White v. United States

• Decision Date: 07 April 1981
• Docket Number: No. IP 79-536-C.,IP 79-536-C.
• Citation: 511 F. Supp. 570
• Parties: John F. WHITE, Administrator D.B.N., C.T.A. of the Estate of Theodore N. Townsend, deceased v. UNITED STATES of America.
• Court: U.S. District Court — Southern District of Indiana

511 F. Supp. 570

John F. WHITE, Administrator D.B.N., C.T.A. of the Estate of Theodore N. Townsend, deceased v. UNITED STATES of America.

No. IP 79-536-C.

United States District Court, S. D. Indiana, Indianapolis Division.

April 7, 1981.

Douglass R. Shortridge, Indianapolis, Ind., for plaintiff.

Virginia Dill McCarty, U. S. Atty., Indianapolis, Ind., and Angelynn C. Hall, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., for defendant.

STECKLER, Chief Judge.

This matter is before the Court on the cross motions for summary judgment filed by each party. The Court, having considered the respective briefs of the parties and having heard oral argument thereon, herein sets forth its findings of fact. The conclusions of law are embodied within the memorandum of law.

Findings of Fact

1. The decedent died on November 9, 1973, a resident of Indianapolis, Marion County, Indiana, after a one-day illness. He was age 52 at the date of his death and had been a continuous, open, and bona fide resident of Indianapolis, Marion County, State of Indiana, since 1946, having moved here after service in the Armed Forces of the United States. At the time of his death he was unmarried (divorced in 1967) and was survived by his three children, namely, Walker Winslow Townsend, Elbert J. Townsend II, and Elizabeth Jane Townsend. These children were his sole and only surviving issue.

2. Decedent died testate leaving a will dated December 13, 1967, which was drafted by Sidney A. Horn, Esquire, of Indianapolis, Indiana. The will consists of three pages and provides for a bequest of $25,000.00 to Vassar College in his mother's name, a devise of $10,000.00 to Bryn Mawr College as a memorial to Ethel Vick Townsend, and the sum of $10,000.00 to Northwood School, Lake Placid, New York, from which decedent had graduated from high school, to stand in decedent's name.

3. Decedent's will contained a standard residuary clause bequeathing the balance of his estate unto his three children, Walker Winslow Townsend, Elbert J. Townsend II, and Elizabeth Jane Townsend, share and share alike, which under Indiana law means equally to the survivors or the issue of a deceased child take their parent's share.

4. The will further provided that in the event all of decedent's children had predeceased him, that the residuary estate would go to his sister, or if she predeceased him, then to be equally divided between Vassar College, the Trustees of Bryn Mawr, and Northwood School. The will constituted and appointed George S. Olive, Jr., a Certified Public Accountant and managing partner of George S. Olive & Company, a large regional accounting firm in Indianapolis, and long time accountant for decedent, as executor of the will and nominated Sidney A. Horn, Esquire, to act as attorney for the estate.

5. The will was offered and duly admitted to probate in the Probate Court of Marion County, Indiana, on November 28, 1973, in the matter of the estate of Theodore N. Townsend, Estate Docket E73, page 1917. George S. Olive, Jr., qualified as executor of said estate and Sidney A. Horn, Esquire, was named as attorney for the estate. The will made no mention of any trust fund nor did it in any way make reference to any power of appointment.

6. Decedent's estate was administered in Indianapolis, Marion County, Indiana, and during the course thereof the executor prepared and filed a Federal Estate Tax Return, Form 706. The Form 706 was filed on August 7, 1974, and showed a total gross estate of $435,913.83. Approximately 98% of decedent's estate consisted of vested trust funds created under the last will and testament of decedent's mother, Charlotte K. Townsend.

7. Decedent's mother, Charlotte K. Townsend, had died testate in 1931, a resident of Le Roy, New York. Her last will and testament, executed the same year, established several trusts with the Marine Trust Company of Buffalo, New York. These trusts continued and as of the date of taxpayer's death were still being administered by the Marine Midland Bank-Western, Buffalo. The Form 706 filed by the executor, using the alternate valuation date, listed decedent's vested interests in certain trusts created originally for the benefit of Ruth M. Keeney and Elbert J. Townsend.

8. There is no controversy with regard to decedent's interest in the Ruth M. Keeney trust and the Elbert J. Townsend trust being taxable for federal estate tax purposes. The executor and the Internal Revenue Service agreed as to the proper valuation of the securities held therein and the tax due in the amount of $77,770.99 was paid.

9. The executor noted in the Form 706, which had attached a copy of the Charlotte K. Townsend will, that Item Seventh of said will established a trust for the benefit of the decedent. The provisions of Item Seventh of the Charlotte K. Townsend will are as follows:

"I give and bequeath to the Marine Trust Company of Buffalo, the sum of One Hundred Thousand Dollars ($100,000.00), in trust, for the benefit of my adopted daughter, Elinor Townsend, and the sum of One Hundred Thousand Dollars ($100,000.00), in trust, for the benefit of my son, Theodore Noyes Townsend. My said Trustee shall invest and from time to time reinvest said trust estates and pay over so much of the net income arising therefrom as to my said Trustee shall seem wise and proper toward the support, maintenance and education of the child for whom said trust fund is held until he or she shall attain the age of twenty-one years and shall accumulate the balance of the income of said trust fund during the minority of said child and pay over such accumulated income to said child when he or she shall attain the age of twenty-one years. After each of said children shall have attained the age of twenty-one years, my Trustee shall pay over the entire net income of the trust funds held for their benefit to them quarterly or at other convenient and regular intervals as long as they shall live. Upon the death of my said adopted son and daughter, my Trustee shall pay over and distribute the property then constituting the trust fund held for his or her benefit to such person or persons, corporation or corporations as he or she shall by his or her last will and testament appoint, and in default of such appointment to his or her issue, if any, otherwise to the other of my said adopted children if he or she shall survive, otherwise to his or her last issue, if any, otherwise to my heirs at law as then determined by the intestate laws of the State of New York."

The above Item Seventh of the last will and testament of Charlotte K. Townsend thus created a trust for the benefit of decedent, Theodore N. Townsend, with income to him for life and further gave him a general power of appointment to be exercised, if at all, by will. Absent the exercise of the power, the trust assets would pass under the terms of the trust instrument. There is no explicit direction as to the exercise of the power nor is there a direction as to what law would apply if an interpretation of the exercise or nonexercise is required.

10. The executor included the following notation in Schedule H of Form 706:

"Powers Created Prior to October 21, 1942, but Not Included in Gross Estate: "Securities held by the Marine Midland Bank-Western, Buffalo, New York, in a trust created by Charlotte K. Townsend, under Item 7th of her Will, subject to general power of appointment, are not included in decedent's gross estate under the provisions of Sec. 2041, I.R.C., because decedent never exercised power. (Copy of C. K. Townsend Will follows Sch. F)"

11. The original bequest by Charlotte K. Townsend to decedent under Item Seventh was in the sum of $100,000.00, and at the decedent's death the trust was valued at $352,760.64.

12. Item Seventh of the last will and testament of Charlotte K. Townsend, therefore, gave a general power of appointment of the trust assets to the decedent as he shall appoint by his last will and testament, and in default of such appointment, then to his issue and others all as set out above. This is therefore a general power of appointment created prior to October 21, 1942, and is not included in the decedent's gross estate and is nontaxable unless it is exercised. Section 2041 of the Internal Revenue Code deals specifically with such pre-1942 powers of appointment.

13. Over the years there has been a great deal of litigation concerning powers of appointment under Sections 811 and 2041. The present law is the outgrowth of 1942 and 1951 acts. The intent of Congress in passing the 1951 legislation was that powers existing in 1942 should continue to be nontaxable unless exercised. The Senate Finance Report stated that neither the 1942 act nor the present bill (1951 act) would bring in any appreciable revenue except from the unwary and the committee felt the most important consideration was to make the law simple and definite enough to be understood and applied by the average lawyer.

14. The auditing agent proposed a one-line adjustment to include the value of the trust created under Item Seventh of Charlotte K. Townsend's last will and testament upon the theory that under the law of the State of New York, a decedent is presumed to have exercised a power of appointment if he leaves a will disposing of all his property unless a clear contrary intent is evidenced. The executor filed a timely protest which was denied by the government. Thereafter the executor determined to pay the tax and file a suit for refund.

15. The probate assets were insufficient to pay the asserted tax and the trustee, Midland Marine Bank-Western, Buffalo, advanced sums to pay the tax. The additional estate tax of $99,727.39 was paid on October 19, 1976, and additional interest of $12,489.13 was paid on November 1, 1976. The balance of the funds in the hands of the Midland Marine Bank-Western, Buffalo, trustee, were paid to decedent's issue (his three surviving children) pursuant to the terms of...