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Holdeen v. Ratterree

decided: October 2, 1959.


Author: Moore

Before CLARK, Chief Judge, and SWAN and MOORE, Circuit Judges.

LEONARD P. MOORE, Circuit Judge.

Plaintiff-appellant, Jonathan Holdeen, brought suit against Riley J. Ratterree, as Late District Director and Fulton D. Fields, as Late Acting Director of Internal Revenue (usually referred to as the "government"), to recover amounts which he claimed had been wrongfully and illegally collected as taxes on his income for the calendar year 1945. In the ninety-day letter containing a statement of determination of deficiency, the Commissioner gave as one reason for the additional tax that, with respect to "ordinary income and net capital gains alleged to have been permanently set aside for charitable purposes," the gifts in trust were "void ab initio by reason of the period of accumulations provided for in the trust instruments." In most of the trusts, the period of accumulation was one thousand years. In two, it was for a much briefer period, namely, five hundred years. The second reason asserted for the imposition of the additional tax was that the purportedly distributable income was taxable to plaintiff "by reason of the ownership and control of the trust corpus retained by him after such transfers in trust." By 3ette9 dated February 24, 1958, the district director rejected plaintiff's claim for refund of $111,962.64 of income tax paid on his 1945 year liability "because income from these purported trusts for the year 1945 is taxable to the grantor under Section 22(a), Section 166 and Section 3814 of the Internal Revenue Code of 1939 [26 U.S.C.A. ยงยง 22(a), 166, 3814]."

Upon the trial to recover the tax paid and after plaintiff had submitted his proof, the government moved for a directed verdict upon the pleadings and the proof and also for a dismissal for failure to prove a case. The court reserved decision. At the end of the defendants' case, the government renewed its motion for a directed verdict. Plaintiff also made a similar motion. Decision was reserved on both motions.

Plaintiff and counsel for the government submitted various special interrogatories for the jury, and plaintiff moved, in the alternative, to send the case to the jury for a general verdict. The trial court denied all requests, but did submit to the jury a special question, namely, "Did Jonathan Holdeen Possess such control over the property of the trusts mentioned below so that he be considered as substantially the owner of the trust properties for income tax purposes?" Around this question he built up a rather lengthy charge in which he pointed out the various elements to be considered by the jury in answering the question. The substance of his charge was that no one element was decisive, that the evidence was undisputed, and that the jury's real function was to draw from the evidence such inferences as would enable them to answer the question posed. Specifically, he said: "What does that evidence lead you to infer? Does it lead you, a proper inference leads (sic) you to the fact that he did exercise control so as to amount to substantial ownership, or does it lead you to the fact that he did not exercise substantial control that leads to ownership. That is all there is to this case." A chart was then submitted to the jury so that it could in writing indicate as to each of the trusts involved whether its answer was "yes" or "no." The jury struggled with this question far into the early hours of the morning and answered "yes" as to six of the seven trusts (Exhibits C, 4, N, 7, 8, and 5) and as to Exhibit 6, "no." The jury was then excused in order that court and counsel could "find out just a little bit more in regard to just what this verdict means." The motions for a directed verdict had not yet been disposed of. The government then moved to set aside what it referred to as "that portion of the verdict" with respect to Exhibit 6, the trust as to which the jury had answered that the plaintiff had not retained substantial ownership. Plaintiff moved to set aside the portion of the verdict adverse to him. Decision on these motions was reserved. Thereafter, the court in an opinion (D.C., 166 F. Supp. 694, 700) disposed of all motions by denying plaintiff's motion to set aside the "special verdict of the jury" and granting defendants' motion to set aside the verdict as to Exhibit 6. The court gave as his reason for overturning the jury's "verdict" as to the one trust the circumstance that since "there was no attempt made to separate the activities of the settlor as to that trust from the others, no sound reason appears which would justify a different result." The court was not too certain as to what the jury might have considered in reaching its conclusion and indulged in some needless self-criticism as to its charge. The findings of the jury as to Exhibits C, 4, N, 7, 8, and 5, were adopted and the finding as to Exhibit 6 set aside, the court substituting its own finding that plaintiff did exercise such control over the trust property that he should be considered as substantially the owner thereof. The conclusion was that plaintiff had failed to sustain his burden of proving otherwise; the motions to set aside the verdict were decided as outlined above; defendants' motion for a directed verdict was granted and judgment dismissing the complaint was entered.

In summary, upon this rather complicated procedural background, it would appear that the court received the answer by the jury to his question, accepted it in part and rejected it in part, and thereafter granted the motions for a directed verdict, on which decision had been reserved, in favor of defendants. From the judgment entered thereon plaintiff appeals.

Plaintiff, a lawyer by profession but primarily engaged in business activities since 1943, has a large family which he frequently refers to as "our clan." His family consists (as of the date of the trial) of his wife, ten children, including an adopted son and a foster child, and twenty-five grandchildren. He has been intensely interested in the effect of accumulation of income and the compound interest table. His writings reflect this interest in his books, "Cult of the Clan" and "Futurite Cult." He is somewhat more practical than the economist who would speculate on the present value of one cent invested at the time of Moses. A sentence from one of his books advises that one cent today invested at four per cent interest for one thousand years will become one thousand trillion dollars. Considering the fact that the money invested in only one of the trusts involved if kept invested at compound interest for one thousand years "would amount to all of the total value of the world," the trial court's wonderment as to how "two of them [the trusts] could be carried out when there is only one world" can easily be understood and shared even in this day of space exploration. Possibly other worlds will mave to be discovered for plaintiff's future investments. Although plaintiff modeled his plan somewhat after that of the thrifty Benjamin Franklin who limited himself to two hundred years (1790-1990), he was not too sanguine that his trusts would not be interfered with by the courts before the day of final accounting arrived. Indeed, such an accounting would be a monumental task because an actuary testified that the corpus of the five trusts for one thousand years alone would be "nine million, nine hundred eighty-eight thousand, three hundred and eighty million billions."

Although the Commissioner assigned as one of his reasons for assessing the additional tax his conclusion that these trusts were "void ab initio by reason of the period of accumulations provided for in the trust instruments," i. e., from 500 to 1,000 years, this appeal presents only the question to be presently resolved, namely, whether plaintiff-taxpayer retained such substantial ownership and control over the property of the trusts that the income therefrom was properly taxable to him. The answer must be found in the trust instruments themselves and in the actions of the settlor and the trustees in the actual administration of the trusts and the handling of the assets therein.

The terms of the trusts varied considerably. The significant features of each are as follows:

Exhibit C: The trust agreement recites that it was executed in 1936, though it is witnessed as of 1938. The trustee, Janet Holden, plaintiff's daughter (Janet Holden Adams after her marriage) was given power to invest without restriction until 1955, and to loan trust funds at interest. Income was to be paid equally to plaintiff's wife and to his father's great-grandchildren until the death of the survivor of Haldis and Hildred Holden, daughters of plaintiff, when the corpus was to be transferred to a Pennsylvania bank as successor trustee. The successor trustee was to pay one-tenth of one percent of the income of the trust multiplied by the number of years which had elapsed since 1936, but not in excess of $200,000 in any year, to Hartwick College until 2936, when the corpus and accumulation was to be paid to the State of Pennsylvania.

The trustee was given the right to appoint a substitute trustee until Haldis and Hildred should die, subject to plaintiff's paramount right to make such an appointment. Plaintiff reserved the right to vary the proportions in which the great-grandchildren might take, to exclude any such beneficiary, to name as income beneficiaries any descendants of great-grandchildren, and to substitute as residuary beneficiary any other charity or governmental unit.

Exhibit 4: This trust agreement is similar to Exhibit C, except it was witnessed in 1936 and plaintiff did not reserve the right to modify the provisions as to beneficiaries.

Exhibit N: The agreement states that it was made in 1936. Janet Holden [Adams] is trustee, with powers as in Exhibit C. Income is to be applied for the benefit of Hildred during her minority and thereafter, subject to plaintiff's reserved right to vary the shares of income among the income beneficiaries, except his wife, who are Hildred and the great-grandchildren of plaintiff's father. Otherwise, the trust is like Exhibit C, though plaintiff reserved no right to substitute residuary beneficiaries.

Exhibit 7: The agreement states that it was made in 1940. Maxwell MacPherson, plaintiff's son-in-law, as trustee, is directed, during the lives of Cyrus and Pamela Holdeen and of any unborn grandchild of plaintiff then in being, to pay the net income to the mothers of minor descendants of plaintiff, other than sons and daughters, with certain variations as to accumulation during the minority of such a descendant. The remainder is to be administered by a Pennsylvania bank which is to pay one onethousandth of the income, multiplied by the number of years elapsed since 1940 until 2340, and thereafter one-tenth of the sum so calculated, to Talladega College, "and pay the remainder thereof and in the year 2940, the principal" to the State of Pennsylvania. Plaintiff reserved the right to change the income beneficiary provisions ...

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