Ingham v. Hubbell

Decision Date17 August 1978
Docket NumberCiv. No. 77-370-1.
PartiesHelen Ann Hubbell INGHAM, Individually and as representative of all others similarly situated, Plaintiff, v. James W. HUBBELL, Jr., Robert J. Fleming, and Riley H. Richards, Trustees of the Frederick M. Hubbell Estate, Richard Turner, Attorney General of the State of Iowa, Roy D. Clark, Director, Midwest Service Center of the Internal Revenue Service, and Michael J. Murphy, Iowa District Director of Internal Revenue Service.
CourtU.S. District Court — Southern District of Iowa

Larned A. Waterman and Thomas J. Shields, Lane & Waterman, Davenport, Iowa, for plaintiff.

J. R. Austin and James R. Austin, Jr., Austin, Myers, Peterson & Gaudineer, Des Moines, Iowa, for Trustees of Hubbell Estate.

Richard H. Gregory, III, Tax Div., U. S. Dept. of Justice, Washington, D. C., and Kermit B. Anderson, Asst. U. S. Atty., S. D. Iowa, Des Moines, Iowa, for defendants Roy Clark and Michael Murphy.

RULING AND ORDER ON FEDERAL DEFENDANT'S MOTION TO DISMISS

STUART, Chief Judge.

This case is a purported class action brought under the Federal Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202 to adjudicate the validity of plaintiff's disclaimer of a portion of her contingent interest in the corpus of the Hubbell Trust. The defendants are the Trustees of the Hubbell Trust, Richard Turner, Attorney General for the State of Iowa, Roy D. Clark, Director of the Midwest Service Center of the Internal Revenue Service (IRS) and Michael Murphy, District Director of the IRS in Des Moines, Iowa. The federal defendants have filed a motion to dismiss them from the action, which motion is now before the Court.

Frederick M. Hubbell created the Hubbell Trust on December 31, 1903. It will terminate on November 17, 1983 and its assets will be distributed per stirpes, among the then living descendants of his three children. The named plaintiff is a lineal descendant of Frederick M. Hubbell and has a contingent interest in the corpus of the Trust which will not vest until its termination. The purported class is composed of all the lineal descendants of Frederick M. Hubbell.

Plaintiff has executed and delivered a disclaimer of her contingent interest in part of the corpus of the Hubbell Trust (1000 shares of Equitable of Iowa) which is expressly made conditional upon the following events:

a. The validity of the Disclaimer * * under Section 2518 of the Internal Revenue Code or under prior federal law;
b. The validity of the Disclaimer * * under Section 633.704 of the Iowa Code or under Iowa common law;
c. The inoperability of the Disclaimer upon the income rights of plaintiff as an income beneficiary of the Hubbell Trust; and
d. The transfer under Iowa law of the interest of plaintiff in the disclaimed property, upon her death prior to November 17, 1983, to her heirs living at the expiration of the trust period.

The Trustees have refused to recognize the validity of the Disclaimer because of its conditional nature, have declined to take any affirmative action with respect to it and have stated that they will take the same position with regard to any similar disclaimer they may receive.

This action was then instituted seeking a declaration of law to satisfy conditions "a", "b", and "d" set forth above. The federal defendants' motion to dismiss is based on three grounds: (1) that there is no actual controversy between the federal defendants and the plaintiff; (2) that the declaratory judgment procedure is not available in any controversy "with respect to Federal taxes"; and (3) that the United States, the real party in interest, has not waived governmental immunity.

The declaratory judgment remedy which was created by 28 U.S.C. § 2201 is pertinent to all three grounds. It provides:

In a case of actual controversy within its jurisdiction, except with respect to Federal taxes, any court of the United States, * * *, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. * * * (Emphasis supplied)

(1)

ACTUAL CONTROVERSY

The federal defendants have neither taken nor threatened to take any action concerning this disclaimer. Plaintiff alleges that an actual controversy exists because the IRS has a fixed, consistent, definite and continuing policy of challenging disclaimers and imposing gift or estate tax consequences. If this issue were determinative of the existence of an actual controversy, the allegations would be sufficient to make it improper for the court to rely upon this ground in granting a motion to dismiss.

However, there are other reasons why there is no actual controversy here. The federal defendants are made parties in the case in order to bind the IRS to a decision as to the validity of the Disclaimer under Section 2518. Plaintiff wants to establish the tax consequences of the disclaimer. The conditional nature of plaintiff's "irrevocable" disclaimer effectively eliminates any possible controversy between the federal defendants and plaintiff. If the Court would decide that the disclaimer is valid under Section 2518, there would be no tax consequences. If the Court would decide that the disclaimer did not qualify under Section 2518, an express "condition subsequent" would not be fulfilled and the disclaimer would be void. Consequently there would be no disclaimer upon which there could be any federal tax consequences. There is no actual controversy between the federal defendants and plaintiff.

In C. I. R. v. Procter, 142 F.2d 824 (4th Cir. 1944), taxpayer attempted to create a condition subsequent to void a transfer by trust agreement if the transfer was determined by a federal court of last resort to be subject to a federal gift tax. The court held such condition was void as against public policy for three reasons. One was based upon the lack of controversy between the taxing authorities and the donor. The Court said:

The effect of the condition would be to obstruct the administration of justice by requiring the courts to pass upon a moot case. If the condition were valid and the gift were held subject to tax, the only effect of the holding would be to defeat the gift so that it would not be subject to tax. The donor would thus secure the opinion of the court as to the taxability of the gift, when there would be before the court no controversy whatever with the taxing authorities which the court could decide * * *.

p. 827.

It may be that the voiding of the disclaimer would eventually result in more tax liability because the property would then pass through plaintiff's estate. However, this is not "a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment". Golden v. Zwickler, 394 U.S. 103, 108, 89 S.Ct. 956, 959, 22 L.Ed.2d 113 (1969); Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 85 L.Ed. 826 (1941).

There is also authority for the proposition that a tax assessment is necessary before an actual controversy exists. In Mitchell v. Riddell, 402 F.2d 842, 846 (9th Cir. 1968), appeal dismissed and cert. den. 394 U.S. 456, 89 S.Ct. 1223, 22 L.Ed.2d 415 (1969), the Court held that a tax assessment was necessary before an actual controversy would exist. Obviously federal defendants and the IRS have not made any assessment for federal taxes in this case because no taxable event has taken place. The Circuit Court of Appeals for the Eighth Circuit has not taken a position on this issue.

(2)

WITH RESPECT TO FEDERAL TAXES

Federal defendants contend that even if there were an actual controversy between them and the plaintiff, it would necessarily be "with respect to federal taxes" and that as such it is specifically excepted from the Declaratory Judgment Act.

Plaintiff argues that the issue is not with respect to federal taxes but involves the ownership of the disclaimed property under the federal disclaimer law, stating:

The Court in the present action is not being asked to declare whether any federal tax is due or how much tax is due as a consequence of the irrevocable disclaimer. The action is not a threat to the determination, assessment or collection of federal taxes. The action simply seeks a declaration that the Disclaimer is valid under applicable law. While it follows that, postulating a valid disclaimer, no tax liability could arise under existing law, this is a conclusion which need not be adjudicated.

In support of her position plaintiff cites many cases which she claims present ten different situations in which matters either directly or indirectly involving federal taxes were not barred by the federal tax exemption clause of the federal Declaratory Judgment Act. The Court believes it necessary to discuss only the cases which plaintiff claims are most analogous to the instant case.

In Henshel v. Guilden, 300 F.Supp. 470 (S.D.N.Y.1969) the ultimate issue was whether a federal income tax deficiency should be paid out of the taxpayer's estate or out of a trust that had received the proceeds from the sale of the stock which brought about the tax liability. Neither the United States nor any named federal defendants were parties. The Court said:

The mere circumstance that a Federal tax assessment is a material element here does not bring this action between private parties within the statute's exception.

p. 472.

In Bullock v. Latham, 306 F.2d 45 (2d Cir. 1962), the Commissioner of Internal Revenue and the District Director were defendants. There had been an adjudication of separate tax liabilities of Giles E. Bullock and E. C. Brown Company, a corporation owned by Mr. Bullock. The tax liabilities were not contested. Certain real estate and machinery and equipment were sold to apply on the tax liabilities. The proceeds from the sale of the real estate were applied against Mr. Bullock's obligation and the proceeds from the sale...

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    ...to parties, but also to declarations having the effect of restraining assessment or collection of taxes. In Ingham v. Hubbell, 462 F.Supp. 59 (S.D. Iowa 1978), aff'd, 596 F.2d 315 (8th Cir. 1979), plaintiffs sought a declaratory judgment regarding the validity of a disclaimer which was exec......
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