Estate of Jack Green, John F. Conway v. United States

KRUPANSKY, J., delivered the opinion of the court, in which RYAN, J., joined. JONES, J. (pp. 154-55), delivered a separate dissenting opinion.

KRUPANSKY, Circuit Judge.

Plaintiff-Appellee, the Estate of Jack Green, challenged the ruling of the Internal Revenue Service (“IRS”) that the reciprocal trust doctrine required that the property transferred in a trust created by Jack Green for the benefit of his granddaughter be included in his gross estate. The district court concluded that the reciprocal trust doctrine did not apply, and the IRS appealed.

Jack Green and his wife, Norma Green, had two grandchildren, Jennifer Lee Goodman and Greer Elizabeth Goodman. Jennifer and Greer were sisters, and the couple’s only grandchildren. On December 20, 1966, Jack and Norma Green executed two trust agreements for the benefit of their grandchildren. As settlor of the “Jennifer” trust, Jack Green designated his wife Norma trustee and Jennifer as its beneficiary. Norma Green, the settlor of the “Greer” trust, named her husband as the trustee and Greer as its beneficiary.

The trusts were substantially identical. The authority vested in each trustee was the same: the trustees could not alter, amend, revoke or terminate their respective trusts. The only retained authority by each trustee was the discretion to reinvest and time the distribution of trust corpus and income until each respective beneficiary reached her 21st birthday. Under the terms and conditions of the trusts, neither Jack or Norma Green, directly or indirectly, retained or reserved any economic benefit from the assets or income of the trusts.

The government posits that the limited discretionary power to reinvest and time the distribution of trust corpus and income to third party beneficiaries invoked the reciprocal trust doctrine to uncross the trusts and subject the trusts to taxation pursuant to 26 U.S.C. §§ 2036(a)(2) and 2038(a)(1). The estate has countered the application of the reciprocal trust doctrine by citing to the Supreme Court decision in United States v. Grace, 395 U.S. 316, 89 S.Ct. 1730, 23 L.Ed.2d 332 (1969), wherein the Court, in a simple one-sentence statement defined, to the exclusion of all other standards, the criteria to be considered in applying the doctrine:

Rather, we hold that application of the reciprocal trust doctrine requires only that the trusts be interrelated, and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries.

Id. at 324, 89 S.Ct. at 1735 (emphasis added).

In the instant ease, the government seeks to rewrite Grace by a strained and attenuated interpretation of language that needs no interpretation. It argues as it has since the Tax Court’s 1977 decision in Bischoff v. Commissioner of Internal Revenue, 69 T.C. 32, 1977 WL 3667 (1977), a decision rejected by every circuit which has considered the application of the reciprocal trust doctrine, that interrelated trusts are taxable by virtue of the doctrine pursuant to 26 U.S.C. § 2036(a)(2) and § 2038(a)(1). The government asserts that the only condition precedent required to apply the doctrine and uncross the trusts is a finding of retained set-tlor/trustee fiduciary powers even if the retained fiduciary powers are not coupled with retained settlor/trustee economic benefits which leave “the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries.” The Supreme Court in Grace explained that “[f]or purposes of the estate tax, we think that economic value is the only workable criter-on.” Grace, 395 U.S. at 325, 89 S.Ct. at 1735 (emphasis added). See also Lehman v. Commissioner, 109 F.2d 99 (2nd Cir.1940), the progenitor of the reciprocal trust doctrine; Krause v. Commissioner of Internal Revenue, 57 T.C. 890, 1972 WL 2473 (1972), aff'd. 497 F.2d 1109 (6th Cir.1974); Exchange Bank & Trust Company v. United States, 694 F.2d 1261 (Fed.Cir.1982), wherein, without exception, retained settlor/trustee discretionary, fiduciary power was coupled with retained settlor/trustee retained economic benefit.¹

Without considering the district court’s findings that the trusts here in issue were not interrelated,² this court concludes that the settlor/trustee retained fiduciary powers to reinvest income and time distribution of trust income and corpus until the beneficiaries reach 21 years of age do not constitute a retained economic benefit that satisfies the core mandate of Grace “that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries.” Grace, 395 U.S. at 324, 89 S.Ct. at 1735 (emphasis added).³

For the foregoing reasons, the decision of the district court is AFFIRMED.

1 . In citing to Lehman; Hill’s Estate; Warner; Krause; Exchange Bank, Moreno’s Estate, and Glaser, the dissent neglects to distinguish those cases from the instant controversy by disclosing that, without exception, each case involved a retained identifiable position that left the set-tlors/trustees in the same economic position they would have been in had they created trusts naming themselves as life beneficiaries. In Lehman, which preceded Grace, each brother retained present economic enjoyment of the property for his lifetime. In Hill’s Estate, which predated Grace, the retained economic benefits were also life estates. Likewise, in Krause, the grandmother and grandfather retained a discretionary right to receive trust income themselves during their lifetime. In Exchange Bank, the transferors retained a present economic power to satisfy their own present legal obligations. In Moreno’s Estate, which predated Grace, the economic interests retained were contingent life estates, the fruits of which one spouse would enjoy if the spouse survived the other spouse. In Glaser, which also predated Grace and which did not involve reciprocal trusts directly, the decedent and his wife merely exchanged one piece of property for another of equivalent value, thus remaining in a similar economic position. The sole case cited by the government which supports application of the reciprocal trust doctrine without an economic benefit, Bischoff, itself indicates that virtually every pre-Grace case and every post-Grace case in which reciprocal arrangements were challenged involved retention of "very substantial economic benefits.” Bischoff, 69 T.C. at 45.

2 . The dissent totally misconstrues and reflects a misunderstanding of the concept and elements of the reciprocal trust doctrine generally and its limited application as dictated by the Supreme Court in Grace. Consequently, it misconstrues completely the thrust and reasoning of the Supreme Court in Grace as adopted, virtually verbatim, by the majority opinion.

Assuming, arguendo, that contrary to the district court’s conclusion, the trusts in the instant case were interrelated as urged by the dissent, the reciprocal trust doctrine would nevertheless be inapplicable for the simple reason that the settlor's/trustee's retained fiduciary powers to reinvest income and time distribution of trust income and corpus until the beneficiaries reached 21 years of age did not rise to the level of a retained economic benefit that satisfies the core mandate of Grace, "that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries.’’ Grace, 395 U.S. at 324, 89 S.Ct. at 1735 (emphasis added).

Apart from a conclusory statement, the dissent fails to articulate any factual support or explanation for its generalization that the settlors/trust-ees were in the same economic position they would have been in had they created trusts naming themselves as life beneficiaries.

Having resolved this case in controversy by adopting the core dictates of the Supreme Court in Grace, this Court need not address the correctness of the district court's finding that the trusts here in issue were not "interrelated". A court of appeals may affirm the decision of a lower court on any basis supported by the record, even if the appellate court's reasoning differs from the lower court's reasoning. Brown v. Allen, 344 U.S. 443, 73 S.Ct. 397, 97 L.Ed. 469 (1953).

3 . Having reviewed and considered the Supreme Court's decisions in Commissioner of Internal Revenue v. Holmes, 327 U.S. 813, 66 S.Ct 519, 90 L.Ed. 1037 (1946) and Lober v. United States, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed. 15 (1953), both of which predate its decision in Grace, this court concludes that the effect of those cases upon ultimate tax inclusion in the instant case, if any, would be relevant only if the reciprocal trust doctrine as interpreted in Grace required the trusts in the instant case to be uncrossed. Stated differently, the rationale of Estate of Holmes and Lober cannot be relied upon to extend the reciprocal trust doctrine to include retained non-economic discretionary fiduciary powers including powers to reinvest and time distribution of trust income and corpus until the core mandate of retained economic benefits by the settlor/trustee has been satisfied.