## Facts

- On December 23, 1941, Charles Nathan executed an inter vivos trust agreement and transferred property to named trustees.
- The trust directed the trustees to pay the entire net income, beginning immediately, to Nathan’s sister, Rose Straus, for her lifetime.
- The trust provided that if Rose Straus died before Nathan, then (and only then) the trustees would pay the net income to Nathan for his lifetime.
- After the termination of the applicable life interests, the trust assets were to be distributed to a third-party remainderman.
- Nathan died in April 1943, and Rose Straus survived him; as a result, the condition that would have entitled Nathan to income (Rose’s prior death) never occurred, and Nathan never received trust income.
- For federal estate tax purposes, the Commissioner of Internal Revenue included the trust property in Nathan’s gross estate, allowing a reduction reflecting the actuarial value of Rose’s intervening life estate.
- The estate challenged the inclusion in the United States Tax Court, arguing that because Nathan never enjoyed the trust property or income, the trust should not be included in the gross estate.
- The Tax Court agreed with the estate and held the trust property not includible in the gross estate; the Commissioner petitioned for review in the Seventh Circuit.

## Issues

1. Whether the transfer to the trust was includible in Nathan’s gross estate under IRC § 811(c) as a transfer “intended to take effect in possession or enjoyment at or after” his death, or as a transfer under which he retained an interest for life or for a period not ascertainable without reference to his death.
2. Whether Nathan’s retained right to receive income for life if he survived Rose Straus constituted a retained interest within § 811(c) even though the survivorship condition did not occur.
3. Whether Treasury Regulation 105 (promulgated in 1937) validly supported inclusion of trust property where the settlor retained only a survivorship-contingent life-income interest.

## Decision

- The Seventh Circuit reversed the Tax Court.
- The court held that § 811(c) governed and required inclusion of the trust corpus in Nathan’s gross estate, with exclusion (by valuation) of the sister’s outstanding life estate as the Commissioner had done.
- The court rejected the estate’s and Tax Court’s reliance on the fact that Nathan never actually received income, reasoning that estate-tax inclusion turns on the retained interest and the death-related timing built into the transfer.
- The court accepted the Commissioner’s construction of § 811(c), including the application of Treasury Regulation 105 to this type of trust arrangement.

## Legal Principles

- A trust transfer may be taxable under IRC § 811(c) when the transfer’s terms postpone full possession or enjoyment until the decedent’s death or make the ultimate economic shift depend on the decedent’s death.
- A settlor’s retained right to receive income for life, even if conditioned on surviving another beneficiary, can be a retained interest for § 811(c) purposes; the fact that the condition fails before death does not prevent inclusion.
- For § 811(c), the determinative inquiry is the nature of the retained interest and the way the instrument ties enjoyment to the decedent’s death, not whether the decedent ultimately collected income.
- Treasury regulations interpreting § 811(c), including Regulation 105, may be applied to include trust property in the gross estate where the settlor kept a contingent life-income interest linked to survivorship.

## Conclusion

Because Nathan created a trust that paid income to his sister for life but reserved to himself a life-income interest that would arise only if he survived her—making the transfer’s enjoyment and ultimate economic consequences dependent on his death—the Seventh Circuit held the trust corpus includible in his gross estate under IRC § 811(c), subject to valuation of the sister’s intervening life estate, and reversed the Tax Court’s contrary ruling.


Commissioner v. Nathan's Estate, 159 F.2d 546 (1947)