298

BLACK, J., dissenting.

See also Miller v. Amusement Enterprises, Inc., 394 F. 2d 342.

It seems clear to me that neither the paddle boats nor the locally leased juke box is sufficient to justify a holding that the operation of Lake Nixon affects interstate commerce within the meaning of the Act. While it is the duty of courts to enforce this important Act, we are not called on to hold nor should we hold subject to that Act this country people's recreation center, lying in what may be, so far as we know, a little "sleepy hollow" between Arkansas hills miles away from any interstate highway. This would be stretching the Commerce Clause so as to give the Federal Government complete control over every little remote country place of recreation in every nook and cranny of every precinct and county in every one of the 50 States. This goes too far for me. I would affirm the judgments of the two courts below.

5 In my opinion in Atlanta Motel v. United States, 379 U. S. 241, 268, which also applies to Katzenbach v. McClung, 379 U. S. 294, concurring in the Court's decision upholding the application of this Act to an Atlanta, Georgia, motel and a Birmingham, Alabama, restaurant, I said:

"I recognize that every remote, possible, speculative effect on commerce should not be accepted as an adequate constitutional ground to uproot and throw into the discard all our traditional distinctions between what is purely local, and therefore controlled by state laws, and what affects the national interest and is therefore subject to control by federal laws. I recognize too that some isolated and remote lunchroom which sells only to local people and buys almost all its supplies in the locality may possibly be beyond the reach of the power of Congress to regulate commerce, just as such an establishment is not covered by the present Act." 379 U. S., at 275.

1

UNITED STATES v. ESTATE OF GRACE ET AL.

CERTIORARI TO THE UNITED STATES COURT OF CLAIMS.

No. 574. Argued April 22, 1969.-Decided June 2, 1969.

In 1931 decedent, Joseph Grace, executed a trust instrument providing for payment of income to his wife, Janet, for her life, with payment to her of any part of the principal which a majority of the trustees thought advisable. Mrs. Grace was given power to designate the manner in which the trust estate remaining at her death was to be distributed among decedent and their children. Shortly thereafter Janet Grace, at decedent's request, executed a virtually identical trust instrument naming decedent as life beneficiary, with the trust corpus consisting of the family estate and securities which decedent had transferred to his wife in preceding years. Upon decedent's death in 1950 the Commissioner of Internal Revenue determined that the trusts were "reciprocal" and included the amount of the Janet Grace trust in decedent's gross estate. A deficiency was assessed and paid and this refund suit was filed. The Court of Claims held that the value of the trust was not includible in decedent's estate under § 811 (c)(1)(B) of the Internal Revenue Code of 1939, which provided that certain transferred property in which a decedent retained a life interest was to be included in his gross estate. Held: The doctrine of reciprocal trusts, which was formulated in response to attempts to draft instruments which seemingly avoid the literal terms of § 811 (c) (1) (B) while still leaving the decedent the lifetime enjoyment of his property, Lehman v. Commissioner, 109 F. 2d 99, applies here and the value of decedent's estate must include the value of the Janet Grace trust. Pp. 320-325.

(a) "[T]he taxability of a trust corpus . . . does not hinge on a settlor's motives, but depends upon the nature and operative effect of the trust transfer," and in the reciprocal trust situation inquiries into subjective intent, especially in intrafamily transfers, create obstacles to the proper application of the federal tax laws. P. 323.

(b) The application of the reciprocal trust doctrine does not depend on a finding that each trust was created as consideration for the other, and does not require a tax-avoidance motive, as such standards, relying on subjective factors, are rarely workable under federal estate tax laws. Pp. 323-324.

316

Opinion of the Court.

(c) The application of the doctrine requires that the trusts be interrelated, and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as if they had created trusts naming themselves as life beneficiaries. P. 324.

(d) Here the trusts are interrelated, as they are substantially identical and were part of a single transaction designed and carried out by the decedent, and the transfers in trust, even though of properties of different character, left each party, to the extent of mutual value, in the same objective economic position as before. P. 325.

183 Ct. Cl. 745, 393 F. 2d 939, reversed and remanded.

Solicitor General Griswold argued the cause for the United States. With him on the brief were Acting Assistant Attorney General Roberts, Harris Weinstein, Harry Baum, Philip R. Miller, and Stuart A. Smith.

William S. Downard argued the cause for respondents. With him on the brief was Walter J. Rockler.

MR. JUSTICE MARSHALL delivered the opinion of the Court.

This case involves the application of § 811 (c)(1)(B) of the Internal Revenue Code of 1939 to a so-called "reciprocal trust" situation. After Joseph P. Grace's

1 Section 811 (c) (1) (B) provided that

"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property..

"(1) General rule. To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise

"(B) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or

Opinion of the Court.

395 U.S.

death in 1950, the Commissioner of Internal Revenue determined that the value of a trust created by his wife was includible in his gross estate. A deficiency was assessed and paid, and, after denial of a claim for a refund, this refund suit was brought. The Court of Claims, with two judges dissenting, ruled that the value of the trust was not includible in decedent's estate under § 811 (c) (1)(B) and entered judgment for respondent. Estate of Grace v. United States, 183 Ct. Cl. 745, 393 F. 2d 939 (1968). We granted certiorari because of an alleged conflict between the decision below and certain decisions in the courts of appeals and because of the importance of the issue presented to the administration of the federal estate tax laws. 393 U. S. 975 (1968). We reverse.

I.

Decedent was a very wealthy man at the time of his marriage to the late Janet Grace in 1908. Janet Grace had no wealth or property of her own, but, between 1908 and 1931, decedent transferred to her a large amount of personal and real property, including the family's Long Island estate. Decedent retained effective control over the family's business affairs, including the property transferred to his wife. She took no interest and no part in business affairs and relied upon her husband's judgment. Whenever some formal action was required regarding property in her name, decedent would have the appropriate instrument prepared and she would execute it.

On December 15, 1931, decedent executed a trust instrument, hereinafter called the Joseph Grace trust.

enjoyment of, or the right to the income from, the property, or (ii) 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 . . . ."

Section 811 (c) (1) (B) has been recodified as § 2036 of the Internal Revenue Code of 1954, 26 U. S. C. § 2036.

316

Opinion of the Court.

Named as trustees were decedent, his nephew, and a third party. The trustees were directed to pay the income of the trust to Janet Grace during her lifetime, and to pay to her any part of the principal which a majority of the trustees might deem advisable. Janet was given the power to designate, by will or deed, the manner in which the trust estate remaining at her death was to be distributed among decedent and their children. The trust properties included securities and real estate interests.

On December 30, 1931, Janet Grace executed a trust instrument, hereinafter called the Janet Grace trust, which was virtually identical to the Joseph Grace trust. The trust properties included the family estate and corporate securities, all of which had been transferred to her by decedent in preceding years.

The trust instruments were prepared by one of decedent's employees in accordance with a plan devised by decedent to create additional trusts before the advent of a new gift tax expected to be enacted the next year. Decedent selected the properties to be included in each trust. Janet Grace, acting in accordance with this plan, executed her trust instrument at decedent's request.

Janet Grace died in 1937. The Joseph Grace trust terminated at her death. Her estate's federal estate tax return disclosed the Janet Grace trust and reported it as a nontaxable transfer by Janet Grace. The Commissioner asserted that the Janet and Joseph Grace trusts were "reciprocal" and asserted a deficiency to the extent of mutual value. Compromises on unrelated issues resulted in 55% of the smaller of the two trusts, the Janet Grace trust, being included in her gross estate.

Joseph Grace died in 1950. The federal estate tax return disclosed both trusts. The Joseph Grace trust was reported as a nontaxable transfer and the Janet Grace trust was reported as a trust under which decedent