Amicus Curiae Brief — Mahoney v. United States

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Supreme Couit, US

FILED

No. 87-1521 ; FPR 1S 1988

cnewren BPANIOL, JR,

IN THE aK

Supreme Court of the United States

OCTOBER TERM, 1987

DANIEL J. MAHONEY, JR.,

Executor of the Estate of James M. Cox, Jr.,

. Petitioner,

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

JOINT BRIEF OF AMICI CURIAE STATE OF OHIO

AND JAMES M. COX, JR. FOUNDATION, INC.

IN SUPPORT OF PETITION

ANTHONY J. CELEBREZZE, JR.

Attorney General of Ohio

JOEL S. TAYLOR *

Chief Counsel]

WILLIAM ScoTT LAVELLE

Assistant Attorney General

STATE OF OHIO

30 East Broad Street

Columbus, Ohio 43266-0410

(614) 466-3180

Counsel for State of Ohio

JAMES S. MONAHAN *

DAVID C. CUMMINS

BRICKER & ECKLER

100 South Third Street

Columbus, Ohio 13202-4291

(614) 227-2300

Counsel for James M. Coz, Jr.

Foundation, Inc.

April 15, 1988 * Counsel of Record

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

Fe I HI 5a ices ons cede ncdtencagamtnssomnbatians

TABLE OF AUTHORITIES _...

THE INTERESTS OF AMICI CURIAE

SUMMARY OF ARGUMENT

ARGUMENT

I. The Sixth Circuit’s Reversal Without Remand-

ing on the Exception Issue Substantially De-

parts From Settled Judicial Procedure and Re-

quires Review by This Court.

II. The Sixth Circuit’s Decision Conflicts in Prin-

ciple With This Court’s Decision in Estate of

Grace and With Other Circuits, Undermining

the Uniform and Fair Administration of Fed-

eral Estate Taxation. ............ :

CONCLUSION .

TABLE OF AUTHORITIES

Cases Page

Bruning v. United States, 376 U.S. 358 (1964) —.... 8

Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) .. 8

Commissioner v. Bilder, 369 U.S. 499 (1962) _.... ; 7

Commissioner v. Estate of Nelson, 396 F.2d 519

(34 Cir; 3008)... eee 5

Donaldson v. United States, 400 U.S. 517 (1971). 7

Estate of Christ v. Commissioner, 480 F.2d 171

(Hk Cle. 1968). «260i eee 6

Guste v. Jackson, 429 U.S. 399 (1977) ..........0..00...... 5

Helvering v. Le Gierse, 312 U.S. 531 (1941) ......... 6, 7

Helvering v. Tex-Penn Oil Co., 300 U.S. 481

CRGBT) ooo ee )

In re Estate of Davis, 440 F.2d 896 (3d Cir.

| tS nanan DRNRM RR e IMR Ten RE TE ish 6

Ivan Allen Co. v. United States, 422 US. 617

COTS) noo ken eee 7

Jackson v. United States, 376 U.S. 503 (1964) ....... 7

Jimenez v. Weinberger, 417 U.S. 628 (1974)... 5

Meyer v. United States, 364 U.S. 410 (1960)........ 7

Stern v. United States Gypsum, Inc., 547 F.2d

1329 (7th Cir.), cert. denied, 434 U.S. 975

OBST TP avnccncenssnuitsnsclacctavecseeeaes eee 5

United States v. Broenan, 363 U.S. 2387 (1960) ....... 8

United States v. Cartwright, 411 U.S. 546 (1973). 7

United States v. Donruss Co., 393 U.S. 297

CTY aa on icccccdecccicnn oi nee ee 7

United States v. Estate of Grace, 395 U.S. 316

CGY: aceiecccnsccsiannivassscesepsseaieee ee a4 6.7

United States v. Gilmore, 372 U.S. 39 (1965) ......... 8

United States v. Gordon, 406 F.2d 332 (5th Cir.

|_| Sm OM sea MIPE NIRA Res (tae PII) OM Te. 6

United States v. O’Malley, 383 U.S. 627 (1966)...... 7

United States v. Shelby Iron Co. of New Jersey,

DTS. UF BEE GR scoala eee 5

United States v. Union Central Life Ins. Co., 368

Ra. eee ~ CREB vccassssnneecceensanaiendies eee. 8

Rules and Statutes

26 U.S.C. § 2036(a) ........

Ohio Rev. Stat. § 109.25 2

Rule 36, Rules of the Supreme Court —.................... 1

IN THE

Siren Court of the United States

OCTOBER TERM, 1987

eee

No. 87-1521

DANIEL J. MAHONEY, JR.,

Executor of the Estate of James M. Cox, Jr.,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

JOINT BRIEF OF AMICI CURIAE STATE OF OHIO

AND JAMES M. COX, JR. FOUNDATION, INC.

IN SUPPORT OF PETITION

THE INTERESTS OF AMICI CURIAE'!

The consequences of this case extend far beyond its

immediate parties. The Sixth Circuit’s ruling has a

significant adverse effect on the citizens of the State of

Ohio and the James M. Cox, Jr. Foundation, Ine. (“‘Foun-

dation”), an Ohio charitable trust Decedent established

in 1969. As a result of language in the Sixth Circuit’s

opinion holding that stock “transferred” to the James

M. Cox, Jr. Trust (“Trust”) “must be included” in the

gross estate of James M. Cox. Jr. (“Decedent’’), the

funding for the Foundation could be eliminated, prevent-

1 Written consents as required by Rule 36 of the Supreme Court

Rules for the filing of this brief were obtained and are on file in the

Clerk’s office. The decision below is reported at 831 F.2d 641.

ing the citizens of Ohio from receiving the benefits which

they otherwise would receive.

The Sixth Circuit ruled that the value of certain stock

placed in the Trust by former Governor of Ohio James

M. Cox, Sr. (“Governor”) for the benefit of Decedent

must be included in Decedent’s gross estate under Sec-

tion 2036(a) of the Internal Revenue Code of 1954.

There is an exception in the statute, however, for trans-

fers that are exchanges for “an adequate and full con-

sideration.” Because the district court had not ruied on,

and the Sixth Circuit had not addressed, whether the

statutory exception applied to the transaction, the James

M. Cox, Jr. Estate (“Estate”) filed a motion in the

Sixth Circuit seeking clarification of the statement in

the court’s opinion that the stock “must be included” in

Decedent’s estate. The State of Ohio filed an amicus

curiae brief in the Sixth Circuit supporting the Estate’s

motion, arguing “that the Estate [should] have its ‘day

in court’ on remand, on the question of whether the [ex-

ception] applies to its case.”* However, the Sixth Cir-

cuit denied the Estate’s motion without explanation.

The Sixth Circuit’s ruling in this case could cause

a significant reduction and perhaps elimination of fund-

ing for the Foundation.* If allowed to stand, the ruling

2 The State of Ohio requires its Attorney General to oversee

charitable trusts benefitting Ohio citizens. The Attorney General

of Ohio is authorized by Ohio Revised Statute Section 109.25 to

“intervene in any judicial proceeding affecting a charitable trust

when he determines that the public interest should be protected in

such proceeding.”

*The Foundation currently has approximately $6,000,000 in

assets, virtually all coming from a single distribution from the

Estate. This distribution was permitted by Decedent’s spouse sub-

ject to certain conditions, including (1) that disbursements from the

Foundation be limited to income on the principal, and (2) that the

distribution be returned to the Estate to the extent there is a final

judicial determination that the Foundation is not entitled to it.

[Continued ]

will increase Decedent’s taxable gross estate, and conse-

quently the Estate’s tax liability. Substantially all of

this liability, asserted by the Internal Revenue Service to

be approximately $6,900,000, would be borne by the por-

tion of Decedent’s estate that funds the Foundation.*

Therefore, the citizens of the State of Ohio would be de-

prived of the benefits provided by the Foundation. In

addition, as a result of the ruling below, taxpayers in

the Sixth Circuit would be treated differently from tax-

payers elsewhere.

SUMMARY OF ARGUMENT

The Sixth Cireuit ignored established rules of judicial

procedure in reversing without remanding the case to

the district court for consideration of the Section 2036 (a)

exception issue. The Sixth Circuit’s failure to remand

denies the parties the opportunity to be heard on the ap-

plicability of the exception in light of the Sixth Circuit’s

ruling that Decedent “transferred” stock to the Trust.

The Sixth Circuit improperly usurped the district court’s

fact-finding role.

Further, this Court’s decision in United States v. Estate

of Grace, 395 U.S. 316 (1969), established that a

transaction involving several constituent parts must be

3 [Continued ]

The Foundation has disbursed over $300,000 to charities in Ohio

since its creation.

* Decedent’s Last Will and Testament provides that half his ad-

justed gross estate shall go to his surviving spouse and that the

residue, after all estate, inheritance, transfer and similar taxes are

paid, shall go to the Foundation. The Will does not contemplate the

possibility that a portion of the Trust would be includable in

Decedent’s gross estate.

Moreover, Decedent’s surviving spouse has taken the position that

if the value of 11.3136 percent of the stock is included in Decedent’s

gross estate, she is entitled to an enhanced interest because her

bequest is for one half of Decedent’s adjusted gross estate. If this

position prevails, the funds to be distributed to the Foundation

could be further reduced or eliminated.

considered in its entirety to determine its ultimate eco-

nomic impact for purposes of federal estate taxation.

Numerous circuit courts have applied this basic principle

to the exception in Section 2036(a) to determine whether

“an adequate and full consideration” was received in ex-

change for a transfer to trust with a retained life inter-

est. The ruling of the Sixth Circuit in this case conflicts

with this principle by treating the transaction among the

Governor, Decedent and the Trust as several separate

transactions for purposes of applying the statutory ex-

ception. This Court should address the Sixth Circuit’s

failure to follow the decision in Estate of Grace.

The Sixth Circuit’s ruling also creates a conflict among

the circuits regarding the applicability of the statutory

exception to integrated transactions. This conflict places

taxpayers in the Sixth Circuit on a footing different from

taxpayers in other circuits, resulting in a lack of uni-

formity and the unfair treatment of taxpayers in Ohio

and other states. Moreover, the conflict creates ineffi-

ciency in the administration of federal estate taxation.

ARGUMENT

I. The Sixth Circuit’s Reversal Without Remanding on

the Exception Issue Substantially Departs From Set-

tled Judicial Procedure and Requires Review by This

Court.

The Sixth Circuit’s reversal without remanding the

case for district court consideration of the applicability

of the statutory exception substantially departs from set-

tled judicial procedure. The district court did not reach

or pass upon whether the exception applies to the trans-

action among the Governor, Decedent and the Trust. In-

deed, it was unnecessary for the district court to address

the exception until the Sixth Circuit held that Decedent

must be deemed to have “transferred” stock to the Trust.

It is well settled that an appellate court ordinarily

cannot base a reversal on a theory not relied upon in

the lower court. See, e.g., Helvering v. Tex-Penn Oil

Co., 300 U.S. 481, 498 (1937); Stern v. Umted States

Gypsum, Inc., 547 F.2d 1329, 1333-34 (7th Cir.), cert.

denied, 434 U.S. 975 (1977). Instead, the appellate court

should remand the case to the district court for consid-

eration of any issue arising as a result of the appellate

court’s ruling. See Guste v. Jackson, 429 U.S. 399, 399-

400 (1977) ‘per curiam): Jimenez v. Weinberger, 417

U.S. 628, 637-38 (1974): United States v. Shelby Tron

Co. of New Jersey, 273 U.S. 571, 581-82 (1927): Com-

missioner v. Estate of Nelson, 396 F.2d 519, 524 (2d

Cir. 1968).

The proper procedure is illustrated by the decision

of the Second Circuit Court of Appeals in Estate of

Nelson, 396 F.2d 519. The decedent in that case had

established a trust to provide marital support for his

wife pursuant to a divorce settlement. /d. at 521. The

parties disagreed as to whether the value of the support

rights relinquished by the wife was at least equal to the

value of the property transferred to the trust by the

decedent. The Tax Court fragmented the trust interests

and concluded that the value of the support rights was

full consideration for only a portion of those interests.

Id. at 522-23. On appeal, the Second Circuit rejected

this approach. /d. at 523-24. The court stated that if

the value of the suppert rights were equal to or exceeded

the value of the trust corpus as a whole, then full con-

sideration was received. Rather than make that deter-

mination itself, however, the Second Circuit remanded

the case for the lower court to ascertain the value of

the support rights. /d.

As in Estate of Nelson, the Sixth Circuit here should

have remanded the case to the district court for a de-

termination of whether the value of the property De-

cedent received in the exchange with the Governor was

equal to or exceeded the value of the property he is

deemed to have transferred. The impact of the Sixth

Cireuit’s decision is to foreclose the parties’ opportunity

to be heard on the exception issue on remand.

Moreover, the citizens of Ohio have a substantial in-

terest in uniform federal procedures and, in particular,

in being treated in accordance with such rules once estab-

lished. The Sixth Cireuit’s failure to follow established

appellate procedures in this case, when citizens in other

circuits have the benefit of such procedures, is antitheti-

cal to our federai system and calls for remedial action

by this Court.

Il. The Sixth Circuit’s Decision Conflicts in Principle With

This Court’s Decision in Estate of Grace and With

Other Circuits, Undermining the Uniform and Fair

Administration of Federal Estate Taxation.

In Estate of Grace, this Court held that a transaction

must be considered as a whole to determine its overali

economic effect for purposes of federal estate taxation.

395 U.S. at 325; see aiso Helvering v. Le Gierse, 312

U.S. 531, 540 (1941). Several other circuit courts have

correctly applied the principle in Estate of Grace to in-

tegrated transactions involving trusts to determine the

applicability of the exception in Section 2036(a). These

courts recognize that the exception may apply to such

a transaction, depending on the overall effect of the

entire transaction on the value of the decedent’s estate.

See, e.g., Estate of Christ v. Commissioner, 480 F.2d

171 (9th Cir. 1973); In re Estate of Davis, 440 F.2d

896 (3d Cir. 1971); United States v. Gordon, 406 F.2d

332 (5th Cir. 1969).

The Sixth Cireuit’s decision in this case, however, ig-

nores the analysis required by Estate of Grace and fol-

lowed by other circuits under Section 2036/a), thereby

creating a conflict among the circuits in this area of

federal estate taxation. As this Court has recognized on

numerous occasions, it is important to resolve conflicts

on issues of federal estate taxation. See, e.g., United

States v. Cartwright, 411 U.S. 546, 550 (1973); United

States v. O'Malley, 383 U.S. 627, 630 (1966); Jackson

v. United States, 376 U.S. 503, 505 (1964); Meyer v.

United States, 364 U.S. 410, 411 (1960).

The practical effect of the conflict will be that the

estate tax treatment of taxpayers in the Sixth Circuit

will differ from that accorded taxpayers in other circuits.

Whenever a decedent has transferred property as part of

an integrated transaction in Ohio, Michigan, Tennessee

or Kentucky, the transferred property will be included

in the decedent’s estate under the Sixth Circuit’s decision

in this case, even when the value of the property received

by the decedent as part of the exchange equals or exceeds

the value of the property transferred. Such transferred

property would not be included in a decedent’s estate if

the decedent were a resident of any other state. More-

over, only estates in the Sixth Circuit will be subject to

double taxation—the transferred property will be taxed

under Section 2036(a), and the property received will be

taxed as part of the estates’ assets. It is important for

the fair, efficient and uniform administration of federal

tax laws that this inequity be addressed by the Supreme

Court. See Ivan Allen Co. v. United States, 422 U.S.

617, 623-24 (1975): United States v. Donruss Co., 393

U.S. 297, 299 (1969); Commissioner v. Bilder, 369 U.S.

499, 501 (1962).°

5 Although the Sixth Circuit relied on Estate of Grace in rvling

that extrinsic and subjective evidence cannot be utilized to recon-

struct the terms of a trust, 831 F.2d at 641-42, the court ignored the

principle also set forth in that case that interrelated parts of a |

transaction must be considered together. See 395 U.S. at 225; see

olso Le Gierse, 312 U.S. at 540.

® Similarly, important technical issues affecting the efficient and

uniform administration and enforcement of federal tax laws have

been addressed and resolved by the Supreme Court. See, e.4.,

Donaldson v. United States, 400 U.S. 517, 522 (1971) (interest of

neiaeeeeneeeieneiaie

Further, this Court has indicated that the potentially

recurring nature of a conflict in the administration of

tax laws is a significant reason fcr resolution of the issue

in the Supreme Court. Bruning v. United States, 376

U.S. 358, 359-60 (1964) (certiorari granted partly be-

cause of potentially recurring nature of question as to

recoverability of post-bankruptey interest on tax assess-

ment); see also United States v. Gilmore, 372 U.S. 39,

40-41 (1963) (“continuing importance” of question re-

garding deductibility of legal expense in divorce action).

The conflict created by the Sixth Circuit in this case

will continue under the Tax Reform Act of 1986, which

retains Section 2036(a) and its exception for transac-

tions for “an adequate and full consideration.” See 26

U.S.C. $ 2086(a). Thus, it is essential that ihis issue be

resolved in the Supreme Court.

taxpayer in proceedings to enforce internal revenue summons) ;

United States v. Union Central Life Ins. Co., 368 U.S. 291, 293

(1961) (income tax filing requirements) ; United States v. Brosnan,

363 U.S. 237, 240 (1960) (whether state proceedings extinguished

federal tax lien); Colony, Inc. v. Commissioner, 357 U.S. 28, 31-32

(1958) (proper scope of statute of limitations for income tax

reporting ).

CONCLUSION

For the reasons set forth above, the State of Ohio and

the Foundation respectfully request that the Estate’s

Petition for a Writ of Certiorari be granted.

Respectfully submitted,