Self v. United States, 54-54.

• Decision Date: 05 June 1956
• Docket Number: No. 54-54.,54-54.
• Citation: 142 F. Supp. 939
• Parties: James C. SELF, Jr., v. The UNITED STATES.
• Court: U.S. Claims Court

142 F. Supp. 939

James C. SELF, Jr., v. The UNITED STATES.

No. 54-54.

United States Court of Claims.

June 5, 1956.

John C. Reid, Washington, D. C., for plaintiff. Ivins, Phillips & Barker, Washington, D. C., were on the brief.

Sheldon J. Gitelman, Silver Spring, Md., with whom was Asst. Atty. Gen. Charles K. Rice, for defendant. Andrew D. Sharpe, Washington, D. C., was on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and LARAMORE, Judges.

LITTLETON, Judge.

This is a suit to recover gift taxes paid by plaintiff for the year 1951, in the amount of $918.23. The facts have been stipulated and may be summarized as follows:

On November 23, 1948, plaintiff's father transferred a block of common stock of a corporation called Greenwood Mills in trust, with the income from the trust fund to be paid to plaintiff for life, with remainders to plaintiff's descendants, if any, and if none, to a charitable foundation. By this trust instrument plaintiff was given the right at any time during his life to appoint by deed all or part of the trust property to or among his descendants. The plaintiff's father paid a gift tax upon the entire value of the property transferred in trust on November 23, 1948.

On October 2, 1951, plaintiff exercised the limited power of appointment given him under the trust instrument by executing 2 deeds appointing 100 shares of the Greenwood Mills common stock to a trust for his son and 100 shares of the same stock to a trust for his daughter. The 200 shares were, pursuant to the terms of the trust, separated and transferred to the 2 trusts for the benefit of plaintiff's children. The plaintiff filed a gift tax return for 1951, and paid, inter alia, a gift tax on the value of the right to receive the income for life from the 200 shares of Greenwood Mills common stock. The plaintiff filed a timely claim for refund. No action has been taken on the claim and this suit was timely filed.

The issue before the court is whether in exercising his limited power of appointment the plaintiff made a taxable gift equal to the value of the right to receive the income for life from the trust property transferred.

The applicable portion of the statute, 26 U.S.C. § 1000, 1952 ed., is as follows:

"Sec. 1000. Imposition of tax. (a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. * * *

"(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *.

"(c) * * * Powers created after October 21, 1942. The exercise of a general power of appointment created after October 21, 1942, or the release after May 31, 1951, of such a power, shall be deemed a transfer of property by the individual possessing such power. A disclaimer or renunciation of such a power of appointment shall not be deemed a release of such power.

"(3) Definition of general power of appointment. For the purposes of this subsection the term `general power of appointment' means a power which is exercisable in favor of the individual possessing the power (hereafter in this paragraph referred to as the `possessor'), his estate, his creditors, or the creditors of his estate; * * *."

At common law, the transfer of property under a power of appointment was considered to have been made directly from the donor to the appointee. The donor's instrument effected the transfer and the property did not belong to the donee. Prior to 1942, the common law concept of powers of appointment was followed by the courts in gift tax cases and it was held that the appointment by the donee of the power did not constitute a taxable gift on the part of the donee. Florence E. Walston v. Commissioner, 8 T.C. 72, affirmed 4 Cir., 168 F.2d 211; Mabel F. Grasselli v. Commissioner, 7 T.C. 255, and the cases cited therein. Section 452 of the Revenue Act of 1942. 56 Stat. 798, and section 3(a) of the Powers of Appointment Act of 1951, 65 Stat. 91, amended section 1000 of the 1939 Internal Revenue Code to provide that the exercise or release of a general power of appointment is taxable, with certain limitations relative to effective dates.

The defendant concedes that the transfer of an interest in property pursuant to the exercise of a limited or special power of appointment is not subject to the gift tax. It is defendant's position that the plaintiff's power related only to the trust corpus, not to the trust income, and that the transfer of the income interest was not made pursuant to a limited power and is therefore subject to the gift tax. The defendant argues that plaintiff transferred two separate interests when he exercised his limited power of appointment. First, he transferred 200 shares of stock in which he had no interest or vested right. Second, he transferred his vested right to the income from those 200 shares for his life. The plaintiff contends that because of the inherent nature of the income-producing property, such as the stock, it was impossible to transfer the property pursuant to the power of appointment without transferring the fruits from the property.

We believe that when the donee exercises a power of appointment over a corpus consisting of income-producing property by transferring part of the income-producing property to the appointee, the income to be earned from the property thus transferred automatically and necessarily goes with the legal title to the property, unless provision is specifically made for the contrary. In fact, the terms of the provision granting the power of appointment to plaintiff indicate that plaintiff's right to the income from the part of the corpus transferred pursuant to the power was to terminate upon the exercise of the power.¹ The first sentence of this article provides that the "entire net income of the trust fund" should be paid to plaintiff during his life. The second sentence provides that nevertheless, plaintiff should have the power by deed to appoint any or all of the corpus to his descendants. The third sentence provides that upon the exercise of the power the "trustees shall...