United States v. Powell, 6920.

• Decision Date: 13 July 1962
• Docket Number: No. 6920.,6920.
• Citation: 307 F.2d 821
• Parties: UNITED STATES of America, Appellant, v. Lucy Thomas POWELL, Nellie Louise Powell and Elmer E. Fox, as Co-Executors under the will and of the Estate of Leonidas Hudson Powell, deceased, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

307 F.2d 821 (1962)

UNITED STATES of America, Appellant, v. Lucy Thomas POWELL, Nellie Louise Powell and Elmer E. Fox, as Co-Executors under the will and of the Estate of Leonidas Hudson Powell, deceased, Appellees.

No. 6920.

United States Court of Appeals Tenth Circuit.

July 13, 1962.

William Jay Howard, Atty., Dept. of Justice, (Louis F. Oberdorfer, Asst. Atty. Gen., Dept. of Justice, Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Newell A. George, U. S. Atty., and Robert M. Green, Asst. U. S. Atty., were with him on the brief) for the United States of America.

John F. Eberhardt, Wichita, Kan. (George B. Powers, Carl T. Smith, Stuart R. Carter, Robert C. Foulston, Malcolm Miller, Robert N. Partridge, Robert M. Siefkin, Richard C. Harris and Gerald Sawatzky, Wichita, Kan., were with him on the brief) for appellees.

Before PHILLIPS, PICKETT and LEWIS, Circuit Judges.

PHILLIPS, Circuit Judge.

Lucy Thomas Powell, Nellie Louise Powell and Elmer E. Fox, coexecutors of the estate of Leonidas Hudson Powell, deceased, brought this action against the United States to recover federal estate taxes paid by them on the Powell estate. The action was tried to the court without a jury and judgment was entered in favor of the taxpayers in the sum of $55,762.46. The United States has appealed.

On June 4, 1932, Leonidas Hudson Powell created an irrevocable living trust. The trust instrument designated Powell and the Fourth National Bank in Wichita as cotrustees. Under it, Powell's wife is the life tenant and his two daughters are the remaindermen. The income of the trust is payable to the wife at her request, but if not so requested, it is added to the principal. On the death of the wife, the residue of the trust is to be divided into equal shares for the benefit of the two daughters, or their surviving issue, per stirpes. Upon reaching the ages of 37, 47, 52, 57 and 62, each daughter is to receive a one-fifth portion of her share of the trust corpus. The trust also makes provision for alternative dispositions in the event of the death of the daughters without issue prior to final distribution.

Powell died on May 16, 1954. An estate tax return was filed which did not include the assets of the trust in the gross estate. The Commissioner of Internal Revenue assessed a deficiency predicated upon the inclusion of such trust assets in the gross estate, which was paid under protest by the taxpayers. A claim for refund was duly filed, which was disallowed by the Commissioner. The instant action was then commenced.

The trust instrument provides, in part, as follows:

"Second: * * *

"During the lifetime of the grantor and while he is acting as a Joint-Trustee hereunder the said Trustees are expressly authorized and empowered to sell, contract for sale, mortgage, pledge, hypothecate, or otherwise deal with the assets comprising this trust estate, and to invest, or re-invest the said trust property or any part thereof in such securities or other property, real or personal, as in the discretion of said Trustee may be deemed most advisable for the benefit of the trust estate herein created, including the right to purchase life insurance, annuity contracts or income bearing contracts issued by legal reserve life insurance companies authorized to do business in the State of Kansas.

"Upon the death of the grantor or upon his incapacity to act, or resignation as Joint-Trustee hereunder, thereafter the Trustees shall invest or re-invest only in high grade municipal, Government, or other bonds, or any loans secured by first mortgages on farm lands or improved City real estate located in a productive part of the country, such mortgage loans not to exceed forty per cent (40%) of the fair market value of such real estate as in the discretion of the Trustees shall be deemed most advisable in order to assure a reasonably safe investment, and to produce satisfactory income, the protection of the principal however to be more important than securing higher rate of income.

* * * * * *

"The Trustees of this estate shall not be held responsible for any loss resulting to this trust estate by reason of retaining any previous investments made by the said Trustees while the grantor is acting as one of the Trustees hereunder.

"Fifth: If, at any time during the continuance of this trust, it is necessary or advisable to use some portion of the principal for the maintenance, welfare, comfort or happiness of the Grantor\'s wife, * * * or Grantor\'s daughters, * * * or for the education of Grantor\'s said daughters, the Trustee is hereby authorized and empowered to use so much of the principal as in the discretion of the Trustee is necessary or advisable to be used to meet such conditions, and provided that the Trustee shall deem that the purpose for which the payments are to be made, justifies the reduction in the principal of the trust properties. * * *" (Emphasis added.)

The trust instrument contained no exculpatory clause, other than that quoted above.

At the time of the creation of the trust, June 4, 1932, the corpus had a value of approximately $60,000. Mr. Powell's income for each of the years of 1931 and 1932, before taxes, was approximately $100,000 and his net worth in 1932 was $502,628. Mrs. Powell's net worth in 1932 was $59,452. In the period between the creation of the trust and Powell's death, Mrs. Powell withdrew $32,000 of trust income and left the balance of such income in the trust. At the death of Powell, the accumulated and reinvested trust income totalled approximately $210,000 and the value of the trust corpus was approximately $170,000. From time to time during his life Powell made gifts to his wife and daughters from his personal assets, totalling over $200,000.

The taxpayers called five witnesses, who testified that during his life Powell was an extremely conservative, frugal and thrifty person. In 1940 Powell hired his son-in-law to work in his grain elevator business at a salary of $100 per month. At this time such son-in-law had no outside income and was required to support his family on this amount. Such salary had been raised to $400 per month when the son-in-law left the business in 1945 or 1946.

Powell was 63 years old when he created the trust. He actively engaged in the grain elevator business until 1944, at which time he sold his business and retired. Until a few years before his death, he remained vigorous and actively managed his investments.

In its findings of fact the court, in part, found:

"10. * * * in all of his business, personal, and family affairs Mr. Powell was an extremely conservative, frugal and thrifty person to whom the thought of making distributions to his wife or daughters from the corpus of the June 4, 1932, living trust for the purpose of administering to their subjective pleasures or `happiness\' — as distinguished from distributions necessary to maintain them according to the conservative standard of living to which they had been accustomed — would have been repugnant. * * *

"11. * * * that * * * paragraph Fifth of the * * * living trust was intended by the settlor, * * *, to mean only that distributions might be made to his wife and two daughters from the corpus of the trust if, but only if, such use of the corpus were required to maintain them in the conservative mode of living to which they had been accustomed during his lifetime, and that as used by Mr. Powell the word `happiness\' in the phrase `maintenance, welfare, comfort or happiness\' was intended to and must be equated with basic maintenance and welfare, not with `pleasure\' or subjective `delight.\'"

Section 811 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 811, in part provides:

"§ 811. Gross estate

"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, * * *.

* * * * * *

"(d) Revocable transfers

* * * * * *

"(2) Transfers on or prior to June 22, 1936. To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, * * *."

The court concluded that the investment powers and the power to invade the corpus did not reserve to the settlor power to "alter, amend, revoke, or terminate" the trust within the meaning of § 811(d) (2) of the Internal Revenue Code of 1939 and that the deficiency was improperly determined.

The contentions of counsel for the United States are:

1. The decedent's power to invest in life insurance or annuities constituted power to alter or amend the corpus of the trust, within the meaning of § 811(d) (2);

2. The decedent's power to invade the trust corpus for the benefit of his family's "happiness" constituted a power to alter and amend the trust, within the meaning of § 811(d) (2); and

3. The powers retained, if not sufficiently broad individually, were sufficiently extensive cumulatively to require inclusion of the trust corpus in the gross estate.

I The Investment Powers

It will be observed that the trustees were to exercise their power of investment, including the power to purchase life insurance, annuity contracts, or income bearing contracts in a manner deemed by them in the exercise of their discretion to be for the benefit of the trust estate. It will be further observed that the trust instrument gave the settlor no direct power to alter or amend the corpus of the trust or the trust instrument, itself, and if it did give the settlor power to affect beneficial interests, it did so indirectly, as a secondary consequence of the exercise of administrative investment powers. It should be noted, also, that there were no provisions in the trust instrument manifesting an intent to give the trustees...