Stewart v. U.S.

• Decision Date: 24 April 1975
• Docket Number: No. 74-1577,74-1577
• Citation: 512 F.2d 269
• Parties: 75-1 USTC P 13,066 Cyrus Q. STEWART, Jr., and William L. Stewart, as Executors of the Will of Mildred L. Stewart, Deceased, Plaintiffs-Appellants, v. The UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 269

512 F.2d 269

75-1 USTC P 13,066

Cyrus Q. STEWART, Jr., and William L. Stewart, as Executors of the Will of Mildred L. Stewart, Deceased, Plaintiffs-Appellants, v. The UNITED STATES of America, Defendant-Appellee.

No. 74-1577.

United States Court of Appeals, Fifth Circuit.

April 24, 1975.

William L. Stewart, Myers, Fla., for plaintiffs-appellants.

Scott P. Crampton, Asst. Atty. Gen., Jay R. Weill, Meyer Rothwacks, Chief, App. Sec., William S. Estabrook, III, Tax Div., Dept. of Justice, Washington, D. C., John L. Briggs, U. S. Atty., Jacksonville, Fla., Loring W. Post, Tax Div., Dept. of Justice, Washington, D. C., Hugh Smith, Gary R. Trombley, Asst. U. S. Attys., Tampa, Fla., for defendant-appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before GEWIN and SIMPSON, Circuit Judges, and NICHOLS, ^* Associate Judge.

GEWIN, Circuit Judge:

Appellants, as executors of the will of Mildred L. Stewart, deceased, (the testatrix or decedent) seek the refund of estate taxes, plus interest, paid on a deficiency assessed against them by the Commissioner of Internal Revenue. The district court ruled adversely to the executors and we affirm.

The facts are not disputed. In July 1929, William T. Lynam (the settlor) created an inter vivos trust, the beneficiaries of which were the settlor and his children, Rodney, William T., Jr., and Mildred L. Stewart. As indicated, this suit involves the will and estate of Mildred L. Stewart. The pertinent terms of the trust for purposes of this appeal provided that the net trust income should go to Rodney Lynam for life and at his death the remaining corpus should be divided equally between William T. Lynam, Jr. and Mildred L. Stewart. In the event Mildred predeceased Rodney her share was to go to whomever she designated in her last will or in default of her exercise of such power to her issue per stirpes. ¹ The parties agree that by virtue of the terms of the trust the decedent possessed a general power of appointment. The issue on appeal, whether the decedent-donee exercised the power ² arises as a result of the trust instrument's generous provision for the execution of the power. The trust instrument provided:

It is the true intent and meaning of this Declaration of Trust that in the making of a will by either or both the said Mildred L. Stewart or William T. Lynam, Jr., it shall not be necessary for her or him to make reference to her or his share and interest in the Trust Estate herein established, but the said share and interest shall be held to vest in their respective legatees as fully and to all intents and purposes, in the same manner as any other portion of her or his estate then actually in her or his possession, any law, custom or usage to the contrary notwithstanding. (Emphasis added)

In 1965 the decedent died testate, but her will which was executed on May 29, 1964, made no mention of the general power of appointment. The trustee, Wilmington Trust Company of Wilmington, Delaware, distributed the decedent's interest in the trust corpus as provided by the residuary clause of her will; forty percent to her daughter and thirty percent to each of her two sons. ³ An estate tax return was timely filed but failed to include as part of the estate any interest in the 1929 trust. The district court ratifying the Commissioner's finding that the decedent had exercised the pre-1942 general power of appointment ⁴ held that the estate tax return was deficient. This appeal followed. The appellants contend that the district court erred in holding that in light of the previously quoted trust provision the decedent's will constituted an exercise of her general power of appointment, regardless of any intent on decedent's part to exercise the power. We affirm, but hold that under the facts and in the circumstances stipulated by the parties and disclosed in the record the decedent's intent to exercise the general power of appointment was as a matter of law and fact manifested by the execution of her will.

The powers of appointment section of the Internal Revenue Code has had a long and variegated history. ⁵ The present section 2041, a result of Congressional statutory revision undertaken in 1951 in order to remedy dissatisfaction with the 1942 Revenue Act, provides that property subject to a general power of appointment created on or before October 21, 1942 is includable in the gross estate only when the power is exercised. ⁶ See Keeter v. United States, 461 F.2d 714, 716 (5th Cir. 1972) and cases cited therein. The question whether a power has been exercised is a frequently litigated one and often arises, as in this case, when a testator purports to dispose of all his property by will but fails to mention the power. ⁷

There are basically three contexts in which litigation prompted by a testamentary disposition which fails to mention a power arises: (1) the donor of the power has explicitly provided for the manner in which the power shall be exercised, (2) the donor has indicated that the laws of a particular jurisdiction will control with respect to the question of exercise, (3) the donor has failed to say whether a power is exercised or not exercised by a will which does not mention the power. See generally, A. Scott, The Law of Trusts 4058-71 (3d ed. 1967); Annot. Conflict of Laws as to Exercise of Power of Appointment, 150 A.L.R 519 (1944); Annot. Power of Appointment-Exercise, 16 A.L.R.3d 911 (1967); Annot. Powers Exercise Intent, 16 A.L.R.3d 951 (1967). Litigation is most prolific when the donor makes no disclosure of intent. In such a case a question of interpretation of the donee's will may arise. ⁸ The appellants contend that the instant suit presents just such a situation and argue that the taxability of the decedent's interest in the trust depends, therefore, on whether the decedent's intention to exercise the power is evidenced by the execution of her will. If we assume for purposes of discussion that the appellants are correct, it is clear that this court must look to local law for guidance as to whether a power may be exercised by a will which fails to mention the power. ⁹ Florida the domicile of decedent at the time of her death and Delaware, the state in which the trust was created, both follow the majority rule that the residuary clause of a will, absent other indications, is insufficient to establish the fact that a general power of appointment has been exercised. De Pass v. Kansas Masonic Home, 132 Fla. 455, 181 So. 410 (1938); Carlisle v. Delaware Trust Co., 34 Del.Ch. 133, 99 A.2d 764 (1953); Powers, 62 Am.Jur.2d 151 (1972). ¹⁰

However, we agree with the district court that this suit is properly conceptualized as arising in the first mentioned litigational context in which the donor has explicitly directed the manner of exercise of the power. The positive terms of the trust instrument therefore support the conclusion that the decedent-donee intended to exercise the power of appointment when she executed her will. In other words, this case is not one, as the appellants contend, in which the trust instrument neglects to say whether the power is exercised or not exercised by a will which fails to mention the power, and local rules of will construction are, therefore, incidental to the determination whether the power was in fact exercised.

The difficult problem presented on this appeal is that while we find this case properly cognizable as one in which the donor's instructions are of critical importance, the manifestation of the donor's intent is the converse of what is normally expected. That is, a donor often states that in order for the power to be exercised it must be explicitly mentioned in the will. See, e. g., In re Schede's Estate, 426 Pa. 93, 231 A.2d 135 (1967). Such a provision is designed to prevent the inadvertent exercise of a power and the inclusion of such a statement will clearly negate the exercise of the power by a will which fails to refer to the power. In the instant case the donor clearly states the opposite; the power shall be exercised by a will notwithstanding a lack of reference. There is a paucity of authority in this area; in fact, we have found no cases which discuss the point precisely. However, the guidance we have found signals our result.

We recognize the principle that a donor's stipulation that a power shall be exercised only by a will making explicit reference to the power is controlling. Stated more generally, the donor may control the manner in which the power is exercised. See, e. g., Annot. 150 A.L.R. 519 (1944); Condon Nat'l Bk. v. United States, 349 F.Supp. 755 (D.Kan.1972); and authorities cited in text, infra. Commentators agree that if the donor may affirmatively prescribe the mode of exercise then it follows that "(I)f it is provided in the trust instrument or will under which the power is created that it may be exercised by a will which does not mention the power, it would seem that it may be exercised by such a will." A. Scott, The Law of Trusts at 4059. See also Restatement (second) Conflict of Laws § 275, comment (b)(1971). The appellants note the equivocal ring of Scott's statement in asserting that the donor's intent in the instant case is addressed only to the proper mode of exercise, and therefore, the donee's intent with respect to actual exercise must be ascertained solely by reference to her will. Such an argument, however, fails to account for the mandatory tenor of the trust instrument's language: the power shall be exercised by a will even though the will fails to refer to the power and the trust property shall be held to vest in the testatrix's legatees notwithstanding any law, custom or usage to the contrary. Moreover, such argument inadequately considers the principle that the donor, as owner of the property subject to the power may dictate the manner of its exercise. ¹¹ In re Estate of Schede, 426 Pa. 93, 231 A.2d 135, 136 (1967). See also, Gibson v....