# Supplemental Brief — Henderson v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Supplemental Brief
- **Published:** January 1, 1971
- **Citation:** 404 U.S. 828

## Text

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—- OUR.
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In The >

Supreme Court of the Hnit (Stats
_ OCTOBER TERM, 1971 |

——_
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

it

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

*

7
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. .

ee

Argument
I.

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-

cd

»

Df

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 ~

i

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

la

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.

2a

.
”
ad
.

_ 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.

Qe

(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
-

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3a

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. “

oe
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)

4a

aa,
~

Appendiz A - Opinion

A.

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

a

<>

en

5a

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.

6a

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. ;

7a

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.

B.

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.) «

ot

8a

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).

9a

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

f

o>

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
the government places particular stress on the ©
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 °

B.

‘ 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
and common law authorization to enforce charitable ©
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 .

a

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_

grant of “absolute discretion.” We, therefore, ©

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385605_1362%3A6. Public record. Not legal advice.