Supplemental Brief — Henderson v. Commissioner

Supreme Court brief1971

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Supreme Court of the Hnit (Stats

_ OCTOBER TERM, 1971 |

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No. 70-236

ESTATE OF LILLIE Mac MUNN STEWART, deceased,

W. ALAN HENDERSON, Executor,

Petitioner,

US.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On Petition for aWrit of Certiorari to the United States

stele of Appeals for the Third Circuit

PETITIONER'S SECOND SUPPLEMENTAL BRIEF

EDWIN M. DOTTEN, JR.

HARTLAUB, BRAUN, THORN,

DOTTEN & SKIDMORE

Attomey for Petitioner

57 Union Place

Summit, New Jersey 0790]

Of Counsel

LEMUEL SKIDMORE

(4775) + ‘LUTZ APPELLATE PRINTERS, INC.

Lew and Financia! Printing

New York, N.Y, Philadelphia, Pa.

(212) 568-6377 (21S) 563-5587

South River, N. J.

. (201) 257-6850

' TABLE OF CONTENTS

- eres ae eae Soe Oh ae eee

Point I. The decision of the Court of

Appeals for the Fourth Circuit in

Greer. v. United States is directly

.and unmistakably in conflict with

the decision of the Court of Appeals

for the Third Circuit in the case at

RN “ar ahts kia Se 5 ee ae ee +

Point II. The conflict created ‘by the

“ ‘decisions of the Circuit Court of

Appeals in these cases cannot be

resolved by a mere determination |

that the laws of the respective state

- jurisdictions as they ‘relate to the

main issue Of these cases are essen-,

tially different. Shel Bee oe ea: ae ‘ss

Conclusion yl at SAR a rg ee

. Appendix A — Opinion Lina cere he.

Table of Citations

CASES CITED:

Barbers Trust Co: v. United States, 308

F. Supp. 545 (S.D.N.Y. 1970), aff'd on

other grounds 438 Fed. 2d 1046 (2d Cir.

1971) Noreee ee re

Contents

‘First National Bank in Palm Beach v.

United States, _. F.2d, 71-1 0U.S.

Tax Cas. Para. 12, 777, 27 Am. Fed.

Tax R.2d Para. 147, 970 (5th Cir., vga

TC OEE “6 oe a ee ke a

Greer v. United States, 70-1 U.S. Tax

Cas. Para. 12,690, 25 Am. Fed. Tax

R.2d 70,1629 (M.D.N.C. 1970), affirmed

F.2d (4th ssi September 1,

Page -

J) SE ee ee erie are Oiae 1, 2, 3, 4, 5, 6

Miami Beach First National’ Bank vy.

United States, __‘ F.2d » 01) US.

Tax Cas. Para. 12,774,27 An Am. Fed. Tax

R.2d Para. 147,565 (5th Cir., April 26,

1971. 2 ear Sey ik tal Tae cae Sa ee

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 CGE Mees SOTO! |. a Gea

Peoples Trust of Bergen County v. United

States, F.2d » 71-1U.S. TaxCas.

Para. 13," 786, 27 Al Am, Fed. Tax R.2d

167,508 (ard Cir, 1971) eS .

State Street Trust Co. v. United States,

263 F.2nd 635 (1st Cir. 1959) .....

- 464

Contents

OTHER AUTHORITIES CITED:

Internal Revenue Code 1954: |

Section 2056 ae a Seats ase eae

Section 2055

In The

Supteme Gourt of the United States

OCTOBER TERM, 1970

—

No. 70-236

ESTATE OF LILLIE Mac MUNN STEWART, p rere

W. ALAN HENDERSON, Executor,

Psileees

US. y

_ COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT ae

PETITIONER'S SECOND SUPPLEMENTAL APPENDIX

Statement

. This Second Supplemental Brief is submitted

to bring to the attention of: this Court developments

since the filing of the Petition and Supplemental

Brief by the petitioner and particularly the de-

cision of the United States Court of: Appeals for

the Fourth Circuit in the case Greer v. United |

States (Appendix. A, la) decided September lI,

1971. The Amici Curiae, the New York State

Bankers , Association (Trust Division) and the

ay St -

Corporate Fiduciaries Association of New York

City, concur fully in the views expressed herein.

Summary of Argument

On September 1, 1971 the United States Court

of Appeals for the Fourth Circuit decided the case,

Greer v. United Stategy, in a way that is

clearly and directly in conflict with thé holding

of the United States Court of Appeals for the

Third Circuit in the case at bar, and with the

two decisions of the United States Court of Appeals

for the Fifth Circuit.1 Fhe Circuit Courts are

diametrically opposed in their final determination

of the basic issue as presented by this case. Un-

less resolved by this-Court the conflict created

by the Circuit Court cases has and will continue

to result’ in confusion and uncertainty as to the

proper application of established guide lines, not

only relative to the Federal Tax laws but indeed

throughout the spectrum of our trust and fiduciary

law. .

1. The opinion of the Fourth Circuit Court of Appeals in the

' Greer case also squarely conflicts with the decisions of the

Court of Appeals for the Fifth Circuit in Miami Beach First

National Bank v. United States, —s- ‘F.2d ___,_- 71-1 U.S. Tax

- Cas. Para. 12,774,27 Am. Fed. Tax R.2d Para. 147,565 (5th

Cir., April 26, 1971) and First National Bank in Palm-Beach

v. United States, _—Ss ~*F.2d _-, -~71l-1 U.S. Tax Cas. Para.

12,777,27 Am. Fed. Tax R.2d Para. 147,570 (Sth Cir., May 7,

1971), which cases generally follow the reasoning espoused

in the case at bar. See Point I, Petitioner’s Supplemental

Brief, p. 3 and brief of Amici Curiae p. 10, 20. .

Argument

THE®DECISION OF THE COURT OF APPEALS

FOR THE FOURTH CIRCUIT INGREERv. UNITED

STATESIS DIRECTLY AND UNMISTAKABLY IN

CONFLICT WITH THE DECISION OF THE COURT

OF APPEALS FOR THE THIRD CIRCUIT IN THE

_ CASE AT BAR.

On September 1, 1971 the United States Court

of Appeals for the Fourth Circuit decided the

case entitled Hattie S. C’Briant Greer, Executrix

of the Estate of William S. O’Briant, deceased, v.

United States of America, 70-1 U.S. Tax cases,

para. 12,690, 25 Am. Fed. Tax 2d 70-1629 (M.D.

N.C. 1970), affirmed F.2d (4th Cir. Sept.

1, 1971) the pertinent po portions of which decision

is appended hereto (Appendix A, la). The pro-

ceedings before the Court of Appeals for the

Fourth Circuit in that case involved both an appeal

by the Executrix on a question of land title and

its applicability to the marital deduction provisions

of 26 U.S.C.A. Sec. 2056 with which we are r.ot

here concerned, and a cross appeal by the govern-

ment directly raising the question whether the

value of. the charitable remainder of a trust.

was “presently ascertainable” so as to entitle

the estate to a charitable deduction in the com-

putation of the estate taxes. és .

It is the latter issue as decided by that Court

‘which is so germane to the issue here at bar.

In the Greer v. United States case, the Court of

Appeals for the Fourth Circuit was faced with a

set of facts growing out of the language of a trust.

instrument very similar to the trust instruments

in the case at bar insofar as the administrative

powers of the trustee are concerned. The trust °

- instruments in both cases proyided for income to

be paid for life and upon the life beneficiary’s

death the remainder to be distributed to charitable

organizations within the meaning of Section 2055

of the Internal Revenue Code of 1954. The trust

instrument in the Greer case contained an addi-

tional provision providing that the trustee should

invade the principal to permit the surviving life

beneficiary to maintain the standard of living in

existence at the time of the creation of the trust.

This. provision however was not considered con-

trolling by either the Court-or the government.

. The Court in the Greer case recognized the

government’s early reliance on the- decision in

* State Street Trust Company v. United States, 263

Fed. 2d 635 (1 Cir. 1959) but discounted the

_ applicability of the reasoning of that case. in

determining, as ‘the petitioner has consistently

argued, that the State Street case had been effec-

tively overruled and repudiated by the Court of

Appeals for the First Circuit in Old Colony

Trust Company. v. United States, 423 Fed.

2d 601 (1 Cir. 1970). This determination is in

direct conflict with the holding of the Court of

Appeals for the Third Circuit in this case whieh

reasoned that the Court of Appeals for the First

Circuit had merely qualified its previous de-

cision in the State Street case and had not re-

pudiated the general. tenor of the doctrine

established by that case, holding that the mere

recitation of the administrativé powers were suf-

ficient to override the applicability of the long

and well established doctrines relative to the duty

and the obligation of the trustees .and fiduciaries

to be fair and just to all parties and interests

they serve:

This seed of conflict through a further analysis

of the two cases grows into a tree of thorns whose

resulting branches are confusion and uncertainty.

For the crucial and overriding conflicts that

persist as a result of the Greer case and the case

at bar fall within two critical and important areas

of our law, transcending beyond their applicability

to an important question of federal tax law and

materially affecting basic concepts of our trust

and fiduciary law.

First the Courts are squarely opposed as to the

applicability of the long established doctrine that

equity and the laws of all of our states require

that a trustee in the performance of its duty act

fairly and justly in relation to all of the parties -

and interests which the. trustee serves. The

Fourth Circuit Court determined that the law of

North Carolina recognizes the rule that a trustee

must deal impartially with the beneficiaries of a

trust and that this rule, in effect, created the

necessary standard upon which “present” as-

certainability, could be based. It is interesting

to note that the Court of Appeals for the Fourth

Circuit in the Greer case cites as authority for

this premise, Bankers Trust Co. v. United States,

308 F. Supp. 545 (S.D.N.Y. 1970), aff’d on other

grounds 438 Fed. 2d 1046 (2d Cir. 1971), the very

case that petitioner here has relied upon in arguing

that the laws of New York also ‘hold that the »

Oe ee ~

general administrative. powers held by a trustee

are subject to a fiduciary responsibility and duty

to be exercised impartially as between the life

and remainder beneficiaries. Here again the’'Court

of Appeals for the Third Circuit in the case at

bar differed with the Court in the Greer case as

to the applicability of the determination in the -

Bankers Trust Co, case.

Secondly, the United States Court of Appeals

for the Fourth Circuit in the Greer case followed

the long established precept of our law prevalent

in all jurisdictions that the intention of the-settlor.

as expressed by the instrument is of tantamount

importance in arriving at a decision as to the

applicability of the Federal Tax laws. That Court,

unlike the Court of Appeals for the Third Circuit

recognized that the intention of the settlor ‘is

reflected in the dispositive provisions of the trust

instrument and that there is a clear distinction

between such dispositive provisions and the ad-

ministrative provisions wherein trustee is given.

certain expressed power for the purpose of per- —°

mitting it to operate effectively. The Court. of

_Appeals in the Greer case was pragmatic in its:

approach while the Third Circuit in failing to

clearly distinguish between the administrative and

dispositive provisions of the trust instrument

_erred, and the result of its decision in this case

is to make of prominent importance, not the in-

tention of the settlor, but rather the technical

administrative language of the scrivener. The

rationale of such a determination will permeate

the very foundation of our long established trust

law, and will eventually tend to weaken the edifice _

of trustee responsibility.

THE CONFLICT CREATED BY THE DECISIONS

OF THE CIRCUIT COURT OF APPEALSIN THESE

CASES CANNOT BE RESOLVED BY'A MERE

DETERMINATION. , THAT THE LAWS OF THE

RESPECTIVE STATE JURISDICTIONS AS THEY

RELATE TO THE MAIN ISSUE OF THESE CASES

ARE ESSENTIALLY DIFFERENT.

The government’s apparent argument in opposi- |

tion to the granting of the Writ of Certiorari in

this case is that while admittedly the various .

Circuit Courts of Appeal have come to. different

conclusions on the same set of facts, they have

done ‘solely through an interpretation of state .

laws which they have found to be quite different.

‘The entire tenor of petitioner’s argument

_ throughout the case at bar has been that this is

simply not so. ‘If we accept the premise that a

sufficient standard for determining “present. as-

certainability” is properly founded on the duty and

obligation of a trustee to act impartially and in -

fairness to all of the parties of a given trust as

adopted by the Court._of Appeals for the Fourth

Circuit and indeed by the Court of Appeals for the

Third Gircuit itself? we are led to the inescapable

-. conclusion that the decision below in this case .

was erroneously conceived.

2. Peoples Trust f

F.2d » Th-1: U.S. Tax Cas. Para. 12, 786, 27 Am. Fed. Tax

R.2d Para. 147,582 (3d Cir. 1971).- See discussion Amici,

reply brief, pp. 3-6.

sete a cy

MIEN Dig EPRI

na \ns RAL

AY,

oro fea Re eI MPA rat NTRS SEH

_ It is -to this issue. which we here seek per-

mission to argue in order that .this Court can

establish clear and definitive guide lines for the

determination-as to those elements necessary to

support “present ascertainability” under the

applicable Federal Tax law. | This we submit-is

of paramount importance to the fair treatment of

all of our citizens under the Federal Tax laws

and throughout the entire sprectrum of trust

and fiduciary law.

Conclusion

‘For the foregoing reasons, and for the reasons

previously expressed on behalf of the pétitioner,

the Petition for the Writ of Certiorari should be

granted.

Respectfully submitted,

s/ Edwin M. Dotten, Jr.

97 Union Place

_Summit, New Jersey 07901

Counsel for Petitioner

Of Counsel

Lemuel Skidmore

Hartlaub, Braun, Thorn, Dotten

& Skidmore

57 Union Place

Summit, New Jersey 07901

APPENDIX A

Opinion

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 15,425 | :

Hattie S. O’Briant Greer, Executrix. of :

thee Estate of William §S. O’Briant, .

deceased, ai

Appellee,

versus |

United States of America,

; Appellant.

| No. 15,426

Hattie S. O’Briant Greer, Executrix of

the Estate of. William s. O’Briant,

deceased, he

Appellant, |

versus

‘United States of America,

Appellee.

”

_ Appendiz A - Opinion .

» Appeals from the United States District Court for

the Middle District of North Carolina, at Greens-

boro. 1G

Edwin M. Stanley, Chief Judge.

(Argued May 13, 1971 Decided September 1, 1971)

WINTER, Circuit Judge: eek “9

The ‘appeal of plaintiff (No. 15,426), the execu-

trix of her deceased husband’s estate, in her suit

for refund of estate taxes, raises the question of

‘whether the deceased’s interest in a farm, the

record title of which was solely in his name,

passed -to his wife so as to entitle the estate to

a magital deduction under 26 U.S.C.A. § 2056. It

is the plaintiff’s position’ that ‘ notwithstanding

record title she, and her deceased husband owned

the farm as tenants by the entireties so that the

deceased’s interest passed to her by operation of

law. The government’s appeal (No. 15,425) raises

the question of whether the value of the charitable

remainder of the trust of the husband’s residuary

estate is “presently ascertainable” so as to entitle

the estate to a charitable deduction in the compu- -

tation of estate taxes. The government’s position

is that the discretionary power of the trustées to.

reinvest the principal of the trust estate and to

allocate and apportion receipts and expenses be-

tween principal and income rendered the ascertain-

a a a

en ON OE

Pi al) Waa Bhis Se PAE Sey ee»

ese Ne tale t TOSS REE ae

Fa TAR IR aE MARES

A aE al

Appendiz A - Opinion :

ment of present value impossible so as to require

disallowance of the charitable deduction. >.

The District~Gourt made detailed findings of

fact, and, without discussion or Citation.of-sup-

_ porting authorities, concluded that the farm was |

owned by the husband alone — thus disqualifying |

it, under this particular will, for the marital

deduction — and that the possibility that the

‘ charitable transfer will not become effective was

so remote as to be negligible "— thus allowing

the charitable deduction. ‘We disagree in part

with respect to the farm, but we agree with

respect to deductibility of the value of the charit-

able remainder. We, therefore, affirm in part

and reverse in part. :

Since the two questions involve large}y un-

related facts and legal issues, we will treat them.

in separate sections of this opinion. “

The Claimed Marital Deduction

Deer

(We omit herewith that part of the Opinion ©

dealing with the marital deduction claim inasmuch

as it is not pertinent to the issue herein presented.)

s a

® ; ~

bec ree

Deductibility of the Charitable Remainder

Annet OnI a | NC RIN SeP SIC ee Ee ore)

aa,

Appendiz A - Opinion

On January 11, 1957, plaintiff and her husband

entered. into a trust agreement: by which they

created an inter vivos trust naming themselves

and Planters National Bank and Trust Company,

Rocky Mount, North Carolina, as trustees. At

the same time, they entered fNto an agreement to

‘ execute separate wills leaving their respective

residuary. estates to this trust, with the further

agreement. ‘on the part-.of plaintiff that in the event

_ her husband predeceased her sh€ would transfer

substantially all of her property to the trust at

his death. The husband died September 21, 1960,

and by his last will and testament he bequeathed

his residuary estate to the trust.

Under the trust agreement the settlors retained

the right to revoke any gift to the trust during

such time as they both should be living.. However,

upon the death of either all transfers to the trust

were to become irrevocable and the retained

power to modiff, amend or alter the trust agree-

ment to cease. Both before and after the trust

became irrevocable, plaintiff and her husband

retained the enjoyment of the income of the trust

for life, with the further provision that

The trustees shall pay to or for the bene-

fit of the settlors or the surviving settlor

from time to time such sums from principal

as will enable. them or the survivor to

maintain the standard of, living to which they,

or the survivor, afe accustomed at the time

of the creation of this trust, taking into

Appendiz A - Opinion .

account such other sources of income and

capital resources as they or the survivor

may have in addition to income from this

trust. :

The remainder of the estate, upon: the death of the

surviving spouse, was directed to be paid to the’

‘Baptist Children’s Home of North Carolina, con-

cededly a charitable organization within the mean-

_ ing of § 2055-of the Internal Revenue Act of 1954.

It was ‘stipulated that after.the husband’s death

the anticipated costs of maintaining plaintiff ac-

cording to the ndard to which she was accus-

tomed at the time the trust was created amounted’

to. $5,500.00 per year, and that the expected

income from the trust as of the date of the hus-

. band’s death was $13,740.00 per year.

The trust agreement contained numerous pro- .

visions relating to the powers of the trustees..

We set forth in the margin those on which the

government relies for disallowance of the deduc-

tion of the value .of the charitable remainder. 1

In the exercise of these and the other powers

1. ITEM ELEVEN. fe) ustees. Without distinguishing

between their or their. successors’ or substitutes’ powers

as trustees, and by way of illustration and. not of limitation

and in addition to any inherent or implied or statutory powers

they may have now or hereafter acquire in such capacity,

we grant the following powers to our trustees and their

successors or substitutes. Whenever the singular forms,

(“my”, “I”, “trustee”) is used herein, it is intended to include

the plural forms unless the context indicates a contrary

intention, | oes

(Continued)

Ee 6 I EE I ace! OOS ED FRO pe.

Appendix A - Opinion

(Continued)

Section 1. Retain original investments. To retain any of the

original property in my estate, including any stock we may

have in the Planters National Bank and Trust Company or its

successor, regardless of the character of such property or

whether it. shall be such as then will be authorized by law for

trust investments or whether it shall-leave a disproportion-

ately large part of the trust invested in one type of property,

or even in cash uninvested, for such time as to our trustees

shall seem best, and to dispose of such property by sale,

exchange, or otherwise, as and when it shall deem advisable.

Section 2. Make new investments. To invest and reinvest in.

stocks (common or preferred), including stock and stock

rights in the Planters National Bank and Trust Company or

its successor; in bonds, notes, or mortgages on property in

or outside the State of North Carolina; in insurance contracts

on the life of any beneficiary or of any person in whom a

beneficiary has an insurable interest; or i

any beneficiary;.in real property whether or not it is‘produc-

tive at the time of investment; in participations in common

trust funds established by the Planters National Bank and

Trust Company or its successor; and generally in such prop-

erty and in such proportions of such area as it ele

deem advisable, even though such investment shall not

the character nor in the BEpors approved by applicable oe

for this provision,

* . * *

Section 18. Employ and Compensate. To employ and com-

pensate, out of income or principal or both and in such pro-

portions as to it shall. seem proper, agents, accountants,

brokers, attorneys at law, attorneys in fact, investment

brokers, realtors, tax specialists, and other assistants and

advisers deemed by it needful for the proper settlement of

my estate and administration of my trusts; and to do so

without liability for any neglect, omission, misconduct, or

default of such agent or representative provided he was

selected and retained with due care on the part of my executor

or trustee. ;

Appendix A - Opinion

conferred under the trust agreement, the cor-

porate trustee was required to render ‘its annual

account of the receipts, disbursements, and dis-

-tributions of both principal and income only to the

income beneficiaries of the trust. | |

On the husband’s federal estate tax return,

plaintiff, as his executor, claimed _a charitable

deduction of $130,073.19, representing some 60%

of the total value of their residuary estate —

the actuarial value specified in the Treasury

Regulations on Estate Tax for a remainder in-

terest subject to a life estate of a person sixty

years old, which was. plaintiff?s age on the date

of her husband’s death.

The Internal Revenue Code of 1954 permits the

deduction from « decedent’s gross estate of the

(Continued)

Section 23, Apportion and allocate receipts e es.

To determine what is principal and what is income of any trust

and to allocate or apportion recei ts and expenses as between

rincipal and income in the exercise of its uncontrolled dis-

cretion, and, by way of illustration and not iimitations of its

discretion, to charge premiums on securities purchased at a

premium agaifist principal or income or partly against each;

to apply stock dividends and other noncash dividends to income

or principal. or apportion them as it shall deem advfsable; to

determine what expenses, costs, taxes (other than estate, in-

heritance, and succession taxes and other governmental legacy |

charges) shall be charged against principal or income or

apportioned between principal and income and in what propor-

tions; to change its plan of allocation or apportionment of

receipts and expenses at any time ‘and from time to time as

it shall deem advisable, and its allocation or apportionment

shal

1 be conclusive. (Emphasis added.) «

Appendiz A - Opinion

value of bequests, legacies, devises or .other

transfers to or for the use of any charitable

organization as defined therein. -26 U.S.C.A.

§ 2055(a). The long-standing provisions of the

Treasury Regulations on Estate Tax state that,

with respect to testamentary transfers of charitable

remainders, the actuariarily computed: value of

the charitable remainder is deductible “only in-

sofar as that interest is presently ascertainable,

and hence severable from the noncharitable in-

terest.” (Emphasis added.) If the transfer is

conditioned on the performance of some act or,

the happening of some event, the_deduction will

be allowed only if “the possibility that the chari-

table interest will not become effective is so

remote as to be negligible.” 26 C.F.R. 8§ 20.2055-

_92(a) an@ (b).2 The additional restrictions on

‘“ charitable deductions imposed by the Tax Reform

Act of 1969, P.L. No. 91-172, 83 Stat. 487, are

not involved because that Act. was passed after

the events at issue here.

In Ithica Trust Co. v. United States, 279 U.S.

151 (1929), the decedent established.a testamentary

trust for. the benefit of his wife for her life, with

remainder to charity. The trustee, however, was

directed to, invade the principal to the extent

2. The Regulations further provide: fe

If the trustee is empowered to divert the property or fund, in

whole or in part, toause or purpose which would have rendered

it, to the extent that it is subject to such power, not deductible

had it been directly so bequeathed, devised or given by the

decedent, the deduction will be limited to that portion, if any,

' of the._property or fund which is exempt from an exercise of ©

the power. (Emphasis added.) 26 C.F.R. § 20.2055-2(b).

Appendix A - Opinion

necessary to maintain the wife “in as much com-’

fort as she now enjoys.” The Court found that

this standard of invasion was “fixed in fact and

capable of being stated in definite terms of money,”

and that the income of the estate was more than

enough to support the wife. It, therefore, allowed

the deduction, noting that “[t]here was no un-

certainty appreciably greater than the general

uncertainty that attends -human affairs:” 279 U.S.

at 154.- In the instant case, the government.con- -

‘cedes that the trustees’ power to pay principal

to the plaintiff is limited by an ascertainable

standard — plaintiff’s previous living standard —

and hence there is no argument that the deducti-

bility of the charitable remainder is destroyed by

the power of invasion.3 Rather, it is argued

that the trust agreement confers such broad ad-

ministrative powers on the trustees as to permit

. them indirectly to divert the corpus of the trust

to the plaintiff, and that these powers, together

with the broad power to make investments,- in-

cluding the purchase of annuity contracts, which

favor the income beneficiary at the- expense of the

remaindermen, have’ the cumulative effect of

rendering not “presently ascertainable” the value

of the charitable remainder, and making more than

“remote” the possibility that the charitable.trans- ~

fer will never become effective.

3. In fact, this power to invade corpus is even more limited than

in Ithaca Trust, since the trustees must also take into account

such sources of income and capital resources as the life

income beneficiary may have other than income from the trust.

ha : ; 10a

Appendiz A - Opinion —

Perhaps the genesis of the government’s argu-

‘ment is the analogous case of State Street Trust

Co. v. United States, 263 F.2d 635 (1 Cir. 1959),

in which a divided court (Magruder, C.J., dis-

senting) held that property a decedent-had trans-

ferred to a trust for the benefit of his children

was nevertheless includable in his gross estate

under §811 of the Internal Revenue Code of 1939,

which required inclusion of property transferred

in contemplation of death -where the decedent had

“retained ... the right ... to designate the persons

who shall possess or enjoy the property,” or where

“the enjoyment thereof was subject at the date

of his death to any change through the exercise

of a’ power (in whatever capacity exercisable) by

the decedent alone or in conjunction- with any

other person... “to alter, amend, revoke, or

terminate ....” ‘26 U.S.C.A. $811(c) and (qd).

The deceased was a cotrustee at the time of his

death. The court held that discretionary powers

conferred by the trust instrument, similar to the

ones at issue’in the present case, gave so much

power to the trustees to affect the rights of the

remaindermen and lifeholder that the statutory

conditions for exclusion were not satisfied.

But_State Street was effectively overruled in

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

601 (1 Cir. 1970), which held: that, ,in the context

of broad administrative powers resembling those

in the present case, “no aggregation of purely .

administrative powers can meet the government’s

amorphous test of ‘sufficient dominion and control’

so as to be equated with ownership.” 423 F.2d at

603. Again, the estate tax problem was not that

lla

Appendiz A - Opinion

of: the deductibility of a. charitable remainder,

-but the question of whether the corpora of the

trusts weré includable in the settlor-trustee’s

gross estate. -The significance of the case is in

its. recognition that, at least under Massachu-

setts law, broad management powers, even

coupled with insulation for liability for mis-

management, could not relieve a-trustee of the

duty to administer the estate equitably for the |

benefit of: all interests’ in the trust, and that

“trustee powers are [not] to be more* broadly

construed for tax purposes ‘than the probate court

would construe them for administrative purposes.”

423 F.2d at 603.

The government has persisted in its advocacy

of new repudiated State Street view.4 And it has

gained some converts. Rand v. United States,

4. As of the time the brief of the United States was filed in this

case (May 15, 1971), we were advised,that the same question

was pending in at least six other cases, viz.,

(1) Gardiner v. United States, 24 A.F.T.R.2d 6108 (Ariz.,

May 21, 1969), — pending C. A. 9;

(2) Miami Beach First Nat. Bk.-v. United ‘estat. 25 A.F.T.R.

2d 1502 (S.D. Fla., December 23, 1969), appeal pending

fe eS

(3) First’Nat. Bk, in Palm Beach v. United States, 25 A.F.T.R.

2d 1588 (S.D. Fla., August 22, 1969), appeal pending C. A.

5; ‘ . és

(4) Peoples Trust Co. of Bergen County v. United States, 311

F.Supp. 1197 (N. J., 1970), appeal panting. A. 3;

(5) Florida stianad Bank at Lakeland ¥. United States, 313

F. Supp. 1072 (M.D. Fla., 1970), appeal pending C. A. 5;

na (C ontinued)

12a

, Appendix A - Opinion

__. F.2d -__ (2 Cir. 1971); Estate of Stewart v.

Commissioner, 436 F.2d 1281 (3 Cir. 1971);

Miami Beach First National Bank v. United States,

ee F.2d __s (5 Cir. 1971); First National Bank

in Palm Beach v. United States, F.2d {5

Cir. 1971). Cf, Florida Bank at Lakeland v.

United States, F.2d - (5 Cir. 1971); Van

* Den Wymelenberg v. United “Misiee. 397 F.2d 443

(7 Cir.), cert. den., 393 U.S. 953 (1968). On the

other hand, many courts have concluded that

general administrative powers held by a trustee

are subject ‘to a fiduciary, responsibility and duty

to be exercised impartially as between the life

tenant and remainderman and that, therefore, the

deductibility of the charitable remainder is not

lost. Bankers Trust Co. y. United States, 308

F.S. 545 (S.D.N.Y. 1970), aff’d on other.grounds,

438 F.2d 1046 (2 Cir. 1971); Gardiner v. United

States, -F.S. _ (D. Ariz. 1969), appeal

pending to th e Ninth Circuit. Cf. Peoples Trust

Co. v. Unifed States, 311.F.S. 1197 (D. NJ.

1970), : appeal pending to the Third Circuit; Estate

of Edward E. Ford, 53 T.C. 114 (1969); William

T. Grant, 48 T:C. 606 (1967); William D. O’Brien,

46 T.C. 583 (1966).

)

(cS) Rand*v. United States, decided November 9, 1970 (Cona.} ),

Pending C. A.2 ~-

The case in the Second Circuit and the three cases 5 in the

Fifth Circuit have been subsequently decided in the govern-

ment’s favor, the citations of which are set forth in the text.

& e

l3a 7

Appendiz A - Opinion

None of the authorities sustaining the govern-

_ment’s position holds ‘that broad administrative

powers always or.never prevent the deduction;

rather, the cases rely heavily on the trust law

doctrines and practices of the particular states

involved, as well as the, language of the trust

winstrument under consideration, to determine if

‘there is any real likelihood that ‘the interests of

the charitable remainderman canbe invaded for

the benefit of the life tenant. Thus, in Stewart,

supra, the court based its denial of the deduction

in part on the conclusion that under New York law

the trustee could “shift ‘very. substantially ... the

economic benefit of the trusts between the life

tenants and the remaindermen.’” 436 F.2d at 1288.

In Rand, supra, where the trustees’ powers were

unusually broad, the court stated that there was .

no indication that Vermont law, applicable to the

. trust at issue, would .prevent a “gross depletion

of the remainder,” for example by investment in

wasting assets which would leave “little or no

remainder ... for the charities.” ___ F.2d at

___- The cases rejecting the government’s posi-

-tion have also rested on the trust law doctrines

and practices. of the particular states involved

as well as the language of the trust instrument

under consideration. although they have evidenced’ 4

greater liberality in sustaining some flexibility

in the administration of the trust without dis-

allowance of the charitable deduction. Thus, we

are brought to a consideration of the law of North

Carolina with regard to the administration of this

trust as the basis of decision of this case.

l4a

Appendiz A - Opinion

To start with the language. of the ccna

aggregate of the trustees’ powers (a) to invest

generaliy in such property and in: such propor-

tions of such property as the trustees*shall deem

advisable, even though such investment shall not

be of the character nor in the proportion approved

by applicable law, (b) to invest in an annuity

contract for the benefit of the widow, and (c) to

allocate and apportion expenses and receipts to

principal and income in their “uncontrolled dis- *

cretion,” with the further protection. that the

trustees’ “allocation or apportionment shall be

conclusive,” urging that singly and collectively

their exercise will permit substantial invasion

of the remainder interest to the detriment of the

remainderman and benefit of the life tenant. The

government finds further significance in the-pro-

vision that the corporate trustees’ annual account-

ing need be made only to the life beneficiary. To-

illustrate how substantial invasion may occur, the

government suggests, in regard to the power to

invest in any type of property in any proportion,

the possibility that the trustees may invest in a

wasting asset -without making provision for

amortization of the asset or other reserve for the

return of corpus. In regard to the power to

allocate and apportion expenses .and receipts, the

government contends that this power may be used

to divert corpus to the income beneficiary if the

trustees, in the exercise of their uncontrolled

discretion, charge a premium on securities pur- .

chased at a premium to corpus, but treat the full

return on such securities as income payable to the _

life beneficiary. The government also suggests -

art. 15a °

‘ that the ‘trustees, in the exercise. of their un= —

_ controlled discretion, could elect to allocate stock

dividends to the income beneficiary so that, again,

a portion of. the value of the corpus would be

diverted to the noncharitable life income benefici-

ary. Finally, the government argues that the

trustees might even allocate Capital gains to

income but capital losses to principal since they

are vested with “uncontrolled discretion” to make

allocations, notwithstanding that both; gain and

Joss on the sale of.investment assets would ordi-

narily be allocable to corpus, Edgecombe Bank &

Trust Co. v. Barrett, 238 N.C. 579, 78 S.E.2d

730 (1953). > )

Appendiz A - Opinion

The law of North Carolina, as elsewhere, is

that, short of an intention to achieve illegal

objectives, the intention of the testator-settlor.

should prevail, and in determining that intent a-¢

¢ court will look at all of the language employed ~

‘as well as the attendant circumstances. Camp-

bell _v. Jordan, 274 N.C. 233, 162 S.F.2q 545

(1968); Callaham v. Newsom, 251 N.C. 146, 110

S.E.2d' 802 (1959); Wachovia Bank & Trust Co. v.

Steele’s Mills, 225 N.C. 302, 34 S.E.2d 425 (1945).

Here, the manifest intent by Plaintiff and her

husband ‘was to retain a life #hterest in income

for themselves, and the survivor of them, but onl»

to the extent. of maintaining their accustomed

‘mode of living, with a remainder for charity.

Not only did plaintiff, the Surviving life -tenant,

act as one of the settlors of the inter vivos trust, .—

naming herself as one of the trustees, she éntéred

into a contract that she would transfer substan-

tially all of her property to the trust upon her.

16a

; Appendiz A - Opinion

husband’s death (if she survived him) and that

she would execute a will leaving her residtary .

estate to the trust. ‘There is thus a strong

evidence of an intention to create, preserve and

protect an admittedly charitable remainder.

In addition to the circumstances surrounding

the establishment of the trust and creation of the

charitable remainder, the intention of the settlors

with respect to invasion of corpus for themselves _—

is manifest from the.express language granting

the power to invade, which they employed. They

authorized invasion to maintain their standard

of living, or that of the survivor — a recognizable

and enforceable standard — and directed that:

invasion be undertaken only after consideration of

their, or the survivor’s, other sources of income’

and capital resources. This express power to

invade has both its positive and negative implica-

tions. Not only does it permit corpus to be ad-

vanced to.them under the conditions stated, it also

manifests an intention that corpus not be used

for the benefit of them, or the ‘survivor, except

under. the conditions stated. Cf. Campbell v.

Jordan, supra, 162 S.E.2d at 551. The specific

intention embodied in their express power, in our

view, limits the more general powers granted to

the trustees. That is to say, the trustees, in

exercising their general powers of administration,

must exercise them within the framework of the

overall intention of the settlors as they expressed

it. /

North Carolina is-not hesitant to exercise judi-

cial control over private trusts, including private

17a

Appendiz A - Opinion .

charitable trusts, not only to enforce them but also

to protect the rights of persons having an interest

therein. First-Citizens Bank & Trust Co. v.

Rasberry, -226 N.C. 586, 39 S.E. 2d 601, 603

(1946) (dictum), and the subsequently cited cases

, adjudicating the rights of beneficiaries with respect

‘to one another and to their trustees. The Attorney

General of ‘North Carolina has express statutory

trusts. N.C.G.S. §§ 36-19 and 36-20 (1966); Stein-

berger v. Tannenbaum, 273 N.C. 658); 161 S.E.2d

. 116 (1968). rhe i

North Carolina has explicitly referred approv-

ingly to the rule that a trustee must deal imparti-

ally with’ the beneficiaries of a trust in Campbell

v. Jordan, supra, 162 S.E.2d at 551, and it has |

done so impliedly in numerous cases. This is the

general rule, Restatement (Second) of the Law of

Trusts §183 (1959); and, to our knowledge, it has

not been rejected by the courts of any state. While

North Carolina may have infrequently exerted

judicial control over the manner in which dis-

cretionary powers of trustees have been exercised,

it has not hesitated to do.so in an appropriate -

case. Albright v. Albright, 91 N.C. 220 (1884);

‘Carter ‘v. Young, 193 N.C. 678, 137.S.E. 875 :

(1927); Woodward v. Mordecai, 234 N.C. 463, 67

S.E.2d 639 (1951); Dillon v, North Carolina Nation-

al Bank, 6° N&. App. 584, 170 S.E.2d 570 (1969).:

“See also, Lightner v. Boone, 222 N.C. 205, 22°

Sooneieeiieeemaeneennicd

S.E.2d 426 (1942), afffd, 319 U.S. 561 (1943).

Albright and Carter equate an abuse of discretion

on. the part of a trustee with “fraud” or “bad

faith” or “improper motive,” but they areimportant _

18a | | ) A

' Appendiz A- Opinion

because of their recognition that these invidious

labels apply to action clearly contrary to the in-

tention of the seitlor of a trust as well as to acts

of moral or tortious legal ‘impropriety. | _ Their

“repeated citation in the later authorities attests

to the continuing viability of this concept. As

recently as the decision in Little v. Wachovia

Bank and Trust Company, 252 N.C. 229, 113 S.E.

2d 689 (1960), the court, in stating the general

rule that a trustee’s exercise of 2 discretionary —

power: will generally be upheld-in the absence of

fraud or: arbitrary action, added the caveat “[o]f

course the trustee will not be given ‘unlimited

power to make allocations as between income and

principal in contravention of the intent of the

settlor as indicated by the terms of the trust

instrument as a whole.’ Annotation: 27.A.L.R.

2d, Income and Principal, p. 1325. » 113 S.E.2d

at 708. : ; 3

We have not.found, nor has there been cited to

us, any North Carolina case dealing explicitly with

the limits of the “absdtute direction” vested in the

trusteés to allocate and apportion expenses and

- receipts between the interests of the beneficiaries

and the circumstances, if any, under which their -

exercise of the power will be judicially controlled.

Ordinarily a settlor’s use of such language,- with

or without the further protection that the trustee’s

exercise of the power shall be “conclusive” —

present here — is treated as conferring even

greater authority on the trustee than a simple

and unqualified grant of discretion. Restatement

(Second) Law of Trusts $187 (1959), comment j,

pp. 408-409; Scott, The Law of Trusts § 187, p.

Sig ras .

Saas ‘

19a

| Appendiz A-Opinion

1502 (3rd ed. 1967). These authorities recognize

that the. addition of such language-dispensés with

--the otherwise applicable test of “reasonableness,”

but they do not fail to add that a trustee is not

thereby given unlimited discretion andhis exercise —

of “absolute discretion” is still circumscribed by

the intention of the settlor.. We have little doubt

that North Carolina would pay close tention to

the intention of a settlor in determining whether

a trustee exceeded his authority in exercising a_

conclude that in this case North Carolina would

permit the exercise of “absolute discretion” to

apportion and allocate expenses and receipts only

within the framework of the settlor’s intent-to

invade the charitable remainder only to the extent

of maintaining the. settlor’sg accustomed mode of

living. And in this case, inasmuch as the sur-

viving life beneficiary — the wife — is one of the

trustees, our view*is reinforced with respect to the

exercise of this power, a$ well as any other which

may be capable of being exercised to prefer the

life beneficiary over the remainderman, by the.

stringent limiting rules of conduct which govern

a trustee’s acting for his own benefit. Wachovia _

‘Bank and Trust Co. y. Johnston, 269 N.C. 701,

153 S.E.2d 449 (1967). — | .

To supplement this expression of what we

perceive: general North Carolina law to be, we

need add only a few comments in response to

specific arguments advanced by. the government.

With regard to the treatment of stock dividends, -

the trustees’ powers of allocation are sufficiently .

broad to permit them to classify stock dividends

rn ; 20a

Appendiz A- Opinion

either as Corpus or as income. But we think the

matter of little moment. In North Carolina,

absent an express power of this breadth, stock

dividends would be treated as principal. -N.C.G.S.«

. §37-5(a) (1966). This is ordinarily called. the

Massachusetts rule. But in. many states the rule

at common law is to the contrary and requires

a determination,of the portion of the stock dividend

attributable to income and the portion attributable

to corpus and the various portions to be charged

accordingly. This is generally referred to as the

Pennsylvania rule, Taggert, Charitable Deductions

for Transfers of Remainder Interests Subject to

Invasion, 21 Tax-L. Rev. 535 (1966). In oral

argument, the government candidly admitted that

in states following the Pennsylvania rule, the -

government would not contend that the deducti-

bility of an otherwise deductible charitable re-

-Mainder would be lost thereby. . We cannot see,

therefore, how the trustees’ power in the instant

case, taken alone or in conjunction with their

‘other powers, should make any difference in the

decision of this case. ae Porites

With var to the trustees’ power to purchase

an annuity onthe life of the life beneficiary,.we

do not think that under the general. law stated,

on the facts of this case, that the trustees could

use any substantial portion of the corpus to

purchase an annuity, or any other wasting asset,

without making provision for the establishment of

a reserve to reimburse corpus or to amortize

the depreciation thereon. Indeed, with respect

™~ i “<7

2la "ea ae ; are

_ Appendiz A ‘ Opinion _

to annuities, N.C.G.S. §36-4.1 (1966) requires

specific court approval as a condition precedent

_to the purchase of a single premium annuity by

a trustee even from income. We would. view it.

very unlikely that judicial approval’ would be ~

readily forthcoming hebe without amortization of

any principal employed to pay the premium where

‘the life’ tenant requires $5,500.00 to'maintain her

accustomed mode of living but is receiving over

twice that amount. The statute has not receivéd

judicial: construction, but we think it equally un-

likely that it could be avoided by the trustee here

in the absence of a specific reference to it by the

settlors and specific authorization to the trustees

to avoid compliance with it. Our conclusion is

_ the same with regard to the purported power to

charge the premiums paid on securities purchased

to corpus, while treating the entire return, except

répayment of principal upon maturity, as income, 5

and the purported power to treat capital gains

“as income while treating capital losses as charge-

able to’ principal in contravention of Edgecombe

- Bank & Trust Co. v. Barrett,’ supra. Under this -

trust when the settlor’s full intention is given —

effect, we do not think that preferment of the life

beneficiary by the exercise of these powers wou!d

receive judicial approval.

5. We note that absent the express power in this trust, N.C G.S.

§-37-6 (1966) would appear to require charging both the .

premium paid on a security purchased and any loss realized

_ upon maturity to principal. Any exercise of the power in

derogation of the statute could, therefore, only aid in the

preservation of the charitable remainder. :

22a

_parcrrentie yp

| Appendiz A-Opinion

To summarize, we ‘conclude that, under the a

law of North Carolina and on. the facts-of this

case, the legal. right of the trustees tq effect an

indirect diversion of corpus tao the detriment, of .

the charitable remainderman under. their eneral

powers of administration is so Susiidt nak re-

stricted that it cannot. be said that the charitable .

remainder was not “presently ascertainable” . at

the date of the husband’s death or that “the possi-

bility that the charitable interest will not become

effective” is other than so remote as to be

negligible. We, therefore, agree with the district

judge that the charitable deduction claimed by the

ener should be sustained.

‘REVERSED IN PART;.

AFFIRMED IN PART.

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