Source: https://supreme.justia.com/cases/federal/us/387/456/
Timestamp: 2019-04-24 11:57:12+00:00

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Where federal estate tax liability turns upon the character of a property interest held and transferred by the decedent under State law, held, federal authorities are not bound by the determination made of such property interest by a state trial court; if there is no decision by the State's highest court, federal authorities must apply what they find to be the state law after giving "proper regard" to relevant rulings of other courts of the State. Pp. 387 U. S. 457, 387 U. S. 462-466.
rights or characterization of property interests when the United States is not made a party to such proceeding.
In No. 673, Commissioner of Internal Revenue v. Estate of Bosch, 363 F.2d 1009, the Court of Appeals for the Second Circuit held that, since the state trial court had "authoritatively determined" the rights of the parties, it was not required to delve into the correctness of that state court decree. In No. 240, Second National Bank of New Haven, Executor v. United States, 351 F.2d 489, another panel of the same Circuit held that the "decrees of the Connecticut Probate Court . . . under no circumstances can be construed as binding" on a federal court in subsequent litigation involving federal revenue laws. Whether these cases conflict in principle or not, which is disputed here, there does exist a widespread conflict among the circuits [Footnote 1] over the question, and we granted certiorari to resolve it. 385 U.S. 966, 968. We hold that, where the federal estate tax liability turns upon the character of a property interest held and transferred by the decedent under state law, federal authorities are not bound by the determination made of such property interest by a state trial court.
In 1930 decedent, a resident of New York, created a revocable trust which, as amended in 1931, provided that the income from the corpus was to be paid to his wife during her lifetime. The instrument also gave her a general power of appointment, in default of which it provided that half of the corpus was to go to his heirs and the remaining half was to go to those of his wife.
"[t]he issue is . . . not whether the federal court is 'bound by' the decision of the state tribunal, but whether or not a state tribunal has authoritatively determined the rights under state law of a party to the federal action."
"New York judgment, rendered by a court which had jurisdiction over parties and subject matter, authoritatively settled the rights of the parties not only for New York, but also for purposes of the application to those rights of the relevant provisions of federal tax law."
Id. at 1014. It declared that, since the state court had held the wife to have a general power of appointment under its law, the corpus of the trust qualified for the marital deduction. We do not agree, and reverse.
"provisions of any statute requiring the apportionment or proration of such taxes among the beneficiaries of this will or the transferees of such property, or the ultimate payment of such taxes by them, shall be without effect in the settlement of my estate."
"decrees of the Connecticut Probate Court . . . under no circumstances can be construed as binding and conclusive upon a federal court in construing and applying the federal revenue laws."
"would seem to be clear and unambiguous to the effect that taxes were to come out of his residual estate and that, despite any contrary statute the testator specifically wished to avoid any proration."
351 F.2d at 491. It agreed with the District Court that, in any event, the judgment of the State Probate Court was not binding on the federal court.
Petitioner in No. 240 raises the additional point that the Court of Appeals was incorrect in holding that decedent's will clearly negated the application of the state proration statute. While we did not limit the grant of certiorari, we affirm without discussion the holding of the Court of Appeals on the point. The issue presents solely a question of state law and "[w]e ordinarily accept the determination of local law by the Court of Appeals . . . and we will not disturb it here." Ragan v. Merchants Transfer Co., 337 U. S. 530, 337 U. S. 534 (1949); General Box Co. v. United States, 351 U. S. 159, 351 U. S. 165 (1956); The Tungus v. Scovgaard, 358 U. S. 588, 358 U. S. 596 (1959). The Court of Appeals did not pass on the correctness of the resolution of the state law problem involved in Bosch, No. 673, and it is remanded for that purpose.
the basis for invocation of the full faith and credit clause. . . ."
". . . if the question at issue is fairly presented to the state court for its independent decision, and is so decided by the court, the resulting judgment, if binding upon the parties under the state law, is conclusive as to their property rights in the federal tax case. . . ."
Gallagher v. Smith, 223 F.2d 218, 225. The opposite view is expressed in Faulkerson's Estate v. United States, 301 F.2d 231. This view seems to approach that of Erie R. Co. v. Tompkins, 304 U. S. 64 (1938), in that the federal court will consider itself bound by the state court decree only after independent examination of the state law as determined by the highest court of the State. The Government urges that an intermediate position be adopted; it suggests that a state trial court adjudication is binding in such cases only when the judgment is the result of an adversary proceeding in the state court. Pierpont v. C.I.R., 336 F.2d 277. Also see the dissent of Friendly, J., in Bosch, No. 673.
"laws of the several states . . . shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply."
This Court has held that judicial decisions are "laws of the . . . state" within the section. Erie R. Co. v. Tompkins, supra; Cohen v. Beneficial Long Corp., 337 U. S. 541 (1049); King v. Order of Travelers, 333 U. S. 153 (1948).
"an intermediate appellate state court . . . is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise."
At 311 U. S. 237. (Emphasis supplied.) Thus, under some conditions, federal authority may not be bound even by an intermediate state appellate court ruling. It follows here then, that, when the application of a federal statute is involved, the decision of a state trial court as to an underlying issue of state law should a fortiori not be controlling. This is but an application of the rule of Erie R. Co. v. Tompkins, supra, where state law as announced by the highest court of the State is to be followed. This is not a diversity case but the same principle may be applied for the same reasons, viz., the underlying substantive rule involved is based on state law and the State's highest court is the best authority on its own law. If there be no decision by that court, then federal authorities must apply what they find to be the state law after giving "proper regard" to relevant rulings of other courts of the State. In this respect, it may be said to be, in effect, sitting as a state court. Bernhardt v. Polygraphic Co., 350 U. S. 198 (1956).
The judgment in No. 240 is therefore affirmed while that, in No. 673 is reversed and remanded for further proceedings not inconsistent with this. opinion.
* Together with No. 240, Second National Bank of New Haven, Executor v. United States, also on certiorari to the same court.
Illustrative of the conflict among the circuits are: Gallagher v. Smith, 223 F.2d 218 (C.A.3d Cir., 1955); Falkerson's Estate v. United States, 301 F.2d 231 (C.A. 7th Cir.), cert. denied, 371 U.S. 887 (1962); Pierpont v. C. I. R., 336 F.2d 277 (C.A.4th Cir., 1964), cert. denied, 380 U.S. 908 (1965).
"(5) Life estate with power of appointment in surviving spouse. -- In the case of an interest in property passing from the decedent, if his surviving spouse is entitled for life to all the income from the entire interest, . . . with power in the surviving spouse to appoint the entire interest, . . . (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the interest, or such specific portion, to any person other than the surviving spouse --"
"(A) the interest . . . thereof so passing shall, for purposes of subsection (a), be considered as passing to the surviving spouse, and"
"(B) no part of the interest so passing shall, for purposes of paragraph (1)(A), be considered as passing to any person other than the surviving spouse."
"This paragraph shall apply only if such power in the surviving spouse to appoint the entire interest, or such specific portion thereof, whether exercisable by will or during life, is exercisable by such spouse alone and in all events."
It may be claimed that Blair v. Commissioner, 300 U. S. 5 (1937), dealt with the problem presently before us, but that case involved the question of the effect of a property right determination by a state appellate court.
Since our 1938 decision in Erie R. Co. v. Tompkins, 304 U. S. 64, an unbroken line of cases has held that the federal courts must look to state legislation, state decisions, state administrative practice, for the state law that is to be applied. See, e.g., Cities Service Oil Co. v. Dunlap, 308 U. S. 208; Bernhardt v. Polygraphic Co., 350 U. S. 198. Those were diversity cases, and in them we have never suggested that the federal court may ignore a relevant state court decision because it was not entered by the highest state court. Indeed, we have held that the federal court is obligated to follow the decision of a lower state court in the absence of decisions of the State Supreme Court showing that the state law is other than announced by the lower court. See, e.g., Fidelity Union Trust Co. v. Field, 311 U. S. 169; West v. A.T. & T. Co., 311 U. S. 223; Six Companies of California v. Joint Highway District, 311 U. S. 180; Stoner v. New York Life Ins. Co., 311 U. S. 464.
"Court of Common Pleas [did] not appear to have such importance and competence within [the State's] own judicial system that its decisions should be taken as authoritative expositions of that State's 'law'"
(id. at 161); "the difficulty of locating Common Pleas decisions [was] a matter of great practical significance" (ibid.); another state court had handed down an opinion rejecting the reasoning of the court of common pleas and espousing the reasoning of the Court of Appeals, illustrating "the perils of interpreting a Common Pleas decision as a definitive expression of [state law]" (333 U.S. at 333 U. S. 162), and the interpretation of the Court of Appeals, which rejected the decision of the court of common pleas, was strongly supported by the decisions of the State Supreme Court. We stressed that our decision was not "to be taken as promulgating a general rule that federal courts need never abide by determinations of state law by state trial courts." Ibid.
"no orders of the probate court, the effect of which would relate to what are deductions to be allowed under the national income taxing law, are conclusive and binding on the federal courts. . . ."
"Moreover, the decision of [the probate] court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the State because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights, and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying § 219 of the Act of 1921."
291 U.S. at 291 U. S. 45.
"The question of the validity of the assignments is a question of local law. . . . By that law the character of the trust, the nature and extent of the interest of the beneficiary, and the power of the beneficiary to assign that interest in whole or in part, are to be determined. The decision of the state court upon these questions is final. . . . It matters not that the decision was by an intermediate appellate court. . . . In this instance, it is not necessary to go beyond the obvious point that the decision was in a suit between the trustees and the beneficiary and his assignees, and the decree which was entered in pursuance of the decision determined as between these parties the validity of the particular assignments. Nor is there any basis for a charge that the suit was collusive and the decree inoperative. . . . The trustees were entitled to seek the instructions of the court having supervision of the trust. That court entertained the suit and the appellate court, with the first decision of the Circuit Court of Appeals before it, reviewed the decisions of the Supreme Court of the State and reached a deliberate conclusion. To derogate from the authority of that conclusion and of the decree it commanded, so far as the question is one of state law, would be wholly unwarranted in the exercise of federal jurisdiction."
voluntary alienation by the beneficiary of his interest. The state court held precisely the contrary."
The idea that these state proceedings are not to be respected reflects the premise that such proceedings are brought solely to avoid federal taxes. But there are some instances in which an adversary proceeding is impossible (see, e.g., Estate of Darlington v. Commissioner, 302 F.2d 693; Braverman & Gerson, The Conclusiveness of State Court Decrees in Federal Tax Litigation, 17 Tax L.Rev. 545, 570-572 (1962)), and many instances in which the parties desire a determination of their rights for other than tax reasons.
must be included in his gross estate even though it does not pass to his heirs. I cannot believe that Congress intended such unjust results.
who was given a general testamentary power of appointment over the corpus, and that the balance should be held in separate trusts for his nine grandchildren. The widow's trust was plainly within the terms of the marital deduction provided by § 2056(b)(5) of the Internal Revenue Code of 1954; the issue in this instance thus simply involves determination of the amount of this trust, and hence the amount of the marital deduction. Under Connecticut's tax proration statute, Conn.Gen.Stat.Rev. § 1401, a bequest exempt from estate tax, as here by reason of the federal marital deduction, is not reduced by any portion of such tax. Accordingly, if the proration statute is applicable to this decedent's will, the widow's trust would bear no part of the federal estate tax, and its entire burden would instead fall upon the grandchildren's trusts. The amount of the marital deduction would be correspondingly increased.
Internal Revenue, but, in accord with the Service's consistent position with reference to such state proceedings, Mim. 6134, Apr. 3, 1947, 1947 CCH Fed. Tax Rep. ¦ 6137, no appearance was entered in his behalf.
Apart from the executor's application, the probate court had the benefit only of argument from the guardian ad litem of the grandchildren; the guardian acknowledged that proration under the statute would place the burden of the estate tax entirely upon his wards' trusts, but nevertheless concluded that he had "no objection" to the executor's application. The court, filing a written opinion, determined that the decedent's disclaimer of the statute was ambiguous, and therefore concluded that the statute was applicable. Petitioner thereupon paid the assessed deficiency, and brought this suit for a refund. The District Court and the Court of Appeals both concluded that, because of the character of Connecticut's probate court system, [Footnote 2/2] the state judgment was not conclusive of the applicability of the proration statute. 222 F.Supp. 446; 351 F.2d 489.
the trust would qualify for the deduction only if the decedent's wife held at his death a general power of appointment over the corpus.
The Commissioner, on the basis of the release signed in 1951 by the widow, disallowed the deduction, but the executor sought from the Tax Court a redetermination of the resulting deficiency. While the Tax Court proceeding was still pending, the executor petitioned in the New York Supreme Court for a determination under state law of the validity of the 1951 release. The Tax Court, with the Commissioner's assent, temporarily suspended its proceeding. In the state court, each of the three parties -- the trustee, the widow, and the guardian ad litem of an infant who was a possible beneficiary -- contended that the release was a nullity. The state court adopted their unanimous view. The Tax Court thereupon accepted the state trial court decision as an "authoritative exposition" of the requirements of state law. 43 T.C. 120. A divided Court of Appeals affirmed. 363 F.2d 1009.
ordinarily be determined; it is instead the more narrow one of whether and under what conditions a lower state court adjudication of a taxpayer's property.rights is conclusive when subsequently the federal tax consequences of those rights are at issue in a federal court.
The problem may not, as the Court properly observes, be resolved by reference to the principles of res judicata or collateral estoppel, see generally Cromwell v. County of Sac, 94 U. S. 351, 94 U. S. 352-353; the Revenue Service has not, and properly need not have, entered an appearance in either of the state court proceedings in question here. Nor do the pertinent provisions of the revenue laws, or their legislative history, provide an adequate guide to the solution of the problem; the only direct reference in that lengthy history relevant to these questions is imprecise and equivocal. [Footnote 2/3] The cases in this Court are scarcely more revealing; they are, as Judge Friendly remarked below, "cryptic" and "rather dated." 363 F.2d 1009, 1015.
surely follow a fortiori in cases in which the application of a federal statute is at issue.
Similarly, it is difficult to see why the formula now ordinarily employed to determine state law in diversity cases -- essentially that, absent a recent judgment of the State's highest court, state cases are only data from which the law must be derived -- is necessarily applicable without modification in all situations in which federal courts must ascertain state law. The relationship between the state and federal judicial systems is simply too delicate and important to be reduced to any single standard. See Hill, The Erie Doctrine in Bankruptcy, 66 Harv.L.Rev. 1013; Note, The Competence of Federal Courts to Formulate Rules of Decision, 77 Harv.L.Rev. 1084. Compare, e.g., Morgan v. Commissioner, 309 U. S. 78, 309 U. S. 80-81; Cardozo, Federal Taxes and the Radiating Potencies of State Court Decisions, 51 Yale L.J. 783. The inadequacy of this formula is particularly patent here, where, unlike the cases in which it was derived, the federal court is confronted by precisely the legal and factual circumstances upon which the state court has already passed.
adherence by federal courts to the provisions of state law, as reflected both in local statutes and in state court decisions, will promote an appropriate uniformity in the administration of law within each of the States. Uniformity will, in turn, assure proper regard in the federal courts for the areas of law left by the Constitution to state discretion and administration, and, in addition, will prevent the incongruity that stems from dissimilar treatment by state and federal courts of the same or similar factual situations. Finally, it must be acknowledged that state courts are unquestionably better positioned to measure the requirements of their own laws; even the lowest state court possesses the tangible advantage of a close familiarity with the meaning and purposes of its local rules of law.
On the other side are important obligations which spring from the practical exigencies of the administration of federal revenue statutes. It can scarcely be doubted that, if conclusiveness for federal tax purposes were attributed to any lower state court decree, whether the product of genuinely adversary litigation or not, there would be many occasions on which taxpayers might readily obtain favorable, but entirely inaccurate, determinations of state law from unsuspecting state courts. One need not, to envision this hazard, assume either fraud by the parties or any lack of competence or disinterestedness among state judges; no more would be needed than a complex issue of law, a crowded calendar, and the presentation to a busy judge of but essentially a single viewpoint. The consequence of any such occurrence would be an explication of state law that would not necessarily be either a reasoned adjudication of the issues or a consistent application of the rules adopted by the State's appellate courts.
The foregoing factors might, of course, be thought consistent with a variety of disparate resolutions of the questions these two cases present. If emphasis is placed principally upon the importance of uniformity in the application of law within each of the several States, and thereby upon the apparent unfairness to an individual taxpayer if an issue of state law were differently decided by state and federal courts, it might seem appropriate to accept, in all but the most exceptional of circumstances, the judgment of any state court that has addressed the question at issue. This is the viewpoint identified with the opinion of the Court of Appeals for the Third Circuit in Gallagher v. Smith, 223 F.2d 218; it is, in addition, apparently the rule adopted today by my Brother DOUGLAS. Conversely, if emphasis is placed principally upon the hazards to the federal fisc from dubious decisions of lower state courts, it might be thought necessary to require federal courts to examine for themselves, absent a judgment by the State's highest court, the content in each case of the pertinent state law. This, as I understand it, is the rule adopted by a majority of the Court today.
In my opinion, neither of these positions satisfactorily reconciles the relevant factors involved. The former would create excessive risks that federal taxation will be evaded through the acquisition of inadequately considered judgments from lower state courts, resulting from proceedings brought, in reality, not to resolve truly conflicting interests among the parties, but rather as a predicate for gaining foreseeable tax advantages, and in which the point of view of the United States had never been presented or considered. The judgment resulting from such a proceeding might well differ only in form from a consent decree. The United States would be compelled either to accept as binding upon its interests such a judgment or to participate in every state court proceeding, brought at the taxpayer's pleasure, which might establish state property rights with federal tax consequences.
The second position, on the other hand, would require federal intervention into the administration of state law far more frequently than the federal interests here demand; absent a judgment of the State's highest court, federal courts must under this rule reexamine and, if they deem it appropriate, disregard the previous judgment of a state court on precisely the identical question of state law. The result might be widely destructive both of the proper relationship between state and federal law and of the uniformity of the administration of law within a State.
to obtain from the federal courts a considered adjudication of the relevant state law issues in cases in which, for whatever reason, the state courts have not already provided such an adjudication. In turn, it may properly be assumed that the state court has had an opportunity to make, and has made, such an adjudication if, in a proceeding untainted by fraud, it has had the benefit of reasoned argument from parties holding genuinely inconsistent interests.
further proceedings in accordance with the views expressed herein.
The deficiency was assessed at $1,333,194.35, plus interest. If the proration statute is applicable, as the executor has contended, the marital deduction attributable to the widow's trust would be approximately $3,600,000. If the statute is not applicable, as the Commissioner has held, the marital deduction would be approximately $1,700,000.
The District Court concluded that Connecticut probate courts are not courts of records (but see Shelton v. Hadlock, 6 Conn. 143, 25 A. 483, and 1 Locke & Kohn, Connecticut Probate Practice 30 (1951)), that its decrees are without legal effect in the State's higher courts, and that their decrees are also subject to collateral attack even in another probate district. 222 F.Supp. at 457; see also 351 F.2d at 494.
A supplementary report of the Senate Finance Committee, concerned with the legislation which eventually became the Revenue Act of 1948, said simply that "proper regard should be given to interpretations of the will rendered by a court in a bona fide adversary proceeding." S.Rep. No. 1013, Pt. 2, 80th Cong., 2d Sess., 4. This language is doubtless broadly consistent with virtually any resolution of these issues, but it is difficult to see the pertinence of the sentence's last four words if, as the Court suggests, conclusiveness was intended to be given to the State's highest court, but to none other.
See, e.g., Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234 F.2d 538; Friendly, In Praise of Erie -- and of the New Federal Common Law, 39 N.Y.U.L.Rev. 383, 408, n. 122; Note, The Competence of Federal Courts to Formulate Rules of Decision, 77 Harv.L.Rev. 1084, 1087.
See King v. Order of Travelers, 333 U. S. 153. Compare Bernhardt v. Polygraphic Co., 350 U. S. 198, 350 U. S. 204, 209-211.
Fidelity Union Trust Co. v. Field, 311 U. S. 169; Six Companies of California v. Joint Highway District, 311 U. S. 180; West v. A.T. & T. Co., 311 U. S. 223, and Stoner v. New York Life Ins. Co., 311 U. S. 464. See also Vandenbark v. Owens-Illinois Glass Co., 311 U. S. 538. All these cases, with the possible exception of Field, and apart from the rather different issue in Vandenbark, concerned intermediate state courts. They have been strongly and repeatedly criticized by commentators. Judge Friendly, for example, described them as "outrages," supra at 401. See also Corbin, The Laws of the Several States, 50 Yale L.J. 762, 766-768; Clark, State Law in the Federal Courts, 55 Yale L.J. 267, 29292, and 2 Crosskey, Politics and the Constitution 922-927 (1953). It may also be wondered whether these cases have any vitality left after King and Bernhardt, supra.
Freuler v. Helvering, 291 U. S. 35; King v. Order of Travelers supra; Bernhardt v. Polygraphic Co., supra.
See, on the importance of uniformity in federal taxation, Hilton v. United States, 3 Dall. 171, 3 U. S. 180; Cahn, Local Law in Federal Taxation, 52 Yale L.J. 799.
It may be doubted, however, whether this approach would actually produce serious practical disadvantages. It is essentially the standard which has been embodied in the Treasury Regulations since 1919, see now Treas.Reg. §§ 20.2053-1(b)(2), 20.2056(e)-2(d)(2), and which was urged before this Court in these cases by counsel for the United States. It is, moreover, similar to the standards employed in various opinions by a number of the courts of appeals. See, e.g., Saulsbury v. United States, 199 F.2d 578; Brodrick v. Gore, 224 F.2d 892; In re Sweet's Estate, 234 F.2d 401; Old Kent Bank & Trust Co. v. United States, 362 F.2d 444. See also Cahn, supra, at 818-819; Braverman & Gerson, The Conclusiveness of State Court Decrees in Federal Tax Litigation, 17 Tax L.Rev. 545. If any practical difficulties actually attend this standard, they have apparently not, despite its wide use, yet appeared.
opportunity to participate; whether the state court "rendered a reasoned opinion and reached a deliberate conclusion', Blair v. Commissioner, 300 U.S.  at p. 10"; whether the state decision has potentially offsetting tax consequences in respect of the state court litigant's federal taxes; and, in general, whether the state court decision "authoritatively determined" future property rights, and thus, as Judge Raum stated, "provided more than a label for past events. . . ."

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