UNITED STATES v. BYRUM
Legal provision: Internal Revenue Code
Argument of Matthew J. Zinn
Chief Justice Warren E. Burger: We’ll hear arguments next in 71-308, United States against Byrum.
Mr. Matthew J. Zinn: Mr. Chief Justice and may it please the Court.
The estate planners have long sort of method whereby majority owners of closely held corporate stock could maintain control of their corporations throughout their lifetimes but nevertheless be able to pass on their businesses a debt without payment of estate tax.
This federal estate tax case presents an attempt which has less far been successful to achieve these two most desirable goals.
Here, the method employed was a transfer of a portion of the majority owner stock into a trust with the owner retaining a sure lifetime control of these corporations by reserving the right to vote the stock he transferred in trust and the right to veto any sale of that stock by the trustee.
We brought this case hereon certiorari to the Court of Appeals for the Sixth Circuit because of our concern with its effect on the administration of the federal estate tax laws.
The specific facts are these.
The decedent, Mr. Byrum owned controlling stock interest in three corporations.
Late in 1958, he created an irrevocable trust naming a bank as trustee to which he there have to transferred stock in the three corporations.
The trustee had power until Mr. Byrum’s youngest child reached the age 21 to distribute trust income and principal to the beneficiaries in its discretion when the youngest child reached age 21, separate trusts would be establish for each child or for the surviving issue of any deceased child.
Each child’s separate trust was to terminate when that child reached age 35.
The trust instruments specifically provided that Mr. Byrum would retain for his lifetime, the right to vote all unlisted stocks such as the stock in the three corporations he transferred and the right to veto sale of that stock by the trustee.
On page 4 of our opening brief, there appears a small chart showing the percentage of each corporation’s stock owned by Mr. Byrum and by the trust at the time of Mr. Byrum’s death.
In the case of the first corporation which is Byrum Lithographing Company, you can see that the total originally owned by Mr. Byrum was 71% of the corporation’s stock.
He transferred 12% of the stock in trust and retained 59% in his own name.
Justice Harry A. Blackmun: (Inaudible)
Mr. Matthew J. Zinn: Yes sir, he did.
Justice Harry A. Blackmun: Are there any (inaudible) and there was a veto?
Mr. Matthew J. Zinn: This case came on, on cross motions for a summary judgment Mr. Justice Blackmun and the record doesn’t reveal any such instance.
The situation that obtained with Byrum Lithographing then so far as the record discloses, is that at all times Mr. Byrum owned the seven -- was able to vote 71% of the stock of the corporation and at all times until his death was in control of the corporation.
Looking at the second and third corporations, Graphic Realty and Bychrome, the situation is the same.
He originally owned 83% and 88% of the stock of those corporations transferred the portion in trust and by retaining the right to vote that stock for his lifetime and the right to veto any sale of the stock which assured lifetime control of those corporations as well as Byrum Lithographing.
Justice Potter Stewart: The trusts have been in existence less than six years at the time of his death.
Mr. Matthew J. Zinn: The trust was created in December 1958.
Justice Potter Stewart: He died on September of 64?
Mr. Matthew J. Zinn: That’s right.
Justice Potter Stewart: And these were series of transfers, it wasn’t just one transfer.
Mr. Matthew J. Zinn: That’s correct the --
Justice Potter Stewart: The creation of a trust in 58 and then a series of transfers over the so many years until his death?
Mr. Matthew J. Zinn: That’s correct.
Justice Potter Stewart: And how are the case stand if the trust had lasted -- if he lived another 10 years and transferred all of these closely held trust to the or closely held the stock in his corporations to the trust in time of his death but had retained course the same.
Would the trust be the same?
Mr. Matthew J. Zinn: So far as the United States is concerned Mr. Justice Stewart the case would be precisely the same.
Justice Potter Stewart: I thought you would say --
Mr. Matthew J. Zinn: Indeed, that may have been the plan in order to obtain the maximum gift tax.
Justice Potter Stewart: So, if the entire 71% and 83% and 88% respectively had at the time of Mr. Byrum’s death then in the hands of the trustee, your case would still be the same [Voice Overlap].
Mr. Matthew J. Zinn: Yes, it would and I would suggest that that would be a kind of see it for estate planners because by then --
Justice Potter Stewart: Yes, that is what you now suggesting but the track of the majority was still in his hands at time of his death, doesn’t make your case any stronger, really?
Mr. Matthew J. Zinn: That’s only true in the case of the first corporation.
Justice Potter Stewart: Alright, but a lot of percentage was still in his hands?
Mr. Matthew J. Zinn: We don’t rely on the distinction between whether the stock retained in his own name or was enough to control or whether to combine right to vote the transfer stock.
Justice Potter Stewart: If there has been a complete transfer of all of these stocks even if the trust in 1958 your argue submission would still be basically the same.
Mr. Matthew J. Zinn: Yes, we’d still be here.
Justice Potter Stewart: Yes.
Mr. Matthew J. Zinn: Yes sir.
Justice Lewis F. Powell: Suppose he had transferred not to the trust but it just sold to unaffiliated interest all are substantial percentages of the shares he retained initially, does that make a difference?
Mr. Matthew J. Zinn: Sold the stock?
Justice Lewis F. Powell: Sold the stock he retained as to that people, suppose he had.
Mr. Matthew J. Zinn: In other words suppose that he didn’t have control?
Justice Lewis F. Powell: Right.
Mr. Matthew J. Zinn: Well, in the case of the first corporation, if he got below 50% ownership, we might still be here if we could show that he had in substance had control even with the smaller interest.
Justice Lewis F. Powell: But your case rests on control.
Mr. Matthew J. Zinn: Yes, it does but --
Justice Lewis F. Powell: Effective control?
Mr. Matthew J. Zinn: Effective control, that’s right and if we’re less than 50% it still might be effective control.
We have to look at the particular facts.
Justice Lewis F. Powell: At least the point I was leading up to, you asked on control and it may or may not exist depending on whether you have 50% or more.
Mr. Matthew J. Zinn: Well, but in this case, we don’t have that problem on, Mr. Justice Powell because there’s no question that he had controlled.
Unknown Speaker: Mr. Zinn, is the term “effective control” one that it used in the statute or in the regulation?
Mr. Matthew J. Zinn: No, it is not Mr. Justice.
I’m to get to the statute in just one moment if I may.
Unknown Speaker: Are you going to give it somewhere along the line that definition of effective control and why it is the controlling principle?
Mr. Matthew J. Zinn: No, because we don’t think we have to rely on effective control in this case.
He has actual control, that’s not disputed both the District Court and the Court of Appeals and I think the respondent conceives that Mr. Byrum was in control of this corporation for his lifetime.
Unknown Speaker: But I took it in and your answer to the question of Mr. Justice Powell that you said that effective control would be equally good, it might be a weaker case in some respect but I take it the rationale of your argument must embrace both actual control and effective control.
Mr. Matthew J. Zinn: That is right.
I hope to demonstrate of why this was in effect the testamentary transfer because of the retention of control in this case legal control perhaps in another effective control.
After Mr. Byrum’s death in September of 1964, the commissioner asserted estate tax deficiencies against his estate on the ground that the stock transferred in trust was includable in this gross estate under both Section 2036 (a) (1) and 2036 (a) (2) of the Code.
The estate of course had included in the gross estate only the stock retained by Mr. Byrum in his own name.
The statute that set out on pages 2 and 3 of our opening brief and reads as follows, “The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at anytime made a transfer, except in the case of a bona fide sale for an adequate and full consideration in money or money’s worth, by trust or otherwise under which he has retained for his life or for any period not as ascertainable without reference to his death or for any period which does not in fact end before his death.”
One, the possession or enjoyment of, or the right to the income from the property or two, the right, either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom.
On cross motion for summary judgment in the District Court, the District Court granted the estate’s motion and a divided Sixth Circuit affirmed.
We begin any discussion of Section 2036 with this Court’s decisions in the O’Malley case six years ago and more recently in the Grace Estate case in 1969.
In 1966, in O’Malley, Mr. Justice White speaking for the Court stated that the predecessor of Section 2036 was “an important cause of the legislative policy of subjecting to tax all property which has been a subject of an incomplete inter vivos transfer.
In Grace Estate, Mr. Justice Marshall writing for the Court explained that the purpose of the predecessor of Section 2036 and I quote now from 395 you asked that 320 was to include in a decedent’s gross estate transfers that are essentially testamentary, “I transfers which leave the transferor a significant interest in for control over the property transferred during his lifetime.”
Unknown Speaker: Is that a case with all your (inaudible) trust?
Mr. Matthew J. Zinn: Yes, that was the cross trust.
Unknown Speaker: No, I didn’t sit in that case?
Mr. Matthew J. Zinn: Judged by the statements of purpose of Section 2036, we think that these transfers must be considered incomplete until the time of Mr. Byrum’s death.
That is essentially testamentary, nothing changed with regard to corporate operations following the transfers.
Mr. Byrum was in control as he had been previously.
All that the beneficiaries had after they transfers were, one, the right to receive such dividends as Mr. Byrum as controlling stock holder determine should be paid; two, the right to receive the proceeds of a sale of its stock if Mr. Byrum agreed that the stock should be sold; and three, the right to the proceeds on liquidation of any of the corporations if Mr. Byrum voted in favor for liquidation.
Unknown Speaker: Well, what they have was the -- whatever rights beneficial stockholders, I haven’t any corporation, isn’t it correct?
Whether the owner was Mr. Byrum and Mr. Smith or Mr. Jones what the beneficiaries of trust have were what the beneficial owners of the shares and the corporations have, correct?
Mr. Matthew J. Zinn: I’m not sure I understand the --
Unknown Speaker: Whatever those rights are as what they had.
Mr. Matthew J. Zinn: Well, the statute doesn’t tax all of the rights, all such interest Mr. Justice but it taxes them with a transfer in trust and the transfer in effect is testamentary as it is here.
Unknown Speaker: You said that the beneficiaries and the trust you were implying that they got very little because
Mr. Matthew J. Zinn: That is right.
Unknown Speaker: Mr. Byrum’s control [Voice Overlap]?
Mr. Matthew J. Zinn: They got what he said he should.
Unknown Speaker: They got whatever shareholders, whatever right shareholders have beneficial to shareholders.
Mr. Matthew J. Zinn: I would draw a distinction and I think between his share --
Unknown Speaker: And this would be true whether Mr. Byrum where the owner of the majority of stock or whether Mr. John Smith was.
Mr. Matthew J. Zinn: That’s right.
But section 2036 have taxes such transfers we believe where the transferor isn’t control.
Unknown Speaker: Now, talking about the taxability of Mr. Byrum’s estate but--
Mr. Matthew J. Zinn: Right.
Unknown Speaker: You implied the somehow or another since he was the owner of the corporation that the beneficiaries of the trust got less but I didn’t follow that argument.
Chief Justice Warren E. Burger: Could he have originally given the voting rights to someone else other than retaining them?
Mr. Matthew J. Zinn: He could have given them to the trustee, Mr. Chief Justice.
Chief Justice Warren E. Burger: Well, I’m speaking of the third person, could he given them the third person?
Mr. Matthew J. Zinn: He could have given them to a third person and then you’re going to ask me whether what the tax consequences would be.
In the case of the first corporation we’d still be here because he retained it in his own name full in control.
Chief Justice Warren E. Burger: Isn’t your position assumed improper decisions on his part to withhold the payment of dividends?
Mr. Matthew J. Zinn: Not at all.
We think fully within the scope for this fiduciary duty he could’ve determined that all of the money should be returned to the corporation.
Chief Justice Warren E. Burger: Well, there are limits on that, aren’t there?
Mr. Matthew J. Zinn: Very scanty limits Mr. Chief Justice.
We think the record in this case shows clearly enough how little did go on.
If you will refer to page 25 and 26 of the record, you will see that the dividends that were the paid on the transferred stock from the time of creation of the trust until Mr. Byrum’s death total $303.50.
Chief Justice Warren E. Burger: What had have been in comparable period before that?
Mr. Matthew J. Zinn: We don’t know that but we do know in the period immediately after Mr. Byrum’s death.
The dividends went up from 10 cents a share on each of the stocks to $2.00 of share a 24 of increase and that the dividends in the first year after his death were $1,498.00 which were some five times what they have been in the preceding six years.
Chief Justice Warren E. Burger: I suppose you would agree that conceivably, possibly that was a very unwise -- could’ve been unwise dividend decision?
Mr. Matthew J. Zinn: Right, but the fact of the matter is, Mr. Chief Justice, that so long as directors act in good faith in determining dividend policy, there’s virtually no check on them.
Chief Justice Warren E. Burger: Doesn’t that apply before death is real as after?
Mr. Matthew J. Zinn: Yes, sir but that was precisely the limitation on the grantor in the O’Malley case and which this Court held that the power to accumulate income constitutes the right to designate within the meaning of Section 2036.
Unknown Speaker: We’ll understand that as a holding of the Court because that wasn’t the issue in that case but it was apparent approval of what the Court recognized to be a rule of longstanding, isn’t that right?
Mr. Matthew J. Zinn: I would say that it’s something I would agree with you that technically it’s not holding on the other hand --
Unknown Speaker: But that wasn’t the issue.
Mr. Matthew J. Zinn: On the other hand I would have to say it’s something more than dictum because it was essential to what the Court did hold than the sense on the question whether accumulated income was transferred that holding presupposes.
Unknown Speaker: But necessary?
Mr. Matthew J. Zinn: Yes sir.
So, I think it’s something more than dictum but perhaps something less than square holding.
Unknown Speaker: Because that was not the issue, that had not been questioned on the ideal party in that Court, in that case.
Mr. Matthew J. Zinn: That’s right.
In any event our point here is that the grantor in the O’Malley case also had to act in good faith despite of broad grant of power that he retained to withhold or distribute income to the beneficiaries if it could be shown that he was acting out his private interest rather than out of the beneficiary’s interest in exercising that power.
We think the Court of Equity would’ve stepped in and could’ve required the distribution every trustee has a duty of good faith and a duty of good motive but in order to establish an objective limitation on the power to designate, we think there has to be a most specific duty and nothing in the respondent’s brief, or for that matter in amicus brief suggests that there’s any objective standard by which a corporate director’s exercise of discretion is limited.
They can -- if they decide to return all of the corporation’s profits into the business.
There’s no way that the Court can step in and do anything about it unless you could show that the directors had a bad motive but that’s a subjective standard.
Unknown Speaker: Or can be federal income tax consequences can they not --
Mr. Matthew J. Zinn: In this particular case?
Unknown Speaker: And unreasonable accumulation of earnings which had motivates directors not do so if they’re going to run that risk?
Mr. Matthew J. Zinn: I would say couple of things about that.
First of all, there’s a $100,000.00 exemption from the Section 531 tax and secondly, that still doesn’t prevent a reinvestment of all the earnings.
There’s no way that Section 531 tax can check, can be a check on the powers.
If you reinvested business, it’s only if you sit on and again, we fail to see any distinction between the limitation on the power here and a limitation on the power in O’Malley.
It’s roughly the same thing and for that reason, we think that the trust that’s taxable under Section 2036 (a) (2) because Mr. Byrum retained the right to designate.
Unknown Speaker: Mr. Zinn?
Mr. Matthew J. Zinn: Yes, sir.
Unknown Speaker: I’d like to be sure, I understand your position.
Suppose the stock placed in the trust had no voting rights at all.
Let’s assume we’re nonvoting stock, so with respect to that trust no problem, no issue with respect to voting but the grantor had retained control of the corporation, do retention of voting stock, that [Voice Overlap] can be the same?
Mr. Matthew J. Zinn: We’d be here, Mr. Justice.
That’s pretty close to revenue ruling that Chief Judge Phillips relied upon in his dissenting opinion in the Court of Appeals which Revenue Ruling 67-54.
Unknown Speaker: 67-54?
Mr. Matthew J. Zinn: Yes and its reprinted beginning at page 48 of the record appendix.
Mr. Justice, our concern here is not with the formalities but ever since this Court decided the Hallock case.
It has consistently held that the estate tax laws to be determined by the realities of the situation.
The realities are put precisely the same whether the grantor turn his none voting stock in trust of to whether he transfers voting but retains control of the corporations.
Unknown Speaker: Suppose there’ve been no limitation on the sale of the stock transferred to the trustee, would that make a difference?
Mr. Matthew J. Zinn: I think that might make a difference, Mr. Justice if the trustee had the power to sell and if the stock was marketable and if it could be shown that there was no understanding of the record whether expressed or implied between the grantor and the trustee then I think that the government would not raise this kind of question.
Unknown Speaker: But it might if in fact the trustee had not sold?
Mr. Matthew J. Zinn: It might but I would point to --
Justice Byron R. White: But only if prohibited (inaudible)
Mr. Matthew J. Zinn: No, that wouldn’t make any difference.
I think that helps our case Mr. Justice White.
Justice Byron R. White: Well, I know but in the example.
You mean if the trustee doesn’t sell, the only reason he doesn’t sell because its dividends have been paid.
The problem is easy to tell if decision have been investment.
Mr. Matthew J. Zinn: Well, he might be under a duty to sell.
Justice Byron R. White: It might be?
I thought maybe you know of this can hold unproductive voting (inaudible)?
Mr. Matthew J. Zinn: Well, the trustee in Amicus case did precisely that Mr. Justice White.
Chief Justice Warren E. Burger: Without a waiver in the trust allowing to hold the family?
Mr. Matthew J. Zinn: Well, the grantor in Amicus (ph) case was the trustee and well, the facts aren’t of record yet the deficiency notice just having issue.
That stock was transferred in trust in 1948 and the decedent there died in 1967.
The government has asserted that the value of the stock transferred at a date of the decedent’s death was $24.5 million.
Now, that subject to question of course, that’s the government’s evaluation but I don’t think it’s subject to question that only $300.00 of dividends was paid on that stock in the 20 years that it was held.
Unknown Speaker: Let’s assume, maybe this is a case I want to put through you.
Suppose the grantor transfers to a bank and to himself as trustee, 100% of the stock of the corporation and he would have to trustee but the trustees are under a duty to distribute all of the income that they received but they happen to be between the two of a 100% over to a corporation and as trustee they have to control we've been talking about, does this make a difference?
Mr. Matthew J. Zinn: We’d be here.
Unknown Speaker: You’d be here even though the trustees are under a fiduciary duty as trustees that this taxpayer in this case is not?
Mr. Matthew J. Zinn: We question of whether they have more than a fiduciary duty in those circumstances more than a good faith fiduciary duty because --
Unknown Speaker: But I think they have whatever fiduciary duty of trustees got?
Mr. Matthew J. Zinn: Well --
Unknown Speaker: But you produce the kind of income before for beneficiaries that has to be (inaudible)?
Mr. Matthew J. Zinn: Well, they may be supposed to produce it Mr. Justice but the fact of the matter is that just don’t produce it.
And I don’t think Amicus case is a typical when you have a situation like this.
Unknown Speaker: So, you say that any kind the owner of stock wish to transfer whether he remains as it, whether he is trustee or whether he is not trustee, as long as he’s got a control, whether as a trustee or not?
Mr. Matthew J. Zinn: Well, I am saying that unless that he has a duty to sell the stock if a determination is made that no dividends should be paid.
In the exercise of his power as a director, he may determine that they shouldn’t have be any dividends pay.
He may determine that the corporation has cash shortage.
Now, nobody sells this kind of stock in closely held corporations, Mr. Justice they hold on to it.
And so there’s a conflict in duties here and we say that the way of that conflict is resolve is, yes the trustee has a duty of good faith, yes to that trustee has duty of to a motive but he has no duty in those circumstances to fairly apportion income.
Unknown Speaker: Do you say a trustee never sell unproductive stock in closely held corporation?
Well, I don’t know about that.
Mr. Matthew J. Zinn: Well, as I say in this case, one could make the same argument for an Amicus case but the fact is they didn’t sell it.
Unknown Speaker: Well, in this case he had duty not to sell except with the permission of the grantor, that was a [Voice Overlap] operate?
Mr. Matthew J. Zinn: This is an easier case for the Government but I’ll not be prepared to concede Amicus case.
I think the facts in that case are so bizarre that’s a stronger case for the government --
Justice Lewis F. Powell: You don’t need to concede it, would you?
Mr. Matthew J. Zinn: No.
One last word Mr. Justice Powell with regard to the question of where the power to sell is given to the trustee, I would refer you to the Berkwitz case which is cited in the footnote on page 19 of our brief involving the situation largely like the one that you raised.
Unknown Speaker: (Inaudible) presumption in fact by the SEC to the effect that a 10% owner is presumptively a controlling stockholder, would you carry your doctrine that far?
Mr. Matthew J. Zinn: I might if the rest of the stock was 45-45 and the other two people log ahead.
Mr. Chief Justice, I should like to reserve my remaining time.
Chief Justice Warren E. Burger: Very well, Mr. Zinn.
Argument of Larry H. Snyder
Mr. Larry H. Snyder: Mr. Chief Justice and may it please the Court.
The facts in this case are relatively simple and to my knowledge they’re not in dispute.
However, I think there is some danger that some of more important facts may be obscured by the rather extensive citations or previous cases and some of the arguments here.
So, if the risk of repeating some of the facts that I before you, I would like to outline briefly some of the more important elements of the Byrum trust.
Counsel has told you that it’s in irrevocable trust for the children of the decedent and that a national banking corporation is trustee.
The trustee instrument provides that until the youngest of these minor children reaches 21, no distributions from either corpus.
To put it this way that the distributions from either corpus or income are entirely within the discretion of a trustee having do regard for the education and the maintenance and the care for the children upon the youngest child’s reaching 21.
The terms of the trust provide that the trust corpus is to be divided into separate trust funds for each of the living or deceased children of the decedent, and that each such fund is to continue until that beneficiary reaches the age of 35.
If prior to reaching age 35, a beneficiary has an emergency such as an extended illness or some other need.
The trustee is authorized to pay two on behalf of that beneficiary from either corpus or income.
Otherwise, the income is to be accumulated and to be distributed at the termination of a trust.
Decedent didn’t retain the right to vote the stock, the unlisted stock held in the trust corpus.
And it’s true that there was of the time the decedent’s death unless it stocked in three corporations and at the right to vote this stock together with the right to vote stock owned by the decedent gave him the majority voting interest in these three corporations.
Unknown Speaker: Mr. Snyder, does the record show who do this trust instrument?
Mr. Larry H. Snyder: No, sir but I know who did.
It’s the Court’s interest did.
My law partner did before I joined.
Unknown Speaker: Before what?
Mr. Larry H. Snyder: Before I was associated with them, my law partner did.
Unknown Speaker: What’s that (inaudible) officer of the corporation?
Mr. Larry H. Snyder: Yes, I believe some officer of all three corporations.
Unknown Speaker: (Inaudible)?
Mr. Larry H. Snyder: Yes.
The Government has made the principle issue in this case.
The question of whether these right to vote stock.
Unknown Speaker: Incidentally, let me follow through, was Mr. Byrum a director of the trustee bank?
Mr. Larry H. Snyder: No.
Unknown Speaker: Was he a customer otherwise than a trust customer?
Mr. Larry H. Snyder: I have to guess it that I don’t know, I didn’t know --
Unknown Speaker: (Voice overlap) show?
Mr. Larry H. Snyder: I doubt very much but I know he wasn’t a director.
I am in no position to know whether he was a customer at bank or not.
As I started to say, the Government has made the principle issue in this case.
The question of whether this reserved power to vote this stock constituted the right to designate the persons who shall possess or enjoy this property or the income from the property, the stock within the meaning of Section 2036 (a) (2).
The argument is of course that the right to vote the stock gave him the right to dictate a corporate dividend policies of these three corporations and therefore to regulate the flow of dividend income to the trust.
Now, assuming for the moment that decedent had this absolute right to dictate corporate dividend policies that by no means follows under the circumstances of Byrum at least that he had the power to shift the income of the stock, the beneficial enjoyment said by the cases to be the basis for tax under Section 2036 (a) (2) is indicated earlier.
The income from the stock did not vest in the sense that it was not payable as earned.
It was to be accumulated unless there were certain emergencies or other conditions shown at which time it was in the discretion, excuse me, of the trustee to pay this income.
If that condition or those conditions did not exist then the income was accumulated headed to the corpus of the trust and paid to the beneficiary under termination of the trust.
And we submit that this indirect and conditional power to affect distributions of income from the trust does not constitute a right to designate who shall receive the trust income.
The right to designate, the term “right to designate” we feel implies some sort of a permissive choice between potential income beneficiaries.
Unknown Speaker: Do you accept the proposition that a trustee’s power to accumulate or not is the right to designate within the meaning of the statute?
What O’Malley has said to stand for by the Government, do you accept that as a [Voice Overlap]?
Mr. Larry H. Snyder: I accept that, yes.
Unknown Speaker: You do?
Mr. Larry H. Snyder: I think O’Malley is distinguishable.
O’Malley was a direct part.
Unknown Speaker: Yes.
Mr. Larry H. Snyder: In O’Malley, as I recall O’Malley the set lower trustee had the [Voice Overlap].
Unknown Speaker: And the Court said that was the power to designate within the meaning of the statute?
Mr. Larry H. Snyder: There, there was the conscious the permissive choice that settlor had the power to choose.
Unknown Speaker: You do begin by accepting that but then you distinguish this situation.
Mr. Larry H. Snyder: I like to get, I’d like not to accept it but its law, I think I am.
So, we submit that that the reason in this case, the facts of Byrum, this right to designate which predicates tax under Section 2036 (a) (2) at least if the terms of the statute or to have meaning at all.
Unknown Speaker: Mr. Snyder, I follow off the wagon long away sometime.
Prior to age 21, there is no accumulation direction I take it, prior to age 21?
Mr. Larry H. Snyder: No sir, prior to age 21 --
Unknown Speaker: Well, everything is discretionary distribution?
Mr. Larry H. Snyder: It’s a discretionary distribution, that’s right.
Unknown Speaker: Now, if the youngest reaches 21 and there is a direction to accumulate except in terms of emergency.
Mr. Larry H. Snyder: But the discretion to distribute income from or corpus, from the trust before the youngest child reaches 21, you will further read is with do regard for the education of maintenance and the care for the child of its shoulder.
So, the question is not a reason under the Byrum trust but it would seem to me that under the -- and I think this is the way to interpret it that it is accumulated unless the trustee determines in its discretion that there is a need for distribution of either income or corpus or educational needs or for maintenance or for care that child or the children.
Unknown Speaker: I suppose that if the stock if they given -- but this test says I retain the income to the stock for my lifetime that the stock would be includable in this estate.
Mr. Larry H. Snyder: As far as I’m concern it would be yes.
Unknown Speaker: But if this trust instrument said, I will pay to you what part of the income from the stock that I’ve feel inclined to pay you?
I may pay a 100% of it or I may a 50% of it, it will be the same result isn’t it?
Mr. Larry H. Snyder: You’re talking now who is the trustee, it’s --
Unknown Speaker: Well, independent trustee, Mr. Byrum gives the stock to the bank that as trustee but says, I am going to [Voice Overlap], how much of the income I keep, it’s up to me.
Mr. Larry H. Snyder: Mr. Byrum has reserved this power to determine what am to maintain it.
Unknown Speaker: He maintain 100% all the time but --
Mr. Larry H. Snyder: Or it may not be.
I would say unto those terms that it was taxable, it was includable in the estate of the decedent.
Some may not agree with me but I don’t see how that could be held not to be taxable in that case.
As distinguish here from whether income is definitely --
Unknown Speaker: If he said, I won’t keep any of it for myself but I retain the power to have some of it channeled to somebody else besides you Mr. Trustee?
Mr. Larry H. Snyder: Well, of course we keep knowing that I would think even in that case, it would still be a taxable transaction.
Unknown Speaker: Yes.
Mr. Larry H. Snyder: But here is how equivocally departed for many interests in this income in this stock whatsoever.
Unknown Speaker: But he does have to retain the power to direct that the money shall be used in a corporation.
Mr. Larry H. Snyder: Well, he does have a majority voting interest in the corporations and I think that’s a point, that should be considered because contrary to the position of the government in this case, I disagree that this gives or gave Mr. Byrum the right to dictate dividend policies to suit his personal interest.
Under the law of Ohio and under the General Corporation Law, he stood in a fiduciary relationship to these corporations and to all of the stockholders of the corporations and significantly that all three of these corporations, there was a minority stock holder outstanding or minority stock interest outstanding who was not related to Mr. Byrum, was not a member of his family.
And we submit that he could not regulated the dividend flow from these corporations to suit his personal interest, his private purpose without violating his position of trust and question arose as to what objective standard is there to hold the majority stock holder and the directors to the objective standard is this, I think quite clearly that this is corporation law is that the stockholders are entitled of the profits of the corporation other than those profits which are reasonably needed for the business and the question of what profits are reasonably needed for the business is a question that’s answered constantly by the Courts.
And it is of course the very question which is involved and the corporate accumulated earnings tax which was referred to by Justice Stewart.
So, they’re very definitely is an objective standard to which a majority stockholder is held.
Indeed, in many respects I think it’s more objective, more restrictive than is some of the (inaudible), some of the standards supposedly imposed upon trustees.
Quite clearly, it is not a matter of the good faith of the majority stockholder or a majority or the board of trustees.
There’s an objective standard.
They are obligated to pay out the profits of the corporation unless there is a reason on business need to retain these profits.
Unknown Speaker: Mr. Snyder, what do you think was the purpose of Mr. Byrum in retaining these powers?
Mr. Larry H. Snyder: Well, I think the purpose of Mr., but frankly, I think the purpose of Mr. Byrum and understand I did not know him and was not around when the trust was created.
I think his purpose was to attempt to hold the corporation together.
I think a small corporation has extreme disadvantage or an older having an interest in a small corporation or larger corporation.
You can give extensive stock to a large listed corporation away without a danger of having the corporation collapse but this was a small everyday kind of a business and I think he was concerned about the business judgments that a bank would make or a successor trustee which would have to be a corporation.
So an answer to your question, I think he was concerned about the business judgments that might occur if the right to vote the stock was given of the national bank.
And frankly, I don’t agree with him.
I think that I don’t know how these other places but in Columbus, Ohio, we probably didn’t have to do that, I’m sure the bank would’ve call them and said Mr. Byrum how do you want us to vote the stock, but that is in our case.
Unfortunately, he did retain the right to vote the stock.
But focusing again on the statute which we can’t get away from section 2036 (a) (2), I don’t really think in the circumstances of Byrum that there’s any shifting of corporate income or rather of dividend income by the payment or the withholding of dividends.
If dividends are declared, they are paid under the terms of this trust, unequivocally to the trust.
Mr. Byrum had nothing to do with it.
They were subject to being withdraw on the terms of the trust.
He had no control of.
If dividends were withheld as a results of legitimate business decision, how can you say there’s any shifting of income if they were withheld partially or totally because of his private motives then the minority stockholders had redressed in the Court and indeed under those circumstances, I think the trustee himself would be obligated to take action because after all he is representing the stockholders, the beneficiary of this trust.
Unknown Speaker: What if Mr. Byrum had been himself for trustee, would that have made your case stronger or weaker?
Mr. Larry H. Snyder: In addition to the --
Unknown Speaker: Yes, and everything else what if he had been a co-trustee?
Mr. Larry H. Snyder: I don’t think it would have changed my case.
I don’t think it would particularly help it but I don’t think it would damage it either which is not a it is rather unequivocal answer.
Unknown Speaker: No, you’re probably --
Mr. Larry H. Snyder: I don’t see that the situation would change.
Unknown Speaker: It was never on the brief will be on that?
Mr. Larry H. Snyder: [Laughter] Yes!
Unknown Speaker: We will bring it a little closer partially to the Reinecke Northern Trust case, wouldn’t it?
Mr. Larry H. Snyder: Yes, I think it would and I think really that Byrum rises and falls under Reinecke.
Because Byrum is after all no more than an administrative, an administrative power, Byrum have no more than an administrative power and in the matter of fact it was indirect administrative power.
Unknown Speaker: (Inaudible)
Mr. Larry H. Snyder: Yes, it was.
But the issue common to Reinecke and common to Byrum is this overly back up.
The specific question in Reinecke was whether these powers to the set law of supervising an investment of the trust and both the stock held in trust whether this constituted the gift of the corpus of the trust; a gift intended to take effect at or after death.
Now, that the rule of Reinecke is that this kind of administrative power did not delay possession or enjoyment.
It did not delay the vesting of possession or enjoyment.
The question is here does the same kind of a power cause a shifting of possession or enjoyment and by apparently of reason if it does not constituted delay of possession or enjoyment, it doesn’t constitute shifting of possession or enjoyment.
I think the Reinecke and all the cases, the lower court cases that have been decided after Reinecke and followed Reinecke stand or as a complete bar to the position of the government here.
They have as you point out attempted to this discount it because it was an active before the predecessor to Section 2036 (a) (2) but the fact to the matter is there is a common thread in Reinecke and in Byrum.
And Reinecke cannot be dismissed.
Unknown Speaker: One last question on stock.
Was there any of chance or reverse in here in Mr. Byrum, what if he survived all of the issue?
Mr. Larry H. Snyder: No, there wasn’t.
Unknown Speaker: All right.
Mr. Larry H. Snyder: There’s a specific provision saying that there shall be no revision.
I can’t pick it out of the record for you now but its part of a trust instrument and there is no possibility of a revered in this case.
To this point discussion has been about the Section 2036 (a) (2) issue, the government also raises the question of Section 30 -- the applicability of Section 2036 (a) (1).
I think the argument in support of its position is unpersuasive on its face.
I don’t intend at this oral argument to try to add to the briefs on this question unless there are specific questions.
I would like the direct the attention just briefly to the Government’s reply brief and it seems to me in it’s reply brief, the Government backs off of its earlier position, this is my opinion.
They take a new track and say that actually Byrum is disposed of by the president of three cases decided by this Court.
The one being the O’Malley case that we discussed here and the other is Commissioner versus Estate of Holmes and Lober versus U.S., and they also suggest or it seems to me, that we didn’t cite these cases if we were trying to avoid them.
And we didn’t cite them but we’re not trying to avoid them because on this point we agree with the Government.
We think these three cases do invite comparison with Byrum.
We’ve compared O’Malley and as you will recall in Holmes and in Lober.
The set law reserved the right to terminate the trust in those two situations before the specified termination date and thereby to cutoff the contingent remainder interest and as compared to Byrum, we think clearly here in Lober and in Holmes is the situation where the set law held a conscious, a permissive and open choice.
He had an open power to directly affect the beneficiaries of those two trusts.
This is not the case in Byrum, the government has to look to some subjective consideration about stock manipulation or dividend manipulation in order to get to where it is now and we submit that this ought not to be made the basis of taxation.
The government is also somewhere in one of its briefs indicated that if Byrum is not reversed that there will be a great deal of litigation to follow.
And I think frankly just the opposite is true, I think it’s been demonstrative by the argument here today that Byrum is just one step in the Government’s plan to expand Section 2036 and I supposed then 2038 because if I understood correctly in the argument here, I don’t think even a trust will stand in the way of the Government search to tax this transaction.
And I would simply say you in conclusion that if these are situations, if Byrum represents a situation that an equity dictates that there should be a tax and I don’t think it is but assuming that that’s true that I submit to you, it’s for the Congress to enact the statutes to tax.
It’s not taxable under the present laws and I submit in all do respect that should not be made taxable by this Court but should be left in the congress.
Chief Justice Warren E. Burger: Thank you Mr. Snyder.
Mr. Zinn do you have anything further?
Rebuttal of Matthew J. Zinn
Mr. Matthew J. Zinn: Yes Mr. Chief Justice, I do.
Three points, first if this Court affirms the decision below, I want to suggest that in the absence of further legislative change, it would be a rare case indeed when stock in a closely held corporation is subject to the estate tax.
I don’t think this is consistent.
Unknown Speaker: Well, stock in a closely held corporation is transferred in trust to somebody else you mean?
Mr. Matthew J. Zinn: Well, if you can do it this way Mr. Justice and keep control throughout your lifetime, I don’t see why you transfer to independent trust estate.
I would suggest only that this is totally incompatible with the congressional intent, I would refer the Court to Section 303 of the Code which provides a special redemption provisions for the payment of debt taxes and administrative expenses and is usually applicable in the case of stock with closely held corporations, how deferral so the Section 6166 of the code which provides that where the bulk in the estate is made up of stock that closely held corporation.
The state tax maybe paid in 10 installments rather than 15 months after death.
I would like to return if I may to Mr. Justice White’s query regarding the duties of trustees.
I would agree with him that where the trustee has only those powers necessary on the estate law that is let’s if he is confined in an investment to the legal list that he has a duty to apportion fairly between the income beneficiaries and remainder but you can take gradations of that case and first you can give him the power to go beyond the legal list and that gives him some all latitude in shifting the beneficial enjoyment of income and then I would --
Unknown Speaker: What if he subject of the most prevailing were all (inaudible)?
Mr. Matthew J. Zinn: Well, I think but these additional powers, Mr. Justice are put in to the trust instruments and they go so far as to say --
Unknown Speaker: Why is then that?
Mr. Matthew J. Zinn: If he has only the powers that to invest, talking about the investment power to invest in property on legal list, we wouldn’t say that he has the right to designat.
But when he can go beyond that, when he can go beyond it and --
Unknown Speaker: However, broad at times to give the trust whether he has support on legal list or they have big fund that come and stock, if still subject normally there’s just some specific provision in the trust instrument, (inaudible)?
Mr. Matthew J. Zinn: Right.
Unknown Speaker: If you think he can get the power of that 100% common stock.
Mr. Matthew J. Zinn: 100% in --
Unknown Speaker: That doesn’t give any power to hold the work with common stock?
Mr. Matthew J. Zinn: Well, it may give power; I think that it could give power to invest.
Let’s say in arbien stocks.
Unknown Speaker: Briefs under state laws --
Mr. Matthew J. Zinn: [Laughter] I would like to make one last point.
We rely also on Section 2036(a) (1) of the Code.
We say that the decedent here retains the enjoyment of the transferred property and we think again the Court’s realistic approach that it has been applied since Holland should be applied here.
If one has bond of AT&T, obviously the essence of enjoyment to that bond is the income from the bond.
If one has an oil painting, the essence of enjoyment of the oil painting is having it hang in once home.
In the case of a close corporation, the essence of enjoyment is controlling that corporation setting ones own salary, setting ones own fringe benefits within limits to be sure that setting them nonetheless and I would in closing in refer the Court to the quotation from Professor O’Neal which we have set out at some length on pages 24 and 25 on our brief.
Thank you Mr. Chief Justice.
Chief Justice Warren E. Burger: Thank you Mr. Zinn.
Thank you, Mr. Snyder.
The case is submitted.