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Gelb v. Commissioner of Internal Revenue

decided: January 22, 1962.

ROSE GELB, EXECUTRIX, VICTOR EDWIN GELB, MANUFACTURERS TRUST COMPANY, EXECUTORS, OF THE ESTATE OF HARRY GELB, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



Author: Friendly

Before CLARK, FRIENDLY and KAUFMAN, Circuit Judges.

FRIENDLY, Circuit Judge.

The executors under the will of Harry Gelb petition for review of a decision of Judge Opper in the Tax Court, 19 T.C.M. 987, which sustained the Commissioner's determination that a residuary trust created by the will did not qualify for the marital deduction. We agree that no deduction was warranted under § 812(e) (1) (F) of the Internal Revenue Code of 1939, as added by § 361(a) of the Revenue Act of 1948, c. 168, 62 Stat. 110, 117-118, 26 U.S.C.A. § 812(e) (1) (F), which was in effect at Gelb's death. However, we hold that a "specific portion" of the trust qualified for the deduction under the retrospective amendment of that section made by § 93(a) of the Technical Amendments Act of 1958, 72 Stat. 1606, 1668.

I.

The critical provisions of the residuary clause of the will, executed May 27, 1953, are set out in the margin.*fn1 At the date of Gelb's death, November 16, 1953, the governing statute, cited above, provided that "an interest in property passing from the decedent in trust" should qualify for the marital deduction "if under the terms of the trust his surviving spouse is entitled for life to all the income from the corpus of the trust, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire corpus free of the trust (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the corpus to any person other than the surviving spouse." The statute added that the provision "shall be applicable only if, under the terms of the trust, such power in the surviving spouse to appoint the corpus, whether exercisable by will or during life, is exercisable by such spouse alone and in all events."

There is no doubt that the residuary trust would fit the statute save for the paragraph with respect to Claire. We find no merit in the Commissioner's contention that this provision violated the requirement that the surviving spouse must be "entitled for life to all the income from the corpus of the trust." The language of the will is plain that the provision in regard to Claire was an additional power to invade corpus, not one to divert income from the widow; if the language were ambiguous, which it is not, the fact that the trust income ranged only from some $3000 to $3500 a year, a probability hardly unknown to the testator, would be determinative in taxpayers' favor. However, the Commissioner and the Tax Court were right that the provision infringed the requirement that there must be "no power in any other person to appoint any part of the corpus to any person other than the surviving spouse," and the converse that the power of the surviving spouse to appoint the entire corpus must be "exercisable by such spouse alone and in all events."

If the draftsman of the will had worded the provision for Claire as he did the clause with respect to wedding gifts for his daughters, there would have been no difficulty. If these happy events should occur, Rose was free in her individual capacity to demand or not to demand an additional $3000 out of corpus. Taxpayers contend that although the power with respect to Claire was vested in two trustees, Rose was one of them and that her discretion was similarly unlimited, hence no person other than Rose could "appoint any part of the corpus to any person other than" herself. They add, as a makeweight, that any payments for Claire's benefit were to be made to Rose.

The contention fails on two counts: (1) The will did not make it certain that Rose would be a trustee throughout her life; and (2) equity would not permit her as a trustee to veto, in her individual interest, payments to Claire required to carry out the testator's stated purpose. The basic argument thus failing, the makeweight alone cannot carry the burden; the interposition of Rose as a conduit, at least after Claire attained majority, see Regulations 105, § 81.47a(c) (9), added by T.D. 6529, I.R.B. 1961-9 at p. 73, would not prevent the appointment's being "to" Claire.

(1) In sharp contrast to the clause as to the wedding gifts and, we must presume, for sufficient reasons, the power with respect to Claire was vested in "my individual Trustees." At Harry's death it was not certain that Rose would be one, or would remain such throughout her life; legal incapacity on her part would prevent this, 1 Scott, Trusts (2d ed. 1956), § 107, at p. 776. If it did, Victor, or Victor and Ruth, would have the power to appoint to Claire. Under the 1939 Act, the entire trust was disqualified for the deduction by the existence of such a power in a person other than the spouse to pay even a limited amount to a person other than the spouse. See Estate of Raymond Parks Wheeler, 26 T.C. 466 (1956); Estate of Allen L. Weisberger, 29 T.C. 217 (1957).

Taxpayers might seek to counter this by pointing to rulings that when a sufficient power of appointment is given to the surviving spouse personally, the trust qualifies for the marital deduction even though the spouse is incompetent on the day of death, Rev.Rul. 55-518, 1955-2 Cum.Bull. 384; see 4 Mertens, Law of Federal Gift and Estate Taxation (1959) § 29.38, at p. 570, and then arguing that, by the same token, the mere naming of Rose as trustee sufficed. This does not follow. In the absence of contrary provision, the effect of incompetency on a power held personally is a suspension of the power for the period of the incapacity; the effect of incompetency on a trustee is removal from office. See 1 Scott, supra. The consequences of the difference are illustrated by Starrett v. Commissioner, 223 F.2d 163 (1 Cir. 1955), where the testator had given his spouse a qualifying power but had provided for its termination in the event of her legal incapacity. The Court, through Chief Judge Magruder, held the sum in controversy not available for the marital deduction, relying ultimately on the distinction between the absolute termination provided for and the mere suspension that would have occurred if the holder of the power had become incompetent, with nothing said in the will, 223 F.2d at 167. Here incapacity on Rose's part would cause a termination of her status as trustee, with effect similar to the termination of the widow's power in Starrett. In that event another person, Victor, or other persons, Victor and Ruth, would have power to appoint part of the corpus to Claire. Estate of Morton H. Spero, 34 T.C. 1116 (1960).

Miller v. Dowling, 1956-1 USTC 11646 (S.D.N.Y.1956), relied on by taxpayers, is distinguishable. There the widow in her individual capacity had a sufficient power to invade corpus and as trustee held a power to terminate the trust. The court held that a provision for a successor trustee in the event of the trustee's incapacity did not render the deduction unavailable. Although a successor trustee would take over the power to terminate the trust, the court said that, because of N.Y.Civil Practice Act, § 1357,*fn2 the widow's power to invade would be protected in the event of her incapacity, so that the trustee's power to terminate could not be exercised in derogation of the widow's rights. Thus it concluded that the trust could be terminated during the widow's life only by her own release, and the deduction was available. No similar reasoning would prevent invasions of principal for the benefit of Claire by Victor, or by Victor and Ruth, in the event of Rose's not serving as trustee; that would be carrying out the testator's intent, not frustrating it.

(2) Even if it were certain that Rose would always be a trustee, she could not in her individual interest block payments required "for the proper support, maintenance, education and up-bringing" of Claire. Whereas the testator indicated no interest in whether the wife bestowed wedding gifts or not, he made it clear that he "particularly [wished] to provide for the support and education" of Claire, and the rest of that paragraph must be read as requiring the trustees to exercise their discretion in that light. The cases cited by petitioners in which equity refused to order any payments did not involve powers in trust but absolute gifts with precatory words of hope that the recipient would take care of someone else or pay him a certain amount. Closer to the instant case is Collister v. Fassitt, 163 N.Y. 281, 57 N.E. 490 (1900). The testator directed his wife to pay money to the testator's niece "out of the property hereinafter given and bequeathed to her * * * as my said wife shall from time to time, in her discretion, think best so to do." No amounts were specified, nor was any standard enunciated to govern the exercise of discretion. Yet the niece was held to have a right enforceable in equity. With the specification of an amount and the articulation of a standard in the instant case, an equitable right in Claire to compel the trustees to exercise the power as dictated by her interest and free from any adverse one of their own follows a fortiori.*fn3 See 1 Scott, Trusts (2d ed. 1956), § 25.2, at pp. 194-195. In Phillips v. Phillips, 112 N.Y. 197, 19 N.E. 411 (1889), a sum was specified, but the wife was to pay only "if she find it always convenient to pay"; the beneficiary was held to have an enforceable right. See also Colton v. Colton, 127 U.S. 300, 8 S. Ct. 1164, 32 L. Ed. 138 (1888).

II.

The provision of the Internal Revenue Code of 1954, § 2056(b) (5), 26 U.S.C.A. § 2056(b) (5), with respect to the qualification for the marital deduction of trusts for the surviving spouse, altered the previous law in an important way. Under the earlier statute, unless a trust qualified in whole, no part of it did. The 1954 Code introduced a new concept - a qualifying "specific portion." Section 93(b) of the Technical Amendments Act of 1958, 72 Stat. 1606, passed after the petition here had been filed in the Tax Court but long prior to the decision, made the new dispensation applicable to estates of decedents who had died after April 1, 1948 and before August 17, 1954, when the provision of the 1954 Code took effect; we quote in the margin the 1939 Code provision as so amended.*fn4 ...


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