Fish v. United States, 24023.

• Decision Date: 15 October 1970
• Docket Number: No. 24023.,24023.
• Parties: Clarence Blagen FISH, Administrator with the will annexed of the Estate of Minnie C. Blagen, deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

432 F.2d 1278 (1970)

Clarence Blagen FISH, Administrator with the will annexed of the Estate of Minnie C. Blagen, deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 24023.

United States Court of Appeals, Ninth Circuit.

October 15, 1970.

Milo E. Ormseth (argued), Frederick H. Torp, of Davies, Biggs, Strayer, Stoel & Boley, Portland, Or., for appellant.

William L. Goldman (argued), Lee A. Jackson, Loring W. Post, Attys., Johnnie M. Walters, Asst. Atty. Gen., Tax Division, U. S. Dept. of Justice, Washington, D. C., Sidney I. Lezak, U. S. Atty., Portland, Or., for appellees.

Before WRIGHT and KILKENNY, Circuit Judges, and TAYLOR,^* District Judge.

TAYLOR, District Judge:

Clarence Blagen Fish (taxpayer), as administrator of the estate of Minnie C. Blagen, has appealed from an adverse judgment of the District Court on his suit for refund of federal estate taxes in the sum of $33,355.13 plus interest, alleged to have been erroneously assessed and collected from the estate by the Commissioner of Internal Revenue. The taxpayer paid the deficiency assessed by the Commissioner and filed a timely claim for refund, which was disallowed in full by the Commissioner. This action followed, seeking recovery of the disputed amount.

The stipulated facts reveal that Clarence G. Blagen, the husband of Minnie C. Blagen, died on May 28, 1951. The residuary clause of his will established a trust, the terms of which provided that Minnie C. Blagen should have, during her lifetime, the right in any calendar year to demand payment to her of all or part of the net income of the trust for that year, but that any income not so claimed by her would be added to the corpus of the trust. Upon the death of Minnie C. Blagen, the trust corpus, including such accumulated income added to the corpus, was to be distributed to the grandchildren of Clarence G. Blagen.

Minnie C. Blagen (decedent) never exercised or released her power over the income of the trust in any year from the inception of the trust until her death on July 13, 1960, except insofar as the annual lapse of the power, if any such lapse occurred, constituted a release of the power as a matter of law under Section 2041(b) (2) of the Internal Revenue Code.¹ The Commissioner, in assessing the tax deficiency, included in the decedent's gross estate the net income of the trust, less allowable exemptions, for the years 1955, 1956, 1957, 1958 and 1959. The inclusion of accumulated income which had been added to the trust in those years resulted in an increase in the decedent's gross estate of $116,045.36. The taxpayer had not included this amount in the estate tax return which he had filed for the estate.

The Commissioner determined that the decedent possessed a general power of appointment over the trust income and that the failure of the decedent to exercise this power constituted a lapse of the power in each year in which it was not exercised. The Commissioner contends that the lapse constitutes a release of the power under Section 2041(b) (2) in such a way that, if it were a transfer of property owned by the decedent, the property would have been includible in the decedent's gross estate as a transfer with a retained life estate under Section 2036 (a) (1).²

The taxpayer agrees that the decedent possessed a general power of appointment, and that the "transfer" each year, had the property been owned by the decedent, would be a transfer with a retained life estate. The taxpayer contends, however, that the decedent was incompetent for some seven years prior to her death and her general power of appointment could not have been lawfully exercised or released by her or by anyone acting in her behalf and that therefore the annual expiration of her power over the trust income was not a "lapse" and thus not a release of the power within the meaning of Section 2041(b) (2). Alternatively, the taxpayer contends that if the incompetency of the decedent is immaterial and a lapse of the power occurred in each year, the Commissioner and the District Court erred in computing the allowable exemption under Section 2041(b) (2) on the basis of five per cent of the net income of the trust instead of, as taxpayer contends, five per cent of the total trust assets.

We agree with the District Court that the competency of the decedent is immaterial in determining whether a lapse or release of the power occurred. The statute provides, without equivocation, that a lapse of the power shall be considered a release, and does not purport to qualify the manner in which the lapse occurs. While no case has been discovered which is precisely on all fours with the facts in the instant case, it nevertheless appears from closely analogous cases that taxability and the inclusion of the assets in a decedent's gross estate are determined by the existence of the power and by circumstances which bring its release or exercise within the ambit of Sections 2041(a) (2) or 2041(b) (2). The precise manner of exercising or releasing the power is immaterial for purposes of determining taxability. Thus it is sufficient here that the power was released...