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A person does not retain possession or enjoyment of the property if he has transferred title irrevocably, made complete delivery of the property and relinquished the right to income where the property is income producing.
Decedent transferred to an irrevocable trust for the benefit of his children stock in three unlisted corporations that he controlled, retaining the right to vote the transferred stock, to veto the transfer by the trustee (a bank) of any of the stock, and to remove the trustee and appoint another corporate trustee as successor. The right to vote the transferred stock, together with the vote of the stock decedent owned at the time of his death, gave him a majority vote in each of the corporations. The Commissioner of Internal Revenue determined that the transferred stock was includable in decedent's gross estate under § 2036 (a) of the Internal Revenue Code of 1954, which required the inclusion in a decedent's gross estate of the value of any property he has transferred by inter vivos gift, if he retained for his lifetime “the enjoyment of the property transferred, or the right, either alone or in conjunction with any person, to designate the persons who shall enjoy the income therefrom.” The Commissioner claimed that decedent's right to vote the transferred shares and to veto any sale by the trustee, together with the ownership of other shares, made the transferred shares includable under § 2036 (a)(2), because decedent retained control over corporate dividend policy and, by regulating the flow of income to the trust, could shift or defer the beneficial enjoyment of trust income between the present beneficiaries and remaindermen, and under § 2036 (a)(1) because, by reason of decedent's retained control over the corporations, he had the right to continue to benefit economically from the transferred shares during his lifetime. The decedent's executrix paid the additional estate tax and sued for a refund in the United States District Court for the Southern District of Ohio, which granted summary judgment for the executrix. The Court of Appeals affirmed. Certiorari was granted.
Should the stock be included in the taxable gross estate of the decedent pursuant to 26 U.S.C.S. § 2036?
The Supreme Court found that plaintiff executor of decedent's estate was entitled to a refund of estate taxes paid on shares of stock that the decedent had transferred into an irrevocable trust. The Court determined that the stock was not to be included in the taxable gross estate of the decedent pursuant to 26 U.S.C.S. § 2036 because, upon transfer into the irrevocable trust, the decedent had not retained before his death the possession or enjoyment of, or the right to the income from, the property. Nor had he the right to designate the persons who would possess or enjoy the property or the income therefrom. It was immaterial that the decedent had control of more than 50 percent of the shares, as this did not confer upon the decedent the power to give the trust proceeds to the person of his choosing. The decedent had no right to command the directors to pay or not pay dividends because the board of directors had to make its decision based on a number of factors. Thus, the decedent's right to vote did not give him actual enjoyment of the property itself for statutory purposes.