United States v. Lincoln Rochester Trust Company

• Decision Date: 10 January 1962
• Docket Number: Docket 26879.,No. 23,23
• Citation: 297 F.2d 891
• Parties: UNITED STATES of America, Appellant, v. LINCOLN ROCHESTER TRUST COMPANY, as Administrator, c. t. a., of the Last Will & Testament of Albert E. Copeland, deceased, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

297 F.2d 891 (1962)

UNITED STATES of America, Appellant, v. LINCOLN ROCHESTER TRUST COMPANY, as Administrator, c. t. a., of the Last Will & Testament of Albert E. Copeland, deceased, Appellee.

No. 23, Docket 26879.

United States Court of Appeals Second Circuit.

Argued November 17, 1961.

Decided January 10, 1962.

Harold M. Seidel, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., Neil R. Farmelo, U. S. Atty., Buffalo, N. Y., and Anthony R. Palermo, Asst. U. S. Atty., Western Dist. of New York, Rochester, N. Y., on the brief), for appellant.

Scott Stewart, Jr., Rochester, N. Y. (Sterling L. Weaver and Nixon, Hargrave, Devans & Dey, Rochester, N. Y., on the brief), for appellee.

Before MOORE, SMITH and HAYS, Circuit Judges.

J. JOSEPH SMITH, Circuit Judge.

This is an appeal by the Commissioner from a judgment of the District Court awarding taxpayer a refund for taxes paid on a deficiency assessment of $14,055.22 plus interest. The case was submitted on an agreed stipulation of facts which are fully set forth in the opinion below, reported at 188 F.Supp. 839 (W.D. N.Y.1960).

The widow of deceased was given a life estate and the power to "use any part of the principal" of the estate. The District Court held that this gave the widow a right to consume the principal of the estate in which she was given the income for life, which power to consume was sufficiently broad to take her life interest out of the class of terminable interest and entitle her husband's estate to the marital deduction under Section 812(e) (1) (F) of the Internal Revenue Code of 1939, as amended. 26 U.S.C.A. (1939 ed.) Section 812(e) (1) (F). We hold that this language did not amount to a power in the surviving spouse to appoint in her own favor in all events and does not qualify for the marital deduction. We reverse and remand for dismissal of the complaint.

Two weeks after Judge Burke's decision this court decided Estate of May v. Commissioner, 283 F.2d 853, 856 (2 Cir., 1960), cert. denied 366 U.S. 903, 81 S.Ct. 1045, 6 L.Ed.2d 202 (1961), which held that under the law of New York the power to invade and consume, any or all of the principal did not create a "power in the surviving spouse to appoint * * (in favor of such surviving spouse) * * in all events."¹ (Emphasis added.)

Unless the surviving spouse has the right to dispose of the principal by gift or otherwise in her absolute discretion the case is controlled by our decision in May, supra. The District Court relied on H.Rep. No. 1027, 85th Cong., 1st Sess., 1957, which accompanied H.R. 8881, passed by the House which contained a specific provision that although the surviving spouse must have the authority to give the property away it need not include the power to dispose of the property by will. H.R. 8881, however, never became law as written and passed by the House. H.R. 8381 which became Section 92(a) of the Technical Amendments Act of 1958, made no mention of the issue. The language referred to in this Report relied on by the District Court was not included in the Act as it finally was adopted. No reliance can therefore be placed on this portion of the Report in interpreting the Act.

In a proceeding concerning the will involved in the instant case the Surrogate's Court of Monroe County decided that the widow had the "unlimited right to consume * * * and that neither Section 141 nor 149 of the Real Property Law of New York preventing a trustee from appointing to himself restrict in any way the right * * * to consume any and all of the principal thereof." The statement that the right is unlimited apparently had reference only to the prohibitions of Sections 141 and 149 and whether they prohibit the surviving spouse from consuming the principal of the trust. There is no reason to believe that the Surrogate had reference to the well settled rule of New York that the right to consume is limited by a standard of good faith. The obligation, imposed by law, to exercise the power in good faith based upon honest judgment, In re Britt's Will, 272 App.Div. 426, 71 N.Y.S. 2d 405 (App.Div.1947), In re Mitchell's Will, 15 Misc.2d 651, 181 N.Y.S.2d 436 (Surr.Court 1959), so limits the power to invade here that it is not a power exercisable in all events.

We held in May's Estate v. Commissioner that the existence of the obligation established that the power was not exercisable in all events. In...