United States v. Allen
293 F.2d 916 (1961)
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Rule of Law:
For the purposes of federal estate tax, "adequate and full consideration" for the sale of a retained life estate must be measured against the value of the trust corpus that would otherwise be included in the gross estate, not merely the actuarial value of the life estate itself.
Facts:
- Maria McKean Allen created an irrevocable trust, retaining for her lifetime the right to 3/5ths of the trust's income.
- The remainder of the trust was to pass to her two children.
- At age 78, Allen was advised that her retained life estate would cause her 3/5ths share of the trust corpus (valued at approximately $900,000) to be included in her gross estate upon death.
- To avoid this tax consequence, Allen sold her 3/5ths life interest to her son, Wharton Allen.
- Wharton Allen, acting as a bona fide purchaser, paid $140,000 for the life interest, which was slightly more than its actuarial value of approximately $135,000.
- At the time of the sale, Maria Allen was in relatively good health and expected to live her normal life span.
- Shortly after the sale, she was diagnosed with an incurable disease and died, resulting in a financial loss for her son on his purchase.
Procedural Posture:
- The Internal Revenue Commissioner determined that 3/5ths of the trust corpus, less the purchase price, should be included in Maria Allen's gross estate.
- The plaintiff-executors of Allen's estate paid the assessed tax.
- The executors then filed a suit for a refund in the trial court.
- The trial court held for the plaintiff-executors, finding that the sale of the life estate was for adequate and full consideration, thus removing the corpus from the gross estate.
- The government appealed the trial court's judgment to the United States Court of Appeals for the Tenth Circuit.
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Issue:
Does the sale of a retained life estate for its full actuarial value constitute 'adequate and full consideration in money or money's worth' under § 811 of the 1939 Internal Revenue Code, thereby removing the underlying trust corpus from the decedent's gross estate?
Opinions:
Majority - Murrah, C.J.
No. The sale of a retained life estate for its actuarial value is not 'adequate and full consideration' sufficient to remove the underlying trust corpus from the decedent's gross estate. To allow this would permit an easy avoidance of the estate tax, which is contrary to congressional intent. The purpose of the statute is to tax property that a person has enjoyed for their lifetime. Therefore, the consideration must be measured against the value of the property that would otherwise be included in the gross estate—the trust corpus—rather than the value of the interest being transferred. Congress intended for the estate to include either the corpus of the trust or, in its stead, consideration of an equal value.
Concurring - Breitenstein, J.
No. The tax liability arose at the time of the initial inter vivos transfer when the trust was created with a retained life estate. The subsequent disposition of that retained right, even for its full value, does not eliminate the pre-existing tax liability on the corpus. To remove the trust property from inclusion in the decedent's estate, the consideration paid must be for the interest that is subject to tax, which is the trust corpus itself, not merely the retained right to income.
Analysis:
This decision closes a significant potential loophole in estate tax law by adopting a substance-over-form approach. It prevents taxpayers from using a last-minute sale of a retained life estate to remove a much larger trust corpus from their taxable estate. The ruling establishes the principle that 'adequate and full consideration' must be measured against the value of the assets being shielded from tax, not just the value of the specific property right being sold. This case significantly impacts estate planning, reinforcing the 'string' provisions of the Internal Revenue Code and making it more difficult to divest retained interests to avoid estate tax.
