Michigan Trust Company v. Kavanagh

• Decision Date: 30 December 1955
• Docket Number: No. 11894.,11894.
• Citation: 137 F. Supp. 52
• Parties: The MICHIGAN TRUST COMPANY, Executor of the Estate of R. Wallace Hook, Plaintiff, v. Giles KAVANAGH, Collector of Internal Revenue for the District of Michigan, Substituted by Thomas G. Kavanagh, Jr., Admr., Defendant.
• Court: U.S. District Court — Western District of Michigan

137 F. Supp. 52

The MICHIGAN TRUST COMPANY, Executor of the Estate of R. Wallace Hook, Plaintiff, v. Giles KAVANAGH, Collector of Internal Revenue for the District of Michigan, Substituted by Thomas G. Kavanagh, Jr., Admr., Defendant.

No. 11894.

United States District Court E. D. Michigan, S. D.

December 30, 1955.

Platt W. Dockery, Grand Rapids, Mich., for plaintiff. Warner, Norcross & Judd, Grand Rapids, Mich., of counsel.

H. Brian Holland, Asst. Atty. Gen., Andrew D. Sharpe, Arthur L. Biggins Sp. Assts. to the Atty. Gen., Fred W. Kaess, U. S. Atty., John L. Owen, Asst. U. S. Atty., Detroit, Mich., for defendant.

FREEMAN, District Judge.

This case involves the validity of a federal estate tax deficiency collected from the plaintiff on November 8, 1951, in the amount of $98,036.43.

On April 17, 1931, R. Wallace Hook executed three irrevocable trust indentures for the benefit of his three minor sons, the terms of which trust instruments were identical. He appointed himself trustee and continued to serve as sole trustee until his death on March 8, 1948, when the Michigan Trust Company and Frank E. Seideman became successor trustees pursuant to the terms of said trust, Michigan Trust Company later becoming sole trustee upon Seideman's resignation.

Michigan Trust Company was also appointed executor of the estate of the decedent-donor of these trusts and filed a federal estate tax return with the defendant Collector. The Commissioner of Internal Revenue determined that all the property in the said trusts was taxable to the estate of the decedent-donor Hook under Section 811(d) (2) of the Internal Revenue Code of 1939, 26 U.S. C. § 811(d) (2). A deficiency in the amount of $88,946.26, plus $9,097.17 interest, was assessed by the defendant and paid, under protest, by the plaintiff.

The respective beneficiaries of these trusts were to receive the trust property after attaining the age of thirty-five years and after the death of the decedent-donor and the property was to revert to the donor if the beneficiaries predeceased him.

The decedent-donor retained substantial control over the trust property during his lifetime. He retained, in addition to usual trustee powers, the right to hold any of the trust property "in his name as trustee, or in his own name, or in the name of a nominee, or in any other manner the trustee may see fit" (Par.Sixteenth), "to exercise in respect of all stocks, bonds or other investments held by the trustee hereunder, all rights, powers and privileges as are or may be lawfully exercised by any person owning similar property in his own right * *" (Par.Seventeenth), and "be the sole and conclusive judge of what is principal and what is income." (Par.Twelfth).

Income derived from the trust fund, after deducting appropriate expenses in connection with the administration of the trust, was to be distributed to the beneficiaries "in such manner or amount and at such times as in the sole discretion of the trustee it may be deemed best." (Par.First).

The provision relating to distribution of the corpus of the trust, which is essential to the determination of the motions at hand, is as follows:

"Seventh: Any provision in this agreement notwithstanding, the Trustee shall have the right in his absolute discretion to distribute in whole or in part, the Trust Property to the Beneficiary at any time and in such manner or amount as he may deem the situation to warrant, it being the intention of the Grantor that while under ordinary circumstances it is not the desire that the Beneficiary come to the ownership of the Trust Property until the happening of all the conditions heretofore provided in that connection, the Trustee shall nevertheless be free to distribute the Trust Property or any part thereof to the Beneficiary at any time or in any manner or amount, should what the Trustee deems a special emergency arise."

In event the corpus of the trust was distributed to the beneficiaries in accordance with the foregoing provisions (Par.Seventh), it was provided that "this trust shall be automatically deemed to be terminated." (Par.Eighth).

Under date of November 8, 1951, plaintiff filed a timely claim for refund. On December 28, 1951, the Michigan Trust Company, as sole trustee of said trust, filed a petition in the Kent County Circuit Court, in Chancery, for construction of these trust instruments and attempted to join as a defendant in those proceedings the defendant Collector Giles Kavanagh to whom the assessed tax deficiency was paid. On motion, Kavanagh was dismissed as a party defendant in the state court suit, in accordance with a federal statute which provides in effect that an officer of the United States may not be sued in a state court without his consent. The state court in that suit entered a decree dated April 8, 1952, which provides in part:

"(b) The power of invasion of the Trustee of each of the said Trusts, exercisable in favor of the life beneficiary of each of said Trusts, in case of a special emergency, as set forth in Paragraph Seventh thereof, is a limited power, exercisable only in case of special emergency; and as such is measured by a definite external standard — to wit, a special emergency occurring to said life beneficiary; and as such the power is subject to the jurisdiction and control of this Court sitting as a Court of Chancery, and the exercise or non-exercise of such power is subject to the review by this Court as to whether such exercise or non-exercise is a reasonable act on the part of the Trustee;

"(c) No special emergency has been shown by any of the beneficiaries in any year from 1931 to and including the present year."

Both parties have filed motions for partial summary judgment under Rule 56 of the Rules of Civil Procedure, 28 U.S.C. Defendant Collector claims that the property in said trusts was taxable to the Hook estate under Section 811(d) (2) of the Internal Revenue Code of 1939 in that the decedent-donor Hook reserved a power under Paragraph Seventh of the trust indenture "to alter, amend, or revoke" within the meaning of said Section 811(d) (2). Plaintiff claims that the power of invasion under Paragraph Seventh of the trust is a limited power measurable by a definite external standard, that such a limited power is not a power to alter, amend or revoke within the meaning of Section 811 (d) (2) and that the decision of the state court to that effect is binding on this court.

Section 811(d) (2), so far as pertinent here, required inclusion in a decedent's gross estate of the value of all property that the decedent had previously transferred by trust "where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power * * * to alter, amend, or revoke * * *."

The first question presented by these motions is whether the power retained by the decedent-donor Hook, during his lifetime, to distribute the trust corpus under Paragraph Seventh of these trusts is a power to alter, amend or revoke within the meaning of Section 811(d) (2).

Plaintiff admits that, if a power of invasion is not circumscribed by a definite external standard, it is tantamount to a power to alter, amend or revoke.

The decedent-donor reserved during his lifetime substantially all the incidents of ownership of the trust property except to revoke the trust and revest title in himself. The beneficiaries had no right to immediate enjoyment of any of the trust property, either income or principal, during the lifetime of the decedent, unless he elected to exercise his reserved power as trustee.

Defendant contends that the test to be applied under controlling case law in determining whether a transfer comes within the provisions of Section 811(d) (2) is: Did the decedent-donor give the beneficiaries a present right to immediate enjoyment of either income or principal?

In the case of Commissioner of Internal Revenue v. Estate of Holmes, 326 U.S. 480, 66 S.Ct. 257, 90 L.Ed. 228, the court held that the power to terminate was the equivalent of power "to alter, amend, or revoke" under Section 811 (d) (2).

In the case of Lober v. U. S., 346 U.S. 335, at page 337, 74 S.Ct. 98, 99, 98 L. Ed. 15, the Supreme Court said:

"We pointed out in the Holmes case that § 811(d) (2) was more concerned with `present economic benefit' than with `technical vesting of title or estates.' And the Lober beneficiaries, like the Holmes

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