United States v. Merchants National Bank of Mobile

• Decision Date: 26 November 1958
• Docket Number: No. 17197.,17197.
• Citation: 261 F.2d 570
• Parties: UNITED STATES of America, Appellant, v. The MERCHANTS NATIONAL BANK OF MOBILE, As Executor under the will of Nettie F. Turner, deceased, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

261 F.2d 570 (1958)

UNITED STATES of America, Appellant, v. The MERCHANTS NATIONAL BANK OF MOBILE, As Executor under the will of Nettie F. Turner, deceased, Appellee.

No. 17197.

United States Court of Appeals Fifth Circuit.

November 26, 1958.

Gilbert E. Andrews, Jr., Melva M. Graney, Lee A. Jackson, Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Ralph Kennamer, U. S. Atty., Mobile, Ala., for appellant.

J. Manson Murray, Mobile, Ala. (Vickers, Riis, Murray & Curran, Mobile, Ala., of counsel), for appellee

Before RIVES, BROWN, and WISDOM, Circuit Judges.

RIVES, Circuit Judge.

This case concerns liability for federal estate taxes. The date of death of the decedent, Nettie F. Turner, was December 12, 1951. Her husband, Horace S. Turner, had died on August 21, 1946. At her death, the decedent possessed general powers of appointment under two separate trust instruments executed by her husband. The broad question is whether the value of the appointive property is includible in her gross estate under Section 811(f) of the Internal Revenue Code of 1939.¹

On December 31, 1935, an inter vivos trust agreement was executed by Horace S. Turner to The Merchants National Bank of Mobile, as trustee. The net income from the trust property was to be paid to his wife, the decedent here. A son, Horace S. Turner, Jr., was given the power to revoke the trust at any time prior to his father's death, in which event the trust property was to revert to the trustor. A like power was reserved to other sons in the event Horace, Jr. should predecease his father. If the power of revocation had not been exercised prior to the death of Horace S. Turner, and if his wife survived him, then she might dispose of the trust property by will. If, however, the wife predeceased her husband or failed to dispose of the trust property by will, then separate trusts were provided for the children of Horace S. Turner. When Horace S. Turner died, the power of revocation had not been exercised. Accordingly, at the time of her death, the decedent possessed a general power of appointment over the trust property, then of the value of $56,823.40.

On July 15, 1931, Horace S. Turner transferred to The Merchants National Bank of Mobile, as Trustee, various insurance policies on his life. The last modification of the trust took place on July 17, 1942. The trustor reserved the unconditional right to terminate the trust, but died without having exercised that right. Upon the death of the trustor, the trustee was to collect the proceeds of the various life insurance policies and hold them in trust for the benefit of his wife and his children. Of the total proceeds collected, $10,000 was to be held in trust for the decedent, the income therefrom to be paid to her for life. The decedent was also authorized to withdraw her share of the trust and was given the general power to dispose of her share by will. At the time of the decedent's death, the portion of the trust over which she had a testamentary power of appointment had a value of $5,026.01.

Decedent executed her will on July 17, 1942, and a codicil thereto on August 31, 1945. After making certain specific bequests, the will provided in pertinent part as follows:

"Item Three.

"I give, devise and bequeath to The Merchants National Bank of Mobile, Alabama, all of my property, of whatsoever nature or kind, real, personal or mixed, howsoever situate, including every interest in property that I may now possess, except the property disposed of in Item Two hereof.

"But this devise is made in trust for the following purposes, to-wit:

"* * *.

"(a) So long as my husband, Horace S. Turner shall live, the Trustee shall, each three months, pay to him the income from my said estate.

"(b) Should my husband, Horace S. Turner, predecease me, then at my death, or if my husband, Horace S. Turner should survive me, then at his death, I direct that my estate be equally divided between my children, and this date shall be referred to hereinafter as `the date for division\', and the respective share of each child shall be held by my Trustee as a separate trust fund to be held, managed, controlled and finally disposed of, both as to income and principal, according to the terms and conditions hereinafter set forth. * * *."

Under paragraph (1) of Section 811 (f), if the power was created on or before October 21, 1942, the value of the appointive property is includible in the decedent's gross estate only if the power was exercised by the decedent by will or by a disposition which would be taxable under Section 811(c). Under paragraph (2), if the power was created after October 21, 1942, the mere possession of the power at death (regardless of whether it was exercised) requires the inclusion of the value of the appointive property in the decedent's gross estate.

The district court held that all of the powers of appointment were "created on or before October 21, 1942" within the meaning of Section 811(f) (1) of the Internal Revenue Code of 1939 footnote 1, supra, and that the powers of appointment were not exercised in the decedent's will.² From such holdings it followed that the value of none of the appointive property is includible in the decedent's gross estate under Section 811 (f) footnote 1, supra. We are called on now to review those holdings.

The trust instruments were all executed before October 21, 1942. However, on that critical date, and until her husband died on October 21, 1946, the decedent's powers of appointment were conditioned on her surviving her husband and upon the trusts not being revoked during her husband's lifetime. Does the existence of powers of appointment so conditioned meet the statutory requirement that they be "created on or before October 21, 1942"?

Appellant, insisting that the question is answered by the plain language of the statute, makes the following argument in brief:

"* * * The reference in Section 811(f) (1) is to a `general power of appointment created on or before October 21, 1942,\' and the reference in Section 811(f) (2) is to a `general power of appointment created after October 21, 1942\' (italics supplied). A `general power of appointment\' is defined in Section 811(f) (3) as meaning `a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate\' with certain exceptions (Italics supplied.)"

We think that the definition of a "general power of appointment" was meant simply to distinguish such a power from a special or limited power of appointment. The latter had been taxable under the 1942 Act, but was no longer taxable under the 1951 Act. In order to have uniformity of operation of the tax throughout the Country, it was necessary to provide one standard rather than to refer to the laws of the several states to determine what type of power was taxable. Impliedly, the definition referred to the incidence of the tax.

Undoubtedly, at or before the time of the taxable event, that is, at or before the death of the decedent, the power must be exercisable³ in order for its mere possession to be taxable, for Section 811(f) (2) states that the value of the gross estate of a decedent includes the value at the time of death "to the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942 * * *." (Emphasis supplied.) If the power of appointment is exercisable at the time of death, it is not material that it was theretofore subject to certain conditions. For example, in Johnstone v. Commissioner of Internal Revenue, 9 Cir., 1935, 76 F.2d 55, 57, the decedent could not have exercised the power if he had left issue surviving. He died without issue, and the court said: "The contingency which would have prevented his exercise of the power did not happen, and decedent was entitled to exercise the general power of appointment given him in the several trust agreements." On the other hand, if the power is conditioned upon an event which had not occurred at the time of the decedent's death, the appointive property is not taxable as a part of the decedent's estate. Cf. Jennings v. Smith, 2 Cir., 1947, 161 F.2d 74, 77. Likewise, if the power of appointment is exercisable at the time of death, it is immaterial that, because of certain contingencies, the property may never be distributed under the power. Fidelity-Philadelphia Trust Co. v. Rothensies, 1945, 324 U.S. 108, 109, 111, 112, 65 S.Ct. 508, 89 L.Ed. 782. If exercisable at the time of death, there is that essential control over the property,⁴ and shifting of the economic benefits⁵ to make the appointive property taxable as a part of the decedent's estate.

Clearly enough, then, at the time of the incidence of the tax a general power of attorney must be exercisable. The verb and phrase used in reference to that moment, "has at the time of his death," are definite in denoting one precise instant of time. On the other hand, "created on or before October 21, 1942" connotes some idea of the past and of the future.

The fact that a general power of appointment must be exercisable at the time of the decedent's death does not prevent the tracing of its creation back to a time before it became exercisable. It is said that Athena sprang full-grown from the brain of Zeus, but not every power is exercisable when the instrument from which it is derived first becomes effective. "Create" ordinarily implies going back to the very beginning of a thing, as for example, "God created the heaven and the earth," Genesis, c. 1. It may well be argued, we think, that these general powers of appointment had their beginning, were "created", for a long while before they became exercisable.

In brief, then, we do not find that the language of the statute furnishes a definite and certain answer to the question,⁶ and we must consider the history and purposes of Section 811(f), and more particularly of the...