Court Opinion

ID: 9453565
Source: CourtListenerOpinion
Date Created: 2023-08-04 18:17:37.861848+00
Date Added: 2024-06-11T17:33:42.946704
License: Public Domain

DAVIS, Judge
(dissenting):
I.
1. Even on the court’s own assumption that subjective motivation is all-controlling, the judgment should go for the Government. Under the rule of the first “line of cases” (as formulated in the majority opinion), I cannot escape the conclusion that Mr. and Mrs. Grace did give “consideration” to each other in the sense that the establishment of each trust was the quid pro quo for the other, and was intended as such. There is, first of all, the basic finding, adopted by the court, that the trusts “were created by, or at the instigation of, Joseph P. Grace as parts of what was essentially a single transaction.” Finding 53. This is far from an overstatement. The decedent was the sole decision-maker in the household; his wife accepted his choices without question, even for her property. Finding 5(a). The creation of two trusts in December 1931 followed this pattern (findings 10 and 45), and there is no possibility that Janet Grace was pursuing an independent course. The two trusts, moreover, were obviously inter-connected; Joseph developed the idea of both at the same time, he had his attorney draw them up simultaneously (findings 10 and 45), the instruments contained very similar provisions and were the same in form (findings 11(a), 12(a), and 13), they were both executed within a short period of time, and both covered substantial properties (findings 11 and 12).1
It follows in common sense, as I gauge it, that one of these inter-related trusts was in exchange for the other, one set-tlor was actually “paying for” the transfer made by the other. Of course, the Graces did not desire to acquire property from one another (finding 15) but neither did the Lehman brothers in the seminal decision and neither do the parties to any reciprocal trust arrangement. That is almost an irrelevant factor since the mutuality is all-important to the parties, not the property content of the individual transfers if they were isolated. Of course, Mrs. Grace as a person was *949not induced or caused to establish her trust by the previous establishment of Joseph’s trust. See finding 12(e). But he was her agent and acted for her in this as in all financial transactions — and he obviously wanted the trusts to be related, connected, and interdependent. Since Joseph was the only real moving party and Janet was wholly acquiescent, it is immaterial that there is no evidence of a factual “bargain” between them (see finding 30), or even a tacit understanding (finding 29), and that, quite likely, Janet Grace had no knowledge of her husband’s trust (finding 12(e)). It cannot be that the law frees from estate tax a reciprocal trust arrangement where, as here, the wife is the submissive instrument of her husband, while imposing the levy where the wife is a sovereign soul who, though making up her own mind, agrees with her spouse to adopt the cross-trust device. Gentlemen with compliant Biancas at their side instead of independent Katherines may enjoy some advantages, but certainly not that one.
2. A separate line of cases, in the court’s view, stresses tax avoidance, but the court concludes that “the reasonable inference to be drawn from the record as a whole is that Joseph P. Grace was not motivated by a purpose to minimize taxes of any kind in originally deciding to create the Joseph Grace and to have his wife create the Janet Grace trust * * My judgment, to the contrary, is that the taxpayers have failed to bear their burden of proving the absence of estate tax motivation.2
The majority concludes that this motive is negated, in the main, by the facts that Joseph Grace desired to avoid the impending gift tax (findings 10 and 15), and that the Graces had a longstanding practice of intra-family donations (findings 7-9 and 16-17), including a great number of trusts (finding 32). However, the wish to by-pass the gift tax is by no means inconsistent with a desire to avoid the estate tax as well, especially when, as is conceded, both trusts were deliberately part of a single undertaking. Cf. Orvis v. Higgins, supra, 180 F.2d 537, reversing 80 F.Supp. 64, 72, 74 (S.D.N.Y.1948); Estate of Carter, supra, 31 T.C. at 1152. Nor does the history of intra-family generosity and the decedent’s “trust-mindedness” support the conclusion. This pattern does not include, so far as the findings show, a single reserved life estate to the other spouse, much less cross-life-estates, in property transferred to the children; nor does it show that the Graces had ever made simultaneous transfers to one another. The uniqueness of these two December 1931 transfers suggests strongly that they were linked to each other, not to any post or ante family practice, and that they had a special purpose. Cf. Estate of Carter, supra, 31 T.C. at 1154. No non-tax reason has been given us why, in this instance, the Grace pattern of generosity to kin worked itself out through this unusual mechanism of interdependent cross-trusts — and I can think of none.
True, there is no direct evidence that the decedent actually had tax avoidance in mind. We do know, however, that he thought and talked about the supposed tax advantages of concurrent trust transfers between spouses. Alan Ross, an executive in the Trust Department of the Grace National Bank, was an advocate of reciprocal trusts as a mode of minimizing estate taxes (findings 36 and 37(e)); though Joseph Grace was not proved to have had direct contact with Ross on this subject, he was aware of the Ross plan and discussed it with Harold J. Roig, an executive of W. R. Grace and Company and a confidant of Joseph’s' (Roig recommended against it) (findings 39 and 44); various Grace business executives and friends or relatives of the decedent either knew of and talked about the idea or had been approached by Ross *950to execute such trusts (findings 38-42) ;3 contrary to decedent’s custom, he presented J. Morden Murphy (who handled most of the Grace family’s financial affairs) with a prepared draft of the Joseph Grace trust and possibly the Janet Grace trust for use as models (findings 35 and 45(f)); these drafts were very similar to the cross-trust instruments drawn by Alan Ross for D. Stewart Igle-hart, a personal friend of Joseph Grace and president of W. R. Grace and Company (findings 41, 42, and 45(f)) (see footnote 3). In addition, although this is not included in the findings, the draft trust instrument which Joseph brought with him, unlike any previously executed by him, designated the Grace National Bank as a trustee and — significantly— was prepared for the signature of Alan Ross on behalf of the bank.
This clear nexus between Joseph and the Ross tax-avoidance device — together with the lack of any other plausible reason for the cross-life-estates and their uniqueness in the Grace annals — persuade me of the probability that the decedent’s actions had a distinct estate tax coloration. At a minimum, the plaintiffs have not succeeded, for me, in their job of persuasion.
II.
1. But the most damaging crack in the foundation of the court’s opinion comes from its hydraulic stress on subjective motivation far beyond its proper weight. Even though the trusts were admittedly part of one transaction, the court still seeks to find whether the settlors actually intended to induce each other to enter into the arrangement and to “pay for” the other’s transfer, whether they actually intended to lessen estate taxes, and whether they were actually dominated by other motives. “Putting the wrong question is not likely to beget right answers even in law.” Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 170, 67 S.Ct. 237, 243, 91 L.Ed. 162 (1946) (Frankfurter, J., concurring). As I understand the reciprocal trust doctrine stemming from Lehman v. Commissioner of Internal Revenue, 109 F.2d 99 (C.A. 2), cert. denied, 310 U.S. 637, 60 S.Ct. 1080, 84 L.Ed. 1406 (1940), the correct question— once the cross-trusts are seen as interdependent (as has been found here) — is whether the trusts created by the two settlors put both in approximately the same economic position, objectively, as they would have been in if each had created his own trust without invoking or using the other as beneficiary. See Lowndes, Consideration and the Federal Estate and Gift Taxes: Transfer for Partial Consideration, Relinquishment of Marital Rights, Family Annuities, the Widow’s Election, and Reciprocal Trusts, 35 Geo.Wash.L.Rev. 50, 80 (1966). The essential purpose is to prevent a reciprocal arrangement from canceling the effect of an ostensibly complete inter vivos conveyance which on its face severs the settlor completely from the transferred assets.4
*951The estate tax is, of course, designed to tax transfers of property made at death. Congress recognized, however, that such an impost could not be effective unless there were some restrictions on inter vivos transfers. Through Section 811 it sought to “include in the gross estate inter vivos gifts ‘which may be resorted to, as a substitute for a will, in making disposition of property operative at death.’ ” Helvering v. Hallock, 309 U.S. 106, 114, 60 S.Ct. 444, 449, 84 L.Ed. 604 (1940). We have been taught by Estate of Spiegel v. Commissioner of Internal Revenue, 335 U.S. 701, 69 S.Ct. 301, 93 L.Ed. 330 (1949), that — once a “transfer” is shown — the critical test is the objective situation, not whether the decedent in his own mind resorted to the inter vivos transfer as a means of testamentary disposition.
In Spiegel the Court held, inter alia, that taxability under Section 811(c) (1) (C) “does not hinge on a settlor’s motives, but depends upon the nature and the effect of the trust transfer.” It is “immaterial” whether the interest upon which inclusion is premised “remains in the grantor because he deliberately reserves it or because, without considering the consequences, he conveys less than all of his property ownership.” Any other approach, “such as a post-death attempt to probe the settlor’s thoughts in regard to the transfer, would partially impair the effectiveness of the * * * provision as an instrument to frustrate tax evasions.” 335 U.S. at 705-706, 69 S.Ct. at 302-303. Although the Court was applying Section 811(c) (1) (C) (transfers “intended to take effect in possession or enjoyment” at the trans-feror’s death), its reasoning applies with at least equal force to Section 811(c) (1) (B), involved here, which is framed in still more objective terms.5
If taxability turns on states of mind, the “difficulty of searching the motives and purposes of one who is dead” is likely to render estate taxes on inter vivos transfers “a weak and ineffective means of compensating for * * * the withdrawal of vast amounts of property from the operation of the estate tax.” Heiner v. Donnan, 285 U.S. 312, 343, 52 S.Ct. 358, 367, 76 L.Ed. 772 (1932) (Stone, J., dissenting); see Bittker, The Church and Spiegel Cases: Section 811(c) Gets a New Lease on Life, 58 Yale L.J. 825, 835-837 (1949). In addition, family arrangements which appear entirely comparable in their actual impact will receive different tax treatment dependent on amorphous testimony as to states of mind.
Avoidance of this danger by not inquiring into motives is more strongly justified when the truly non-tax reasons for a particular form of arrangement are rare, at best. Cross-trusts which are shown to be truly reciprocal definitely have this characteristic. Originally developed by enterprising attorneys during the 1930’s as a tax avoidance device, nothing in their history indicates that they were engineered to fulfill any other function. See note 4 supra. Focusing on the beneficial interest or power granted to a decedent, one is hard put to find a purpose other than tax avoidance or, if the decedent was not fully aware of the tax implications, the aim of achieving some substitute for a will in disposing of property at death — to give the *952property at life’s end but to keep a grasp on it while life lasts. See Orvis v. Higgins, supra, 180 F.2d at 540-541; Estate of Carter, supra, 31 T.C. at 1153-1154; McLain v. Jarecki, 232 F.2d 211, 213-214 (C.A. 7, 1956) (dissenting opinion). The short of it is that, first, the obstacles to a fair determination of the actual subjective intent of the decedent are many and heavy; second, there is the highest probability that, by an interdependent reciprocal-trust arrangement, a decedent desires to avoid estate taxes or at least to achieve the type of transfer the estate tax is designed to assess (postponement until the transferor’s death of relinquishment of his right to possess and enjoy the property); and, finally, in the remote instance in which the decedent has some other curious purpose, the objective fact, whether he knows or desires it or not, is that he is tieing a string to the very property he purports to give completely away.6
2. This objective standard comes into play only after it is found that the cross-trusts are truly reciprocal, connected, interdependent; and in making the latter determination subjective intent does have its role. Clearly the estate tax permits a person during his lifetime to rid himself of property, and it also allows him to receive a beneficial interest in or power over the trust of another without necessarily having the corpus included in his estate. There is no doubt that this is true even if the chance effect of such independent transfers is to leave him in the exact situation he would have been in had he transferred his property retaining an interest or power similar to that granted by his benefactor. We can borrow an illustration from 0. Henry’s “Gift of the Magi”, transforming it in milieu and feeling-tone. Suppose Janet Grace were a self-reliant woman and, consulting her own attorneys and advisers, independently and secretly decided to make a Christmas present to Joseph and her children in December 1931 by setting up the Janet Grace trust. Moved in the same way and unaware of Janet’s plan, Joseph also decided, secretly, to make that kind of holiday gift to his family by establishing the Joseph Grace trust. On Christmas morning, the two executed trusts would appear to an outsider to be reciprocal and interdependent, but from the background we would know that that was not so. The appearance would mask the reality.
In the technical terms of the statute (§ 811(c) (1) (B)) the inquiry into true reciprocity and interdependence assesses whether the decedent made a “transfer”, even though he was not the nominal set-tlor. If the cross-trust arrangement was mutual and interdependent, there is such a “transfer”; if the crossing of the trusts was haphazard, not pre-arranged,' not part of a plan, there is no “transfer”. To that extent the background of the transaction, including subjective motives, is relevant. Motivation is used to determine the link between the trusts, and not, as a separate question, what the parties *953hoped or wanted to accomplish from their plan. The interdependence, in and of itself, furnishes the only “consideration” which the reciprocal trust doctrine should demand.
In the present case the findings and record show that the crossing was not haphazard but part of a single, interdependent transaction. See Part I of this opinion, supra. Accordingly there was a “transfer” by Joseph of the assets of the Janet trust, just as there was a “transfer” by Janet of the property in the Joseph trust. Those mutual transfers left Joseph, up to the limits of his wife’s trust, in the same position as if he had given himself, rather than his wife, the life interest under the Joseph trust. If he had done that directly, the tax would admittedly be due under § 811(e) (1) (B), no matter what his subjective motivation for creating the life interest. The estate should not escape because the same result came in more roundabout fashion. There is no need to delve further into Joseph Grace’s intentions or motives.
3. This analysis is, I believe, consistent with the results, though not with all the language in a few of the opinions, in the estate tax reciprocal-trust cases of which we are aware.7 The basic rationale of many, probably most, of the decisions is affirmatively in accord. Included are those cases emphasizing interdependence and, once that is found, holding the tax due without much more in the way of facts.8 Quite explicit are Cole’s Estate v. Commissioner of Internal Revenue, supra, 140 F.2d 636, and Hanauer’s Estate v. Commissioner of Internal Revenue, supra, 149 F.2d 857. Cole’s Estate upheld a Tax Court decision “based upon the legal effect of the trust agreements coupled” with the finding that “ ‘the property of the wife was in effect exchanged for that of the husband.’ ” 140 F.2d at 637, 638. It further held that “ ‘with few exceptions the law attaches legal consequences to what the parties do quite independently of their private purpose or intent.’ ” 140 F.2d at 638. Similarly, Hanauer’s Estate, supra, concluded that “the two trust indentures were contemporaneously developed and executed as though all part of a single transaction” and that, “[tjhere being no contention that the decedent’s transfer was one in contemplation of death, his motive was not controlling.” 149 F.2d at 859.
The few opinions which seem to insist, in part, on a conscious, subjective bargain-and-exchange seem to rest on a determination that the crossed trusts were not in fact interdependent. In Newberry’s Estate v. Commissioner of Internal Revenue, 201 F.2d 874, 875 (C.A. 3, 1953), the husband gave unrebutted testimony “that he would have created his trusts regardless of whether Mrs. New-berry had decided upon a similar course.” The trusts were created fifteen months apart in In re Leuders’ Estate, 164 F.2d 128, 132 (C.A. 3, 1947), and there was very little indication of interdependence. McLain v. Jarecki, 232 F.2d 211, 213 (C.A. 7, 1956), is not so clear, but the court seems to have treated the “donative state of mind once extant” between the spouses as showing that each was pursuing an independent course.9 The decisions are thus distinguishable, but to *954the extent the opinions reflect adherence to the narrow view that an actual subjective bargain is necessary, I would reject them as contrary to the aims of the estate tax provisions on inter vivos transfers and out of harmony with the bulk of the jurisprudence on this point.
For these reasons I dissent and would hold that the taxpayers are not entitled to recover.

. See also the evidence referred to infra as to the decedent’s probable tax motivation and the departure from the type of gifts the Graces had been making in the past or would make in the future.
The findings that the trust instruments were signed 15 days apart (findings 11 (a) and 12(a)) and that no attempt was made to equalize the value of the trust corpora (finding 45(g)) do not swing the balance the other way. The latter would be pertinent for transfers between spouses only in very special circumstances since the distribution of assets between husband and wife is rarely of great consequence and spouses infrequently deal with each other at arm’s length. Compare Estate of Ruxton, 20 T.C. 487, 494 (1953), with Cole’s Estate v. Commissioner of Internal Revenue, 140 F.2d 636, 638, 151 A.L.R. 1139 (C.A. 8, 1944). The first is insignificant in light of the finding that the instruments were drafted at about the same time. See Orvis v. Higgins, 180 F.2d 537 (C.A. 2), cert. denied, 340 U.S. 810, 71 S.Ct. 37, 95 L.Ed. 595 (1950) (6 day gap); Estate of Carter, 31 T.C. 1148, 1151-1153 (1959) (1 day); Estate of Eckhardt, 5 T.C. 673, 678-679 (1945) (6 days).

. The estate has the task of showing that it is entitled to recover under the governing rules. See Orvis v. Higgins, supra, 180 F.2d at 541; Estate of Eckhardt, supra, 5 T.C. at 680; Estate of Lindsay, 2 T.C. 174, 177 (1943).

. Among those whom Ross tried to convert were Harold J. Roig (finding 39); W. R. Grace, brother of Joseph and a trustee for each of the Grace trusts involved here (finding 40) ; and D. S, Igle-hart, president of the Grace company and a long-time friend of the decedent (finding 41). Apparently, of these, only Igle-hart was inclined to follow Ross’ plan. Findings 39-41. Although he did not hew to every aspect of the idea, the evidence supports the conclusion that he hoped to save some estate taxes when he and his wife executed the trust instruments drawn by Ross. The scheme was also a topic of discussion among the personnel of the Customer Securities Department (J. Morden Murphy and A. S. Rupley) and of the Legal Department (H. N. Deyo, A. B. Shea, and Cogswell). Finding 38. Finally, the record indicates that W. G. Holloway, a nephew of the decedent and a trustee on both trusts, knew of the plan although it is not clear whether he was fully aware of the estate tax implications.

. The background of reciprocal trusts is discussed in Colgan & Molloy, Converse Trusts — The Rise and Fall of a Tax Avoidance Device, 3 Tax L.Rev. 271 (1948). Congress has, in effect, approved the doctrine’s effort to close the loophole. In the Technical Changes Act *951of 1949, ch. 720, § 6, 63 Stat. 891, 893-94, it permitted those who had used the device prior to 1940 to give up their control over a reciprocal trust without paying a gift tax on the relinquishment. The Senate Finance Committee noted that, prior to Lehman, the device had been used “with the apparent intent of minimizing estate taxes” and that Lehman “put taxpayers on notice as to the probable tax consequences of reciprocal trusts in the future.” S.Rep.No. 831, 81st Cong., 1st Sess., at 5-6 (1949), reprinted in 1949-2 Cum.Bull. 289, 292.

. Even as to the word “intended”, the Court pointed out in Commissioner of Internal Revenue v. Estate of Church, 335 U.S. 632, 638, 69 S.Ct. 322, 325, 93 L.Ed. 288 (1949), that the historic test of “ ‘intended’ was not a subjective one, * * * the question was not what the parties intended to do, but what the transaction actually effected as to title, possession and enjoyment.”

. In Spiegel the Court held that an infinitesimal reversionary interest arising by operation of state law was enough to bring the transferred property within the decedent’s gross estate under the portion of Section 811(c) covering transfers “intended to take effect in possession or enjoyment” at death. Shortly afterwards, Congress repudiated this particular result when applied to transfers made before October 8, 1949, by requiring (1) that the reversionary interest be expressly reserved in the trust instrument and (2) that the value of the interest exceed 5 per cent of the value of the property transferred. See Technical Changes Act of 1949, eh. 720, § 7(a), 63 Stat. 891, 895, as amended by Technical Changes Act of 1953, ch. 512, § 207, 67 Stat. 615, 623. However, there is no indication that Congress, even through this express-reservation requirement, meant to make the transferor’s subjective intent a crucial factor for taxation. See Bittker, Church and Spiegel. The Legislative Sequel, 59 Yale L.J. 395, 410 (1950). But cf. Estate of Marshall, 16 T.C. 918, 921-923 (1951), aff’d, 203 F.2d 534 (C.A. 3, 1953). As for transfers after October 7, 1949, the statutes do not require that the reversionary interest be specifically reserved. See Int.Rev.Code of 1954, § 2037 (a) (2); Technical Changes Act of 1949, supra, § 7(a).

. I do not discuss the non-estate tax cases, which often present complicating problems.

. See Estate of Moreno v. Commissioner of Internal Revenue, 260 F.2d 389, 392 (C.A. 8, 1958); Orvis v. Higgins, supra, 180 F.2d at 540; Hanauer’s Estate v. Commissioner of Internal Revenue, 149 F.2d 857, 858 (C.A. 2), cert. denied, 326 U.S. 770, 66 S.Ct. 175, 90 L.Ed. 465 (1945); Estate of Carter, supra, 31 T.C. at 1154; Estate of Newberry, 6 T.C. M. 455 (1947), aff’d per curiam, 172 F.2d 220 (C.A. 3, 1948); Estate of Eckhardt, supra, 5 T.C. at 680, 682; Estate of Fish, 45 B.T.A. 120, 125 (1945); cf. Blackman v. United States, 48 F.Supp. 362, 368, 98 Ct.Cl. 413, 426-427 (1943). Compare Estate of Ruxton, supra, 20 T.C. at 494; Estate of Resch, 20 T.C. 171, 183 (1953); Estate of Lindsay, supra, 2 T.C. at 177, 179.

. Estate of Guenzel v. Commissioner of Internal Revenue, 258 F.2d 248, 252, 254 (C.A. 8, 1958), contains dicta suggesting the bargain-and-exchange approach, but also quotes the broader formulation of Cole’s Estate, supra.