## Facts

- Between 1939 and 1942, Daniel McNichol executed and recorded general warranty deeds transferring income-producing Pennsylvania real estate to his children.
- The deeds recited no consideration and contained no express reservation of any interest in the realty or the rents.
- At the time of the transfers, there was an oral understanding that McNichol would keep the rental income for life.
- Consistent with that understanding, McNichol collected all rental income from the transfer dates until his death on June 17, 1951.
- McNichol reported the rents on his federal income tax returns (including 1948–1950 and the 1951 pre-death period) and claimed related deductions (e.g., depreciation and property expenses); the children did not report the rents as their income.
- The Commissioner determined the properties were includible in McNichol’s gross estate under Internal Revenue Code of 1939 § 811(c)(1)(B) (predecessor to I.R.C. § 2036(a)(1)).
- The Tax Court upheld inclusion, and the Estate sought review in the Third Circuit.

## Issues

1. Whether real property transferred by deed with no written reservation is includible in the gross estate under § 811(c)(1)(B) when the decedent, by oral understanding, retained the rental income for life.
2. Whether the phrase “under which he has retained” requires that the retained interest be expressly reserved in the written instrument of transfer.
3. Whether state property law, including the Statute of Frauds’ effect on enforceability of an oral agreement, controls the federal estate-tax inclusion analysis.

## Decision

- The Third Circuit affirmed the Tax Court.
- The court held the properties were includible in the gross estate under § 811(c)(1)(B) because McNichol in fact retained possession/enjoyment and the right to income for life as part of the transfer arrangement.
- The court rejected the argument that retention must be legally enforceable or memorialized in the deed to satisfy “under which he has retained.”
- The court treated state-law formalities and Statute of Frauds arguments as immaterial to the federal tax question where the record showed continued lifetime enjoyment of the income.

## Legal Principles

- Property transferred during life is includible in the gross estate under § 811(c)(1)(B) (now § 2036(a)(1)) if the decedent retained for life, or for a period not ending before death, the possession or enjoyment of the property or the right to income from it.
- The inclusion inquiry is factual and focuses on actual retention of economic benefits, not merely on the written terms of conveyance.
- “Under which he has retained” is satisfied when the decedent’s continued enjoyment is causally connected to the transfer arrangement, even if based on an oral understanding rather than a formal reservation.
- State property-law characterizations and enforceability doctrines (including Statute of Frauds limitations) do not control the federal estate-tax determination when the decedent actually retained lifetime enjoyment.

## Conclusion

The court required inclusion of the transferred real estate in the decedent’s gross estate because, despite deeds conveying title without any written reservation, an oral understanding and the parties’ conduct showed the decedent retained lifetime enjoyment of the rental income within the meaning of § 811(c)(1)(B) (now § 2036(a)(1)).


Estate of McNichol v. Commissioner, 265 F.2d 667 (3d Cir. 1959)