HILL, District Judge.
In 1947, Arthur Sweet executed a revocable trust agreement in the State of Utah, naming his wife and four children as beneficiaries. Tracy-Collins Trust Company was made trustee, and as such received the corpus of the trust estate.
This trust agreement provided among other things that the trustee should pay the income to the trustor during his lifetime and thereafter to trustor's wife for her lifetime; and upon the death of both trustor and his wife, the trust should terminate and the trust estate be distributed equally to trustor's four children with further provision for payment in a specific manner in event of the death of one or more of the children before the termination of the trust.
On July 27, 1948, the trustor executed an instrument denominated "Supplemental Trust Agreement". This instrument provided for the cancellation of paragraph IV of the original agreement and substituted a new paragraph therefor. The substituted paragraph provided trustor's wife should "have the power of appointment over such portion of the Trust Estate as equals one-half (½) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes. The power of appointment of the said Margaret M. Sweet shall be exercisable in favor of herself, or in favor of her estate, or in favor of any other person, whom she shall elect to appoint. * * * In the absence of an appointment completely disposing of said portion of the Trust Estate, upon the death of said Margaret M. Sweet, said portion of the Trust Estate shall terminate and
Arthur Sweet died on October 21, 1952, A marital deduction from the gross estate of the decedent was claimed under section 812(e) (1) (F) of the Internal Revenue Code of 1939, as amended by section 361 of the Revenue Act of 1948, c. 168, 62 Stat. 110, 26 U.S.C.A. § 812 (e) (1) (F).
The Commissioner of Internal Revenue disallowed the claimed deduction and imposed a resulting deficiency in estate tax.
On August 22, 1952, and after this controversy arose over the estate tax deficiency, petitioner here filed an action in the District Court of the Third Judicial District of Utah to interpret and construe the two trust instruments. The primary beneficiary and the remaindermen under the instruments were named defendants and entered their appearances in that action. The Utah District Court entered judgment determining that the original trust agreement and the supplemental agreement created two trusts. Petitioner then filed its petition in the Tax Court seeking a redetermination of the estate tax deficiency. The decision there was adverse to petitioners, 24 T.C. 488, and the proceeding was brought here on petition for review.
To decide the case, the legal effect of the two trust instruments must be determined insofar as federal estate tax liability is concerned.
The power vested in the surviving spouse to appoint only a part of the trust estate does not comply with the exaction of the statute requiring that she have power to appoint the entire corpus. Estate of Louis B. Hoffenberg, 22 T.C. 1185, affirmed, Hoffenberg v. Commissioner, 2 Cir., 223 F.2d 470.
The petitioner seeks to meet this exaction of the statute by contending that the trustor set up two separate trusts. The argument proceeds on the level that the supplemental trust agreement modified the original agreement so as to create two separate and distinct trusts; that the surviving spouse was vested with power to appoint the entire corpus of the trust created by the supplemental agreement; and that in respect to such trust estate the marital deduction is well founded. But the trust instruments considered together do not lend themselves to that view. It is clear that the original instrument created a single trust with no power of appointment in the surviving spouse of the trustor.
The petitioner makes the further argument that the decision of the Utah State District Court declaring that two trusts were created is binding in this proceeding.
Legal rights and interest of parties in property are created and determined by state law but the manner in which and the extent to which such rights and interests shall be subjected to federal tax is determined by federal law. Morgan v. Commissioner, 309 U.S. 78, 626, 60 S.Ct. 424, 84 L.Ed. 585; Brodrick v. Gore, 10 Cir., 224 F.2d 892; Brodrick v. Moore, 10 Cir., 226 F.2d 105.
While rights and interests of parties in property are created and determined by state law, an order or judgment of a state court obtained through collusion, or attended with some other badge of fraud, or entered in a nonadversary proceeding, is not binding as between one or more parties to such proceeding and the United States in respect to income or estate tax imposed by federal legislation. Brodrick v. Gore, supra; Brodrick v. Moore, supra.
The judgment of the Tax Court is affirmed.
"(i) the interest so passing shall, for the purposes of subparagraph (A), be considered as passing to the surviving spouse, and
"(ii) no part of the interest so passing shall, for the purposes of subparagraph (B) (i), be considered as passing to any person other than the surviving spouse.
This subparagraph shall be applicable only if, under the terms of the trust, such power in the surviving spouse to appoint the corpus, whether exercisable by will or during life, is exercisable by such spouse alone and and in all events. * *"