Petition for a Writ of Certiorari — Wells Fargo Bank v. Platt

No. 41023

~ fn the Supreme Court oflahi

: United States

WELLS F arco

as Executors of: the Will

of Louis L. Pendleton, Deceased.

°

Howarp C. PLat

-. Petitioners,

- VS.

.

r. Roperr C.

.

* Office Supreme Court, U.S.

FILED -

APR 20 1964

An pavis, CLERK’

‘Bank and A. B. Neip, Jk.,

PLaTr, a minor,

and Marityn A. Patri, a’ minor,

~ by his, and her Guardian Ad Litem,

; - Howard C, Platt,

. Respondents...

“

. bs 6 ; oar, - : y

’ Petition for Writ of Certiorari tothe © ~~~

District Court of Appeal of the State of California: |

First — —

a

e

<=="

Davin C. DuNLap

- Prruspury & Dun Lap

155: Montgomery Street

San "Franciseo 4, California

Pav. Myers, Jr. |. «

« 681 Market Street

San Francisco 5, California ©

-Of Counsel’

Pirie th

Pu LSBURY

5 Montgomery Street

oa \

San Francisco 4, California —

¢

.

Attorney tor Petitioners

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: a,

ee SUBJECT. INDEX ;

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« : e. wm, : sae F : ; > : = »

Opinions RECT CIR Rye ome gist eemeceeecneeees _ 2

Jurisdiction 00. iabnledibpeshticen icaaiitaiess __ sR ae OE

Questions Presented... eee & ionggewtneonsnesisonens AGES RS Wear

so as *. is = y : ° *L

Statutes and Regulations Involved.

ad _ : ° =

“ s Statement re ol ee np ances a

Raising and Disposition of Fedéral) Questiens in Courts

° x»

IG pigiacout Miter oe? babidcticedibiancanetand pralitsdac claktasiesdiabdieks Getalalasss

. ue

& a” Aetge toga Ae on eee S

Reasons for Granting. the Writ... Soins Santini delat ccilecereecag aie "i2 -

‘The Questions Presentad are-Federal Questions... 12

: . . >” * Se

The Question .of Enforeeability of Tax Evasion Transac?

. ‘ tious Is of Paramount Importanhee and Should’ Be De-

- ¢ided by This-Court........ iallapecahectlaon canning AR EEER OUI

» Z ° . : . = : 5

a . Marital Deduttion Could Not Be Properly Ctaimed 28

rcs a ce ak TR phe Specitie ie Iss ic ie Involving Evasion of the. Marital De,

ductio Provi isions of the Estate Tax Law Is Itself a

ve * "rdtadeny of F ar Reaching ( onsequenc "Bice ee alee aca ciens ae

, x

I ere es 32

Linnie, : . :

. . és i ° : . ‘ ° ats

— Appendix (Supplemental Voélume) . *

“i : ; ALE

= = Appendix A-—Opinion of California Distriet Court of Appeal —_1

> ike ne a

. i . .

__Appendis B—Ovderot-tistiTot Court’ of Appeal oe

: Rehearing ssciersmunaetusnpacdlpcriennihsantpnatstntessadesatianterorsnces> tb

“ . ° 4 -

7%. Appendix ¢ Order of Calidrnia Supreme Court De ‘nying

: Ikearing © ......... siguiente eect aaesloes mcactccoitonsresniialliaces | NE

i Appedtlix J) Opinion of California Superior Court. Is

‘Appendix E- Exeerpts from, Appellate Briets and Petitions - 64

>

o>

SP NEE eideemeenicrinaling: arnik—Sutiaae torn ge ated ened Rsculibcdidiaeeiswabees ;

Crregors v. vcifering 995 OU SS. 465 | ene ucts Retna 26

r aa

<

t

‘TABLE OF AUTHORITIES CITED

*, CASES ; Pages

ALC. Frost & Vo. v. Coeur D Afene Mines Corp: 312 &S. :

38 , (1941)............. capeehamipcoes SET on ake alte ext AS, 23

Awotin «vy. Atlas Exchange” Nationa! Bank, 24% U.S. 209

iy so, eevee MNS ra ice

Brainard v. Hubbard, 79 S- 1, 9-10 (1831). Bean Pant Rae 29

Bruce’s-Juices v. American Can Co. 330 U.S. 743. 947 hist 14, 24

Burnet v. Harmel, 287 U.S. 103 (1932)... Series We sales . 1¥

7 a Rey “ee €

Christopherson & Kiaer v. U.S Naviension Co, ae Se

Supp. 902, 121 Mise.“77s° (1923) sR sae “pa TRS fe : a AE oo .

Coates v. Commissioner, 234 F. 2d 459 (sth Cir, 1956) 8. 28,

Cele v.- Ralph, 252 U.S. 286, 293, (1920) 000... “SAK ites Sela “D4

4 ‘ollins v. Beeklenberg, 236 ri App. 324 2D . ) An Seema.

Créeekmore vy. Chitwood, 7 7 Bush (70 Ky 317 sere Seite Seacs 2

“Curtan v. Down, 3 ae App. 468 (4877) .. RR 25

. . a |

Dent v “Ferguson, 132 Us. 50 (ROR) on sccc.. paltnssaupersencerccucase Pa

~ Deitrick .v. Greaney: 309 US. 190 (1940)... euigneaees RES

. Dobson vy. Commission 33 ) v S. 489, 44. 195, (1943).......... 24

DOench, Duhine & Co. . Egderal Deposit lis: Corp., $15

CARMEN. LID) icecsicciieniacceon nase ce Seasiods Rese PEE i

Farber -y, “John Aquino, Sons, 3 ig 7. Supp. wd afi, 2553 App. v=

bes

. Div, GOO. (1938) +

ey ne ow i os thennesvesenncnsensqaampennstie yA

e

“Garner Vv! Purcell (1916 173 Cal. 493, 40), 160 Pac 682 7

Hanse UY. ‘Bear Film Ay om paris,

CR ee a pede “nth, 25

Harriman v. Northern + Seeudibion’s Co., 197 Us Ss. oy 1903) 22

larry Feldinan, 94.BT-A. 517 (1006). ites etc. 98

Hazelton v. Shgckels, 202 U.S. 77 CRO} eee ieee. : 19

Helvering v. Mitchell, 303 U.S. 391, 399 (1938)..............: Oe ae: |

e

2

6

Sie

e -

Tablas or AvTiogites Cirep Cie is

¢ Pages

Hernia Co. Ine. VP-P. 442 C1948), altenien sta curiam J 75

Bed 776 (4d Cir, 1949) ca * 2s

“‘Tlubbard y. Lowe, 226 Fed. 135, 137 US. D. N.Y, 1915 DY cooteerseren -s B.-

in, ne Sharp, IL. Wi Cal App. 63h 636, 120 Pae _ 1079, .

PN ireesd Aneta eee eee saseepueqworesoscnrneereensees RSES mae 7

Jackson v. United States... US... -, do L.IW. 4322

i

KRellyov. Kosuga, 338-FoS) 516 (1959) 7 Be UINCx ae a ier Ontaree Ys |”

Kins Atlas Exehanee | National Bank? 295 U.S. 2iIy

(1935) :

Lindsey v £ imted States, 167 Fed. Supp. 136 ‘Dalla 1958)... thy

—L yet Haey 2305 US: 188 (1938s ee a

> ; so . ee Z 29

ays = ; ; Ly

ee v Westinghouse aes « Mtg. Co., .329 U. s. be :

. NS . - ‘

“

“Sage vy. Hampe 235 is: ay 1914 roe eres An ROBIE “eee ii, 19, 20-

CEONT) oes gee eS To, Deas ee iv ees uy

~ MeMutlen v. ee hadd S. 639: (1899) 72... ne A ban ot. 1s

Prior’ \. Andrews 1927 83 at App. is 257 Bae.

SHU. SOE = ML re” ARCO eE a ri

° A

ste «/

“Rogers” Estate ¥. The Ive cing 201. 7 AO cg, | Sea cae | i

a ? a ‘ oe - a

“Shaw #) Addison, 239 Lowa 377, 2s MW. Yd se ed 25

Smythe y. Fiske, 23 Wall. (90 U STAM IST4- vee ae 27

Sola Eleetgic (Co. y. ietom Co., 317 US: 173

192) ee we ee : a tLe. a

.

Sahat ¥. wa US. 881 (1954) 2 Shaieetaen: Ye

‘298 US. 5445 548-549 (1936) .0°0 on

Viited Stites’ vo Knc

Unired States y. Mississippi Valles (Fenerating Co., 364 10S.

520, 563 (196f)........ > EaCA Ee hae pee eval nee 19, 2]

ae" ° a

-

. : e

* o

ve ——— “ ais

o i ool

e . Pe. a >

- (Mareh 23, 19645) .00000000000. Saecketnameteensernes ea decencal peated a

Katzinver vo es Metallic Mig.-Co 329 Us. 394 (1947). 14

cc kcgphechnincganee tt tcee ecsars Sembpihisspbeboicaan ok WY

F

a c

/

‘

*

‘oe

°

.

’

t nited States v. ini Freight Aswuciation, 166 TS.

; 0. itinerant seine Tae sbecib O ial UA anna mats 22.

Weil v. Neary, 27% U.S (1929) ee. eater ines Rr en a ea

Woodstock Iron-Co. vy. ‘Rie mond & Danville Extension ("o.. oe

129 ES. [ORB (BBD esa ese etna a

. .

Sratpres AND REGUL. \TIONS ta oe

“ inte rnal Revenue ‘Code of 1939 (26 U.S. Code, 1952 Ed. ; °

See. S12 (as amended, by Revenue Act of 1948. eh. 16s. Es

| NTA ratte ee haa Bel eo no as 3

Sec. B12(e) (1) ( LN SEES here SOS eee 3.4.6.9. 17, 29

» = g 4 ‘ .

Internal” Revenue Code of 194 (26 US. Code) ~

See. 2056 (a). (b) (1) (A), (B). doctnenentelnisints ne ne on eee 3.6--

See. 4706. 4714 Perdew iaibAdeksinsciaindep inset BANE Sec Aah aBals 26 .

’ “3 Sec. 4853 | b} > RT See ae a bones awe aieil : somwapash x tpgetecen ee a" a fnscimnchs 2 ,

| Geb S008; O018- SE SR ee

se i aeRO feo ey

"See. 7201-72 | 245

Seg.“ 7302 | 26 :

See. F841ia ) ie Shes ae Ady teres alas. DENS ae = 26

Towa Acts 1 33-4 Ex. ‘Sess. (45, G A 25 G

“6. C -PLRS S § 81. 47 by (2) (ii): (149 / ‘pocket supp.3 0... 3 ’

26 CLF.R. § 81. s7bid) (1949 Ed., poeket supp.) :.. maine Ditegatenkces’ A s >

- ad o

26 CAPR. § 20,2056 (8) Dees cceectccceceec <A On a aes 4

26-0 CER. § 20.2056 (e)-2(a).. appoce Fn ARP Ae PO ROOTES auth a

rie 7 : roar

28 PSC. x 1257 (3) ORI e eR SESE EEN aN OTTER, 2

. ‘ % ° = 6

4 5 a -[ : 1 &

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oa .. Tague or AutTHoRrties Crrep «9%, a

T wm , \ — ras 2 : °@Q

“ EXTS AND MISCELLANEOUS

ae Reel sae erat ke Sn Pa

Balter, “Tax Fraud and Evasion” p. 14 (3d Ed. 1963) 200007.

: a8 2 . . . - "ea

.. Internal Revenae Service Publieation No. 406 (Nov. 18-1963).

“Statisties of bicome— 1960, Fiduciary, Gift, and Estate

Tax Returtis Filed During 1961", pp. 46, 48.2005. ema

+. Mertens, “Law of Federal Gift ‘and Estate THxa'tion”

y ~

‘ oie

1 9! y) § 17? 29S-hetneies reksumpansscunt evessikidvihancceue Mew cenboocecepecnsoonsscscecbect Are ceeeeee _P

Mortenson, “Federal Tax Fraud Law”. p © -(1008).....,.......2.

Paul. “Taxation for Prosperits:”’, p, 287, | nc fo RT ee

a

Code Cong. Serv. “1ggs } 1637 at £190... e | Kame lesa © ,

e a2 >

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Senate Report No. 1013, 80th Cong 2d Sess. 1948, Fs :

“oe

In the Supreme | Court of the

-. * United States

» Weits Farco Bans and A, B. Nen, Jn.,

as , os *- of the Will

or savuis LL Pendleton, Deceased.

?

Petitioner S.

i vs. ‘

i f . 1 * 4 ay ° a > a - , J

“a '* Howarp C.‘Piarr, Robert C. Parr, a minor,

iy CPecae ce and Marinyy A. Peart, a miinor, |

9 Sai Le by his and her "Guardian Ad Lite m,

“Lx “ E

ero ea: “Howard C. Platt, :

of bik i a Resjiondents.. st ees : <

Petition for Writ of Certiorari to the

District Court of Appeal of the Staie of California

, First oe District,

2 Petitioners, WeELLS Farco Bank and A. B. NEIL, JR, as.

executors of the will of Louis L. Pendleton, ‘Deceased, pray

» that a Writ of Certiorari issue to review a Judgment of

the District Court, of Appeal ofgthe State of Califdrnia,

First Appellate District, Division Two, entered, on No-.

vember 27, 1963. This Judgment affirmed a Judgmem of -

the Superior Court of the State of ¢ ‘alifornia in and for the

County of San Mateo which had ordered enforcement of a ._

¢

~

at aus = "

trust. wotwithstanding Petitioners’ defense that’ the trust

wre for a purpose w hich was illegal wider Federal law.

ae “OPINIONS s tlw i ae

\ oo 5 ee ae a

The Opinion of the California. District Court of Appe: al’

Kis” dated November. mi, 1963 (Aqgp. 1-15).* Tt has, not

vet been officially reported. It is reported. unofhe ‘ally in

20) Ady. Cal. App. “18 and 35 Cal. Reptr. 377> An Opinion

dated - May 0. 1961. *( Appz 48-68) was also rendered by

the California Superior Court which was the trial court: |».

al

This Qpinion is unreported, ates ." le ha

. read ‘

‘~

rn surisoieni ON .

om ti nder California praefice the Judgme nt of the District

Court of Appeal is comprised i in the last paragraph of

its opinion. (App. 15) The judgment was dated and entered

November 27, 1963, On December 17, 1863 the District

Cyurt of Appeal made an Order denying Petitioners” peti.

#, fora rehearing (App. 16): 3 wid ou January 2), 164,

the Supreme | Court of the State of California shade its

Orde yr denying Petitioners’ Petition fore Hearing hy that :

court, (App. 17.) - a P ae

“The jurisdiction.of this: court is invoke d unde aos USC.

‘ N 127 ( 3): : :

QUESTIONS PRESENTED . ae eth,

1. Da the’ prinviples which preclude court enforcement

of ile VEE nsactions apply to transactions entered into

for the purpese’ of accomplishing an uniawful evasion of

taxes under the Internal Revenue Code?" 1f so. will en-

forcement or nonenforeement of a patently ts transac-

« ° 4 ‘& ae

on view of the total Jeneth of the two opinions below to be

- printed, the Appendix material is presented under sepurate binding.

e)

x

SS

ae

er “tg : , “ aaer™

3 i ne:

tion depe nd on the subjective ood back teak of the

parties? oS R | 7

o Misdhd « court enforcement be granted for a coustruc-

tive’ trust which was created for t the purpose, of enabling

the parties to make a false claim to the benefit of ‘the

Inarital deduction in ‘the dete rnination of Federal Estate®

Taxes ¢ re vi a . i

Dé, Seder the Federal ‘Estate Tax law, is the imarital

dediietion allowable for property given by will, apparently —

eutiight, to a surviying spouse wire the testator exe

cuted the will in reliance’ upon oral and. writtemagreements

of the surviving spouse that the spouse would hold a life

Festate only and that, the. property would thereafter gg to

third parties designs ated by the testator?

eo ¢ . ‘

+ STATUTES AND REGULATIONS INVOLVED .

Section S12 of the Internal Revenue Code of 19° oy (as

aanenclesd hy the Revenwe Act of April 2, 14s, ch. 168,

< Boliad, G2Stat. WT. 26U S.CUS1D (195aEd.)* provided

in_relevant part as follows: Ar aed ee Fe |

“S812. Net e- tate, . /

For the purpose’ of the tax the value of the net

estate: shall be determined, in the case of a citizen or

resident of the United States by deductins from’ the

valueof the grggs extate—” eg oe a

. - + * ® _* a ae . *

‘ ~ an ann ae)

“fj I Git sts ete... (9 SHPLIVING SPouse,

(1), Alowanée of marital deduction. e.

(A) In acneral. An amount, equal to Ss Mev

of any interest in property which _ passes - has

passed from. the decedent to bis surviving he

but only to,the extent that such interest is included

in sia the value of the gross estate.

»

---— + ° x 2

The counterpart of the quoted Provisions under Scr 1954 In-

ternal Revenue Code is-26 U.S.C. 2056) a). Cb)! -(B).”°

= ;

. 0) ; ¥

oe

——_

tel

‘ar ot

(B). Life. estate or other terminable intere st

_ Where, upon the Japse of time, upen the occurrence

of an event or contingency, or upon the failure of

an event or contingency to oceur, such, interest pass-

ing to the surviving spouse will terminate or fail, no

interest: _ : -

(i) if an interest in such property passes or has

passed (for less than an adequate and. full con-

sideration in money or money's worth) from the

decedent to an¥ person other than such surviving

>» spouse (or the estate of such spouse ) ; ; and

; (ii) if by reason of such passing such person

(or his heirs or assigns) may possess or -enjoy

any part of such property after such termination

or failure of the’ nano sO passing to: the sur-

viving spouse ;”

Estafe Tax Regulatiens, 26 C.E.R. s8L47bid) (1949

Eid., pocket supp.)*, added by Treasury Decision 5699 of,

May 19, 1949, 14 FR. 2653, provided in relevant part as

follows: : a

“(d) Interest ine property which another persan ,

mary keyed or enjoy. Rig Section SIL (fe) . (B)

. annie. as teriaiaatte interests" ) whieh passe d from

the decedent to hs surviving spouse, in case:

(i) An interest in the same property passed at any

time (for less than an adejuate and full cor isideration

in money or money's worth). from the decedent to’any

person other than such spouse (or: the estate of such

spouse), and ‘

o . Z R

(ii) By reason thereof, such:person (or his heirs or

a! assigns) may possess or enjoy any part of such prop-

ey ‘ounterpart of this provision appears in the presetit regulations

in 26 C ¥. R. § 20.2056(b)-1. :

deduction shall be allowed with respect to such’

9) ” .

erty after the termination or failure ‘of the interest

therein which passed from the decedent to his sur-

VIVINE spouse, *

(2) The foregoing prov ision is apphieable only where

interests in*the samie property passed from ‘the de-

cedent both to his surviving spouse, and te some pther

person (for less. than an adequate and full considera-

tion? in money or money's worth), and is applicable

irrespective of whether both such interests ‘passed from

the decedent at*the same time or under the same in-

strument. Under such cireumstances, if the other per-

~on tag liom an interest passed may, by reason thervot,

@... joy any part of the property after the

posse

termination or, failure of the imterest therein which

passed from the decede mt to his surviving spouse, son

latte oe in a ‘nandeductible interest’.

-

_ Watate Tox Regulations, 26 CARLR. § Si 4facbP zi)

(149 Kd..-pocker supp.t* ,added by Treasury Decision 5699

. , OF MM iy 19, 1949, 14 FR. 2629, provided in relevant part

° as eee

~

“The deduction nay not be taken with respect to a

property Interest whieh passed to such spouge merely

as trustee, or subject to a binding agreement by such

spouse to dispose of such interest in favor of a third

e ny

person. ve . pare

-

.

STATEMENT OF THE CASE

In 1948. by ame ndment of the: Internal. Revenue ¢ ‘ode, .

‘Tax parposes. The deduction can be taken for property

up-to one-half\of the “gross estate” bequeathed by a de-

cedent to his sufviving spouse, The deduction is expressly |

°

Congress provided for the marital deduction in the deter’

mination of a decedent's taxable estate for Féderal-Estate

Suitetantiatly the same prov iSion appe ars in the present regzulay

tiors in 2b L 1 R.§ 8 0). 2056(¢ -2(a). .

.

6

dimited, however, to property which passed to the sufviving

spouse outright and Wit), no‘other person designated by

the decedent to take the property upon the death. of the

“spouse or other contingency. The deduction is not per! -

witted for “terminable interests” (Int. Rev. ode 1939

<8] are 11)(B). quoted supra op. 4+ and 1954 Code POnb

(by i). Thus, if the decedent has limited lias surviving

Spouse toa life estate, the marital deduction ix not available. _

In the present case, the decedent, Gladys Pendleton, whe

was ‘making a new wl in October 1949, desired’ to limit

cher spouse, Col, Pendleton, to e? life estate with’ the re-

. mainde 'r interest to go to her nephew, Howard Platt, and

his” family. (Opinion on Appeal, App..1-3: Findings, CT.

Tr, 356-7; Ro Tre 25,)* She also wanted her estate to have

bd — .

the benefit of the marital deduction.“(R. Pr. 273, 281, 1146;

seo Opinion on Appeal, App.-2.) In order te accomplish

this dut) objective, the decedent, her husband, and her

nephew entered into the following arrangzement,: aa

“The decedent made a will in which one-hal? of the residue

of her estate Was left to her husband, apparently outright

and without restriction: and .the other one-halfeof the

residue Was bequeathed to the decedent's nephew, How: ard

Platt (Opinion: on Appeal, App. 1). Prior to making the

will, however, the decedent had received promises from

her husband and her. riephew that upon distribution of the

residue of lier estate to them, they would place the same

in an irrevocable trust. in which her husband would be

limited to a life estate in a pertion-of the property ami

i Which the property, _ upon her husband's teath, would

ZO © Howard Platt and members of his family. ( Findings,

Tr, 358.) Cok Pendleton and Howard Platt further

“Cl Tr, refers to Clerk's Transeript, and “R. Tr.” refers to

_Reportér’s Transeript of proceedings in the trial court.

“Findings” refers to Findings of Faet made by the trial court.

-

.

7 >

agreed with Mrs. Pendleton that they would sign a written ;

agreement to this effect (Findings, Cl. Tr. 358). The. writ-

fen agreement™ was read to and approved by Mrs, ‘| Pendle-

ton prior to her r execution of the will and was in fact —

vn the same day. ( Findings, Cl. Tr. 359; R. Tr. 64, 84,

333.) Mrs. Pendleton made her ‘will in aliases upon ao

arrangements by which her husband was to be- limited to’

i life estate and upon his death the property would go

to the others whom she Somennien (Findings, Cl. Br, BOD.

39S, 403). : 4

in’ previous wills Mrs, Poadiebais had provided: ior® her

husband's life estate by, a testamentary trust (Findings,

CL. Tr. 354-355). The purpose of the changed arrangements

‘Wats to’ secure the benefits of the marital deduction. (See

Opinion of Distrief Court of Appeal quoted iifra, p. 10;

R. Tr. 26788, 276, 287, 1222-4. ) “Thik would be ac complished

on the basis of the Autright bequest to Col. Pendleton in

Mrs. Pegdleton’s will, Sand Col. Pendleton would. still be .

linvited through the secrett trust to a life estate. This pur-

pose was in fact carried out. Mi rs: Pendieton died i-th, —

and Howard Platt and Col. Pendleton, as CO- -executors of

her estate, executed’ and filed a Federal Estate Tax Return |

in Which, the marital deduction Was claimed op the basis

of the outright bequest’ of one-half of the residue of: the

estate to. Col Pendleton Without disclosure of the secret

trust which would limit Col. Pendleton to a non-qualifying

*The terms of the written agreeme nt. are summarized in the

Opinion on Appeal «App. 2-3), The agreement is set forth at length

“Ti the Opinion of the trial court. ( App. 26-27).

#(* rages trusts of the type heyifi involved are recog-

nized ia. California and have been referred to &s “seeret” trusts. >

frarner Purcell (1916) 173 Cal. 495, 499, 160 Pac. G82. GS4. Jn

‘re Sharp (1911) 17 Cal. App. 634, 636.. 120 Pac. 1079, 1080; Prior |

t. lndrews (1927+ 83 Cal. App. 782, 791, 257 Pae. 960, S64.

-———————

]

¢

- life estate (Findings, Cl. Tr. 395). Fhe question in the

- Federal Estate Tax Return schedule as ‘to whether: any

person other than thé surviving spouse Aaimed or eon

templated claiming” any interest in the property listed, avs

passing ‘to the surviving. spouse was’ answered, “No™

(Opinion on Appeal, App. 4.) Asa result, some # 16,000 in?

Federal Estate Taxes were evaded (R. Tr. 790-91).

The parties had had the advice of an attorney in planning

and carrying out ‘the’ foregoing arrangements. Counsel had

‘advised that the marital-deduction would not be allow able

if Col. ~ Perdleton swere limited to a life estate by a testa-

‘mentary trust (R. Tr: 1147) but that ike Mrs. Pendleton

nade an oright. iniadeet in Wer will, jon her shusband

and ‘her nephew could inake any agreement betweer them-

‘selves which they desired, so lohg as no restrictions on the

* outright bequest “emanated” from Mrs. Pendleton (Opinion

on Appeal, App. 2). Later on counsel prepared the Feel.

eral Estate. Tax Return whig ich the parties, executed aid ”

+4 ae ae ‘

filed. (Findings, Cl. Tr. 399. ) Although the scheme whie ah

the parties adopted Was so obviously evasive that Howard

P latt himself referred to it as “shenanigans” (R. Tr. 63),

othe trial court found tha? the parties did what they did in

‘good faith in reliance: upon: counsel's advi ice cand without

deliberate intent té violate the Federal law (Findings, °C L

Tr. 393, 395). :

F The trust was never fully activated. and in 1959 eis ard

‘Platt and his two children, Robert and Marilyn Platt. Re-

spondents hereingfiled this action to enforce the trust in the

Superior Court in San Mateo County, California. | App. 3:

Cl. LTedy > ae

“Cok. | -endleton died pr ior to the trial of tlie ease, and his

‘executors, Pétitioners herein,-were substituted for him in

the litigation ( App. 6).

«--

a

~

~

. - 9 z =

Raising and Disposition of Federal Questions in Courts Below.

The federal question as to the consequences of the ille-

galits of the purposé of the transaction urider the Federal]

ce . > state Tax law has been the primary issue throughout the

"> >

case. It was first raised in Col. Pendleton’s first adversary

appearance by demurrer filed Jantary 13, 1960. In the

demurrer dese ndant specifically asserted iNegality, under

SSI: eo) of the Internal Revenue € ‘ode of 19: 9 (C1 Tr. Sd- 6).

T he trial court overruled the demurrer without opinion (Cl.

Tr. wy ’ ; 5°

_ In defendants’ answer filed May 3, 1960, the illegality

under the I ederal estate Tax law Was reasserttd at length

as defendants’ first affirinative defense. (Cl. TY. 97- 1h; >see

* Opinion on Appeal. App. 6.) P etitioners alleged. i in suhstance

that the purpose of the secret trust was to permit’ a false

claim to the marital deduction under the F ederal. Estate Tax

law and that this illegality barred anv enforcement of the

_ trust. : ,

This issue of iMefgality ‘under the federal law was reiter-

ated im the deter xdants’ pre- -trial statement (C1, Tr. 165) and

in the court’s pre-trial order (C 4. Tr. 150).

The trial court, In its Oputtion ( gs 16- 68), Findings of

~ Fact and Conclusions of Lawi(€ l. Tr. 352-463; 517-528) and

Judement (Cl. Tr. 465-491: anit) held that the trust

shod nevertheless be enforeed. The fact that the parties.

acted on advice of counsel without any deliberate intent to

violate the law was one of the factors which influenced the

court's decision. The trial court was also impressed with the

view that’ the rules against enforcement of Jeenal trans-

“actions were inapplicable to transactions inv of¥ing evasion

of Federal taxes. (See Opinion of trial@ourt, App. 48-51.)

Again, on Petitioners’ appeal to the California District

c ourt of Rppeal the illegality issue under the Federal Ks-

v

10 ‘

.tate Tax law was the primary issue raised by Petitioners. In

accordance with California practice, the issue was raised in|

Petitioners’. Appellate Brief. (See quotations from Brief,

App. 69-70.) The Californja Distriet Court of Appeal, in its

Opinion, recognized that this was the principal issue pre-

sented for its determination (App. 6).

The District Court of? Appeal, in aftirming the Judgment *.

of the trial court, relied upon the finding of good faith in

ae ting on advi ice of coansel as & sufficient answer to the ille-

gality (Xpp. 7-10), although it agreed that:

“There i is no doubt that the objective 6f the parties in

entering“into the agreement was to obtain the marital

tax deduction, while still carrying-out Mrs. Pendleton’s

wishes with respect: to the alispositiong@f the Folger

stock.” (App. 6) :

a

The issue of iilegality under the Federal Extate Tax law.

was again raised as the principal issue in Petitioners’ Peti-

tion for a Hearing ip.the California Supreme Court. (See

excerpts from Petition for California Supreme Court tear-

ing, App. 75-76.) The California Supreine Court denied the

Petition for- Hearing without comment .( App. 17).

The third Federal question presented is whether or not it

was actualiy improper to take the marital deduction under

‘the circumstances of the case. This question has heen raised

impiiegiy throughout the case in that a necessary elemerit

of Petitioners’ contention that the court should not enforce

the'trust because’of illegality under Federal law is that there

‘was in fact some illegality. ‘Thus, throughout the case, Peti-

tioners have taken the position that Mrs. Pendleton was in-

strumental in limiting her husband to a terminable interest

and it was therefore iNegal to take the marital deduction. -

No serious question was ever raised az tothe correctnes="

of this wition, at least until the decision of the California

: : . hak — il :

District Court of Sppeal. Although the, Court's Opinion ix

not clear on the point, it appears possible that the Court.

may have based-its judgment in part upon the proposition

that that-na-illegalitv under the Federal Estaté Tax jaw

Was necessarily involved in. the transaction? The court, in

its Opinion, refers to the advice of counsel to the effect that

Col. Pendleton and ‘Howard Platt, as legatees under Mrs.

_Fepdieton’s: wil could nfake any agreement between them-

‘elves as to the ultimate disposition of the property which

they might desire . and that so long as-the limitation of Col.

Pendleton to a life estate dil not “emanate” from Mrs.

"Pendleton, this would not affect the allowability of the mafi-

tal deduction under the Federal Estate Tax law ’( App. 2). :

The coirt, in referring to the objective of the parties of ob-

taining the magital deduction on this basis states :

; “As an abstract matter, this is not an illegal objec-

tive.” (App. 6) ¢

The facts of thie case as found hy the trial court, however.

were that Mrs. Pendleton made her will with the outright be-

quest in reliance upon the oral and written agreement of Col.

Pendleton and Howard Platt that’ the property. would be

-placed in a trust in which Cof, Pend] Mon would be linsited to

a life estate. (See supra, p. 7.) The District Courfot Appeal

“did net, in any way modify these ‘findings, and we should

state frankly that we do not believe that tie Court actuaily

intended te hold that the marital deduction could properly

be taken under these Circumstances, It has appeared ‘desir.

able to present the question, however, in order to cover all

possible expfanations of the Ceurt’s decision. If the Coimt’s

Opinion is to be construed asx holding that under these.

facts the marita)- deduction could properly, be taken in the

dete rnuination of Federal ‘state Taxes, ethen’ this third

~Pederal question has definitely been’ brought inte the: Cane,

-

42

In Petitioners’ Pétition to the District Court of Appeal for

a Rehearing, Petitioner's pointed out that Mrs. Pendleton ;

had peen instrumental in placing restrictions on the bequest

to her husband, and Petitioners asked for clarification of

the.court’s Opinion on: this point. (See quotation from Peti-.

tion for Rehearing; “App. 70-75.) The District Court of Ap-

» peal denied the Petition for Rehearing wenent comment

-(App/16). ,

- THis question arising under the Opinion of the District

_Conrt of Appeal was also brought to the attention of the

California Supreme Court in Petitioners’ Petition for a

‘Hearing by that court. (See quotation from Petition for

Hearing, App. 75-76.) ‘The California _ Supreme Court

denied the Petition w ithout cominent | App. 17). :

Respondents, in their reply to the Petition for Hearing

by the California Supreme C ourt, agreed with Petitioners’

contention that under the facts of the case the restriction of

Col. Pendleton” to a life estate was a limitation placed by

Mrs. Pendleton. (See quotation. from’Respondents’ Reply,

App. 76-77. ) This, Respondents agreed, was the whole basis

of the case which the District Court of Appeal had before

it to decide. Thus, if the District4’ourt of Appeal Opinion

. is to be construed as holding that since ‘Col. Pendleton and -

Howard Piatt also had a written agreement between them,

it was legal to take the marital deduction regardless of the

part played bv the decedent, then the third+Federal ques-

tion, under the Federal Estate Tax nie is presented.

“REASONS FOR: GRANTING THE writ

The Questions Presented are Federal ¢ |

_ Many decisions of this court Wat e ‘dessonstrated that w hen

Federal law jis involved it is the province 9f this court not

only to construe its express provisions, but also to determine

‘ .

ad

“se

f .

a

pa

thee ‘xtent and nature of the legal conseduences of any viol: -

tion, eventhough the transaction ixtbetween private litig: raints.

~ and-on its face presents nothing iore than a local em: :

Thus, the Federal aspect of a transactio n involving Fe ederal

-Taty is n@t confined to the construction and applic ition of the

.

_ express provisions ‘of the law. It extends te all consequential :

phases, for here the poliey of the law and the intent ef Con-

gress may he just as inpe rtant as itx-e Xpress prov —

Sola. Electric Cc 6. t« de Fe rsou Elec tric + 0., "317 US oe

(1942). This was Qn action to recover roy altiescand enforce

a patent licensing: agreement. The defendant conte nded that-

the agreement, which contained a price fixing clause, was in-

violation of the Sherman Act. Plaintiff argued that defend.

ant was estopped to assert this'defense. This Court held

that the question Gf estoppel was a matter of Federal law

to be decided in accordance with Fede inet porte: . T he Court

stated:

“When atederal statute condenms an act as unlaw ful.

‘the extent and nature ef the legal consequences of the

condemnation, though left by the statute to judicial de.

termination, are nevertheless federal questions, the an-

swers to which are to be derived from the statute and

the federal poliey which it has adopted. To the federal

statute and pohliey, conflicting state law and potieymiust

- yield.” gue ° Jee =

* * . a Be. hes x Hale ‘

‘A state by. applying its own law of specific perforn

ance may not compel the performance of a contract con,

wigs, merssd violation of the federal lamd laws. Lidersan

~Carkins, 135 US. 483,34 Led. 272. Similarly thi-

( ourt hax declared that ‘anyone sued upor a contract

way set up as a defense that it is in violation of the

Sherman Act. FE. Bement & Sos +. National Harrow’

Co. IS6. US. 70, 88, 46 L.Ed. 1058, 1067. And it has pro-

ceeded Gn the assumption that whether the parties to

o

~ ject or not, the effect of illegality: under

a Federal question. © te

, a, ae

eee is

an agreement in’ violation of the Act are in. pari delicto

is a question of federal, not state, law. Harriman v..

_ Northern Securities Co., 198 U.S. 244, 49 !.Ed. 739;

Eastman Kodak Co. v. Southern Photo Materials Co.

73 US. 359, 376-378, 71 L.Ed. 684, 690, 691.* *.*” (317 :

U ‘S. at 176, 177)

See also Katzinger v. riven Metallic M fg. Co '0., 329 a

394 (1947).

MacGregor , v. W cstisighouse Elec. d: & Mifa. Co., 329 Cv. Ss.

~~ 402 (1947), (reversing Pennsylvania. Supreme Court on

certiorari).

: Similarly, questions: -of sulobeeabiiny ‘of transactions

-which involve some element of illegality under Federal law

are Federal questions. This, of course, is obvious W here Con-

gress has legislated specifically as to the consequences of

‘llegality. But whether Congress has been apes on the sub-

ederal law is still

Bruce’ s dnices v.-American Car C 0.,.330 v’. S.- 743 (1947 ),

This was an action in the Florida state courts to’ enforce:

renewal promissory notes. The defendant vontended, that

‘the notes weré illegal and unenforceable because they arose

out of sales by the plaintiff which were discriminatory in |

_ violation of the Robinson-Patman Act. This Court heard the

~ ease on certiorari, and held that this question of illegality

was a Federal question. The-Conrt stated :

“The federal question which survives proceedings i in

the Florida state courts is W hether renewal notes repre-

‘senting the purchase price-of goods sotd and delivered

are uncellectible if it is found that tlie vender violated

the Robinson- Patinar®. \ct™. (3380 ULS. at ghd a

&

Pa 274 ad £

ws

Kelly t. Kosuga,* 358 US. 516 (19 99). This was an action

* for the purchase pri ice of fifty cars of onions. The buyer de-

e . -é

mm , a e

?

y

15 | ae

fended on the ground of itlegality ‘under the Sherman Act.

This Court recognized that the question; Wasa KF ederalsques-

tion when it stated: ee

“Obviously, state law governk in-general the rights and

o duties of sellers and purchasers of goods, and, while the

__ effect of illegality under a federal statute is a matter of

tederal law, * * *". (358 U.S. at d19) -

‘A.C. Frost & Co. Coe ar De, flene Mines: Corp..oh2 Ts

38-(1941). This court, in reversing an Idaho. Supreme Court

_deéision on certiorari, held that theeffect of iNegality under

the Securities Act-of 19333 was a Pédegal «question.

Deitrick ¢. Greaney, 309.0 SS. 190 (1940), involved enfaree

ment of note giv eyitoa bank fora consiade ration which was

illegal under the > National. Bank Act. The United States

Supreme Court stated: “se |

“A point much dise ussed in brief and argument, upon’

the assumption that local taw/will guide oir decision,

see Erie RCo. v. Fompkins 504 U.S. 64, is whether by

Massachusetts law * * * [defendant] is precluded from

setting up the illegality of the,transaction as a defense

to his note. But it isthe federal statute which condemns

asx unlawful .* * * defendant’ x} acts. The extent ant

nature of the legal consequences ofsthis condemnation

though left. by the statuté to judicial ‘determination,

are hevertheless to be derived frond it and the federal

policy which it has adwpted'* * *. We have recenaly he lel!

. that the judigiai determination of the le wal © aeons ~

which flow: front acts condemned as unlawful by the Na--

tional Bank Act involves decision of a federal, not a

“state question.” “( S00 =. at ZUM). 201) ‘

Awotin v. Allas ‘Ethangé ‘National Bank, 295 U.S. 209

. (1939). This was an action in the Illinois state courts against

a national bank for breach of an agreement by the bank to

~ repurchase certain bonds. It was conttntied that this agree.

ment was legal’ under the ational Bank Act. This Court

| £ oS Ee, : :

_gratited certiorari. This Court held that the question of en.

* foreeability and also the question of plaintiff's right to resti-

tution in the absence of enforcement were Federal questions.

age Nimen «, Atlas Bachasiqe National Bank, 299

US. 219 (1935). - :

D'Oench. Duline & Co: vo. Fe deral Deposit Las. Corp.

SED US. 447 (1942). | Fant

Sage ¢. Hamp?, 235 US. 99 1914). Sena aa a contract

ror the sale of certain land i in Ransas. The land was owned

by an Indian patentee under act of Congress which con-

tamed certain limitations on transferability of the land.

The Kansas Supreme Court had held the contravt to. de

enforceable since the Indian patentee was not a party to

the contract and the ¢ ‘ongressional, limitations did not apply

directly te the contgact, Justice Holines, speaking. for th is

Court, held that even though the partie were not expire fash

subjeet to the C oh¢ressional réstrietions, still the contract -

was illegal jecase of the tendgney to promote illegality

sinder the Federal act. Justice Holmes further held that

this was a Federal question. His Opinion is certainly. ayp-

plicable here: . 7

™ The on doubt open in the prese nt position of the

case is whether the ground upon which we hoid the

contract unenforeeable is not a matter of -cognmon

daw, which we may think that the Kansas courts ought

to apply, but. which is not -open to review here, The

case at first sight seems like those ‘in which a state

decides to enforce or not to-enforcee a domestic con-

tract, notwithstanding or because of its tendeney te

cause a breach of the Jaw of some other state. Cita

| tions omitted] But the policy invelved here is the

-poliey of the U nited States, If'is not a matter that

the states can regard or disregard at ther wilh’ (259,

VS: at 7) oo

¢

>

tS

AZ

]

It is thus clear that where legality under Federal law

is involved, the effect of such ihegality upen enforceability |

of private transactions is a question of the poliey vat the.

Federal law to be passed upon Ly this court. [tis also

‘clear that the existence of the Federal question ix not de-

_pendent. upon its being labeled as such. It is the inherent’

nature of the question which controts, (See Dettrich ¢.

(rreane y oue US. 190 (1940) SMPTE Pp. 15.)

The third question rey lewed above is alse clearly a Fed.

eral qiestlon. It involves the cons tfaction ‘ot the express

provisions of the Internal Revenue Code SSt2te)ity >i

concerning terminable interests. It the California District

Court of Appead has -held that under the Gircumstances of

this case the heque st to the surviving spoiise Was not a

terminable interest, then certa.aly we have a question which

should be decided on a uniform basis for the whole country

Without _vegard to how ans particular state court might

r + at bg ’ .

-apply its own ‘iveal law te rite facts.- sd

Burnet v. Harmel, 287 US. 105 (1952

Lyeth ev. ee iss (1938) :

mre Enited States vr. Pelzer V2 US. 399% Pe

. Rogers Estate Me clon ay.: 1a. Ss. 410002945

. The tion of Enforceability of Tax Evasion Transactions Is of

P nt Importance and Should Be Decided by This Court.

The basic issue in this case is whether or not court

enforcement should be granted toe a transaction entered

into for the purpose af aecomplisiting an evasion of Bed

pral taxes. An incident of this question is the weight to

be attached: to the Subjective good faith of the partie ~ i ‘thie

* patently evasive, transaction, : ,

Our research has revealed no case in’ Which this court

has decided the ‘se illegality question In the tas field.” This

“court has,. however, had frequent occasion to enunciate

° 2 : 18 , .

the general principles concerning court efforeement ‘of,

illegal transactions in other areas of the law. Phe general

principle that the courts should not enforce iHlegal trans-

actions or transactions entered into for ‘an egal purpose

has heen fully recognized. The importance of discouraging

illegal transaci.or~ far outweighs the importance of: aud just-

_ing-the private equities of the parties. Thus, when a party

must rely upona transaction tainted with illegality in order

to establish his case, the courts cannot help him. The polices

ix “hands off¥ <9 °°. : .

Thus, in McMullen vo Hoffman, 174 0.5. 630 PSH) a

case which arose out of a collusive bidding arrangement,

the Court stated :

“The authorities from the e: irhiest’ time to the present:

Leg unanimously hold that no court will lend Its assistance

in any way towards carrying out the terms of an

iHegal ¢ontract. In case anv action is brought in which

it ix neeersarv to prove the illegal contract in order

to maintain the detion, courts will not, enforce it nor

wil] they enforce any alleged rights divectly ae hagas

from such contract.”

* 7 ~* ~~ * cd .

whe, “The court refuses to enforce such a contract, and

it permits defendant to set up its illegality, not out of

any reg#ed for the defendant who sets it up, but only

on account of the public interest. It has been often

stated in similiar cases that, the defense is a very dis.

honest one, and it lies ill in the mouth of the defendant

to allege tt. and it ix only allowed for pubie considera.

tions and in order the better to seetire the public against

dishonest transactions. To refuse to grant either party

* > te an illegal contraet judicial aid for the enforcement

of his alleged rights undey it tends strongly towards

reducing the number of such transactions to a mini

mun, The more plainly parties understand that when

they ‘enter into contracts of this nature they place

themselves outside the protection of the law, so far as

that protection consists in aiding them to enforce such

,

.

19

contracts, the less inciined will they be to énter into

them. In that way the public sec cerot je Oe i

rigid adherence to the law.” (174 UA. 4. GEES

\ .

In Deut mr. Berguson, 132 US. 00 (1889), | the Court be-

fused to enforce a secret trust under which a grantey of

“property conveyed in- fraud of creditors had agreed to re-

turn the property to the grantor, The court stated:

“dt* * * involves a secret. trust for the return te him-

self of property of which such creditors have the im-

“mediate right of sale. The law does net countenance

any such transaction, but leaves both parties in the

position where they hate piaced the mselves.” (132

ao ti Seat a> és ; r

. &

Application of this rule of nonehforeement ix not de-

pendent on express statutory language to the effeet. ‘that

violative transactions shall not be enforceable.

United States ve Mississippi Valley Generating Co..

364 U.S. 520, 565 (4961) quoted mmsra, page 21.

“> Hazelton ¢. Sheckels, 202-U.S8. 71 (1906) (Contract

against public policy )

Application of the rule against nonenforcement ix not

confined to transactions whieh expressly call for a viola-

tion of the law. The mere tendency to promote illegality

ora purpose to accomplish an illegal objective prev ide: ade-

sarge reason for court refusal to enforce, In Sage ¢. Hamper,

985 TOS UG (LOT4) drev lewwed SM pru, page 16) . the statute

involved Was an act of Congress which barred any con

vevance of land by an lidian patentee for a period.of 25:

“years without approval of the Secretary o f Interior. This

Court held “that under‘this law a contract Tor the sale of

the land by a seller who did not own the land and whe

was not-direetiy sybject to the congressional aet, Was illegal

20 .

beahuse of the tendency which the contract would induce .

to attempt to get the land away from the Indian owner in

viglation of the intent of C ongr ess. Justice Holmes, speak:

~ ing for.the Court, stated :

- And more broadly, it long has bee ” secognized that

_ contracts that obviously and difectly tend in a matked

x degree to bring about results’ that the law seeks te

’ prevent cannot be made the. ground of a successful

suit. Pro@idence Tool C6. v. Norris, 2 W all. 45, 17 1. *

od. S68: Trist v. Child (Busk v. Child) 2) Wall. 441,

2 L. ed. 623; Oscanyan.¥. W inchester Repeating Arm-

ae: 103 U.S. 261, 26 L. ed. 539; Fuller v. Dame, 1S

_ Pick. 472. It appears to us that this is a contract of

that class.* * *” ; -

“It is true that liter statutes in foree when the con-

tract was made allowed a conveyance W ith the approval

of the Secretary of the Interior. * * * The Kansas

court laid these statute’ on one side, and in our view

also they do not’ affect, the case.. The purpose of thie

law -still is to protect the Indian interest, and a con-

tract that tends to bring_to me gmese intluence

“2 ppon the Secretary of the he Int ~ and te induce at-

tempts to mislead him as to what the welfare of the

Indian requires, are ax contrary to the poliey af the

law as others that hav e been condenmed hy the Gourts.

235 U.S. at 105)

Woodstock Tron Co. t. Richmond & Danville Bate Wsron

o.. 129 U.S. 643 (1889). This Court stated: |

“agreements like the ene in this case; . .. are

against public policy because of their corrupt tendency,

whether lawful or unlawful means are® contemplated

or used in carrying them into execution. ‘The law,

looks to the general tendency of such agreements: and

it closes the door to'te niptation by re ‘fusing theti recog-

nition in any of the courts of the country.” (129 U.S.

at 665)

uy

tea i iy

See also Weil). Neary, 278 U.S. 160 (1929), queted imfra,

° - . ‘ 4 ad a

pages 22-25. |. “~~

In the great majority of the ille gakity cases the courts’

ruling against enforcement is based upon the actual ille-

gality inhe ‘rent in the fransaction or in its purpose, without

regard to the subjective goad or bad: faith of the parties.

“There have, ‘however, been some cases before’ this court.

-in which a party has ‘contended that the’ usual rules of

_ lle gality should not be apphed because the parties acted

* On good faith and without any evil fraudtlent intent. Thus.

in Uwited States v. Mississip pi : alle y Generating Co. bt

“US. S20 (19614, involving a goverment contract in which

there was a contlict of interest on. the part of one of the

negotiators, this Court held: :

“Having determined that Wenzell’s activities con-

stituted a violation of Section 434, we must next con-

sider whether Wenzell’s illegal conduct renders the

contract unenforee: ible. It is true that Sectron 454 does

not specifically prov ide for the invalidation of contract=

which are made in violation of the statutory prohibi-

tion. Hawever, that fact is not determinative of the

_ question, for a statute frequently implies that a con-

tract is not-to be enforced when it-arises out of-cir-

* Cummdtifnees that would lead enforcement to offend the

essential oe ay bel the enactment. e. g.. Miller v.

Ammon, 145 U.S. 421, 36 Led 159,12 8 Ct S84: Bank

of United States v. gibi (US) 2 Pet S27 Led

SON: 6 Williston, Contracts (rev sre aips £1765.

* * * ee -_ -* - . *

“The Court of Claims was of the Gpinien that it

woukk’ be overly. harsh not to enforee’ this contract.

since the sponsors could not have controlled Wenzell’s

activities and were cuilty of no “wrongdoing. However.

we think that the court enfPhasized the wrong con

<itlerations, Although nonenforcement frequendly has

‘the effect of punishing one who has broken the bet

«-

' _

‘its: primary purpose ix to guarantee the integrity of

the federal contracting process and to protect the pub-

lic from the corruption which might lie undetectable

beneath the surface of a conjract conceived in a tainted

transaction. Cf. Crocker v. United States, 240 US 74,

* $0,81, 60 L ed 533, 537, 36 8 Ct 245. Luis this inherent

_— © difficulty in detecting corruption. which requires that

contracts made in violation .of Section "434 be held

‘unenforceable, even though the party seeking enforce-

, ment ostensibly appears entirely innocent. Cf. Hazel-

ton Vv. Sheckels, 202 US 71, 79, 50 L ed 939, 941,

268 Ct 567, 6 Ann Cas 297." (364 U.S. at 565, 564)

: United States v. Trans-Missouri Freight A ssociation, 166

U.S. 200 (1897), a case arising under the Sherman Act:

“For these reasons’ the suit of the government can be

-‘naintained without proof of the allegation that the

agreement was entered into for the purpose of restrain-

ing trade or commerce OT for maintaining rates aliove

“what was reasonable. The necessary effect of the agree-

‘ment is to restrain trade or commerce, no matter what

the intent was on the part of those who signed it.” (186,

_ US. at 342) - . : are

Harriman v. Northern Securities Ce., 197 U.S. 244: (1905),

parties acted in good faith and without intention to vio-

. late the law as without merit. With knowledge of the

facts and of the statute, the-parties turned out to he

: mistaken in supposing that the statute would not be

held applicable to the facts.” (197 U.S.’at 298)

Weil v. Neari, 278 U.S. 16011929), a case involving an’,

agreement to divide fees in a bankruptcy matter:

f “The chief argument that is pressed upon Us te de-

“clare the contract valid and to sustain the judgment

ets |

Sega

—_—

%

23

“based upon it is the success with which the plaintiff is

found to: have-worked out a useful settlement of the es-

» + tate for the benefit of the creditors, and the absence of

any finding or showing that there was actual fraud. But

this is not a sufficient answer to the charge of illegality.

The contract is contrary to public policy—plainly se. °

> What.is struck at in the refusal. to enforce contracts of

“this kind is noTGityuctualexil results but their tend-

ency to evil in other cases. Even if the wWtiimate results

in the managennt of the Thompson estate were good

that could be no exeuse for a contract pkiinly illegal, be-

cause tending to produce the recognized abuses: which

follow fraud and disloyalty by agents and trustees. En-

forcement of such contracts, when actual evil does not

follow, would destroy the safeguards of the law and

lessen the prevention of abuses. Providence Tool Co. v.

Norris, > Wall, 45,17 L. ed. 868; Woodstock lren Co.

v- Richmond & D. Extension Co. 129 U.S. 643, 32 L. ed.

819, 9 Sup. Ct. Rep. 402; Oscanyan v. Winchester Re-

peating Arms Co. 103 U.S, 261, 26 L.ed. 539: Maguire v.

Corwine, 101 U.S. 108, 25 L.ed. 899; Connors v. Con-

nolly, 86 Conn. 641, 45 L.R.A. (N.S.) 564, 86 Atl. 600;

Richardson v. Crandall, 48 N.Y. 548; Palmbaum v.

Magulsky, 217 Mass. 306, 308, 194 N.E. 746, Ann. Cas.

1Y15D, 799." (278 US. at 173)

“There are numerous decisions of this court as to just how

these basic principles on illegality should be applied in par-

ticular fields of Federal law. (See case> reviewed at pages

13 to 16, supra, artsing under Sherman Act, Roebinson-

Patman Act, Securities Act ‘of 198%, and National Bank

Act.) The rtiles applicable in one’ field are not necessarily |

contlusive, however, as to the proper rujes in other fields.

Seo for example A.C. Frost & Ca, ©. Coeur D'Alene Mines

Corp.2 312 U.S. 38 (1941) in which non-enforcement would

have hindered rather than helped the purposes of the Secur-

ities Act of 1955, In edieh field this court must consider the ;

. - 24 |

policy and purpose of the enactinent In question and the

‘intent of Congress, together with the circumstances of the.

particular case, in establishing principles a= to what trans-

actions are and what transactions are not enforceable. Com

pare also Bruce's Juices v, American Can Co., 33) U.S. 743

(1947) supra, p-. 14. -

So far as we have been able to ascertain, this court has

never made any corresponding determination ander the In-

ternal Revenue Code. The. Internal Revenue Code ts prob-.

ably the most important law we have, both from the stand:

point of government revenues and frem the standpoint of

the number of persons affected. “No other branch of the law

touches human activities at so: many points.” Dobson v.

Com missioner, 320 U.S. 489, 494-495 (1943). But on this very

vital question of enforceability of Federal tax evasion trans-

actions, this court has made no adjudication. |

We’ should point out that we are not here concerned with

some incidental! violation of the revenue laws. In the present

ease the whole purpose of tlie secret trust for which enforce-

ment is sought was fo accomplish an unlawful evasion, Deci-

sions involving perfectly legal transactions where there may

be some incidental violation of the tax law involved are con-

sequently - inapplicable. (Compare, tor example, Cole 0.

Ralph, 252 U.S. 286, 293° 1920), in which failure to affix

revente stamps did not invalidate a conveyance made for

a perfectly legal purpose. oe

Decisions of the state courts have been ot little assistance

in solving the enforceability question where the actual pur-

pose is Federal Tax evasion. As a matter of fact. there is a

conflict. On the one hand we refer to the decision of the Cali-

fornia District Court of Appeal inthe instant case. We refer

also to Hansen v. Bear Fitr-Compams 2S Cal. 2d 154, 10S

P. (2d) 946 (1946), an whicli the California Supreme Court

ssaid.in a suit to enforce a resulting trust:

Po

7:

2 tt teem”

25.

>

« "if the transaction resulted in evasion under the.

federal taxing statutes, that is an exclusive concern of

the federal authorities.” (28 Cal. 2d at 176; 165 P. (2d)

at 960.) : : : ;

| See also Farber ve John Aquine Sons, 3 NY. Supp.

- (Yd)y 286, 253 App. Div. G00 (T9BS)s

Christopherson & Kiaer v.U.S. Narvigition Cos 202

N.Y. Supp. 902, 121 Mise. 778 (1923).

On-the other hand, decisions in other states, have treated

a purpose to evade Federal taxes as grounds for court. re-

fusal to enforce a transaction. Thus, in Shaw. Addison, 239

Lowa 377, 28 N.W.2d 81641947}, the-court refused to enforce

a trust created for the purpose of evading Federal® ‘income

tax. The court stated: | : i

“Plaintiff. as heir of the donor, had no rights supe-

‘rior to those of the donor at the time of his death. The

transfer which has for its object and purpose the eva-

sion of taxation ix analogous to transfers to defraud

_ereditors about which more will be said in the next divi-

sion of this epinion. In both cases the parties are in pari

delicto and no relief will be granted the transferor in

equity but the law will leave them where it finds them.

The equitable maxim ‘he who comes into equity must

come’ with clean hands’ governs the court’s action. No

resulting trust, that a couft of equity will enforee, as

established in favor of the transferor, or his successor

upon proof of a transfer inade for the purpose ofsevad-

ing tax.” (28 N.W.2d at 826) _

See also Creckmore e. Chitwood, 7 Bush (70 Ky.) 317

(1870). :

Collins v. Becklenberg, 236 TM. App. 324 (1925):

Curran ¢. Down, 3 Mo. App. 468 (¥ST7).

*The.transters in this ease alleged as the basis for the trust were

in 1922 and 1929 prior té the enactment of the Lowa income tax

law. (lowa Acts 1933-34 Ex. Segs. (45 ©. AL) eh. SZ.) Tlenee. the

income taxes referred to were exclusively federal... :

.

“

eG U.S.C, $5612, 5613 (Aleoholig Beverag

Seon) a 26 met

_ Congress. has not ‘provided any clear-cut answer-to the.

e

. question. Congress has provided criminal sanctions. (¢.£..

Internal Revenue Code of 1954, 26 U.S.¢ * $s 7201-7215) and

violations. In isolated situations, largely where the purpose

of the tax is regulatory, Congress has made specific provi-

sions for forfeitures. or for the application of the law to

private transactions. For example, under the 1954 Code:

96 U.S.C. £4706, 4714 (Forfeiture of narcotics) ;

6 US.C,'§ 4853 (b) (Sale of cotton futures—specitic

- prohibition intended ; See Hubbard v. Loup, 226

of Fed. 135, 187. (8.D.N.Y. 1915): | Pore

© forfei

tures);

4) USC. § 7302 (No property rights in property used ¢

- for violation—See US. v. Diron, 347 US. 38)

(19:4) ) ae

- 26 USL. § 7341 (a) (Voiding debts incurred for pur-

- chase of property sold with intent to avoid tax.)

e “9s ms - ;

Congress ha: not, however, legislated on the general

civil penalties (e.g., 26 U.S.C. § 6653) for various. types of-

subject of enforceability of tax evasion transactions, cand

our review of the legisiative history of the above special

orovisions has hot provided any definite clue as. to the

intent of Congress on the general question. It could he

argued that the various specific laws which Congres= ha-

enacted preclude any broader congressional infent on the

subject. We submit that it is much more probable, however.

“that the congressional intent I that the courts should apply

the established general rules of illegality to tax evasion

transdctions and refuse enforcement. The tax laws, although

sometimes penal in, their nature, are to be construgd liky-

erally for the protection of the revenues.

.

Qo

7 ® ,

United States v. Ryan, 284 U:is. 167, 172 (1981)

Smuthe +. Fiske, 23 Wall. (90 U.S.) 874 AST4): :

United States v, Stowell, 133 U.S: 1, 12 (1890).

Our.tax structure is based primarily on securing a full and

fair disclosure by the taxpayer, in his tax return. ;

: Spies rUnited States, 317 U.S. 492, 495 (1945):

| Helvering v. Mitchell, 303 U'S..291, 399 (1988): ;

Balter, “Tax Fraud and Evasion” p. 14 (3rd. fd,

1963). | : i

_ In many countries this just doesn't work. Cheating the tax

collector is consideréd to be fair game. In the I‘nited States

there.is a fair degree of cooperation from at least the ma-

jority of taxpayers, but’ evasion continues to be a serious

rt

threat to the system. 7. <r ;

os A “*'* * evasion practiced by the sinall minority of tax-

~~ pavers breeds disrespect lor the tax laws on the part

of the great majority who attempt to cut square corners

‘with the Government.” (Mortenson, “Federal Tax

Fraud Law”, p. ¥ (1958) ). a oe ge

See also Balter, “Tax Fraudeand Hvasion™, p. 14 (3d

_ Kd. 1963). rs ae

Paul. “Taxation for Prosperity”. p. 287 (1947).

~The significance of subjective good faith must also be con-

_ sidered in the light of these factors. The several cases re-

7 Shag

viewed sipra, p..21 to’ p. 25 demonstrate tliat on illegality

questions generally good faith is ne answer; that the im. -

‘portance of discouraging illegality is such that the Courts

‘cannot, afford to get bogged down on the jlways difficult

— of subjective mtent.

SI

Wuld these rules concerning illegality le any more re;

laxed in the tax evasion field ?°To what extent does advice

o

ao

wt

os 8 2

of cneamilic in ar obviously evasive ‘transaction serve to

insulate the taxpuyer from the normal COTSe quences of his

acts? Certainly it is not a complete shield.

Harry Feldman, 34 B.T.A. 517° (i! 36) : ;

Coates U. Commissioner, 234 F. | (2d) 459 48th Cer.

1956); ‘ ‘ ; A 2 J

“Herma Cu. Inc., 1 T.C. 442 (1948) affirmed per

curiam 175 F. (2d) 76 = Cir, 1949).

Here again on this good faith issue Congress has “not

povided any ‘definite guide. Congress has prov iris Se ea

for the most stringent’ sanetion, the criminal proseet

a showing of willfulness—vevil intent?—isx required (Spies

» United States x 317 U.s. 49: (1943) ). This of course doe=

not mean that the same requirement should he applicable

to thre ply civil sanction of unenforce: bility.

We respectfully submit that the’ reasons why courts

refuse enforcement of transactions tainted with illegality

are fully applicable in the tax ev asion field; and that this is.)

what C ongress has intended.

sth Meritt Deduetion Could Not-Be Property Climed.

“he facts of the case are that’ Mrs. Pendléton made her

will ‘in reliance upon her husband's promise to-limnit his.

bequest fo a life estate. and to enter into a Written agree-

ment for this purpose. This -was the finding of the trial

court. It was not modified by the District Court of Appea wo

and it ix ‘therefore eontrofling ax to en ‘acts of the case.

sbedaomitalioas

*We should point out that the parties did not follow the advies

of counsel, Counsel advised that it would be proper to take the

marital’ deduction sv long as no restrictions on the outright bequest

te Col. Pendleton emanated fron Mrs. Pendieton; but the restric

tidns which were placed did emanate fromeMrs. Pefidleton,

7

&

“f

“

iy

P : Zo

lnite - States v. Knott, 298 US. S. S44, 048-549 (1856);

Brainard ct. Hubbard, 79 UsS., 1, 9-10 (isa ).

It’ requires no citation of specific authorits to Gemon-

strate that under these ‘circumstances the interest which

Col. Pendleton ree eV ed as surviving spouse, as limited by

the restrictions which the decedent placed, was. terminable

so that the marital deduction could not properly be taken.

For tax purposes the substance of a transaction is far more

— than its in (see Gregory cv. Helvermg, 295

US. 465 (1935)) Specific authority does however exist on

thy pot. we hee ‘

. Treasury Regulations quoted supra. pp. 4-5:

Lindsey «UL S., Mie Fed, Bais 136 6D. Md, 195s).

Ifthe District Court ot Appeal ‘ie ision is tbe ¢ const ried

as holding that it was proper to’ claim the tharital dedue

tion under the ¢ ircumstances of the case, then such holding ae

is certainly contrary to the clearly expressed Congressional

intent“in ¥S12(e)1)(B) cquoted supra, p. 4) Uaat ter

ninable Faia res not deductible, “If so construed, tie

District Court of Appeal decision would be a vaey danger-

.ous precedent in anything as far reac ‘hing in its ies ta]

as 2% | SY deduction under the F ‘ede ral Estate Tay Law.

We'4nust state again that we do not believe that thf

"District Court of Appeal intended tocrule that the miatritfal

.

deduction Was properly taken. We present the supe ba i

to cowl possible explanations © / the

n. :

ever, ‘in. ordey

court's deeisi

_ The Specific Issue Involving Evasion of the Marital Deduction Pro-,

ae Sra ina

Reaching Consequence.

“The marital deduction, provided for by an aind-ndutent of

the Federal Estate Tax Law in 1948, opens a fe tile tield foe

+t] j P . /

ae

~»

30,

tax evasion through the use of a secret trust of the type

Which respondents are = seeking to enforce. The estate

of a married decedent: ow ning separate property is 2 allowed

a deduction up to one-half of thégross estate’ for prop:

erty transferred to a surviving spouse, The purpose of this

deduction is to place separate, property and ¢ COMMAUTATY

proper’ - on niet alam ‘ly equal footing for ede ral Estate®

Tax .rposes. . .

Jackson r, United States, 0 US. 0... 82 Law. toon

( March 23, 1964) : ae

- Senate Report No. 1015 (5 16 48). accompanying

H.R. 4790 [Revenue Act of L948) 80th Cong, 24

Sess., reproduced at 2 UL 8. Code Cong. Serv.

: . (1948) 1165, at 1190;

4 Mertens, “Law of Federal Gift and iistate. Tax,

ation’. (1959), p. 458.

It was not the intent of Congress however that property

should in this manner: escape taxaiion in the estates of

hoth Spouses, Even community property would not, have

this advantage. Li order to insure that property for whieh

A

the marital deduction was taken would not have the added Y i

| benefit of being left’ out of:the estate of the surviving “spouse

it Wax necessary to require that marital deduction property.

be left to the spouse ‘either outright or with a general power

‘-of appointment whic he would subject it tocestate taxes in

the estat® of the surviving arteah

-" . Senate Report No. 1015 (5 16 4S )e supra, 2 U.S.

Code Cong. Serv. ( 1948) HG: 3 tut 11905,

4 Mertens, supra, p. 440.

.

If it is possible through’ the secret trust arrangement |

which the parties here adopted to-nullify the terminable

9

31.0.

interest limitation, then ‘a wide loophole fgor tax evasion

is presented. ~ care , ; rs

> We are not here concerned with an Gaited problem

under the Internal Revenue Code. The most recent avail.

able figures, for. 1961, wilt demonstrate its portance. In|

that sear 64,558 Federal FE state Tax Re ‘turns were filed. On

30,738 of Shese, the marital deduction Was claimed. The

‘total gross estate |shown on all-returns was $14, 622,075,000.

The total deduction from the gross estate claimed on

‘aceount ‘of the marital deduction was FTI, O00. This

deduction was more than all other deductions combined.

(Internal eat Serv ice, Publics ition No. 406 *Now 15,

163) “Statistics > Income — 1960, Fiduciary, Gift, and

Mstate Tax . Filed During 1961", pp. 46, 48). °

a : e » v

It becomes Apparent that over a period of years there

are huedreds of thousands of testators whe have faced or

will have to face the same dilemuni us “that whieh confronted

Mrs, Pendléton in the present etise, On the one hand, there

isa desire to limit the surviving spouse to a life estate se

as to insure ultimate distribution to other henéficiaries

designated by the testator, On the other hand, thete is alse

a desire to minimize ,tanes hy utilizing, the marital dedue-

tion. Uneer the law ghich © fongre ss has enacted testators

with this problem must make a choice, They may “ACCT

plish one ob jective onthe other. They cannot legally accom

plish both. | ;

~ There will certainly be a strong-temptation on the part

of PELE of these festators to attempt to accomplish beth

objectives through # secret trust of the sdime ise a> that

utilized by Mrs. Pendleton, There should be no ene ourage

ment provided for those who anay beso tempted. This cer

tainly is a-situation in Which the established rules against

enforecment of transactions tainted with illegality should

‘apply.

_.—"

7.

Pact L. Myers, Jr.

“=

»

CONCLUSION

We respectfully submit that the foregeing questions, in-

volving as they do the very basie question of the effect of

iHegality under the. Internal Revemie Code and the more

specific question concerning the use of the secret trust

device in’ evasion of Federal histate tanes, should have the

attention of this court.

Dated: April 17, 1964

Respectfully submitted |

Epwin S. Pittsbury

lbp Mon! omery Street

San [Francisco 4, ¢ ‘alifornin ~.

* Attorney tor Pe ifiaoners

Davin C. Du snap

Pintspury & Duntar . | iat oe

155 Montgomery Street

San Francisco 4, Californiz a“ -

OS] Market Street

San Francisco }, é sliferaia

Of Counsel