APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 75-67, Erie).
Seitz, Chief Judge, Aldisert and Hunter, Circuit Judges.
This appeal is from a final judgment of the district court ordering the United States to refund estate taxes in the amount of $77,939.42 together with interest to Marien E. Durst and G. Chester Durst, Executors of the Estate of John E. Dieteman, deceased. The refund is equal to the tax deficiency assessed against and paid by the plaintiff-executors attributable solely to their failure to include as part of his gross estate the value of an irrevocable inter vivos trust created by Dieteman.
The Internal Revenue Service determined that the value of the trust was includable under §§ 2036(a)(2) and 2038(a)(1) of the code. Those sections provide that the value of property transferred inter vivos shall nevertheless be includable in the decedent's gross estate when he retained the right, whether alone or in conjunction with others, either to thereafter designate the persons who will share in the trust or their degree of participation or to affect the enjoyment of the trust through a power to alter, amend, revoke or terminate the trust. The taxpayers concede that under the terms of the trust, the trustees retain some of the powers enumerated above so that if the settlor could appoint himself co-trustee, the value of the trust was includable in the estate. The single issue which divides the parties is whether settlor retained the power to appoint himself trustee.
It is settled, as a matter of federal law, that the intent of the settlor to exercise any of the retained powers enumerated in §§ 2036 and 2038 is irrelevant. The inquiry is limited to whether or not the settlor reserved the power, and the answer to this question is furnished by the state law which governs the trust, here the law of Ohio. See Mathey v. United States, 491 F.2d 481 (3d Cir. 1974) (in banc). The taxpayers concede that under Ohio law a settlor may reserve a power of self appointment. It is also clear that Article Sixth A of the trust instrument, which is quoted infra, empowers the settlor to appoint one or more individual trustees, although it neither expressly reserves nor withholds the power of self appointment. The district court examined the instrument as a whole together with extrinsic evidence, and concluded that under Ohio law the provision would be construed to deny the power of self appointment. We now review the legal correctness of that determination.
It appears that Ohio follows the position of the Restatement (Second) of Trusts § 4(1957),*fn1 that the terms of the trust are to be ascertained by reference to the settlor's intent as expressed in the instrument and such extrinsic evidence as is admissible. See, e.g., Provident Savings Bank & Trust v. Pettengill, 143 N.E. 2d 884, 887 (Ohio C.P. 1957) (if settlor's intent in using certain words or phrases was somewhat different from their accustomed meaning his intent must prevail; extrinsic evidence admissible to determine whether term "issue" embraced adopted grandchildren).
The government accepts the proposition that Ohio law controls and that under Ohio law the settlor's intent governs the construction of the terms of the trust, but nevertheless, citing Mathey, supra, appears to argue that, as a matter of federal law, the denial of the power must expressly appear in the instrument. The government's reliance on Mathey is misplaced. In Mathey we dealt with a trust instrument which permitted the settlor to appoint successor trustees but which neither expressly reserved nor withheld a self-appointment power. The only evidence of an intent to withhold a self-appointment power was use of the word "it" to describe successor trustees, which, it was argued, limited successors to corporate trustees. We held that the finding of the district court that "it" is used by draftsmen to refer to individual as well as corporate successors was not clearly erroneous, and affirmed the conclusion that a self-appointment power had been reserved.
It is implicit in Mathey, and we so hold, that the power of self-appointment need not be expressly withheld (though careful draftsmen will continue to do so) so long as under the controlling state law the power of self appointment would not be permitted under the terms of the trust indenture. It follows, therefore, that the district court was correct in following the law of Ohio which requires examination of the instrument as a whole to determine whether it evinced an intent by settlor to deny himself the power of self appointment, notwithstanding that Article Sixth did not expressly prohibit settlor from doing so. As to the admissibility of the extrinsic evidence of intent, that is also a matter of state law, see, e.g., Craft v. Commissioner, 68 T.C. 249 (1977). Since the government does not challenge the admissibility of the evidence on appeal we assume it is properly a part of the record.
It is urged by the taxpayers that an intent to withhold the power of self appointment is evident from certain provisions of the trust which would on a contrary assumption appear to be unnatural or absurd. Taxpayers argue that if the instrument contemplated that settlor could be a trustee, Article Sixth A would not have been written, as it was, to require the settlor-trustee to take action after his own demise. Article Sixth A provides:
The Settlor reserves the right at any time during his life to appoint one or more Individual Trustees to act with the Corporate Trustee by giving written notice of such appointment, signed by the settlor, to the Corporate Trustee. After the death of the Settlor the Individual Trustee may appoint a successor Individual Trustee by ...