Court Opinion

ID: 4480478
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:19.59466+00
Date Added: 2024-06-11T14:53:59.548462
License: Public Domain

Pierce, J., dissenting: I was the trial judge in this case and am the only member of our Court who saw and heard the witnesses testify. Based on my familiarity with the case, I think the Court has approached the problems herein from too narrow and unrealistic a viewpoint; and that its decisions on issues 1 and 3 are erroneous. As regards issue 2,1 point out that if the Court had decided issue 1 in favor of the petitioner (as I believe it should have done) it would not have reached or had to decide issue 2, which appears to involve a possible extension of principles approved by the Supreme Court in United States v. O'Malley, 383 U.S. 627 (decided Mar. 23, 1966), reversing the decision of the Seventh Circuit at 340 F. 2d 930. I. Be Issue 1 1. The basis of the Court’s opinion as to issue 1 is that it regards the decision in Lober v. United States, 346 U.S. 335 (1953) to be, in effect, an insuperable obstruction to reaching an opposite result. As the Court frankly stated, it applied “Albeit reluctantly” what it considered to be standards prescribed by Lober; and it also stated that, “If the question herein were one of first impression, it might have been possible to sustain the petitioner’s position under section 2038 [1954 Code].” In my view Lober presents no such obstruction to attaining the contrary result which the Court indicated that it might otherwise have reached. I believe that Lober is here distinguishable on its facts, and is therefore inapplicable. The Court, as I have hereinabove suggested, appears to have approached the case from too narrow and unrealistic a viewpoint, and thus has failed to perceive that the transactions here considered simply effected: (a) The making of fully completed, closed, and irrevocable gifts of shares of corporate stock by parents to their minor children; and (b) the concurrent creation of custodian-type trusts which, by reason of the underage legal disabilities of the children, were necessary for the preservation, management, and administration of the gift properties until such disabilities would be eliminated by the children’s attainment of their majorities.. In such circumstance I would have applied the principles which were applied by the Court of Appeals for the Second Circuit in its recent opinion in Estate of J. F. Chrysler v. Commissioner, 361 F. 2d 508 (1966), reversing the decision of this Court in 44 T.C. 55 (1965). In that case the Court of Appeals decided: That the decedent therein had relinquished to his children all beneficial interest in the gift property, without reserving either a life estate or the power to terminate or alter the enjoyment thereof; that he could not thereafter increase his powers over the property previously transferred, without the consent of the children; and hence, that it was not necessary to resolve questions pertaining to the applicability of sections 2036 and 2038, of the 1954 Code. The Lober case, which involved application of a statute cognate to the last-mentioned section, was cited in the Government’s 'brief filed with the Second Circuit in the Chrysler case, but was not even mentioned in that Court’s opinion. 2. The following comparison of the transactions involved in the present Varian case and in the Lóber case, reveals the distinction between these cases. (A) In the instant Varian case, the Court’s findings of fact show that in 1955 the decedent and his wife decided to make a gift to each of their three minor children (whose ages were then, 11 years, 5 years, and 4 years, respectively). The gifts consisted of 425 shares of stock in the Varian Associates corporation which the decedent had founded. They were of modest value ($8,500 in the case of each child) because the parents wished to prevent the children from getting an idea that they were “wealthy people’s children,” instead of being self-reliant. The parents hoped that this stock, in which they had confidence but on which no dividends were expected to be paid in the foreseeable future, would appreciate in value, so as to assure the children of university educations consistent with their abilities; and that with such assistance, the children would be able to establish satisfying careers. The actions of the parents in furtherance of this plan met all requirements for complete and irrevocable gifts, i.e.: The parents intended (and they formally stated in sworn statements executed for the purpose of meeting requirements of California law) that the gifts were “outright” and “irrevocable”; the stock was transferred, as has been stipulated; and acceptance of the gifts (which is presumed where donees are minors and the gifts are for their benefit) was formally made by the parents in their capacities as trustees of the custodian-type trusts that were concurrently created to hold the property for the children during their underage legal disabilities. With further regard to the children’s trusts, these were, in reality simply devises for administering property of minors without going through the cumbersome and expensive process of creating and operating guardianships which otherwise would have been necessary. Even if the stock here involved had been acquired by the children from grandparents through inheritances, instead of through gifts from their parents, either custodian-type trusts or guardianships would have been required under California law, since the value of the property was in excess of that which the local law permitted minors to receive directly. See Cal. Prob. Code secs. 1400, 1430; Pollack v. Industrial Accident Commission, 5 Cal. 2d 205, 54 P. 2d 695, 697-698. The powers granted to the trustees under the declarations of trust were fiduciary in character. They are similar to powers which are commonly employed in minors’ trusts; they are identical with the powers which Congress incorporated in the new provisions of section 2503(c) of the 1954 Code for the purpose of indicating those powers under which transfers to minors would be recognized as present interests (as distinguished from “future interests”) for gift tax purposes. Said powers also were similar, and indeed less broad, than those selected for use in making gifts in accordance with the Uniform Gifts for Minors Act, which was approved in 1956 by both the National Conference of Commissioners on Uniform State Laws and also by the American Bar Association, and of which counterparts have now been adopted by nearly all the States, and by Congress on behalf of the District of Columbia. See 9B Uniform Laws Ann. 174, and 1965 cum. ann. part 62-63. The inclusion in all such powers, of discretionary authority for the fiduciary to distribute income or principal for a minor beneficiary’s benefit, is necessary for protection of the minor in the event of unforeseeable catastrophes (such as loss of support through death of both parents in a common accident) that might make it necessary for the fiduciary to resort to the minor beneficiary’s own property. It is well settled that transfers of interests in property and the character of interests in trusts, are governed by State law as distinguished from Federal law. The Supreme Court said in Helvering v. Stuart, 317 U.S. 154, 161-162: Grantees under deeds, wills and trusts, alike, take according to the rule of the state law. * * * Congress has selected an event, that is the receipt or distributions of trust funds by or to a grantor, normally brought about by local law, and has directed a tax to be levied if that event may occur. Whether that event may or may not occur depends upon the interpretation placed upon the terms of the instrument by state law. Once rights are obtained by local law, whatever they may be called, these rights are subject to the federal definition of taxability. Recently in dealing with the estate tax levied upon the value of property passing under a general power, we said that “state law creates legal interests and rights. The federal revenue aets designate what interests or rights, so created, shall be taxed.” * * * To the same effect see Blair v. Commissioner, 300 U.S. 5, 9; and see also statements in Commissioner v. Stern, 357 U.S. 39. Under the local law of California, the decedent herein and his wife, while acting as trustees of the custodian-type trusts, could not have applied the children’s trust property in discharge of their parent-obligations to support the children, so long as they were able to adequately meet such obligations. Ex parte Carboni, 46 Cal. App. 2d 605, 116 P. 2d 453, 457; In re Keck,, 100 Cal. App. 513, 280 P. 387; and Fagan v. Fagan, 43 Cal. App. 2d 189, 110 P. 2d 520, 525. See also to the same effect: In re Ceas’ Estate, 134 Cal. 114, 66 P. 187; and Cal. Prob. Code sec. 1504. In the instant case, the evidence establishes conclusively that the decedent was able to, and did, adequately perform his duty to support and educate all his children at all times; and hence, section 2036 (a) (1) of the Code is not here applicable. Even if Varían and his wife had decided (improbable as it would have been) to distribute all the trust properties to the children prior to their attaining majority, California law would have required that property of such substantial value be delivered not to the children directly, but to guardians appointed to receive the same. In such event, the result would have been a mere shifting of the property from one fiduciary to another, without effecting any change in “the enjoyment thereof” within the meaning of section 2038 of the Code. As was pointed out by the Supreme Court in the Lober case, supra, and also in Commissioner v. Estate of Holmes, 326 U.S. 480, 486— so long as property of a child is being administered for him by a fiduciary (there a trustee), the child has no “present right to immediate enjoyment” of either the income or principal. Finally, in the instant case the death of Varían did not effect any change in property rights of either the donors or the donees; nor did it effect any change in the powers granted to the fiduciaries under the declarations of trust involved. Furthermore, each of the three trusts had only a single beneficiary, whose identity at the time of the decedent’s death was not subject to change. Also, the time when the property of each trust would become distributable under the terms of the declarations of trust, was definitely fixed and not subject to change. Thus, keeping in mind that the Federal estate tax is an excise on the transfer of property from the dead to the living, and on the extin-guishment of interests or powers held by the decedent, it becomes clear that none of the provisions of the Federal estate tax law is here applicable. (B) Considering next the transactions in the Lober case, none of the trusts therein created was a custodian-type trust under which property of a minor was to be administered solely during his underage legal disability. Bather, each of the Lober trusts was to continue until the beneficiary reached the age of 25 years which was 4 years after he would attain majority — unless Lober elected to exercise his retained power to change the date on which the trust property would become distributable. Said trusts were, in substance, two-stage trusts. The first stage thereof was to continue until the beneficiary attained his majority, at and after which time the trust income but not the principal was to be distributed to him; and then the second stage would commence, during which only the trust principal would continue to be held in trust for the adult beneficiary, until he attained the age of 25 years — unless as before stated, the decedent elected to shorten such period. Thus, Lober did not intend at the time he created the trusts in 1929, to relinquish all his control over the trust property. Bather he retained substantial powers that would have enabled him during the second stage to hold onto the “purse strings” of the trust property; and which would have empowered him, either to distribute the trust property to the adult 'beneficiaries for their full 'present enjoyment— to use, spend, waste, or invest as they might desire; or on the other hand to elect, if the adult beneficiaries did not act or live in a manner which suited him, to continue the trusts until the beneficiaries attained their respective ages of 25 years. Under the latter situation the adult beneficiaries would have been deprived of their full present enjoyment of the property. It was this second stage of the Lober trusts to which the Supreme Court appears to have given principal consideration in its decision; for the Court said: The Lober beneficiaries, like the Holmes beneficiaries, were granted no “present right to immediate enjoyment of either income or principal.” * * * To get this full enjoyment they had to wait until they reached the age of twenty-five ■unless their father sooner gave them the money and stocks by terminating the trust under the power of change he kept to the very date of his death. * * * What we said in the Holmes case fits this situation too: “A donor who keeps so strong a hold over the actual and immediate enjoyment of what he puts beyond his own power to retake has not divested himself of that degree of control which * * * [the estate tax statute] requires in order to avoid the tax.” [Emphasis supplied.] Based on all the foregoing, I would have held with respect to issue 1, as hereinbefore suggested: That the Lober case is here distinguishable ; and that neither the provisions of section 2036 of the Code, nor the provisions of section 2038 which is cognate to an earlier statute to which the Lober case pertained, is here applicable. I would have decided issue 1 in favor of the petitioners, in accordance with the rationale of the Second Circuit’s opinion in the above-cited Chrysler case. II. Be Issue 3 I think the Court’s decision as to issue 3 is unrealistic. Kealizing that this issue is largely one of fact, and that in such situation importance usually is attached to the views of the trial judge, I deem it appropriate to here again state that I was the trial judge in this case and am the only member of the Court who saw and heard the witnesses testify. Therefore, I also deem it appropriate to point out some of the principal factors established by the evidence, which cause me to feel that a contrary decision should have been made as to this issue. Both this Court and others have previously decided cases involving a similar question, i.e.: Whether or not the possibility of invasion of a charitable bequest is sufficiently remote to justify such possibility being disregarded. See, for example, Estate of Mary Cotton Wood, 39 T.C. 919; Estate of Oliver Lee, 28 T.C. 1259; and Ithaca, Trust Co. v. United States, 279 U.S. 159. In dealing with, such a question, I feel that the approach to the problem must be reasonable and realistic, and not overly pessimistic; for otherwise, if too much emphasis is placed on all the catastrophes, physical and mental illnesses, and financial misfortunes that could beset the person for whose benefit the invasion might be made, it seems likely that in no such case would the claimed charitable deduction be allowed. Thus, in resolving such a question it is essential that all factors revealed by the evidence which bear upon the reasonable possibility of the charitable bequest being invaded, must be very carefully considered and weighed. In the instant case, I regarded the testimony of all the witnesses to be highly credible. I do not agree with the Court’s suggestion that the testimony of the trustees of the charitable trust should be viewed as obviously having “a self serving aura”; and its further suggestion that “the trustees would be more likely to accede to pressures to use the [charitable] funds for the benefit of the children.” To the contrary, I think the trustees testified with the higher motive of trying to be frank and helpful to the Court in expressing their views with respect to a situation with which they were especially well acquainted. I would have accorded substantial weight to the trustees’ testimony, including their opinions that the possibility of invasion was remote. Also, I would have given no weight to the fact that paragraph (g) of article 10 of the decedent’s last will, is labeled “Emergency Provision.” The evidence indicates that such provision had been carried over from a prior will of the decedent which had been executed at an earlier time when the value of the assets of the children’s trusts was considerably less, and when such provision then seemed to be appropriate. The evidence also establishes that at the time when decedent’s attorney was preparing the draft of the last will here involved, decedent expressed the opinion that, because the value of the stock held under the children’s trusts had appreciated beyond his expectations, he thought the' so-called Emergency Provision was no longer necessary. He thereupon definitely instructed the attorney to delete the same from the draft of the new will; but he was thereafter persuaded, though reluctantly and contrary to his expressed views, to permit said “Emergency Provision” to remain, in his last will and testament. . Viewed in this setting I think the “Emergency Provision” should be dealt with cautiously; for otherwise an unjust result might flow from the action of a layman in being overeoncerned for the welfare of his children. Furthermore, I think that the Court in considering only “three potential sources of funds to which the children could look,” inadvertently overlooked what I regard to be the most important potential source of all, to wit: The future earnings of the children from the careers for which they were being prepared and educated. Most parents would reasonably expect, I believe, that such future earnings of children so reared and educated, would be the principal source for their meeting necessary future needs. The situation here presented, and the factors which I think justify a different decision on the present issue, are these: The Varían family, notwithstanding the parents’ wealth, had a simple background, as the Court has found, and it maintained a modest standard of living. It thus is reasonable to anticipate that the children, whom the decedent had strived to prevent from acquiring any idea that they were “wealthy people’s children,” would continue to maintain in the future, this same modest and sensible standard of living. The children were all healthy; were enrolled in good schools; and were expected to obtain, with their mother’s assistance, university educations which would make them self-reliant and enable them to establish satisfying careers of their own. Also the parents, in furtherance of assuring fulfillment of their plan, had established the inter vivos trusts for their children. The corpus of each of these trusts consisted of listed stock of Varían Associates, a corporation that had enjoyed phenomenal success and could reasonably be expected to be successful in the future. This stock, at the time of decedent’s death, was being managed for the children under custodian-type trusts, and was to be distributed to the children upon their attaining majority. The value of the stock in each trust at the time of decedent’s death, was more than $300,000. An additional factor to be considered is the situation regarding the charitable trust. The evidence shows that this trust was viewed with great pride and interest by both the decedent and his wife; and the testimony of three of the five trustees was to the effect that they would resist any invasion of the trust for the children’s benefit. Viewing the situation as a whole, as reasonably and realistically as I can, I think that most prudent persons including those who are parents, would be astounded by any suggestion that the Varían children — who were healthy normal children, who were being reared and educated with an objective of having them provide for themselves, and who in addition had each been funded with a “nest egg” of over $300,000 — would not be able to take care of their future needs without reaching into the funds of the charitable trust. I would have held, in deciding issue 3, that the possibility of invasion of the charitable trust for the children’s benefit is so remote as to be negligible. Therefore, I would have decided issue 3 in favor of the petitioners. FORRESTER and Fat, agree with this dissent solely as to issue 3.