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Peoples Trust Co. v. United States

decided: June 27, 1969.


Van Dusen, Aldisert and Stahl, Circuit Judges.

Author: Stahl


STAHL, Circuit Judge.

Peoples Trust Company of Bergen County, as executor under the Will of Elsie Downer O'Brien, initiated this refund suit to recover estate taxes paid to the United States. The sole issue presented is whether decedent's power to invade the principal of a trust, the decedent also being the income beneficiary, was a power of appointment limited by an ascertainable standard relating to the health, education, support or maintenance of decedent within the meaning of § 2041(b) (1) (A) of the Internal Revenue Code of 1954.*fn1

In his will,*fn2 the relevant provisions of which are set out in the margin,*fn3 decedent's husband established a trust of the residue of his estate. The trustee was directed to pay the net income to the decedent as well as "such amounts out of the principal as my said wife from time to time may require; she to be the sole judge as to the amounts and frequency of such principal payments." During her life,*fn4 the decedent received the income from the trust but she neither requested nor received any portion of the principal.*fn5

The estate tax return filed by Elsie O'Brien's executor reported the existence of the trust but did not include in the taxable estate the value of the principal. The Internal Revenue Service disputed the claimed exclusion and assessed estate taxes in the amount of $21,978.92 plus interest.*fn6 The assessment was paid by the appellant, the executor-bank, and following denial of its refund claim by the taxing authorities the bank brought this action in the district court.

The bank contended in the court below that decedent's power to consume the trust principal was limited by an ascertainable standard so that under § 2041 (b) (1) (A) the value of the principal was not includable in decedent's gross estate. On the basis of factual stipulations and briefs submitted by the parties the district court entered judgment for the United States*fn7 and the taxpayer has appealed.

We start with the proposition that while the taxability of the interest possessed by decedent is to be determined by federal law, we must look to the local law -- here New Jersey's -- to determine the legal rights and interests possessed by decedent under the trust: Morgan v. Commissioner, 309 U.S. 78, 80-81, 626, 60 S. Ct. 424, 84 L. Ed. 585 (1940); Miller v. United States, 387 F.2d 866, 868 (3d Cir. 1968); Strite v. McGinnes, 330 F.2d 234, 238 (3d Cir.), cert. denied, 379 U.S. 836, 85 S. Ct. 69, 13 L. Ed. 2d 43 (1964); Citizens First Nat'l Bank of Ridgewood v. United States, 288 F. Supp. 750, 753 (D.N.J.1968); 2 Mertens, Law of Federal Gift & Estate Taxation § 19.08, pp. 515-517 (1959).

Determining the nature of decedent's interest under New Jersey law requires us to construe the will of her husband, Paul O'Brien, and in so doing our function is "to ascertain and give effect to the 'probable intention of the testator,'" Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564, 178 A.2d 185, 187 (1962), having in mind that when construing wills "the controlling consideration is the effect of the words as actually written * * *." In re Armour's Estate, 11 N.J. 257, 271, 94 A.2d 286, 292 (1953).

In ascertaining the meaning of Item C. of Paragraph Seventh of the will, appellant would have us focus on the words "may require" as providing the standard or measure of decedent's right to request and utilize principal. To read "she to be the sole judge as to the amounts and frequency of such principal payments" as supplying the standard governing decedent's right to consume principal would, according to the appellant, result in ignoring the words "such" and "require."

In the taxpayer's view, proper construction of Item C. indicates that decedent's right to consume was limited to such amounts out of principal as she may require. By reference to New Jersey law, appellant then argues that "require" means "needs" and that the power to consume is limited by a duty imposed under New Jersey case law to consume only such principal as is reasonably necessary for comfortable maintenance and support. In other words, while decedent was to be the sole judge of the amounts and frequency of payments from principal, her requests were limited by what she believed she required, in good faith, for reasonable necessities or maintenance. And appellant argues further that the decedent would have been accountable as a fiduciary to the remaindermen for any invasion of principal beyond her good faith needs.

For a number of reasons we are unable to accept the arguments which appellant advances. First, the New Jersey cases to which we have been referred do not, as appellant asserts, consistently construe "require" to mean needs, or necessities, or maintenance. In fact, in one of the early New Jersey cases we have found which deals with the question the court implicitly assumed that "require" meant "demand."

In Lippincott v. Stokes, 6 N.J.Eq. 122 (Ch.1847), the issue presented was whether certain securities belonged to the estate of one Hope Haines and were to be disposed of under her will or whether they belonged to a trust created by the decedent's mother. By her will the decedent's mother had created a trust of one-fourth of her personal property, with directions to pay the interest to Hope for her life and to pay her "so much of the principal as she shall, from time to time, by writing under her hand, attested by two credible witnesses, require of the said trustees. * * *" During her life Hope had acquired the principal of the trust from the trustees, and the issue presented was whether she had "required" payment of the principal in the manner prescribed in the will, that is, by her own attested writing. In finding that she had not met these testamentary commands, which if followed would have entitled her to the principal without meeting any other condition, the court impliedly assumed that "require" meant "demand."*fn8 See also Lippincott v. Ridgway, 11 N.J.Eq. 526 (Ch.1858) (different issue but same will), cf. Corlies v. Allen, 36 N.J.Eq. 100 (Ch.1882) (payment of trust income "as she may need or require" held to limit the beneficiary's rights to income to so much as the trustees in good faith decide is necessary for her comfortable support, the court distinguishing the will under consideration in the Lippincott cases by stating "that there the word [require] was used in the sense of 'demand.'" 36 N.J.Eq. at 101.)

We have examined other New Jersey cases, particularly those upon which appellant relies,*fn9 and we do not find them to support the conclusion that in every case "require" means "need." Rather "require" has been viewed in the context in which it was used and an effort made in each ...

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