# Petition for a Writ of Certiorari — Wells Fargo Bank v. Platt > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385601_1674%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for a Writ of Certiorari - **Published:** January 1, 1964 - **Citation:** 377 U.S. 965 ## Text 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 - 4 . : . : a, ee SUBJECT. INDEX ; i ss Pas « : 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 ; 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 & ‘- p ‘ a » ey Oo - -@ * . hie R) . * / ° o . m ° G ° . 4 e ** “ a « Se so - ' . : 2 . ° o . A , ° & ? os ° 3 ? od os al = = o . ‘ . 2 : : . 4 ry : _ Lan z : . . . 7 o . . “ - * . ¢ ’ . e ae . 6. ; ‘ . - tf . - : 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 : 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, » 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 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¥ 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 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. 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385601_1674%3A2. Public record. Not legal advice.