Source: https://law.justia.com/cases/federal/appellate-courts/F2/630/340/238230/
Timestamp: 2020-08-13 17:49:37
Document Index: 651814519

Matched Legal Cases: ['§ 2041', '§ 2041', '§ 2041', '§ 2041', '§ 402', '§ 403', '§ 2041', '§ 2056', '§ 2056', '§ 2042', '§ 20', '§ 2041', '§ 2036', '§ 2036', '§ 2036', '§ 811', '§ 2036', '§ 20', '§ 2036', '§ 2036', '§ 2041', '§ 2041']

Estate of Anna Lora Gilchrist, Deceased, Layland Myatt Andelizabeth Dearborn, Independent Executors,petitioners-appellees, v. Commissioner of Internal Revenue, Respondent-appellant.estate of Ruth T. Reid, Deceased, Walter D. Reid,independent Executor, Petitioners-appellees. v. Commissioner of Internal Revenue, Respondent-appellant, 630 F.2d 340 (5th Cir. 1980) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Fifth Circuit › 1980 › Estate of Anna Lora Gilchrist, Deceased, Layland Myatt Andelizabeth Dearborn, Independent Executors,...
Estate of Anna Lora Gilchrist, Deceased, Layland Myatt Andelizabeth Dearborn, Independent Executors,petitioners-appellees, v. Commissioner of Internal Revenue, Respondent-appellant.estate of Ruth T. Reid, Deceased, Walter D. Reid,independent Executor, Petitioners-appellees. v. Commissioner of Internal Revenue, Respondent-appellant, 630 F.2d 340 (5th Cir. 1980)
U.S. Court of Appeals for the Fifth Circuit - 630 F.2d 340 (5th Cir. 1980) Nov. 13, 1980
The foremost question on appeal is whether Mrs. Gilchrist, contrary to the Tax Court's holding at 69 T.C. 5, 19 (1977), at the time of her death had a "general power of appointment" within the meaning of that term in the Revenue Code. The Code provides in pertinent part that a decedent's gross estate shall include the value of all property "with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment...." I.R.C. § 2041(a) (2). A "general power of appointment" is defined as "a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate...." Id. § 2041(b) (1).1 A general power of appointment under § 2041 must be "exercisable." This appeal is mainly a dispute over the meaning of that work in estate-tax argot. The Commissioner contends that § 2041 embraces all powers which are exercisable by the terms of the instruments creating them. Mrs. Gilchrist's executor prefers a more everyday construction of the word, arguing that a power which a decedent is personally unable to exercise cannot be an "exercisable" one.
The history of Congressional treatment of taxation of powers of appointment does not support exempting from taxation powers held by incompetents. See generally Note, Federal Estate Tax: A Possible Exception in the Application of I.R.C. Section 2041 to Testamentary Powers of Appointment Held by Incompetent Decedents, (1977) B.Y.U.L.Rev. 644, 650-51. Originally, appointive property was taxed only if subject to a general power which had been exercised. Revenue Act of 1918, § 402, 40 Stat. 1057, 1097. Amendments made in 1942 included property subject to unexercised pre-1942 powers in the taxable estate unless "the donee of such power is under a legal disability to release such power...." Revenue Act of 1942, § 403(d) (2), 56 Stat. 798, 944. It is clear from the language of these amendments that a power could be "exercisable" under the Revenue Act even though such a disability existed. See Pennsylvania Bank & Trust Co. v. United States, 451 F. Supp. 1296, 1300 n. 6 (W.D. Pa. 1978), aff'd, 597 F.2d 382 (3d Cir.), cert. denied, 444 U.S. 980, 100 S. Ct. 483, 62 L. Ed. 2d 407 (1979).
The present § 2041 of the Code was born with the Powers of Appointment Act of 1951, 65 Stat. 91. This Act further limited the retroactive application of the 1942 amendments, but did not distinguish between competent and incompetent holders of post-1942 powers. The 1942 amendments had shown Congress's awareness of the problem of the incompetent holder of a taxable power; Congress's silence was eloquent when it declined to create an express dispensation for holders of post-1942 powers. See Alperstein v. Commissioner, 613 F.2d 1213, 1217 (2d Cir. 1979), cert. denied sub nom. Greenberg v. Commissioner, --- U.S. ----, 100 S. Ct. 1852, 64 L. Ed. 2d 272 (1980).
Parallel usage of the term "exercisable" in § 2056 of the Revenue Code also shows that the word was not used by Congress in its quotidian sense. Section 2056 defines the property which qualifies for the "marital deduction"-an exemption from estate tax of certain property passing between spouses. Property subject to a life estate with a testamentary power of appointment in a surviving spouse is excluded from the decedent spouse's estate if the "power in the surviving spouse ... is exercisable by such spouse alone and in all events." I.R.C. § 2056(b) (5). Since eligibility for the martial deduction must be determined at the time of the donor spouse's death,2 "exercisable" in this context must mean "exercisable under the terms of the instrument creating the interest." See Pennsylvania Bank, supra, 451 F. Supp. at 1300-01, adopted 597 F.2d 383-84.
The utilitarian grounds for limiting non-statutory estate-tax exemptions have been recognized and relied on by the Supreme Court. Commissioner v. Estate of Noel, 380 U.S. 678, 85 S. Ct. 1238, 14 L. Ed. 2d 159 (1965), arose under § 2042 of the Code; this section requires inclusion in the gross estate of the proceeds of life insurance, if a decedent possessed at death exercisable "incidents of ownership" over the policy. Mr. Noel had taken two flight insurance policies at an airport. These documents were given to Mrs. Noel before her husband boarded a plane which crashed three hours after take-off. There was no practical opportunity for Mr. Noel to assign the policies or change their beneficiaries at the time of his death, yet the Court held that the proceeds of the policies must be included in Mr. Noel's gross estate, declaring that
380 U.S. at 684, 85 S. Ct. at 1241.
It is not beyond cavil that the "prudent man" standard of action imposed on guardians by Texas law is, as the Tax Court concluded, an "ascertainable standard" in the everyday sense; more importantly, the Tax Court erred in its interpretation of this statutory phrase. Under Treasury Regulation § 20.2041-1(c) (2), 23 Fed.Reg. 4529, 4560 (1958), as amended, 26 Fed.Reg. 11861 (1961), "(a) power is limited by such a standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in items of his needs for health, education, or support...." The statute and the regulation3 both refer to ascertainable standards imposed on the holder's exercise of the power by the terms of the instrument creating the power-not to standards imposed on guardians by local law. A contrary interpretation would make § 2041 what Justice Frankfurter has termed the "victim of conflicting state decisions on matters relating to local concerns and quite unrelated to the single uniform purpose of federal taxation." See Estate of Rogers v. Helvering, 320 U.S. 410, 414, 64 S. Ct. 172, 174, 88 L. Ed. 134 (1943).
The rule that state law defines the type of property interest held by a decedent is well established. See, e. g., Keeter v. United States, 461 F.2d 714, 717 (5th Cir. 1972); Estate of Vardell v. Commissioner, 307 F.2d 688, 692 (5th Cir. 1962). This case does not call that rule into question. State law creates property interests but federal law determines which incidents of ownership are taxable. See Morgan v. Commissioner, 309 U.S. 78, 80-81, 60 S. Ct. 424, 425-26, 84 L. Ed. 585 (1940); Keeter, supra. A federal rule should determine which state-created powers of appointment are "general" and taxable. Cf. Estate of Rogers, supra, 320 U.S. at 414-15, 64 S. Ct. at 174 (decided under 1932 Revenue Act).
Against the weight of judicial and executive precedent urging a clear-cut test of taxability of powers held by incompetents stand the recent cases of Finley v. United States, 404 F. Supp. 200 (S.D. Fla. 1975), vacated on jurisdictional grounds, 612 F.2d 166 (5th Cir. 1980) and Williams v. United States, 43 A.F.T.R.2d 1254 (W.D. Tex. 1978), on appeal, No. 78-3797 (5th Cir.) (decision pending). Finley, cited by the Tax Court in its decision in the present case, now lacks precedential force; Williams follows rather than supports the Tax Court's reasoning in the present case.
In January of 1972 Mrs. Reid was declared mentally incompetent by a Texas Court; in November of that year she died. This case raises the question whether the property subject to the 1955 trust was includable in Mrs. Reid's gross estate under I.R.C. § 2036. This section provides in pertinent part that a decedent's gross estate shall include the value of property transferred by a trust under which the decedent retained "the right ... to designate the persons who shall possess or enjoy the property or the income therefrom." Id. § 2036(a) (2). A settlor's retention of the power to accumulate or distribute trust income and corpus at his or her discretion results, by virtue of § 2036, in the inclusion of the trust property in the settlor's gross estate. United States v. O'Malley, 383 U.S. 627, 631-32, 86 S. Ct. 1123, 1126, 16 L. Ed. 2d 145 (1966); Struthers v. Kelm, 218 F.2d 810, 813-14 (8th Cir. 1955) (both decided under I.R.C. § 811 (1939), predecessor of the present § 2036).
Under Treasury Regulation § 20.2036-1(b) (3), 23 Fed.Reg. 4529, 4552 (1958), as amended 25 Fed.Reg. 10869 (1960), it is immaterial to the question of the existence of a decedent's taxable § 2036 power whether the power was exercisable only in conjunction with another person. The capacity in which the decedent or such other person could exercise the power is likewise irrelevant under the regulation. As noted in the Gilchrist case, statutory interpretations contained in Treasury Regulations of such comparatively ancient provenance are accorded great weight. The utilitarian considerations undergirding such clear-cut rules have been outlined above and need not be repeated here. Parenthetically, we note that only this final aspect of the Gilchrist opinion has application in Reid.
The Tax Court has noted an exception to § 2036(a) (2)'s rule of inclusion: if the right to designate who shall enjoy property or the income from it is subject to an "ascertainable standard" of exercise, that property is not includable in the estate of the holder of the right. Estate of Cutter, 62 T.C. 351, 354 (1974). This "ascertainable standard" exception is not statutory, as is the similarly-styled exception to § 2041 noted in Gilchrist ; it is not necessary to consider whether the limits of that exception noted in Gilchrist are applicable here. For although it could be said that Texas law imposes some standards on a guardian's exercise of a ward's power of "self"-appointment as trustee of a trust, those standards govern the validity of the appointment ; they do not affect the scope of the trustee's powers to accumulate or distribute property once appointed. Those powers are in this case set by the terms of the trust, and are not limited by any standards ascertainable within that instrument or imposed by state law.
I.R.C. § 2041(b) (1).
Jackson v. United States, 376 U.S. 503, 507-09, 84 S. Ct. 869, 871-72, 11 L. Ed. 2d 871 (1964)
A treasury regulation incorporating a long-standing executive construction of a tax statute carries considerable weight. Bingler v. Johnson, 394 U.S. 741, 749-51, 89 S. Ct. 1439, 1444-45, 22 L. Ed. 2d 695 (1969); Kurzner v. United States, 413 F.2d 97, 112 (5th Cir. 1969)