Getty v. C.I.R.

• Decision Date: 14 September 1990
• Docket Number: No. 89-70108,89-70108
• Parties: -5517, 90-2 USTC P 50,502 Jean Ronald GETTY; Karin Getty, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1486

913 F.2d 1486

66 A.F.T.R.2d 90-5517, 90-2 USTC P 50,502

Jean Ronald GETTY; Karin Getty, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 89-70108.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 11, 1990.

Decided Sept. 14, 1990.

Philip S. Magaram and Mark S. Levin, Valensi, Rose & Magaram, Los Angeles, Cal., for petitioners-appellants.

Bruce R. Ellisen, Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from a Decision of the Tax Court of the United States.

Before WALLACE, THOMPSON and O'SCANNLAIN, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

J. Ronald Getty ("Ronald") and Karin Getty appeal the tax court's decision in Getty v. Commissioner, 91 T.C. 160 (1988), that $10 million which Ronald received from the settlement of a suit against the trustees of the J. Paul Getty Museum ("the Museum") is taxable as income. ¹ We have jurisdiction under 26 U.S.C. Sec. 7482(a), and we reverse.

FACTS

Ronald is the son of the late J. Paul Getty ("J. Paul") and his third wife, Adolfine Getty ("Fini"). J. Paul and Fini were married in 1928. Fini returned to her native Germany soon thereafter as a result of her mother's death. Ronald was born in Germany in 1929.

J. Paul and Fini divorced in 1932. In 1934, Fini sought an improvement in her prenuptial agreement with J. Paul and attacked the validity of the divorce. By 1934, J. Paul had remarried and had two more sons by his new wife. ² In a letter to Fini's father, Otto Helme, dated November 20, 1934, J. Paul threatened that if Fini brought him "worry, anxiety, and trouble," he would not be disposed to leave Ronald a large sum of money. Less than one month prior to that letter, J. Paul had executed a codicil to his will, reducing Ronald's bequest to $5,000. Prior to the execution of On Christmas Day 1934, J. Paul and his mother, Sarah, entered into an oral agreement for the joint establishment of an irrevocable inter vivos spendthrift trust ("the 1934 trust") to which each, as a trustor, would contribute assets. J. Paul agreed to contribute about $1 million of his stock in George F. Getty, Inc. (the predecessor corporation to Getty Oil Company ("Getty Oil")). Sarah agreed to contribute $2.5 million in promissory notes.

this codicil, Ronald would have been treated equally under the will with J. Paul's other children.

The 1934 trust provided that the income from the trust would be paid to J. Paul during his lifetime and then to his children or their descendants in certain proportions. J. Paul, the trustee, could waive income in whole or in part. ³ The waived income, and all income after J. Paul's death, was to be allocated and paid annually as follows: $9,000 each to Paul, Jr. and Gordon (or their respective issue); $3,000 to Ronald (or his issue); and the remainder equally to Paul, Jr., Gordon, George, Jr., and any afterborn children of J. Paul (or their respective issue). Thus, Ronald's half-brothers (or their issue) would share equally in annual income distributions after distribution of the first $21,000. Ronald's income interest was limited to $3,000 per year. The trust was to terminate upon the death of J. Paul's last surviving son. The corpus of the trust would then be divided among all of J. Paul's grandchildren, per stirpes, with the same share to Ronald's children as to the children of the other sons.

In 1940, it was discovered that the 1934 trust did not contain language declaring it to be irrevocable. If the 1934 trust was revocable, Sarah's contribution to the trust might have been included in her estate for federal estate tax purposes. Sarah wrote a letter (drafted by her attorneys) to J. Paul indicating that it had been her intention at the time of the creation of the 1934 trust that the trust be irrevocable. The letter further stated that if the trust was revocable, Sarah wanted to revoke the trust and dispose of her share "in a manner which is more pleasing to me at present than now provided by the Declaration of Trust."

On May 20, 1940, J. Paul brought an action (Getty I ) against Sarah and his sons to declare the 1934 trust irrevocable. Ronald, then eleven years old, was represented in Getty I by Fini as his guardian ad litem. Fini learned for the first time in Getty I about the 1934 trust and the inequality of Ronald's treatment thereunder (sometimes hereafter referred to as "the inequality"). Fini refused to sign and deliver pleadings in Getty I that J. Paul asked her to sign until she obtained J. Paul's assurance that he would see to it that the inequality was eliminated. Getty I was "friendly" litigation which was decided eleven days after the complaint was filed. As a result of the lawsuit, the 1934 trust was declared irrevocable on May 31, 1940.

Soon after the 1934 trust was declared irrevocable, J. Paul's attorneys drafted a new will for Sarah. Correspondence between David Hecht (attorney for J. Paul and Getty Oil), David Staples (in-house counsel for Getty Oil), and Thomas Dockweiler (attorney for J. Paul and Sarah) in June, July, and August 1940 ("the Hecht letters") dealt with Sarah's will and the inequality.

On August 7, 1940, Sarah executed a new will. In this will, Sarah provided testamentary trusts of $50,000 each for Paul, Jr. and Gordon, and $200,000 for Ronald. The residue of Sarah's estate was to be held in trust with income for life to J. Paul, and thereafter with income to go equally to J. Paul's sons, including Ronald. The disparity in the size of the trusts for J. Paul's sons under Sarah's will was to remedy the inequality that would exist as to Ronald until J. Paul's death. Sarah's will did not purport to deal with the inequality which would exist under the 1934 trust after J. Paul died. Sarah died on December 26 Ronald learned about the inequality for the first time from Fini in 1948, when he was eighteen years old. When Ronald spoke to J. Paul about the inequality, J. Paul assured him that he intended to eliminate it. J. Paul gave Ronald similar assurances periodically thereafter.

1941, leaving an estate valued at approximately $1.7 million.

J. Paul died on June 5, 1976, leaving an estate valued at about $760 million. Ronald was named one of the three co-executors of J. Paul's will and collected an executor's fee of about $4,350,000. The other co-executors were Gordon and Title Insurance and Trust Company. In his will, J. Paul left Ronald 2,000 shares of Getty Oil stock valued at the date of his death at about $330,000, some personal effects, and a life interest in a home in Italy. J. Paul's other sons received only nominal bequests. No other son received shares of Getty Oil stock.

After certain minor individual bequests, J. Paul's will left the residue of his estate to the trustees of the Museum to become part of the Museum's endowment fund. The residue of the estate consisted of approximately 20% of the outstanding shares of Getty Oil stock. The Museum received in excess of $1.2 billion from the estate valued at the dates of distribution.

At the time of J. Paul's death, the 1934 trust held approximately 32 million shares of Getty Oil valued at approximately $1.3 billion. The stock generated millions of dollars of dividends each year. After J. Paul's death, all of the income from the 1934 trust was distributed to the income beneficiaries; however, Ronald received only $3,000 per year.

On June 1, 1979, Ronald, individually and as guardian ad litem for his children, filed suit in Los Angeles County Superior Court. The defendants named in Counts I and II of the complaint were the successor trustees and income beneficiaries of the 1934 trust. The defendants in Count III of the complaint were the trustees of the Museum.

In Count III of the complaint, Ronald sought to impose a constructive trust on the assets received by the Museum from J. Paul's estate and on all income derived therefrom in an amount equal to the amount of income received by each of J. Paul's other children (or their issue) from the 1934 trust for the period between J. Paul's death until the termination of the trust. Ronald alleged that J. Paul had promised Sarah that he "would provide in his Will for income to [Ronald] or his issue in an amount equal to that received by his other children and their issue from [the 1934 trust] following J. PAUL's death." Ronald further alleged that Sarah, in reliance on that promise, did not revoke the 1934 trust or make more generous provisions for Ronald in her will. The prayer for relief in Count III asked:

That the Court declare that the trustees of the Museum are constructive trustees of the assets received and to be received from the estate of J. PAUL GETTY and all income derived therefrom in an amount equal to the amount of income received by or credited to each of J. PAUL's other children (or their issue by right of representation) from [the 1934 trust] since [the date of J. Paul's death] until the termination of [the 1934 trust].

The prayer further asked that the trustees of the Museum be ordered to pay Ronald or his issue "all sums of which said trustees have been declared to be constructive trustees."

Ronald did not seek to set aside J. Paul's will or assert a direct claim against the estate because (1) he believed an action against the Museum as the residuary beneficiary was the better form of action under California law, (2) he did not want to take a position adverse to that of the estate given his fiduciary obligations as a co-executor of J. Paul's will, and (3) he did not want to jeopardize his fee as co-executor.

In June 1980, the trustees of the Museum and Ronald entered into a settlement agreement. The settlement agreement provided that Ronald would dismiss Count III of the complaint with prejudice in exchange for the payment of $10 million. A Ronald did not report the $10 million he received from the settlement as income on his 1980 income tax return. On audit, the Commissioner determined that...