United States v. Turner

• Citation: 287 F.2d 821
• Decision Date: 08 March 1961
• Docket Number: No. 16478.,16478.
• Parties: UNITED STATES of America, Appellant, v. Winifred H. TURNER, Executrix of the Estate of Alice H. Turner, Deceased, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

287 F.2d 821 (1961)

UNITED STATES of America, Appellant, v. Winifred H. TURNER, Executrix of the Estate of Alice H. Turner, Deceased, Appellee.

No. 16478.

United States Court of Appeals Eighth Circuit.

March 8, 1961.

L. W. Post, Atty., Dept. of Justice, Washington, D. C., for the appellant. Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson and Harry Baum, Attys., Dept. of Justice, Washington, D. C., Edward L. Scheufler, U. S. Atty., and J. Whitfield Moody, Asst. U. S. Atty., Kansas City, Mo., were with him on the brief.

Kent E. Whittaker, Kansas City, Mo., for the appellee, and Elmer B. Hodges, Gage, Hodges, Moore, Park & Kreamer, Kansas City, Mo., were with him on the brief.

Before JOHNSEN, Chief Judge, and VAN OOSTERHOUT and BLACKMUN, Circuit Judges.

BLACKMUN, Circuit Judge.

The sole issue here is whether this Missouri decedent, Alice H. Turner, at her death in 1955 possessed, with respect to certain insurance proceeds, a general power of appointment "created on or before October 21, 1942" so that those proceeds were free from federal estate tax. The governing statute is § 2041 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 2041.¹ The District Court held that the powers were created prior to October 1942 and that the fund in question was not taxable. Turner v. United States, D.C.W.D.Mo., 178 F.Supp. 239.

The pertinent facts are either admitted by the pleadings or are stipulated. We set them forth chronologically:

(a) September 1911. Two $5,000 whole life policies were issued by The Northwestern Mutual Life Insurance Company upon the life of Frederick H. Turner, husband of the present decedent. The insured possessed all rights under these policies.

(b) March 1935. Mr. Turner executed a supplement applicable to both policies revoking prior beneficiary designations and option settlements. By this instrument he named his wife as beneficiary and their two children as contingent beneficiaries. He specified that the death proceeds were to be retained by the insurance company under Option A of the contracts; that the insurer was to pay Mrs. Turner an annuity in minimum monthly instalments; and that she was to have "the privilege of surrender and withdrawal". The right to change or revoke this designation was retained by the insured. The supplement was accepted by the insurance company and made a part of the policies.

(c) July 12, 1948. Mr. Turner died without having revoked or changed the 1935 supplement in any respect.

(d) December 11, 1955. Mrs. Turner died testate² without having exercised to any extent her privilege of surrender and withdrawal.

(e) December 20, 1955. The Turners' daughter, Winifred, was appointed executrix of her mother's will.

(f) March 8, 1957. The executrix filed a timely federal estate tax return for her decedent's estate. The fund held by the insurer under the 1935 designation, and constituting the death proceeds of the two policies upon the insured's life, was included in the gross estate in this return and the tax shown by the return was paid in full.

(g) May 1958. The present action was instituted by the executrix to recover that portion of the federal estate tax attributable to the inclusion of this fund.³ As has been noted, she prevailed below.

The situation, therefore, is the factually simple one involving an insured's revocable designation of beneficiaries and option settlements prior to October 21, 1942; the absence of any further action on his part during the remainder of his life; his death after 1942; the emergence at that time of the insurance fund through the maturing of the policies; and the absence of any surrender or withdrawal action by the widow-beneficiary during her life. The widow thus died possessed of complete power over the fund. Nevertheless, she did not exercise that power in any respect and, by the terms of the insured's 1935 designation, the fund devolved for the benefit of the children named as contingent beneficiaries.

Mrs. Turner's possession of this matured command over the appointive property could render that property validly includable in her gross estate if Congress so prescribed. See Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916. The question here, however, is not one of power to tax but is whether the statute, in its definition of the gross estate, embraces these particular insurance proceeds.

If a power is a general one as defined in § 2041(b) (1) and if it was created on or before October 21, 1942, the appointive property is includable in the gross estate and taxable only if the power is exercised. If, in contrast, the general power was created after that critical date, the property is taxable irrespective of exercise or non-exercise of the power. There is no dispute here as to this power being a general one and there is no dispute as to its not having been exercised. The controversy therefore centers around the date of the power's creation. Unfortunately, the statute does not attempt to define the word "created" except as to certain testamentary powers. § 2041(b) (3).⁴

The executrix claims that the power of appointment possessed by the decedent was created, within the meaning of the statute, in March 1935 when the insured executed his supplement and when the insurance company made that supplement a part of the insurance contracts; that it thus was a pre-1942 general power; and that the appointive property is to be excluded from the gross estate by the specific provisions of § 2041(a) (1). She urges that the insured was the creator, that his affirmative act of creation was in March 1935 and that his death in 1948 was not the act which created the power.

The government, on the other hand, emphasizes that the insured retained all rights under the policies; that his 1935 supplement was revocable; that it is a "stark fact that the husband gave his wife nothing when he executed the settlement designation in 1935"; that he could always have deprived his wife of all interest in the policies and their proceeds; that the policies did not mature and their proceeds did not come into being until the insured's death in 1948; that only at that time did the power of appointment become effective in the sense that it was vested and in the additional sense that there was a fund over which it could operate; that only at the insured's death was the power created and the appointive property rendered capable of valid inclusion in the gross estate; and that the legislative history supports this analysis. Its position here is in accord with Rev.Rul. 278 issued by the Internal Revenue Service in 1953 (with respect to the 1939 Code, as amended), 1953-2 C.B. 267,⁵ and with an example, as to the parallel trust situation, set forth in § 20.2041-1(e) of the current Regulations issued in 1958.⁶

A review of the legislative history is interesting but not determinative. The first reference in the federal estate tax law to property subject to a power of appointment appeared in the Revenue Act of 1918 (February 24, 1919).⁷ § 402(e) of that Act included in the gross estate "any property passing under a general power of appointment exercised by the decedent" by methods therein described. This provision remained essentially unchanged through succeeding revenue acts⁸ until that of 1942. § 403(a) of the 1942 Act amended § 811(f) of the 1939 Code to provide for the taxation of certain special or limited powers and, as well, the mere possession of unexercised general powers. The Powers of Appointment Act of June 28, 1951, was in effect, retroactive to the date of the 1942 Act and, with a minor exception not relevant here, restored the law in existence prior to 1942 so far as powers created before that date were concerned. The reasons for this 1951 restoration were a desire for simplicity, fairness and definiteness, the avoidance of hardship on the unwary, and a realization that the power of appointment provisions were not a source of an appreciable amount of revenue. Sen.Rep. No. 382, 82d Cong., 1st Sess., p. 3 (2 U.S.Code Cong. & Adm.Serv. 1951, pp. 1530-1532).

Two Courts of Appeals, four District Courts (including the one below), and the Tax Court all have held, when this issue has been presented, that the appointive property is not taxable. United States v. Merchants National Bank of Mobile, 5 Cir., 261 F.2d 570, affirming Merchants National Bank of Mobile v. United States, D.C.S.D.Ala., 156 F.Supp. 827; United States v. Hubner, 9 Cir., 285 F.2d 29, affirming Hubner v. United States, D.C.S.D.Cal., 187 F.Supp. 659; Hyman v. United States, D.C.S.D.N.Y., 187 F.Supp. 661; Estate of Rosenthal, 34 T.C. 146 (reviewed by the Court). Some of these cases (Hubner and Merchants National Bank) involve an inter vivos trust, another (Hubner) a matured insurance policy, and the others (Hyman and Rosenthal) an insurance designation made prior to maturity. The Merchants National Bank case involves the 1939 Code (after the 1951 amendments) instead of the 1954 Code. Yet in each of these cases the statute is the same and the vital facts are the same: The designation before October 21, 1942, by one person (donor or insured) of another person as a trust or insurance beneficiary with a general power of appointment over property (the trust assets or the insurance); the revocable character of that designation; no further action thereafter by either of the two persons during their respective lives; the death of the first person after 1942; and the subsequent death of the beneficiary while still possessed of the unexercised power.⁹ We therefore regard all these decisions as pertinent authority. See also Freeman, If This be Simplification — a View of Pre-1942 Powers of Appointment and the 1954 Internal Revenue Code Section 2041, 40 Cornell Law Quarterly 500, 505 (1955). We know of no opposing judicial determination. There is, however, at least one contrary comment which antedates the cited cases. Lowndes and Kramer, Federal Estate and Gift Taxes (1956), Ch. 11, §...