Court Opinion

ID: 4632223
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:11:21.177509+00
Date Added: 2024-06-11T07:57:51.296342
License: Public Domain

JOHN S. MONTGOMERY ET AL., EXECUTORS, ESTATE OF HARRIETTE HALL MORRIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Montgomery v. CommissionerDocket No. 18668.United States Board of Tax Appeals17 B.T.A. 491; 1929 BTA LEXIS 2294; September 25, 1929, Promulgated *2294  Decedent in exercising a power of appointment created equitable life estates with void limitations over.  Held, since under the laws of Massachusetts the prior disposition is allowed to operate as if the void limitations over had never been made, that the respondent correctly included the present worth of such equitable life estates in decedent's gross estate under section 402(e) of the Revenue Act of 1921.  Burton E. Eames, Esq., for the petitioner.  L. S. Pendleton, Esq., for the respondent.  MORRIS *491  This proceeding is for the redetermination of a deficiency in estate tax of $1,166.65.  The question presented is whether decedent validly exercised a certain power of appointment so that the property subject to the said power became a part of her gross estate within the meaning of section 402(e) of the Revenue Act of 1921.  FINDINGS OF FACT.  Under date of November 15, 1898, Samuel M. Child of Boston, Mass., executed a trust indenture placing in trust thereby certain property which consisted entirely of real estate situated in Massachusetts.  Subsequently, over 75 per cent of the trust property was reduced to personalty.  Two trustees*2295  were provided for by the trust indenture and since 1909 they have been residents of Massachusetts.  After naming the trustees and describing the premises coveyed in trust, the trust indenture provided that the trust property should be held "until the death of the last survivor of the following named persons, to-wit, John C. Pegram, Senior, Isabel Homer Pegram, John C. Pegram, Jr., Nancy D'Wolf Pegram, Alice Prescott Mayer, Harriette Hall Morris, and Josephine M. D'Wolf Homer." During the term of the trust the trustees were to collect and receive the rents, income and profits accruing or arising from the trust properties and after deducting expenses therefrom and repairs and all *492  other necessary charges and expenses relating to the execution of the trust, to pay over the remaining or net rents and income in the following proportions: one-eight part thereof to each of the following: John C. Pegram, Sr., Isabel Homer Pegram, John C. Pegram, Jr., and Nancy D'Wolf Pegram, and two-eights part thereof to each of the following: Alice Prescott Mayer and Harriette Hall Morris.  It was then provided that: * * * Upon the decease of each [beneficiary] during the term of this trust. *2296  to pay over his or her share of said net income as he or she shall appoint by will or other instrument in the nature thereof and in default of such will, or other instrument, or so far as the same shall fail to operate, to pay over the same to those who are at the several dates of payments the heirs by blood of such deceased beneficiary, and subject to the deductions from the share of the said Morris as hereinafter set forth, upon the death of the last survivor of the said beneficiaries, to pay over, transfer and convey the principal of said fund in the proportions above set forth as each such beneficiary shall be his or her last will or any instrument in the nature thereof direct and appoint, and in default of such last will or other instrument, or so far as the same shall fail to operate, to pay over, transfer and convey the same to those persons who are at that time the heirs by blood of such deceased beneficiary; and it is further understood and agreed that any of the beneficiaries may by his or her will transmit the power to his or her appointee or appointees, and their or his heirs and assigns to direct by his or her will upon his or her death how the said net income shall be*2297  distributed during the term of the trust and the principal at the termination thereof, it being the intention of this instrument that said beneficiaries and their appointees and the appointees of such appointees shall have the same power to direct by will or other instrument duly executed, to take effect at their decease the application of the income and the eventual disposition of the principal or capital of their respective shares of or interests in the said trust property that they would have if their respective shares or interests in the said trust property were in their own possession and control free of trust.  * * * The decedent died testate June 15, 1923, while comiciled at Newport, R.I.  Her last will and testament was probated in New York and no administration has been taken out or applied for in Massachusetts.  Her will, after making certain specific bequests, provided in part as follows: FOURTH: ALL the Rest, Residue and Remainder of my property, both real and personal, and wheresoever situated, of which I shall die seized or possessed, or to which I may be entitled at the time of my death, or over which I may have the power of appointment, as is provided in the Deed*2298  of Trust of Samuel M. Child to John C. Pegram and Charles E. Cotting, * * * I GIVE, DEVISE, and BEQUEATH to JOHN D. PEABODY, of the City of New York, and JOHN S. MONTGOMERY, of Riverside, Connecticut, IN TRUST, to divide the same into four equal shares: And 1.  To hold Two of said SHARES IN TRUST, during the life of my son, LEWIS G. MORRIS, to collect and receive the rents, issues and profits thereof, and to apply the net income of the said two shares so held in trust to the use of my son LEWIS G. MORRIS so long as he shall live; and upon his death, to hold ONE of *493  said Shares held in trust for his benefit, IN TRUST, during the life of my granddaughter, ALLETTA NATHALIE LORILLARD MORRIS, to collect and receive the rents, issues and profits thereof, and to apply the net income of the said share so held in trust to the use of my said granddaughter so long as she shall live; and upon her death to divide and distribute the principal of the said share to and among such of the lawful issue of the said ALLETTA NATHALIE LORILLARD MORRIS as she may, by her last will and testament, direct, or in default of any such direction by will to divide the same equally among her*2299  lawful issue, per stirpes and not per capita; or, should she die without leaving issue then to pay over the principal sum of the said share to her next of kin.  And upon the death of the said LEWIS G. MORRIS, to hold the OTHER of said two Shares held in trust for his benefit, IN TRUST, during the life of my granddaughter, FRANCES ELIZABETH MORRIS, to collect and receive the rents, issues and profits thereof, and to apply the net income of the said share so held in trust to the use of my said granddaughter so long as she shall live; and upon her death to divide and distribute the principal of the said share to and among such of the lawful issue of the said FRANCES ELIZABETH MORRIS as she may, by her last will and testament, direct, or in default of any such direction by will to divide the same equally among her lawful issue, per stirpes and not per capita; or should she die without leaving issue then to pay over the principal sum of said share to her next of kin.  2.  To hold Two of said SHARES, IN TRUST, during the life of my daughter, ALICE PRESCOTT MORRIS VALLIN; to collect the rents, issues and profits thereof, and to apply the net income of the said shares so held in*2300  trust to the use of my daughter ALICE PRESCOTT MORRIS VALLIN so long as she shall live; and upon her death to hold ONE of said Shares held in trust for her benefit, IN TRUST, during the life of my granddaughter, HARRIETTE HALL MORRIS, the daughter of ALICE PRESCOTT MORRIS VALLIN, to collect and receive the rents, issues and profits thereof, and to apply the net income of the said share so held in trust to the use of my said granddaughter so long as she shall live; and upon her death to divide and distribute the principal of the said share to and among such of the lawful issue of the said HARRIETTE HALL MORRIS as she may, by her last will and testament, direct, or in default of any such direction by will to divide the same equally among her lawful issue, per stirpes and not per capita; or, should she die without leaving issue then to pay over the principal sum of the said share to my grandson, FRANCIS MORRIS the son of ALICE PRESCOTT MORRIS VALLIN, or if he be dead to his issue.  AND upon the death of the said ALICE PRESCOTT MORRIS VALLIN, to hold the OTHER of the said two Shares held in trust for her benefit, IN TRUST, during the life of my grandson FRANCIS MORRIS, above mentioned, *2301  to collect and receive the rents, issues and profits thereof, and to apply the net income of the said share so held in trust to the use of my said grandson so long as he shall live; and upon his death to divide and distribute the principal of the said share to and among such of the lawful issue of the said FRANCIS MORRIS as he may, by his last will and testament, direct, or in default of any such direction by will to divide the same equally among his lawful issue, per stirpes and not per capita; or, should he die without leaving issue then to pay over the principal sum of the said share to HARRIETTE HALL MORRIS, above mentioned, or, if she be dead to her issue.  * * * The executors of decedent's will were also named trustees and were specifically given the necessary powers to effectuate the purposes of the testamentary trust which she provided for in her will.  *494  At the time of decedent's death two of the six beneficiaries named in the trust indenture of Samuel M. Child were living, one, Isabel Homer Pegram Graham, having been born January 31, 1867, and the other, Nancy D.'Wolf Pegram Clark, July 7, 1872.  These two beneficiaries were still living on November 22, 1928. *2302  Decedent's daughter, Alice Prescott Morris Vallin, and her son, Lewis G. Morris, were born November 10,1875, and June 4, 1882, respectively.  They were living at decedent's death and each had two children.  None of the four grandchildren were in being on November 15, 1898, and none of them were of age on June 15, 1923.  Upon decedent's death, John Peabody and John Montgomery, as decedent's executors and trustees, demanded from the trustees of the trust created by Samuel M. Child, that the latter pay over to them all the net income accrued after decedent's death on the two-eights interest held for decedent's benefit by the trustees of the Child trust fund.  The trustees of the Child trust fund, being in doubt as to what course they should follow, filed two petitions in January, 1924, in the Probate Court for Suffolk County, Massachusetts, the one praying for instructions as to their duty in the matter of the payment of certain inheritance and succession taxes upon certain shares of the trust estate created by Samuel M. Child and held for the benefit of Alice P. Mayer during her lifetime, and Harriette Hall Morris during her lifetime; and the other, praying for instructions as to*2303  their duty in the matter of disposition of the net income that had been derived since the death of Harriette Hall Morris and that would thereafter accrue from her portion of the principal of the trust fund created by Child for her benefit.  On May 12, 1924, the probate court, after argument by counsel on the first petition, held as follows: AFTER HEARING AND CONSIDERATION the Court doth order and decree: that the said petitioners be and they hereby are instructed that any and all Federal and Massachusetts inheritance and succession taxes are to be paid out of the capital as a whole of the original trust; and not out of any respective share, and not out of any income.  * * * On May 31, 1924, after hearing and consideration of the second petition the court ordered and decreed: * * * That said petitioners be and they hereby are instructed that said respondent, Lewis G. Morris and Alice Prescott Vallin are entitled to receive payment, in equal shares, of the net income that has accrued since the death of said Harriette Hall Morris from the two-eights portion of the principal of said trust given for her benefit under the terms of said deed of trust executed by Samuel M. Child*2304  and of the net income that will accrue therefrom during the joint lives of said Lewis G. Morris and Alice Prescott Morris Vallin; that the said income is not subject to claims of creditors against her said estate and should not be paid to her executors, and that said income should be *495  paid by the petitioners directly to said Lewis G. Morris and Alice Prescott Morris Vallin, instead of to the trustees under the will of Harriette Hall Morris, as the payment to them would have no effect except to charge it with the commissions of a second set of trustees.  * * * So far as the petition and answers may raise any question as to payment of income from said trust estate that may accrue after the joint lives of said Lewis G. Morris and Alice Prescott Morris Vallin, or any question as to distribution of principal upon the termination of the trust, the Court declines to pass upon the same in this proceeding.  Thereafter and on October 2, 1924, the trustees paid taxes to the Commonwealth of Massachusetts "on account of the tax on legacies, devises in the trust agreement of Samuel L. Childs for benefit of Harriette Hall Morris, late of Newport, R. I. Donee of power of appointment. *2305  * * *" Details of assessment were shown on the tax statement as "being in full on all interests presently due passing by reason of failure to exercise power of appointment." In computing the deficiency in estate tax of $1,166.65 the respondent determined that decedent had by the terms of her last will and testament exercised the powers of appointment vested in her by the trust indenture of November 15, 1898.  The respondent found that the value of her one-fourth interest in the entire trust fund was $184,630.82, which was held to be the value of the property over which decedent exercised the power of appointment in behalf of her children.  The income from one-half of this amount the respondent found was appointed to each of decedent's children.  He then computed the present worth of each one-half on the basis of 4 per cent income.  Where the recipient was 51 years of age he found the present worth to be $44,973.10, and where the recipient was 56 years of age, the present worth was computed to be $39,399.57, making a total of $84,372.67.  This latter amount was included in decedent's gross estate and resulted in the deficiency in question.  OPINION.  MORRIS: The question in this*2306  proceeding arises as a result of respondent's application of section 402(e) of the Revenue Act of 1921.  That section provides as follows: That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated - * * * (e) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, *496  his death, except in case of a bona fide sale for a fair consideration in money or moneys worth; In applying this section to the facts herein respondent asserts that decedent validly exercised the power given her, and that, although her appointment, when incorporated in the trust indenture, violates the rule against perpetuities as to the limitations over which she created, nevertheless, such limitations over could be stricken out, leaving the prior disposition to operate as though the limitations over had never been made.  Petitioner contends that since the appointment violates the rule against perpetuities, *2307  the whole appointment is void.  Petitioner further contends that in any event decedent's will did not specifically appoint the income from the trust indenture to her children for their lives, and that the decisions of the probate court and the action of the Massachusetts taxing authorities are tantamount to an adjudication that decedent failed to exercise the power.  Preliminary to a discussion of the issue raised, it is necessary to determine whether the laws of Massachusetts, New York, or Rhode Island govern the exercise of the power of appointment.  In , it was held that the effect and validity of the instrument whereby the appointment was exercised was to be determined according to the law of the domicile of the donor and not of the donee.  Here the domicile of the donor was Boston, the trust property was real estate situated entirely in Massachusetts, and the trustees since 1909 were residents of Massachusetts.  We have no hesitancy, therefore, in holding that the laws of Massachusetts are applicable, more particularly, since the Massachusetts doctrine seems to follow the general rule.  31 Cyc. 1135.  *2308  It appears to be the law in Massachusetts that in determining whether the execution of a power of appointment is in contravention of the rule against perpetuities, the estate created under such power must be referred back to the donor's instrument whereby the power was created.  It further appears that property subject to the power is property of the donor, but that equity will step in and treat property subject to a power, as property of the donee where creditors of the donee are involved.  ; . It has been held that the donee in exercising a power of appointment is in effect writing the will of the donor in respect to the property subject to the power, and that the donor has by the very terms of his instrument accepted in advance the disposition which the donee subsequently makes.  Therefore, the Massachusetts courts hold that in reckoning the period within which an estate in fee must vest under the rule against perpetuities, the measure must start from the time of the creation of the power and *497  not the exercise thereof.  *2309 ; . Decedent exercised the power by last will and testament which specifically refers to the power created in the trust indenture, but failed to differentiate between the power to appoint income and the power to appoint principal at the termination of the trust.  Such failure is, in our opinion, immaterial, since she gave all her residuary estate and all the property subject to powers of appointment, in trust, to be divided into four equal shares, the income from two shares to be paid to her son for life, and the income from the other two shares to her daughter for life, and upon the death of her children, the income from one share to each of her grandchildren for life, and upon their death to their lawful issue as each grandchild should by will direct.  Referring this disposition back to the creation of the power by the donor, and measuring the period from the creation of the power until the vesting of the estate in fee, it is clear that there has been a violation of the rule against perpetuities, which is, that executory limitations are void unless they take effect from necessity and in all possible contingencies*2310  within the period of a life or lives in being and 21 years thereafter.  Petitioner asserts that this violation of the rule as to limitations over makes the exercise of the power invalid, the whole appointment becomes void and the property descends to decedent's children as her "heirs by blood." Respondent asserts that the prior disposition, whereby decedent's children were given equitable life estates, should be sustained as valid and that only the limitations over, which admittedly violate the rule against perpetuities, should be excluded from the decedent's gross estate.  Respondent cites in support of his contention that a void limitation over can be stricken and the prior disposition allowed to stand, the case of ; . In that case the donor executed an antenuptial deed of trust reserving to herself the income for life and a special power of appointment.  By her will she bequeathed all her property, including the property subject to the power to her executors in trust to pay the income, among others, to her son Robert during his life, and upon his death to*2311  pay over the principal in equal shares to his then living children The court held that the limitation over to the children of Robert was void for remoteness because it might vest beyond the rule of perpetuities, and that a limitation over which violated the rule would be considered as stricken out, leaving the prior disposition to operate as if the limitation over had never been made.  It is our opinion that this case is controlling, and that the principle laid down by the *498  Supreme Court of Massachusetts sustains the position of the respondent.  Accord: . The second contention advanced by petitioner is that in any event the decedent did not specifically appoint the income from the trust to her children, but rather give it to trustees to hold in trust for her children.  It would seem unnecessary to answer this contention in view of our holding that the power as exercised would stand except as to the limitations over.  However, we call attention to the fact that decedent appointed whatever property she had in trust to pay the income to her children during their lives.  While the trust created by*2312  Child continued in existence, the only thing that decedent could appoint was her portion of the income therefrom.  The appointment as made, carried with it the income, and at the termination of the trust, the principal.  It is our opinion that decedent exercised the power within the meaning of section 402(e) of the Revenue Act of 1921, and that the present worth of such equitable estates should be included in decedent's gross estate.  The third contention of the petitioner is that the decisions of the probate court and the action of the Massachusetts taxing authorities amount to a judicial determination that the decedent failed to exercise the power.  We are unable to agree with this contention, for the reason that the petitions filed prayed for instructions as to the disposition which the trustees of the Child trust fund should make of income in their possession.  The question of the validity of the exercise of the power of appointment was not considered by the court as an issue in those proceedings.  True, the court directed the trustees to pay the income from the trust directly to the children of the decedent instead of paying such income to the trustees under the testamentary*2313  trust created by decedent.  But it appears that the reason for this action was to avoid circuity of payments and to avoid the payment of additional commissions to other trustees, since the income in any event belonged to decedent's children.  The probate court expressly refused to pass on any question as to payment of income from the trust after the joint lives of decedent's children, or on any question as to distribution of principal upon termination of the trust.  The actions of the Massachusetts taxing authorities are purely administrative and not judicial, so that any determination which they made would have no effect on our opinion, except as it might be persuasive.  It is our opinion that the law and legal principles sustain the determination of the respondent, and we so hold.  Reviewed by the Board.  Judgment will be entered for the respondent.