Appeal from the District Court of the United States for the Southern District of New York.
Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
This action is for a refund of estate taxes paid by the plaintiff-appellant as administrator c.t.a. of the will of John S. Adriance, who died in January, 1934. The disputed taxes are based upon the inclusion in the gross estate of the testator of the principal of two inter vivos trusts set up by him in 1923 and 1912, respectively, and upon the disallowance of a deduction of the estimated expenses on the final account in one of the trusts to be had after the death of the life tenant.
Under the trust created by the decedent in 1923 it was provided that the income of the corpus, comprising all the property, real and personal, which he then had or might thereafter acquire, should be paid to him during his lifetime and the principal and any unpaid income thereof should be transferred and delivered "to such person or persons as may be lawfully entitled thereto, whether as hires and next of kin of the * * * party of the first part or personal representatives or devisees or legatees under and by virtue of any Last Will and Testament of the * * * party of the first part."
The question regarding the 1923 trust is whether the corpus in which the decedent had an equitable life estate and over which he had a testamentary power of appointment is taxable under Section 302 (d) of the Revenue Act of 1926, 26 U.S.C.A.Int.Rev. Acts page 228.
Section 302 provides that the gross estate of a 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 -
"(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, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth."
The taxpayer argues that the enjoyment of the corpus was not subject at the date of the settlor's death to change through the exercise of a power to "alter" or "amend" because the power to appoint by will was reserved in the trust itself. This argument is fallacious, for only by a provision embodied in a trust instrument can there be any power "to alter, amend or revoke" it. The interpretation advocated would defeat the purpose of Section 302 (d) and indeed leave its provisions both ineffectual and meaningless. It can make no difference whether a trust deed reserves a power to amend the trust by an inter vivos instrument, or by a will, or by both. In either case the devolution of the corpus after the expiration of the life estate will be altered through the exercise of a power, as was done here.
The other attack upon the inclusion of the corpus of the trust in the taxable estate is based on the contention that such inclusion depended on Section 302 (d) of the Revenue Act of 1926, enacted three years after the trust of 1923 was set up and made retroactive in its application by Section 302 (h). It is argued that such a retroactive application violates the Fifth Amendment of the Constitution of the United States. To sustain this position the taxpayer strongly relies on Helvering v. Helmholz, 296 U.S. 93, 56 S. Ct. 68, 80 L. Ed. 76. But there the Commissioner sought to tax the entire principal of the trust, in which a power of appointment by will, reserved to the settlor in the trust instrument, was limited to creating a life estate after the termination of her own. No question was raised about the taxation of the subject of that limited power of appointment and the opinion of the Supreme Court did not discuss whether it was taxable. Accordingly, Helvering v. Helmholz, supra, did not decide that retroactive taxation of a transfer effected through the exercise of a testamentary power of appointment reserved to the settlor of a trust was unconstitutional. The principal subject of consideration was whether the reserved right to revoke the trust by an instrument to be executed by the settlor and other beneficiaries having adverse interests constituted a power to revoke within the meaning of Section 302 (d) and the court held that upon the facts presented the corpus was not subject to taxation because the provision for revocation by consent of all the beneficiaries was not a power within the meaning of Section 302 (d) and because a tax could not be laid retroactively on the corpus of a trust where revocation could only be effected by the consent of parties other than the settlor, who had interests adverse to a revocation. Helvering v. Helmholz, 296 U.S. 93, 98, 56 S. Ct. 68, 80 L. Ed. 76.
Our decision in Commissioner v. Chase National Bank, 2 Cir., 82 F.2d 157, certiorari denied 299 U.S. 552, 57 S. Ct. 15, 81 L. Ed. 407; Kimball v. Commissioner, 2 Cir., 71 F.2d 1011, certiorari denied 293 U.S. 607, 55 S. Ct. 123, 79 L. Ed. 698; Witherebee v. Commissioner, 2 Cir., 70 F.2d 696, and Porter v. Commissioner, 2 Cir., 60 F.2d 673, 675, affirmed 288 U.S. 436, 53 S. Ct. 451, 77 L. Ed. 8808 all sustain the taxon the corpus which the Commissioner assessed. In the case at bar the settlor had seven years after Sections 302 (d) and 302 (h) were enacted within which to renounce his power of appointment. Hence, in taxing the corpus, under our decisions last mentioned there was no violation of the Fifth Amendment. Moreover, even if it be assumed, as the taxpayer argues, that the settlor could not by filing with the trustee a release in favor of his heirs and next of kin, or by some other act of renunciation, terminate his powers of amendment and revocation, nevertheless he had a power to do these things that required no concurrence of others, as did the power in Helvering v. Helmholz, supra. The subject of the power, the exercise of which would take effect on his death, was, therefore, taxable. Porter v. Commissioner, 288 U.S. 436, 444, 53 S. Ct. 451, 77 L. Ed. 880; Reinecke v. Trust Co., 278 U.S. 339, 346, 49 S. Ct. 123, 73 L. Ed. 410, 66 A.L.R. 397.
On February 21, 1912, the decedent John S. Adriance made a contract with his wife for the settlement of marital differences in which they agreed that each should live separate from the other during the remainder of their lives and that neither should have any rights in the property of the other and neither should contest the will of the other, or, upon the death of the other, should claim anything from his or her estate. Under the contract the husband paid to the wife $15,000 and agreed to pay her $4,500 annually during her life in monthly installments of ...