Leser v. Burnet

• Decision Date: 13 January 1931
• Docket Number: No. 3033.,3033.
• Citation: Leser v. Burnet, 46 F.2d 756 (4th Cir. 1931)
• Parties: LESER v. BURNET, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — Fourth Circuit

46 F.2d 756 (1931)

LESER v. BURNET, Commissioner of Internal Revenue.

No. 3033.

Circuit Court of Appeals, Fourth Circuit.

January 13, 1931.

Oscar Leser, of Baltimore, Md., for petitioner.

Helen R. Carloss, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., J. Louis Monarch, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Prew Savoy, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before PARKER, Circuit Judge, and McCLINTIC and COLEMAN, District Judges.

PARKER, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals holding that there should be included in the gross estate of Mrs. Annie E. Agnus, for the purpose of estate taxation, property passing under two powers of appointment exercised by Mrs. Agnus in her will. One power related to property on Eutaw street in the city of Baltimore; but as it was conceded at the bar of this court that the decision of the board was correct with regard to this, we need not consider it further. The other power related to certain newspaper property which in the year 1883 was conveyed in trust by Charles Carroll Fulton, the father of Mrs. Agnus, under a provision that after paying an annuity to the widow of the grantor, the remainder of the income therefrom should be distributed among his four children. As to three of the children the deed of trust gave simple life estates with remainders over. As to the fourth child, Mrs. Agnus, it provided:

"And upon the decease of the said Anne E. Agnus, and as to one-half of the part or share or portion of said principal estate property and subject out of which her said portion or part of the rents, issues, income and annual produce arises, together with one-half of her said part or portion of the income and annual produce aforesaid, in trust for the use and behoof of such person or persons as she, by her last will and testament or by any instrument of writing in the nature of or purporting to be a last will and testament, appropriately executed, shall have named, limited and appointed to take and have the same, which will or testament or instrument of writing she is declared competent and is hereby authorized and empowered to make and execute, whether she be sole or covert."

Mrs. Agnus died in 1922. She left a will which, after referring to the power, exercised same in favor of her two daughters. Under this exercise of the power, the daughters received property of the value of $232,461.15; and the question presented to us is whether it was proper to include this in the gross estate of Mrs. Agnus in valuing same for the purpose of computing the federal estate tax.

The Revenue Act of 1921 (section 402 (e), provides that in valuing the estate of a decedent for the purpose of determining the estate tax to be assessed against it, there shall be included in the gross estate the value of any property passing under a general power of appointment, exercised by the decedent by will or by deed executed in contemplation of death. 42 Stat. 279. The first question to be determined, therefore, is what is meant by a general power within the meaning of the act, and we think there can be no question that by a general power is meant one which may be exercised by the donee of the power in favor of any person whomsoever including the donee himself or his own creditors.

It is true that where the power is limited to be exercised by will, and the grantee cannot for that reason exercise it in favor of himself during his lifetime, it is nevertheless held to be general if he have the unrestricted right to designate the beneficiaries; for it is the right to designate the beneficiaries, and not the method provided for its execution, which determines its nature. Whitlock-Rose v. McCaughn (C. C. A. 3rd) 21 F.(2d) 164, 165; Johnson v. Cushing, 15 N. H. 298, 41 Am. Dec. 694; Greenway v. White, 196 Ky. 745, 246 S. W. 137, 32 A. L. R. 1385. But whether the power granted is to be exercised by deed or by will, the distinguishing characteristic of a general power is that the donee has unfettered control over its exercise, and may appoint in favor of his own estate or his creditors as well as in favor of others. From this characteristic has arisen the doctrine followed in England, and by most of the courts of this country, that where the donee exercises the power in favor of volunteers, i. e. in favor of persons other than his creditors, such creditors may in equity subject the property passing under the power to the satisfaction of his debts. U. S. v. Field, 255 U. S. 257, 263, 41 S. Ct. 256, 65 L. Ed. 617, 18 A. L. R. 1461; Brandies v. Cochrane, 112 U. S. 344, 5 S. Ct. 194, 28 L. Ed. 760; Clapp v. Ingraham, 126 Mass. 200, 202; Tallmadge v. Sill, 21 Barb. (N. Y.) 34, 51; Johnson v. Cushing, supra, 15 N. H. 298, 307, 41 Am. Dec. 694; Rogers v. Hinton, 62 N. C. 101; Freeman's Adm'r v. Butters, 94 Va. 406, 26 S. E. 845; Patterson v. Lawrence, 83 Ga. 703, 708, 10 S. E. 355, 7 L. R. A. 143; Thompson v. Towne, 1694 2 Vern. 319, 23 Eng. Reprint 806; Lassells v. Cornwallis, 1704 2 Vern. 465, 23 Eng. Reprint 898; Townshend v. Windham, 2 Ves. Sr. 9, 28 Eng. Reprint 1; O'Grady v. Wilmot, 2 A. C. 231.

Chief Justice Gray of Massachusetts, in Clapp v. Ingraham, supra, thus discusses this characteristic of a general power and the history of the doctrine to which we have adverted:

"It was settled in the English Court of Chancery, before the middle of the last century, that where a person has a general power of appointment, either by deed or by will, and executes this power, the property appointed is deemed in equity part of his assets, and subject to the demands of his creditors in preference to the claims of his voluntary appointees or legatees. The rule perhaps had its origin in a decree of Lord Somers, affirmed by the House of Lords, in a case in which the person executing the power had in effect reserved the power to himself in granting away the estate. Thompson v. Towne 1695 Prec. Ch. 52 24 Eng. Reprint, 26; S. C. 1694 2 Vern. 319 23 Eng. Reprint, 806. But Lord Hardwicke repeatedly applied it to cases of the execution of a general power of appointment by will of property of which the donee had never had any ownership or control during his life; and, while recognizing the logical difficulty that the power, when executed, took effect as an appointment, not of the testator's own assets, but of the estate of the donor of the power, said that the previous cases before Lord Talbot and himself (of which very meager and imperfect reports have come down to us) had established the doctrine, that when there was a general power of appointment, which it was absolutely in the donee's pleasure to execute or not, he might do it for any purpose whatever, and might appoint the money to be paid to his executors if he pleased, and, if he executed it voluntarily and without consideration, for the benefit of third persons, the money should be considered part of his assets, and his creditors should have the benefit of it. * * * Although the soundness of the reasons on which the doctrine rests has been impugned by Chief Justice Gibson, arguendo, and doubted by Mr. Justice Story in his Commentaries, the doctrine is stated both by Judge Story and by Chancellor Kent as well settled; and it has been affirmed by the highest court of New Hampshire, in a very able judgment, delivered by Chief Justice Parker, and applied to a case in which a testator devised property in trust to pay such part of the income as the trustees should think proper to his son for life, and, after the son's death, to make over the principal, with any accumulated income, to such persons as the son should by will direct. * * * A doctrine so just and equitable in its operation, clearly established by the laws of England before our Revolution, and supported by such a weight of authority, cannot be set aside by a court of chancery, because of doubts of the technical soundness of the reasons on which it was originally established."

It will be noted that the revenue act directs that property passing under a general power shall be included in the estate of a decedent, but not property passing under a special power. In determining what was meant by a general power, therefore, it is important to consider in what respect such a power differs from a special power in relation to the estate of the decedent, for it is upon the estate of the decedent that the tax is levied. There is no difference, of course, with respect to the source of the property; for, whether the power be general or special, it is well settled that the existence of the power does not of itself vest an estate in the donee, and that upon its exercise the appointee takes under the donor. U. S. v. Field, supra. There is no difference with respect to the passing of the property to the appointee; for, in either case, the appointee takes no interest until the power is exercised, and can no more be said to have received property by the act of the donee in the one case than in the other. The only difference between the two, so far as they can be said to affect the estate of the donee of the power, is that in the case of the general power the donee has the right to exercise same in favor of his creditors, whereas in the case of the special power he does not have such right. Upon the death of the donee of a general power this right terminates; and something has passed from him to those who have taken the property under the appointment, viz., the right to subject the property to his debts. In the case of a special power, nothing whatever passes from the donee or his estate by reason of his death.

In this respect, the case of a general power of appointment is analogous to that of a policy of insurance where the insured has the right to change the beneficiary and thus secure for his estate or his creditors the proceeds of the policy. In such case it is...