United States v. Byrum

Milliken Byrum owned a controlling share of three corporations. Each corporation also had a substantial number of minority shareholders unrelated to Byrum. Byrum formed an irrevocable trust for the benefit of his children, with their children as successors, and transferred a portion of his shares in the three corporations to the trust. The trust agreement required appointment of a corporate trustee, which Byrum appointed. Although the trustee had broad discretionary powers, Byrum retained the right, under the trust agreement, to vote the transferred shares. Consequently, even though Byrum owned less than 50 percent of the shares of each of the three corporations after the transfer, he still held voting control over the corporation. This retained power meant that Byrum could select each corporation’s board of directors. Under state law, the board of directors of any of the three corporations held the power to retain corporate earnings or, alternatively, to distribute them as dividends, a portion of which the trust would receive as income. Byrum died while the trust was still in existence. The Internal Revenue Service (IRS) (defendant) determined that the shares Byrum had transferred to the trust were includable in Byrum’s gross estate. The IRS’s argument was that, because the corporations’ directors controlled whether the corporations issued dividends and because Byrum controlled the election of those directors, Byrum retained adequate control over the flow of income to the trust to require the shares’ inclusion. The executor of Byrum’s estate (plaintiff) paid the additional taxes and sued for a refund in district court. The district court found in favor of the executor, and the court of appeals affirmed. The government appealed to the United States Supreme Court.