Rothensies v. Cassell, 103 F.2d 834 (3d Cir. 1939)

James W. Morris, Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and Lyle M. Turner, Sp. Assts. to Atty. Gen. *835 (J. Cullen Ganey, U. S. Atty., of Bethlehem, Pa., and Thomas J. Curtin, Asst. U. S. Atty., of Philadelphia, Pa., of counsel), for appellant.

Isaac S. Grossman and George V. Strong, both of Philadelphia, Pa., for appellee.

Before BIGGS, MARIS, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

We rather question the soundness of the Treasury's approach to the case at bar. The problem is one phase of the application of taxation to the "cake and eat it" weakness of our human nature. Congress and the courts have had to draw the line between "devices through which men of substance continued their dominion over property and yet evaded taxes which others with no more substantial dominion over the property had to pay", and cases involving genuine relinquishment of property and dominion over it, Sutter and Owen, Federal Taxation of Settlors of Trusts, 33 Michigan Law Review 1169, 1174; Surrey and Aronson, Inter Vivos Transfers and The Federal Estate Tax, 32 Columbia Law Review 1332. Cases may fall on either side of this line a particular application of Mr. Justice Holmes' line theory first developed in "The Common Law" (1881), p. 127. See Bullen v. Wisconsin, 240 U.S. 625, 630, 36 S. Ct. 473, 60 L. Ed. 830. As Mr. Randolph E. Paul (incidentally at one time a fellow legal Helot of the writer of this opinion) discussing the case last cited in his stimulating Restatement of Tax Avoidance puts it: "The issue is drawn as one in which legitimate avoidance must be recognized and put on the safe side of the line and in which illegitimate avoidance (or evasion) must be put on the wrong side of the same line. Condemnation is for others than courts, the question being a matter of cold-blooded analysis which places a transaction with reference to a line which shifts to some extent as the policy of the law may dictate." Studies in Federal Taxation First Series, p. 101. The same learned author in footnote 349 on p. 101 observes that the decedent was on the right side of the line in Becker v. St. Louis Union Trust Company, 296 U.S. 48, 56 S. Ct. 78, 80 L. Ed. 35. In that we agree with him and by the same token must disagree with the government in the principal case.

The one "phase" referred to in our opening paragraph has been a matter of much litigation ever since the imposition of the first state inheritance tax. The best discussion we know of is contained in two articles by Professor Rottschaefer (Professor of law, University of Minnesota) in 14 Minnesota Law Review 452 and 613. He entitles both articles in the stock words of the statutes, state and federal (26 U.S.C.A. § 411(c), "Taxation of Transfers Intended to Take Effect in Possession or Enjoyment at (or after) Grantor's Death". He phrases our particular circumstance:

"A donor may dispose of property on such terms that there remains a possibility of its reverting to him. The question arises whether the mere existence of this possibility makes a transfer taxable." P. 482.

"The preceding discussion leads naturally to the cases in which the factor that a remainder interest continued contingent or conditional until the donor's death weighed heavily in holding the succession thereto taxable. The provision most frequently considered in this connection is that which makes the right to succeed depend on the remainderman surviving the donor." P. 484.

In reviewing the cases in the state courts holding the transfer taxable, the Professor says: "The theory in the above cases seems to have been that the remainderman's interest continued contingent in right until the donor's death." P. 485. This view of the state cases and of the learned Professor did not meet with the approval of the majority of the Supreme Court. In the Restatement of Tax Avoidance, above cited, Mr. Paul says: "A remote possibility of reverter does not vary the rule that a complete and final transfer will not result in the imposition of estate tax." Studies in Federal Taxation First Series, above cited, pp. 45-46. He cites Becker v. St. Louis Union Trust Company, above cited; Helvering v. St. Louis Union Trust Co., 296 U.S. 39, 56 S. Ct. 74, 80 L. Ed. 29, 100 A.L.R. 1239; Bingham v. United States, 296 U.S. 211, 56 S. Ct. 180, 80 L. Ed. 160, decisions which had in fact been anticipated by the snuggest possible affirmance of a case arising in this circuit, Helvering, Commissioner of Internal Revenue v. Duke, 3 Cir., 62 F.2d 1057; Duke v. Commissioner, 23 B. T.A. 1103, 1104, affirmed by a divided *836 court, 290 U.S. 591, 54 S. Ct. 95, 78 L. Ed. 521. See also Commissioner of Internal Revenue v. Grosse, 9 Cir., 100 F.2d 37.

We complain of the Treasury counsel's failure to meet this existing state of the law with complete candor. The taxpayer very properly made use of the deadly parallel and compared his trust with that of Becker:

      In the Becker case              In the case at bar
    "(a) If the said beneficiary     "In trust if the said R.
  should die before                S. shall die during the
  my death, then this trust        lifetime of said G. F. U.
  estate shall thereupon           to pay over the principal
  revert to me and become          and all accumulated
  mine immediately and             income thereof unto the
  absolutely, or                   said G. F. U. in fee, free
                                   and clear of any trust.
    "(b) If I should die before      "In trust if the said
  her death, then this             R. S. after the marriage
  property shall thereupon         shall survive the said
  become hers immediately          G. F. U. to pay over the
  and absolutely and be            principal and all accumulated
  turned over to her and           income unto the
  in either case this trust        said R. S.  then R. U. 
  shall cease." [296 U.S.          in fee, free and clear of
  48, 56 S. Ct. 79.]                any trust."

A skeletonization of the diverse expressions used in both trusts is, we think, even more revealing:

    In the Becker case            In the case at bar
  (1) "my daughter"               "R. S." (fiancee)
  (2) "before my death"           "during the life time
                                of the said G. F. U."
  (3) "trust estate"              "the principal and all
                                accumulated income"
  (4) "revert to me"              "pay over * * * unto
                                the said G. F. U."
  (5) "mine absolutely"           "free and clear of any
                                trust"
  (6) "if I should die before     "shall survive the said
         her death"             G. F. U."
  (7) "turned over"               "pay over"
  (8) "this trust shall           "free and clear of any
         cease"                 trust"

It is apparent that the only differences are in the relationship of the settlor to the beneficiary and in the first and third person phraseology. To force a distinction from them is as futile as measuring the relative affection implicit in the different ties or appraising the delicacy implicit in avoiding the possessive appellation of the bride-to-be. Our argument notes indicate that counsel finally abandoned this uncongenial task and frankly stated that he agreed with the minority of the United States Supreme Court in Helvering v. St. Louis Union Trust Company, above cited, and Becker v. St. Louis Union Trust Company, above cited.

Why he did so may appear from a continuance of the deadly parallel method of argument:

   Mr. Justice Sutherland           Mr. Justice Stone dissenting
      speaking for five                        for four
           Justices                            Justices
    "The grantor here, by            "It seems plain that
  the trust instrument,            the gift here was not
  left in himself no power         complete until decedent's
  to resume ownership,             death. He did not desire
  possession, or enjoyment,        to make a complete
  except upon a contingency        gift. He wished to keep
  in the nature                    the property for himself
  of a condition subsequent,       in case he survived his
  the occurrence of                daughter. He kept this
  which was entirely fortuitous    hold upon it by reserving
  so far as any                    from his gift an interest,
  control, design, or volition     terminable only
  on his part was                  at his death, by which
  concerned. After the             full ownership would be
  execution of the trust           restored to him if he
  he held no right in the          survived his daughter.
  trust estate which in any        * * *
  sense was the subject
  of testamentary disposition.       "Having in mind the
  His death passed                 purpose of the statute
  no interest to any of the        and the breadth of its
  beneficiaries of the trust,      language it would seem
  and enlarged none beyond         to be of no consequence
  what was conveyed                what particular conveyancers'
  by the indenture.                device, what
  His death simply put an          particular string, the
  end to what, at best,            decedent selected to hold
  was a mere possibility           in suspense the ultimate
  of a reverter by extinguishing   disposition of his property
  it; that is to                   until the moment of
  say, by converting what          his death. * * * However
  was merely possible into         we label the device
  an utter impossibility."         it is but a means by
                                   which the gift is rendered
    Helvering v. St. Louis         incomplete until the
  Union Trust Co., above           donor's death."
  cited, 296 U.S. page 43,
  56 S.Ct. page 76, 80 L.            Helvering v. St. Louis
  Ed. 29, 100 A.L.R. 1239.         Union Trust Co., above
                                   cited, 296 U.S. page 47,
                                   56 S.Ct. page 77, 80 L. Ed. 29, 100 A.L.R. 1239.
    "Unlike the Klein Case           "If he had reserved a
  [Klein v. United States,         power to revoke the
  283 U.S. 231, 51 S. Ct. 398,      trust, if he survived her,
  75 L. Ed. 996], where the         Reinecke v. Northern
  death was the generating         Trust Co., supra [278 U.
  source of the title,             S. 339, 49 S. Ct. 123, 73 L.
  here, as the court below         Ed. 410, 66 A.L.R. 397],
  said, the trust instrument       would have made the
  and not the death                gift taxable, as would
  was the generating               Klein v. United States,
  source. The death did            supra, if he had reserved
  not transmit the possibility,    a remainder in
  but destroyed it."               himself with gift over,
                                   if he did not survive his
    Helvering v. St. Louis         daughter. Instead, by
  Union Trust Co., above           using a different form
  cited, 296 U.S. pages 45,        of words, he attained
  46, 56 S.Ct. page 77, 80         the same end and has
  L.Ed. 29, 100 A.L.R.             escaped the tax. * * *
  1239.
                                     "In determining
                                   whether a taxable transfer
                                   becomes complete
                                   only at death we look to
                                   substance, not to form.
                                   Klein v. United States,
                                   supra, 283 U.S. [231], 234,
                                   51 S. Ct. 398, 75 L. Ed. 996."
                                     Helvering v. St. Louis
                                   Union Trust Co., above
                                   cited, 296 U.S. page 47,
                                   56 S.Ct. page 77, 80 L. Ed. 29, 100 A.L.R. 1239.

*837 Why we cannot be so persuaded needs no elaboration. Counsel may in the vernacular pay their money, and take their choice. The choice is not one for an "inferior" Federal court. It must await the judicial miracle of the loaves and fishes, four becoming five.

Mr. Justice Brandeis has, with his customary erudition, collected the cases (some twenty-six in all) in which that parable may be truly applied to the Supreme Court, Washington v. Dawson Co., 264 U.S. 219, 238, 44 S. Ct. 302, 68 L. Ed. 646; Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406, 52 S. Ct. 443, 76 L. Ed. 815. The passage of time enables us to add: Fox Film Corp. v. Doyal, 286 U.S. 123, 52 S. Ct. 546, 76 L. Ed. 1010, overruling Long v. Rockwood, 274 U.S. 729, 47 S. Ct. 587, 71 L. Ed. 1319; West Coast Hotel Co. v. Parrish, 300 U.S. 379, 57 S. Ct. 578, 81 L. Ed. 703, 108 A.L.R. 1330, overruling Adkins v. Children's Hospital, 261 U.S. 525, 43 S. Ct. 394, 67 L. Ed. 785, 24 A.L.R. 1238; Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S. Ct. 623, 82 L. Ed. 907, overruling Gillespie v. Oklahoma, 257 U.S. 501, 42 S. Ct. 171, 66 L. Ed. 338, and significantly Burnet v. Coronado Oil & Gas Co., above cited; Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487, overruling Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865; and Graves et al. v. People of New York ex rel. O'Keefe, 59 S. Ct. 595, 83 L.Ed. ___, 120 A.L.R. 1466 overruling Collector v. Day, 11 Wall. 113, 20 L. Ed. 122, and New York ex rel. Rogers v. Graves, 299 U.S. 401, 57 S. Ct. 269, 81 L. Ed. 306.

The order of the District Court is affirmed.