Pennsylvania Bank & Trust Co. v. United States

• Decision Date: 09 May 1978
• Docket Number: Civ. A. No. 76-155.
• Citation: 451 F. Supp. 1296
• Parties: PENNSYLVANIA BANK AND TRUST COMPANY, Executor of the Estate of Ethel S. Brice, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

451 F. Supp. 1296

PENNSYLVANIA BANK AND TRUST COMPANY, Executor of the Estate of Ethel S. Brice, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 76-155.

United States District Court, W. D. Pennsylvania.

May 9, 1978.

W. Rodgers Moore, Pittsburgh, Pa., for plaintiff.

Martin Teel, Trial Atty., Tax Div., Dept. of Justice, Washington, D. C., Thomas Daley, Asst. U. S. Atty., Pittsburgh, Pa., for defendant.

OPINION

MARSH, District Judge.

This is an action by the executor of the estate of Ethel S. Brice to recover federal estate taxes. Jurisdiction is based on 28 U.S.C. § 1346(a)(1).

The executor, Pennsylvania Bank and Trust Company, has moved for summary judgment. The defendant, the United States, has moved for entry of judgment on the pleadings, or, alternatively, for summary judgment. Both sides have agreed that no significant facts are in dispute.

I. INCLUDIBILITY OF TRUST ASSETS IN DECEDENT'S GROSS ESTATE

The major issue is whether the estate of the decedent, Ethel S. Brice, who was incompetent from the time of her husband's death until her own death, should include the value of a trust created by the will of decedent's husband where the terms of the trust gave the decedent a general power of appointment and a power to consume. We conclude that the value of the trust should be included in decedent's estate.

The facts may be summarized as follows:

In his will executed in 1956, Dr. James W. Brice established a trust for the benefit of his wife, Ethel S. Brice. Under the trust, the decedent was given "the right during her life to consume or appoint by Will . . the entire principal of this Trust." In 1964, Dr. Brice executed a codicil which revoked the appointment of his wife as co-executor and substituted plaintiff bank as sole executor.¹

Dr. Brice died on February 9, 1965. His estate received a marital deduction for the value of the trust, pursuant to 26 U.S.C. § 2056.

A petition to have Mrs. Brice declared incompetent was executed on February 12, 1965. On March 31, 1965, Mrs. Brice was adjudicated an incompetent by the Orphans' Court of Crawford County, Pennsylvania. Plaintiff contends that Mrs. Brice was incompetent for a long period prior to the adjudication and has submitted an affidavit from Dr. Robert L. Taylor stating that Mrs. Brice was incompetent and lacked testamentary capacity at least from and after April, 1960. Dr. Taylor's affidavit also asserts that, at least from the date of Dr. Brice's death, the condition of Mrs. Brice "was at all times progressive, hopeless and incurable." There is no contradictory evidence.

Mrs. Brice died August 15, 1969 and her will dated September 11, 1959 was admitted to probate on August 22, 1969. Mrs. Brice's will reflected an intent not to exercise any power of appointment given to her.²

On November 16, 1970, the plaintiff filed a United States Estate Tax Return for the estate of Mrs. Brice. The estate, as reported, included the trust, which was valued at $717,391.08. The executor paid a federal estate tax of $483,430.51, the amount shown on the return. On November 14, 1973, the plaintiff filed a claim for a refund of federal estate tax in the amount of $347,427.30, plus interest. The claim was disallowed to the extent of the issues discussed in this case.

Federal estate tax law provides that a decedent's estate includes

"any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942."

26 U.S.C. § 2041(a)(2). A general power of appointment is defined as

"a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate."

26 U.S.C. § 2041(b)(1). "Exercisable" is not defined. Section 2041(b)(1)(A) provides:

"A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment."

A. PLAINTIFF'S ARGUMENTS

The plaintiff contends that Mrs. Brice did not have an exercisable power of appointment because, subsequent to Dr. Brice's death, she lacked testamentary capacity; that the power to consume did not amount to a general power of appointment since in Pennsylvania a power to consume is limited by a standard of good faith; and, that the power to consume was limited by an ascertainable standard imposed by Pennsylvania law which strictly restrains the expenditures which may be made by the guardian of an incompetent.

In support of these arguments, plaintiff relies heavily on Finley v. United States, 404 F.Supp. 200 (S.D.Fla.1975) and Estate of Gilchrist, 69 T.C. 5 (1977). The opinions in these cases are quite persuasive from an equitable point of view.

The decedent in Finley, in accordance with a trust created by her husband's will, received the income from the trust for the extent of her life and a general testamentary power of appointment. From the time of the devise until her death, the decedent was incompetent and her will did not exercise or release the power of appointment. The court held that because the decedent "lacked the legal capacity to exercise the general testamentary power of appointment" she was prevented "from possessing a general power of appointment within the meaning of Section . . . 2041(a)(2)." 404 F.Supp. at 204.

Gilchrist involved a decedent who, under the terms of her husband's will, was given the right to income from all of her husband's property, along with the intervivos right to sell or transfer the property. The decedent became incompetent and remained so until her death. The tax court held that because Texas law limited the decedent's guardians by an ascertainable standard the decedent did not have an exercisable power of appointment.

Neither Finley nor Gilchrist involved all of the factors relevant to Mrs. Brice's situation. In Finley the decedent had no right to consume the corpus of the trust and upon initiation of the suit by her executors, the marital deduction was withheld from her husband's estate; in Gilchrist no testamentary power of appointment was given to the decedent and the court was not required to address the question of how the outcome would have been affected if the events had not transpired in Texas which is a community property state.

B. PRECEDENT CONTRARY TO PLAINTIFF'S POSITION

Prior to the decisions in Finley and Gilchrist, a line of cases had indicated that the competency of the holder of a general power of appointment was not relevant in determining whether the power was included in the holder's estate.

In Fish v. United States, 432 F.2d 1278 (9th Cir. 1970) aff'g 291 F.Supp. 59 (D.C.Or. 1968), the decedent held a general power of appointment after the death of her husband. She was competent for two years before becoming incompetent. She did not exercise the power and it lapsed. The government argued that the lapse constituted a release of the power and that the amount should therefore be included in her gross estate under Section 2041(b)(2). The wife's executors argued that because the wife was incompetent her failure to act did not constitute a release of the power.

The district court held that if the wife possessed the power of appointment at the time of her death and prior thereto, it was immaterial whether she was physically or mentally capable of exercising the power. The court stated:

"It is not the manner in which a taxable power is exercised, but rather the existence of the power, that determines taxability."

291 F.Supp. at 61 (emphasis supplied). The Ninth Circuit Court of Appeals, in affirming, agreed

"that the competency of the decedent is immaterial in determining whether a lapse or release of the power occurred."

432 F.2d at 1280.³

In Bagley v. United States, 443 F.2d 1266 (5th Cir. 1971), a husband and wife were killed in an automobile crash and a state court upheld a provision in the husband's will that should he and his wife be killed simultaneously, his wife should be declared the survivor. The husband's estate received a martial deduction and the wife's estate was deemed to include a power of appointment granted by the husband's will. The court held that "for the theoretical instant in which the wife survived her husband, the power of appointment created by the husband's will was exercisable" and therefore includible as part of her gross estate. 443 F.2d at 1270. The court was not influenced by the fact that there was no way the wife possibly could have exercised the power in the theoretical instant. It is clear that the decedent's competency to execute a will did not concern the court.

Similar logic was articulated in Townsend v. United States, 232 F.Supp. 219 (E.D.Tex. 1964), where the husband's will gave a power of appointment to the decedent who was alleged to be physically and mentally unable to exercise the power from the time of her husband's death until her own death. The court stated that since the decedent

"possessed the power of appointment at the time of her death and prior thereto, it is immaterial . . . whether she was physically or mentally capable of exercising such power."

232 F.Supp. at 221, citing Hurd v. Commissioner of Internal Revenue, 160 F.2d 610 (1st Cir. 1947) (emphasis supplied). See also, Commissioner of Internal Revenue v. Noel Estate, 380 U.S. 678, 85 S.Ct. 1238, 14 L.Ed.2d 159 (1965).⁴

The conclusion of these cases is that whether a power is "exercisable" does not depend on whether the decedent could have actually exercised the power; the health or competency of the person holding the power is immaterial. In light of the contrary conclusion reached in Finley and Gilchrist, it is helpful to determine which holdings are more consistent with the general nature of the estate tax to impose an excise on the passing of wealth from one generation to another,⁵ and which approach reflects the meaning intended by Congre...