Round v. CIR, 6248.

• Decision Date: 04 June 1964
• Docket Number: No. 6248.,6248.
• Citation: 332 F.2d 590
• Parties: John J. ROUND, Jr., et al., Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — First Circuit

332 F.2d 590 (1964)

John J. ROUND, Jr., et al., Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 6248.

United States Court of Appeals First Circuit.

June 4, 1964.

James Charles Roy, Boston, Mass., for petitioners.

Earl J. Silbert, Attorney, Department of Justice, with whom Louis F. Oberdorfer, Asst. Atty. Gen. and Lee A. Jackson and Loring W. Post, Attorneys, Department of Justice, were on brief for respondent.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

HARTIGAN, Circuit Judge.

This is a petition for review of the decision of the Tax Court of the United States determining a deficiency of $162,072.88 in the federal estate tax of John J. Round, Sr., deceased.

The petitioners are Boston Safe Deposit and Trust Company and John J. Round, Jr., co-executors of the Estate and under the will of John J. Round, deceased, late of Wakefield, Massachusetts (hereinafter called decedent).

The decedent died on April 4, 1958 at the age of eighty-six. In 1934 and 1935 the decedent established three "spendthrift" trusts under which his five minor children were the principal beneficiaries. The first trust (hereinafter called the September trust) was established on September 14, 1934 by a trust agreement entered into between decedent and Old Colony Trust Company. The second trust (hereinafter called the August trust) was established by a trust agreement entered into between decedent and State Street Trust Company of Boston on August 21, 1935. On December 31, 1935, the third trust (hereinafter called the December trust) was established by a trust agreement entered into between decedent and State Street Trust Company.

The August trust provided for the children to receive all of the income from their respective shares "so long as they shall live." It also allowed the trustees to advance or pay over portions of the principal held for the income beneficiary "if at any time in their sole discretion they shall deem such a distribution desirable." The September and December trusts gave the trustees the power to invade and advance principal "in case of emergency, from time to time and upon such conditions as in their sole discretion they shall determine to be for the best interests of said children." The September and August trust instruments gave the trustees the express power to withhold and accumulate income otherwise payable to the children in quarterly installments during the terms of the trusts.¹

The August and December trusts allowed for the resignation of "any trustee hereunder * * * by giving a notice in writing mailed to the last known address of all of the persons immediately interested therein, stating the fact of such resignation. * * *" All of the trusts provided that upon the decease, resignation or incapacity of decedent, the corporate trustee should act as the sole trustee of the particular trust.

In the latter part of 1955 or the early part of 1956 the decedent was unable to handle the details of his affairs. On April 6, 1956, he gave his son, John J. Round, Jr., a general power of attorney, and thereafter the son handled most of the decedent's affairs.

In October, 1956, the decedent's securities were placed in a non-supervised custodian account with Boston Safe Deposit and Trust Company. Under this type of account the bank had custody of the securities, did the bookkeeping, collected income and disbursed income. It had no other duties.

After the establishment of the custodian account, the decedent continued to have difficulty, and in 1957 he discussed with his son the appointment of a conservator. As a result of this conversation, the son communicated with George M. Poland, an attorney who was a lifelong friend of decedent. Poland had several talks with the decedent at his home during which decedent told Poland that he could not keep track of his affairs.

Poland explained to decedent what the appointment of a conservator would accomplish and discussed the manner of securing such an appointment. It was decided that it would be best for decedent himself to petition. The ground for the application for the conservatorship was discussed and Poland and decedent agreed that it would be on the ground that decedent was incapacitated by age. Poland prepared the petition and performed the necessary legal work in court to secure the appointment. The petition, signed by the decedent, was filed in the Middlesex Probate Court on October 25, 1957.

As required by law, the certificate of Dr. Robert Dutton was filed in court on the same day, certifying that he was a registered physician, that he had personally examined decedent within one day of the signing of the certificate, and that in his opinion "decedent was mentally competent to petition the Court for the appointment of a conservator of his property and was incapable by reason of advanced age of caring for himself and his estate."

The decree of the Middlesex County Probate Court dated October 28, 1957, recited that "After a hearing of the matter of said petition, it appears to the Court that said John J. Round is incapable of caring properly for his property" and decreed that the Boston Safe Deposit and Trust Company be appointed conservator of the property of the decedent.

This decree was in full force and effect from October 28, 1957 until the death of the decedent on April 4, 1958 and was not revoked nor modified. As of the date of his death, decedent had never tendered in writing his resignation as co-trustee of any of the trusts.

Upon the entry of the conservatorship decree Boston Safe Deposit and Trust Company took charge of the property of decedent as conservator and had sole management and responsibility until the date of his death. Shortly after its appointment as conservator Boston forwarded to Old Colony Trust Company and to State Street Trust Company certified copies of its appointment. Both trust companies thereupon halted all compensation payments to decedent and took over sole responsibility for the trusts. There is no evidence that decedent took any action in regard to the trusts following the appointment of the conservator.

The trust property was not included in decedent's gross estate on the estate-tax return. The fair market value as of the date of decedent's death of the property held in the three trusts was $493,445.92. Included in this value was undistributed income totalling $131,109.21 which had been accumulated and added to the principal. The respondent included the value of the three trusts at $493,445.92 in the decedent's gross estate and determined a deficiency in the Federal estate tax of $162,072.88.

The Tax Court sustained the action of respondent. It held that decedent in establishing the trusts, retained sufficient powers as co-trustee to accumulate or distribute income and to invade and distribute corpus to make the trusts includible in his estate by reason of section 2036(a) and section 2038(a) (2) of the Internal Revenue Code of 1954.² Petitioners do not here question this holding (except as to the income accumulations which will be discussed later) and, in any event, it is supported by well-established authority. E. g., Lober v. United States, 346 U.S. 335, 74 S.Ct. 98, 98 L.Ed. 15 (1953); Commissioner v. Estate of Holmes, 326 U.S. 480, 66 S. Ct. 257, 90 L.Ed. 228 (1946); Industrial Trust Co. v. Commissioner of Internal Rev., 165 F.2d 142 (1st Cir.1947); Hurd v. Commissioner of Internal Revenue, 160 F.2d 610 (1st Cir.1947).

Petitioners' argument is that at the date of decedent's death, decedent no longer retained his powers as co-trustee; that under the terms of the trust decedent was removed as trustee upon his becoming incapacitated; further, the appointment of a conservator for decedent's property was a definitive act which extinguished all of the right, power and authority of decedent to act as co-trustee under the three instruments. The Tax Court held that decedent was not permanently removed from his trusteeship position and the appointment of a conservator was not the definitive act called for by Hurd v. Commissioner of Internal Revenue, 160 F.2d 610 (1st Cir.1947), affirming Estate of Edward L. Hurd, 6 T.C. 819 (1946).

The three trust instruments contained the following provision:

"Upon the decease, resignation or incapacity of * * * decedent, the corporate trustee shall act as sole Trustee hereunder, and shall exercise all of the rights, privileges, immunities, discretions and duties hereunder."

Petitioners read this provision to provide that upon any of the three described contingencies, the corporate trustee would become sole trustee. It is reasoned that since upon resignation or death the corporate trustee would, in fact, become sole trustee rather than merely act as such, a harmonious construction of the provision requires the finding that upon incapacity as well, the corporate trustee would become sole trustee, extinguishing any powers decedent had over the trust.

While it is true that regardless of the words used in the trust instruments, the corporate trustee would, in fact, become sole trustee upon death or resignation of decedent, this fact is the necessary result of the permanent removal caused by those two events. Such a permanent removal does not necessarily follow from incapacity, which is often a temporary condition. Only an unusually strict construction of the provision could lead to the conclusion that upon the incapacity of a co-trustee his powers over the trust would be forever terminated. "Incapacity" is not defined in the trust instruments and if the word is given its common meaning, a two week hospital stay following an automobile accident would find a trustee sufficiently incapacitated and subject to removal within the contended-for meaning of the trust provision. It could not have been the intention of decedent, who as co-trustee maintained a large share of control over the trust, that he could be so easily ousted. Rather, it is...