Opinion ID: 379557
Heading Depth: 2
Heading Rank: 1

Heading: Powers as Executor

Text: 14 The government argues that as executor Lloyd possessed the power to enjoy economic benefits of the policies, and therefore possessed incidents of ownership. See Treas.Reg. § 20.2042-1(c)(2), supra. The relevant provision of the will states that the executor of Hazle's estate 15 shall have and may exercise, as executor or substitute or successor executor, the same broad powers I confer on my husband in his capacity as trustee, in Section 5 of Article IV hereof, if or to the extent the conferring upon and exercising of such powers shall be appropriate to executorship and will be permitted by or will not be violative of applicable law; and each of them shall have the power also to sell any of the assets of my estate, in each instance at the property's value as shown in the inventory and appraisement of my estate filed in the Probate Court, and without the Probate Court's prior authorization or subsequent approval, or at such lesser price as the Probate Court may approve, and in either case to any person or persons whomsoever, including my spouse (even though he as executor may be dealing with himself in his individual and independent capacity) and children, in order to raise funds needed to pay death taxes and court costs and expenses of administration, or for any other proper purpose. 16 This provision, the government contends, gave Lloyd as executor the power to sell the policies at or below their full value to any person, including himself in his individual capacity. This capacity to self deal, the argument continues, gives Lloyd the right to obtain economic benefits in the policies from his powers as executor. 17 The district court held that Missouri statutes and case law prohibit an executor from self dealing despite permissive language in the will, subject to only one exception: upon the consent of all the distributees. Hunter v. United States, supra, 474 F.Supp. at 768. See Mo.Rev.Stat. §§ 473.457(3), .477. See also Earney v. Clay, 516 S.W.2d 59 (Mo.App.1974). 18 We agree with the district court that (a)lthough the ultimate question of 'incidents of ownership' is one of federal tax law, the decision may turn on state law. Landorf v. United States, 408 F.2d 461, 466, 187 Ct.Cl. 99 (1969). Hunter v. United States, supra, 474 F.Supp. at 768. The above issue being governed by state law, the opinion of the local federal district judge that Missouri law prohibits self dealing except with the written consent of the distributees is entitled to great weight. American Motorists Insurance Co. v. Samson, 596 F.2d 804, 807-08 (8th Cir. 1979). 19 Even if the district court's interpretation of state law regarding this matter is accepted, 2 the government argues that the necessity of obtaining the consent of the distributees is irrelevant because section 2042(2) extends to any incident of ownership exercisable alone or in conjunction with any other person. The district court responded that 20 (t)his argument fails in that the phrase exercisable either alone or in conjunction with any other person refers to the joint possession of incidents of ownership. That phrase contemplates the situation of joint ownership of a policy where the incidents of ownership are shared and does not refer to a situation where a single individual requires the consent of others before he is given the incidents of ownership. See, Commissioner of Int. Rev. v. Karagheusian's Estate, 233 F.2d 197 (2nd Cir. 1956). 21 Hunter v. United States, supra, 474 F.Supp. at 768-69. 22 It is our view that this distinction made by the district court might lead to the sanction (of) tax avoidance by means of insubstantial alterations in the forms of ownership. Commissioner v. Karagheusian's Estate, 233 F.2d 197, 200 (2d Cir. 1956). We need not decide this issue, 3 however, because we conclude that other restrictions on Lloyd's powers as executor prohibit him from exercising incidents of ownership of the policies under section 2042(2). 23 We begin by noting that mere possession by a decedent of powers in the nature of incidents of ownership held in a fiduciary capacity does not invariably require inclusion of the proceeds of the policies on the decedent's life in his gross estate. Estate of Fruehauf v. Commissioner, 427 F.2d 80, 85 (6th Cir. 1970). The district court held that Lloyd did not have the power as executor to sell these policies because under the terms of the will itself the power was exercisable only to pay death taxes and court costs and expenses of administration, or for any other proper purpose. The court, relying on the reasoning of Estate of Anders Jordahl, 65 T.C. 92, 99-100 (1975), concluded that because the powers were exercisable only if necessary to pay the expenses, and this necessity never arose during Lloyd's term as executor, the decedent did not possess the powers in question. 24 The parties stipulated that administration expenses, estate taxes, inheritance taxes and court costs relative to Hazle's estate were paid by the executors from non-probate assets. We agree with the district court that all Lloyd possessed in his capacity as executor at death was a power over a contingency which never arose the need for cash to pay estate expenses. Therefore Lloyd as executor never had the legal authority to exercise incidents of ownership in the policies. 4 Commissioner v. Noel Estate, 380 U.S. 678, 683-84, 85 S.Ct. 1238, 1241, 14 L.Ed.2d 159 (1965) and United States v. Rhode Island Hospital Trust Co., 355 F.2d 7 (1st Cir. 1966) do not require a different result. As stated by the district court: 25 The cited cases both involved unexercised abilities to exert possessed powers or legal rights. Herein, decedent possessed the legal right to self deal only upon the express conditions found in the will and permitted under Missouri law. To possess an unexercised power as in the cited cases is distinguishable from the possibility of obtaining a power as executor which may or may not be exercised. 26 Hunter v. United States, supra, 474 F.Supp. at 770. See Estate of Smith, 73 T.C. No. 27 (Nov. 21, 1979); Estate of Anders Jordahl, supra, 65 T.C. at 100. Cf. Estate of Margrave v. Commissioner, 618 F.2d 34 (8th Cir. 1980) (proceeds of life insurance policy not included in decedent's gross estate under section 2042(2) where there was never an instant when (decedent) possessed more than a mere power over an expectancy.). 27 We conclude that legal obligations imposed by the will and by Lloyd's fiduciary capacity as executor restricted his legal authority, 5 and he therefore did not possess incidents of ownership in the policies in his capacity as executor. See C. Lowndes, R. Kramer & J. McCord, Federal Estate & Gift Taxes § 13.7 at 332 (3d ed. 1974).