Union & Peoples Nat'l Bank v. Commissioner

UNION & PEOPLES NATIONAL BANK OF JACKSON, A NATIONAL BANKING ASSOCIATION, AND E. B. ROBERTS, ADMINISTRATORS (WITH WILL ANNEXED) OF THE ESTATE OF EDITH M. DANCER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Union & Peoples Nat'l Bank v. Commissioner Docket No. 70456. United States Board of Tax Appeals 30 B.T.A. 1277; 1934 BTA LEXIS 1196; July 25, 1934, Promulgated *1196 In her will the decedent attempted to dispose of certain trust property in respect of which she had been given a power of appointment in the trust agreement. The state court of proper jurisdiction determined that the power of appointment was not properly exercised in accordance with the trust agreement and that the property in question did not pass by the attempted exercise of the power of appointment, but passed in accordance with the provisions of the trust agreement. Held, that the trust property did not pass under a general power of appointment exercised by the decedent by will and is not includable in her gross estate under the provisions of section 302(f) of the Revenue Act of 1926. Freuler v. Helvering,291 U.S. 35. Howard F. Burns, Esq., Justin R. Whiting, Esq., and William H. Aubrey, Esq., for the petitioners. Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent. SMITH *1278 This proceeding involves a deficiency in estate tax of the estate of Edith M. Dancer in the amount of $97,326.10. The only question presented for our determination is whether there should be included in the*1197 decedent's gross estate the value of a certain trust estate which was created by the decedent's husband and over which the decedent was given a power of appointment to be exercised by her will. FINDINGS OF FACT. The decedent's husband, John B. Crouse, on January 12, 1920, entered into a trust agreement with the Cleveland Trust Co., which, so far as material to this proceeding, reads as follows: 17. One-third (1/3) of the rest, residue and remainder of the trust estate shall be held by The Cleveland Trust Company, in trust, nevertheless, for the uses and purposes and for the benefit of the persons hereinafter named, viz.: As soon as possible, after my death, to pay to my said wife, Edith M. Crouse, out of said one-third (1/3) the sum of One Hundred Thousand ($100,000.00) Dollars in cash, unconditionally, to do with as she pleases, and the remainder of said one-third (1/3) to invest and reinvest the same with the approval in writing of my said wife in United States, State, County, or Municipal bonds and pay the net income arising therefrom to my said wife monthly, for the period of and during the term of her natural life, and in no case shall said Trustee withhold the payment*1198 to my said wife of said net income longer than one month after the receipt thereof by it, and on the death of my said wife, my said Trustee shall pay, transfer and distribute the balance of the trust property together with the interest, income and dividends arising therefrom in its hands mentioned in this paragraph to such persons as my said wife may by her Last Will and Testament designate and appoint, and upon the terms and conditions imposed by my said wife in her said Will, or in default of such designation or appointment, then the same shall pass to and vest in and be distributed among the same persons, in the same manner and proportions and upon the same trusts, terms and conditions as in paragraph 20 hereof provided. * * * 20. If my said wife, Edith M. Crouse, shall not survive me, then and in that case all property and rights hereinbefore directed to be conveyed, delivered or held for her benefit shall be held by The Cleveland Trust Company in trust for the uses and purposes and for the benefit of the persons hereinafter named, vix.: To invest and reinvest the same and in quarterly installments to pay the interest, income and dividends arising therefrom to my said stepdaughters, *1199 Gladys M. Avery and Grace A. Avery in equal shares until the said Gladys reaches the age of thirty-five (35) years, or, should she sooner die, until such time as, living, she would have reached the age of thirty-five (35) years, at which time my said Trustee shall divide, pay and distribute the same *1279 between my said step-daughters or their issue per stirpes in equal shares; provided that if either of my said step-daughters should die, before the said Gladys reaches the age of thirty-five (35) years, leaving no issue her surviving, the whole of the trust property in this paragraph mentioned shall be paid and transferred to the other or to the surviving issue of such other in equal shares at such times as the said Gladys, if living, shall reach the age of thirty-five (35) years, or dead, at such time as she would have reached said age. If both my said step-daughters should die before the said Gladys M. Avery reaches the age of thirty-five (35) years leaving no issue them surviving, then and in that event the Trustee shall hold the property to it in this paragraph hereinbefore directed to be held by it in trust for the same persons mentioned in paragraph 17 hereof upon*1200 the same terms, trusts and conditions therein expressed. John B. Crouse died November 26, 1921, and thereafter the income of the trust was paid to the decedent. On January 2, 1925, the decedent, then a resident of East Cleveland, Ohio, entered into a trust agreement with the Cleveland Trust Co., trustee, under the terms of which she transferred certain property in trust, the income from which was to be paid to her for life and after her death $50,000 was to be paid to each of her two daughters and after payment of other specific bequests the remainder was to be divided into two equal parts and each daughter was to receive the income from one part for life. The trust agreement further provided: I authorize and empower each of my daughters to dispose of the share of the trust estate held for her benefit or so much thereof as may remain undistributed by last will and testament in such manner as each one may desire, and upon the death of either daughter exercising such power of testamentary disposition, the Trustee shall pay over and distribute said share in accord therewith, and thereupon this trust to such extent shall cease and determine. Upon failure of either of the daughters*1201 to exercise the power of appointment the property was to vest in the surviving issue of such daughter. The decedent reserved a power to revoke or alter the trust agreement at any time. The trustees were empowered, among other things, to make advances or to borrow money during the lifetime of the decedent with her written permission, or after her death, if necessary for the improvement, protection, or preservation of the trust estate. In such case the trustee was to have a lien upon the trust estate and might issue its promissory notes secured by a mortgage on any property of the trust estate. The decedent executed her will on December 23, 1925. Subsequently, in 1928, she married William G. Dancer and became a resident of the State of Michigan. She died March 18, 1930, and her will was admitted to probate in the Probate Court of Livingston County, Michigan, on April 10, 1930. *1280 The decedent's will, after making certain specific bequests, provided in paragraph IV as follows: Inasmuch as my husband, JOHN B. CROUSE, under the provisions of a certain trust agreement dated the 12th day of January, 1920, between my said husband and THE CLEVELAND TRUST COMPANY, as Trustee, *1202 gave to me power to dispose by last will and testament of a certain portion of the trust estate held under the terms of said trust agreement, as more particularly set forth in paragraph 17 of said trust agreement; now, therefore, in the exercise of such power of testamentary disposition, I give, devise and bequeath all of the portion of said trust estate held under the terms of said trust agreement over which I have power of testamentary disposition, and also all the rest, residue and remainder of my property, of whatsoever character and wheresoever situate, to THE CLEVELAND TRUST COMPANY, of Cleveland, Ohio, to be held, managed and controlled by it, as Trustee, under settlement of trust entered into by and between myself and said Trust Company dated the 2nd day of January, 1925, to be administered under the powers and discretions therein conferred, and in accordance with its agreement, for the uses and purposes therein set forth. The decedent's daughters, Grace A. Avery Cowan and Gladys M. Avery Gale, were of the ages of 38 and 40 years, respectively, at the time of the decedent's death. On or about November 29, 1930, the Cleveland Trust Co., assuming to act under paragraph*1203 IV of the decedent's will, transferred the property held by it as trustee under the John B. Crouse trust to the trust created by the decedent, claiming to hold the property by virtue of the exercise of the power of appointment by the decedent in her will. One of the decedent's daughters, Mrs. Cowan, challenged the right of the Cleveland Trust Co. to hold the property under the exercise of the power of appointment by the decedent and demanded that the trustee distribute one half of the trust property to her, claiming to be the owner thereof under the provisions of the John B. Crouse trust agreement. In the meantime, one of the decedent's daughters, Mrs. Gale, had died and the Cleveland Trust Co. had been made executor of her estate. Thereupon, the Cleveland Trust Co., as trustee of both the John B. Crouse trust and the Edith M. Crouse trust, brought suit for a construction of the trust agreements. The Court of Common Pleas of Cuyahoga County, Ohio, on September 1, 1932, decreed that the attempted exercise of the power of appointment in decedent's will had failed and that the property in question be returned to the John B. Crouse trust avd distributed in accordance with the terms*1204 of that trust agreement. Thereafter, the trustee distributed the trust property in accordance with the decree. In its decree the court ruled that the decedent in her will did not make a valid appointment of the property of the John B. Crouse trust; that the decedent was not authorized to include the *1281 property in a trust with the residue of her estate, but that the power was limited to naming in her will the persons to receive the trust property upon here death; that the two daughters had a vested estate in the trust property subject to be divested by a valid appointment exercised by the decedent in her will, which valid appointment was never made; and that the trust property became the absolute property of the two surviving daughters upon the death of the decedent by virtue of the provisions of paragraph 17 of the John B. Crouse trust agreement. In the determination of the amount of inheritance tax due the State of Michigan upon the decedent's estate the State of Michigan instituted a proceeding in the Probate Court of Livingston County, Michigan. Subsequently and appeal was taken to the Circuit Court of Livingston County, and on August 15, 1933, that court entered*1205 a judgment finding, as did the Court of Common Pleas of Cuyahoga County, Ohio, that the decedent failed in her will to exercise validly a power of appointment in respect of the John B. Crouse trust property, and that such property did not pass under the decedent's will and was not subject to inheritance tax in the State of Michigan. The opinion of the court reads in part as follows: (3) The property held by The Cleveland Trust Company as Trustee of John B. Crouse under agreement dated January 12th, 1920, as amended, respecting which the decedent had a power of appointment, did not become part of the estate of Edith M. C. Dancer, deceased, and title thereto did not pass by virtue of her will, paragraph IV of said will being void and of no legal effect as an exercise of the power of appointment. The decedent did not designate in her will the persons to receive the beneficial title; she attempted to govern the distribution of the property over which she had a power of appointment by will only, by the provisions of her agreement with the trustee; this is not a valid appointment by will, in accordance with the limitations of the instrument creating the power. The trust agreement of*1206 Mrs. Dancer reserves a power of revocation and alteration to be exercised by a mere notice delivered to the trustee, not in accordance wtih the requirements of the statute of wills. Decedent was further limited by the trust agreement to appoint an estate in fee. She had the simple power to name in her will the persons to take the absolute beneficial ownership. Her two daughters had a vested estate in the remainder of the trust property, which could be divested only by a valid appointment to others; her attempt to limit the daughters to an equitable life estate constituted a failure to exercise the power given her; the absolute title to the property in fee passed to the two daughters directly under the trust agreement of John B. Crouse. The decedent was not authorized to create a trust of the property subject to the power of appointment, and her attempt to do so is not a valid appointment under the power. Decedent's trust agreement further attempts to delegate the distribution of the property to the trustee to dispose of in accordance with its agreement with her. By the provisions of the trust agreement she again attempted to delegate to her daughters the exercise of the power*1207 of appointment, to be exercised by their wills. This attempted delegation of the power is not an exercise thereof under the provisions of the trust agreement *1282 which contemplated that decedent alone should exercise the power of appointment and designate the persons to receive the property after her death. Title to said property passed directly to Gladys M. Avery Gale and Grace A. Avery Cowan as remaindermen, by the provisions of the trust agreement of John B. Crouse. There was accordingly no transfer of said property by reason of the will of the decedent subject to inheritance tax in this state. (4) The property held by the Cleveland Trust Company at Cleveland, Ohio, under the trust agreement of John B. Crouse is not subject to inheritance tax in this state; that the Michigan Inheritance Tax Law does not apply to and does not tax property permanently located outside of the jurisdiction of the state. * * * OPINION. SMITH: The issue before us in this proceeding is whether the value of the property held by the John B. Crouse trust passed under a general power of appointment exercised by the decedent in her will and is therefore taxable in the decedent's estate under*1208 the following provisions of the Revenue Act of 1926: SEC. 302. 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 - * * * (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *. The decedent by her will attempted to exercise the power of appointment in respect of the property by directing that it be transferred to the trust which she herself had created, but the Court of Common Pleas of Cuyahoga County, Ohio, which had jurisdiction of the property, has decreed that the attempted exercise of the power of appointment in the decedent's will failed and that the property in question passed in accordance with the terms of the John B. Crouse trust agreement. The property was actually distributed pursuant to the court's decree and the time for appeal has since expired. The Supreme Court held, in ; reversing *1209 , and affirming , that the decision of the state court, until reversed or overruled, establishes the law of that state respecting the distribution of trust property within its jurisdiction. The Court there said: * * * We understand the respondent to concede the binding force of a state statute, or a settled rule of property, followed by state courts, and, as well, an antecedent order of the court having jurisdiction of the trust, pursuant to which payments were made. But, if the order of the state court does in fact govern the distribution, it is difficult to see why, whether it antedated actual payment or was subsequent to that event, it should not be effective to fix the amount of the taxable income of the beneficiaries. We think the order of the state court was the order governing the distribution within the meaning of the Act. *1283 Moreover, the decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the State because not based on a statute, or earlier decisions. The rights of the beneficiaries*1210 are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying section 219 of the Act of 1921. In , it was held that the gross estate of a decedent did not include a trust fund over which the decedent had a power of appointment by will where the trust estate did not pass under the power of appointment for the reason that the appointees under the decedent's will elected to renounce their bequests thereunder and to take as remaindermen under the will of the creator of the trust; that under the New York law the attempt to execute the power was not effective because it did nothing. The statute here involved, section 302(f) above, includes in the gross estate the value of the property "passing under a general power of appointment exercised by the decedent." The state court of proper jurisdiction has determined that the trust property in question did not pass under a power of appointment exercised by the decedent. In the circumstances of this case it would be necessary, in order to sustain the respondent's position, to*1211 reach a conclusion contrary to that reached by the Ohio court as well as those of the State of Michigan, namely, that, as a matter of fact and of law, the property in the John B. Crouse trust did actually pass by a general power of appointment exercised by the decedent in her will. In our opinion we are precluded from making such a determination. Even if we were in doubt as to the correctness of the fuling reached by the state courts as to whether the property passed by the attempted exercise of the power of appointment, we would be disposed to follow them. We therefore hold that the value of the property in the John B. Crouse trust is not includable in the decedent's gross estate. In respect of the further issue contained in the petition as amended, it was stipulated at the hearing that the amount of $10,969.20 was paid to the State of Michigan as an inheritance tax on the decedent's estate. As provided in section 301(b) of the Revenue Act of 1926, such amount is allowable as a credit in computing the Federal estate tax due on the decedent's estate. Reviewed by the Board. Judgment will be entered under Rule 50.