Helvering v. Bullard
Headline: Estate tax rule upheld: Court allows including property put into a 1932 trust, where the decedent kept lifetime income, in her taxable estate under the 1931 tax change, limiting a common tax-avoidance device.
Holding:
- Includes post-1931 trusts with retained life income in taxable estates.
- Reduces a common method families used to avoid estate taxes.
- Reverses appeals court and enforces the 1931 tax rule.
Summary
Background
Clara R. Smith, an Illinois resident, made an irrevocable trust in 1927 transferring securities to her son while reserving income for her life. The son died in 1928 leaving a widow. In 1931 the decedent and beneficiaries settled a state-court dispute about the old trust, which violated the rule against keeping property tied up too long, and she then executed a new irrevocable trust in 1932 conveying about one-third of the original corpus while again reserving the income for her life.
Reasoning
The central question was whether Congress’s March 3, 1931 resolution required including in a decedent’s gross estate property transferred in trust when the transferor retained the income for life. The Commissioner included the 1932 trust corpus in the estate; a lower appeals court reversed. The Court rejected the argument that the 1932 transfer was a bona fide sale that avoided tax, accepted the Illinois decree that the 1927 trust was void, and explained that Congress can treat transfers with retained life interests as taxable to prevent tax avoidance. The Court relied on the resolution’s purpose and past rulings treating retained powers or interests as grounds for estate inclusion.
Real world impact
As a result, trusts created after March 3, 1931 that transfer property while the donor keeps income for life can be counted in the donor’s taxable estate. The ruling curbs a commonly used technique families relied on to reduce estate taxes. The Supreme Court reversed the appeals court and sent the case back for proceedings consistent with this decision.
Dissents or concurrances
Two Justices took no part in the decision; there is no separate opinion described in the text.
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