Hepburn v. Commissioner

CHARLES J. HEPBURN, EXECUTOR OF THE ESTATE OF MARY MORTON, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hepburn v. Commissioner Docket No. 82242. United States Board of Tax Appeals 37 B.T.A. 459; 1938 BTA LEXIS 1028; March 15, 1938, Promulgated *1028 A power of appointment, the exercise of which, at any time, is, in fact, subject to the discretionary approval of individual trustees appointed by the donor of the power, is not a general power of appointment, and property passing thereunder is not within the Revenue Act of 1926, section 302(f). Wm. Barclay Lex, Esq., for the petitioner. E. G. Smith, Esq., for the respondent. LEECH *460 This proceeding involves a deficiency in estate tax in the amount of $39,758.16. The only issue submitted is whether the respondent properly included in the estate of petitioner's decedent, for Federal estate tax purposes, the share of the corpus of a trust for the decedent, under the provisions of the Revenue Act of 1926, section 302(f). We make the following findings of fact. FINDINGS OF FACT. Mary Morton, the decedent, died April 20, 1932. By her last will and testament dated May 5, 1930, she appointed Charles J. Hepburn executor of her estate. Her will was duly probated and is of record in the office of the register of wills of Berks County, State of Pennsylvania. Mary Morton was the daughter of Levi P. Morton, who died May 16, 1920. His*1029 will was duly probated in the District of Columbia. The will of Levi P. Morton, as originally executed on June 29, 1910, appointed the Guaranty Trust Co. of New York to be "the executor of and trustee under this my will." Inter alia, that will provided: * * * to divide the same into as many equal parts or shares as will be equal in number to my wife and children whom I may leave me surviving, and children of mine deceased at the time of my death who shall have left lawful issue me surviving and to designate one of the said parts or shares by the name of my wife, and one other of said parts or shares by the name of each of my said children then surviving, and one other of said parts or shares by the name of each child of mine then deceased leaving issue then surviving * * *. * * * * * * provided, however, that I authorize either of my said children who shall survive me, by her last will and testament to direct and appoint that the remaining one-third part of the share of such child in my residuary estate or any part of said third shall remain in trust in the hands of my executor during the life or until the re-marriage of any husband who may survive such child as her husband, *1030 and that the net income thereof shall be paid or applied to the use of such husband during the residue of his life or until his remarriage, and subject to such provision, if any, for her said husband, and subject to two-thirds of said share being held in trust as aforesaid during my wife's life, I authorize each of my said children who may survive me by her last will and testament to give, dispose of and distribute one-half of her share of said residue, of which half the amount, if any, so disposed of for the benefit of her husband shall be deemed a part, to and among such person or persons, including such husband, and in such proportions as she shall by her said last will and testament designate and appoint, but the power hereby given and created shall extend only to such child's original share in my residuary estate and not to any addition to or accretion thereof from the distribution of any other share in my residuary estate. Such appointees may be natural persons or corporations, and such appointment of any part of said two-thirds to take effect only after my wife's death. * * * * * * And with a view of securing for the benefit of my children the advice and counsel of personal*1031 friends who can exercise discretion in family affairs more satisfactorily than a Board of Trustees of a corporation can do, I hereby appoint *461 my friend Charles H. Allen, of Lowell, Massachusetts, my nephew Morton Minot, of Brockport, New York, and my friend Bronson Winthrop, of the City of New York, jointly with my executor, the Guaranty Trust Company of New York, trustees for my several daughters of the several shares of my residuary estate, set aside by my will for their benefit during their lives respectively, * * *. And I authorize and empower my said individual trustees, or such of them as shall accept the trust, or the survivors or survivor of them or their successors as hereinafter provided, to determine in their or his discretion to what extent the income of my said daughters' shares in my residuary estate shall be paid by my executor to them personally and to what extent the same shall be and in what way otherwise applied to their use, and my executor shall and is hereby directed in the payment and application of such income to follow the written instructions of my said individual trustees or of such of them as shall accept said trust or the survivors or survivor*1032 of them from time to time in this respect. In the absence of such instructions, however, payment to my said daughters personally shall be deemed to be the proper application of such income to their use. I also direct that the power of appointment herein given to my said daughters over one-half of her original share of my residuary estate, including as part thereof, if she shall so by will direct the continuance of the trust during the life or until the re-marriage of a husband over not exceeding one-third of her original share, shall be subject to the approval in writing of my said individual trustees or such of them as shall accept the trust, or the survivors or survivor of them, such approval to be indicated by endorsement on any such will, signed by such individual trustees or the survivors or survivor of them, or by separate paper approving a particular testamentary disposition or dispositions positions made or to be made by either of my said daughters. * * * On failure to appoint, and upon the death of decedent's wife, the property subject thereto was to be divided among the then living issue of such child or, in default of such issue, to the surviving children of petitioner's*1033 decedent. The will further provided that any investment and reinvestment, sale, or leasing of any property and manner of distribution to the beneficiaries "where it affects the interest of the trust funds created for my daughters for which there are co-trustees shall be subject to the approval of said co-trustees or two of them." The will also provided for the appointment of successor individual trustees. On March 30, 1911, Levi P. Morton added a codicil to that will under which he revoked the appointment of Guaranty Trust Co. of New York as executor and trustee under his will and named Allen, Minot, and Winthrop executors in its stead and the American Security & Trust Co. of Washington, D.C., as trustee in its stead, "with said Allen, Minot and Winthrop as co-trustees thereunder", with the same power and authority as given them in the will. By codicil dated June 14, 1911, Levi P. Morton, after modifying the provisions of the will in connection with the disposition of his residuary estate for his daughters, provided: My purpose in making this change is to carry out more effectually than I could do as a citizen of New York, my general purpose to keep my estate in my *462 *1034 own family so far as I may do so lawfully and consistently with the power which I have given my daughters to dispose by will subject to the approval of the co-trustees named in or appointed conformably to my will, of one-half of their original shares in my residuary estate. On June 24, 1911, Levi P. Morton added the following codicil to his will: The co-trustees of my several daughters' shares in my residuary estate are hereby authorized in determining in what manner income may be applied to their use, to direct its application to the use of or for the benefit, maintenance or education of the families of my said daughters, whether separated from them or not, in a manner suitable to their condition in life, and such application shall be deemed an application to the use of said daughters within the meaning of the provisions of my will relating thereto. When Mary Morton adopted Lewis Peter Morton, negotiations were entered into between her counsel and the personal trustees under the will of Levi P. Morton, deceased, which resulted in the latter by written instrument dated July 9, 1925, formally agreeing to an appointment not in excess of $50,000, after they had made an investigation*1035 and were satisfied of the propriety of such request. By her codicil executed July 14, 1925, to her will of May 26, 1924, Mary Morton appointed $50,000 for the benefit of Lewis Peter Morton, her adopted son. While the negotiations referred to in the preceding paragraph were under way, the decedent requested permission of the personal trustees to appoint a sum for the endowment of Bynden Wood, a charitable institution which she was maintaining in Lower Heidelberg Township, Berks County, Pennsylvania. She requested permission to appoint for such purpose as large a sum as such trustees would approve, suggesting that it be not less than $500,000. This was refused; but after protracted negotiations such trustees did consent to an appointment by her for such purposes of $250,000, such appointment to be made in the form and words and for the purposes by such trustees approved. Formal approval thereof was subsequently given by said surviving trustees, by written instrument dated July 13, 1925. The exercise of the power so permitted was made by Mary Morton in a third codicil to her said will of May 26, 1924, which third codicil was also dated July 14, 1925. Subsequently, after*1036 her adoption of Miriam Morton, the decedent requested the personal trustees under the will of Levi P. Morton, deceased, for permission to appoint for the use and benefit of any adopted children she might leave her surviving, the entire unappointed balance of that part of her father's residuary estate over which by his will such power was given subject to the consent and approval of such surviving trustees. This was refused. Subsequently, *463 however, after protracted negotiations, the trustees agreed to permit an appointment for such purpose, subject to the restrictions hereinafter set forth. After much discussion and many conferences the personal trustees gave permission to Mary Morton to appoint upon compliance with the following conditions: (1) That the two former appointments made by her under their respective approvals dated July 9, 1925, and July 13, 1925, should be revoked and annulled by her, and their former approval be treated as canceled and without effect; (2) that the new appointment to be made by her should be limited to the personal estate and should not extend to or include any part of the real estate situate in the State of New York forming a part of the*1037 corpus of the trust for her benefit under her father's will, which amounted to a very substantial sum; (3) that the appointment to be made from the personalty should not exceed, at its maximum, $750,000; and that, in the event of the death, in the lifetime of Mary Morton, of her sister Helen Morton, and the vesting in Mary Morton absolutely of a share in the New York real estate held for the benefit of the said Helen Morton, the maximum amount subject to appointment under such approval should be automatically reduced to $600,000. The approval of the surviving trustees to such appointment was in due course given by formal instrument in writing bearing date April 26, 1930. Thereafter by her will dated May 6, 1930, Mary Morton, the decedent, provided as follows in the form and manner permitted by the personal trustees: ITEM VIII. - Whereas, in and by the last will and testament of my father, Levi Parsons Morton, formerly of Rhinecliff, Dutchess County, New York, and of Washington, District of Columbia, now deceased, it is provided, (In Clause "Fifth" thereof), as to each of his daughters him surviving, that she may by her last will and testament give, dispose of and distribute*1038 one-half of the original share of the residue of his estate by his said will given in trust for her benefit during her life, to and among such persons and in such proportion as she shall by such last will and testament designate and appoint, - subject, however, to the following provisions, viz: "I also direct that the power of appointment herein given to my said daughters over one-half of her original share of my residuary estate * * * shall be subject to the approval in writing of my said individual trustees, or such of them as shall accept the trust, or the survivors or survivor of them, such approval to be indicated by endorsement on any such will, signed by such individual trustees or the survivors or survivor of them, or by separate paper approving a particular testamentary disposition or dispositions made or to be made by either of my said daughters." And Whereas, the now surviving individual trustees under the will of my father have duly and formally, by separate paper, approved the testamentary *464 disposition by me in this will hereinafter made in partial exercise of such power of appointment: Now therefore, in partial exercise of the said power of appointment, *1039 I do hereby appoint and bequeath - so much of one-half of the principal of that original share of my father's residuary estate which was given by my father's will in trust for my benefit, and which consists of property other than real property in the State of New York or the proceeds of sale or other disposition of said real property, as shall remain after deducting from the said one-half the sum of One hundred and sixty-five thousand dollars ($165,000.), (which said sum of $165,000. has heretofore been paid to me out of the said one-half), and shall not exceed the total sum of Seven hundred and fifty thousand dollars ($750,000.); except that, in the event that I shall survive my sister, Helen Morton, then, and only in such event, the said total sum by me here so appointed shall not exceed the sum of Six hundred thousand dollars ($600,000.) instead of the aforesaid total sum of Seven hundred and fifty thousand dollars ($750,000.). The value of the property so appointed with the formal permission and approval of the cotrustees in conformance with the will of Levi P. Morton and which vested in accordance therewith, was included by the respondent in the gross estate of petitioner's*1040 decedent as property passing under a general power of appointment exercised by decedent. OPINION. LEECH: The Revenue Act of 1926, section 302(f), provides, for purposes herein material, as follows: 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 * * *. Our sole inquiry is to decide whether the property, the value of which was thus included in the gross estate of petitioner's decedent for estate tax purposes was "property passing under a general power of appointment exercised by the decedent (1) by will * * *." The Supreme Court, in , in passing on this section, said: * * * Analysis of this clause discloses three distinct requisites: (1) The existence of a general power of appointment; (2) an exercise of that power by the decedent by will and (3) the passing of the property in virtue of such exercise. * * * Since, whatever power the*1041 decedent possessed was exercised by her will and the disputed property passed by virtue of the exercise of such power, our only question is to determine whether or not petitioner's decedent possessed under the will of her father, Levi P. Morton, a general power of appointment, by will, of the contested property. *465 A power of appointment is general when it is exercisable in favor of any person the donee may select and special or limited when it is exercisable only in favor of a person or class of persons designated in the instrument granting the power. , affirming . The respondent contends that the petitioner's decedent had a general power of appointment under the will of her father, Levi O. Morton, arising from the following provision of the will: * * * I authorize each of my children who may survive me by her last will and testament to give, dispose of and distribute one-half of her share of said residue, of which half the amount, if any, so disposed of for the benefit of her husband shall be deemed a part, to and among such person or persons, including such husband, and in such*1042 proportions as she shall by her said last will and testament designate and appoint, but the power hereby given and created shall extend only to such child's original share in my residuary estate and not to any addition to or accretion thereof from the distribution of any other share in my residuary estated. Such appointees may be natural persons or corporations, and such appointment of any part of said two-thirds to take effect only after my wife's death * * *. Undoubtedly, if that provision were read alone, the position of the respondent would be sound. It may be said further that unless the intention of the testator to limit the power there defined to a special power is established, the power must be construed as general. Thompson v. Garwood, 3 Hwarton, 287. However, the intention of the testator, Levi P. Morton, which is controlling, is to be ascertained, not from any part of his testament but from the whole instrument considered as an entity. ; ; affd., *1043 ; certiorari denied, . And, when so considered, other provisions of the will become pertinent. Thus, it is later provided that: * * * I also direct that the power of appointment herein given to my said daughters over one-half of her original share of my residuary estate, including as part thereof, if she shall so by will direct the continuance of the trust during the life or until the re-marriage of a husband over not exceeding one-third of her original share, shall be subject to the approval in writing of my said individual trustees or such of them as shall accept the trust, or the survivors or survivor of them, such approval to be indicated by endorsement on any such will, signed by such individual trustees or the survivors or survivor of them, or by separate paper approving a particular testamentary disposition or dispositions made or to be made by either of my said daughters. * * * Respondent argues that, in no event does this paragraph indicate a purpose to limit the general power of appointment granted in the earlier paragraph because petitioner's decedent was never married and the provision for approval of the individual*1044 trustees was meant to apply only "if she shall so by will direct the continuance of the trust during the life or until the re-marriage of a husband over not *466 exceeding one-third of her original share." We disagree. The quoted clause, upon which respondent bases his argument, affects not the necessity of the approval of the individual trustees in any exercise of the power given by the testator but only describes certain property over which the power to appoint shall conditionally exist. But respondent then says, in effect, that the approval of the individual trustees in the exercise of the power was intended by the testator, Levi P. Morton, to be a mere perfunctory, administrative act. Cf. ; appeals dismissed, . The record unquestionably contradicts that statement. See ; . The will of Levi P. Morton is replete with provisions clearly indicating his desire that his property, after his death, should, so*1045 far as it was within his power, remain within his own family. The investment and reinvestment of the share of petitioner's decedent and her sisters in their father's estate could be made only with the approval of the individual trustees. The sale and leasing of property included as part of those shares was subject to the same approval. The use to which funds applicable to the petitioner's decedent and her sisters under her father's will, could be put, was determinable only with the approval of those trustees. The testamentary expression is not only mandatory that the exercise of the power "shall be subject to the approval * * * of my said individual trustees * * *" but it provides that such approval shall be evidenced in the formal and specific manner of a writing signed by such trustees. That the approval of the individual trustees, who occupied the position of personal representatives of the testator, Levi P. Morton, was recognized s a substantial and actually necessary requisite in the exercise of the power by petitioner's decedent and those trustees alike, significantly and repeatedly appears. See *1046 ; Case . In fact, so far as the record discloses, no attempt was made to exercise the power without that approval. And, if any doubt existed, as to the all-important testamentary intention as to the contested power, we think it is removed by the codicil of Levi P. Morton, dated June 14, 1911, wherein he said: My purpose in making this change is to carry out more effectually than I could do as a citizen of New York, my general purpose to keep my estate in my own family so far as I may do so lawfully and consistently with the power which I have given my daughters to dispose by will subject to the approval of the co-trustees named in or appointed conformably to my will, of one-half of their original shares in my residuary estate. The Federal estate tax is an excise tax imposed not upon the property of the decedent but upon the transmission of that property by *467 decedent. ; *1047 . Thus, as stated by the Circuit Court of Appeals in the case of : * * * A logical explanation of the inclusion of property passing under general powers of appointment and the exclusion of property passing under special powers is that where the original testator has limited the right to appoint to certain named beneficiaries or to a limited class of beneficiaries, it is he and not the donee of the power who in the broadest sense transmits the property to the beneficiaries. The donee's exercise of such narrow and limited powers may be taken rather as a mere stage in the original scheme of inheritance than as an independent source of descent. In such case, it is really the death of the original testator which may reasonably be taken as the transmission of the property for the purpose of taxation. Where, however, the donee has full power to direct the property to any beneficiary that he pleases, there is in a real sense a transmission of it from him rather than from the original testator. The important thing is the latitude of the donee's*1048 power of disposition rather than the quantum of the interest which he may dispose of or the time of its vesting. * * * Thus, an absolute and unconditional power to revoke a trust is equivalent to a general power to appoint. . But a power to revoke is not absolute where it requires the joinder or consent of the trustees or a majority of them. ; Since the period at which the limitation of the power must be construed is the time of its exercise (; 1 Sugden on Powers, 495), the exercise of the presently contested power, by which the disputed property actually did pass, was possible when thus exercised, only, in favor of those and in the amounts as then formally approved in accordance with the provisions of the Levi P. Morton will. Obviously that was not the exercise of a general power of appointment by decedent. Whatever else it may have done, the condition making the disputed power of appointment "subject to the approval in writing of my said*1049 individual trustees * * *" limited the petitioner's decedent, in the exercise of that power, at any time, to those, corporate or otherwise, then having the formal approval of the trustees. That limitation of those in favor of whom the power can be exercised effectively distinguishes the cases of , and , upon which the respondent relies. The conclusion follows that the property, the value of which supports the pending deficiency, was not "property passing under a general power of appointment exercised by the decedent * * * by will * * *." Revenue Act of 1926, sec. 302(f). Decision will be entered under Rule 50.