Helvering v. Safe Deposit & Trust Co.

• Decision Date: 10 June 1941
• Docket Number: No. 4750.,4750.
• Citation: Helvering v. Safe Deposit & Trust Co., 121 F.2d 307 (4th Cir. 1941)
• Parties: HELVERING, Com'r of Internal Revenue, v. SAFE DEPOSIT & TRUST CO. OF BALTIMORE et al.
• Court: U.S. Court of Appeals — Fourth Circuit

121 F.2d 307 (1941)

HELVERING, Com'r of Internal Revenue, v. SAFE DEPOSIT & TRUST CO. OF BALTIMORE et al.

No. 4750.

Circuit Court of Appeals, Fourth Circuit.

June 10, 1941.

Samuel O. Clark, Jr., Asst. Atty. Gen. (Sewall Key, Arthur A. Armstrong, and Richard H. Demuth, Sp. Assts. to Atty. Gen., on the brief), for petitioner.

Charles McH. Howard, of Baltimore, Md., for respondents.

Before PARKER, SOPER, and NORTHCOTT, Circuit Judges.

PARKER, Circuit Judge.

This is a petition by the Commissioner of Internal Revenue to review a decision of the Board of Tax Appeals with respect to estate tax alleged to be due by the estate of the late Zachary Smith Reynolds. The decision of the Board is reported in 42 B.T.A. 145. Many contentions pressed before the Board have been abandoned in the petition here. Only two questions are before us: (1) whether decedent had such an interest in the property embraced in trusts created by his father and mother as to bring that property within the provisions of sec. 302(a) of the Revenue Act of 1926, 44 Stat. 9, 26 U.S.C.A. Int.Rev.Acts, page 227; and (2) if not, whether his estate is taxable, under the principles laid down in Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410, by reason of a settlement of litigation, under which his brothers and sisters received an interest in the trust property which he had attempted to give them by the void exercise of testamentary powers of appointment vested in him under the trusts.

On the first question, the facts are that decedent was the beneficiary of three trusts, one created under the will of his father in 1918, one by deed of trust executed by his mother in 1923, and one by will of his mother in 1924. Under the trust created by his father, a small portion only of the income from the trust property was to be paid to him until he arrived at the age of twenty-eight years, when the entire corpus of the property was to be turned over to him. Under the trusts created by his mother, he was to enjoy the income of the property for life, with certain restrictions as to payments to be made to him before attaining the age of twenty-eight. In the case of all three trusts he was given general testamentary powers of appointment with respect to the trust property; and, in all, there was a gift over, in default of the exercise of the power, to decedent's descendents, if any, or, if he had no descendents, to his brothers and sisters and their representatives per stirpes. Decedent died in the year 1932 before reaching the age of twenty-one years. He was domiciled in the state of North Carolina and under the laws of that state was incapable, because of his infancy, of exercising the testamentary powers of appointment vested in him. It is not contended that there was any valid exercise by him of such powers.

On the second question, the facts are that decedent did attempt to exercise the powers of appointment in favor of his brothers and sisters by will executed August 21, 1931. This will was void under the law of North Carolina and constituted no valid exercise of the powers. Decedent was twice married. He left surviving him a child by the first marriage, and a child by the second marriage was born to him a few months after his death. A question arose as to the validity of the divorce dissolving the first marriage and this raised a question as to the legitimacy of the posthumous child and its capacity to take as a descendent. A question as to the right of the child of the first marriage to take as a descendent was raised because of a settlement entered into with the mother and guardian of the child at the time of the divorce. Litigation ensued in the North Carolina state courts (see In re Reynolds' Guardianship, 206 N.C. 276, 173 S.E. 789; Reynolds v. Reynolds, 208 N.C. 578, 182 S.E. 341), and a compromise was reached under which, after the payment of estate taxes to the state of North Carolina, 37½ per cent of the remainder was allotted to the child of the first marriage, 25 per cent to the child of the second marriage and 37½ per cent to the brothers and sisters of decedent to be held in trust for them pursuant to the terms of their father's will. It is this 37½ per cent of the estate which the Commissioner contends is subject to inheritance tax in any event under the principles laid down by the Supreme Court in Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410. It is to be noted, however, that this portion of the estate did not pass to the brothers and sisters absolutely, as it would have done under the exercise of the powers of appointment, but was placed in trust for them under the will of their father as was provided by that will in case of death of decedent without issue and without exercise of the power.

The chief contention of the government is that the property embraced in all three trusts was property in which decedent had an interest at the time of his death and which was therefore subject to the estate tax under sec. 302(a) of the Revenue Act of 1926, ch. 27, 44 Stat. 9, which provides:

"Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated —

"(a) To the extent of the interest therein of the decedent at the time of his death".

The trouble with this contention is that upon his death decedent had no interest of any sort in the trust property. Under the will of his father he had the right to certain income until he became twenty-eight years of age, at which time he was to have turned over to him the corpus of the property theretofore held in trust for him; but the property was not to become his until he reached that age, and when he died without exercising the power of appointment vested in him with respect thereto, the property passed under the will of his father to persons designated in that will. Under the will and deed of trust of his mother he had the right during his life to the income of the property placed in trust, with certain restrictions upon the income's being paid over to him; but this property was never to become his, although he had general testamentary powers of appointment with regard thereto, and when he died without exercising the powers it passed under the will and deed of his mother to the persons designated by her to take in default of appointment. His death, therefore, terminated all interest that he had in the property embraced in all of the trusts and he had no interest therein of any sort which passed from him to another at his death. It is beside the point to say that he was to have the benefit of the property during his life time. This is true of any life estate; and no one would contend that a mere life estate subjects the life tenant to the estate tax. Nor is anything added by reason of the fact that the property embraced in the trust created by the father's will was to become the property of decedent upon his reaching the age of twenty-eight. This right was contingent upon his reaching that age; and, as he died before reaching it, the property never became his. Nor is anything added by reason of the fact that the persons designated to take in default of appointment were the natural objects of decedent's bounty. They were the natural objects of the bounty of his father and mother also; but the point of importance is that, in default of the exercise of the powers of appointment by him, they took not from or through him but under the wills of his father and mother and under the deed of his mother. United States v. Field, 255 U.S. 257, 41 S.Ct. 256, 65 L.Ed. 617, 18 A.L. R. 1461; Wachovia Bank & Trust Co. v. Doughton, 272 U.S. 567, 47 S.Ct. 202, 71 L.Ed. 413; Helvering v. Grinnell, 294 U.S. 153, 55 S.Ct. 354, 79 L.Ed. 825; Legg's Estate v. Commissioner, 4 Cir., 114 F.2d 760; Leser v. Burnet, 4 Cir., 46 F.2d 756.

Unless, therefore, a general power of appointment with respect to the property is such an interest as subjects it to the provisions of section 302(a), decedent had no interest which would subject it to the estate tax. We think it clear that a general power of appointment is not such an interest. The question was before the Supreme Court in United States v. Field, supra, 255 U.S. 257, 41 S.Ct. 256, 258, 65 L.Ed. 617, 18 A.L.R. 1461. That decision dealt with provisions of the Revenue Act of 1916, which did not include the provision which appears as 302(f) of the Act of 1926, taxing the estate with respect to property passing under a general power of appointment. Estate tax was imposed by section 202 of the Act of 1916, 39 Stat. 777, which valued the estate of decedent "(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate." Contention was made that when a general power of appointment is exercised, equity regards the property appointed as assets for the payment of debts, and that the property appointed should be treated as part of the estate for the purposes of the estate tax. The Supreme Court denied this contention on the ground that the property appointed was not the property of the donee at the time of his death, saying: "But the existence of the power does not of itself vest any estate in the donee. * * * And, whether the power be or be not exercised, the property that was subject to appointment is not subject to distribution as part of the estate of the donee. If there be no appointment, it goes according to the disposition of the donor. If there be an appointment to volunteers, then, subject to whatever charge creditors may have against it, it goes not to the next of kin or the legatees of the donee, but to his appointees under the power. It follows that the interest in question, not having been property of...