State Street Trust Company v. United States

• Citation: 263 F.2d 635
• Decision Date: 23 January 1959
• Docket Number: No. 5379.,5379.
• Parties: STATE STREET TRUST COMPANY et al., Executors, Plaintiffs, Appellants, v. UNITED STATES of America, Defendant, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

263 F.2d 635 (1959)

STATE STREET TRUST COMPANY et al., Executors, Plaintiffs, Appellants, v. UNITED STATES of America, Defendant, Appellee.

No. 5379.

United States Court of Appeals First Circuit.

Heard October 7, 1958.

Decided January 23, 1959.

Dissenting Opinion February 25, 1959.

William Minot, Boston, Mass., with whom Thomas W. Tavenner and Peabody, Arnold, Batchelder & Luther, Boston, Mass., were on the brief, for appellants.

Kenneth E. Levin, Atty., Dept. of Justice, Washington, D. C., with whom Andrew F. Oehmann, Acting Asst. Atty. Gen., and Lee A. Jackson and L. W. Post, Attys., Dept. of Justice, Washington, D. C., and Anthony Julian, U. S. Atty., and Andrew A. Caffrey, Asst. U. S. Atty., Boston, Mass., were on the brief, for appellee.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

WOODBURY, Circuit Judge.

This is an appeal from a judgment entered in a civil action brought under Title 28 U.S.C. § 1346(a) (1) by the executors of the estate of Milton L. Cushing to recover an asserted overpayment of estate taxes resulting primarily from the Commissioner's inclusion in the decedent's gross estate of the value of three inter vivos trusts of which the decedent was in effect the settlor and at the time of his death a co-trustee. After trial without a jury the District Court, upon its findings of fact and conclusions of law, held that the value of the three trusts was properly includible in the decedent's gross estate and that the Commissioner had properly disallowed certain claimed deductions for executor's commissions and legal fees. But it held that the estate was entitled to a deduction of $2,000 as the reasonable expense of the prosecution of this action. The court below therefore entered judgment for the plaintiffs in the amount of $567.20, with interest, and the plaintiffs thereupon took this appeal.

It is agreed that the only question now presented is whether the discretionary powers set out in the three trusts render the trust property includible in the decedent's gross estate under § 811(c) and (d) of the Internal Revenue Code of 1939 quoted in material part in the margin.¹

There is no substantial dispute over the facts. They are as follows:

In 1925 Milton L. Cushing established three spendthrift trusts for the benefit of three of his children wherein he named himself and a bank as co-trustees. These trusts were irrevocable and there was no express reservation of power to alter, amend or revoke, but the settlor reserved the power to terminate them and cause the properties held in the trusts to be distributed to the respective beneficiaries. In 1949 the decedent exercised this power with respect to each of the trusts, but he did so upon the condition that the respective beneficiaries immediately establish new trusts of the property covered in each of the old ones. The beneficiaries did so and the court below held and the appellants agree that in this situation the decedent must be treated as the settlor. Thus, although the trust instruments in issue are written as though the respective beneficiaries are the settlors, it is admitted that actually the decedent was the settlor, and therefore that the powers given to the trustees in these trusts must be regarded as having been reserved by the decedent himself.

The District Court found that the 1949 trusts were created primarily to carry out the decedent's original purpose to assure the maintenance of his three children. More specifically, that court found that because of a possibility of reverter in the 1925 trusts the decedent was concerned about the possible effect of Estate of Spiegel v. Commissioner, 1949, 335 U.S. 701, 69 S.Ct. 301, 93 L. Ed. 330, which held an estate taxable under § 811(c) for the value of an inter vivos trust wherein there was the possibility of a reversion to the settlor should he outlive his children and grandchildren. But in addition the court found that the decedent 160 F.Supp. 878 "also wished to make some changes in the very rigid and restrictive investment provisions and, since two of the beneficiaries had been married and divorced, he thought that the terms of the original trusts were no longer adequate."²

The three 1949 trusts are substantially identical, and they are similar to the 1925 trusts in that they contain no express reservation of power to alter or amend. They differ from the earlier trusts, however, in that they are expressly irrevocable and there is no reservation of power to terminate them and cause distribution of the trust properties to the beneficiaries. The decedent and Old Colony Trust Company are made co-trustees and in the first paragraph of each of these trusts, the trustees are directed to pay the net income of the trust funds to the life beneficiary named therein, "quarterly, or oftener if practicable," and in addition from time to time to pay to that beneficiary or for his benefit, in their "sole and uncontrolled discretion," such portion or portions of the principal as the trustees "may deem necessary or advisable" for the beneficiaries' "comfortable maintenance and/or support." The District Court held that under Massachusetts law³ the trustees' power to invade capital for the beneficiaries' "comfortable maintenance and/or support," though broad, nevertheless created determinable rights in the beneficiaries which could be enforced in a court of equity. It therefore concluded that under the rule applied in Jennings v. Smith, 2 Cir., 1947, 161 F.2d 74, the corpora of the trusts were not made taxable to the settlor's estate under § 811(c) or (d), by reason of the trustees' power to invade principal for the support of the life beneficiaries. The government does not urge error in this holding as ground for sustaining the judgment below.

The problem on this appeal arises from the provisions of the third paragraph of the trusts wherein the trustees are clothed with broad powers with respect to the investments open to them and their management of the assets of the trusts. The language of this paragraph which the court below found to be so broad that the trustees were not limited in the exercise of their fiduciary duties by any determinable standard, so that the rule of the Jennings case does not apply to prevent inclusion of the corpora of the trusts in the deceased settlor's gross estate, and on which the government relies to sustain that holding, is as follows:

"In addition to and not in limitation of all common law and statutory authority, the Trustees shall have power * * * to exchange property for other property; * * to retain and invest and reinvest in securities or properties although of a kind or in an amount which ordinarily would not be considered suitable for a trust investment, including, but without restriction, investments that yield a high rate of income or no income at all and wasting investments, intending hereby to authorize the Trustees to act in such manner as it is believed by them to be for the best interests of the Trust Fund, regarding it as a whole, even though particular investments might not otherwise be proper; * * * to determine what shall be charged or credited to income and what to principal notwithstanding any determination by the courts and specifically, but without limitation, to make such determination in regard to stock and cash dividends, rights, and all other receipts in respect of the ownership of stock and to decide whether or not to make deductions from income for depreciation, amortization or waste and in what amount; * * and generally to do all things in relation to the Trust Fund which I, the Donor, could do if living and the Trust had not been executed."

In conclusion the third paragraph of the trusts provides: "All such acts and decisions made by the Trustees in good faith shall be conclusive on all parties at interest and my Trustees shall be liable only for their own wilful acts or defaults, but in no case for acts in error of judgment."

The case is very close, but we agree with the result reached by the District Court.

It is true that it is not at all unusual to clothe trustees with power to invest trust assets in securities other than so-called "legals." And it is also true that it is far from uncommon to provide that trustees shall have the power in their discretion to allocate accretions to the property they hold in trust to principal or to income, at least when there is no settled rule of law to apply and proper allocation is open to honest doubt. Certainly in the exercise of one or both of these powers trustees can to some extent affect the interests of the various beneficiaries. Indeed, even in a trust wherein investment is limited to "legals," a trustee can effect some shifting of benefits between life beneficiaries and remaindermen by his choice of investment with respect to rate of income return or growth potential. But we would hardly suppose that in the ordinary case inclusion of one or both of the above provisions in a trust instrument would be a crucial factor in deciding whether or not the corpus of the trust should be included in a decedent's estate.

This, however, is not an ordinary case. Literally, the trustees have power to exchange trust property for other property without reference to the value of the properties involved in the exchange. And literally, they have power to invest the trust assets in securities yielding either a high rate of income or no income at all, and even in wasting investments, and they have power to invest trust assets in these categories in whatever amounts they choose without limitation with respect to the percentage of the trust corpus invested in any one of them. Moreover, the trustees' discretionary power to allocate trust assets to corpus or income is not limited to situations where the law is unsettled and there is honest doubt whether a given accretion or receipt should be classified as capital or income. See Doty v. Commissioner, 1 Cir., 1945, 148 F.2d 503, 507,...