TREANOR, Circuit Judge.
Petitioner seeks a review of a decision of the United States Board of Tax Appeals affirming the determination by the Commissioner of Internal Revenue of a deficiency in the estate tax liability of the estate of decedent, Elizabeth S. Morgan. The asserted deficiency resulted from the inclusion in the value of the gross estate of decedent the value of certain property in respect to which the decedent held powers of appointment, which powers she had exercised by her last will.
"Sec. 302 [§ 411]. 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 intangible, wherever situated * * * —
* * * * * *
"(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *."
The decedent died testate in 1933 while a citizen of the United States and a resident of the state of Wisconsin, and the petitioner is the duly appointed executor of her last will and testament. Decedent's father, by his will and several codicils thereto, created a trust for the benefit of his children. The trust estate was divided into nine parts, the part numbered five being conveyed in trust for decedent's benefit as follows:
"Item Fifteen: I direct said trustees to pay to my daughter Elizabeth S. Morgan annually the net annual income from part numbered five (5) into which my trustees shall have divided my estate * * *
"I give, devise and bequeath to the appointee or appointees of my daughter Elizabeth 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) * * *"
Shortly before his death the father of decedent executed a deed of trust to continue for a period of 21 years after his death. The trust property was divided into parts and one part was allocated to each beneficiary. The following provisions of the deed of trust relate to decedent:
"7. After my death and during the continuance 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 shall die prior to the termination of said trust, then said Trustees shall pay annually the net annual income from said part five (5) to such person or persons as she may appoint by her last will and testament duly admitted to probate, and at the termination of this trust said Trustees shall transfer the property then in their possession constituting said part five (5) to such person or persons as she may appoint in the manner aforesaid."
In her will decedent exercised the powers of appointment granted by her father's will and by the deed of trust, respectively, the appointments being in the following words:
"Twenty-second: Under the last will and testament of my father * * * I do hereby nominate, constitute, authorize, and appoint my husband, J. Earl Morgan * * *
"Twenty-third: Under the Deed of Trust dated May 12, 1917, * * * I do hereby appoint my husband, J. Earl Morgan * * *"
It is not questioned that under the law of Wisconsin the property, which the Commissioner included in decedent's estate under authority of Section 302(f), passed to decedent's appointee by virtue of the exercise of the powers of appointment. Section 302(f) selects a particular type of transmission of property through a power of appointment, a type of transmission which is essentially a testamentary disposition, and treats such transmission as a transfer of estate property of the decedent who exercises the power of appointment. In the instant case the decedent had the income of the trust property during her life with the right ultimately to receive the corpus; and under the powers of appointment she had full power to dispose of all of her property interest after her death to whomsoever she might select as her appointee, or appointees. She exercised her powers of appointment by will and under the law of Wisconsin all of the interest which she had in the property passed to her appointee. Consequently, the precise question for decision by this Court is whether the powers of appointment were general powers within the meaning of that term as used in Section 302(f) of the Revenue Act of 1926, as amended.
The term "general power of appointment" has a well defined legal meaning. Ordinarily it designates a power to appoint any person or persons in the discretion of the donee of the power; and a power of appointment is general regardless of the extent of the property interest which is transferred by the exercise of the power. It is the limitation on the discretion of the donee in the selection of the appointee, or appointees, that distinguishes a special power of appointment from a general. By Treasury Regulation the former meaning of general power of appointment is adopted.
The following definition has been uniformly recognized by federal courts as a correct statement of the meaning of "general power" as that term is used in the Revenue Act: "A power of appointment is general when it is exercisable in favor of any person the donee may select, and special or limited when it is exercisable only in favor of persons or a class of persons designated in the instrument creating the power. * * *"
We accept the foregoing definition of general power of appointment for the purpose of applying Section 302(f). The language which creates and grants the powers in the instant case places no restriction on the discretion of the grantee of the powers in respect to the selection of an appointee, or appointees. The language of the grants left the grantee free to exercise the powers of appointment in favor of any person whom she might select. In our opinion the powers were general powers within the meaning of Section 302(f) of the Revenue Act, and must be treated as such for purposes of this case unless some rule of Wisconsin law controls, as against Section 302(f), and requires a different result.
The Wisconsin case chiefly relied upon by petitioner is Cawker v. Dreutzer.
Petitioner relies on Leser v. Burnet, Commissioner,
In Burnet v. Harmel
A recent decision of the Supreme Court in the case of Lyeth v. Hoey
While recognizing that state law determines the rules, both substantive and procedural, relating to descent and distribution of property within the jurisdiction, the Supreme Court held that in case of receipt of property by an heir as a result of a compromise it is a federal question "whether what the heir has thus received has been `acquired by inheritance' within the meaning of the federal statute * * *"
Congress can adopt as a part of federal law rules and standards recognized by local law; but such adoption must be indicated by express declaration or necessary implication. But we find no indication of congressional intention to adopt local definitions of "general power of appointment" and thus create diversity of administration of Section 302(f).
Petitioner urges that even if the language of the grant of powers is sufficient to create general powers their generality is destroyed by certain provisions of the will and the deed of trust which petitioner contends create a right of veto of an appointment which might be made under the powers. This contention is not based upon any doctrine peculiar to the law of Wisconsin but upon petitioner's construction of the language of the provisions.
The clauses of the will and trust deed relied upon by petitioner provide that whenever in the judgment of the trustees there is danger that anything "coming to any beneficiary under this trust (or will)" will be dissipated through intemperate or spendthrift habits, lack of business capacity or subjection to injurious influences of others, or for any other reason, the trustees may withhold from such beneficiary as much as they deem advisable and pay and transfer as much as they deem advisable. Instead of doing the latter the trustees were authorized to expend the funds for the welfare and support of such beneficiary.
Petitioner construes "any beneficiary under this trust (or will)" to include appointees and insists that the power of the trustees to withhold income or installments of corpus from "unworthy beneficiaries" amounts to a veto of the power of appointment of decedent. But we are convinced that a reasonable construction of the language of the so-called veto clauses, in the light of related provisions of the will and deed of trust, precludes the inclusion of "appointee" in the term "any beneficiary."
Many carefully worded provisions both of the will and deed indicate clearly that decedent's father intended to differentiate between "beneficiaries" under his will and deed and "appointees" under the wills of his children to whom he had granted powers of appointment. The provisions in the deed of trust which dispose of property or income which is withheld from any "unworthy beneficiary" provide that the property or income shall be transferred to such issue of the unworthy beneficiary as would have taken the property so withheld "in case such unworthy beneficiary had died intestate at the time of such withholding;" and it is further required that in the event there should be no such issue at the time any such property should be payable or transferable, "then such trustee shall pay and transfer and distribute such property so withheld to and among the then other existing remaining parts." It will be noted that the withheld property is to go to the issue of the unworthy beneficiary who would have received it had the unworthy beneficiary died intestate. The trustor thus eliminated any appointee under the will of the unworthy beneficiary from participation in "withheld" property, and excluded any such appointee from the class
Apt provisions in the will of the father of decedent provide for the disposition of the portion of each named beneficiary in case the named beneficiary should die without having exercised the power of appointment. But there is no language which purports to exercise any control over the property when it has passed to an appointee as a result of the exercise of the power of appointment. The provisions of the will which control the disposition of property or income withheld from an "unworthy beneficiary" require the same to be paid or transferred "to such other worthy beneficiary under my will who would have been entitled thereto in case such unworthy beneficiary had died." (Our italics.) But if an "appointee" is to be considered a beneficiary under the will of the father of decedent the trustees cannot identify the "worthy beneficiaries" under the will who are to receive withheld payments until the death of an "unworthy beneficiary" who holds a power of appointment. This follows from the fact that by the terms of the will the issue of a named beneficiary, who holds a power of appointment, receives the beneficiary's property interest in the testamentary trust only in case such beneficiary does not exercise his power of appointment in his will. And this cannot be determined until the death of the named beneficiary. Obviously the intent of the testator, as expressed in the terms of the testamentary trust, was that the trustees be able to select the worthy beneficiaries at the time that payments should be withheld from named unworthy beneficiaries, which could not be done if appointees were treated as beneficiaries under the will.
By the terms of the testamentary trust a named beneficiary who holds powers of appointment is entitled not only to payment of income but also to distribution of designated portions of principal at stated intervals over a period of sixteen years. But an appointee is entitled to the immediate possession and enjoyment of all property in the hands of the trustees at the death of the beneficiary-appointee. The foregoing is inconsistent with an intention on the part of the trustor to apply the veto provisions to appointees, since such possession presupposes a period during which the beneficiaries do not have possession and full enjoyment of the principal.
The father of decedent limited the grant of powers of appointment to his own children, both in the testamentary trust and the deed of trust, although in both the list of named beneficiaries included his wife, his own children, and his grandchildren. Furthermore, powers of appointment were not granted to all of his own children and in the case of some grantees the exercise of the power was conditioned upon the lack of issue at the time of the death of the grantee of the power. In the first paragraph of the deed of trust the trustor recites that it had been his observation that many widows and children had been unable to preserve the principal of the fortune they had inherited and that he desired to provide for the support of his wife and his children and grandchildren. In the testamentary trust there was also a declaration of desire to provide for trustor's wife and children and the issue of his deceased children. The provision authorizing the withholding of property from an "unworthy" beneficiary obviously is included to give effect to the foregoing desire of the trustor to assure financial security for his wife and for his children and their issue. There is nowhere in either trust instrument any indication of interest in the welfare of appointees or their issue. Having carefully chosen the grantees of powers of appointment, the testator evidenced no intention of controlling whatever property passed to any appointees.
In view of the foregoing we conclude that the so-called veto provisions do not authorize the trustees to withhold payments of income or installments of principal from appointees.
We hold that the powers of appointment exercised by decedent under the trust and will of her father were general powers within the intent and meaning of Section 302(f), and that the transmission of the property interests in question by the exercise of the powers of appointment by decedent constituted a "passing [of property] under a general power of appointment exercised by the decedent (1) by will * * *"
The decision of the Board of Tax Appeals is affirmed.
LINDLEY, District Judge (concurring).
I am in accord with the conclusion reached, but it seems to me unnecessary to decide whether, under Blair v. Com'r, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465, and Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. ___, 119 A.L.R. 410, decided Dec. 5, 1938 and other decisions of the Supreme Court, the character of the power involved is to be determined from consideration of the federal law alone, for I am of the opinion that under the laws of Wisconsin, also, the power was general in character. When it was exercised, the estate of the deceased, under the Wisconsin statutes, was augmented by the amount of property included in the devises and bequests as to which right of appointment existed.
The state statute is as follows:
"232.05 General power. A power is general when it authorizes the alienation in fee, by means of a conveyance, will, or charge of the lands embraced in the power, to any alienee whatever."
"232.06 Special power. A power is special: (1) When the person or class of persons to whom the disposition of the lands under the power to be made are designated. (2) When the power authorizes the alienation by means of a conveyance, will, or charge of a particular estate or interest less than a fee."
In asserting that the power involved is special in character, petitioner relies upon Cawker v. Dreutzer, 197 Wis. 98, 221 N. W. 401. That case concerned a power of appointment in favor of two daughters who were to have the income from the res for life with power of appointment by will. In default of such appointment, the issue of each daughter was to take her interest, and, if one of the daughters died without having exercised the power, the corpus of her interest was to pass to the other daughter, if surviving, or, if not, to that daughter's issue. One of the daughters filed a petition asking that her power be decreed to be general and her estate a fee. The time for exercise of the power had not arrived. As I read the case, the point involved here was not decided. Any language indicating the conclusion urged by petitioner was unnecessary to the decision. The court refused to pass upon the daughter's request that she had the absolute power of disposition on the ground that the request was not presented to or considered by the trial court. The Supreme Court left the question open.
Here the time for exercise of the power has arrived and it has been executed. I find nothing in the decisions indicating that the Supreme Court of Wisconsin would construe it as other than general in character. Indeed, that court, in the opinion cited, took cognizance of the fact that the Wisconsin statute defining powers of appointment had been adopted from New York and said that it should have the same interpretation in Wisconsin as in New York. Under the New York decisions, such a power as is here being considered is general. In re Lathers' Will, 137 Misc. 222, 243 N.Y.S. 380; Farmers' Loan & Trust Co. v. Shaw, 56 Misc. 201, 107 N.Y.S. 337.
Furthermore, the power of veto, if any can be attributed to the trustees, never having been exercised and the power to appoint having come to fruition, that is, the property having been disposed of under
232.06. "Special power. A power is special: (1) When the person or class of persons to whom the disposition of the lands under the power to be made are designated. (2) When the power authorizes the alienation by means of a conveyance, will, or charge of a particular estate or interest less than a fee."