transfer incomplete until his death, and the trust property should be included in his gross estate.

In Saltonslall v. Saltonstall, 276 U. S. 260, the Supreme Court said:

So long as the privilege of succession has not been fully exercised it may be reached by the tax. * * * And in determining whether it has been so exercised technical distinctions between vested remainders and other interests; are of little avail, for the shifting of the economic benefits and burdens of property, which is the subject of a succession tax, may even in the case of a vested remainder be restricted or suspended by other legal devices.

In Porter v. Commissioner, 288 U. S. 436, the Supreme Court said:

The power did not amount to an estate or interest in the property. It was much like, and for the purposes of this case may be deemed the substantial equivalent of, a general power of appointment by will. * * * But the reservation here may not he ignored for, while subject to the specific limitation, it made the settlor dominant in respect of other dispositions of both corpus and income. His death terminated that control, ended the possibility of any change by him, and was, in respect of title to the property in question, the source of valuable assurance passing from the dead to the living. That is the event on which Congress based the inclusion of property so transferred in the gross estate as a step in the calculation to ascertain the amount of what in section 301 (26 USCA §§ 1092-1093) is called the net estate. Thus was reached what it reasonably might deem a substitute for testamentary disposition. United States v. Wells, 283 U. S. 102, 116.

We think the facts of this case bring it within the provision of section 302 of the Revenue Act of 1926 (as amended March 3, 1927) and that the reservation of a power to pass the property by will made the entire transaction subject to the estate tax. It appears the decedent made, a will within 30 days preceding her death. But for her death within 30 days after the making of the will, the succession to the property would have been changed. Her death, then, was the motivating force that controlled the final disposition of the property. Decedent’s failure to pass the property by will resulted in fact in a disposition to her heirs; Katherine B. Albrecht et al., supra. The contention of the petitioner, while somewhat ingenious is, we think, factually unsound. As a condition precedent to a valid will the trust instrument provided that it should be made at least 30 days before the decedent’s death, but it was her death that cut off her power to pass the property by will.

Decision will be entered for the respondent.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      (a) To the extent of the interest therein of the decedent at the time of his death;

        * * * * ⅜ ⅜ ⅜
      (e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession! or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
      (d) To the extent of any interest therein of which the decedent has at any time mad© a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in the .case of a bona fid© sale for an adequate and full consideration of money or money’s worth.

       By Joint Resolution approved March 3, 1931, the first sentence of subdivision (c) of section 302 above was amended to read as follows:
      “(c) To the extent of any interest therein of which the decedent has at any time mad© a transfer, by trust or otherwise, in contemplation of, or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor-has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from the property or (2) the right to designate the persons-who shall possess or enjoy the property or the income therefrom; except in ease of a bona, fide sale for an adequate and full consideration in money or money’s worth.”