First Nat. Bank of Denver v. U.S., 78-1339

• Decision Date: 11 May 1981
• Docket Number: No. 78-1339,78-1339
• Parties: 81-1 USTC P 13,408 The FIRST NATIONAL BANK OF DENVER, Trustee of the Barry M. Sullivan Trust, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1286

648 F.2d 1286

81-1 USTC P 13,408

The FIRST NATIONAL BANK OF DENVER, Trustee of the Barry M.

Sullivan Trust, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 78-1339.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted Nov. 26, 1979.

Decided May 11, 1981.

Marilyn E. Brookens, Atty., Tax Div., Dept. of Justice, Washington, D. C. (M. Carr Ferguson, Asst. Atty. Gen., and Gilbert E. Andrews and Jonathan S. Cohen, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief), for defendant-appellant.

W. David Pantle of Dawson, Nagel, Sherman & Howard, Denver Colo. (Douglas M. Cain and David Thomas, III, Denver, Colo., on brief), for plaintiff-appellee.

Before SETH, Chief Judge, HOLLOWAY, Circuit Judge, and BROWN, District Judge. ^*

HOLLOWAY, Circuit Judge.

The First National Bank of Denver, as the executor of the estate of the decedent Barry M. Sullivan and trustee of the Barry M. Sullivan trust, brought this suit for refund of $338,472 in federal estate tax. The only issue on this appeal is whether the decedent possessed a general power of appointment over the corpus of the Barry M. Sullivan trust so that it was includable in decedent's gross estate. Other issues were settled by agreement in the trial court.

The case was tried without a jury. The record consists of the testimony of one witness, a number of documents, and facts stipulated to by the parties. The district court made oral findings and conclusions and entered judgment for the plaintiff taxpayer in the amount of $328,946 plus interest, and the Government appeals.

I

The subsidiary facts are not in dispute. In 1913 after the death of decedent's father, decedent's mother, Mary Morey Sullivan, married Baron Albrecht von Schroeder, a German citizen then living in the United States. As a result, Mary von Schroeder lost her American citizenship until 1938. Pursuant to the Trading with the Enemy Act of 1917, the Alien Property Custodian determined in 1918 that Mrs. von Schroeder was an enemy of the United States and demanded that her father turn over all her property; this demand was complied with. This property was vested in the Custodian until September 1920, at which time the principal was returned; interest and Liberty Bond coupons were not returned until January 1931.

On April 7, 1932, and April 8, 1932, Mrs. von Schroeder created two revocable trusts in which she retained income interests for life. (Exs. 3, 4). The trust provisions were essentially identical. Upon her death half the income from the trusts was to go to her husband, if surviving, for life. The other half of the trust was to be divided among her three children and their descendants. The two daughters were to receive life estates, with subsequent interests in their descendants. The decedent, on the other hand, was to be given his share of the trust corpus outright. In 1938 and 1939 Mrs. von Schroeder amended the two trusts so as to give Barry M. Sullivan an income interest, identical to those of his sisters, rather than a distribution of principal; ¹ the two trusts were consolidated in 1939. (Exs. 7, 8).

On November 6, 1945, the consolidated 1932 trusts were revoked and replaced by a new revocable trust. (Exs. 48, 14). The new trust was similar to the old ones. It provided that the income was to go to the settlor for life. At her death the trust was to be divided into three equal funds, one for each of the children.

Each child was to receive a life estate, with eventual distribution of the principal to the grandchildren or their descendants. As to each child's fund, the trustee was empowered to make distribution of principal to the child in such amounts as it "in its sole and absolute discretion deems necessary or proper for (his or her) support, maintenance, welfare, comfort or happiness, taking into consideration all other means of support available to said (beneficiary) " (Ex. 14(A) at 2-3).

The original trustee of the 1945 trust, as in the case of the 1932 trusts, was the International Trust Company. As amended on December 10, 1951, Article V of the trust provided for revocation or amendment of the trust and the change, resignation, or merger of the trustee as follows:

This trust may be revoked, or any of the income or principal assets thereof withdrawn by the Grantor at any time or times by written notice signed by the Grantor and delivered to the Trustee during the Grantor's lifetime. The Grantor may add to the assets of the trust at any time or times by the delivery to, and acceptance by, the Trustee of further or additional property or securities. The Grantor may also amend or supplement this instrument in any particular or particulars at any time or times by an instrument in writing signed by the Grantor and the Trustee and filed with the Trustee during the Grantor's lifetime. The Trustee may, at its election, resign, and the Grantor may at any time during her lifetime change the Trustee and, after her death either the Grantor's brother, John W. Morey, or her son, Barry Morey Sullivan, may at any time during their lifetimes change the Trustee. Should the Trustee or any successor as trustee merge or consolidate with any other corporation, then the corporation with which the Trustee has merged or consolidated shall act in its place and stead. Should the Trustee resign and elect to appoint a successor, then such other bank or trust company in the City and County of Denver having a capital and surplus of at least $1,000,000 as the retiring Trustee nominates shall act in its place and stead. In all cases, the successor in trust shall have all the powers, privileges and discretion herein given unto said The International Trust Company. The resignation of the trustee and/or the nomination by it of a successor may be effected by notice in writing to the Grantor, if living, otherwise to the adult beneficiaries at the time entitled to the income of the trust estate. The designation of a new trustee by the Grantor during her lifetime, or thereafter by either the said John W. Morey or Barry M. Sullivan, may be effected by an instrument in writing nominating the new trustee, signed by the Grantor or either the said John W. Morey or Barry Morey Sullivan, as the case may be, accepted by the new trustee and filed with the trustee to be removed, and shall be effective upon such filing. (Emphasis added). ²

Ex. 14(E). Pursuant to this provision, the First National Bank of Denver became the trustee after the International Trust Co. merged with it in 1958.

We turn to the parties' contentions and the findings and conclusions of the trial court.

II

By the terms of the 1945 trust instrument as amended in 1951 three separate funds one for each child were created on Mrs. von Schroeder's death in 1954. The Government contends that Barry Sullivan, at the time of his death in 1973, possessed a general power of appointment as defined in § 2041 of the Internal Revenue Code over his fund, the Barry M. Sullivan trust. ³ This would render the trust corpus includable in his estate.

More specifically the Government asserts that pursuant to his power to change the trustee after his mother's death, decedent could have removed the trustee and named himself as the new trustee. As trustee, he would have had absolute discretion under the terms of the trust to distribute principal "for his support, maintenance, welfare, comfort or happiness " This power, the Government argues, would be a general one as it would not be limited by "an ascertainable standard relating to the health, education, support, or maintenance of the decedent" under § 2041(b)(1)(A) of the Code, citing Treas.Regs. § 20.2041-1(c)(2); ⁴ see also Miller v. United States, 387 F.2d 866, 869 (3rd Cir.). The decedent's power to appoint himself as trustee, combined with the trustee's power to distribute the corpus to the decedent, constitutes a general power of appointment under Regs. § 20.2041-1(b)(1), according to the Government. ⁵

The plaintiff taxpayer argues that decedent Barry Sullivan could not have appointed himself trustee, that under the terms of the trust he could change the trustee but could only replace it with a bank or trust company in Denver with a capital and surplus of at least $1,000,000, and that since the decedent had no general power of appointment over it, the fund in question was not includable in his estate.

The trial court's oral findings incorporated the stipulated facts. The judge found that the decedent was limited to appointing a corporate trustee. He held that this conclusion was mandated by the language of the trust instrument, which he did not consider to be ambiguous. He also held that the extrinsic evidence presented at trial supported the conclusion that the intent of the grantor was that the decedent could only name a corporate trustee. ⁶ Thus the court concluded that no general power of appointment was held by the decedent and ruled for the taxpayer.

III

The dispositive issue is whether decedent had the power to name himself as trustee or could only replace the trustee with another corporate trustee. And "(t)hough this case arises under the federal estate tax laws, the issue in dispute turns on the proper interpretation of the meaning and effect of the trust provisions, a question governed by Colorado rather than federal law." Maytag v. United States, 493 F.2d 995, 998 (10th Cir.). Under Colorado law, "the intent of the settlor is to prevail unless that intent is in violation of public policy or statutory enactment." Id. at 998, citing Ketcham v. International Trust Co., 117 Colo. 559, 192 P.2d 426 (Colo.).

The Government strenuously argues that there is no explicit limitation preventing the decedent from appointing himself as trustee, and that he could thus do so under the general wording of the trust instrument. It is true that the only explicit limitation covers the case in which the trustee resigns and elects to appoint a successor; the trustee...