393 F.2d 939 | Ct. Cl. | 1968
Lead Opinion
OPINION
This case was referred to Trial Commissioner Mastín G. White with directions to make findings of fact and recommendation for conclusions of law. Following a trial on the merits, the commissioner filed an opinion and report, and the case was submitted to the court on the briefs of the parties. After hearing oral argument of counsel, we remanded the case to the commissioner for determination “whether the decedent [Joseph P. Grace] was motivated in the setting up of the Joseph Grace and the Janet Grace trusts, in December 1931, by the desire to avoid and lessen estate taxes.” A further trial was held and thereafter the commissioner filed his supplemental report and a memorandum opinion.
After hearing additional oral argument and considering the briefs and exceptions of the parties, we have determined that the findings of fact made by the commissioner are amply supported by the record and that where such findings consist of
Commissioner White’s opinions, as modified and unified by the court, are as follows:
The primary question to be decided in this case is whether the Internal Revenue Service acted correctly in adding to the gross estate of Joseph P. Grace, who died on July 15, 1950, the sum of $1,116,888.-62, representing the value of a trust that had been created on December 30,1931.
The Internal Revenue Service purported to act under the authority of Section 811(c) of the Internal Revenue Code of 1939, as amended.
It is clear that under the provisions of the trust of December 30, 1931, the decedent for his lifetime had the right to the income from the income-producing portion of the trust property, and that he was entitled to the possession and enjoyment of the remainder of the trust property. On the other hand, the decedent, at least in form, was not the settlor of the trust, he had not directly “made a transfer” of any property or interest in property to the trust, and, strictly speaking, he had not “retained” any beneficial interest in the trust property but, rather, had obtained such interest by virtue of the instrument creating the trust. The person who executed the instrument creating the trust of December 30,1931, and who directly transferred to that trust all the property covered by it,- was the decedent’s wife, Janet Grace. (For the sake of convenience, the trust of December 30, 1931, will usually be referred to hereafter in the opinion as “the Janet Grace trust.”)
The defendant contends that the decedent, by himself creating on December 15, 1931, a reciprocal trust which conferred on Janet Grace benefits similar to those which were conferred on the decedent by the Janet Grace trust, furnished consideration for the creation of the Janet Grace trust; and, therefore, that for estate-tax purposes the decedent and Janet Grace should be switched or crossed as settlors and the decedent should be regarded as having been in substance the settlor of the Janet Grace trust. This contention is based upon a judicially developed rule that was first announced in the case of Lehman v. Commissioner of Internal Revenue, 109 F.2d 99 (2d Cir. 1940), cert. denied 310 U.S. 637, 60 S.Ct. 1080, 84 L.Ed. 1406.
The facts in the Lehman case were stipulated by the parties. According to the stipulation, two brothers, Harold M. and Allan S. Lehman, owned equal shares in certain stocks and bonds. Harold agreed to transfer his share in trust for Allen and the latter’s issue, in consideration of Allan transferring his share in trust for Harold and Harold’s issue, and trusts were created in accordance with
There are two divergent views of the precise proposition that the Lehman case stands for, each espoused in several cases. Since in this case the same result is reached under either view, we have not felt it necessary to choose between the two lines of cases. Each shall be considered in turn.
According to one line of cases, the crucial factor in the Lehman case was that, under the agreed facts, Harold Lehman had furnished consideration for —i. e., he had “paid for and brought about” the transfer of property by Allan Lehman in trust for the benefit of Harold Lehman and the latter’s issue. In re Lueders’ Estate, 164 F.2d 128, 133-134 (3d Cir. 1947); Newberry’s Estate v. Commissioner of Internal Revenue, 201 F.2d 874, 877, 38 A.L.R.2d 514 (3d Cir. 1953); McLain v. Jarecki, 232 F.2d 211, 213 (7th Cir. 1956); Tobin v. Commissioner of Internal Revenue, 183 F.2d 919 (5th Cir. 1950), cert. denied, 340 U.S. 904, 71 S.Ct. 280, 95 L.Ed. 654. See, also Estate of Lindsay, 2 T.C. 174 (1943); Guenzel’s Estate v. Commissioner of Internal Revenue, 258 F.2d 248 (8th Cir. 1958). In the present case, it becomes necessary, under the rule followed in the above-cited cases, to determine whether the decedent by creating the trust of December 15, 1931, was furnishing consideration for — i. e., whether he was paying for — the subsequent creation of the Janet Grace trust on December 30, 1931. This is a question of fact, which involves an inquiry into the element of motivation. The facts show that when decedent created the Joseph Grace trust, he was not paying for the transfer of the property covered by the Janet Grace trust and that when Janet Grace made such transfers to the Janet Grace trust, she was not induced or caused to do so by reason of the previous establishment of the Joseph Grace trust by the decedent.
Unfortunately, it is necessary to rely largely on circumstantial evidence in making the factual determination that is crucial in the disposition of this case, as both the decedent and Janet Grace were dead at the time of the trial. Consequently, it will be necessary to outline in considerable detail the known facts which appear to be pertinent in drawing inferences with respect to the motivation which led the decedent and Janet Grace to create the trusts of December 15 and 30, 1931.
The decedent and Janet Grace were married in August 1908. Five children, three sons and two daughters, were born to them. One of the daughters died in 1935, but the other four children were living at the time of the trial.
The decedent was a man of great wealth at the time of his marriage to Janet Grace and thereafter. Janet Grace, on the other hand, had no wealth or property of her own at the time of her marriage to the decedent, and she did not thereafter inherit any substantial wealth. However, Janet Grace acquired the ownership of extensive property and financial interests during her marriage to the decedent as the result of transfers which the decedent made to her, either directly
There is in the record evidence concerning 24 transfers of property and financial interests by the decedent to Janet Grace during the period between April 19, 1917 and May 10, 1929. One of these transfers involved 3,000 shares of stock in the Ingersoll-Rand Company having a book value of $300,000, and there were 9 additional instances where property having a book value of $100,000 or more was transferred by the decedent to Janet Grace.
The record also contains evidence regarding the creation by the decedent, during the period between August 26, 1920 and June 5, 1930, of 26 trusts for the benefit of his children. While in most instances the properties transferred by the decedent to these various trusts had relatively modest book values, the decedent provided 5 of the trusts with properties having book values in excess of $100,000 for each trust.
In addition, the record contains evidence concerning five instances during the period between August 26, 1920, and March 31, 1929, when Janet Grace made transfers of assets to or for the benefit of the decedent or their children. These incidents involved transfers of properties having book values ranging all the way from $3,860.15 to $613,344.32. It is interesting to note that the largest of these tranfers, which was shown by the record to have been a gift from Janet Grace to the decedent, in effect involved a retrans-fer by Janet Grace to the decedent of property which the decedent had transferred to her in the first instance. What Janet Grace transferred to the decedent in that instance was stock in a personal holding company which had been set up on behalf of Janet Grace to hold valuable corporate shares which the decedent had previously transferred to Janet Grace.
The decedent exercised supervision and control over, and he made the decisions that were involved in the management of, the business affairs of the family. In performing this function, he made the decisions regarding the management and disposition of the property and financial interests that were in the ownership of Janet Grace. The latter did not concern herself with business matters, but relied on her husband’s judgment as to such matters. Janet Grace’s time and attention were devoted to her home and to society, music, the theater, the arts, and civic affairs. When the decedent decided that some formal action by Janet Grace was required in connection with the management or disposition of a piece of property or a financial interest that was in her ownership, the decedent customarily would have the appropriate instrument prepared for his wife’s signature, and he would then have her execute such instrument. Therefore, although there is no direct evidence, in the record relative to the circumstances that were involved in the transfers of assets by Janet Grace previously mentioned, it is reasonable to infer that such transfers were made by Janet Grace in accordance with plans devised by the decedent.
In managing the business affairs of the family, including the property and financial interests that were in the ownership of Janet Grace, the decedent utilized the services of the Customers’ Securities Department of W. R. Grace and Company to assist him by handling the details that were involved in carrying out his decisions.
The events that led directly to the creation by the decedent of the trust dated December 15, 1931, and to the creation of the Janet Grace trust on
Following the conference mentioned in the preceding paragraph, and in accordance with the plan devised by the decedent, he executed on December 15, 1931, a trust instrument which created a trust that will be referred to hereafter in the opinion as “the Joseph Grace trust.” William R. Grace, William G. Holloway, and the decedent himself were named in the instrument as trustees of the Joseph Grace trust. The trustees were directed to pay the income from the trust to Janet Grace during her lifetime, and also to pay to her any amounts of the principal which a majority of the trustees might deem advisable. Janet Grace was given the power to designate, by will or deed, the manner in which the trust estate remaining at the time of her death should'be distributed to or for the benefit of the decedent and their children.
In connection with the execution of the trust instrument on December 15, 1931, the decedent transferred to the Joseph Grace trust blocks of the capital stock of three corporations, several parcels of real estate, and a one-fourth undivided interest in a certain joint venture which, at the time, owned a tract of land, a number of real estate mortgages, other receivables, cash, and 10,620 shares of common stock in the Ingersoll-Rand Company.
Fifteen days after the creation of the Joseph Grace trust by the decedent, Janet Grace on December 30, 1931, acting in accordance with the plan of the decedent previously mentioned, executed the trust instrument which created the Janet Grace trust. William R. Grace, William G. Holloway, and Janet Grace were named as the trustees of the Janet Grace trust. Under the provisions of this trust, the trustees were to pay the income from the trust property to the decedent during his lifetime, together with any amounts of the principal which a majority of the trustees might deem advisable. Also, the trust instrument directed that, during the life of the decedent, he should be entitled to the use and occupancy of the real property that was included in the trust.
In connection with the execution of the trust instrument referred to in the preceding paragraph, Janet Grace on December 30, 1931, transferred to the Janet Grace trust the family homestead, Tullaroan, and 40 shares of stock in a corporation known as Lundy’s Lane Corporation. That corporation was a personal holding company which had been incorporated on behalf of Janet Grace on November 9, 1923. At that time, she received 607 shares of Lundy’s Lane stock in exchange for 12,000 shares of Ingersoll-Rand Company stock, 3,600 shares of W. R. Grace and Company common stock, and 3,040 shares of W. R. Grace and Company preferred stock, all of which had been received by Janet Grace as gifts from the decedent at various times during the years 1917, 1918, 1919, and 1922. Of the 607 shares
The pattern of creating trusts for the benefit of members of the family, and of transferring assets directly to members of the family, continued during the years that followed the creation of the Joseph Grace trust and the Janet Grace trust in December of 1931. Both the decedent and Janet Grace were involved in such actions.
Janet Grace died on December 31, 1937, at the age of 53 years. The Joseph Grace trust terminated with the death of Janet Grace. The estate of Janet Grace filed a Federal estate tax return in which the Janet Grace trust was disclosed and reported as a nontaxable transfer by Janet Grace. Following an examination of the return by the Internal Revenue Service, the IRS asserted a deficiency on the ground that the Joseph Grace trust and the Janet Grace trust were reciprocal. Negotiations were then conducted between representatives of the Internal Revenue Service and representatives of the estate of Janet Grace. During the course of these negotiations, the representatives of the estate countered the contention of the Internal Revenue Service by contending that the gross estate should be adjusted by reductions in the values, as shown on the return, of certain blocks of corporate stock owned by Janet Grace at the date of her death, and by elimination from the assets shown on the return as Janet Grace’s property of certain household effects which (according to representatives of the estate) belonged to the decedent. As a result of the negotiations, the Internal Revenue Service and the estate of Janet Grace entered into a compromise agreement whereby 55 percent of the total appraised value of the corpus of the Janet Grace trust at the time of her death was included in her taxable estate, and the estate of Janet Grace abandoned its counter-contentions.
In discussing the issue as to the reciprocity of the Janet Grace trust and the Joseph Grace trust, as indicated in the preceding paragraph, the negotiators believed that the value of the Janet Grace trust was less than the value of the Joseph Grace trust, and that if the doctrine of reciprocal trusts were applicable, it would be the value of the lesser trust (i. e., the Janet Grace trust) that would be taxable as part of the estate of Janet Grace.
The decedent died on July 15, 1950, at the age of 73 years. A Federal estate tax return was filed on behalf of the decedent’s estate. In this return, the transfers of assets by the decedent to the Joseph Grace trust were disclosed as transfers not includible in the decedent’s gross estate, and the Janet Grace trust was reported as a trust under which the decedent held a limited power of appointment. Neither trust was included in the taxable gross estate of the decedent.
Following an examination of the return referred to in the preceding paragraph, the Internal Revenue Service (in addition to several relatively minor adjustments that are not involved in this litigation) added to the decedent’s gross estate the sum of $1,116,888.62, with the following explanation:
Represents reciprocal trust made by decedent’s wife, Janet, on Dec. 31 [sic], 1931, for the benefit of decedent. In-cludible in the gross estate under Section 811(e) of the Internal Revenue Code. A full explanation of this adjustment was given to the estate representatives.
On the basis of this adjustment (and others that are not involved in this litigation), the Internal Revenue Service
A claim for refund was subsequently filed with the Internal Revenue Service on behalf of the decedent’s estate. Administrative relief was not obtained, and the present action followed.
A very significant fact in connection with the creation of the Joseph Grace trust and the Janet Grace trust was that, as inferred from the evidence in the whole record, neither the decedent nor Janet Grace had any desire to acquire property from the other. Instead, the motivation behind the creation of these trusts was the desire of the decedent to effect transfers of assets among, and for the benefit of, members of the family with a minimum of gift-tax consequences. These transfers were part of a well-established pattern of conduct, managed by the decedent, which began as early as 1911, which continued for many years, and which involved numerous transfers of valuable property and financial interests among the members of the family.
It is certainly obvious that the decedent, when he created the Joseph Grace trust on December 15, 1931, was not motivated by any intention to give consideration for, or pay for, the transfer of Tullaroan by Janet Grace to the Janet Grace trust on December 30, 1931, in order that he might obtain the right to the use and enjoyment of the family homestead. As previously indicated, Tullaroan had been the family homestead since about 1911. The decedent had paid the original purchase price for Tullaroan, although the title had been taken in the name of Janet Grace, and the decedent had subsequently provided the funds that were required for the construction of the buildings and other improvements in developing Tullaroan into a country estate (except that an uncle of the decedent bore the cost of making certain additions to the main residence in about 1920). At the time of the creation of the Joseph Grace trust and the Janet Grace trust, there was no indication that either Janet Grace or the decedent ever expected to leave Tullaroan during their lives; and, in fact, they both continued to live there until they died. There was no change whatever in the use and enjoyment of the homestead by the decedent, Janet Grace, and their children as a result of the transfer of the legal title from Janet Grace to the trustees of the Janet Grace trust. Consequently, there is no basis in the record for a finding that the decedent created the Joseph Grace trust and transferred property to it in order to induce Janet Grace to transfer Tullaroan to the Janet Grace trust so that the decedent might obtain the right to the use and enjoyment of the family homestead.
It would also be unrealistic to find that the decedent, in creating the Josph Grace trust on December 15, 1931, intended to furnish consideration for, or pay for, the transfer by Janet Grace of the 40 shares of stock in Lundy’s Lane Corporation to the Janet Grace trust. That corporation was a personal holding company that had been established on behalf of Janet Grace to hold valuable shares of corporate stock which the decedent himself had previously given to Janet Grace. Actually, as stated heretofore, the inference to be drawn from the whole record is that the decedent, when he created the Joseph Grace trust and transferred property to it, was not motivated by a desire to obtain any sort of property, or interest in property, from Janet Grace. Rather, he was merely continuing a long-established pattern of conduct, and the immediate motivation was a desire to effect transfers of assets among members of the family before an expected new gift tax became effective.
Conversely, there is no basis in the record for a finding that Janet Grace, in transferring Tullaroan and 40 shares of stock in Lundy’s Lane Corporation to the Janet Grace trust, was influenced in any way by the circumstance that the decedent had previously created the Jo
However, there remains for consideration a separate line of cases which apply different legal standards in determining the existence of consideration within the meaning of the Lehman case. These cases vary somewhat in the statement of the rule, but basically they look at the objective evidence to determine whether trusts created by husband and wife similar to those involved in this case are reciprocal and taxable. In some of these cases, consideration is inferred from the fact that the properties included in the two trusts are of approximately the same amount, that the trusts are created at or about the same time, and that each grantor gives the other a life estate in income, so that the trust would normally be included in his estate if the grantor had reserved that power to himself. Cole’s Estate v. Commissioner of Internal Revenue, 140 F.2d 636, 151 A.L.R. 1139 (8th Cir. 1944) . Other cases in this group hold that the same inference will be made unless rebutted by clear evidence. Hanauer’s Estate v. Commissioner of Internal Revenue, 149 F.2d 857 (2d Cir. 1945), cert. denied, 326 U.S. 770, 66 S.Ct. 175, 90 L.Ed. 465; Orvis v. Higgins, 180 F.2d 537 (2d Cir. 1950), cert. denied, 340 U.S. 810, 71 S.Ct. 37, 95 L.Ed. 595. In still others, the presence or absence of a motive to avoid the payment of estate taxes has been an important factor in deciding the application of the “reciprocal trust” doctrine. Estate of Louis D. Ruxton, 20 T.C. 487 (1953). The additional evidence heard at the second trial in this case and the facts found therefrom do not change the result when the rule announced in the above-cited cases is applied here.
It appears from the evidence in the augmented record that Joseph P. Grace never said or did anything which would indicate or imply that he was motivated by the desire to avoid or lessen estate taxes when he created the Joseph Grace trust on December 15, 1931 and caused his wife to create the Janet Grace trust on December 30, 1931. The evidence also establishes the existence of other logical and even compelling motives for these transactions.
It is true that there is a great deal of evidence in the record, as supplemented in July 1966, about a plan which was being promoted during the period 1930-1931 by Alan Ross, of the Grace National Bank’s Trust Department, which involved the creation of trusts by a husband and wife for the benefit of each other, and which had, as one of its supposed advantages, the possibility of ultimately minimizing estate taxes. At that time, both the Grace National Bank and W. R. Grace and Company were controlled by the Grace family, of which Joseph P. Grace was generally considered to be the head. The two companies occupied the same building in New York City, and Joseph P. Grace maintained his office in that building.
Alan Ross was very active during the period 1930-1931 in attempting to generate and obtain trust business for the Grace National Bank. He approached many people with respect to the desirability of creating trusts and naming the Grace National Bank as trustee. As one of his promotional activities, Mr. Ross endeavored to interest wealthy married couples of his acquaintance in a plan whereby a husband and wife would each set up a trust for the benefit of
Details concerning the Ross plan, and regarding Mr. Ross’ efforts to interest various persons in the plan, are set out in the additional findings 37-41.
Alan Ross never discussed the creation of trusts with Joseph P. Grace. However, in some manner that is not shown by the evidence, Mr. Grace learned of Alan Ross’ plan relative to the creation of trusts by a husband and wife for the benefit of each other. Sometime in 1931, Mr. Grace asked Harold J. Roig what the latter thought about the Ross plan. Mr. Roig had formerly been head of the Legal Department of W. R. Grace and Company, was then an official of that company, and occupied an intimate and confidential relationship with Joseph P. Grace. Mr. Grace did not indicate that he was considering the creation of such trusts, and Mr. Roig did not understand that Mr. Grace was consulting him for legal advice. Mr. Roig responded to Mr. Grace’s inquiry by indicating that he had not done any legal research on the plan, but that it was his “curbstone” opinion that Mr. Ross’ plan would not be advantageous in so far as any prospective savings in estate taxes were concerned.
That Joseph P. Grace, in connection with the creation of the Joseph Grace trust and the Janet Grace trust in December 1931, was not attempting to carry out the Ross plan to minimize estate taxes is indicated by the circumstances that Mr. Grace created the Joseph Grace trust on December 15 and caused Mrs. Grace to create the Janet Grace trust 15 days later, or on December 30, 1931, whereas an essential part of the Ross plan to lessen estate taxes was the lapse of a considerable period of time between the creation of trusts by a husband and wife.
Perhaps specific reference should be made to the circumstances that, as indicated in additional finding 46, Joseph P. Grace was aware of the contention made by the Internal Revenue Service after the death of Janet Grace that the Joseph Grace trust and the Janet Grace trust were reciprocal and one of the trusts was includable as part of the taxable estate of Janet Grace; that Mr. Grace preferred not to litigate the issue; and that he instructed counsel for the estate of Janet Grace to go ahead and make the best settlement with the Internal Revenue Service that was possible. Subsequently, a compromise agreement was entered into between the Internal Revenue Service and the estate of Janet Grace whereby 55 percent of the total appraised value of the corpus of the Janet Grace trust at the time of her death was included in her taxable estate. However, Mr. Grace’s willingness to compromise a disputed claim cannot properly be regarded as an admission by him that the Internal Revenue Service was correct in its contention that the two trusts were reciprocal. 4 Wigmore, Evidence § 1061(c) (1940).
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 trust and to have his wife create the Janet Grace trust, although Mr. Grace did indicate that, from the standpoint of timing, he desired that the
Therefore, if we take the view of those cases which impose the burden on the taxpayer to rebut any inference arising under the circumstances of this case that the Janet Grace trust was created in consideration of the trust previously established by the decedent, we think the burden has been met. It has been shown that the two trusts were not created to avoid estate taxes but merely as another step in a long-established pattern of family giving. Thus, since it has been shown that there was substance to the transactions and that they were not merely shams to avoid the imposition of estate taxes, the Janet Grace trust should not be included in the estate of the decedent. Accordingly, plaintiffs are entitled to recover, with the amount of the recovery to be determined pursuant to Rule 47(c).
The dissenting opinion of Davis, Judge, in which Nichols, Judge, concurs follows the opinion of the Trial Commissioner which has been adopted by the court.
. When the decedent died on July 15, 1950, the original language of Section 811 (c), as found in 53 Stat. at pp. 120-121, had been amended by Section 7(a) of the Act of October 25, 1949 (63 Stat. 891, 894).
Dissenting Opinion
(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).
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
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.
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
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.
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.
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
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
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.
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.
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
. 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.
