Kurz v. United States
| Decision Date | 25 October 1957 |
| Citation | 156 F. Supp. 99 |
| Parties | Charles KURZ, Ruth G. Joseph and Thorkil Aschehoug, as Executors under the Last Will and Testament of Theodore H. Joseph, deceased, Plaintiffs, v. The UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Bondy & Schloss, New York City, Eugene L. Bondy and Bertram Braufman, New York City, of counsel, for plaintiffs.
Paul W. Williams, U. S. Atty., for the Southern Dist. of N. Y., New York City, Gerard L. Goettel, Asst. U. S. Atty., New York City, of counsel.
This is an action to recover estate taxes which are alleged to have been illegally assessed against the plaintiffs, as Executors under the Last Will and Testament of Theodore H. Joseph.1 Both sides move for summary judgment.2
The assessment of the estate taxes sought to be recovered was based on the determination of the Director of Internal Revenue that the principal of an inter vivos trust, valued at the time of decedent's death at $353,846.22, was includible, for estate tax purposes, in the decedent's gross estate. This determination was based upon Section 811(d) of the Internal Revenue Code of 1939, 26 U.S.C. § 811(d), the trust being deemed a transfer which was subject to a power in the transferor to alter, amend or revoke, either alone or in conjunction with another. Plaintiffs concede the existence of a reservation of such power in paragraph eighteenth of the trust instrument, which was executed on December 4, 1931. However, they contend that the words which reserved such power were nugatory and ineffective, since prior rights had been created in the trust corpus, and these rights, they maintain, were beyond the decedent's power to divest.
The essential facts are not in dispute.
On October 16, 1931, the decedent and his wife, Sylvia F. Joseph, entered into a marital separation agreement which provided, among other things, that the decedent create a trust, the payments under which were to be in full discharge of any liability on the part of the decedent for the support of his wife. The couple agreed that the corpus of the trust would consist of certain securities which were listed on an annexed schedule, that the trustee would be United States Trust Company of New York, and that the trust would contain the following dispositive provisions:
(a) The trustee was to pay the entire income to the wife during her lifetime.
(b) Upon the death of the wife, the principal was to be divided into three separate funds in stipulated proportions, a fund to be held during the life of each of the decedent's three daughters.
(c) The income from the fund held for any daughter living at the death of the wife was to be paid as follows: two-thirds thereof to the said daughter and one-third thereof to the grantor.3
(d) If any daughter predeceased the wife, the fund that would have been held for such daughter was to be distributed absolutely upon the wife's death as follows: two-thirds thereof to the lawful issue of such deceased daughter and one-third thereof to the grantor;4 however, in the event that such deceased daughter had left no lawful issue living at the date to the wife's death, then the fund that would have been held for such daughter was to be added in equal parts to the funds held for the remaining daughters.
(e) Upon the death of each daughter that survived the wife, one-third of the principal of the trust held during the life of that daughter was to be paid to the decedent,5 and two-thirds thereof was to be paid to the daughter's lawful issue, or if there were none, then to the deceased daughter's sisters and their lawful issue, per stirpes.
There followed a provision which would have been operative if the wife survived the husband. Since she predeceased him, however, by about fourteen years, no reference need be made to it.
In addition, the separation agreement in paragraph nine thereof, provided as follows:
"The trust agreement under which the foregoing trust specified in Paragraph 1 shall be established, shall be in such form as may be agreed upon between counsel representing the respective parties."
Nowhere in the separation agreement is there any indication of the parties' intention that the contemplated trust be either revocable or irrevocable.
Subsequently, on December 4, 1931, in an agreement between the decedent, as settlor, and United States Trust Company of New York, as trustee, the decedent established the trust which he had promised to create in paragraph one of the separation agreement. The trust agreement substantially restated the dispositive provisions of the separation agreement. It contained, in addition, many paragraphs pertaining to matters which had not been mentioned in the separation agreement. Among these was paragraph eighteenth, in which the decedent-settlor reserved a right of revocation. Since the reservation of this power is the factor upon which the Government relies in placing the trust in a taxable category, the validity and significance of paragraph eighteenth is the crucial issue here. The paragraph provided as follows:
Plaintiffs contend that paragraph eighteenth was void from its inception, and that the decedent-settlor could not, and therefore did not, effectively reserve the power to alter, amend or revoke the trust which he created. They assert that the decedent's daughters and their lawful issue, though none of the latter was yet in being at the time, were third-party beneficiaries of the marital separation agreement between the decedent and his wife; that under the applicable New York law, the rights of the third-party beneficiaries became fixed when the separation agreement was executed; that their rights could not thereafter be diminished or divested except with the consent of all the beneficiaries; that in October, 1931, when the decedent and his wife entered into the marital separation agreement, one of their daughters was still a minor; that since that time and until the decedent's death there has been at least one minor beneficiary in esse at all times; and that the vested rights of infants are, under New York law, incapable of surrender. Therefore, plaintiffs argue, it was impossible for all the third-party beneficiaries, at any time, to have consented to a diminution of their rights under the separation agreement. The inclusion of paragraph eighteenth in the deed of trust, they assert, was a faulty compliance with the separation agreement. They characterize paragraph eighteenth as a deliberate violation of rights conferred by the separation agreement, and urge, in consequence, that it be treated as though it were without legal content.
The Government contends that no irrevocable rights were granted by the separation agreement; that the reservation of power contained in paragraph eighteenth of the deed of trust was valid and effective; and that the trust was therefore properly taxed pursuant to § 811(d).
The foundation upon which plaintiffs' position rests is the asserted irrevocability of the rights conferred by the separation agreement upon its third-party beneficiaries. It is well established that the nature of a third-party beneficiary's interest must be determined from the terms of the promise. 2 Williston on Contracts § 364(A) (1936 ed.). The promise in this case, as embodied in the separation agreement, was a promise to create a trust. The securities which would constitute the trust corpus and the dispositive provisions with respect to income and ultimate distribution of the principal were specified....
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