Pyle by Straub v. U.S.

• Decision Date: 10 July 1985
• Docket Number: No. 84-2242,84-2242
• Citation: 766 F.2d 1141
• Parties: -6521, 85-2 USTC P 13,626 Grace S. PYLE, a disabled adult, by Carolyn STRAUB, Successor Guardian of her Estate, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1141

766 F.2d 1141

56 A.F.T.R.2d 85-6521, 85-2 USTC P 13,626

Grace S. PYLE, a disabled adult, by Carolyn STRAUB Successor Guardian of her Estate, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 84-2242.

United States Court of Appeals Seventh Circuit.

Argued April 12, 1985.

Decided July 10, 1985.

R.E. Dehen, Springfield, Ill., for plaintiff-appellee.

Patricia A. Willing, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Before CUMMINGS, Chief Judge, and POSNER and FLAUM, Circuit Judges.

CUMMINGS, Chief Judge.

Grace S. Pyle, through her successor guardian, Carolyn Straub, brought suit to recover federal gift tax in the amount of $315,298.00, plus interest and costs. The court below granted Pyle's summary judgment motion. 581 F.Supp. 252 (C.D.Ill.1984). We reverse.

I

On November 29, 1973, taxpayer and her husband executed a joint and mutual will containing the following two clauses:

Third: I, Homer V. Pyle, hereby will, give, devise and bequeath all of my property, both personal and real or mixed, and wheresoever situated, to my wife, Grace S. Pyle, in fee simple.

Fourth: I, Grace S. Pyle, hereby will, give, devise and bequeath unto my husband, Homer V. Pyle, all of my property, both personal, real or mixed, and wheresoever situated, to be his in fee simple.

Subsequent paragraphs specified in great detail the disposition that the couple desired of their property at the death of the survivor of them.

Homer died on March 27, 1978. In December of that year, while Grace was hospitalized, ¹ her attorney filed a gift tax return and eventually paid taxes and interest of $315,298.00 on all of Grace's property. Evidently he assumed that the couple's will functioned to make a valid gift from Grace to the named beneficiaries. Grace now challenges this payment as erroneous and seeks a refund.

Grace, along with other parties, filed suit in state court for judicial construction of her and her husband's will. On January 10, 1981, the Illinois Circuit Court of the Seventh Judicial Circuit rendered its opinion. The court construed the will as a joint and mutual will. Illinois courts interpret such arrangements to give the survivor the equivalent of a life estate in the couple's assets. See, e.g., First United Presbyterian Church v. Christenson 4 Ill.2d 491, 1 Ill.Dec. 344, 356 N.E.2d 532 (1976). The contract not to revoke that is held to underlie mutual wills renders them irrevocable, by which statement courts mean that the beneficiaries of the joint and mutual will can sue beneficiaries under any subsequent will for specific performance of the mutual will's provisions. Tontz v. Heath, 20 Ill.2d 286, 292-294, 170 N.E.2d 153 (1960); Freese v. Freese, 49 Ill.App.3d 1041, 1043-1044, 7 Ill.Dec. 692, 364 N.E.2d 983 (4th Dist.1977). ² The court found in the will that Grace and Homer intended "to provide for the needs of the surviving spouse, whomever it might have been, for his or her lifetime, but upon the death of the survivor, a specified plan of disposition was established." App. 31. In order to effect this specified plan, the state court determined that Grace was bound not only to convey whatever happened to remain at her death according to the joint and mutual will's provisions but also to conserve the corpus of the property. Consequently, the court prohibited her "from alienating all of the property and disposing of the same without restriction except insofar as it is necessary to utilize any or all of the assets for her health, support, comfort or maintenance." Id. The court then held that Grace

has fee simple title to any and all property standing in the sole name of Homer V. Pyle at the time of his death subject to the contract contained in the Joint and Mutual Will. Said contract restricts Grace S. Pyle from alienating, transferring, conveying or disposing of any and all of her property howsoever acquired with the exception that she or her legal representatives may utilize the income and any corpus necessary for her health, support, comfort and maintenance requirements.

Id. Finally, the court authorized Grace or her legal representatives to sell any of the assets "for investments of equal or more value," with the exception of two parcels of real estate that had been specifically devised. Id.

The district court accepted the government's position that the will effected a gift from Grace of her and her husband's entire property to the will's named beneficiaries. But because the district court interpreted the state court's opinion, especially its references to Grace's ability to invade the corpus for her comfort, to mean that her power to invade was not limited by an ascertainable standard, it determined that her gift to the remaindermen was incomplete and therefore not subject to federal gift tax. According to the lower court, the federal government would have to wait until Grace's death and then impose estate tax on the property. We disagree.

II

The issue to be decided is whether the beneficiaries' interests in Homer's and Grace's property was sufficiently certain upon his death to constitute a completed gift from Grace to the remaindermen at the time of Homer's death. The certainty of the gift (and the concomitant ability to value it for taxation purposes) depends on whether Grace's powers to dispose of the property were unlimited or constrained by some ascertainable standard. Illinois law determines the latter question. Morgan v. Commissioner, 309 U.S. 78, 80, 60 S.Ct. 424, 425, 84 L.Ed. 1035 (1940) (powers of appointment); Brantingham v. United States, 631 F.2d 542, 545 (7th Cir.1980) (same).

The will stated that Homer's property would pass to Grace "in fee simple," but this language is only the beginning of the inquiry. The emphasis plaintiff places thereon is misguided. The Illinois Supreme Court has made clear on previous occasions that general words such as "in fee simple" are not determinative when followed by subsequent clauses that confer the property on another at the death of the first taker. In such a situation, the instrument in question creates no more than a life estate in favor of the first person named. First United Presbyterian Church v. Christenson, 64 Ill.2d at 498-499, 1 Ill.Dec. 344, 356 N.E.2d 532 (joint and mutual will); Griffin v. Griffin, 29 Ill.2d 354, 357-358, 194 N.E.2d 641 (1963) (successive life estates in will). Of critical importance is that the testators' intent "be determined from a reading of the entire will and not from a single word, phrase or section." First United Presbyterian Church v. Christenson, 64 Ill.2d at 498, 1 Ill.Dec. 344, 356 N.E.2d 532.

In the case at bar we are fortunate to have the guidance of an Illinois state court's interpretation of the will at issue. The court did not specifically address the question before us, but a close reading of the entire opinion indicates the correct result. Although the court, as had the will itself, described Grace's interest as being held in fee simple, the court imposed significant constraints on her liberty to dispose of the property. While entitled to the income from the property, she may invade the corpus only for her "health, support, comfort and maintenance." The court permitted her to sell some of the assets, but only in order to acquire "investments of equal or more value." Even then certain parcels of real estate may not be disposed of at all unless Grace has consumed all of the other assets first and requires the proceeds of the real estate for her health, support, comfort and maintenance. Although Grace has in fact sold, mortgaged, and used some of the property at issue, she has done so only with the court's approval. While her requesting permission in and of itself is not dispositive, the state court's recognition of the limits imposed by her contractual obligation not to revoke illustrates the extent to which her ability to alienate the property is constrained. These stringent limits reinforce the inference that Grace may not freely dissipate the property so that an ascertainable standard indeed limits her interest.

Unfortunately, other than the judicial construction of the will by the state court, little case law on the issue exists. Plaintiff argues first that the joint and mutual will, as far as its beneficiaries are concerned, was contractual and not dispositive. While they might have a right as third-party beneficiaries to enforce the underlying contract not to revoke, their interest is still both undeterminable and unvested until Grace's death, at which time the right to the property will vest in them. In support of this argument plaintiff cites Estate of Lidbury, 84 T.C. 146 No. 10 (1985), purporting to apply Illinois law. In Lidbury, the Tax Court held that a joint and mutual will did not effect a gift from the widower to the will's beneficiaries at the wife's death and would not do so until the husband died.

The Lidbury decision is not probative for several reasons. To begin, the Tax Court's characterization of the will as being joint and mutual was in error. The will was joint, because it was a single document acting as the will for two different people, and it contained reciprocal provisions. But it was not mutual in the legal sense of the word, because the couple had not executed the will pursuant to a contract not to revoke. Id. at 155. The contract not to revoke underlying joint and mutual wills is the feature rendering them irrevocable and conferring on the beneficiaries thereunder their right to specific performance. In addition, the will in Lidbury had not even been admitted to probate when Mrs. Lidbury had died, so that it was not effective as a will. Id. at 154. Consequently it was not effective as either a will or as a contract to dispose of the property. In the instant situation the will was admitted to probate at Homer's death. The state court specifically found that it had been executed pursuant to a...