Porter v. Commissioner
288 U.S. 436, 1933 U.S. LEXIS 46, 53 S. Ct. 451 (1933)
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Rule of Law:
Property transferred into a trust where the grantor retains the power to alter or modify the beneficiaries' enjoyment of the trust, even if that power cannot be exercised for the grantor's own benefit or estate, must be included in the grantor's gross estate for federal estate tax purposes under § 302(d) of the Revenue Act of 1926.
Facts:
- On October 18, 1918, the decedent transferred bonds to the Bankers Trust Company, establishing a trust for the benefit of his daughter and her son.
- On February 1, 1919, the decedent made similar transfers of bonds to the same trustee, establishing a trust for the benefit of his son and his son’s daughter.
- Each of these trust agreements included a paragraph reserving to the decedent the power to alter or modify the trust indenture and any or all of the trusts in any manner, but expressly stipulated that this power could not be used to make changes in favor of himself or his estate.
- On November 27, 1926, the decedent sent letters to the trust company, purporting to revoke the trusts benefiting his daughter and her son, terminate the interests of all persons therein, and directed the trustee to deliver the principal and income under a new deed to make provision for two children of his daughter born after the creation of the original trusts.
- The decedent died three days later, on November 30, 1926.
Procedural Posture:
- The Commissioner of Internal Revenue included the value of the property described in the new trust deed in the gross estate of the deceased for estate tax purposes.
- The petitioners (the decedent's estate) sought redetermination from the Board of Tax Appeals.
- The Board of Tax Appeals held that § 302(d) applied due to the reserved power to alter and amend, and thus included the corpus of all the trusts in the gross estate.
- The Circuit Court of Appeals affirmed the ruling of the Board of Tax Appeals.
- The Supreme Court granted a writ of certiorari due to conflicts between the decision of the Circuit Court of Appeals in this case and those of the Circuit Court of Appeals for the First Circuit in Brady v. Ham and the Court of Appeals of the District of Columbia in Cover v. Burnet.
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Issue:
Does Section 302(d) of the Revenue Act of 1926 require property transferred in trust to be included in the gross estate for tax purposes when the decedent retained the power to alter, amend, or modify the trust, even if the power could not be exercised in favor of the decedent or their estate?
Opinions:
Majority - Mr. Justice Butler
Yes, Section 302(d) of the Revenue Act of 1926 requires the inclusion of property transferred in trust in the gross estate for tax purposes when the decedent retained the power to alter, amend, or modify the trust, even if that power could not be exercised in favor of the decedent or their estate. The Court reasoned that § 302(d) is not merely a specification of what is covered by § 302(a) but covers distinct transfers, requiring inclusion of property where its enjoyment remained subject to any change through the decedent's exercise of a power to alter, amend, or revoke. The disjunctive use of “alter,” “modify,” and “amend” in the statute negates the argument that the power must allow changes for the decedent's own benefit. The decedent retained significant power to make a complete revision of the trusts, including taking property from named beneficiaries and transferring it to others. For tax purposes, there is no difference in principle between a transfer subject to such changes and one that is revocable, as the decedent's death terminated this control and provided valuable assurance passing from the dead to the living. The Court distinguished Reinecke v. Northern Trust Co. by noting that in Reinecke, the decedent’s power to alter or modify trusts required joint action with beneficiaries, thus putting the title beyond his control, whereas here the power to alter was unilateral and substantial.
Concurring - Mr. Justice Cardozo
Mr. Justice Cardozo concurs in the result.
Analysis:
This case significantly broadened the reach of the federal estate tax under Section 302(d), clarifying that a decedent's retained power to control the beneficial enjoyment of transferred property, even without the ability to reclaim it for themselves, triggers inclusion in the gross estate. It highlights Congress's intent to tax transfers that act as substitutes for testamentary dispositions, reinforcing the government's ability to prevent estate tax avoidance through trusts where substantial control is retained. The distinction made regarding unilateral versus joint powers of modification (as seen in Reinecke) remains critical for future analyses of retained powers in trusts.
