Brown v. Commissioner ( 1938 )

HARRY J. BROWN, RALPH SKIDMORE AND C. W. SKOWLUND, AS EXECUTORS OF THE WILL OF MAGGIE HODGINS, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Brown v. Commissioner

Docket No. 91233.

United States Board of Tax Appeals

38 B.T.A. 298; 1938 BTA LEXIS 884;

August 10, 1938, Promulgated

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One Isaac Stephenson created a trust in 1917, by the terms of which petitioners' decedent was entitled to the income from a part of the trust estate and ultimately to the principal of that part. She was also given a power of appointment as to her interests in the trust estate. The trust instrument provided that under certain circumstances, similar to those recited in "spendthrift" trusts, the trustees might make the payments due under the trust not to the beneficiaries directly, but for their benefit. Petitioners' decedent died in 1935, having, by will exercised her power of appointment. Held, on authority of J. Earl Morgan, Executor,36 B.T.A. 588">36 B.T.A. 588, the power of appointment exercised by petitioners' decedent was general, and the value of property passing pursuant to the power was properly included by respondent in the value of decedent's gross estate.

Perry J. Stearns, Esq., for the petitioners.

R. F. Staubly, Esq., for the respondent.

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KERN

This proceeding involves a deficiency in Federal estate taxes determined by respondent in the matter of the estate of Maggie Hodgins, deceased, in the sum of $41,524.51, arising by reason of the inclusion by respondent, in the value of decedent's estate subject to such tax, of the value of certain property passing pursuant to a power of appointment exercised by decedent by will.

FINDINGS OF FACT.

The parties have filed a stipulation of facts, which we incorporate herin by reference. Those facts which are material to an understanding of the issues may be summarized as follows:

The decedent, Maggie Hodgins, was a daughter of the late Isaac Stephenson of Marinette, Wisconsin. At the time of her death she resided at Marinette, and her will was admitted to probate May 7, 1935. Her estate is being administered in the County Court of Marinette County.

By deed of trust dated May 12, 1917, Isaac Stephenson transferred certain property listed therein to five trustees, and named the trust the "Isaac Stephenson Trust." He required the trustees to divide the trust property into eight numbered parts, and provided as to part 2 that the trustees should pay annually to his daughter Maggie Hodgins the net income from that part, and if she should be living at the time of the termination of the trust, should transfer to her all the property then constituting said part 2.

The trust further provided that, if Maggie Hodgins should die prior to the termination of the trust, the trustees should pay the net annual income from part 2 to such person or persons as she might appoint by will, and, at the termination of the trust, should transfer the property then constituting part 2 to such person or persons as she might appoint by will. The pertinent provisions of the trust instrument are as follows:

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10. After my death and during the continuance of the trust hereby created, said trustees shall pay annually to my daughter MAGGIE HODGINS the net annual income from said part numbered two (2):

If my daughter Maggie Hodgins shall be living at the time of the termination of this trust, said Trustees shall transfer to her all property then in their possession constituting said part two (2).

If my daughter Maggie Hodgins should did prior to the termination of said trust, then said Trustees shall pay annually the net annual income from said part two (2) to such person or persons as she may appoint by her last will and testament duly admitted to probate, and at the termination of this trust said Trustees shall transfer the property then in their possession constituting said part two (2) to such person or persons as she may appoint in the manner aforesaid.

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The term of the trust was limited by the lives of the creator, Isaac Stephenson, and his wife, Martha E. Stephenson, and twenty-one years thereafter.

The trust indenture provides at item 15:

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15. Whenever, in the judgment of said Trustees, there shall be danger that any portion or portions of the trust property coming to any beneficiary under this trust, whether income or corpus, as hereinbefore provided, will be dissipated or improvidently handled through intemperate or spendthrift habits, lack of business capacity, or subjection to the injurious influences of others affecting business capacity, or for any other reason or reasons, said Trustees shall withhold, if they deem it best, from every such beneficiary the whole or any and each portion of the trust property, whether of income or corpus, coming to such beneficiary as unworthy to receive the same, and said Trustee shall pay and transfer to every such beneficiary only so much of said trust property, whether of income or corpus, otherwise coming to such beneficiary, as said Trustees shall deem advisable. Said Trustees shall, if they deem it best, instead of paying and transferring to any such beneficiary or beneficiaries any portion of said trust property, whether of income or corpus, expend the same, or any portion thereof, for the welfare and support of such unworthy beneficiary or beneficiaries.

Whatever shall have been once withheld, as above provided, from any such unworthy beneficiary under this trust and shall not have been expended by such Trustees for the benefit and support of such unworthy beneficiary, shall be paid and transferred by said Trustees to such of his or her issue as would have taken the property so withheld, both income and corpus, in case such unworthy beneficiary had died intestate at the time of such withholding; and in the event of there being no such issue at the time any such trust property shall be payable or transferable, then said Trustees shall pay and transfer and distribute such property so withheld to and among the then other existing remaining parts.

Whenever, and while in the judgment of said Trustees the reason or reasons for withholding the portion or portions thereof of any beneficiary, as above provided, shall have ceased to exist, then during such cessation said Trustees may pay and transfer to such beneficiary any portion or portions of said Trust property, whether income or corpus, that shall thereafter be coming to such beneficiary under any of the provisions of this trust, or said Trustees shall expend the same for the benefit or support of such beneficiary.

Maggie Hodgins, by her will, appointed her cousin Bertha M. Baker of Marinette, Wisconsin, to receive $100 per month during her lifetime out of the net annual income which might become payable from said part 2, and any additions thereto, of the trust created by the trust deed. She appointed her niece Alice W. Keerl, daughter of a sister of her late husband, Joshua Hodgins, if she should survive her, to receive the sum of $25 per month so long as she might be unmarried, out of the net annual income which might become payable from part 2 and any additions thereto; and she appointed her sisters Mary S. Brown, Georgiana S. Ludington, and Harriet S. Skidmore to receive and have in equal shares after her death the remainder of the net annual income which might become payable to her appointed her three sisters last named to receive and

She further appointed her three sisters last named to receive and have all the property in the possession of the trustees of said trust at the termination thereof constituting part 2 and any additions thereto.

Such appointment further provided that if any of her said sisters should not survive her, or, surviving her, should not survive the termination of the trust, then she appointed Howard S. George, Isaac Watson Stephenson, Mary Stephenson Whitehill, and Jane Stephenson Skidmore, nephews and nieces, respectively, of the decedent, to receive and have, in equal shares, after the death of any of said sisters the share of net income from part 2 which any such deceased sister would have received if living, and at the termination of the trust to receive and have absolutely the share of the principal of part 2 of the trust which any such deceased sister would have received had she survived the termination of the trust; provided, that if any one of the four persons last named should die before the termination of the trust, leaving issue him or her surviving, then she appointed such issue to receive the same share, by right of representation, both of income and principal of the trust, which the parent of such issue would have received if living.

The will of Maggie Hodgins was admitted to probate by the County Court of Marinette County on the 7th day of May 1935, and petitioners were appointed executors of the will.

OPINION.

KERN: The principal question presented in this proceeding is whether the power of appointment which was received by petitioners' decedent under the trust created by Isaac Stephenson in 1917 and was exercised by her in her will, was a general power of appointment within the meaning of section 302(f) of the Revenue Act of 1926, set out in the margin. ^{J. Earl Morgan, Executor,36 B.T.A. 588">36 B.T.A. 588, which involved a similar power of appointment arising under the same trust. Upon the authority of that decision, we hold that the power of appointment exercised by petitioners' decedent was a general power. The opinion in the case cited did not discuss the effect upon the character of the power of appointment of the "spendthrift" provisions contained in paragraph 15 of the trust instrument executed by Isaac Stephenson in 1917, which are set out above. These provisions do not make the power of appointment special rather than general. By the terms of the trust instrument, they apply only to the portions of the trust property going to any beneficiaries under the trust, which might well be construed as meaning those beneficiaries expressly named therein. However, assuming that these provisions might apply to payments made to persons not expressly named as beneficiaries under the trust, but who were merely those designated by the beneficiaries pursuant to the power of appointment of which they were donees, we are still of the opinion that they do not render special a power of appointment otherwise general, since they are concerned only with the method of payment of income and principal, and do not withdraw or alter in substance the beneficial enjoyment of the income or principal by the person or persons designated pursuant to the power of appointment.}

Also, there is nothing in the record to indicate that these "spendthrift" provisions were ever availed of by the trustees with reference to any payments to petitioners' decedent or her appointee.

Petitioners contend further that, since the Isaac Stephenson trust took effect by trust indenture dated May 12, 1917, before the Revenue Act of 1926 was enacted, no part of this trust estate should be included in decedent's gross estate in computing the estate tax thereon. They also contend that, should a part of such trust estate be thus included in decedent's gross estate pursuant to section 302(f) of the Revenue Act of 1926, this section would be contrary to the Fifth Amendment to the Constitution of the United States.

Both of these arguments seem to be predicated on a contention that the person taking property pursuant to the exercise of a power of appointment by a donee of such power takes such property as from the donor of the power rather than from the donee. The only case cited by petitioner which is relevant to this contention is United States v. Field,255 U.S. 257">255 U.S. 257. That case arose under the Revenue Act of 1916, which did not have any section therein similar to section 302(f) of the Revenue Act of 1926. The Court, in that case, indicated clearly that if there had been a section in the Revenue Act of 1916 which specifically provided, as section 302(f) of the Act of 1926 does, that property passing under a general power of appointment exercised by the decedent should be included in decedent's estate for Federal estate tax purposes, such a tax would be upheld. This inference may be justifiably made by reason of the fact that the Court, in holding in that case that property passing under a general power of appointment exercised by a decedent should not be included in decedent's estate, gave as one of the reasons for the decision the failure of the Revenue Act of 1916 to specifically provide for such inclusion, whereas the Revenue Act of 1918 did provide for its inclusion. This case and the case of Helvering v. Grinnell,294 U.S. 153">294 U.S. 153, in which the Court assumed the validity of this section in holding that it did not apply to the facts of the case, would indicate that, where the appointee under a general power of appointment takes property pursuant to the exercise of such power by the donee thereof by will, the value of the property thus taken is includable in the estate of the donee for estate tax purposes, pursuant to the provisions of section 302(f), regardless of the fact that the power was created by the donor thereof prior to the enactment of this section of the act, since the property was transmitted to the appointee by the donee by the exercise of the power of appointment, and such transmission is subject to the Federal estate tax. Stratton v. United States, 50 Fed.(2d) 48, decided by the Circuit Court of Appeals for the First Circuit some four years prior to the decision of Helvering v. Grinnel, supra, is squarely in point. In that case the court used the following language:

The appellants' contention that, under the law of Massachusetts, the property passing under the decedent's exercised powers of appointment was no part of her estate, and therefore, not taxable, while possibly logically sound, is not practically tenable. Compare United States v. Field,255 U.S. 257">255 U.S. 257, 41 S. Ct. 256">41 S.Ct. 256, 65 L. Ed. 617">65 L.Ed. 617, 18 A.L.R. 1461">18 A.L.R. 1461. The federal power to tax is not thus limited. The decedent had, to repeat, not only the income during her life, but full power to dispose of it at her death. She actually transmitted the property by exercising the granted powers. Congress might tax such transmission. Tyler v. United States,281 U.S. 497">281 U.S. 497, 50 S. Ct. 356">50 S.Ct. 356, 74 L. Ed. 991">74 L.Ed. 991, 69 A.L.R. 758. The fact that the decedent's appointees took, technically, from the donor of her power, is, for present purposes, immaterial. Compare Third Nat. Bank & Trust Co. v. White (D.C.) 45 F.(2d) 911.

See Fidelity Philadelphia Trust Co. v. McCaughn, 34 Fed.(2d) 600; James C. Webster et al., Executors,38 B.T.A. 273">38 B.T.A. 273; Edward J. Hancy, Executor,17 B.T.A. 464">17 B.T.A. 464; cf. Saltonstall v. Saltonstall,276 U.S. 260">276 U.S. 260.

Decision will be entered for the respondent.

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Footnotes

• 1. SEC. 302. 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 -

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  (f) 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, his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. ↩