Court Opinion

ID: 9452033
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:28:56.602282+00
Date Added: 2024-06-11T17:33:01.999207
License: Public Domain

FRIENDLY, Circuit Judge
(dissenting).
The Commissioner’s appeal concerns an important problem in the administration of the revenue laws — the conclusiveness of a judgment of a lower state court, typically in an intra-family setting, that determines property interests entailing federal tax consequences. The Supreme Court has not spoken to the point for nearly thirty years. Difficulties arise because of the practical unacceptability of the strictly logical polar positions; that the judgment of an inferior state court not binding as res judicata can never be more than rebuttable evidence of state law, and that any such judgment which is effective as a determination of property rights among the parties is conclusive upon the federal fisc. The former position could operate unfairly in the many cases where persons having a genuine controversy over property rights desire resolution by an appropriate local tribunal without wishing to press their differences to the highest court of the state. The latter would permit citizens, unwilling to accept the tax consequences of actions taken by them or their decedents, to evade federal taxes by taking advantage of an unwitting lower state tribunal.
The compounding of factual variables, the somewhat intractable nature of the problem, and the cryptic character of the Supreme Court’s rather dated pronouncements, see Freuler v. Helvering, 291 U.S. 35, 43-47, 54 S.Ct. 308, 78 L.Ed. 634 (1934); Blair v. C. I. R., 300 U.S. 5, 9-10, 57 S.Ct. 330, 81 L.Ed. 465 (1937); and Sharp v. C. I. R., 303 U.S. 624, 58 S.Ct. 748, 82 L.Ed. 1087 (1938), have created widespread conflict among the circuits. Contrast, e. g., Saulsbury v. United States, 199 F.2d 578 (5 Cir. 1952), cert. denied, 345 U.S. 906, 73 S.Ct. 645, 97 L.Ed. 1342 (1953) ; Stallworth’s Estate v. C. I. R., 260 F.2d 760 (5 Cir. 1958); Sweet’s Estate v. C. I. R., 234 F.2d 401 (10 Cir.), cert. denied, 352 U.S. 878, 77 S.Ct. 100, 1 L.Ed.2d 79 (1956); and Faulkerson’s Estate v. U. S., 301 F.2d 231 (7 Cir.), cert. denied, 371 U.S. 887, 83 S.Ct. 182, 9 L.Ed.2d 121 (1962), refusing to give effect to state judgments, with Gallagher v. Smith, 223 F.2d 218 (3 Cir. 1955); Darlington’s Estate v. C. I. R., 302 F.2d 693 (3 Cir. 1962), and Goodwin’s Estate v. C. I. R., 201 F.2d 576 (6 Cir. 1953), doing the opposite. The Fourth Circuit has declined to give effect to a lower state court judgment with respect to a widow’s power of appointment rendered under circumstances quite similar to those here, Pierpont’s Estate v. C. I. R., 336 F.2d 277, 281-282 (1964), cert. denied, 380 U.S. 908, 85 S.Ct. 890, 13 L.Ed.2d 795 (1965), distinguishing its earlier decision in Pitts v. Hamrick, 4 Cir., 228 F.2d 486 (1955), and expressly refusing to follow the rule of the Third Circuit which my ^brothers adopt. The Eighth Circuit seems to be less deferential to state judgments now than it used to be. Contrast Straight’s Trust v. C. I. R., 245 F.2d 327 (1957), and Peyton’s Estate v. C. I. R., 323 F.2d 438 (1963), with Helvering v. Rhodes’ Estate, 117 F.2d 509 (1941); and Eisenmenger v. C. I. R., 145 F.2d 103 (1944). The Ninth Circuit appears to be more so. Contrast Flitcroft v. C. I. R., 328 F.2d 449 (1964), with Newman v. C. I. R., 222 F.2d 131 (1955), and Wolfsen v. Smyth, 223 F.2d 111 (1955). The conflict among the judges is echoed among the commentators. Most of them disapprove the acquiescent attitude now identified with the Third Circuit. See, e. g., Cardozo, Federal Taxes and the Radiating Potencies of State Court Decisions, 51 Yale L.J. 783 (1942); Cahn, Local Law in Federal Taxation, 52 Yale L.J. 799, 818-19 (1943); Oliver, The Nature of the Compulsive Effect of State Law in Federal Tax Proceedings, 41 Calif.L.Rev. 638 (1953); Stephens and Freeland, The Role of Local Law and Local Adjudications in Federal Tax Controversies, 46 Minn.L.Rev. 223, 242-51 (1961) ; Braverman & Gerson, The Conclusiveness of State Court Decrees in Federal Tax Litigation, 17 Tax L.Rev. 545 (1962); Note, Effect of State Court Decrees in Federal *1016Tax Litigation: A Proposal for Judicial Reform, 30 U.Chi.L.Rev. 569 (1963); Sacks, The Binding Effect of Nontax Litigation in State Courts, N.Y.U. 21st Inst, on Fed. Tax. 277 (1963). But the Third Circuit also has a defender. See Note, The Binding Effect of a Nonad-versary State Court Decree in a Federal Tax Determination, 33 Fordham L.Rev. 705 (1965). With our own court uncommitted,1 I regret my brothers’ vote to align ourselves with the rather mechanical view of the Third Circuit rather than the more realistic one of the Fourth and Fifth, thereby needlessly handicapping the Commissioner in the fair and equal enforcement of the federal revenue laws. I would hold that when it is evident that state court litigation has been brought primarily to have an effect on federal taxes, the judgment of an inferior state court adjudicating property rights is entitled to little weight, and that when the state court has not had the benefit of a fair presentation of both sides of the controversy, it is entitled to none. While these principles will not resolve all cases, they are ample to decide this one.
When Herman Bosch died in 1957, the critical date for determining taxes on his estate, his wife had only a special power of appointment over the trust whose status is here in question. Admittedly this was all. she purported to have and all she or her husband thought she had. So long as Mr. Bosch lived, no one had questioned the validity of the partial release of the quondam general power, least of all the experienced attorneys who had recommended it. Nor was there any basis for doing so. There had indeed been New York decisions that a power of appointment by will, whether or not contingent on the donee’s surviving the donor, could not be released since this' would defeat the purpose of preserving the donee’s freedom of action until death. Learned v. Tallmadge, 26 Barb. 443 (1856); Farmers’ Loan and Trust Co. v. Mortimer, 219 N.Y. 290, 114 N.E. 389 (1916). But, upon enactment of the Revenue Act of 1942, thenceforth taxing all property subject to a preexisting general power of appointment unless this was released by a specified date,2 New York’s legislature moved swiftly to permit holders to rid themselves of such powers in whole or in part. The statute, Real Property Law § 183, was phrased in the broadest terms:
“Any power which is exercisable by deed, by will, by deed or will, or otherwise, whether general or special, other than a power in trust which is imperative, is releaseable * * * with respect to the whole or any part of the property subject to such power and may also be released in such manner as to reduce or limit the persons or objects, or classes of persons or objects, in whose favor such power would otherwise be exercisable.”
Nothing in the language suggests a desire to except powers that were, like Mrs. Bosch’s, contingent on the donee’s surviving the settlor or destructible by the settlor’s amending or revoking the trust;3 “exercisable” would not normally be read as including only cases where the exercise would be effective if the *1017donee died the next minute. And there was no reason why New York’s legislature should thus fail in part to enable its citizens to do what Congress contemplated they might. Unless such a contingent power was partially released before the end of the grace period accorded by Congress, the settlor’s death would leave the donee in the same unenviable position as any other holder of a general power created on or before October 21, 1942, where any exercise, although in favor of persons other than the donee, his estate, or their creditors, would result in the inclusion in his estate of the property over which he held the power — just what the release here suggested by the trustee in October 1951 was meant to avoid. Since there is no apparent reason why the New York legislature should have wished to discriminate against holders of contingent or revocable powers and the language affords no indication that it did, it is not surprising that what appears to be the only New York case raising the problem in a truly adversary context held that the contingent nature of a power of appointment, in that instance upon death of the donee without issue, did not prevent release under § 183, In re Woodcock’s Will, 19 Misc.2d 268,186 N.Y.S.2d 447, 450 (Surr. Ct. Westchester Co. 1959).4 This was the unpropitious background in which the attorneys who had counseled that Mrs. Bosch convert her general power into a special one in 1951 determined to engage in what the Commissioner has aptly characterized as post mortem estate planning, regaining for her through the New York courts a general power she no longer had at Mr. Bosch’s death.
’ The only reason advanced by the trustee for seeking a declaration as to the validity of the release was the effect on the trust’s liability for its share of the taxes on Mr. Bosch’s estate — allegedly only $930 if the. release was not valid but $21,479 if it was. The trustee’s petition to the New York court gave no reason why determination of that question by the Tax Court in the litigation there pending would not fully protect it. The brief for Mrs. Bosch, joining in the trustee’s request that the release be declared invalid, made no suggestion that she desired to avail herself of the released power to appoint by will to herself, her estate or her creditors. Indeed, her regaining the general power made it less likely that she would exercise it in any respect. Under the Internal Revenue Code of 1954, § 2041(a) (1), while any exercise of the power would cause the trust property to be included in her estate, failure to exercise it would produce the optimum result of availability of the trust property for the marital deduction in Mr. Bosch’s estate and freedom from taxation in his widow’s — a feat which could not have been accomplished by revocation of.the trust during Mr. Bosch’s life. In default of appointment the trust was to be divided equally’ between the then next of kin of the two spouses; the interest of the many persons cited as presumptive remaindermen, taken as a class, thus also favored a declaration of invalidity which would make exercise in favor of Mrs. Bosch’s relatives less likely, as was conceded in the brief filed by a guardian ad litem for a relative of Mr. Bosch, the only re-mainderman to take a position. Mrs. Bosch in no way indicated that if the release was held valid, she would exercise her special power in favor of any particular person, who might thus be interested in urging validity. The briefs, filed by the trustee, Mrs. Bosch and *1018the guardian, treated the invalidity of the release as almost beyond reasonable debate. The attorneys for the trustee did not inform the court on what basis they had recommended action in 1951 which they now considered so plainly a nullity— something as to which they would have been questioned sharply in a truly adversary proceeding. The sole relevant authority, In re Woodcock’s Will, supra, was not cited, and the legislative purpose behind § 183 was not explored. Under these circumstances it is not to be wondered that a judge sitting in the busy motion part of the Supreme Court for New York County should have erroneously ratified the parties’ unanimous contention, citing only the inapposite decision of In re Piffard, see n. 3.
The case thus fits perfectly the description cited by way of contrast in Freuler v. Helvering, supra, where “all the parties joined in a submission of the issues and sought a decision which would adversely affect the Government’s right to additional * * * tax.” 291 U.S. at 45, 54 S.Ct. at 312. The problem in this • area has been bedeviled by iteration of terms such as “collusive” or “non-adversary.” To require proof of collusion in the normal sense of prearrangement would impose a nigh impossible burden on the Commissioner; yet a court shrinks from using such an opprobrious epithet when no prearrangement has been shown. Again, while a proceeding in which, for example, a life tenant with what appears to be a limited right to invade principal seeks a declaration of absolute ownership is surely “adversary” in a formal sense, it may'not be in a practical one, as when the life tenant is an aged mother seeking to qualify a bequest for the marital deduction and the remaindermen are her adult sons. See Peyton’s Estate v. C. I. R., supra, 323 F.2d 438. What makes this case so easy is that the state court proceeding had no significant purpose other than the reduction of tax liability; Mrs. Bosch was not shown to have the slightest intention of using the general power the New York court was led to thrust upon her, or even the special one if she was held to have only that. In a practical sense the decision was thus devoid of any effect except on taxes.5 There was no question affecting the integrity of the corpus, as in Freuler, or the assignability of the beneficiary’s right to income, as in Blair v. C. I. R., supra. In such a case the considerations for respecting the determination of a lower court which is not the product of a weighing of opposing arguments approach zero.6 One well-considered article has said: “Whenever all parties to the state court proceeding approve and have never opposed the proffered result, and the decree embodying it appears to serve no purpose other than to avoid federal taxation, the decree should not be regarded as determinative of the state law property rights purportedly adjudicated.” Braverman & Gerson, supra, 17 Tax L. Rev. at 576. Another comment suggests that “If a taxpayer, intending to avoid *1019.tax liability, institutes a state suit, and if no interested party presents the argument urged by the Commissioner, then the state court judgment should be considered to have been collusively obtained.” Note, supra, 30 U.Chi.L.Rev. at 581. A third proposes that a state court adjudication of property rights be respected “unless it was obtained by collusion, i. e., for the sole and single purpose of defeating the federal tax imposed upon those rights.” Sacks, supra, N.Y.U. 21st Inst, on Fed.Tax. at 295. It is unnecessary to choose among these formulations; all call for reversal here.

. The decision in Kelly’s Trust v. C. I. R., 168 F.2d 198 (2 Cir. 1948), is inapposite in my view since the deference given to the state court adjudication was on the basis that its “appeal made it adversary, * * * especially as, on appeal from the state-court judgment, one judge disssented.” 168 F.2d at 198-199.

. Initially this was January 1, 1943, 56 Stat. 944. Later Congress successively granted postponements until November 1, 1951, and made clear that a partial release would qualify. See Powers of Appointment Act of 1951. 65 Stat. 91; S. Rep. No. 382, 82d Cong., 1st Sess. 2-8, 1951 U.S.Code Cong. & Ad.News 1530-1537; Int.Rev.Code of 1954, § 2041(a) (1).

. We have been cited to no New York cases that had ever drawn this distinction. The one New York case cited by the Supreme Court Justice, In re Piffard, 111 N.Y. 410, 18 N.E. 718, 2 L.R.A. 193 (1888), held that although a power of appointment granted by will could not have been exercised as such by a donee who predeceased the testator, the latter’s will should be read as incorporating the legatee’s disposition.

. Any shadow of doubt has been dissipated by § 146 of the new Article 5 of the Real Property Law, added by Laws 1964, c. 864, effective June 1, 1965, which was not called to the attention of the Tax Court— or to us. This section provides that the donee of a power not presently exercisable cannot contract to make an appointment but “[t]he provisions of this section sháll not, in any way, abridge the ability of the donee of a power of appointment not presently exercisable, to release his power, in whole or in part, pursuant to the provisions of section one hundred and forty-three * * Section 143 is old § 183. It is thus apparent that no other New Yorker in Mrs. Bosch’s situation can ever obtain a ruling like that made here.

. It is immaterial that if Mrs. Bosch should choose to exercise the power in favor of her own relatives, she would subject her estate to a tax — apparently much smaller than the sum here at issue —which would have been saved if the- release had not been attacked. The post mortem estate planning condemned in Pierpont’s Estate v. C. I. R., supra, 336 F.2d 277, and Peyton’s Estate v. C. I. R., supra, 323 F.2d 438, would also have increased the estate tax payable on the widow’s death.

. I fail to see the significance attributed by my brothers to the Commissioner’s knowledge of the New York proceeding or his courtesy in awaiting its outcome. For twenty years the announced policy of the Internal Revenue Service, surely well known to the appropriate committees of Congress, has been not to intervene in such suits and to move to dismiss if made a party. Mim. 6134 (1947). The reasons are obvious — insufficient staff, unfamiliarity with state procedures, and lack of standing to intervene and thus to appeal unless, indeed, the Commissioner were to concede the very point of the conclusiveness of the state judgment which he properly disputes. In the absence of contrary congressional direction the United States is entitled to litigate liability for federal taxes in its own courts. Compare Leiter Minerals, Inc. v. United States, 352 U.S. 220, 77 S.Ct. 287, 1 L.Ed.2d 267 (1957).