« ForrigeFortsett »
The majority would prop up its untenable position by suggesting that a controlling shareholder is constrained in his distribution or retention of dividends by fear of derivative suits, accumulated earnings taxes, and "various economic considerations . . . ignored at the director's peril." I do not deny the existence of such constraints, but their restraining effect on an otherwise tempting gross abuse of the corporate dividend power hardly guts the great power of a controlling director to accelerate or retard, enlarge or diminish, most dividends. The penalty taxes only take effect when accumulations exceed $100,000, 26 U. S. C. $ 535 (c); Byrum was free to accumulate up to that ceiling. The threat of a derivative suit is hardly a greater deterrent to accumulation. As Cary puts it:
“The cases in which courts have refused to require declaration of dividends or larger dividends despite the existence of current earnings or a substantial surplus or both are numerous; plaintiffs have won only a small minority of the cases. The labels are 'business judgment'; 'business purpose'; ‘non-inter
dend policy of the corporation, he has retained, for a period which did not in fact end before his death, the right to determine the income from the nonvoting stock. If he also retains control over the disposition of the nonvoting stock, whether as trustee, by restriction upon the trustee, or alone or in conjunction with another, he has in fact made a transfer whereby he has retained for his life the right to designate the persons who shall possess or enjoy the transferred property or the income therefrom. Since under section 20.2036–1 (b)(3) of the Estate Tax Regulations it is immaterial in what capacity a power was exercisable by the decedent, it is sufficient that the power was exercisable in the capacity of controlling stockholder. Under the facts of this case, therefore, the decedent has made a transfer with a reserved power within the meaning of section 2036 (a) of the Code.”
and thus excludable from the application of $ 811 (c)
and (d).” 220 F. Supp., at 33–34. It was another aspect of that case that brought the matter to the Court of Appeals, 340 F. 2d 930 (CA7 1964), and then here. We were asked to decide whether the lower court's holding should be extended and the accumulated income as well as the principal of the trust included in the settlor's taxable estate because the settlor had retained excessive power to designate the income beneficiaries of the shares transferred. We held that, though capable of exercise only in conjunction with one other trustee, the power to allocate income without greater constraint than that imposed "is a significant power . . . of sufficient substance to be deemed the power to designate within the meaning of [the predecessor of $ 2036 (a)(2)].” 383 U. S., at 631.
O'Malley makes the majority's position in this case untenable. O'Malley establishes that a settlor serving as a trustee is barred from retaining the power to allocate trust income between a life tenant and a remainderman if he is not constrained by inore than general fiduciary requirements. See also Commissioner v. Estate of Holmes, 326 U. S. 480 (1946), and Lober v. United States, 346 U. S. 335 (1953). Now the majority would have us accept the incompatible position that a settlor seeking tax exemption may keep the power of income allocation by rendering the trust dependent on an income flow he controls because the general fiduciary obligations of a director are sufficient to eliminate the power to designate within the meaning of $ 2036 (a)(2).8
7 See n. 3, supra.
8 This incompatibility was readily perceived by the Internal Revenue Service. Shortly after O'Malley was handed down, it promulgated Rev. Rul. 67-54 (1967) which concluded:
“Where a decedent transfers nonvoting stock in trust and holds for the remainder of his life voting stock giving him control over the divi
I find no greater substance in the greater length of the majority's discussion of $ 2036 (a)(2).
Approaching the § 2036 (a)(2) problem afresh, one would think United States v. O'Malley, 383 U. S. 627 (1966), would control this case. In O'Malley the settlor “had relinquished all of his rights" to stock, but he appointed himself one of three trustees for each of the five trusts he created, and he drafted the trust agreement so that the trustees had the freedom to allocate trust income to the life tenant or to accumulate it for the remainderman "in their sole discretion.” The District Court held that the value of securities transferred was includable in the settlor's gross estate under $ 811 (c) and (d) of the Internal Revenue Code of 1939, as amended, $ 811 (c)(1)(B) being the similarly worded predecessor of § 2036 (a), because the settlor had retained the power to allocate income between the beneficiaries without being constrained by a “definite ascertainable standard” according to which the trust would be administered. O'Malley v. United States, 220 F. Supp. 30, 33 (1963). The court noted “plaintiff's contention that the required external standard is imposed generally by the law of Illinois,” but found this point to be "without merit.”
“The cases cited by plaintiff clearly set out fundamental principles of trust law: that a trust requires a named beneficiary; that the legal and equitable estates be separated; and, that the trustees owe a fiduciary duty to the beneficiaries. These statements of the law are not particular to Illinois. Nor do these requirements so circumscribe the trustee's powers in an otherwise unrestricted trust so as to hold such a trust governed by an external standard
trol is not important, that it either cannot be held by a private shareholder or that it is of so little use and relevance the taxpayer can hardly be said to have "enjoyed” it. This view of corporate life is refuted by the case law; 4 by the commentators; 5 and by everyday transactions on the stock exchange where offers and trades repeatedly demonstrate that the power to "control” a corporation will fetch a substantial premium. Moreover, the majority's view is belied by Byrum's own conduct. He obviously valued control because he forbade the bank that served as trustee to sell the trust shares in these corporations without his-Byrum's—approval, whatever their return, their prospects, their value, or the trust's needs. Trust Agreement | 5.15, App. 14.
In sum, the majority's discourse on $ 2036 (a)(1) is an unconvincing rationalization for allowing Byrum the tax-free “enjoyment” of the control privileges he retained through the voting power of shares he supposedly "absolutely” and “unequivocally” gave up.
which the Court intended or attempted to narrow the meaning of § 2036 (a)(1).
4 See, e. g., Honigman v. Green Giant Co., 208 F. Supp. 754, aff’d, 309 F. 2d 667 (CA8 1962), cert. denied, 372 U. S. 941 (1963); Essex Universal Corp. v. Yates, 305 F. 2d 572 (CA2 1962); Perlman v. Feldmann, 219 F. 2d 173 (CA2 1955).
5“[S]hareholders in a close corporation are usually vitally interested in maintaining their proportionate control ....
1 F. O'Neal, Close Corporations $ 3.39, p. 43 (1971). At least since Perlman v. Feldmann, supra, the academic dispute has not been over the existence of control, or its value, but, rather, over who is to benefit from the premium received upon its sale. See Leech, Transactions in Corporate Control, 104 U. Pa. L. Rev. 725 (1956); Hill, The Sale of Controlling Shares, 70 Harv. L. Rev. 986 (1957); Bayne, The Saleof-Control Premium: The Disposition, 57 Calif. L. Rev. 615 (1969); Bayne, The Noninvestment Value of Control Stock, 45 Ind. L. J. 317 (1970).
6 See, e. g., the transactions described in Bayne, supra, n. 5, at 617. 2 Transcript of Record 3, in No. 90, 0. T. 1928, Reinecke v. Northern Trust Co., 278 U. S. 339 (1929).
North Western R. Co.) 2 shatters any theory that might lead one to believe that the Court in Northern Trust was concerned with anything like the transactions in this case.
On what basis, then, does the majority say that Northern Trust involved a decision on facts "similar to Byrum's power over the three corporations”? And on what basis does it say that the Government's position that Byrum's use of trust shares to retain control renders those shares taxable is "against the weight of precedent?”
2. The majority implies that trust securities are taxable only if the testator retained title or the right to income from the securities until death. But this ignores the plain language of the statute which proscribes "enjoyment” as well as “possession or ... the right to income.”
3. The majority concludes with the assertion that Byrum secured no “substantial present economic benefits” from his retention of control. It is suggested that con
3 I am constrained to note that nowhere in the statute (which the majority elsewhere in its argument would read with extreme literalness) do the words "substantial" and "present”-or suggestions to that effect-appear. The phrase "substantial present economic benefit” does appear in Commissioner v. Estate of Holmes, 326 U. S. 480, 486 (1946), from which it is quoted by the majority. But there the Court held Holmes' estate liable to taxation on the corpus of an irrevocable trust because the settlor (Holmes) had kept the power for himself as trustee to distribute or retain trust income at his discretion. The Court held that this power enabled the settlor to retard or accelerate the beneficiaries' “enjoyment” at his whim. The donor had thus kept “so strong a hold over the actual and immediate enjoyment of what he [allegedly had put] beyond his own power” that he could not be said to have “divested himself of that degree of control which [a provision analogous to $ 2036 (a)(2)] requires in order to avoid the tax.” 326 U. S., at 487. Holmes is thus strong precedent contrary to the majority's § 2036 (a) (2) argument. See also Lober v. United States, 346 U. S. 335 (1953); it certainly is not a case in