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Strite v. McGinnes

March 31, 1964


Author: Mclaughlin

Before MCLAUGHLIN, KALODNER and GANEY, Circuit Judges.

MCLAUGHLIN, Circuit Judge.

This is an action by the executors of the estate of Lillian D. Cree for the refund of certain estate taxes paid.

Lillian Cree was one of three sisters who, in 1939, executed identical wills. Each sister in her will established a trust of the residue of her estate, the net income from which was to be paid for life to the other two sisters and their survivor, and thereafter to a brother for life. On the death of the surviving sisters and brother, each trust estate was to be divided among the testatrix's nephews and nieces and their issue.

Under each testamentary trust, the other sisters were named as trustees, and given the power to appoint the principal if in their judgment it was "at any time necessary or advisable in order to provide for the reasonable needs and proper expenses or the benefit or comfort" of the other two sisters, i. e. themselves.*fn1

As it happened, brother James died in 1941; sister Mary, in 1950; and sister Katherine, in 1953. Sister Lillian thus became the sole beneficiary of the net income and trustee of the trusts established by Mary and Katherine. When Katherine died in 1953, Lillian appointed the Commonwealth Trust Company as cotrustee of the trust established under the will of Mary.*fn2 Lillian died in 1956 before Katherine's estate was completely administered and the trust under Katherine's will as such apparently never came into existence.

The Internal Revenue Service and the District Court below held that Lillian had a general power of appointment over the trusts of Mary and Katherine, because the powers of Lillian to invade were not limited by an ascertainable standard relating to health, education, support or maintenance in accordance with § 2041(b)(1)(A) of the Internal Revenue Code, and that the property subject to the power was includible in Lillian Cree's gross estate.

The posture of the case as developed by the taxpayer and the government requires an examination of sections 2041 and 2055. Both deal in part with "ascertainable standards" and powers to invade trust principal. The taxpayer regards § 2055 standards as inapplicable. The Government contends they are "analogous".

Section 2041 taxes property subject to powers of appointment possessed by a decedent at his death. Under this section, a general power of appointment is defined as a power which is exercisable in favor of the decedent, his estate, his creditors or the creditors of his estate. 26 U.S.C. 2041(b)(1). The estate tax consequence to a decedent who possessed such a power (if created after October 21, 1942, which is the situation before us) is that property subject to the power will be included in the decedent's gross estate, whether or not the power was exercised. However, the statute provides that a power to consume, invade or appropriate property for the benefit of the decedent which is limited by "an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment", with the taxable result that the property subject to that limited power will not be included in the decedent's gross estate. 26 U.S.C. 2041(b)(1)(A).

On the other hand § 2055 deals with deductions for charitable transfers.*fn3 The scope of this section is developed by the Internal Revenue Regulations. In part the present Regulation 20.2055-2 provides that "[if] a trust is created or property is transferred for both a charitable and a private purpose, deduction may be taken of the value of the charitable beneficial interest only insofar as that interest is presently ascertainable, and, hence, severable from the non-charitable interest". (Emphasis supplied.)

Commenting on this section, in force at least since 1934 (Treasury Regulations 80 (1934 Ed.) Art. 44), the Supreme Court said:

"Although Congress, in permitting estate tax deductions for charitable bequests, used the language of outright transfer, it apparently envisaged deductions in some circumstances where contingencies, not resolved at the testator's death, create the possibility that only a calculable portion of the bequest may reach ultimately its charitable destination.* * * The limit of permissible contingencies has been blocked out in a more convenient administrative form in Treasury Regulations which provide that, where a trust is created for both charitable and private purposes the charitable bequest, to be deductible, must have, at the testator's death, a value 'presently ascertainable, and hence severable from the interest in favor of the private use,' and further, to the extent that there is a power in a private donee or trustee to divert the property from the charity, 'deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of such power.'" Merchants National Bank of Boston v. Commissioner, 1943, 320 U.S. 256 at pp. 259260, 64 S. Ct. 108 at p. 110, 88 L. Ed. 35.

The Court went on to say that these regulations were an appropriate implementation of the Code Section and, "having been in effect under successive reenactments of that provisions, define the framework of the inquiry in cases of this sort."

Thus it is said that the private interest must be limited by an ascertainable standard in order that the amount entitled to a charitable deduction, might be determined. "Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become ...

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