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Commissioner of Internal Revenue v. Cardeza's Estate

decided: February 8, 1949.


Author: O'connell

Before STEPHENS, GOODRICH, and O'CONNELL, Circuit Judges.

O'CONNELL, Circuit Judge.

The principal questions posed by the appeals at bar are not without difficulty. As was aptly stated by the American Law Institute at 3 Restatement, Property, 1936 ed., page 1810, "* * * the American case authority on powers of appointment is distinctly thin in quantity - so thin that in nearly all states there are many important matters upon which local decisions are not yet conclusive, and in many states practically the entire field remains free for future development."

Specifically, we have been called upon to decide (a) whether the doctrine enunciated in Dobson v. Commissioner, 1943, 320 U.S. 489, 64 S. Ct. 239, 88 L. Ed. 248, forecloses our review of the substantive questions which follow; (b) whether, under section 812(b) (1) of the Internal Revenue Code, 26 U.S.C.A. § 812(b) (1), the value of a trust established by decedent for perpetual maintenance of a family mausoleum is deductible from her gross estate; (c) whether, under sections 811(d) (2) and 811(c) of the Internal Revenue Code, 26 U.S.C.A. § 811(c), (d) (2), her gross estate includes property which is part of the trust created by her father, but which was purchased with donations she made to that trust; (d) whether, under section 811(a), decedent's gross estate includes the value of certain future interests, the coming into possession of which is contingent upon the death of decedent's son without children; (e) whether section 811(f) of the Internal Revenue Code, prior to the amendments of the Revenue Act of 1942, requires taxation of property over which decedent had a general testamentary power of appointment, if the appointee renounced a bequest made by decedent pursuant to that power; and (f) whether in the alternative the property subject to the power of appointment, except for a life estate in the renouncer, passed to the decedent by intestacy and is therefore taxable under section 811(a) of the Internal Revenue Code.

According to the Commissioner, the deficiency in decedent's estate tax was more than $2,300,000; the Tax Court, resolving most of the aforementioned issues in favor of the estate, determined the tax deficiency to be $116,232.69. Both sides have appealed.

The facts were stipulated. Thomas Drake ("Drake") died testate in 1890. His survivors were decedent, who was his daughter and sole next of kin and heir at law, and his grandson Thomas D. M. Cardeza ("Thomas"), then aged 14, decedent's only child. Grandfather Drake's will, inter alia, directed the creation of a residuary trust ("Drake Trust"), the annual income from which was to be divided and paid in the following manner: (a) $5,000 to his daughter, decedent, for life, for charitable distribution; (b) two-thirds of the remainder to his daughter, decedent, for life; and (c) the balance to his grandson Thomas for life. As to the corpus of the Drake Trust, (a) no provision specifically stated what disposition was to be made of the part producing the $5,000 charitable annuity; (b) the two-thirds portion was subject to a gentral testamentary power of appointment by decedent; and (c) the balance was to be divided per stirpes among Thomas' children and the issue of Thomas' deceased children, Thomas however having the privilege by will of reserving sufficient principal to permit Thomas' widow to receive up to $10,000 per year for life.

Several contingencies were expressly covered in Drake's will: (a) if no child, grandchild, or other descendant of Thomas survived Thomas' widow, the one-third balance of the principal was to be paid to Drake's other grandchildren or their descendants per stirpes; (b) if Drake's daughter, the decedent, died "without having executed the power of disposition hereinbefore given to her," Drake's grandchildren were to share the income from the two-thirds portion until Thomas died, at which time that portion of the corpus was to be divided per stirpes among Drake's grandchildren and the issue of Drake's deceased children and grandchildren; (c) if Drake's daughter, decedent, survived all her children and their issue, she was to receive thereafter all the Drake Trust income for life and to have a general testamentary power of appointment of the entire trust corpus, i.e., the one-third balance as well as the two-thirds portion; and (d) if Drake's daughter, decedent, died "without having executed the power of disposition hereinbefore given to her" and if no lineal descendant survived her, the Drake Trust was to be used to establish a girls' private school. In connection with these contingencies, we deem it useful at this point to mention that decedent died before Thomas did, and that Thomas was her lone lineal descendant.

On eight occasions before she died, decedent donated to the Drake Trust funds totalling approximately $1,000,000, so as to enable the Drake Trust to exercise certain stock subscription warrants, since Drake had not authorized the Drake trustees to use the Drake Trust assets for that purpose.

In 1939, decedent died testate. A childless couple, Thomas, then aged 64, and his wife Mary, five years his junior, survived decedent. As to decedent's will, only three provisions need concern us here: (a) naming several life beneficiaries of the income, she created a residuary trust, the corpus of which Thomas was to receive after the death of the life beneficiaries; (b) reciting that her father Drake "did confer upon me the power of appointment, and the exercise of such power of appointment," decedent gave and devised "unto my son, Thomas Drake Martinez Cardeza all of the property and estate of which I have the power of appointment to him and his heirs and assigns, absolutely, giving and granting unto him a right of appointment or disposal of any inheritance which I may receive from said estate"; and (c) she created a $25,000 trust "for the perpetual care, upkeep, all necessary maintenance, repairs and replacements of the Drake Mausoleum," where she was to be buried.

About fourteen months after decedent died and the admission of her will into probate, but before the estate tax return was filed by decedent's executors, her son Thomas in writing renounced "the benefits I may receive under the exercise of the said power by my mother in her Last Will," but reserving all other benefits to which he was entitled under the wills of Drake, Thomas' grandfather, and decedent, Thomas' mother.

Shortly after this renunciation, the account of grandfather Drake's estate was called for audit. Two counsel appeared, one representing the "Accountants" and the other the "unborn and unascertained remaindermen." Judge Sinkler, after outlining briefly some of the pertinent provisions of the two wills and the renunciation, made the following statement: "Accordingly, the balance of principal [of the Drake Trust] will be held by the trustees and the entire net income therefrom paid to the said Thomas D. M. Cardeza for life." He awarded the Drake Trust principal, then in excess of $5,000,000, "to be retained by the accountants for the uses and purposes of the trust."

About three months later, Judge Stearne of the same Orphans' Court, in confirming the first account of the executors of decedent, mentioned substantially the same details and referred to Judge Sinkler's adjudication in the auditing of grandfather Drake's estate.

Thomas' wife, Mary, died in 1943, after the Commissioner sent the deficiency letter prompting this litigation, but before the Tax Court heard this case. Thomas was still alive and childless when argument was had on the instant appeals. A urologist was prepared to testify that "there has not been and is not now any known physical impediment to the ability of said Thomas D. M. Cardeza to procreate."

The Tax Court held as follows: (1) as to the trust for mausoleum maintenance, section 812(b) (1) of the Internal Revenue Code required application of Pennsylvania law, which allows such deductions; (2) as to the property purchased from the donations which decedent made to the Drake Trust, the entire value of that property was part of her gross estate;*fn1 (3) as to the entire corpus of the Drake Estate, although Thomas' death without issue would cause an intestacy from which decedent's estate would benefit, any attempt to evaluate "such a highly contingent and remote interest" of decedent at the time of her death would be merely speculative;*fn2 (4) as to the two-thirds portion of the corpus of the Drake Trust, section 811(f) of the Internal Revenue Code, as it read prior to 1942, did not require inclusion in decedent's gross estate, both because the facts at bar are governed in that respect by Helvering v. Grinnell, 1935, 294 U.S. 153, 55 S. Ct. 354, 79 L. Ed. 825, and because the Pennsylvania probate court had here found decedent's appointment to be ineffectual in view of Thomas' renunciation; and (5) the property subject to the power did not become part of decedent's estate by intestacy because, in Pennsylvania, "in the absence of expressed contrary intention a legacy bequeathed in default of ...

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