Respondents Brief in Opposition — Morgan v. Commissioner

a No. 210 : zs

Inthe Supreme Court of the United States

OctoBER TERM. 1939

J. Eart. Moreax, Executor oF THE Estatr op

BiizABETH S. Morcan, Deckasep, PETITIONER

v.

(ivy T. Hetvertnc, ComMISSIONER oF INTERNAL

REVENUE .

ON PETITION FOR A WRIT OF CERTIORARI TO. THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SEVENTH

CIRCUIT ;

BRIEF FOR THE RESPONDENT: IN OPPOSITION

a INDEX

Opinions below. . tii ne icaadea dines webencedseborses 1

PEs oo cc cccccccoevescteces saanenedeueeseebeosnes 1

Question presented. -......-*..---.------------------- hou 2

Statute and sepeatens involved Guisewebuwesone beasveeueueee 2

ee age suweeeen advéséeguqseeneaned 3

IN. occ vocecesdecen«se ~weescucbudeuduveusenabewadss 7

CIO. 6 ccs conccceccssesevectestbocceadseneeveuneue 14

CITATIONS a

Cases: : ee

Blackburne v. Brown, 43 F. (2d)°320.......-.----- wenenet -

Blair v. Commissioner, -300 U. 8. 5... .------------ qroce 12

Burad v. Horadl, FEE DG. BH. WBBccccocccccctccccsceesese 12

Cawker v. Dreutzer, 197 Wis. 98--. - -- beqecctececcsovece . 9

Freuler v. Helvering, 291 U. 8. 35... ---.---------------- 12

Fidelity-Philadelphia Trust Co. v. McCaughn, 34 F. (2d) 600,

certiorari denied, 280 U. 8. 602. - - -- Voccoqecccesecess Fil

Helvering v. Grinnell, 204 U. 8. 153.......----.--------- 14

Lang v. Commissioner, 304 U: 8. 264... .-.- BEES a 12

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

5 2 Se ee Seer <edicdivatadtaaedeamaedl 7,14

Leser v. Burnet, 46 F. (2d) 756... --- « acaehuniaataaieinadnan 7, 9,10

Loh 2. MagiOGS G.. ©. WBicccvcccctteececgpcccesedce «

McFee'y v. Commissioner, 296 U.S. 102........------ rx 8

Morrissey v. Commissioner, 206 U. 8. 344.....-----.----- 8

Poe v. Seaborn, 282 U. 8. 101...-.....-- aca halal . 12

‘Sharp v. Commissioner, 303 U. 8. 624......------.----- 12

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

SES De B Geb cecccccccdacececdecessedécésvceceseues .

__—Whitlock-Rose. v. MeCaughn, 21 F. (2d) 164 ecmemee 7, 9, 10, 11

Statutes: +2

Revenue Act of 1926, c. 27, 44 Stat. 9, inet by Sec.

803 (b) ‘of the Revenue Act of 1932, c. 209, 47, Stat. 169:

Sec. 302 (U. 8. C., Titde 96, Bes. 411). habuanseil ecsews 2

Statutes of Wisconsin, 1937:.

ie, BEE. Lwcccdrenscoecccvasedsessesesossoehes 8

Bh, GE chacundLicceccéacesecseeesoneeens iealeie 8

Misvellaneous:

Griswold,’ Powers of Appointment and the, Federal Estate

Tax, 52 Harv. L. Rev. 929, 942.......-.------------- - 12

Treasury Regulations 37, Art. 30......-. évecepeces dence 7

Treasury Regulations 80, Art. 24...........------------ 3,7

171417—39 ah (I)

©

Ynthe Supreme Gourt of the Wnited States

ae

-OcTOBER Term, 1939

No. 210

J. Ear Morcan, ExecuTor OF THE ESTATE OF

ELIZABETH S. MorGAN, DECEASED,. PETITIONER

vz.

Guy. T. HevErtno, ‘COMMISSIONER OF ‘Yoevsnat,

REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SEVENTH

CIRCUIT

i BRIEF FOR - RESPONDENT uaa

_* rai |“ OPINIONS BELOW

| The opinion of the Board of Tax Appeals (R.

91-96) i is reported in 36 B. T. A. 588. The opinion

of the Circuit Court of Appeals (R. 112-122) is

reported i in 193-F. (2d) 636.

TUREESTESOS

The judgment of the Circuit Court of Appeals

was entered April 22, 1939. (R. 124.) Petition ©

for writ of certiorari was filed July 19, 1939. The

| (1) Z

2

ie _jurisdiction of this Court is invoked under Section

240: (a) of: the Judicial. Code, as amended by the |

Act of February 13, 1925. Teeth er a,

—

=

ape ‘Quzstion ‘PRESENTED

"Whether certain powers of a exer-

" cised by the decedent by her last will were general

‘ powers of appointment within the meaning of Sec-

tion 302 (f) of the Revenue Act ‘of 1926, as -

/- amended. ‘

- STATUTE AND epee es INVOLVED

: ‘Raverive Act of 1926, ce. 27, 44 Stat. 9, as amended

_. _ by See. 803 (b) of the Revenue Act of 1932, c. 209,

_ “47 Stat. 169: .

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—

‘* 7 = Ce iio

(f ) To the extent of any property passing

under a general power of appointment ex-

- ereised by the decedent. (1) by will, or (2)

_ - by deed executed in. contemplation of or in-

* tended to take effect in possession or enjoy*_

ment. at or after his death, * * *

except in case of a bona fide sale for an.ade-

' : quate and full consideration in money or

. . money’s worth; *°* *. (U. 8. °C. Title

/:-26, See. 411.) - . PN as:

, * ‘*

* . . : a - @

eo ee |

Treasury Regulattoris 80 (1934 Ed.) :

ART.. 24. Property passing under general

power of appointment.—The value of all

property passing under a general power of |

appointment must be included in the~gross

__estate of ‘the person exercising the power

(known as the donee, or appointor) if ‘the

power is exercised by ‘will and such donee _

_ dies after the enactment of the Revenue Act

of 1918. * 7

- Only property passing ‘oaks a general

_ power should be included. Ordinarily a gen-

. eral power is one to appoint to any‘person or

persons-in the discretion of the donee of

-the power. If thé donee.is required to ap-

eS point to a Specified person or class of per-

‘gons, the property should not be included in

his gross estate. * * *

Go -¢ | STATEMENT

“The facta a as stipulated ( R, 75-78) and as gs :

by the Board (R. 91-93), may be summarize

, follows:

as

The decedent, Elizabeth Ss. SS, died testate._

on: -May 3, 1933, a resident of the-State of Wis-

—eonsin, and petitioner is the ‘duly appointed”

executor of her last will and testament. Isaac

‘Stephenson, decedent’s father, died. testate on-

March ‘15, 1918, likewise a resident of the State of

, Wisconsim By his last will and testament and

several codicils thereto, he conveyed certain prop-

-ebty in trust for: the. benefit of his children. The —

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children were to receive the income annually and:

. a certain portion of the principal at the end of

four, eight, and twelve years after his. death, and _

the entire remaining principal at the end of six-

teen: years-after his death, provided they. were liv-

‘ing at the end of each of the four-stated periods. .

(R. 91-92.) _ The trust estate was divided into nine

parts, part numbered five. being conveyed in trust

for decedent’s benefit pursuant to cig following

-provisions (R. 92): 3

Item Fifteens.I. direct said trustees to |

pay to my daughter Elizabeth S. Morgan |

annually the net ‘annual income from part

rilumbered five (5) into which my trustees

. shall have divided my estate * * *,

I give, devise and bequeath to the ap-

pointee or appointees of my daughter Eliza-

-beth S...Morgan by -her last will and

testament all property of any nature and

kind in the hands of my said trustees at.

the time of her death constituting said part -°

five: (5): at"

The trust further provided that, shold decedent

die without exercising the -power, then whatever

portion of the principal remained should go to her

“issue, and, in the event of-her death without. issue, |

_ then such remaining portion of. the. principal

_ should be equally . divided and distributed among

the other remaining parts into which the estate.

_Wwas divided. _(R. 92.).. |

o

ae

Shortly betore his death Isaac iia

executed a deed of trust to continue for 21 years -

after his death. The trust property subject to this

. deed ‘of trust was also divided into parts. and one’

ee allocated to each beneficiary. (R- 113.) The

following provisions of the deed of trust related to

decedent (R. 18-19, 92-93) : cask

7. After my death. and during the con-

tinuance of the trust hereby created, said -

Trustees shall pay annually to my daughter ;

Elizabeth S. Morgan the net annual income

' from said part numbered five (5). (~~

- If my daughter Elizabeth S. Morgan’shall

be living at the time of the termination of

this trust, said Trustees shall transfer to °

her all property then in their possession

constituting said part five (5).

If my daughter Elizabeth S. Morgan

‘should die prior to the termination of said

trust, then said Trustees shall pay. annually

“the net annual income from said part five

—~ ao such person or persons as she may

~~appoint by her last will and testament duly:

admi o probate, and at the termination

of this triigt said Trustees shall transfer the .

_- property then in their possession constitut-

‘ing said part five (5) to such person or per-

sons as she may appoint in the manner

- aforesaid.

_ If my daughter Elizabeth ‘S. iam:

~~ dying as aforesaid, should fail to make such

ppointment * * .* then and in any

6.

such event the annual income from said part —

-.~ five (5), * * shall be paid annually

oy said. Trustece to her issue surviv- ©

ing. * * * and at. the termination of —

said trust, said Trustees shall transfer all: —

the property then in their possession, con=- ~~

stituting said part. five (5), * * °:

to the then ‘surviving issie of my

said daughter, * *.-*.

During her lifg, decedent received the distribu- :

‘tions payable. to hk at the end of the fourth,

~~ eighth, and twelfth’ years after the death of her

father, as’ ‘provided for in his. will, but she did not

receive the distribution payable to her at the end -

of the sixteenth year because of her price death.

(R: 93.) *

By her last will and » testament, decedent,

exercised the power of appointment under her

-father’s will as: to that .portion of the property i

which she would have received at. the end of the |

sixteenth year after her father’s death, had she

lived, and she also exercised the power of appoint-

ment given her by her father’s deed of trust, the

appointments being in the - following words

(R. 93): er ae .

Twenty-Second: Under the last will and

- testament of my father * * * I do

hereby nominate, constitute, authorize

and ,appoint my husband, J. ; Earl

Morgan’ ne ee?

. Tw enty-Third: ‘Under the Deed of Trust.

‘dated May 12, 1917, i a

/

J

2

7

.Morgan *. @- @, .

mined that both powers which decedent exercised

by will were “general” powers of appointment ;

— appoint my husband, 5. Ear =

The Commissioner of Internal emia oe. a

4nd that the value of the property passing under |

the powers should. be included in decedent’s gross

estate under Section 302 (f) of the Revenue Act of

1926, as amended by Section 803 ({b) of the Reve-

nue Act of 1932. The Board of Tax Appeals ap-

proved dhe Commissioner’s action (R: 91-96), and

_ the court below affirmed (R124)...

ARGUMENT

The term “ sicineiin’ power of a as

_ used in the Revenue Act, has consistently been

construed to mean the power to appoint to any

the power. Lee v. Commissioner, 57 F. (2d) 399

(App. D. C.), certiorari denied, 286 U.S. 563;

Leser v. Burnet, 46 F. (2d) 756 (C. C. A. 4th);

"person or-persons in the discretion of the donee of.

Blackburne v. Brown, 43 F. (2d) 320 (GC. A. 3d); __

Fidelity-Philadelphia Trust Co. v. MMaughn; 34

_ «F. (2d) 600 (C.-C. A. 3d), certiorari denied, 280

“* U.S. 602; Whitlock-Rose v. McCaughn, 21 F. (2d)

164 (C. C. A. 3d); Treasury Regulations 80, Art.

_ 24... Under this test the Circuit Court of Appeals ¥

1The Revenue Act does not define “general powers of

appointment.” However, in the 1919 revised edition of

Treasury Regulations 37 a general power is defined in

Article 30 as “one to appoint to any person or persons in the.

“|| discretion of the donee.” Substantially the same definition

O |

| oa oo: a eis

__ was clearly correct in its conclusion that the powers

_ Vested in the decedent were ‘‘general’’ powers and ‘

_ that, therefore, the property passing ee

decedent’ s exercise of those powers was’ taxable _

~ under Section 302 (f) of the Revenue Act of 1926,

as pinended... © —__—

Petitioner does not deny that, ian from certain

_ veto ‘powers vested in the trustees which are’

referred: to below, the will and deed d of trust gave.

the decédent power to appoint ‘to any person or

persons in her sole discretion, but contends that

‘the determination of whether such a power is *

‘‘general”’ or ‘special’’-within the meaning of the--- ©

Revenue Act depends upon the manner in which

such a power is charadterized under Wisconsin

* law, rather than upon the interpretation which the ee

- federal courts have given to the Federal tax stat-

“ute. Petitioner: urgés that under the’ provisions ~

of a Wisconsin statute, set forth in the margin,’ —

has been contained in all later regulations, the only change

being the addition of the word “ordinarily” in the 1924 and

subsequent regulations. The repeated reenactment of the

. Provisions first contained in the Revenue Act of 1918, relat-

‘ .jng to property passing under a general power of appoint-

ment, in the light of the administrative definition of a ‘gen-

‘eral power, shows that Congress adopted the administrative

construction. McFeely v. Commissioner, 296 U. S. 102, 108;

Morrissey v. Commissioner, 296 U. S. 344, 355.

2 Statutes ‘of Wisconsin,. 1937, Sec. 232.05. ‘General eo

Power: A power is general when it authorizes-the aliena- ~

tion in fee, by means of ‘a conveyance, will, or charge of the _

_ lands embraced in the power, to any alienée whatever.” |

932.06. “Special Power. A power is special: (1) When

the person or class of persons to whom the disposition of the

7

s

- déeedent wotild be characterized as “special” by

_ the Wisconsitr ¢ courts. ~ &

. The édurt below found it t unnecessary to decide be

o

‘ é,

~ tnd a casual: reference thereto. in Cawker a

& Dreutzer, 197 Wis. 98, 135, the power. vested in the .

whether, under Wisconsin law, the power vested in .

decedent would be deetired general or special. It

held that, under Wisconsin law, the language of the

grant of powér vested in the decedent unlimited

1G

_ power to appoint to any person. or persons, and.

concluded that “‘such a power shtisfies the defini-~

tion of a general_ power as that_term_is-used in

~ Section 302 (f), even though it is characterized as

a special power - under., statutory oie in

Wisconsin’ (R. 116):

1, The decision 6f the court below is in: entire |

accord with the decisions in Leser Vv. Burnet, supra,

and Whitlock-Rose v. McCaughn, supra, with

which petitioner asserts it to be in conflict. ‘In

Leser v. Burnetswhich likewise involved a\ trans-

fer of property passing under the exercise of a

a

s boil under thé” Fefeer to be made are designated. (2)

When ,the power @uthorizes the alienation by means of a

conveyance, will, or charge of a particalad3 tatate or interest .

less than a fee.” %&

~. ot}

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. ;

~,

—_—_—

power of appointment, the court first determined, ~

. independently of any local statute of court

* decision, the meaning of “general power’’ as used _

’ in-the Revenue ‘Act.and held that such a power is

_ “one whieh may be exercised by the ‘donee of the

10 ave ee

9 power in iver of any person vicmsnaig ined:

ing the donee himself or his own creditors” (46 _

- (2d) at 758). The court then said that it was nec-’

‘essary to determine whether the particular’ power

involved was ‘‘a general power within this mean-

aig) ‘ing of the act of Congress”’ and stated that: this

_ was to be determined by the law of Maryland (p. °

760). Since, under Maryland law,.the power-in ~

question could ‘not be exercised in favor of the

. donee’s creditors, the court concluded that it did

not come ‘‘within thé meaning of a general power. __

of appointment. as that term is used in the lan-

guage .of the’ revenue act” (p. 761). Thus

the same approach was used in the Leser cas¢ as ©

in the case at ‘bar: ‘state laws were examined to —

determine the precise scope of the power created

by the languagesin the grant and, this having been —

determined, the question of whether a power of

o such scope came within the definition of a general

pow er for purposes | of the Revenue Act was -

decided as a matter of federal law.

| + Whitlo¢k-Rose v. McCaughn, supra, enunciates

Ce |

the same principle“ The question there involved

: Was whether a power. of appointment exercisable

only by will was a general power within the niean-

ing of the Rev enue Act. The court, interpreting

the Act to cover any ‘power in which there was no _

restriction’as to appointees, even though there was.

a restriction as to the method of appointment, held

the power there involved to:be general’ becatise

under state law the donee of such a power was sub-

72

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ject to-no limitations in the choice of his ap-

_ pointees arid the property subject to the power, was ;

‘subject to the donee’s debts.’ .

| The Wisconsin statute upon which’ petitioner :

* relies in the present case to change an otherwise -

general power into a special power in no way-re- |

stricts the’ donee’s selection _ of appointees ; it .

. _ provides merely that a power authivrizing the”

alieriation of an estate or interest less than-a fee

‘shall be deemed special.: ‘While we do not concede ;

that the estate here involved was less than a fee ..

43 within the meaning of that statute, it seipeclkinay

. Clear that the statute could not in any event affect

the operation of the federal taxing’ act. The tax —

here is not gp property but onthe privilege en-

_ joyed by the decedent in the exercise of a power.

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

_ Ast), eertiorari.deniéd, 284 U. S. 651. The Reve- .

"nue Act is obviously concefned with the latitude pf

_ the power rather than with the quantum of the

wey

Sy

“&

* The court’s statement in the Whitlock-Rose opinion that lt.

. “The law of New Jersey controls. this case,”-when read in -

‘its context in the opinion as a whole, obviously refers only

to the state law with. respect to the scope of the power. If .

this were not otherwise perfectly clear, it is made so by the .

. subsequent decisions of the same court in Fidelity-Phila-

delphia Trust Co. v. McCaughn, | supra, and Blackburné v.

Brown, supra, holding, in accord with the decision .of the -

court below in the present case, that the meaning which.

state law attributes to the term “general power. of appoint-

ment” is not binding upon the federal courts in construing

those words in the Revenue Acts. _

‘ .

. ee

a 12

estate passed pursuant. to its exercise, for the tax -

is imposed upon ‘‘any property”’ pussing under a.

_ general power of appointment. * There is no basis

_ for reading into the statute the qualification that -

_> the property must be a fee simple estate. Conse-

_. quently i it is immaterial that, under the Wisconsin

law, the power here. involved might possibly. “be.

classified as “special’’ because it might be held to

-- authorize the alienation of less than a ‘fee. See

me

-

_ Griswold, Powers of Appointment and the Federal Gis

Estate Taz, 52 Harv. L. Rev. 929, 942.

' 2. The decision below is not in conflict, as’ oer’

tioner contends (Pet. 10, 20-25), with the decisions

_of this Court in Lang Vv. Commissioner, 304 U. S.

' 264; Sharp v. Commissioner, 303 U. S. 624; Blair v.

Commissioner, 300-U. S, 5; Freuler v. Helvering,

~291 U. S. 35; or Poe ‘ve Seaborn, 282 U. S. 101.

: Those cases merely hold that state law is’control-

| ling i in determining the nature of the legal interest

. which the taxpayer had in the property or income .

subject to taxation. They do not hold that, after

_ the nature of such interest is established, state law

controls in determining whether such interest

' comes within the terms ‘of the Revenue Act. .

As pointed out. in Burnet v. Harel, 287 U. ‘8.

103, state law creates legal interests but the federal

law determines when and how they shall be taxed.

There this Court held that a Texas gas.and oil lease,

which under: Texas law was classified as a sale, was

~

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13 } ‘

not the type of transaction constituting a sale

within the contemplation. of. the federal statute.

3 ‘taxing capital gains. More recently, in. Lyeth v.

~ . Hoey, 305 U. S. 188, a case dealing with the federal

estate tax, this Court recognized that the taxpay- '

er’s status as an heir was'to be determined by state |

‘law but. that when, pursuant to a compromise

- agreement among the heirs, a distribution was s

‘made, the question whether the property so

received was “acquired by inliefitance”” within the .

_meaning of the federal taxing - statute was

necessarily a federal question.

- 3.°While not asserted as a reason for granting -

the writ, the further contention is made in the brief —

supporting the petition (Br. 33) that the will and

trust deed must be construed as vesting a veto

_ power in the trustees over any appointment made:

by the donee of the power. This contention was:

Srejected by the court below after full consideration

(R. 118-122) ‘and its decision i in this respect -pre-

sents no conflictz but involves merely the construc- _

tion of. the particular instruments here involved.

Accordingly, it furnishes no hasis. for the i issuance

of the writ. be ks wn |

--4, The additional contention is ‘stated but not,

- argued (Br. 46) that the Revenue Act as applied _

to this case is invalid because retroactive, the power

of appointment having been given prior to the first

enactment of the tax. This contention is unten- |

able, ‘The statute may be applied if the power is

- exercised after the date of enactment. Lee v. Com-

: micsionet, supra.’

| i | ieee ‘ | ae

There. is no conflict of authority. The decision ; |

below is in accord with the applicable decisions of ~—

this Court. The petition should be denied.

Respectfully submitted.

. | RoBERT H. JAcKson,

Solicitor General.

seni, O. CuaRK, Jr., °

Assistant Attorney General.

i SEWALL KEY, ;

| JosePH M. “Jones, |

Special Assistants to the Attorney. General,

“RicuAnp H. DEMUTH,

: saa arsttiie

~ Avousr, 1939. )

‘ Disapproved only as to another point i in Heteering Y¥.

ae a areal S. 153.

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