Keeter v. United States

Decision Date14 April 1972
Docket NumberNo. 71-2644.,71-2644.
Citation461 F.2d 714
PartiesP. C. KEETER, as Executor of the Estate of Bessie Love Shaw, Deceased (Aden Keeter, appointed administrator de Bonis Non of the estate of Bessie Love Shaw, deceased, be substituted in the place and stead of P. C. Keeter, deceased), Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

COPYRIGHT MATERIAL OMITTED

William H. Stafford, Jr., U. S. Atty., Clinton Ashmore, Asst. U. S. Atty., Tallahassee, Fla., James Stabler, Atty., Fred B. Ugast, Asst. Atty. Gen., Meyer Rothwacks, Gilbert Andrews, William S. Estabrook, III, Loring W. Post, Attys., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant.

Thomas C. O'Bannon, Jacksonville, Fla., Louis O. Gravely, Jr., Ocala, Fla., for plaintiff-appellee.

Before JOHN R. BROWN, Chief Judge, and GOLDBERG and MORGAN, Circuit Judges.

GOLDBERG, Circuit Judge:

As with most tax disputes, the facts of this case are not in issue. We have before us only the correctness of the district court's legal conclusions. We often preach that taxation is practical and realistic. As we search for substance over form, once in a while our preachments become prattle in application as a "greyness" enters our decisions. But we find the government's claim here to be endowed with unusual pellucidity and the taxpayer's claim to be unusually factitious. Without a quiver of equivocation, we conclude that an insurance settlement option which granted the proceeds from the life insurance of the decedent taxpayer's husband to "the executors or administrators" of the decedent is includable in her gross estate as a general power of appointment for the purpose of computing estate taxes.

The decedent's husband, Daniel A. Shaw, died in 1930, the owner of an insurance policy on his own life in the amount of $100,000, which he had purchased in 1919. In 1926 Mr. Shaw (the "insured" or the "settlor") elected a settlement option which provided that the insurance proceeds should be held under four identical supplementary contracts, issued to the decedent, Mrs. Bessie Love Shaw, and their daughters in equal shares. By the terms of this settlement option decedent was to receive interest on her share of the proceeds for her life, and a supplementary contract in the amount of $25,000 was accordingly issued to the decedent. The settlement option also expressly provided that the principal and accrued interest from the proceeds were to be paid to "the executors or administrators" of the decedent at her death. Mrs. Shaw, domiciled in Florida, died in 1964, leaving a will, duly probated, that read in part:

"All the rest, residue and remainder of my property of every kind and description and wherever located, and any property over which I may hold the power of appointment or distribution, I give, devise, and bequeath in three equal portions for her daughters."

Pursuant to the 1926 settlement election, the insurance company paid the $25,000 to the decedent's executor. The executor did not include that sum in the decedent's gross estate when he filed the estate tax return, and the Commissioner assessed a deficiency. The executor paid the deficiency and recovered a refund in the lower court. 323 F.Supp. 1093. The government has appealed that decision, and we reverse.

General powers of appointment created on or before October 21, 1942, are includable in the gross estate of a decedent only if they are "exercised," 26 U.S.C.A. § 2041(a) (1). Compare 26 U.S.C.A. § 2041(a) (2), regarding powers created after October 21, 1942. See Helvering v. Grinnell, 1935, 294 U.S. 153, 55 S.Ct. 354, 79 L.Ed. 825; 2 U.S. Cong. & Adm. Serv. 1530, 82nd Cong., 1st Sess. (1951). The issue in this case is whether or not the settlor's election of annuities-cum-payments to the decedent's executor constitutes such a power of appointment for purposes of the estate tax. It is acknowledged by all parties that if the settlement option elected by the decedent's husband constituted a general power of appointment, the power was "created," for tax purposes, prior to 1942. See United States v. Turner, 8 Cir. 1961, 287 F.2d 821 (Blackmun, J.). And it is also conceded by all that the power of appointment, if that is what it really was, was "exercised," for tax purposes, by a specific provision in the decedent's will that distributed any of her property held under power of appointment to her three daughters in equal shares.1

We will look to applicable state law to determine whether the substance of the property interests created by the settlor fits within the federal tax law's definition of a power of appointment, but we emphasize that it is the substance of the state law that is relevant and not any labels that a state or the parties might attach to that substance. See 26 C.F.R. § 20.2041-12; Jenkins v. United States, 5 Cir. 1970, 428 F.2d 538, cert. denied, 400 U.S. 829, 91 S.Ct. 59, 27 L.Ed.2d 59; see also Morgan v. Commissioner of Internal Revenue, 1940, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585:

"State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed."

The law in this case is as clear as the Internal Revenue Code and attendant regulations are ever wont to be. A general power of appointment is defined by the Code as "a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate," 26 U.S.C.A. § 2041(b) (1) emphasis added. The Code definition is cast in the disjunctive, so that the donee is in possession of a general power of appointment if he or she is able to exercise that power in favor of any one of the four groups of beneficiaries specified in the statute. Jenkins v. United States, supra; 2 Mertens, The Law of Federal Gift and Estate Taxation § 19.09 (1959). A donee possesses a general power of appointment when he or she holds

". . . such a power of control as to be able to apply it to his own benefit, or the benefit of his creditors, to dispose of it by will, or to appoint it to his estate or the creditors of his estate, or to consume it without restriction."

Security-Peoples Trust Co. v. United States, W.D.Pa.1965, 238 F.Supp 40 at 45. See Helvering v. Grinnell, supra.

Mrs. Shaw's executor argues that the settlement option elected by Mrs. Shaw's husband was not a general power of appointment, resting his argument principally upon the assertion that Mrs. Shaw did not receive solely from that settlement option, and at the moment of the death of the insured, the unrestricted power to dispose of the insurance proceeds. Mrs. Shaw's power to distribute the funds came, the executor concludes, from the laws of Florida which empowered her to make a will and not from her husband's settlement option. In sum, the executor's argument is that because the proceeds would have to receive their direction under the will and not directly under the insurance clause, the option could not be called a power of appointment at the time of the insured's death. The executor's argument is unrealistic at best, conclusory at worst. We conclude that the making of a will was merely a conduit, not a rheostat, in the legal authority that ran between the decedent and the insurance option.

It is clear that

"a power is regarded as `general\' when it is not restricted by the donor to particular objects or beneficiaries, though the method of exercising it may be restricted and limited to a testamentary paper."

Blackburne v. Brown, 3 Cir. 1930, 43 F.2d 320 at 322; see also Whitlock-Rose v. McCaughn, 3 Cir. 1927, 21 F.2d 164. We would add that a grant of distributory suzerainty over a fund is a general power of appointment within the habitat of the estate tax if the decedent holds the power to direct the funds freely and without restriction, regardless of the source of the fund. The principal or face amount of the insurance contracts formed the corpora of the power of appointment, but the manner of distribution came only upon the death and by the direction of the one who was designated by the settlor. Mr. Shaw, through his insurance policy, was not the director of the fund. It was the will of Mrs. Shaw that spread the largesse, and Mr. Shaw, by placing the proceeds in the hands of Mrs. Shaw's executors, simply named the decedent as the director of the fund. The settlor "created" a general power of appointment, for estate tax purposes, when he elected to place the residuum of the insurance proceeds into a position from which the decedent could appoint freely and without restriction. The fact that the position chosen by the donor was one formed by a previously-existing legal right of the decedent donee, in this case the statutory right to make a will, does not vitiate at all the practical and realistic consequences of the original grant from the settlor. See generally "Tax Evasion Through Settlement Options: Another Defeat for Substantial Ownership in Estate Taxation." 64 Yale L.J. 137 (1954).

Granting the residuum of the insurance proceeds to Mrs. Shaw's executors was tantamount to granting the residuum directly to Mrs. Shaw, subject only to the proviso that she appoint the fund by her will. Had the funds been expressly left for Mrs. Shaw's unfettered distribution by will, the fact that the grant was a power of appointment would be beyond doubt, even though her right to make a will arose only under a previously-existing state statute. Blackburne v. Brown, supra; Whitlock-Rose v. McCaughn supra; Jenkins v. United States, supra; United States v. Bank of Clarksdale, 5 Cir. 1965, 346 F.2d 638. Similarly, if the settlor had granted the insurance proceeds to a trust terminable at his wife's death over which his wife was sole trustee with sole power to distribute trust funds, we feel that the grant would clearly be a power of appointment and taxable as such, even though the trust itself might have been set up by a third party before Mr....

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