Morgan v. Commissioner of Internal Revenue

• Decision Date: 22 April 1939
• Docket Number: No. 6611.,6611.
• Parties: MORGAN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

103 F.2d 636 (1939)

MORGAN v. COMMISSIONER OF INTERNAL REVENUE.

No. 6611.

Circuit Court of Appeals, Seventh Circuit.

April 22, 1939.

Brode B. Davis and Arthur M. Kracke, both of Chicago, Ill., for petitioner.

Berryman Green, Sp. Asst. to Atty. Gen., James W. Morris, Asst. Atty. Gen., and Sewall Key and Lee A. Jackson, Sp. Assts. to Atty. Gen., for respondent.

Before EVANS and TREANOR, Circuit Judges, and LINDLEY, District Judge.

TREANOR, Circuit Judge.

Petitioner seeks a review of a decision of the United States Board of Tax Appeals affirming the determination by the Commissioner of Internal Revenue of a deficiency in the estate tax liability of the estate of decedent, Elizabeth S. Morgan. The asserted deficiency resulted from the inclusion in the value of the gross estate of decedent the value of certain property in respect to which the decedent held powers of appointment, which powers she had exercised by her last will.

The Commissioner's action was predicated upon the following provisions of the Revenue Act:¹

"Sec. 302 § 411. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated * * * —

* * * * * *

"(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *."

The decedent died testate in 1933 while a citizen of the United States and a resident of the state of Wisconsin, and the petitioner is the duly appointed executor of her last will and testament. Decedent's father, by his will and several codicils thereto, created a trust for the benefit of his children. The trust estate was divided into nine parts, the part numbered five being conveyed in trust for decedent's benefit as follows:

"Item Fifteen: I direct said trustees to pay to my daughter Elizabeth S. Morgan annually the net annual income from part numbered five (5) into which my trustees shall have divided my estate * * *

"I give, devise and bequeath to the appointee or appointees of my daughter Elizabeth S. Morgan by her last will and testament all property of any nature and kind in the hands of my said trustees at the time of her death constituting said part five (5) * * *"

Shortly before his death the father of decedent executed a deed of trust to continue for a period of 21 years after his death. The trust property was divided into parts and one part was allocated to each beneficiary. The following provisions of the deed of trust relate to decedent:

"7. After my death and during the continuance of the trust hereby created, said Trustees shall pay annually to my daughter Elizabeth S. Morgan the net annual income from said part numbered five (5).

"If my daughter Elizabeth S. Morgan shall be living at the time of the termination of this trust, said Trustees shall transfer to her all property then in their possession constituting said part five (5).

"If my daughter Elizabeth S. Morgan shall die prior to the termination of said trust, then said Trustees shall pay annually the net annual income from said part five (5) to such person or persons as she may appoint by her last will and testament duly admitted to probate, and at the termination of this trust said Trustees shall transfer the property then in their possession constituting said part five (5) to such person or persons as she may appoint in the manner aforesaid."

In her will decedent exercised the powers of appointment granted by her father's will and by the deed of trust, respectively, the appointments being in the following words:

"Twenty-second: Under the last will and testament of my father * * * I do hereby nominate, constitute, authorize, and appoint my husband, J. Earl Morgan * * *

"Twenty-third: Under the Deed of Trust dated May 12, 1917, * * * I do hereby appoint my husband, J. Earl Morgan * * *"

It is not questioned that under the law of Wisconsin the property, which the Commissioner included in decedent's estate under authority of Section 302(f), passed to decedent's appointee by virtue of the exercise of the powers of appointment. Section 302(f) selects a particular type of transmission of property through a power of appointment, a type of transmission which is essentially a testamentary disposition, and treats such transmission as a transfer of estate property of the decedent who exercises the power of appointment. In the instant case the decedent had the income of the trust property during her life with the right ultimately to receive the corpus; and under the powers of appointment she had full power to dispose of all of her property interest after her death to whomsoever she might select as her appointee, or appointees. She exercised her powers of appointment by will and under the law of Wisconsin all of the interest which she had in the property passed to her appointee. Consequently, the precise question for decision by this Court is whether the powers of appointment were general powers within the meaning of that term as used in Section 302(f) of the Revenue Act of 1926, as amended.

It is petitioner-appellant's contention (1) that powers of appointment granted in language substantially the same as that used in the grants in the instant case have been held to be special powers by the Supreme Court of Wisconsin; and (2) that those decisions apply to the facts in the instant case and require the conclusion that the powers in question are special powers, and a holding that the property passing from decedent under her exercise of the powers was improperly included by the respondent, Commissioner, in decedent's gross estate. The foregoing contention presupposes that the language which grants the powers in the instant case must be tested by the definitions of general and special powers recognized by the law of Wisconsin.

The term "general power of appointment" has a well defined legal meaning. Ordinarily it designates a power to appoint any person or persons in the discretion of the donee of the power; and a power of appointment is general regardless of the extent of the property interest which is transferred by the exercise of the power. It is the limitation on the discretion of the donee in the selection of the appointee, or appointees, that distinguishes a special power of appointment from a general. By Treasury Regulation the former meaning of general power of appointment is adopted.

The following definition has been uniformly recognized by federal courts as a correct statement of the meaning of "general power" as that term is used in the Revenue Act: "A power of appointment is general when it is exercisable in favor of any person the donee may select, and special or limited when it is exercisable only in favor of persons or a class of persons designated in the instrument creating the power. * * *"²

We accept the foregoing definition of general power of appointment for the purpose of applying Section 302(f). The language which creates and grants the powers in the instant case places no restriction on the discretion of the grantee of the powers in respect to the selection of an appointee, or appointees. The language of the grants left the grantee free to exercise the powers of appointment in favor of any person whom she might select. In our opinion the powers were general powers within the meaning of Section 302(f) of the Revenue Act, and must be treated as such for purposes of this case unless some rule of Wisconsin law controls, as against Section 302(f), and requires a different result.

The Wisconsin case chiefly relied upon by petitioner is Cawker v. Dreutzer.³ In the course of the opinion the Wisconsin Supreme Court stated that the power of appointment which was under consideration and which was granted in language substantially the same as the language used in the instant case was, by statutory definition, a special and not a general power.⁴ The court stated that the power "is a special power * * * because it embraces an interest less than a fee." Respondent-appellee contends that the foregoing statement of the Supreme Court of Wisconsin was dictum. But granting that the statement expressed a holding, the significance of such a holding, for our present purposes, is that under the Wisconsin law the powers of appointment created by the language used in the will and deed herein involved embrace interests less than fees and are therefore, by statutory definition, special powers. But such a power satisfies the definition of a general power as that term is used in Section 302(f), even though it is characterized as a special power under statutory provisions in Wisconsin.

Petitioner relies on Leser v. Burnet, Commissioner,⁵ for a holding that state law determines whether a power is general for federal taxation purposes. In that case decedent exercised a power of appointment and the question was whether the property passing under such exercise should be included in decedent's gross estate for the purpose of computing the federal estate tax. The Circuit Court of Appeals first determined, independently of any local statute or court decisions, the meaning of "general power" as used in the Revenue Act, and held that 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." The court then said that it was necessary to determine whether the power "is a general power within this meaning of the act of Congress"; and stated that this was to be determined by the law of Maryland. The court then pointed out that in Maryland such grants of power as the one in question were construed strictly, and that unless the language of the grant of power expressly states that the donee may exercise the same for his own benefit or for the benefit of his creditors, then the power does not include the right so to be exercised. And since the grant of power did not expressly so...