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Mathey v. United States

filed: January 29, 1974.



Van Dusen and Adams, Circuit Judges, and Broderick, District Judge. Seitz, Chief Judge, Van Dusen, Aldisert, Adams, Gibbons, Rosenn, Hunter, Weis and Garth, Circuit Judges. Van Dusen, Circuit Judge, with whom Aldisert and Weis, Circuit Judges, join, dissenting.

Author: Adams

(On Reargument)


ADAMS, Circuit Judge:

Plaintiff taxpayers, the executors of the estate of the late Helen H. Mathey, seek to recover federal estate taxes, interest paid thereon, and administrative and legal fees in the amount of $390,402.50, which they claim were illegally assessed and collected by the Government.*fn1

The Government contends, and the district court concluded, that the value of eleven inter vivos trusts created by Mrs. Mathey were includable in her gross estate under section 2038 of the Internal Revenue Code,*fn2 for the purpose of computing federal estate taxes. We must evaluate the propriety of that conclusion.

On April 20, 1955, Mrs. Mathey, then 63 years old, set up under New York law eleven trusts for the benefit of her grandchildren, the youngest of whom was then two years of age. Two additional trusts were created in 1961 and 1962, for two more grandchildren.*fn3 The Empire Trust Company (later merged into the Bank of New York) was named, and continues to serve, as trustee. All thirteen trusts were identical, with the exception of the beneficiaries' names and their birth dates. When Mrs. Mathey died in September, 1965, eleven of the thirteen trusts remained in existence (two grandchildren having previously reached the age of distribution) and were valued at $808,018.52.

Mrs. Mathey died testate, and a federal estate tax return was filed by her executors in December, 1966, revealing a gross estate valued at $1,811,198.02, and an estate tax liability of $484,599.19. After audit and examination, the Government took the position that Mrs. Mathey's gross estate should include, for federal estate tax purposes, the value of the eleven inter vivos trusts in existence at the date of her death. The Government's position resulted in a claimed net deficiency in estate tax liability of $318,883.17. Mrs. Mathey's executors paid this sum, together with $41,769.33 in interest, and then filed suit in the district court for a refund.*fn4

The controversy over the includability of the trusts in Mrs. Mathey's gross estate stems from a clause in each of the trust agreements giving Mrs. Mathey the power to change the trustee.

"ARTICLE SIXTH: The Grantor reserves to herself and after her death to her Executors the right at any time and from time to time during the continuance of the trust to change the Trustee hereunder after ten days notice in writing which shall specify the name of the trustee to be substituted, the date of such substitution and the time and place within the City of New York where the securities then constituting the trust estate are to be delivered to the substituted trustee and to require the trustee, upon receiving such notice to transfer and deliver to the substituted trustee at the time and place within the City of New York specified in such notice any and all securities, cash and other assets constituting the trust after deducting its lawful compensation and expenses.

"Upon its removal as above provided, any Corporate Trustee, shall be entitled to reimbursement from the trusts hereunder for all loans and advances, if any, theretofore made by it and all expenses, including expenses incurred by it in connection with the settlement of its accounts as Trustee. Likewise in the case of the change or removal of any corporate Trustee, it shall be entitled to all fees to which it would be entitled if the trust were fully administered or if the trusts for which it is Trustee were then to terminate."

The Government contends that, under Article Sixth of the trust indentures, Mrs. Mathey retained the unrestricted power to appoint herself as successor trustee and that, because under the terms of the trust instruments the trustee has the power to pay trust income and corpus to the beneficiaries before the date set for corpus distribution, the trust corpora were includable in her gross estate. In support of this proposition, the Government points to section 2038 of the Code, which provides in part:

". . . . The value of the gross estate shall include the value of all property . . . .

". . . . To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any person . . . ., to alter, amend, revoke, or terminate . . . . ."

The taxpayers, on the other hand, assert essentially that (1) in view of the terms and design of the trust agreements, Mrs. Mathey retained the power to name only a corporate trustee as successor to the original trustee, and under no circumstances intended to or did reserve the right to substitute herself as trustee; and (2) even assuming that Mrs. Mathey did retain the power to substitute herself as trustee, a New York court would not have permitted her to act in that capacity.

The district court dismissed the taxpayers' complaint, holding that Mrs. Mathey did in fact retain the power to appoint herself successor trustee and that New York law erected no absolute bar to her exercise of that power. It concluded that the aggregate value of the eleven trusts was includable in her gross estate for federal estate tax purposes. We affirm.

Section 2038, quoted above, focuses upon the retention by a grantor of the power to "alter, amend, revoke, or terminate" a trust. If such power exists at the date of the grantor's death, the value of such trust is includable in the decedent's gross estate. The taxpayers concede that, under the trust agreements involved here, a power in the grantor to name herself as trustee would amount to a power to "alter, amend, revoke or terminate."*fn5 The taxpayers agree, too, that such a power, if it exists, need never actually be exercised for the trusts to be includable in the decedent's estate.*fn6 Their argument, in essence, is that the facts and circumstances of this case make clear that Mrs. Mathey intended to retain no such power, that the trust agreements cannot be read to provide for a retention by her of such power, and that New York law would bar her from ever exercising any such power. The trust agreements do not expressly forbid Mrs. Mathey from appointing herself as trustee.

At the request of the taxpayers, and over the objection of the Government, the trial court ruled that oral testimony would be permitted on the question of the meaning of the language of the trust indentures and on the practice in the New York courts regarding the service of trustees. Pursuant to this ruling, the parties introduced extensive expert testimony concerning the language in the trust indentures that refers to the trustee and its successor or successors and specifically the use of the pronoun "it." The taxpayers assert that the use of the pronoun "it" establishes that, under the trust agreements, Mrs. Mathey could name only a corporate trustee as successor to the original trustee, inasmuch as a natural person is more commonly referred to as "he" or "she." The district court found that use of the ...

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