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In re Estate of Fanny Sicher Cohn

decided: January 19, 1967.


Lumbard, Chief Judge, and Hays and Feinberg, Circuit Judges.

Author: Hays

HAYS, Circuit Judge:

This is an appeal from a decision of the United States District Court for the Southern District of New York which held that a certain trust established by the decedent in 1930 was includable in decedent's gross estate for purposes of the Federal Estate Tax. We affirm the decision.

The provisions of the Deed of Trust which are relevant here provided that decedent was to receive the income from the trust and that she had the right to revoke or modify the trust in whole or in part, with the approval of certain named individuals.

Decedent died in 1960. Her retention of the power to modify or revoke the inter vivos trust brings the trust within the provisions of Section 2038 of the Internal Revenue Code of 1954.*fn1 The retention of that power is also a retention of the "possession and enjoyment" of the property under Section 2036(a) of the 1954 Code.*fn2 Appellants argue, however, that taxation is precluded by the limitation provision of Section 2036(b):


This section shall not apply to a transfer made before March 4, 1931; nor to a transfer made after March 3, 1931, and before June 7, 1932, unless the property transferred would have been includable in the decedent's gross estate by reason of the amendatory language of the joint resolution of March 3, 1931 (46 Stat. 1516).

The "transfer" was made in 1930, that is to say the trust was created before March 4, 1931 and therefore comes within the terms of Subdivision (b) of Section 2036.

If we read Section 2036 alone, without regard to its history and without regard to Section 2038, it appears that neither the reservation to the donor of the income nor of the power "to designate the persons who shall possess or enjoy the property" will have the effect of making the present trust taxable.

But the true significance of Section 2036 is revealed only in the light of its history.

Section 2036(a) directly derives from the Joint Resolution of March 3, 1931 (c. 454, 46 Stat. 1516). The reasons for which that Resolution was adopted and the circumstances of its adoption are set forth in some detail in Commissioner v. Estate of Arents, 297 F.2d 894 (2d Cir.), cert. denied, 369 U.S. 848, 82 S. Ct. 932, 8 L. Ed. 2d 9 (1962) and we need not repeat that material here. It is sufficient to say that the occasion for the Resolution was a series of cases decided by the Supreme Court in which it was held that trusts were not taxable to the estates of the trustors by reason of reservation to the trustors of the trust income.*fn3 The Joint Resolution was rushed through Congress and signed by the President for the purpose, and only for the purpose, of repairing that leak in the dike.

The Resolution, however, did contain the language, still found in its successor Section 2036, concerning reservation of the power to designate the persons who were to enjoy the property. And, just as it is true under the 1954 Code that the language is unnecessary in Section 2036 because the situation envisaged is fully covered by Section 2038, so it was unnecessary in the Joint Resolution because the situation was already fully covered by Section 302(d) of the Internal Revenue Code of 1924 which is the direct ancestor of Section 2038.

No harm was done by the fact that Section 302(c), the section amended by the Joint Resolution, in effect repeated the same requirement as was already contained in Section 302(d). The important part of Section 302(c), that which made trusts taxable where the donors retained an interest in the income, sufficiently filled the loophole created by the Supreme Court cases. Where the donor retained the right to dispose of the remainder the trust had always (since 1924) been taxable under Section 302(d). It made no difference that it was now also taxable under Section 302(c).

In 1949, however, the Supreme Court overruled the decisions which had led to the adoption of the Joint Resolution and held that, even in the absence of the Joint Resolution, trusts in which the donor retained a life interest were taxable.*fn4 The effect of this decision was to make such trusts taxable though they had been set up before the adoption of the Joint Resolution (the Joint Resolution had been held to be only prospective in application*fn5). In order to correct this situation and to protect donors of trusts who had acted before March 4, 1931 in reliance on the then applicable decisions of the Supreme Court, Congress adopted a statute in the form of the present Section 2036, that is, a statute containing not only the substance of the Joint Resolution, but an express exception for trusts created before March 4, 1931. The exception was appropriate and intended as far as ...

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