Pierpont v. CIR, 9398.

• Decision Date: 04 September 1964
• Docket Number: No. 9398.,9398.
• Citation: 336 F.2d 277
• Parties: ESTATE of Mervin G. PIERPONT, Deceased, Union Trust Company of Maryland and Ernest L. Poyner, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

336 F.2d 277 (1964) ESTATE of Mervin G. PIERPONT, Deceased, Union Trust Company of Maryland and Ernest L. Poyner, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 9398.

United States Court of Appeals Fourth Circuit.

Argued June 19, 1964.

Decided September 4, 1964.

John S. McDaniel, Jr., Baltimore, Md. (John W. Cable, III, and Lawrence A. Kaufman, Baltimore, Md., on brief), for petitioners.

Benjamin M. Parker, Atty., Dept. of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, on brief), for respondent.

Before BRYAN and J. SPENCER BELL, Circuit Judges, and HEMPHILL, District Judge.

J. SPENCER BELL, Circuit Judge:

The Estate of Mervin G. Pierpont petitions for review of the Tax Court's decision that the estate was not entitled to a marital deduction with respect to a testamentary trust. The Tax Court concluded that the power granted by Pierpont's will to the life beneficiary, his wife, Lallah R. Pierpont, did not constitute, under Maryland law, a power to appoint the corpus of the trust to her estate within the meaning of § 2056(b) (5) of the Internal Revenue Code of 1954. The language employed in creating the Lallah R. Pierpont Trust, quoted below, makes it clear that Pierpont desired to take advantage of the marital deduction provisions of § 2056(b) (5). Concededly the only controversy before the Tax Court and before this court on appeal is whether or not the power created met the third condition prescribed under Treasury Regulations, § 20.2056(b)-5:

"Sec. 20.2056(b)-5. Marital deduction; life estate with power of appointment in surviving spouse.

"(a) In general. Section 2056(b) (5) provides that if an interest in property passes from the decedent to his surviving spouse (whether or not in trust) and the spouse is entitled for life to all the income from the entire interest * * *, with a power in her to appoint the entire interest * * *, the interest which passes to her is a deductible interest, to the extent that it satisfied all five of the conditions set forth below * * *:

* * * * * *

"(3) The surviving spouse must have the power to appoint the entire interest * * * to * * * her estate."

In reaching the conclusion that the third condition had not been met, the Tax Court did not deem itself bound by a decree of the Circuit Court of Baltimore City, a nisi prius court, that Lallah held the requisite power of appointment.

In the fall of 1948, following the passage of the Internal Revenue Act of 1948, Pierpont began discussions with officers of a Maryland Trust Company concerning the preparation of his will. During these discussions, Pierpont expressed the dual desires to make adequate provision for his wife and to minimize estate taxes by taking advantage of the recently enacted marital deduction provision of the Internal Revenue Code. Trust Company officials suggested that Pierpont set up a testamentary trust, in favor of his wife, providing for income payments to her for life and granting her the power to appoint the principal at her death. These suggestions were followed, and Pierpont's attorney created the Lallah R. Pierpont Trust under Item Sixth of his will. Pertinent portions of the Trust provided:

"ITEM SIXTH: Provided my said wife shall survive me, I direct my Executors to determine an amount which will be equal to one-half of my "Adjusted Gross Estate" (as defined in Paragraph (2) (A) of subsection (e) of section 812 of the U. S. Internal Revenue Code as amended by the Revenue Act of 1948) and to deduct from such amount the total value, as finally determined for Federal Estate tax purposes of all other interests in property which are included in my Adjusted Gross Estate but which will pass or will have passed to my said wife, by operation of law or in any other manner, and assets of my estate equal in value (as finally determined for Federal estate tax purposes) to such resulting net sum I give, devise and bequeath unto the named Trustee, as Trustee and its successor in trust, to be held in trust for the uses and purposes hereinafter set forth, such trust to be known as the LALLAH R. PIERPONT TRUST. The Trustee shall collect the income, rents and profits from this Trust and after the payment of all taxes thereon and all expenses and charges incident to the management thereof, shall, accounting from the date of my death, pay over and distribute the net income and principal thereof in the following manner:

"(a) The Trustee shall pay to my said wife, in quarter-annual installments, all of the income during the remainder of her lifetime.

* * * * * *

"(e) Upon the death of my said wife the entire remaining principal of the LALLAH R. PIERPONT TRUST, or such portion thereof as may be validly appointed shall be paid over free of this Trust in such manner and proportions as my said wife may designate and appoint in her Last Will and Testament. The power of appointment herein granted to my said wife shall be exercisable by her alone and in all events. To the extent that my said wife does not exercise a valid power of appointment in accordance with the power herein granted, that portion or all, as the case may be, of the principal of the LALLAH R. PIERPONT TRUST over which my said wife has failed to exercise a valid power of appointment shall be distributed absolutely to the Trustee of the residuary Trust created by Item Seventh of this Will, to be retained in trust and/or distributed in the same manner and under the same conditions as though such additions had been a part of the original principal of such residuary trust."

Upon Pierpont's death in 1956, the executors of his estate filed a federal estate tax return with the District Director, claiming as a marital deduction the value of the Lallah R. Pierpont Trust. The Commissioner disallowed the deduction, and in apt time, the estate filed a petition for review in the Tax Court. Thereafter, the widow, the trustee, and the executors instituted an action for declaratory judgment in the Circuit Court of Baltimore City, petitioning that the court uphold Lallah's right to appoint by her will the corpus of the trust "to her estate." Joined as respondents were Pierpont's son, his daughter-in-law, their children and descendants, and a Masonic fraternal organization, the alternative beneficiaries of a residuary trust under Item Seventh which was to receive the unappointed corpus of the Lallah R. Pierpont Trust. Any increase in the federal estate tax, resulting from a disallowance of the marital deduction would, ipso facto, decrease the corpus of the residuary trust, since the will under Item Third directed payment of estate and inheritance taxes from the residue.

All named respondents were duly summoned. Whether for tax considerations or some other, neither William nor his wife filed an answer to the petition and neither appeared individually nor by representative. The court appointed a guardian ad litem for William's children and descendants and the guardian, without admitting or denying the allegations of the complaint, by way of answer submitted his wards' rights for determination by the court. This answer was drafted by petitioners' counsel, who now represents the estate in the present controversy. The Masonic fraternal organization filed an answer agreeing that the court could grant the relief prayed for in the petition.

The Circuit Court of Baltimore City passed a decree pro confesso against the respondents named in the complaint and referred the matter to an examiner-master. After a hearing, which consisted in its entirety of the testimony of an officer of the Trust Company, the examiner-master filed his report and it was signed by the court. The report incorporated verbatim a memorandum of law submitted by petitioners' counsel¹, including the last paragraph reading as follows:

"Accordingly, it is respectfully submitted that a decree should be entered determining that under a proper construction of the Last Will and Testament of the Decedent the Petitioner, Lallah R. Pierpont, has the power to appoint all or any part of the corpus of the trust estate to her estate."

No appeal was taken from the decree.

On review of the Commissioner's deficiency determination by the Tax Court, that court held the decree not binding as to extent of Lallah's power of appointment because "the proceeding was nonadversary and because the petition therein, upon which the decree was based, was admittedly uncontested and the only apparent purpose thereof was to obtain a tax advantage. In effect, the decree was a consent decree, and does not settle the instant question for Federal tax purposes." The court then made an independent survey of the applicable Maryland law and concluded that "a donee of a granted power of appointment does not have the right to appoint to his estate unless the donor has, by express language to that effect, authorized him to do so." The court, therefore, upheld the Commissioner's determination of a deficiency.

The estate attacks both major premises of the Tax Court decision, contending that the Tax Court was conclusively bound by the decree of the Circuit Court of Baltimore City that Lallah had the power to appoint to her estate. It further contends that even if the Tax Court was not so bound, it erred in its independent determination that under Maryland law Lallah was unable to appoint to her estate. We are convinced that the Tax Court was correct on both points.

We recognize that we are bound by the law of Maryland in determining whether or not Lallah had those incidents of dominion over the corpus of the trust enumerated in the Int.Rev.Code of 1954, § 2056(b) (5), that would qualify the estate to take a marital deduction. As stated by the Supreme Court in Morgan v. Commissioner, 309 U.S. 78, 80, 60 S.Ct. 424, 426, 84 L.Ed. 585 (1940):

"State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so

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