Petitioners Brief — Helvering v. Grinnell

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Specification of errors to be urged. -.....-.....-.-----.---.- 5

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CITATIONS

Cases:

Bishop v. Commissioner, 23 B. T. A. 920.._......_--__-- 17

Blackburne v. Brown, 43 F. (2d) 320__.__....____.______- 12

Se es Se, GE Ws Gy Si tececcccceccceecssecce 10

Burnham v. Treasurer & Receiver General, 212 Mass. 165_- 9

ee oy Ge ee a, ON eewnnenee 9

Chase Nat. Bank v. United States, 278 U. 8. 327__....___- 12

Hancy v. Commissioner, 17 B. T. A. 464_____- ‘ecaidumeaiocitandds 17

Helvering v. New York Trust Co., 292 U.S. 455___.______- 13

Lee v. Commissioner, 57 F. (2d) 399, certiorari denied, 286

[iii cieiuiawnsibudesaaGhenivdbeinaneanaawesss 15

Mass. Mutual Life Ins. Co. v. United States, 288 U. S. 269- 18

ee ar GE, DE Ble We Slcccevcnceccoescscesesee 9

Pe Oe ee, TED Bee We Bcc cc cccccuscccucceesc 9,10

Minis v. United States, 66 C. Cls. 58, certiorari denied, 278

2 Beth SiR Ee a Ce en 16

Minot v. Treasurer & Receiver General, 207 Mass. 588-__-_-_- 10

SE We GE, Sls Ws Gann cencencensencescsecscee 10

a 8 eee 10

Ozawa v. United States, 260 U. S. 178..______-__.______- 13

Pennsylvania Co. for Ins. on Lives, Etc. v. Lederer, 292 Fed.

aha bdaditdidnnnadadwecsnedia metus wemndéeue 17

Porter v. Commissioner, 288 U. S. 436___..-__..._______- 12,18

Stratton v. United States, 50 F. (2d) 48, certiorari denied,

I a 12, 16, 17

Tyler v. United States, 281 U. S. 497__......_______-- 11, 12,15

United States v. Dakota-Montana Oil Co., 288 U. S. 459___- 18

Wear v. Commissioner, 65 F. (2d) 665.._.__..__________. 12

Whitlock-Rose v. McCaughn, 21 F. (2d) 164_.__._.______. &

(I)

96789—34——-1

Se Se er re ® eae

+ eset

II

Statutes: Page

Revenue Act of 1926, c. 27, 44 Stat. 9:

Sec. 301 (U. S. C. App., Title 26, Secs. 1092, 1093) _ -___ 7

Sec. 302 (U. S. C. App., Title 26, Sec. 1094)__......-_- 2

Miscellaneous:

H. Rep. No. 767, 65th Cong., 2d Sess., p. 21..----------- 13

Treasury Regulations 37, Art. 30_.......--------------- 17

Treasury Regulations 63, Art. 25.........-----.-------- 17

Treasury Regulations 68, Art. 24..........-.-----.----- 17

—a-™

Iuthe Supreme Court of the Anited States

OcToBER TERM, 1934

No, 268

Guy T. HerLvertnGc, CoMMISSIONER OF INTERNAL

Revenue, petitioner

Vv.

EK. MorGAN GRINNELL, AS EXECUTOR OF THE ESTATE

of Annie Stone

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPLALS FOR THE SECOND CIRCUIT

BRIEF FOR THE PETITIONER

OPINIONS BELOW

The opinion of the Circuit Court of Appeals

(R. 17) is reported in 70 F. (@d) 705. The memo-

randum opinion of the Boarf*of Tax Appeals (R.

8-11) is not reported.

JURISDICTION

The judgment of the court below was entered

May 7, 1934 (R. 22). The petition for certiorari

was filed August 7, 1934, and was granted October

(1)

” ht aim, ellos _

a

2

8, 1934. The jurisdiction of this Court is conferred

by Section 240 (a) of the Judicial Code, as

amended by the Act of February 13, 1925.

QUESTION PRESENTED

May the value of property over which the dece-

dent by will exercised a general power of appoint-

ment be included in her taxable estate, when she

appointed the property to the same persons who

would have taken under the will of the donor if the

power had not been exercised and the appointees

expressly elected to take under the will of the donor

and not under the appointment ?

STATUTE INVOLVED

Revenue Act of 1926, ec. 27, 44 Stat. 9:

Sec, 302. The value of the gross estate of

the decedent shall be determined by includ-

ing the value at the time of his death of all

property, real or personal, tangible or in-

tangible, wherever situated—

* * * * *

(f) To the extent of any property passing

under a general power of appointment exer-

cised by the decedent (1) by will, or (2) by

deed executed in contemplation of, or in-

tended to take effect in possession or en-

joyment at or after, his death, except in case

of a bona fide sale for an adequate and full

consideration in money or money’s worth;

and

* * * oa *

ae ed a Se ee Pk wee

3

(h) Except as otherwise specifically pro-

vided therein subdivisions (b), (¢), (d), (e),

(f), and (g) of this section shall apply to

the transfers, trusts, estates, interests,

rights, powers, and relinquishment of pow-

ers, as severally enumerated and described

therein, whether made, created, arising, ex-

isting, exercised, or relinquished before or

after the enactment of this Act.

(U.S. C. App., Title 26, Sec. 1094.)

STATEMENT

The facts as found by the Board of Tax Appeals

(R. 8-10) may be summarized as follows:

The decedent, Annie Stone, died September 24,

1927, a resident of the United States. John O.

Stone, her father, died in 1876, a resident of New

York, leaving a will whereby he devise™ the residue

of his estate to executors in trust to divide into as

many shares as there were children surviving him,

or who may have died leaving issue surviv: ig him,

and to keep the same invested so as to produce a

regular income. The income from the shares set

apart for each child was to be applied to her main-

tenance and education until she reached twenty-one

years of age and thereafter to her use for life.

Upon the death of each child her share of the estate

was given to such persons and such uses as she

might appoint by will and in default of appoint-

ment her share was given to her children or issue

and in default of issue to her next of kin.

4

John O. Stone was survived by his widow (who

died many years before the present decedent) and

three daughters, Sarah J. Grinnell, Ellen J. Stone,

and Annie Stone (the present decedent), his only

children, heirs at law and next of kin. Under the

will of John O. Stone, one-third of his estate was

held in trust for the benefit of the decedent during

her life, and upon her death was distributable to

such persons and for such uses as she might ap-

point by will, and in default of appointment, to her

issue and in default of issue to her next of kin.

The sole next of kin surviving Annie Stone, the

decedent, who died without issue, were her sisters,

Ellen J. Stone and Sarah J. Grinnell. By her will

the decedent gave, devised, and bequeathed all the

residue of her estate, including her share of her

father’s estate over which she had the power of

appointment, to her sisters in equal shares. The

value of the share of her father’s estate left in trust

for the decedent and over which she had a general

power of appointment was $75,764.26 at the date of

her death.

The decedent’s sisters, by writing filed with the

Surrogate’s Court, elected to take the share of their

father’s estate left in trust for the decedent under

the will of their father and not under the appoint-

ment made by the decedent in her will.

The Commissioner determined that the share of

the decedent’s father’s estate left in trust for her

and appointed by her to her sisters should be in-

4)

eluded in her gross estate and accordingly asserted

a deficiency in estate taxes of $9,628.78. The Board

of Tax Appeals sustained the determination of the

Commissioner. The Cireuit Court of Appeals for

the Second Circuit reversed.

SPECIFICATION OF ERRORS TO BE URGED

The Circuit Court of Appeals erred:

1. In holding that the property appointed by the

decedent by her will, under the general power con-

ferred by the will of her father, did not pass under

the exercise of the power within the meaning of

the Revenue Act and, therefore, should not be

included in her taxable estate.

2. In not holding that the property over which

the decedent by will exercised the general power

of appointment conferred by the will of her father,

passed under the exercise of the power within the

meaning of the Revenue Act and, therefore, must

be included in her taxable estate, notwithstanding

the property was appointed to the remaindermen

under the donor’s will and they expressly elected

to take from the donor rather than under the exer-

cise of the power.

3. In holding that the law of New York is con-

trolling in determining whether property ap-

pointed under a general power exercised by will to

the same persons who would have taken in default

of the exercise of the power, passes under the exer-

6)

cise of the power within the meaning of the lederal

Fstate Tax Act.

4+, In reversing the decision of the Board of Tax

Appeals.

SUMMARY OF ARGUMENT

Section 301 of the statute imposes a tax upon the

transfer of the net estate of every decedent dying

after the enactment of the Act and Section 502 (f)

provides that in valuing the gross estate there shall

be included the value at the time of death of all

property ‘‘passing under a general power of ap-

pointment exercised by the decedent (1) by will.”

The property here in question was left by the

father of the decedent in trust for her for life and,

upon her death, to such persons and such uses as

she might appoint by will and, in default of such

appointment, to her next of kin. The decedent by

her will exercised the power and appointed the

property in equal shares to her sisters, who also

were her next of kin. The power of appointment

clearly was general and the decedent obviously ex-

ercised the power by will. The fact that the prop-

erty would have passed to the appointees as re-

maindermen under their father’s will if the power

had not been exercised is immaterial, and it is not

important that under the laws of the State of New

York the appointees took title to.the property from

the father under his will and not from the decedent

under the appointment. The tax is imposed not

upon the property passing at death, but upon the

power to transmit or the transmission of property

by death; the shifting of the economic benefits in

property is the real subject of the tax. The real

question is whether the death of the decedent

ripened or enlarged for the survivors valuable

property rights and not whether there has been

strictly a transier of property. Upon the death of

this decedent, with the exercise of the power in

favor of her sisters, their estate, theretofore con-

tingent upon the nonexercise of the power ad-

versely, became vested free from that risk. It was

the death of the decedent with the exercise of the

power in favor of her sisters that ripened or en-

larged valuable property rights for them. It must

be concluded that the property in question passed

to the sisters under the general power of appoint-

ment exercised by the decedent by will within the

meaning of the statute.

ARGUMENT

Section 301 of the Revenue Act of 1926, c. 27, 44

Stat. 9 (U.S. C. App., Title 26, Secs. 1092, 1093),

imposes a tax upon the transfer of the net estate

of every decedent dying after the enactment of the

Act and Sectien 302 (f), supra, provides that in

valuing the gross estate there shall be included the

value at the time of death of all property ‘‘passing

under a general power of appointment exercised

by the decedent (1) by will.”

The property here in question was left by the

father of the decedent in trust for her for life and

96789—34— —2

8

upon her death to such persons and such uses as

she might appoint by will and, in default of ap-

pointment and issue, to her next of kin. By her

will the decedent, who died without issue, devised

and bequeathed such property, together with the

residue of her estate, in equal shares to her two

sisters who were her sole next of kin.

The power of appointment conferred upon the

decedent by the will of her father clearly was gen-

eral (Whitlock-Rose v. McCaughn, 21 F. (2d) 164

(©, C. A. 3d)) nor has it been otherwise contended.

or suggested by the respondent or the court below.

It seems equally plain that the decedent exercised

the power by her will whereunder she devised and

bequeathed all the residue of her estate, including

the property which she was allowed to dispose of

under the will of her father, to her two sisters in

equal shares. Thus it would appear that the prop-

erty left in trust for the decedent by her father and

appointed by her will to her sisters falls squarely

within the provisions of the statute, for it is prop-

erty passing under a general power of appointment

exercised by the decedent by will, and must be in-

cluded in the decedent’s taxable estate. The court

below, however, held that this property did not

pass under the power of appointment exercised by

the decedent because under the law of New York

the decedent’s sisters took title to the property

from their father and the property passed to them

under their father’s will and not by virtue of the

i)

appointment. It is argued that the appointment

having been made to the same persons entitled

under the donor’s will in default of appointment

and such persons having expressly rejected the ap-

pointment and elected to take from the donor, the

attempted exercise of the power was a nullity and

the property passed under the will of the donor,

citing Matter of Lansing, 182 N. Y, 238. Whether

or not that decision is sound need not be considered,

but it is interesting to observe that in Maiter of

Cooksey, 182 N. Y. 92, an appointment by will of

property to the same persons who would have taken

anyway under the will of the donor was a valid and

effectual exercise of the power and the property

passed under the power. The author of the opin-

ion in the Lansing case concurred in the decision

of the Cooksey case and the author of the Cooksey

opinion dissented in the Lansing case. The dis-

tinction made in the Lansing case seems unsubstan-

tial. Moreover, it would seem that the ultimate

basis of the Lansing decision, that the property did

not pass under the power because in contemplation

of law the appointees took from the donor and not

the donee, is untenable. See Chanler v. Kelsey,

205 U. 8. 466. In other jurisdictions under stat-

utes similar to that of New York and analogous to

the Federal statute it is held that property passes

under the exercise of a power notwithstanding the

appointees take from the donor and would have

taken in default of exercise of the power. DBurn-

10

ham v. Treasurer & Receiver General, 212 Mass.

165; Minot v. Treasurer & Receiver General, 207

Mass. 588; Montague v. State, 163 Wis. 58. Cf.

also, Moffitt v. Kelly, 218 U.S. 400.

In any event, whatever may be the law of New

York as declared in the Lansing case, which in-

volved the state inheritance or transfer tax act,

respecting the source and passage of title to prop-

erty over which a power of appointment has been

exercised is not material and the court below

erroneously considered the local law controlling

here. We are not here concerned with any state

rule of property or the source of title to property,

but only with the construction and application of a

Federal revenue act. In such matters the laws of

the States cannot control and the Federal courts

must exercise their independent judgment in con-

struing and applying the Federal statute. In ‘Bur-

net v. Harmel, 287 U. S. 103, 109-110, an income-

tax case, the Court, recognizing the principle that

the state law regulates and controls the passage of

title to property, pointed out that the principle has

no application where the question is solely one of

the construction and application of a Federal

statute. The Court said (p. 110):

Here we are concerned only with the

meaning and application of a statute enacted

by Congress, in the exercise of its plenary

power under the Constitution, to tax income.

The exertion of that power is not subject to

state control. It is the will of Congress

11

which controls, and the expression of its will

in legislation, in the absence of language evi-

dencing a different purpose, is to be inter-

preted so as to give a uniform application

to a nation-wide scheme of taxation. * * *

State law may control only when the federal

taxing act, by express language or necessary

implication, makes its own operation depend-

ent upon statelaw. * * *

In Tyler v. United States, 281 U. S. 497, 503,

holding that the provision of the statute including

the value of the whole property held as tenants by

the entireties in the taxable estate of the deceased

spouse is valid notwithstanding the state rule of

property respecting the title to estates so held, the

Court said (p. 503):

According to the amiable fiction of the

common law, adhered to in Pennsylvania

and Maryland, husband and wife are but one

person, and the point made is, that by the

death of one party to this unit no interest

in property held by them as tenants by the

entirety passes to the other. This view,

when applied to a taxing act, seems quite un-

substantial. The power of taxation is a

fundamental and imperious necessity of all

government, not to be restricted by mere

legal fictions. Whether that power has been

properly exercised in the present instance

must be determined by the actual results

brought about by the death, rather than by

a consideration of the artificial rules which

delimit the title, rights and powers of ten-

ants by the entirety at common law. * * *

12

This principle is well established and has been fol-

lowed by other Circuit Courts of Appeals. Wear

v. Commissioner, 65 F. (2d) 665 (C, C. A. 3d);

Stratton v. United States, 50 F. (2d) 48 (C. C. A,

Ist), certiorari denied, 284 U. 8. 651; Blackburne

v. Brown, 43 F. (2d) 320 (C. C. A. 3d).

The court below disregarded or overlooked the

essential nature of the tax and the plain purpose

of the statute involved. The decision below is

predicated upon the premise that since under the

state law title to the property passed from the

donor and not from the donee of the power, the

property did not pass under the power exercised

by the decedent within the meaning of the statute

and hence there was no transfer from the decedent

subject to the tax. The estate tax, however, is im-

posed upon the power to transmit or the transmis-

sion of property at death and the question in every

case is not whether there has been a transfer in a

strict sense but whether the death has brought into

being or ripened for the survivor (the recipient of

property) valuable rights not theretofore pos-

sessed. The tax is not limited to transfers of prop-

erty passing directly from the decedent but in-

cludes as well property the completed transfer of

which depends upon or relates to the death of the

decedent. Tyler v. United States, 281 U.S. 497,

503, and Chase Nat. Bank vy. United States, 278

U.S. 327. See also Porter v. Commissioner, 288

U. 8. 486. The statutory provision here involved

15

was incorporated in the Act in aid of the purpose to

reach all transfers affected by the death of the

decedent,

The Revenue Act of 1918 was the first statute ex-

pressly requiring property passing under a general

power of appointment exercised by will to be in-

cluded in the donee’s estate, and the report of the

Committee on Ways and Means referring thereto

(H. Rep. No. 767, 65th Cong., 2d Sess., pp. 21-22)

clearly shows that Congress deemed the donee of a

general power of appointment over property to be

the substantial owner thereof for the purposes of

the estate tax, and intended that such property

should be included in the donee’s estate when the

power is exercised by will.

The court below in construing the statute disre-

garded this clear Congressional purpose and intent

and in so doing violated a cardinal principle of stat-

utory construction, as established by decision of

this Court. In Helvering v. New York Trust Co.,

292 U. S. 455, this Court, quoting from Ozaw? vy.

United States, 260 U.S. 178, 194, said (p. 464):

It is the duty of this Court to give effect to

the intent of Congress. Primarily, this in-

tent is ascertained by giving the words their

natural significance, but if this leads to an

unreasonable result plainly at variance with

the policy of the legislation as a whole, we

must examine the matter further. We may

then look to the reason of the enactment and

inquire into its antecedent history and give

as

14

it effect in accordance with its design and

purpose, sacrificing, if necessary, the literal

meaning in order that the purpose may not « ©

fail.

Other Circuit Courts of Appeals, recognizing the

principles established by this Court, have held that

property appointed by will under a general power

must be included in the taxable estate of the dece-

dent notwithstanding the appointment is to the

same persons who would have taken in default of

the exercise of the power and under the state rule

of property title passes from the donor rather than

the donee. In Wear v. Commissioner, supra, after

pointing out that the tax is imposed not upon the

property but upon the transmission of or the privi-

lege to transmit property and the question is not

whether there has been strictly a transfer but

whether the death has brought into being or ripened

for the recipients valuable property rights not

theretofore possessed, the court said (p. 667) :

We have not been convinced that on the

death of the donee nothing happened in re-

spect to the property of the power and in

respect to the daughters’ right to the prop-

erty by the exercise of the power. Before

its exercise the daughters of the decedent,

the twice-named recipients, had, under

Pennsylvania law, an estate in the property

of the power. But it was a lefeasible es-

tate, not unlike the interest of a beneficiary

in a policy of life insurance where the

insured has reserved, yet has not exercised,

15

the right to change the beneficiary. Their

estate was liable to be wholly taken away

from them by the exercise of the power in

favor of others. So long as the donee lived

and retained control over the disposition of

the property the daughters ran that risk,

which was akin to the risk of a change of

beneficiaries in a policy of insurance. Not

until the donee died did that risk disappear.

Until then he stood in their way. There-

fore it was upon his death without exercis-

ing the power adverse to them that the

estate of the daughters became indefeasible,

Death, with an exercise of the power in their

favor, was the event that wrought the

change. Then their estate, theretofore con-

tingent upon the nonexercise of the power

against them, became vested, iike the inter-

est of a beneficiary of a policy of life insur-

ance becomes vested upon the death of the

insured without exercising a reserved right

to change the beneficiary, the value of which

must, under the cases, be included in the

gross estate of the insured for purposes of

taxation. Chase National Bank v. United

States, 278 U: S. 327. The generating

source of the change was the death of the

donce without action adverse to them. That,

too, was the generating source of the tax,

(Italics supplied.)

In Lee v. Commissioner, 57 F. (2d) 399 (App.

D. C.), certiorari denied, 286 U. S. 563, where the

nature of the tax as expounded in Tyler v. United

States, supra, also is referred to, the court, in hold-

ee

16

ing that property appointed in the exercise of a

general power by will must be included in the

donee’s taxable estate, although the appointee is

the remainderman under the donor’s will, said (p.

402) :

It is true that, if Robert E. Lee at the time

of his decease had entirely omitted to exer-

cise the power of which he was the donee,

his brother, George Bolling Lee, would have

held the moiety of the former by devise

under the willof W. H. F. Lee. But, on the

other hand, Robert E. Lee was entitled dur-

ing his lifetime to appoint the moiety to any

other person, and thus defeat the devise to

George Bolling Lee. Therefore the exer-

cise of this power by Robert E. Lee at least

confirmed the title of his brother to the

moiety in question. Chanler v. Kelsey, 205

U.S. 466.

* * * * *

Accordingly, in this ease the exercise by

the donee, Robert EK. Lee, of the power of

appointment vested in him, was the ‘‘gen-

erating source’’ of the title of Mary M. Lee

for her life or widowhood, and of George

Bolling Lee in remainder, of the moiety held

by the donee in the estate of W. H. F. Lee.

The decisions of other Federal courts and the

Board of Tax Appeals are in accord with the de-

cisions of the Third Circuit Court of Appeals and

the Court of Appeals for the Distriet of Columbia.

Stratton v. United States

, supra; Minis v. United

al ne . am . anne 6 ere Sanne cael

17

States, 66 C. Cls. 58, certiorari denied, 278 U. S.

657; Pennsylvania Co. for Ins. on Lives, Ete., v.

Lederer, 292 Fed. 629 (E. D. Pa.) ; Bishop v. Com-

missioner, 23 B. T. A. 920, and Hancy v. Commis-

sioner, 17 B. T. A. 464. Although it does not defi-

nitely appear from the report of Stratton v. United

States, supra, that the appointees of the property

were remaindermen under the will of the donor.

this very point was urged in the petition for cer-

tiorari in that case (No. 303, October Term. 1931,

Petition and Brief in Support, pp. 36-38, Brief in

Opposition, pp. 6-7).

Moreover, the consistent departmental interpre-

tation of the statute and the administrative prac-

tice thereunder clearly demonstrates that the stat-

ute requires the inclusion of all property over which

the decedent has exercised a general power of ap-

pointment by will. Article 30, Regulations 37. pro-

mulgated under the 1918 Act, specifically provided

that “property appointed under a general power

should be ineluded in the estate of the appointor,

although the persons to whom the appointment Was

made would have taken the property had the power

not been exercised * * *,% Substantially identi-

eal regulations were promulgated under the Reve-

nue Acts of 1921 and 1924 which contained provi-

sions identical with that of the 1918 Act. Article

29, Regulations 63; Article 24, Regulations 68. No

similar provision was contained in Regulations 70,

promulgated under the Revenue Act of 1926, but

CPR

> 739m

PP OR Eo RR amy beam aoa

18

the omission seers to have been inadvertent or

possibly such a provision was considered unneces-

sary. The provision of the Revenue Act of 1926 is

substantially identical with that of the preceding

Acts. The reenactment of the pertinent statutory

provision of the 1918 Act without change in the

1921, 1924, and 1926 Acts in view ef the adminis-

trative interpretation of the statutes prior to 1926

would seem to indicate legislative approval of the

Department’s construction. United States v.

Dakota-Montana Oil Co., 288 U.S. 459, 466; Mass.

Mutual Life Ins. Co. v. United States, 288 U.S.

269, 273.

The instant case, we believe, is controlled by thie

principle underlying Porter v. Commissioner,

supra. There the decedent had transferred prop-

erty in trust for the benetit of his son and daughter

and their children, reserving the power to alter or

modify the trust instruments and to change the

trusts in any manner, except that no change could

be made in favor of the decedent or his estate. The

Revenue Act of 1926 (the statute here involved) by

subdivision (d) of Section 302 included in the gross

estate all property at any time transferred by the

decedent where the enjoyment thereof was subject

at the date of his death to any change through the

exercise of a power, either by the decedent alone

or in conjunction with another, to alter, amend, or

revoke. The Court, holding that the property

19

transferred must be included in the decedent’s

estate,

said (p. 443):

The net estate upon the transfer of which

the tax is imposed, is not limited to property

that passes from decedent at death. Subdi-

vision (d) requires to be included in the cal-

culation all property previously transferred

by decedent, the enjoyment of which remains

at the time of his death subject to any change

by the exertion of a power by himself alone

or in conjunction with another. * * *

Here the donor retained until his death

power enough to enable him to make a com-

plete revision of all that he had done in re-

spect of the creation of the trusts even to

the extent of taking the property from the

trustees and beneficiaries named and trans-

ferring it absolutely or in trust for the bene-

fit of others. So far as concerns the tax here

involved, there is no difference in principle

between a transfer subject to such changes

and one that is revocable. The transfers

under consideration are undoubfedly cov-

ered by subdivision (d).

The Court, rejecting the contention that the statute

so construed is unconstitutional, said (p. 444):

But the reservation here may not be ignored,

for, while subject to the specitied limitation,

it made the settlor dominant in respect of

other dispositions of both corpus and income,

His death terminated that control, ended the

possibility of any change by him, and was,

in respect of title to the property in question,

od

RIDES LE WS PRES IOR HP ED oe

Rn kt a TM Sk i oon Ore ee,

= ae note at

the source of valuable assurance passing

from the dead to the living. That is the

event on Which Congress based the inclusion

of property so transferred in the gross estate

as a step in the calculation to ascertain the

amount of what in § 301 is called the net

estate. Thus was reached what it reasonably

might deem a substitute for testamentary

disposition.

Sinularly, in this case, which involves subdivision

(ft) of Section 302 of the same statute, the decedent

until her death was dominant in respect to the dis-

position of the property to others than herself (the

power being exereisadie ois uy wlhiedive voddi-inhk

appoint to herself) and her death with the power

exercised in favor of her sisters ended the possi-

bility of appointment to others and was, in respect

of title to the property, the source of valuable

assurance passing from the dead to the living.

In this case the decedent clearly had a general

power of appointment over property left in trust

for her by her father and she manifestly exercised

that power by her will in devising such property te

her sisters. The mere fact that her sisters were her

sole next of kin and would have taken the property

under the will of their father had the power not

heen exercised, and under the state law the title to

the property passed to the sisters from their father

and not from the decedent, is not material. Nor is

it of any consequence that the sisters expressly

elected to take from their father and not from the

E—E————— a ee

21

decedent. The fact remains that the decedent had

a general power of appointment and that she did

everything possible or required of her to exercise

that power by will. The voluntary act of the sis-

ters as recipients of property in refusing the ap-

pointment because the property came to them in

any event, cannot be effective to extinguish the fact

that the decedent fully and completely exercised

the power. It seems plain that within the meaning

of the statute here involved the property in ques-

tion passed under the general power of appoint-

ment exercised by the decedent by her will and must

he imebuded in her taxable estate.

CONCLUSION

It is respectfully submitted that the decision of |

the Circuit Court of Appeals is erroneous and

should be reversed.

J. CRAWFORD Buiaas,

Solicitor General.

FraNK J. WIDEMAN,

j Assistant Attorney General.

| SEWALL Key.

| JoHN Mac. Huepson,

, ain

Special Assistants to the Attorne y General.

NOVEMBER 1934.

BRIEF IN OPPOSI -

TION TO PETITION

FOR A WRIT OF —

CERTIORARI

FILE COPY

IN THE

Supreme Court of the United States

OCTOBER TERM, 1934.

Docket No. 268.

GUY T. HELVERING,

Commissioner of Internal Revenue,

Petitioner,

against

Kk. MORGAN GRINNELL,

as Executor of the Estate of Annie Stone,

Respondent.

BRIEF FOR RESPONDENT IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES CIRCUIT COURT OF

APPEALS FOR THE SECOND CIRCUIT.

/ BERNHARD KNOLLENBERG, f

Counsel for Respondent.

INDEX

PAGE

Oesssons Below ............... aria eA mS Sh

JURISDICTION Peas a PR a eer ner era 1

STATEMENT OF THE CASE _____________ se 9

Argument :

Pornt I. The decisions of the Cireuit Court of Ap-

peals for the Third Cireuit and the Court of Ap-

peals for the District of Columbia alleged to be in

direct conflict with the decision herein are not

actually in conflict vel ied eS ae aN

Point IT. None of the other grounds relied on by

the petitioner is sufficient to warrant the granting

of a writ of certiorari by this Court under its

I oe ea aa eae umm

Point III. Petition for writ of certiorari should be

© pate ea SETS gE Te age An Pannen ae

CITATIONS

Cases :

Lee v. Commissioner of Internal Revenue, 57 F. (2d)

as ee pRA ae Bar L eety eAa e acet B SC

Matter of Lansing, 162 N. Y. 238 _..__.._...._...-

Wear v. Commissioner of Internal Revenue, 65 F.

er ree rer oe On a a eet

Statutes:

Section 240 (a) of the Judicial Code ESAT Shy EN

Section 302 of the Revenue Act of 1926... ss”

a at Se he ee a, te

a a es ”

> ; Ro TOI OP RRS

Dag EU ee

Pe aerssneteri enon erm IS ea ETET RA moms

Re

IN THE

Supreme Court of the United States

OCTOBER TERM, 1934.

Docket No. 268.

GUY T. HELVERING,

Commissioner of Internal Revenue,

Petitioner,

agaist

Kk. MORGAN GRINNELL,

as Executor of the Estate of Annie Stone,

Respondent.

BRIEF FOR RESPONDENT IN OPPOSITION

TO PETITION FOR WRIT OF CERTIO-

RARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE SECOND

CIRCUIT.

Opinions Below.

The opinion of the Circuit Court of Appeals (R. 33) is

reported in 70 F. (2d) 705.) The memorandum opinion of

the Board of Tax Appeals (R. 15-22) is not reported.

Jurisdiction.

The jurisdiction of this Court is invoked under Section

240 (a) of the Judicial Code, as amended by the Act of

ee ee ‘ : = oe a |

‘

~

February 13, 1925. The judgment of the court below was

enfered May 7, 1934 (R. 38).

Statement of the Case.

The statement of the case contained in the petitioner's

brief (pp. 3-5) is satisfactory to the respondent.

ARGUMENT.

POINT I.

The decisions of the Circuit Court of Ap-

peals for the Third Circuit and the Court of

Appeals of the District of Columbia alleged to

be in direct conflict with the decision herein are

not actually in conflict.

The decision of the Circuit Court of Appeals in this

case is based on the law of the State of New York with

respect to the passage of property under a power of ap

pointment. The Cireuit Court of Appeals examined this

law and found that an appointee under a power has the

right of election to accept or refuse the appointment. An

essential element of a completed appointment is that thie

appointee accept, and if he refuse to accept this essential

element is lacking and the attempted appointment is a mul-

lity. This is on the authority of Matter of Lansing, 182

N. ¥. 238.

The remaindermen in the present case specifically and

definitely refused the appomtment. Shortly after probate

of decedent's will they executed and filed with the Surro-

gate’s Court in New York a writing in which they elected

to take the property as remaindermen under their father’s

will and refused to take the property as appointees under

decedent's will. (R. 19.)

AM 6 Peet ms Oe

3

Under these circumstances the conclusion reached by

the Cireuit Court of Appeals is, it is submitted, the only

possible one. Section 302 of the Revenue Act of 1926, pro-

vides that ‘‘the value of the gross estate of the decedent

shall be determined by including the value at the time of

his death of all property, real or personal, tangible or in-

tangible, wherever situated— * * * (f) to the extent

of any property passing under a general power of ap-

pointment exercised by the decedent * * *."' The stat-

ii aatt naif

ute only includes the value of the property in the gross

estate if it passes under the power of appoiutment, that

is, if nothing is done which defeats the effectual exercise

of the power of appointment. Under the law of the State

of New York property demonstrably does not pass under a

So POTN ee

power of appointment where the appointee refuses to ac-

cept the appointment.

Tae nat

This same condition was not present in the cases of Wear

v. Commissioner of Internal Revenue, 65 F. (2d) 665 (CLC, ’

A. 3d, 1933) and Lee v. Commissioner of Internal Revenue, j

ov F. (2d) 399 (App. D. C., 1932). In both of those cases

the appointees were the same persous who would have

taken as remaindermen if the appointments had not been

made. ‘To that extent the cases are similar to the present

case. The appointees did not, however, refuse the appoint-

SPINE LEER Re OE FOES ee

ment and it does not appear from the reported opinions

what the law of the State of Pennsylvania and of the State

of Virginia would have been in the event of a refusal.

The respondent does not concede that the decisions in

the two above mentioned cases are correct. He does sub-

mit, however, that, whether correct or not, these decisions

are not in conflict with the decision of the Cireuit Court

of Appeals for the Second Circuit in the instant case.

Seon es oe OR PL te

4

POINT II.

None of the other grounds relied on by the

petitioner is sufficient to warrant the granting

of a writ of certiorari by this Court under its

Rule No. 38.

The petitioner’s brief (p. 8) alleges that the writ of

certiorari should be granted because ‘tthe decision below

is erroneous and nullifies the manifest purpose of the in

tent of the statute.”” The respondent submits that, on

the contrary, the decision below is based on a conclusion

which is irresistible under the facts of this case.

The petitioner further alleges (Pet. Brief, p. 10) that

‘*the decision below is contrary to and negatives the con

sistent departmental interpretation of the statute and ad

ministrative practice."’ The regulations of the department

have not been consistent in regard to the statute taxing

passage of property under a general power of appointment

because the regulations which were issued in connection

with the Revenue Acts of 1918, 1921, and 1924 were omit

ted in the case of the Revenue Act of 1926. Furthermore,

the decision below is uot contrary to departmental inter-

pretation of the statute as evidenced by the departments

regulations, because the regulations do not cover the situa

tion where the appointee refuses the appointment and thus

by the law of the state where the property is located com-

pletely defeats the appointment.

POINT III.

The petition for writ of certiorari should be

denied.

Bern uanp KNOLLENBERG,

Counsel for Re sponde nt.

CIY9740

RESPONDENTS

BRIEF

pe FILE COPY

IN THE

Supreme Court of the United States

Ocroser Term, 1934

No. 268

GUY T. HELVERING, COMMISSIONER OF

INTERNAL REVENUE,

Petitioner,

v.

E. MORGAN GRINNELL, AS EXECUTOR

OF THE ESTATE OF ANNIE STONE,

Respondent.

On Wait or CerrioraRI To THE Unirep States Crixcuir

Court or APPEALS FOR THE SEcOND Crrculrt.

BRIEF FOR THE RESPONDENT.

J Bernuarp KNOLLENBERG,

Counsel for Respondent.

Lorp, Day & Lorp,

‘S Auten Evarrs Foster,

Harry J. Rupick,

Of Counsel.

November 1934.

ad - = a 5 eee nt he NEM. at ES

_ y MP Ni idic FARE OOO

e ,

SUBJECT INDEX

PAGE

Opinions BeLow ____--___- SEReaey ce La ee 1

SUNN oS Ak chart cas esha amiss cp giannce ao atumeasas anainee 1

SraTEMENT OF THE CaSE ______.________________-__. es

Caine OF See soe ee

ARGUMENT:

I. The property in question did not pass under

a general power of appointment exercised by the de-

cedent and should therefore be excluded from the

ee es ak, Ree ee 3

Il. The construction of the Court below is in ae-

cordance with common sense and with the principle

of decisions in effect at the time the provision in

question was first included in federal estate tax legis-

NID sedrenditsaieiogtanecindandiataadcammmaade asad ate bateiiiea ts

qn

Ill. The real question in the present case is not

‘‘whether the death of the decedent ripened or en-

larged for the survivors’ valuable property rights’’,

but rather whether there has been a passing of prop-

erty under the appointment —~-__-------_----------- 9

IV. It is respectfully submitted that the deci-

sions of other courts which have passed upon this

question are distinguishable or unsound ______-___ 12

V. The Court below correctly held that the law

of New York determines whether there was a pass-

ing of property under the power _-_----__--_______- 16

vey,

vo

VI. The Commissioner’s contention that the Re-

port of the Committee on Ways and Means sustains

his construction of the statute is plainly negatived by

the language of the Report _--------___-_________ 18

PRR EO TARG GR ey Loreen

a ea sci te i i ie ss

il INDEX

PAGE

VII. The Commissioner’s assertion that ‘‘in

other jurisdictions under statutes analogous to the

Federal statute, it is held that property passes under

the exercise of a power notwithstanding the ap-

pointees would have taken in default of exercise of

Ne Oe I inverse cwereee 21

er eat wiibedinineen 23

TABLE OF CITATIONS

CasEs:

Bishop v. Commissioner, 23 B. T. A. 920 ------.. 15

Blackburne v. Brown, 43 F. (2d) 320 (CC. A. 3) 15

Burnet v. Harmel, 287 U. 8S. 103 -_-___- ttt

Burnham v. Treasurer & Receiver General, 212 Maes.

165 _ 21

Chanler vu. Kelsey, 205 U. S. 466 5

Chase National Bank v. United States, 278 U.S

ee apa criecne ee 10

Cone v. lilediones, 31 B. Zs nN Pein No. 104. 18

Crooks v. Harrelson, 282 U.S. 55 8

Goodell v, Koch, 283 U.S. 118 —_-- 16

Haney v. Commissioner, 17 B. T. A. 464 —__- 15

Lee v. Commissioner, 57 F. (2d) 399, (App. D. C.),

certiorari denied 286 U. S. 563 _--.----- 12

eee ae Se) i D 17

Matter of Delano, 176 N. Y. 486, aff’d under name of

Chanler v. Kelsey, 205 U. S. 466 _____________5, 7

Matter of Haggerty, 128 App. Div. (N. Y.) 479, aff ‘d

Es Oe ie OOP wnaeciewedacecus anes 3

Matter of Lansing, 182 N. Y. 238, 74 N. E. 882._ 2, 5,

1

ee

' ie a -

ad)

INDEX ill

PAGE

Matter of Pell, 171 N. Y. 48, 63 N. i. 789 ~ ie

Minis v. United States, 66 Ct. Cls. 58, certiorari de-

Me, OF ee Oe) cae eee 15

Minot v. Treasurer & Receiver General, 207 Mass.

ME aia eudenaituees ay sabe ca eee ee

Montague v. State, 163 Wis.58 2 21

Orr v. Gilman, 183 U. 8S. 278 ___. 17

Pennsylvania Co. for Ins. on Lives, Ete. v. Lederer,

292 Fred. G27 (EB. D. Pa)_.._.........§.. 15

Poe v. Seaborn, 282 U.S. 101 _ eee — 16

Porter v. Commissioner, 288 U.S. 436 10

Root v. Stuyvesant, 18 Wendell (N. Y.) 257 11

Stratton v. United States, 50 F. (2d) 48 (CLC. AL 1),

certiorari denied 284 U.S. 651 - 15

Tyler +. United States, 281 U.S, 497 10, 16

Wear ¢, Commissioner, 65 F. (2d) 665 (C.C. A. 3) 12

STATUTES:

Kevenue Act of 1918, See. 402 (c) i)

Revenue Act of 1926:

See. 301 (26 UL S. CL AL See. 1092, 1095) p

See. 302 (26 U.S. C. A. See. 1094) 2

New York Laws of 1897, See. 220 of Chapter 284 5)

New York Personal Property Law, Sec. 11 3

New York Real Property Law, See. 41 3

MiIscELLANEOUS:

Report of Committee on Ways and Means on Rev-

enue Act of 1918 __ rip etapa alteiptsiaieainipaai eae aaa 4

Treasury Regulations pas a arpansh xsegusc each chen cet

ae

a ms

IN THE

Supreme Court of the United States

Ocrovern Term, 1954

No. 268

GUY T. HELVERING, COMMISSIONER OF

INTERNAL REVENUE,

Petitiner,

‘LP

Kk. MORGAN GRINNELL, AS EXECUTOR

OF THE ESTATE OF ANNIE STONE,

Respondent.

On Writ or Cerrionarnt To THE UNntrep Srares Circuit

Courr of APPEALS FOLK THE SECOND CircUIT.

BRIEF FOR THE RESPONDENT.

Opinions Below.

The opinion of the Cireuit Court of Appeals (R. 33) is

reported in 70 F. (2d) 705. The memorandum opinion of

the Board of Tax Appeals (R. 15-22) is not reported.

Jurisdiction.

The judgment of the court below was entered May 7,

1954 (R. 38). The petition for certiorari was filed August

7, 1934, and was granted October 8, 1934. The jurisdic-

SB --w ee

tion of this Court is conferred by Section 240 (a) of the

Judicial Code, as amended by the Act of February 15, 1925.

Statement of the Case.

The statement contained in the petitioner’s brief (pp.

3-5) is satisfactory to the respondent.

Summary of Argument.

Section 301 (a) of the Revenue Act of 1926 (26 UL.

C. A., see. 1092) imposes an estate tax upon the transfer

of the net estate of every decedent dying after its cnact-

ment, and section 302 (1) of the act (26 U.S. ©. A., see.

1094) (1) provides that, in valuing the gross estate, there

should be included the value at the time of death of all

property ‘*passuig under a generat 'power~ol ‘appurnrinenr!

exercised by the decedent (1) by will.”’

The trust estate here did not pass under the power

of appoimtment for the reason that the appointees elected

in writing to renounce their bequests under the will of

Annie Stone and to take as remaindermen under their

father’s will, and for the further reason that, under the

New York law, which governed the passage of title, **the

attempt to execute the power was not effective, because it

did nothing. The exercise of a power which leaves every-

thing as it was before is a mere form, with no substance.”

Matter of Lansing, 182 N. Y. 238, 243, 74 N. 16. 882, 884.

The real question is not, as stated by the Commissioner

(Brief, p. 7), whether there has been a ‘shifting of the

economic benefits in property’’ or ‘‘whether the death of

the decedent ripened or enlarged for the survivors valuable

property rights’’.* Had the decedent died intestate, the

*This might be the question if the constitutionality of the statute were be-

ing challenged, which is not the case.

ine 8

(‘ommissioner would not have asserted any tax. Yet there

would have been a shifting of economic benefits and a

ripening or enlargement of property rights for the sur-

vivors. This, therefore, cannot be the question at issue.

The real and only question is whether the property

‘passed under’ a power of appointment exercised by the

decedent. Respondent submits that the Court below was

correct in holding that within the meaning of those words

as used in Section 302 (f) of the 1926 Act, where the ap-

pointees reject the appointment, there can be no passing

of property under it.

Argument.

\' LHe property in question did not pass under a gen-

eral power of appointment exercised by the decedent and

should therefore be excluded from the decedent’s taxable

estate.

There is but a single question to be determined on

this appeal:

Did the principal of the trust fund created by the

will of John O. Stone who died in 1876 ‘‘pass under a ¢en-

eral power of appointment exercised by’? Annie Stone?

The will of John Stone created a trust fund, the income

of which was to be paid to Annie Stone during her life.

On her death, the principal was to pass to her appointees,

or in default of appointment to her issue and in default

of issue to her next of kin. Annie Stone’s next of kin

thus acquired a vested remainder in tie property subject

to be divested by the exercise of the power in-favor of

strangers. (Matter of Haggerty, 128 App. Div. 479, aff’d

194 N. Y. 550, 57 N. E. 120; New York Real Property Law,

Sec. 41; Personal Property Law, See. 11.)

4

When Annie Stone died, she appointed the property to

her two sisters, Ellen J. Stone and Sarah J. Grinnell, who

were her only next of kin. But the sisters rejected the ap-

pointment by executing and filing an instrument of clee-

tion whereby they renounced their right to receive said

property under the fifth paragraph of decedent’s will and

elected to take such property under the fifth paragraph

of the will of John O. Stone.

The appointees having rejected the decedent’s appoint-

ment, there is no possible ground for holding that the

property passed under such appointment, and the Court

below so held.

The respondent challenges the Commissioner’s state-

ment (Brief, p. 8) that the instant case ‘falls squarely

within the provisions of the sfatute’’. The statute pro-

vides—See. 302 (f)—that in valuing the gross estate there

shall be ineluded the value at the time of death of all

property ‘Spassing under a general power of appointment

exercised by the decedent (1) by will’. The respondent

concedes of course that the power of appointment held

by the decedent was a general one. He also coneedes that

the decedent exercised it. But he denies that the prop-

erty passed under it. The decedent exercised the power

in favor of her sisters, but they were not obligated to ae-

cept the appointment. They specifically renounced it and

refused to take the property under it. To say that prop-

erty passes under an appointment which is specifically re-

jected is to stretch the elasticity of language to the burst-

ing point.

4)

Il. The construction of the Court below is in accor-

dance with common sense and with the principle of deci-

sions in effect at the time the provision in question was

first included in federal estate tax legislation.

The Commissioner concedes that if the decedent had

died intestate or had refrained from including in her will

any mention of the appointment, the property in ques-

tion would not be included in the taxable estate. He fur-

ther admits, as the facts require him to admit, that the

appointment was to the very persons who would take

(and in the same proportions) as remaindermen under

their father’s will, in default of appointment. The Com-

missioner’s position is therefore in effect that. the super-

fluous attempted exercise of the power determines the tax-

ability of the property. This is an obviously unreasonable,

not to say absurd, result, which the construction of the

Court below avoids. This Court might well be tempted to

depart from the natural meaning of the languavze of the

statute, if necessary, to avoid such a result, but it is in-

conceivable that it will modify it to produce such a result.

The Respondent's construction of Section 302 (ff) is

further supported by two important Court decisions in

force at the time a similar provision (Section 402 (ce)

of the Revenue Act of 1918) was first included in the

federal estate tax law. These decisions are Matter of

Lansing, 182 N. Y. 238 (1905), and Matter of Delano, 176

N. Y. 486 (1907), (affirmed under the name of Chanler

v. Kelsey, 205 U. S. 466), cases which arose under See-

tion 220 of Chapter 284 of the New York Laws of 1897

reading as follows:

» Pa ¥

‘‘Whenever any person shall exercise

the power of appointment derived from any dispo-

6

sition of property made either before or after the

passage of this act, such appointment when made

shall be deemed a transfer, taxable under the provi-

sions of this act’? (the New York Transfer Tax

Act).

In the Lansing case, counsel for the State of New

York maintained that, under the provisions quoted

above, the exercise of a power of appointment sub-

jected the appointed property to the New York trans-

fer tax even though the property was appointed to the

very persons who weuld have taken as remaindermen any-

way. The New York Court of Appeals rejected this con-

tention, saying (pp. 248-7):

‘Her’? (the appointee’s) ‘rights were fixed by

the will of her grandfather, and unless changed pur-

suant to its provisions her estate in expectancy would

become an estate in possession upon the death of her

mother. While the situation was subject to change

under the power of appointment, no change was made.

Although the power was exercised in form, her title

was perfect without it and she derived no benefit from

it. The power was to ‘dispose of the remainder’ and

the remainder was not disposed of but continued where

it was. The attempt to execute the power was not

effective, because it did nothing. The exercise of a

power which leaves everything as it was before is a

mere form, with no substance.

“The power as it might have been exercised would

have left Mrs. MeVickar with no title at all, but as it

was exercised it left her the same title that she had

before. It gave her nothing and took nothing away

from her. She is not forced to claim through the see-

ond clause of her mother’s will, for she took under

the will of her grandfather. She had the right of

election and could refuse to take under the appoint-

ment and still hold the property, for her title was as

good without as with the exercise of the power. Her

attitude in this proceeding, both now and before the

surrogate, is that she took wholly from her grand-

father and in no respect thrpugh the action of her

mother. '

* * ’ * ‘ . 7 * *

“We pass without serious discussion that part of

the statute which provides, in substance, that the fail-

ure or omission to exercise a power of appointment

subjects the property to a transfer tax in the same

manner as if the donee of the power had owned the

property and had devised it by will. * * * because

as we held in the Pell case such an act imposes no

direct tax and is unconstitutional since it diminishes

the value of vested estates, impairs the obligation of

contracts and takes private property for publie use

without compensation.’’

In the Delano case, supra, the Court had sustained the

State’s position that where the donee of the power ap-

pointed the property to persons other than those who

would have taken the property as remaindermen (or who

would have taken in different proportions or subject to

different conditions), the property so appointed was prop-

erly included by the State in the decedent’s taxable es-

tate. But the Court, in the Lansing case, found no diffi-

culty in reconciling the two decisions, because in the

Delano case the exercise of the power of appointment was

the effective source of passing the property to the ap-

pointee or appointees, whereas in the Lansing case it was

not.

In the light of these decisions it is fair to assume that

Congress meant precisely what it said in using the words

:

Tr ee Be ete

| center gtneedem nae

‘*property passing under a general power of appointment”’,

namely, that property subject to a general power of ap-

pointment is to be included in the taxable estate if ‘ pass-

ing under’’ a power exercised by the decedent, but not

if, beeause of default in appointment or because the ap-

pointment is superfluous, it) passes under the original

donor’s will or deed.

Under the construction contended for by the Commis-

sioner, the mere exercise of the power would be sufficient

to bring the property within the application of the stat-

ute. But unless the statute is held to refer to an effce-

tual exereise of the power, the words ‘passing under”

become meaningless. If Congress had intended to make

the mere exercise of the power the basis for the tax, the

statute would no doubt have read

‘Property subject to”’” [instead of ‘‘ passing under’’ |

‘fa general power of appointment exercised by the

decedent by will’’.

In the instant case the decedent’s exercise of the power

was rendered completely ineffectual by her sisters’ renun-

ciation of her appointment. ‘*The attempt to execute the

power was not effectual because it did nothing’’. Matter

of Lansing, 182 N. Y. 238. It ean hardly be asserted with

any show of reason that property passes under a nullity.

The practice of extending the language of tax statutes

by implication beyond commonly accepted limitations has

never had the approval of this Court. In Crooks v. Iar-

relson, 282 U.S. 55, this Court said:

‘‘Courts have sometimes exercised a high degree of

ingenuity in the effort to find justification for wrench-

ing from the words of a statute a meaning which liter-

ally they did not bear in order to escape consequences

- . . CRE ak tin

a eauasoms

)

thought to be absurd or to entail ereat hardship. But

an application of the principle so nearly approaches

the boundary between the exercise of the judicial

power and that of the legislative power as to eal]

rather for great caution and circumspeection in order

to avoid usurpation of the latter.

* * * * * a . ad

“Finally, the fact must not be overlooked that we |

are here concerned with a faxing act, with regard to ;

which the general rule requiring adherence to the let-

ter applies with peculiar strictness. In United States

v. Merriam, 263 U.S. 179, 187, 188, 44S. Ct. 69, 71, 68

L. Kd. 240, 29 A. lL. R. 1547, after saying that ‘in stat-

utes levying taxes the literal meaning of the words

employed is most important for such statutes are not

to be extended by implication beyond the clear import

of the language used,’ we quoted with approval the

words of Lord Cairns in Partington v, Attorney-Gen-

eral, L. Rt. 4 I. L. 100, 122, that ‘if the crown, secking

fo recover the tax, cannot bring the subject within the

letter of the law, the subject is free, however apparent-

ly within the spirit of the law the case might otherwise

appear to be. In other words, if there be admissible

in any statute what is called an equitable construction,

certainly such a construction is not admissible in a

taxing statute, where you can simply adhere to the

words of the statute’.”’

III. The real question in the present case is not

“‘whether the death of the decedent ripened or enlarged

for the survivors’ valuable property rights’’, but rather

whether there has been a passing of property under the :

appointment, ;

The Commissioner appears to rely heavily on the fol-

lowing argument set forth in his brief, page 12: 4

‘“‘The estate tax is imposed upon the power to

Hi

10

transmit or the transmission of property at death and

the question in every case is not whether there has

been a transfer in a strict sense but whether the

death has brought into being or ripened for the sur-

vivor (the recipient of property) valuable rights not

theretofore possessed. ‘The tax is not limited to trans-

fers of property passing direetly from the decedent

but includes as well property the completed transfer

of which depends or relates to the death of the dece-

dent. T'yler v. United States, 281 U.S. 497, 503, and

Chase Nat. Bank v. United States, 278 U.S. 827. See

also Porter v. Commissioner, 288 U. 8S. 4386.”’

This argument merely confuses the issue. The respon-

dent’s position in the present case is not, as assumed by

the Commissioner, predicated upon the proposition that

the federal estate tax is imposed exclusively upon the

transfer of property owned by the decedent and passing

directly from the decedent at death. The three cases cited

by the Commissioner establish clearly that in certain cases

the tax may be and is exacted with respect to property not

owned by the decedent at the time of his death, or not

passing directly from him. But in these cases the statute

plainly imposed the tax and the point at issue—in thie

Chase ease, the inclusion in the estate of the proceeds of

insurance policies over which the decedent had a power

of control; in the Tyler case, the inclusion of properly

owned by the decedent and his spouse as tenants by the en-

tirety; and in the Porter case the inclusion of property

transferred by the decedent subject to a power of altera-

tion,—was not the construction of the statute, but its con-

stitutionality. As the Court below observed in its opin-

ion (R. 22): '

‘*But in each of those cases (Tyler and Chase Nation-

al Bank) the statute expressly covered the subject

matter sought to be taxed and the question was not

one of interpretation, but of constitutional power.’’

APRG

1]

In the instant case, the respondent is not challenging

the validity of the statute; he is merely contesting the

Commissioner’s interpretation of it. However, it should

be borne in mind that the Chase National Bank case, the

Tyler case, the Porter case and other cases upholding the

ralidity of estate taxes imposed with respect to property

not owned by the decedent at the time of his death or not

passing directly from him, all involved property which

at some prior time had belonged to the decedent. No case

has gone so far as to hold that the tax applies with respect

to property which was never owned by the decedent. In

the instant case, the property was never owned by the dece-

dent because under the laws of New York, at least, a gen-

eral power of appointment exercisable by will is not equiva-

lent to ownership. Root v. Stuyvesant, 18 Wendell 257,

268; Matter of Lansing, supra."

There is a very good practical reason for distinguish-

ing between property which is or was owned by the dece-

dent, and property which was never own.q by the dece-

dent, and that is the possibility of not being able to en-

foree the tax in the latter “ase. For example, if in the

instant case, the decedent Annie Stone had di‘d leaving

no property of her own, there would be no means of en-

forcing the tax with respect to the property subject to

the power of appointment. Her sisters, having taken the

property under the will of their father, could not be held

liable for any tax on the decedent’s estate. The property,

of course, would not form a part of the decedent’s estate

for administration purposes. It should not be inferred

*If the possession of a power of appointment were the equivalent of own-

ership of property, the property covered by the power would, indeed, be sub-

ject to federal estate tax; not, however, under sub-section (f) relating to trans-

fers under a power of appointment, but under sub-section (a) of Section 302 re-

lating to the taxation of ordinary property interests passing on the death of

the deceased, is

i

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‘ PORTS orm M ENE peor Det Mate > Sa a

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12

that Congress intended to enact a tax the collection of

which could not be enforced.

IV. It is respectfully submitted that the decisions of

other courts which have passed upon this question are

distinguishable or unsound.

The reasoning of the Courts tn the cases Wear v. Com-

missioner, 65 BF. (2d) 665 (C. C. A. 8rd), and Lee v. Com-

missioner, 57 F. (2d) 3899 (App. D. ©.), certiorari denied,

286 U.S. 568, is apparently in coutliet with the decision of

the Court below in the present case, although the Wear

and Lee cases may be distinguished on the ground that in

neither of those cases does it appear that the donees re-

jected the right to take under the appointment and elected

to take under the will of the donor.*

The Commissioner (Brief, p. 15) quotes from the Wear

opinion as follows:

“Death, with an exercise of the power in their

favor, was the event that wrought the change. Then

their estate, theretofore contingent upon the non-exer-

cise of the power against them, became vested, like

the interest of a beneficiary of a policy of life in-

surance becomes vested upon the death of the insured

without exercising a reserved right to change the bene-

ficiary, the value of which must, under the cases, be

included in the gross estate of the insured for pur-

poses of taxation. * * * The generating source of

the change was the death of the donee without action

_~—— =

*Moreover, in the Lee ease, the appointment effected a different distribu-

tion than would have resulted from non-exercise of the power: Had there

been no exercise of the power, the decedent’s brother would have received the

property in fee. The decedent, by his will, provided that his widow

should have a life estate in the property and that his brother should have

the property only after the widow’s death. The decedent’s will thus cut

down the estate which the brother would otherwise have received, with the

result that, in the Lee case, the property in part passed under the exercise of

the power.

a ne

13

adverse to them, That, too, was the generating source

of the tax. * * *”’ [Italics Commissioner’s. ]

It is respectfully submitted that the Court’s reasoning

in the Wear ease is not sound. The fallacy lies in the last

quoted italics:

‘The generating source of the change was the death

of the donee without action adverse to them. That,

too, was the generating source of the tax.’’

This statement, if correct, would justify the imposition

of the tax even if the decedent had died intestate; and

for the imposition of such a tax, the Commissioner himself

concedes that the statute provides no basis whatever.* In

the instant case death was the event that wrought the

change—not ‘‘death, with the exercise of the power in their

favor’’. The attempted exercise of the power was a nullity,

and, as stated above, death alone would not be sufficient to

form a basis for the tax.

The Court’s analogy to life insurance policies is not

apt, for the reason that the Court is comparing property

owned by a decedent with property not owned by a dece-

dent. Thus, if a decedent had a power of control, e. g.,

right to change beneficiary, over policics on his life ay not

taken out by him, his death would not give rise to any estate

tax on the proceeds of the policies. Yet it would be the

event upon which the property would pass freed of the

possibility of exercise of the power of change.

As for the Lee case, the Court in that case declared that

““* * * the exercise by the donee, Robert E. Lee, of

the power of appointment vested in him, was the ‘ gen-

*Such a tax, in so far as it related to powers conferred prior to its enact-

_ ment might even be unconstitutional. Matter of Pell, 171 N. Y. 48, 63 N.

E. 789,

|

14

erating souree’ of the title of Mary M. Lee for her life

or widowhood, and of George Bolling Lee in remain-

der, of the moiety held by the donee in the estate of

W. H. F. Lee.’’

(This language is quoted in the Commissioner’s Brief,

p. 16.)

Clearly, the exercise of the power in the Lee case was

the ‘generating source’’ of the life estate of Mary A. Lee,

for without it, as indicated in the footnote on page 12 here-

in, she would have received no interest in the property; it

would have passed in fee to George Lee. Whether the ex-

ercise of the power was the ‘‘generating source’’ of George

Lee’s remainder interest is questionable, but, in any event,

the Court’s reasoning is obviously inapplicable to the pres-

ent ease, for here the decedent’s exercise was rendered com-

pletely ineffectual by the refusal of her appointees to take

under it.

This is clearly recognized in the opinion of the Court

below in the present case:

4% + *

It is coneeded that the revenue act would

not have imposed an estate tax upon the transfer if

the remainder had vested in possession without an at-

tempted exercise of the power of appointment. There-

fore, it hardly seems right to say that: ‘The gener-

ating source of the change was the death of the donee

without action adverse to them. That, too, was the

generating source of the tax.’ Such reasoning would

require the imposition of a tax under the act even

though Annie Stone had died intestate, though the

statute furnishes no warrant for taxation under such

circumstances. The argument of the opinion in Wear

v. Commissioner is concerned mainly with the con-

stitutional authority of the Government to tax prop-

erty where the source of the transfer was the death

15

of the donee of a power ‘without action adverse’ to

persons having interests derived under the will of the

donor. We need not differ with the conclusion that it

might be taxed, but we think it was not taxed by an

act directed only at property ‘passing under a general

power of appointment’ because there was no such

property here. The appointees not only declined to

take the gift, but the appointment when exercised in

favor of the same persons who would take irrespec-

tive of it was ‘a mere form with no substance’ which

the law of New York that regulates the passage of

title has refused to recognize. Matter of Lansing, 182

N. Y. 238, 243, 74 N. FE. 882. In a tax statute espe-

cially, such a doubtful imposition involving as it does

an extension of the statute to cover powers of ap-

pointment, having no effective import, should not be

sanctioned. Crooks v. Harrelson, 282 U. S. D9, 51 S.

Ct. 49, 75 L. Ed. 156.”’

As for“the other eases cited by the Commissioner

(Brief, pp. 12, 16 and 17), (Blackburne v. Brown, 43 F, (2d)

3820 (C. C. A. 3); Stratton v. United States, 50 F. (2d) 48,

(C. C. A. 1), certiorari denied 284 U. S. 651; Minis v.

United States, 66 C. Cls. 58, certiorari denied, 278 U. S.

697; Pennsylvania Co. for Ins. on Lives, Ete. v. Lederer,

292 Fed. 627 (HK. D. Pa.); Bishop v. Commissioner, 23 B.

T. A. 920, and Hancy v. Commissioner, 17 B. T. A. 464), it

does not appear in any of them, with the exception of the

Hancy case (which the Board followed in deciding the

present case), that the property was appointed to the same

persons, and in the same proportions, as would have taken

in default of the exercise of the power. Neither does it

appear in any of them—except the Hancy case—that the

appointees rejected the appointment.

=

ERENT gcd

16

V. The Court below correctly held that the law of

New York determines whether there was a passing of prop-

erty under the power.

The Commissioner argues (Brict, p. 10) that whatever

may be the law of New York as declared in the Lansing

‘ase, supra, the New York law is not controlling in the

present case, and cites in support of the argument Burnet

v. Harmel, 287 U.S. 103 and Tyler vy. United States, supra.

These cases, far from supporting the Commissioner's

position on this point, establish its unsoundness. The Tyler

case involved the constitutionality of the statute in so far

as it requires the inclusion in the gross estate of the entire

value of property held as tenants by the entirety. This

Court said, in upholding the constitutionality of the stat-

ute:

‘“The decisions of the courts of Maryland and Penn-

sylvania follow the common law and are in accord in

respect of the character and incidents of tenancy by the

entirety. In legal contemplation the tenants constitute

a unit; neither can dispose of any part of the estate

without the consent of the other; and the whole con-

dirues in the survivor. In Maryland, such a tenancy

may exist in personal property as well as in real estate.

These decisions establish a state rule of property, by

which, of course, this court is bound. Warburton v.

White, 176 U.S. 484, 496.’’ (Italics ours.)

As indicated by the above quotation, the general rule is

that, in the absence of provision to the contrary, the appli-

cation of the federal tax laws follows the rules of prop-

erty in the various States, even though these rules are not

uniform. Thus in community property States,* the income

*Poe v. Seaborn, 282 U. S. 101 (1930) (Washington); Goodell v. Koch,

283 U. 8S. 118 (1930) (Arizona).

17

from the husband’s personal services is taxed in equal

shares to the husband and wife, although in non-community

property States, the entire income from his personal ser-

vices is taxable to the husband.*

In the Tyler case, the character of the tenancy was

established by the law of Maryland. If under the law of

the state, the original conveyance of the property in ques-

tion had created a tenancy in common instead of by the

entirety, only a part of the value “of the property would

have been taxed. Thus the Tyler case, instead of being

authority for the position that the State law is immate-

rial, recognizes the principle that such law is controlling

in cases of this nature.

In the Harmel case, this Court also recognized the prin-

ciple when it said:

“State law may control only when the federal tax-

ing act by express language or necessary implication,

makes its own operation dependent upon the state

law.’’

(Quoted on p. 11 of Commissioner’s Brief.)

When the statute refers to property passing ur er a

power of appointment it at least by necessary implication

if not by express language, makes its own application de-

pendent upon the question of whether there has been a

assing under the state law. If under the state law the

sedi appointment were ineffective, it could not be

maintained that there was a passing of property under it.

The descent and distribution of property of decedents

is a matter subject to the exclusive jurisdiction of the states

(Orr v. Gilman, 183 U. 8. 278), and the laws of the state

*Lucas v. Earl, 281 U. 8. 111 (1930).

Grrr Be es deh erectile. Re ee ae ee a tad . . —

where the situs of the property is located, should, in the

absence of clear-cut language by Congress to the contrary,

control in determining whether there has been a passing

of property. This principle was very recently applied by

the Board of Tax Appeals (which decided the present case

against the respondent herein) in Cone v. Commissioner,

31 B. T. A. Pamphlet No. 104. There the decedent had a

general power of appointment. He disposed of his estate

by a residuary clause without any mention of the power

or any specific bequest of the property covered thereby.

The Board held that under the law of Illinois where the

property had its situs, the residuary bequest was not an

exercise of the power, and theretore the property could

not be included in the gross estate.

VI. The Commissioner’s contention that the Report

of the Committee on Ways and Means sustains his con-

struction of the statute is plainly negatived by the lan-

guage of the Report.

The Commissioner on page 13 of his Brief, asserts that

the Report of the Committee on Ways and Means on the

Revenue Act of 1918 (which was the first statute expressly

requiring property passing under a general power of ap-

pointment exercised by will to be included in the donee’s

estate) shows that Congress intended that property over

which the decedent had a general power of appointment

should be subject to estate tax if the power was exer-

cised even though the property did not pass under such

exercise.

Assuming for the sake of argument that the present

case is one in which the language of the statute is so am-

biguous as to warrant a resort to the Committee Report

19

for guidance, the language of the Report, far from sus-

taining the Commissioner’s construction, supports the

position of the Respondent that the tax applies only to

property which passes under the exercise of the power;

and that the naked, ineffective exercise of the power does

not give rise to the tax. The language of the Committee

Report is as follows (pp. 21-22):

“There has also been included in the gross estate

the value of property passing under a general power

of appointment. This amendment as well as that pre-

ceding is for the purpose of clarifying rather than

extending the existing statute. <A person having a

general power of appointment is, with respect to dis-

position of the property at his death, in a position not

unlike that of its owner. The possessor of the power

has full authority to dispose of the property at his

death, and there seems to be no reason why the privi-

lege which he exercises should not be taxed in the same

degree as other property over which he exercises the

same authority. The absence of a provision including

property transferred by powgr of appointment makes

it possible, by resorting to the creation of such a pow-

er, to effect two transfers of an estate with the pay-

ment of only one tax.’’ (Italics ours.)

From the above, it appears that ‘‘there has also been

included in the gross estate the value of property passing

under a general power of appointment”’ and that the para-

mount purpose of Congress was to prevent ‘‘two transfers

of an estate with the payment of only one tax’’. The pres-

ent case clearly falls outside the language of the Report,

for the attempted second transfer was rejected by the

transferees who claimed the right to take and in fact took

under the original deed. What happened in the present

case was exactly the same as if John Stone, the decedent’s

een Se

a a

_ Pe Prt ape, .

20

father, had left the property to the decedent for life, with

remainder to her next of kin. Could it be maintained in

such case that there were two transfers?

Assuming that Congress may impose a tax on the mere

possession of a power of appointment, regardless of its

exereise or effective exercise, the fact remains that Con-

eress has not seen fit to do so. Had the intent of Congress

been as the Commissioner asserts it to have been, is it

not reasonable to suppose, as has heretofore been pointed

out (p. 8), that Congress would have substituted for

, ’”’

the words ‘‘passing under’’ the words ‘‘subject to

There is no more basis for emasculating the meaning of

the words ‘‘ passing under”’ than there would be for ignor-

ing the word ‘general’’, and making the statute include

all powers, whether general or special. Indeed, an effee-

tual exercise of a special power would achieve two trans-

fers of an estate; yet, clearly only one tax would be pay-

able, because Congress confined the statute to general

powers.

The Commissioner also urges here, as he did in the

Court below, that, because the Treasury Regulations

promulgated under the 1918, 1921 and 1924 Acts contained

‘property appointed under a general

a provision that

power should be included in the estate of the appointor,

although the persons to whom the appointment was made

would have taken the property had the power not been

* * * and because Congress subsequently

exercised

re-enacted the statute as it originally stood, Congress must

have intended the tax to apply to a situation of the kind

presented in the case at bar. The argument is without

force, however, first, because the Treasury Regulations

have never provided that the tax shall apply to a case,

like the present, where the exercise of the power is ren-

21

dered inetfective by the appointee’s renunciation of the ap-

pointment; and second, because the rule of construction

relied on is not applicable to the present case since, un-

der the very Act (the 1926 Act) herein involved the De-

partment omitted from the Regulations the sentence

quoted above—thus indicating an abandonment by the De-

partment of its prior position. This contemporaneous con-

struction of the 1926 Act by the Department which tends

to sustain respondent’s construction of the statute, is en-

titled to great weight.

VII. The Commissioner’s assertion that ‘‘in other

jurisdictions under statutes analogous to the Federal Stat-

ute, it is held that property passes under the exercise of

a power notwithstanding the appointees would have taken

in default of exercise of the power’’ is erroneous,

The Commissioner asserts on page 9 of his brief:

‘In other jurisdictions under statutes similar to

that of New York and analogous to the Federal statute

it is held that property passes under the exercise of

a power notwithstanding the appointees take from the

donor and would have taken in default of exercise of

the power.’’,

and cites in alleged support of this assertion the following

cases:

Minot v. Treasurer & Receiver General, 207 Mass.

D88;

Burnham v. Treasurer & Receiver General, 212

Mass. 165;

Montague v. State, 163 Wis. 58.

Analysis of the decisions cited show that they do not

sustain the Commissioner’s assertion.

The Minot case sustained ae constitutionality-of a pro-

vision in the Massachusetts inheritance tax law that:

‘*Whenever any person possessing such a power of

appointment so derived shall omit or fail to exercise

the same * * * a disposition of property

shall be deemed to take place to the extent of such

omission or failure.’’

5S

The Burnham case held that the above-quoted provision was

intended to cover special as well as general powers of ap-

pointment and that as so construed, the statute was con-

stitutional, following the Minot case. In the Montague

ease, which involved a statute of Wisconsin containing a

provision substantially the same as that in the Massachu-

setts statute quoted above, the Wisconsin court held that

the provision was intended to cover special as well as gen-

eral powers and that as so construed the statute was con-

stitutional.

It will be seen from the above that the Massachusetts

and Wisconsin statutes which the Commissioner describes

as being ‘‘analogous to the Federal statute’’ are vitally

different from the federal statute and that the Massachu-

setts and Wisconsin cases cited by the Commissioner do not

in the least sustain his position in the present case. The

defect in the Commissioner’s argument is that he in effect

asks this Court to interpolate in the federal statute provi-

sions which were inserted by the legislature in the Massa-

chusetts and Wisconsin statutes, whereas the very omis-

sion of these provisions in the federal statute shows that

Congress had a different intent. Congress provided and

must be assumed to have intended that under the federal

act property subject to a power of appointment shall be

included in the taxable estate of the decedent only if the

oo

pay |

property passed under the exercise of the power of ap-

pointment. The inevitable inference is that in other cases

property subject to a power of appointment is not to be

included in the taxable estate. The Court below so held,

and this dgcision was, it is submitted, sound.

Conclusion.

The property in question did not pass under a power of

appointment exercised by the decedent, and should there-

fore be excluded from the taxable Estate. The decision

of the Court below should be affirmed.

Respectfully submitted,

Bern arp KNOLLENBERG,

Counsel for Respondent.

Lonp, Day & Lorn,

ALLEN Hvanrs Foster,

Harry J. Rupicx,

Of Counsel.

November 1934.

CPY9945