Amicus Curiae Reply Brief — Henderson v. Commissioner

No. 70-236

IN THE

pm iuireme Court of the United States

Ocroser Term, 1971

Kstate or Linure MacMunxn Srewart, Deceased,

; W. Avan HeENperson, Executor,

, Petitioner,

€ V.

COMMISSIONER OF IwreRNat REVENUE,

Respondent.

ON PETITION FOR A WRIT -OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

REPLY BRIEF FOR AMICI CURLAE

Hewitr A. Conway,

Ketiey Daye Warren Cuark Carr & Eis

300 Park Avenue

New York, N. Y. 10022

PAGE

sone minme ice eta cn fh -08 LSS ED 1

Summary of Argument oo 1

NN ee ein aT Ss tons .

Conelusiow aA ES Sock I Bee ERAN NRL COREG ree Lt

TABLE oF AUTHORITIES

Colt v. Duggan, 25 F. Supp. 268 (S.D.N.Y. 1938) ....2, 5, 6n,

. “48.

First National Bank in Palm Beach v. United States,

F.2d ——, 71-1 U.S. Tax Cas. Para, 12,777, 27 |

Am. Fed. Tax R.2d Para. 147,570 (5th Cir. 1971) .... 10n

Greer v. United States, 70-1 U.S. Tax Cas. Para. 12,690, '

259 Am. Fed. Tax R.2d, 70-1629 (M.D.N.C. 1970) af-

firmed —— F.2d —— (4th Cir. Sept. 1, 1971) ....2n, 6n, 9n

Miami Beach First National Bank v. United States,

— F.2d » (1-1 U.S. Tax Cas. Para. 12,744,

27 Am. Fed. Tax R.2d Para. 147,565 (Sth Cir. 1971) .. 10n

Old Colony Trust Company v. United States, 423 F.2d

601, 70-1 U.S. Tax Cas. Para. 12,667, 25 Am. Fed.

Tax R.2d 70-1549 (1st Cir. 1970) rissesesseseeeeedy ON, 4, 5, 6, 6n

Peoples Trust of Bergen County v.- United States, 7

F.2d , 41-1 U.S. Tax Cas. Para. 12,786, 27°

Am. Fed. Tax R.2d, 147,582 (3d Cir. 1971) .....1, 2, 3, 4,5, 8

| we PAGE

State Street Trust Co. v. Unifed States, 263 F.2d 635

(Ret Cee SR a eee ee ees 2, 2n, 5, 6n, 7n

Talbot, Matter of, 170 Mise. 138, 9 N.Y.S. 2d 806 (Sur, “™

Ct. Orange Ce, 1990)... stoneb ccaaeeeeioes TIES 7n

Worcester County National Bank v, King, - Mass.

seen SGN NA, Sa OSS C10TTS ee ee 6n

MIscELLANEQUS |

Revenue Ruling 99-620, 1995-2 Cum. Bail. 36 oc +

Revenue Ruling 60-385, 1960-2 Cum. Bull. 77 .0.00.......... +

i ° . ets ~

Internal Revenue Code of 1954

RCE a te ea ee 7

Section O42(6) (2) 32-58. Pe EMMA Misia ece eB biob 7

ection ING -c5. | Core eee 2, 5, Sn, 6, 7

Re RE ou nO a eee ee 2,5, dn, 6

COLIN. TOO" oA es ee ee ee 2,4, 7

MOCTON Same cl eee Pap SED NVA ORU OEE B

No. 70-236

IN THE

Supreme Court of the United States

OcroseR Term, 1971

-Estare or Linum MacMunn Stewart, Deceased,

W. Atan Henperson, Executor, -

| : Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNIT®D STATES COURT OF APPEALS FOR THE THIRD CIRCUIT’

REPLY BRIEF FOR AMICI CURIAE

Statement

This Brief is submitted by the Amici Curiae, The New

York State Bankers Association (Trust Division) and The

Corporate Fiduciaries Association of New York City, in

reply to the Brief for the Respondent in Opposition. Peti-

tioner concurs fully in the views expressed herein.

Summary of Argument

All three of Respondent’s legal arguments are destroyed

by its own arguments in its Brief and in its Petition for

Rehearing in the Peoples Trust Co. case (set forth in Pet.

Supp. 13a-21a).

2

1. The government’s Petition for Rehearing in Peoples

Trust ‘Co. destroys its Point 1, by conceding that state law

differences are not legally significant to the proper appli-

cation- of section 2055, the laws of the various states being

all based on the same equitable principles.

2. Respondent’s citation of State Street Trust Co. v.

United States, a case dealing with Massachusetts law and

the inclusion of a trust corpus in a decedent’s gross estate

under sections 2036 and 2038, destroys its argument in Point

2, that Old Colony Trust Co. v. United States is not in con-

flict with the case at bar, because the case at bar “deals —

neither with Massachusetts law nor with inclusion of ‘a

‘trust corpus in a decedent’s gross estate under Sections

2036 or 2038,” ! 7 nee ae

3. Respondent’s citation of Colt v. Duggan destroys its

Point 3, that the issue herein “has been rendered moot for

the future by amendments to Section 2055 of the Internal:

Revenue Code of 1954 enacted by the.Tax Reform. Act

of 1969.” Under Colt v. Duggan and the government’s

interpretation of the case at bar as revealed in its Petition

for Rehearing in Peoples ‘Trust Co., no pre-Tax Reform

Act charitable remainder -trust would be entitled to an .

income tax charitable deduction in any future year for

capital gains “permanently set aside for charity”. Such

-trusts are numbered in the thousands.

4. The government’s silences speak as eloquently as its

_ admissions. It does not deny: (i) that the additional dis-

cretions given the trustee by Mrs. Stewart did not mate-

rially increase the trustee’s power to shift economic inter-

a

' 7A second direct conflict with the decision in the case at. bar

has just been created by the Fourth Circuit’s affirmance on Sep-

tember 1, 1971 of Greer v. United States. Petitioner will file a

Second Supplemental Brief, appending the Fourth Circuit’s opin-

ion thereto.

“.

a : 3

ests between income beneficiary and remaindermen; (ii)

that the valuation tables prescribed by the Commissioner

are valid only on the assumption that all trustees’ discre

tions will be impartially exercised ;. (iii) that there is no “~~

reason to believe ‘that the discretions given the trtistee in

the’case at bar will not be exercised impartially; (iv) that

the chance that the charitable remaindermen will not re-

ceive the gift Mrs. Stewart intended is so remote as to be

“hegligible; and (v) that the government’s position, as set

forth in its Peoples -Trust Co. Petition: for Rehearing,

would result ‘in the denial of. income, gift and estate tax

charitable deductions for all charitable remainders follow-

ing income interests in trust, though settled law is to the

contrary. In stating that there is “no conflict” and that |

the question presented is “moot”; Respondent also con-

-veniently omits reference to the more than 48 docketed

cases involving this issue.

0. The question presented here has never been decided

by this Court. In order to put an end to existing wide- —

spread controversy, and prevent extensive future burden-

some litigation from clogging the federal courts, petitioner

has shown overwhelmingly the need for this Court to grant .

the Petition for Certiorari and to correct the decision below.

Argument

1. Without being told, no one would believe that the

government’s Brief for the Respondent in Opposition and

its Petition for Rehearing in the Peoples Trust Co. case —

(Pet. Supp. 13a-2la), were filed by the same party.

Reasoning from the premise that the decision below is

correct, Respondent in Peoples Trust Co. was all for

“clarity and consistency in this area of the tax law” -

* (Pet. Supp. 14a). Respondent submitted “that. if New

York’s fiduciary law did not limit the Stewart trustee’s

Ue oh oan A th en Oh ea P:

~ 4

invasionary powers so as to satisfy the requirements of

Section 2055, New Jersey law must equally be insufficient

to satisfy the requirements of thai section. The laws of

_ these two states are based upon essentially the same equi-

table principles.” (Pet. Supp. 19a-20a). And it concluded,

_» “The mere fact that the two trustees may be held account-

able to courts of different states, provides no adequate

basis for the difference in outcome when these courts apply

the same standards to review exercises of discretionary

powers.” (Pet. Supp. 21a): | hes

In this Court, however, where the correctness of *the

decision below is hotly disputed, one hears nothing what- °

. ever from the governmefit about the desirability of “clarity

and consistency.” Itsefforts are directed to pointing out

differences in the eases rather than discovering the under- .

lying principles of law common to them: Not integration,

but differentiation is the government’s purpose here: So,

writes Respondent, “the decision [below] turns largely

upon a proper construction of state (here New York) law

governing the administrative powers of a fiduciary.”

(Resp. 5). “That case [Peoples Trust Co.] involves New

Jersey rather than New York law, and the opinion ex-

plains that it does not conflict with the opinion in the in-

stant case.” (Resp. 6-7, n. 1). So again, Respondent writes

that Revenue Ruling 60-385 1960-2 Cum. Bull. 77 (and,

of necessity, Revenue Ruling 55-620, 1955-2 Cum. Bull. 56,

which was in foree when Mrs. Stewart acted and which

Revenue Ruling 60-385 overruled) “was concerned only

with the effect of a power to allocate capital gains distribu-

tions of regulated investment. companies to an income

beneficiary—only one of:the many possible administrative

powers which may alter the dividing line between a char-

itable remainder interest and a noncharitable life estate.”

(Resp. 10, n. 3). And “of course,” writes Respondent, the

decision below does not conflict with Old Colony Trust Co. 2

5

. V. United States, 423 F. 2d'601, 70-1, U. S. Tax Para. 12,667,

_ 25 Am. Fed. Tax R. 2d 70-1549 (1st Cir. 1970) because the

' case at bar “deals neither with Massachusetts law nor with

inclusion of a trust corpus in a decedent’s gross estate

under Sections 2036 or 2038.” (Resp. 13).° |

The Petition for Rehearing in Peoples Trust Co. shows

that the government has no difficulty whatever in perceiv-

ing and utilizing the common legal principles in these _

cases when it believes its purposes. are served thereby.

It exposes completely. the pretense of the government’s

Point 1 (Resp. 5-12), that state law differences are ma- —

- terial. The laws of the states are founded on the same

equitable principles, and the fiduciary duties imposed on

trustees -are essentially the same everywhere. —

9, Respondent’s Brief in Opposition exposes the falsity

of its Point 2 (Resp. 12-13), that the instant, case and the

Old Colony Trust Co. case are not in conflict.

Clearly stung deeply by our reproach that this case in-

volves a retroactive application of a ehanged interpreta-

tion of the law by the Internal Revenue Service (Am.

Cur. 5, n. 3) Respondent offers the following justification :

’ “The decedent here had long been put on notice that the

existence of broad administrative discretion in the trustee

might render an otherwise deductible charitable interest

unascertainable for federal tax purposes. See, e.g., Colt v.

Duggan, 25 F. Supp. 268 (S.D.N.Y.) ; State Street Trust

Co. v. United States, 263 F.2d 635 (C.A. 1.)” (Resp. 10, |

n. 3).

But State Street Trust Co. was not a charitable dedue-

tion case. It deals “with Massachusetts law” and “with

inclusion of ‘a trust corpus in a decedent’s gross estate

under Sections 2036 or 2038,” ° the very two circumstances

? Actually, sections 811 (ce) and 811(d) of the 1939 Code, which

became sections 2036 and 2038 of the 1954 Code.

Ly

A SH pals 2.

6

the government claims prevent Old Colony from conflicting

with the case at bar (Resp. 13). If decisions under sections

2036 and 2038 involving Massachusetts law were relevant

to the’ deductibility of Mrs. Stewart's gift-in 1960, when

she made it, they are relevant now.’ The government’s

own words show its Point 2 is unténable. The conflict does

exist, as the petition alleges (Pet: 19-24).

_* Respondent’s statement (Resp. 12), that the Massachusetts

court had “oyerruled prior law” between the times State Street

_ Trust Co. and Old Colony Trust Co. which specifically overruled ©

it, were dacided, is incorrect. .The First Cireuit in Old Colony

expressly stated that the Massachusetts court “has twice criticized

State Street for-its seeming departure [from Massachusetts law]”

‘(423 F. 2d at 603) (einphasis supplied), and the Massachusetts

court itself ‘in. Worcester County National Bank v. King,

Mass. , 268 N.E. 2d 838 (1971) has made it erystal clear that

Massachusets law on. this point has been the same right‘along:

“We trust that this opinion will serve to dissolve any re-

maining doubts concerning that supervision which Massa- °

chusetts courts sitting in equity will exercise over trusts con-

. taining broadly phrased -clauses relative to trustees’ admin-

istrative or management powers. Doubt in this area of the

law was caused by the decision of the United States Court of

Appeals, First Circuit, in State Street Trust v. United States,

263 F.2d 635, relying on broad language in Dumaine v.

Dumaine, 301 Mass. 214, 16 N.E. 2d 625, a ease which dealt

with a fact situation far removed from this one. In the inter-

“vening years we took occasion, most notably in the Silliman

case, to dispel the misunderstanding engendered by the Du-

maine case as interpreted by the State Street Trust Co. case.

[cites omitted] The First Circuit itself has recently reversed

the view it topk of Massachusetts law in State Street Trust

Co. v. United States, supra, (Old Colony Trust Co. v. United

States, 1 Cir., 423 F. 2d 601, 602-603).” (268 N.E. 2d at 841) -

(emphasis supplied).

State Street, like Colt v. Duggan, erroneously interpreted exist-

ing state law by failing to give full effect to the identical state

law principle—the trustee’s duty to exercise all his discretionary

powers, both investment and administrative, impartially for the

benefit of all beneficiaries—that is at the heart of this case. Re-

spondent incorrectly suggests that Old Colony is not inconsistent

with State Street (Resp. 12). State Street was “effectively over-

ruled” by Old Colony (Greer v. United States, supra, n. 1).

a ‘

7

3. By citing Colt v. Dugan, supra, the government refutes

its own statement, elaborated on in its Point 3, that “the

_ issue presented has been rendered moot for the future by

‘amendments to Section 2055 of the Internal Revenue Code

of 1954 enacted by the Tax Reform Act of 1969.” (Resp. 5)..

Citation of this case shows that the government agrees with

. the statements in Petitioner’s Supplemental Brief (at p. 8)

and the Brief for Amici Curiae (at p. 13), that-the issue

herein affects the income tax liability of every charitable

remainder income trust for all open and future years in

which capital gains are realized. The specific question in

Colt v. Duggan was whether capital gains realized by the

trustee could be said to be “permanently set aside” for

charitable purposes, and hence whether they were deductible

under section 162 of the Revenue Act of 1932, the predeces-

ser of present section 642(c)(2), in view of the trustee’s |

broad administrative powers.‘ The issue herein is hardly

“moot” and passage of the Tax Reform Act obviously: did.

little to diminish the importance of the question in this case.

The government’s tough position is ludicrous that Mrs.

Stewart should have reasoned from a long discredited sec-

tion 642(c) (2) case, and an always*controversial and sub-

sequently overruled section 2036 case, rather than from a

1955 Service ruling dealing directly with sections 170, 2055. . ©

and 2522, the income, estate and gift tax charitable deduc- ~~

tion sections that Mrs. Stewart was trying to comply with.

It simply emphasizes the injustice done Mrs. Stewart and

other taxpayers similarly situated by the government’s fail-

* In an exact foreshadowing of the downfall of State Street Trust

Co. v. United States three decades later, Colt v. Duggan, which

was decided on September 16, 1938, came to its end as a viable

legal precedent -.on February 9, 1939, when the New York court

construing, the identical: trust decided that the trustee had no

right. under NewYork law to do the things the federal district

court had said he could. Matter of Talbot, 170 Mise. 138, 9 N.Y.S.:

2d 806 (Sur. Ct. Orange Co. 1939). -_—

8

ure to recognize that it had any obligation to guide tax-

payers in this obviously difficult area of the tax law. Our

statement bears repeating fhat “Many wills and trust agree-

ments prepared in all good faith that became effective, or

will become effective, between January 1, 1961 and October

9, 1972 and are now or will be in litigation would have been

rewritten to conform to the changed rules if the draftsmen

had only known .new rules were in effect and what they

were.” (Am. Cur. 5, n. 3). Taxpay ers like Mrs. Stewart

are not tax dodgers to be dealt with so insensitively. All

they wish to accomplish when making trusts of this kind is

to discharge their. primary obligations to themselves and

their families and then give what is left to charity. They

deserve better treatment at the hands of the government

than =

4, Reponden makes no effort to deny that the addi-

tional discretions given the trustee by Mrs. Stewart did not

materially increase the trustee’s power to shift economic

interests between income beneficiary and remainderman

(Am. Cur. 14-16); or that the valuation tables prescribed

by the Commissioner are valid only on the assumption that

all trustees’ Giscretions will be impartially exercised (Am.

Cur, 17-18); or that there is no reason to believe that the

discretions given the trustee in the case at bar will not be

exercised impartially (Am. Cur. 18-24); or that the chance

that the charitable remaindermen will not receive the gift

Mrs. Stewart intendéd is so’ remote as to be negligible |

(Am. Cur. 24-25) ; or that Respondent’s position, set forth in

its Peoples Trust Co. Petition for Rehearing, would result

in the denial of income,- gift and estate tax charitable de-

ductions for all charitable remainders following income in-

terests in trust, through settled law is to the contrary (Pet.

Supp. 5-10). In stating that there is “no conflict” and that

the question presented is “moot”, Respondent also con-

9

veniently omits reference to the more than 48 docketed-

cases involving this issue listed ‘in Respondent’s Chief

Counsel’s Office (Pet. Supp. 10-11,-22a-23a:)

5. Respondent is less than candid in suggesting that

‘prior decisions of the Supreme Court have settled the

merits of the issue presented in this case (Resp. 5). While

the merits are secondary to the primary issue presented by

this Petition—the need to bring order out of the chaotic

state of the law and to resolve the indefensible conflict

among the circuits’—it is important not to be misled. by

Respondent’s suggestion that the merits have already been

decided by this Court. The prior decisions of this Court.

cited by Respondent (Resp. 5, 7-10) involved trust instru-

ments which evidenced an affirmative intention on the part

of the creator of the trust that principal should’ be invaded

for the benefit of non-charitable beneficiaries, as expressed

in the dispositive provisions of those instruments, What is

new in this case is the government’s fastening upon routine

administrative provisions dealing with allocation of receipts

and disbursements between principal and income which are

invariably inserted in trust instruments -by experienced

_ draftsmen for the purpose of facilitating the orderly ad-

ministration of the trast. This Court has not decided any

_ case holding or implying that routine administrative pro-

visions in trust instruments should determine their tax

consequences.

By every standard—the significance of the legal issue, —

the confusion in the cases and conflict in the circuits, the

number of taxpayers affected, the amount of ‘revenue in-

‘volved, the justice of taxpayer’s case, and most important

of all, the need to put an end to existing widespread con-

° The conflict continues to escalate. Greer v. United States (Am,

Cur. 10) was affirmed by the Court of Appeals for the Fourth

Circuit in favor of the taxpayer on September 1, 1971. (See ni 1).

10

troversy and stem the tide of litigation in the already

heavily burdened federal courts‘’—Petitioner has shown

overwhelmingly the need for this Court’s granting the Peti-

tion for Certiorari and correcting the decision below.

°

=

CONCLUSION

Respondent has presented no convincing argument for

denial of a Writ of Certiorari, and the Petition should be

granted. =

Respectfully submitted, c

Hewitt A. Conway,

Keiiey Drye Warren Cuark Carr & ELLIS

350 Park Avenue

New York, N. Y. 10022

®° Already thé. tide of litigation is lapping at this Court’s feet.

Petitions for Certiorari to the Fifth Cireuii were filed on July 7,

1971 in the First National Bank in Palm Beach case, and on Sep-

tember 3, 1971 in the Miami Beach First National Bank ease (Pet.

10, Pet. Supp. 3). e