Estate of Campbell v. United States

• Decision Date: 12 October 1977
• Docket Number: Civ. No. 76-949.
• Citation: 449 F. Supp. 675
• Court: U.S. District Court — District of New Jersey
• Parties: ESTATE of Grace L. CAMPBELL, Dec'd, James A. Campbell, II and Martha C. Hookway, co-executors, Plaintiffs, v. UNITED STATES of America, Defendant.

449 F. Supp. 675

ESTATE of Grace L. CAMPBELL, Dec'd, James A. Campbell, II and Martha C. Hookway, co-executors, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 76-949.

United States District Court, D. New Jersey.

October 12, 1977.

Cohen, Carles & Poe, Newark, N. J. (Thomas S. Carles and Martin D. Cohen, Newark, N. J., appearing), for plaintiffs.

Jonathan L. Goldstein, U. S. Atty., Newark, N. J. (George E. Mittelholzer, Asst. U. S. Atty., Newark, N. J., appearing), Myron C. Baum, Acting Asst. Atty. Gen., Jerome Fink and Stephen T. Lyons, Attys., Dept. of Justice, Washington, D. C., for defendant.

OPINION

BIUNNO, District Judge.

This is a suit for refund of federal estate tax in connection with the estate of Grace L. Campbell (Grace) who died in 1973. The major item claimed will be controlled by the question whether the assets of a trust established by the will of her father, William H. Lummis, with a power of appointment in Grace, are to be included in the determination of her federal estate tax.

As is well known, the assets comprising the estate of a decedent for the purpose of probate administration under the law of the State with jurisdiction are not necessarily the same as the assets which must be reported as part of the gross estate for federal estate tax purposes.

A common example is the estate by the entirety. Land conveyed by deed to spouses to create such an estate does not pass to a surviving spouse by virtue of the will of the deceased spouse, or by the intestacy laws in case there is no will, because title is derived by virtue of the deed itself. The same is true of joint tenancies with right of survivorship in either real or personal property.

In both examples, the title or ownership of the surviving tenant is not part of the probate estate of the tenant who dies first. In each case, the interest that exists while both live comes to an end with the death of one, who, for failure to survive, has no further claim to or interest in the property. The theory is that during the common lifetimes, each tenant has hold of a handle of the property. With death of one, he no longer holds a handle while the survivor continues to hold his. Nothing is transferred in the contemplation of property law or of probate law.

In applying tax laws, whether State or federal, these property concepts do not necessarily apply, and provisions of the tax laws reflecting different concepts of legal theory can control.

The facts in the present case are not complicated. Lummis made a will in 1933 and died in 1940. He was survived by his widow, Gertrude, and three children, William, Robert and Grace. He left the residue of his estate in trust to provide for Gertrude for life. At her death, what remained was to be divided into four parts.

One part was to be distributed as directed by Gertrude under power of appointment as exercised by her will or, if not exercised, then in equal shares to William, Robert and Grace per stirpes.

Each of the other three parts was to be held in trust, to pay income to each of William, Robert and Grace and on the death of each to pay the principal as directed by power of appointment as exercised by the will of each or, if not exercised, then to that child's issue per stirpes.

In early 1971, Grace executed a will, and died in early 1973 leaving two children, James and Martha, who were also named co-executors. The residuary clause in Grace's will gave the residue of her estate, "including any property over which I may have any power of appointment" to James and Martha or their issue per stirpes.

Thus, Grace's designation under the power of appointment was of the same beneficiaries (James and Martha) who would have received her share of the Lummis trust, so far as shown by the facts presented, if she had not exercised the power.

Under New Jersey law, property received through the exercise of a power of appointment passes directly from the estate of the person who created the power (here, Lummis) to the beneficiaries designated without becoming part of the probate estate of the person who exercises the power (here, Grace). This is not the same as the treatment under the federal estate tax law.

By 26 U.S.C. § 2041(b)(3), a power of appointment created by a will executed on or before October 21, 1942 is considered to be created on or before that date even though the testator does not die (to give the will effect) until after that date, so long as the death occurs before July 1, 1949 without having republished the will by codicil or otherwise after October 21, 1942. In this case, both the date of execution of the Lummis will (1933) and the date of death (1940) preceded October 22, 1942, and so the treatment of the power and its exercise is that provided for powers created on or before October 21, 1942 (a "pre-October, 1942" power).

Under the federal estate tax law, 26 U.S.C. § 2041(a)(1), the gross estate of a decedent (here, Grace) is to include the value of property with respect to which decedent, by will, exercised a "pre-October 1942" general power of appointment. Failure to exercise the power or the complete release of the power is not to be deemed an exercise of the power. The rules applying to powers created after October 21, 1942, 26 U.S.C. § 2041(a)(2), are different and are not involved here.

The power created by the Lummis will placed no restrictions on who might be designated as beneficiary, and so it was a general power of appointment coming within the definition of 26 U.S.C. § 2041(b)(1) as a power exercisable in favor of the decedent, his estate, his creditors or the creditors of his estate.

On the face of the basic facts recited, it is plain that the property in the Lummis trust, passing to James and Martha through Grace's exercise of the power of appointment, is part of Grace's federal gross estate, and its inclusion resulted in additional estate tax.

The claim for refund is made, and the suit is here, based on the proposition that Grace probably had no intent to exercise the Lummis power of appointment, and so this court should construe Grace's will as not having exercised the power in accordance with that "probable intent", relying on such New Jersey decisions as Bank of New York v. Black, 26 N.J. 276, 139 A.2d 393 (1958); and later cases in the line.

The facts relied on are set out in a stipulation of facts and documents, and in affidavits proferred by plaintiffs which are taken as true for the purpose of the cross-motions. Grace's children say they were never aware of the existence of the power and, judging from their conversations with Grace she was not aware of it. They first learned of it a year after her death when the point was raised by IRS. Grace is described as a frugal person, willing to pay any tax due but desirous of saving taxes legally. They consider it inconceivable that Grace would have exercised the power when its only effect was to incur an additional tax.

They also say that on receiving their shares of the Lummis trust, they assumed it was pursuant to the Lummis will, and not because of anything done by Grace. The trustee bank officer says he received a copy of Grace's will from Martha's husband, had an accounting prepared and approved, and distributed the trust corpus to James and Martha under the Lummis will.

An accountant who prepared Grace's returns for 12 years says she would send him tax information on the basis of which he prepared returns, and that from his conversations with her it was clear she was concerned about paying any more taxes than necessary.

The lawyer who drew Grace's will says he had not known her before. Her basic object was to provide equally for James and Martha while keeping taxes to a minimum. There were three or four conferences before the final draft (the will discloses an arrangement for the stock in a family printing company to end up in James, with a cash adjustment to equalize Martha's share). He tried to get complete information about Grace's assets, but nothing she said gave any inkling that she had a power of appointment. If he had any notion that there was a "pre-October, 1942" power, he would not have allowed the use of the language exercising all powers. He included the provision in the residuary clause to insure that anything Grace might acquire in the future would go equally to James and Martha, thus avoiding the need to make another will. Grace had difficulty grasping legal language and he doubts she had any idea what a power of appointment is, or that she had one.

The doctrine of "probable intent" as used in New Jersey allows testimony to be received outside the will to an extent well beyond what could be offered under prior law. The testimony includes circumstances and relationships, the draftsman's file notes and recollections, declarations of testator's intent, and the like. These materials along with the will itself, are considered together to determine the "probable intent". It is not necessary for the question to arise on the face of the will. The burden of persuasion is a preponderance; but see N.J.S.A. 2A:81-2, which appears to require clear and convincing proof, and N.J.S.A. 3A:3-2, requiring wills to be in writing.

In any event, as shown by the decisions to be listed, the Supreme Court of New Jersey has applied the doctrine to add a provision exercising a power of appointment, to delete an express provision excluding an inter vivos trust from the calculation of a marital share, and to redraw a residuary clause outside statutory limits to deal with a contingency that occurred a few years after the will was made but some 6 years before testator's death, among others.

It may be said that about the only things not done by application of the doctrine are (1) to find valid a will which it was the probable intent of a decedent to make, though he died intestate; and (2) to find intestacy of a decedent dying with a will which it was his probable intent to revoke.

Some of the cases...