Estate of Gilchrist v. C.I.R.

• Decision Date: 13 November 1980
• Docket Number: Nos. 78-2400,79-3005,s. 78-2400
• Citation: 630 F.2d 340
• Parties: 80-2 USTC P 13,378 ESTATE of Anna Lora GILCHRIST, Deceased, Layland Myatt and Elizabeth Dearborn, Independent Executors, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. ESTATE of Ruth T. REID, Deceased, Walter D. Reid, Independent Executor, Petitioners-Appellees. v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 340

630 F.2d 340

80-2 USTC P 13,378

ESTATE of Anna Lora GILCHRIST, Deceased, Layland Myatt and

Elizabeth Dearborn, Independent Executors, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

ESTATE of Ruth T. REID, Deceased, Walter D. Reid,

Independent Executor, Petitioners-Appellees. v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

Nos. 78-2400, 79-3005.

United States Court of Appeals Fifth Circuit.

Nov. 13, 1980.

M. Carr Ferguson, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Washington, D.C., Richard Farber, Atty., Gilbert E. Andrews, Chief, Appellate Section, James A. Riedy, Atty., Chief Counsel, I.R.S., N. Jerold Cohen, James L. Stegmann, Washington, D.C., for respondent-appellant.

Brooks, Tarlton, Gilbert, Douglas & Kressler, Ben A. Douglas, Fort Worth, Tex., Robert C. Johnson, Jr., Dallas, Tex., for petitioners-appellees.

Appeals from the Decisions of the United States Tax Court.

Before COLEMAN, Chief Judge, PECK ^* and KRAVITCH, Circuit Judges.

JOHN W. PECK, Circuit Judge.

The questions raised by these federal estate-tax cases concerned property over which decedents "had" certain incidents of ownership-incidents which the decedents in these cases lacked the legal capacity to exercise at the times of their deaths.

I. THE GILCHRIST CASE

In 1960, Anna Gilchrist's husband, having made several specific bequests to others, left to his wife "the income the use and benefits with full rights to sell or transferall (sic) the remainder of (his) property, both real and personal, so long as she may live...." This remainder was to be divided among named remaindermen should Mrs. Gilchrist not have exercised her power over it.

In 1971, a Texas court declared Mrs. Gilchrist to be of unsound mind and appointed guardians of her person and estate. Two years after Mrs. Gilchrist's death in 1973, the Commissioner declared in a notice of estate-tax deficiency that Mrs. Gilchrist had received a general power of appointment under her husband's will and that the value of the property subject to this power should be included in her gross taxable estate. The Tax Court held otherwise and this appeal followed.

The foremost question on appeal is whether Mrs. Gilchrist, contrary to the Tax Court's holding at 69 T.C. 5, 19 (1977), at the time of her death had a "general power of appointment" within the meaning of that term in the Revenue Code. The Code provides in pertinent part that a decedent's gross estate shall include the value of all property "with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, or with respect to which the decedent has at any time exercised or released such a power of appointment...." I.R.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...." Id. § 2041(b)(1). ¹ A general power of appointment under § 2041 must be "exercisable." This appeal is mainly a dispute over the meaning of that work in estate-tax argot. The Commissioner contends that § 2041 embraces all powers which are exercisable by the terms of the instruments creating them. Mrs. Gilchrist's executor prefers a more everyday construction of the word, arguing that a power which a decedent is personally unable to exercise cannot be an "exercisable" one.

Construing § 2041 requires a balancing of considerations of fairness and utility. Equitable considerations weigh against including property in a decedent's estate, when that decedent held only the most attenuated incidents of ownership of the property. Yet to require the Commissioner and the courts to determine whether in every case decedents personally had the legal capacity to exercise powers of appointment would seriously complicate an area where Congress has sought "a test of taxability which is simple, clear-cut, and easy to apply." Senate Rep. No. 82-382 (on Powers of Appointment Act of 1951) reprinted (1951) U.S.Code Cong. & Admin.Serv. at 1530, 1531.

The history of Congressional treatment of taxation of powers of appointment does not support exempting from taxation powers held by incompetents. See generally Note, Federal Estate Tax: A Possible Exception in the Application of I.R.C. Section 2041 to Testamentary Powers of Appointment Held by Incompetent Decedents, (1977) B.Y.U.L.Rev. 644, 650-51. Originally, appointive property was taxed only if subject to a general power which had been exercised. Revenue Act of 1918, § 402, 40 Stat. 1057, 1097. Amendments made in 1942 included property subject to unexercised pre-1942 powers in the taxable estate unless "the donee of such power is under a legal disability to release such power...." Revenue Act of 1942, § 403(d)(2), 56 Stat. 798, 944. It is clear from the language of these amendments that a power could be "exercisable" under the Revenue Act even though such a disability existed. See Pennsylvania Bank & Trust Co. v. United States, 451 F.Supp. 1296, 1300 n. 6 (W.D.Pa.1978), aff'd, 597 F.2d 382 (3d Cir.), cert. denied, 444 U.S. 980, 100 S.Ct. 483, 62 L.Ed.2d 407 (1979).

The present § 2041 of the Code was born with the Powers of Appointment Act of 1951, 65 Stat. 91. This Act further limited the retroactive application of the 1942 amendments, but did not distinguish between competent and incompetent holders of post-1942 powers. The 1942 amendments had shown Congress's awareness of the problem of the incompetent holder of a taxable power; Congress's silence was eloquent when it declined to create an express dispensation for holders of post-1942 powers. See Alperstein v. Commissioner, 613 F.2d 1213, 1217 (2d Cir. 1979), cert. denied sub nom. Greenberg v. Commissioner, --- U.S. ----, 100 S.Ct. 1852, 64 L.Ed.2d 272 (1980).

Parallel usage of the term "exercisable" in § 2056 of the Revenue Code also shows that the word was not used by Congress in its quotidian sense. Section 2056 defines the property which qualifies for the "marital deduction"-an exemption from estate tax of certain property passing between spouses. Property subject to a life estate with a testamentary power of appointment in a surviving spouse is excluded from the decedent spouse's estate if the "power in the surviving spouse ... is exercisable by such spouse alone and in all events." I.R.C. § 2056(b) (5). Since eligibility for the martial deduction must be determined at the time of the donor spouse's death, ² "exercisable" in this context must mean "exercisable under the terms of the instrument creating the interest." See Pennsylvania Bank, supra, 451 F.Supp. at 1300-01, adopted 597 F.2d 383-84.

Decisions of this and other circuits of the Court of Appeals have established that a decedent's actual inability (as distinguished from legal incapacity) to exercise a power of appointment at the time of death is irrelevant to the application of § 2041. In Estate of Bagley v. United States, 443 F.2d 1266 (5th Cir. 1971) the decedent had possessed a testamentary power of appointment for only a "theoretical instant" during the auto crash in which she was presumed to have survived her husband, the grantor of the power. This Court held the power was in that instant legally exercisable by the decedent wife; the property subject to the power was therefore reckoned part of the decedent's estate.

In Fish v. United States, 432 F.2d 1278 (9th Cir. 1970) the Ninth Circuit held that the annual lapse of a power of appointment was a taxable release of the power, even though the lapse resulted from the holder's actual mental incapacity. The Court in Fish noted in the margin of its opinion that the decedent had "never been adjudicated an incompetent prior to her death," 432 F.2d at 1280 n. 3, but that fact had little relevance to the body of the court's opinion, which stressed that the incidence of estate tax should not depend on the circumstances surrounding the exercise or release of powers of appointment. See id. at 1280.

The utilitarian grounds for limiting non-statutory estate-tax exemptions have been recognized and relied on by the Supreme Court. Commissioner v. Estate of Noel, 380 U.S. 678, 85 S.Ct. 1238, 14 L.Ed.2d 159 (1965), arose under § 2042 of the Code; this section requires inclusion in the gross estate of the proceeds of life insurance, if a decedent possessed at death exercisable "incidents of ownership" over the policy. Mr. Noel had taken two flight insurance policies at an airport. These documents were given to Mrs. Noel before her husband boarded a plane which crashed three hours after take-off. There was no practical opportunity for Mr. Noel to assign the policies or change their beneficiaries at the time of his death, yet the Court held that the proceeds of the policies must be included in Mr. Noel's gross estate, declaring that

It would stretch the imagination to think that Congress intended to measure estate tax liability by an individual's fluctuating, day-by-day, hour-by-hour capacity to dispose of property which he owns. We hold that estate tax liability for policies "with respect to which the decedent possessed at his death any of the incidents of ownership" depends on a general, legal power to exercise ownership, without regard to the owner's ability to exercise it at a particular moment.

380 U.S. at 684, 85 S.Ct. at 1241.

The root issue of this case is whether the adjudication of the incompetence of a holder of a power of appointment should be classed among the legally irrelevant fluctuations in the holder's "day-by-day, hour-by-hour capacity" to dispose of property, or whether such an adjudication destroys the holder's "general, legal power" to exercise incidents of ownership. While sympathy inclines to the latter view, reason counsels that simplicity and utility should prevail wherever possible in the administration of estate-tax laws. Simplicity is best served by a rule under which the adjudication of a holder's...