Martin v. U.S.
| Decision Date | 09 January 1986 |
| Docket Number | No. 85-1229,85-1229 |
| Citation | 780 F.2d 1147 |
| Parties | -1507 Walter A. MARTIN, Appellee, v. UNITED STATES of America, Appellant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Martha B. Brissette (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Robert A. Bernstein, J. Frederick Motz, United States Atty., on brief), for appellant.
Albert J. Matricciani, Jr. (Clapp, Somerville, Honemann & Beach, Roy Dragone, on brief), for appellee.
Before HALL, MURNAGHAN, and WILKINSON, Circuit Judges.
Here the question is purely one of construction of a testamentary interest, raised by cross-motions for summary judgment, one by a taxpayer, one by the Government. We make the construction to ascertain whether the estate of a decedent, who was a life beneficiary of a testamentary trust with power of appointment, should, for federal estate tax purposes, have included the value of the property subject to the power of appointment. The decedent's estate paid an estate tax of $14,226.39, which was calculated on the basis that the trust property was includible. However, a claim for refund then was lodged on the grounds that the trust property should not have been included, in which case no federal estate tax would have been due. The district court granted summary judgment in favor of the taxpayer.
The testamentary provision with which we are concerned reads as follows:
I give and bequeath one hundred fifty thousand dollars ($150,000.00) to William S. Hart, as Trustee, IN TRUST to hold, invest and re-invest the same, to collect the income and to pay the net income in installments not less often than quarterly, to Theo N. Martin as long as she may live. In the event of the illness of Theo N. Martin, or other emergency, I authorize the Trustee, in his discretion, to invade the principal of the Trust for the benefit of Theo N. Martin. At the death of Theo N. Martin, the Trustee shall pay over and distribute the balance of the trust, principal and any accrued income, to such person or persons as Theo N. Martin may appoint by her Last Will and Testament, and if she shall not have exercised this power of appointment, the same shall be paid over and distributed to the Executor or Administrator of the Estate of Theo N. Martin as part of her personal estate.
In the great majority of American jurisdictions and perhaps in every other state besides the State of Maryland, we would have nothing to decide. A direction to pay over and distribute the balance of a trust's assets to such person or persons as the holder of the power may appoint would constitute a true general power (i.e., one exercisable in favor of creditors or in favor of the holder's estate) and estate tax liability on the death of the holder of the power would be unquestioned. 26 U.S.C. Sec. 2041(a)(2); Id. (b)(1) (a general power is one exercisable "in favor of the decedent, his estate, his creditors or the creditors of his estate."). 1
Just as clearly, however, in Maryland, there is a difference amounting to an anomaly. A power to appoint to such person or persons as the holder of the power may select is construed in Maryland to mean such person or persons other than persons meeting the description of the donee of the power, her estate or the creditors of her estate. Balls v. Dampman, 69 Md. 390, 16 A. 16 (1888). 2 The trust property escapes estate taxation on the death of a holder of such a Maryland "general" power (a special power elsewhere). Leser v. Burnet, 46 F.2d 756 (4th Cir.1931).
Concentrating solely on the language of the power of appointment itself, the district judge favored the taxpayer, 3 ordering refund of the tax. Regrettably, however, in doing so the district judge gave insufficient consideration to language closely connected by the associative word "and" to the power itself:
and if she shall not have exercised this power of appointment, the same shall be paid over and distributed to the Executor or Administrator of the Estate of Theo N. Martin as part of her personal estate.
It is established law that, while, for federal estate tax purposes, the nature and extent of property interests are customarily, as here, ascertained by resort to the substantive law of the state, e.g., Guiney v. United States, 425 F.2d 145, 147 (4th Cir.1970), nevertheless, it is also equally determined that state law nomenclature at variance with the actuality of the situation, viewed as a whole, does not prevail where substantively the federal law, acting on a right ascertained by state law, prescribes a result contrary to a label attached for state law purposes. Morgan v. CIR, 309 U.S. 78, 80, 60 S.Ct. 424, 425, 84 L.Ed. 585 (1940); Pierpont v. CIR, 336 F.2d 277, 281 (4th Cir.1964), cert. denied, 380 U.S. 908, 85 S.Ct. 890, 13 L.Ed.2d 795 (1964); Keeter v. United States, 461 F.2d 714, 717 (5th Cir.1972).
Here, had only the life estate and the Maryland "general" power been bequeathed to Theo Martin, no tax would have been due. However, she also received a power, which she could exercise by refraining from exercising the Maryland "general" power, in which case the property would pass to her personal estate. In other words, while the dispositive language was broken into two parts, when they were joined together 4 they amounted to a true general power, namely, one which could be exercised in favor of the holder's estate.
It is incontestable, therefore, that there is no difference in substance between a true general power of appointment and a Maryland "general" power plus a default of appointment provision for the property to go to the estate of the holder of the power. It makes no difference for the purposes of the federal estate tax law. In the case of a true general power, the testator, to have her estate or creditors take, would have to do something in the way of designating the takers. In the case of a Maryland "general" power combined with a default provision in favor of the estate of the holder of the power, however, she need do nothing to obtain precisely the same result. It is well established that, in Maryland, someone desiring to do so may, by appropriate choice of language, create a true general power. Leser v. Burnett, supra, 46 F.2d at 761. As "not to decide" may frequently amount to the taking of a decision, so here the power was conferred upon Theo Martin to accomplish by non-exercise, bringing the default clause into play, exactly the same result as that available to a holder of a true general power. 5
The district judge disposed of the Government's arguments deriving from the default of appointment provision on the grounds that "in the event of default in exercising the power of appointment, the beneficiary of the proceeds of the trust would, therefore, receive such proceeds upon the direction of the settlor of the trust and not upon the direction of the decedent." However, that is an exaltation of some proportions of form over substance. "[I]t is the right to designate the beneficiaries, and not the method provided for its execution which determines its nature." Leser v. Burnett, supra, at 758. The all important Leser case recognized the taxability of a true general power of appointment notwithstanding "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." Id. "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." Id. 759. 6
The taxpayer has made a bold and imaginative attempt to argue that the reference, in case of default in exercise of the power, to the estate of the holder of the power of appointment as the taker should be construed as extending only to those beneficiaries of her estate who were not creditors. The argument appears to be an attempted expansion of the Balls v. Dampman anomaly. 7 The taxpayer was forced to concede that no Maryland authority supports such a departure from plain language. "Her personal estate" is a term of no ambiguity in the instant circumstances and, as a matter...
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