Opinion
No. J-639.
June 2, 1930.
Suit by Henry P. Williams and another, as executors of the last will and testament of George W. Williams, deceased, against the United States.
Judgment for plaintiffs.
This suit is for the recovery of $1,679.40 additional estate tax exacted by the defendant, with interest.
The tax in question arose as a result of the inclusion by the Commissioner of Internal Revenue in the gross estate of the decedent of the amount of $27,990.02 as the value of decedent's interest in certain real property transferred on May 7, 1917, by John H. Kohnke to the decedent as trustee for the use of himself and wife during their life and thereafter to his children. The amount which the Commissioner determined to be the value of plaintiffs' interest in the property was included in the gross estate as a transfer intended to take effect in possession or enjoyment at or after decedent's death.
Special Findings of Fact.(1) George W. Williams, a resident of Charleston, S.C., died April 27, 1923, leaving a last will and testament under which the plaintiffs herein were named as his executors. The plaintiffs qualified as executors, and are still acting in that capacity.
(2) On May 7, 1917, John H. Kohnke duly executed an instrument, a true copy of which is attached to the petition in this case as Exhibit A, and by reference made a part of these findings, which instrument, so far as pertinent to the question presented, is as follows:
"Know all men by these presents, That I, John H. Kohnke, unmarried, in consideration of the sum of five dollars ($5.00) and other valuable consideration to me in hand paid, at and before the sealing and delivery of these presents, by George W. Williams, the elder, herein nominated as trustee, on the trusts hereafter set out (the receipt whereof is hereby acknowledged), have granted, bargained, sold and released, and by these presents do grant, bargain, sell, and release unto the said George W. Williams, the elder, as trustee, on the trusts hereafter set out:
"To have and to hold, the said premises with its rights, members, hereditaments and appurtenances, unto the said George W. Williams, the elder, as trustee, on the trusts hereafter set out, his heirs, successors in the Trust and assigns, forever, in trust to and for the following uses, intents, and purposes, that is to say: In trust for the joint use of the said George W. Williams, the elder, and Margaret A. Williams, his wife, for and during the term of their joint lives, the same not to be subject to the debts, contracts, or engagements of any present or future wife or husband of either of them and from and after the death of either the said George W. Williams, the elder, or the said Margaret A. Williams then in trust for the use of the survivor during the term of his or her natural life and from and after the death of the survivor then in trust for the lawfully begotten child or children of the said George W. Williams, the elder, who may be alive at the death of such survivor, share and share alike, freed and discharged from all further trusts, to them and their heirs and assigns forever, the child or children of any deceased child of the said George W. Williams, the elder, to take such share as his, her, or their parent would have taken if alive.
"And I do hereby bind myself, my heirs, executors, and administrators to warrant and forever defend all and singular the said premises above described (except that part thereof known as Cedar Island, to which I have hereby granted all my right, title, interest, and estate), unto the said George W. Williams, the elder, as trustee as aforesaid, his heirs, successors, and assigns, against me and my heirs, and all other persons whomsoever lawfully claiming or to claim the same or any part thereof."
(3) April 4, 1924, the executors filed an estate tax return for the estate of George W. Williams under the provisions of the Revenue Act of 1921 showing a net estate of $483,447.65 and an estate tax liability of $15,506.86. This tax was paid April 28, 1924. On May 21, 1924, an additional amount of $1.75 was paid, making a total of $15,508.61. The return did not include as a part of the estate any value with respect to the lands conveyed by the deed of trust above mentioned dated May 7, 1917.
(4) In July, 1926, the Commissioner of Internal Revenue assessed an additional estate tax of $3,484.37, which was paid under written protest on July 31, 1926, upon demand of the collector.
(5) On March 5, 1928, the executors filed a claim for refund of $3,526.74, representing a claimed overpayment of tax for the estate due to the inclusion as part of the taxable estate of $58,779.05 covering certain transfers of real estate and including the transfer made by the deed of trust of May 7, 1917, hereinbefore mentioned. June 25, 1928, the Commissioner of Internal Revenue rendered his decision allowing a claim for refund in the amount of $1,847.34 and disallowing it for the remainder, or $1,679.40, and issued a certificate of overassessment accordingly. Thereafter, on July 3, 1928, plaintiffs received Treasury check for the amount of overpayment, together with $197.61, interest thereon. The partial allowance of the claim for refund was due to the exclusion from the estate of the decedent of $30,789.03 representing transfers other than the said transfer of May 7, 1917. The rejection of the claim in the amount of $1,679.40 was due to the inclusion as a part of the taxable estate of the amount of $27,990.02 on account of the transfer of May 7, 1917.
William M. Williams, of Washington, D.C. (Edmund B. Quiggle, Williams, Myers Quiggle, all of Washington, D.C., and Buist Buist, of Charleston, S.C., on the brief), for plaintiffs.
Fred K. Dyar, of Washington, D.C., and Herman J. Galloway, Asst. Atty. Gen., for the United States.
Argued before BOOTH, Chief Justice, and LITTLETON, WILLIAMS, and GREEN, Judges.
The questions presented are: (1) Whether the transfer of May 7, 1917, from John H. Kohnke to the decedent as trustee for himself and his wife was such a transfer intended to take effect in possession or enjoyment at or after the decedent's death as may be included in the decedent's gross estate within the meaning of section 402(c) of the Revenue Act of 1921; and, if so, (2) whether the taxation of an amount representing the transfer as a part of the estate of the decedent by the Revenue Act of 1921, which was passed more than four years after the transfer was made, is constitutional.
Section 402(c) of the Revenue Act of 1921, 42 Stat. 227, provides:
"That the value of the gross estate of the 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 — * * *
"(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act). * * *"
The plaintiffs contend, first, that the tax in question was wrongfully exacted, for the reason that the statute under which it was collected applies only to interests "of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust," and that inasmuch as the instrument in question which made the transfer and created the trust was made by John H. Kohnke and not by the decedent, there was no authority for the inclusion of any amount in respect thereof in the decedent's gross estate; secondly, that irrespective of whether the transfer was made by the decedent within the meaning of the statute it was not intended to take effect in possession or enjoyment at or after the decedent's death; and, thirdly, that if it be held that the transfer was one made by the decedent and intended to take effect at or after death, the Revenue Act of 1921 is unconstitutional under Nichols v. Coolidge, 274 U.S. 531, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A.L.R. 1081, to the extent that it taxes retroactively as a part of the decedent's gross estate the interest so transferred.
We think plaintiffs must prevail upon the first point. The transfer of the property and the creation of the trust in respect thereof were the act of John H. Kohnke. On this point the defendant states "that the transfer from Kohnke to George W. Williams, as trustee, was for consideration paid by the latter, and the trust so recites. The situation, therefore, is no different than it would be had the land been conveyed in fee to Williams and the trust then established by the latter. The decedent, Williams, merely took a short cut but he was the founder of the trust." This defense might carry some weight if there were sufficient facts to support it. But, before we can hold that the trust was one created by the decedent or that the creation thereof by Kohnke was "a short cut," and that the decedent was the founder of the trust, we must have sufficient facts clearly to establish this. All we know is that John H. Kohnke, for a consideration of $5 in cash and "other valuable consideration," created a trust in favor of the decedent and his wife. This he had a perfect right to do, and without more we cannot say that the decedent created the trust. Plaintiff has overcome the prima facie correctness of the Commissioner's assessment.
On any other theory we think the exaction of a tax by the inclusion of the value of any portion of this property in the gross estate of Williams would also be unauthorized. The transfer was complete and beyond recall when made in May, 1917, more than four years before the passage of the Revenue Act of 1921. It is unimportant that the decedent had a life interest in the use and the income of the property. The cestui que trust took under the terms of the trust instrument. There was no transfer from Williams by death. Nichols v. Coolidge, 274 U.S. 531, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A.L.R. 1081; Reinecke v. Northern Trust Co., 278 U.S. 339, 49 S. Ct. 123, 73 L. Ed. 410; May, et al., Executors, v. Heiner, 50 S. Ct. 286, 74 L. Ed. 826, decided April 14, 1930. In Reinecke, supra, the court held that the value of certain property in respect of which the decedent had created certain trusts, reserving to himself the life interest in the income and the management of the property, should not be included as a part of the estate subject to tax. In that case the trusts were created in 1919 and the grantor died in 1922.
Plaintiffs are entitled to recover $1,679.40 with interest thereon from July 31, 1926, to such date as the Commissioner may determine in accordance with the provisions of subsection (b), § 177, of the Judicial Code, as amended by section 615(a) of the Revenue Act of 1928 (28 USCA § 284(b), for which judgment will be accordingly entered.