Piatt v. Gray
| Decision Date | 29 November 1961 |
| Docket Number | Civ. A. No. 3989. |
| Parties | Jane G. PIATT et al., etc., Plaintiffs, v. William M. GRAY, etc., Defendant. |
| Court | U.S. District Court — Western District of Kentucky |
Stoll, Keenon & Park, Lexington, Ky., for plaintiffs.
William E. Scent, U. S. Atty., Louisville, Ky., for defendant.
This action is submitted on the record and the briefs of the parties, and the facts have been stipulated. Plaintiffs, co-executors of the estate of Thomas Carr Piatt, claim that the defendant, the former District Director of Internal Revenue for the District of Kentucky, improperly disallowed a marital deduction for an interest in property passing under the testator's will to his widow, resulting in an overpayment of federal estate taxes. The testator died on December 9, 1957. Clause III of his will provides in part:
Section 812(e) (1) (F) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 812(e) (1) (F), Section 93 of the Technical Amendments Act of 1958, is the applicable law under which the wife's interest must qualify, if at all, for the marital deduction.1
There are two questions to be answered, and the first question relates to the type of power the surviving spouse must have, in addition to her life estate, in order to qualify as a "power to appoint" exercisable "in all events" within the meaning of Section 812(e) (1) (F). This is a matter of federal law. Morgan v. Commissioner, 309 U.S. 78, 626, 60 S.Ct. 424, 84 L.Ed. 585, 1035; Hoffman v. McGinnes, 277 F.2d 598 (C.A.3). The answer to this question, by the weight of authority, is that the surviving spouse must be given the unrestricted right to appoint the principal of the estate to himself or herself as unqualified owner or to appoint it to his or her estate. See Estate of Semmes v. Commissioner, 288 F.2d 664 (C.A.6); May's Estate v. Commissioner, 283 F.2d 853 (C.A.2), cert. denied, 366 U.S. 903, 81 S.Ct. 1045, 6 L.Ed.2d 202; Hoffman v. McGinnes, supra; Stallworth's Estate v. Commissioner, 260 F.2d 760 (C.A.5); Commissioner of Internal Revenue v. Ellis' Estate, 252 F.2d 109 (C.A.3); Pipe's Estate v. Commissioner, 241 F.2d 210 (C.A.2), cert. denied, 355 U.S. 814, 78 S.Ct. 15, 2 L.Ed.2d 31; Starrett v. Commissioner, 223 F.2d 163 (C.A.1). Contra, McGehee v. Commissioner, 260 F.2d 813 (C.A.5); Lincoln Rochester Trust Co. v. United States, 188 F.Supp. 839 (W.D.N.Y.); and Boyd v. Gray, decided by this Court in 1959 and reported in 175 F.Supp. 57. These same authorities demonstrate that "power to appoint," as the phrase is used in the statute, means that the surviving spouse must be able to cut off remainder interests by withdrawing all or a specific portion of the principal from the testator's estate at any time and must be able to make an independent testamentary disposition of the unconsumed portion of the principal so withdrawn.
The cases relied upon, especially Commissioner of Internal Revenue v. Ellis' Estate, supra, and Starrett v. Commissioner, supra, have carefully analyzed the congressional intent behind the marital deduction provisions and the statutory scheme of Section 812 (), particularly with regard to subparagraph (F) of that section. The reason subparagraph (F) was included in Section 812 was because Congress saw fit to make the marital deduction available for the frequently-used common law form of testamentary transfer whereby the surviving spouse is given a life estate coupled with a general power of appointment by deed or will with a devise over in the event of a failure to appoint. Commissioner of Internal Revenue v. Ellis' Estate, supra; Starrett v. Commissioner, supra. But for subparagraph (F), such a transfer does not qualify because the surviving spouse's interest is terminable in the event of her failure to exercise the power. Commissioner of Internal Revenue v. Ellis' Estate, supra.
The purpose of the marital deduction provisions is to make available to surviving spouses in common law states the estate tax benefits flowing from community property law, and the important consideration is that the surviving spouse can become the owner of the property, not that he or she can appoint it to others. Where nothing more than the exercise of a power stands between the surviving spouse and absolute ownership of the property, this interest is deemed sufficiently like that of a surviving spouse in a community property state to be entitled to the same tax treatment.
There appears to be no sound reason, however, for holding that the marital deduction should be available where the surviving spouse's interest is substantially less than that of a surviving spouse in a community property state. As said in the case of Commissioner of Internal Revenue v. Ellis' Estate, supra at 114 of 252 F.2d, "It appears that Congress looked to an absolute ownership of the surviving spouse in a community-property state as the test and that anything less should not be granted the deduction unless it comes squarely within a strict construction of subparagraph (F)." There the widow was entitled to receive annually, in addition to the greater of (1) the income of the trust or (2) $5,000, such further amounts of principal as she should "require," "she and she alone to be the sole judge of how much shall be required * * *." The marital deduction was disallowed, because under Pennsylvania law the wife's power to deal with the property was limited by a good faith requirement — that is, she could in no way alter the remainder interests created by her husband except by her consumption of the estate. In the later case of Hoffman v. McGinnes, supra, the marital deduction was allowed where the will in question had directed that the trustees pay over to the wife from time to time "any part of the principal of my estate she may desire and said trust shall cease as to that part of the principal so paid to her." In distinguishing the case from Commissioner of Internal Revenue v. Ellis' Estate, supra, the Court emphasized that the above-quoted provision was "intended as a `cut-off' of the right of remainder interests to the extent of the principal `used' by the surviving spouse." As to any sums of principal paid to her, the wife became the absolute owner — in other words, she had the power to appoint to herself as unqualified owner.
Further support is found in May's Estate v. Commissioner, supra, where the Court said, obiter, "The power to invade at will does not comprehend the important power to appoint to the spouse or her estate." This statement was made in conjunction with a reference to Pipe's Estate v. Commissioner, supra, in which case the Court said, obiter, that the power to consume or dispose of the principal without restraint during the wife's lifetime would not qualify for the marital deduction if she could not "devise or bequeath any unconsumed corpus at her death to beneficiaries of her own choice." This very question was pointedly raised by the dissent in Estate of Ellis, 26 T.C. 694, reversed, Commissioner of Internal Revenue v. Ellis' Estate, supra, in the following language:
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