Before MCLAUGHLIN, KALODNER and STALEY, Circuit Judges.
Does the Limitation provision in § 2036 of the Internal Revenue Code of 1954*fn1 making that section inapplicable with respect to transfers prior to March 4, 1931, preclude the levying of an estate tax under § 2038 of the 1954 Code?*fn2
The District Court answered in the affirmative, holding that "the applicability of § 2036 precludes taxation under § 2038". 221 F. Supp. 861, 863 (E.D. Pa. 1963).
The hard core of the Government's position on this appeal is that it relies for taxability on § 2038 and not on § 2036; that (1) there is nothing in the provisions of the two sections which makes them mutually exclusive; (2) that the March 4, 1931 limitation in § 2036 is expressly confined to that section and does not bar application of § 2038; (3) § 2038 contains no provision making it inapplicable to transfers prior to March 4, 1931; and (4) the indenture of trust executed by the decedent on February 20, 1929, retained certain powers to make changes regarding the income and principal, and the power to remove the trustee and appoint a successor, which made the corpus of the trust includible in the decedent's gross estate under § 2038.
It must immediately be noted that the District Court did not reach the issue as to whether the decedent had retained a power to alter or amend the trust under the provisions of § 2038 because of its view that " § 2036 precludes taxation under § 2038". It was the District Court's view that "the single issue before us is whether or not this trust comes under § 2036 or § 2038." 221 F. Supp. 862.
The indenture by which the decedent Herbert T. Ballard created the inter vivos trust*fn3 in 1929 (he died December 15, 1956) contained the following clause:
"Ballard has irrevocably parted with the title to the securities and property constituting the subject matter of this trust estate, but reserves to himself the right at any time to make any change in the limitations herein contained with respect to the distribution of principal and income of this trust fund, provided that no such appointment shall be in favor of himself or his estate. Ballard further reserves the right at any time, upon thirty days written notice to the Trustee, to cause the resignation of the Trustee, which shall then state a final account of its management of the trust estate and shall deliver all the assets composing the trust estate to such other Trustee as Ballard may designate, and shall thereupon be released and discharged from all liability as trustee hereunder. In all other respects this Deed of Trust is irrevocable."
The Internal Revenue Service determined that the value of the corpus of the trust was includible in the decedent's gross estate under § 2038 on the theory that under the quoted clause the decedent had retained power to alter, amend or revoke the trust except that he could not make an appointment to himself, and assessed a deficiency in tax. The estate paid the tax and later filed the instant action for refund on its theory that the trust was a transfer distinctly described in § 2036 and since it was created prior to March 4, 1931 it was expressly excluded from taxation by subsection (b). The District Court held that Commissioner v. Ridgway's Estate, 291 F.2d 257 (3 Cir. 1961) and Commissioner v. Canfield's Estate, 306 F.2d 1 (2 Cir. 1962)"are authority for the general proposition that § 2036, * * * avoids taxation of the trust fund as a part of the gross estate when the 'transfer' of legal title took place prior to 1931", and entered summary judgment in favor of the estate.
The District Court erred in construing Ridgway and Canfield to be dispositive.
Neither case presented the issue as to whether "the applicability of § 2036 precluded taxation under § 2038"; otherwise stated, that the provisions of the two sections make them mutually exclusive.
In Ridgway, the Commissioner sought to include the trust corpus in the decedent's gross estate under a predecessor section of § 2036, and in Canfield under § 2036, since in each instance he could not have invoked § 2038 inasmuch as the creator of the trust had long prior to death relinquished power reserved in the trust indenture to change its provisions,*fn4 and § 2038 is only applicable where the power is extant at the date of death. In both cases the critical issue was solely as to whether the act of relinquishment, occurring after March 4, 1931, was the "transfer", or whether the "transfer" occurred when the trust was created prior to the 1931 date. In the instant case the decedent did not prior to his death relinquish the reserved power to alter or amend the trust with respect to making a change regarding the income or principal, so that Ridgway and Canfield are inapposite on their facts; and for the further reason that they did not even touch upon the issue presented here as to whether the March 4, 1931 limitation provision of § 2036 "precludes taxation under § 2038", since the Commissioner there had invoked only § 2036.
Section 2038 does not contain a provision excluding from its coverage inter vivos trusts created prior to March 3, 1931 as does § 2036 (and its predecessor sections).
Ridgway and Canfield decided only that a "transfer" occurs at the time a trust is created and not at the time a retained power to alter ...