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Commissioner of Internal Revenue v. Rogers' Estate

April 2, 1943


Petition to Review a Decision of the Tax Court of the United States.

Author: Frank

Before L. HAND, CHASE, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

This court disagrees with the Tax Court and agrees with the Commissioner. However, the several members of this court arrive at that conclusion by different paths. I shall, therefore, describe only my own path.

The taxpayer, purporting to rely on Helvering v. Grinnell, 294 U.S. 153, 55 S. Ct. 354, 79 L. Ed. 825, contends that, if there had been and exact equivalence between the interests appointed to the widow and daughter and the interests which those beneficiaries respectively would have received if the power had not been exercised, then those appointed interests would not be included in decedent's estate under § 302(f), and that this is an a fortiori case, since the interests appointed to the widow and daughter are less in value than the interests which each of them would have received if the power had remained wholly unexercised. I think that the taxpayer has misinterpreted Helvering v. Grinnell. There, although there was an exact equivalence, the court held, I think, that there was no tax solely because the beneficiaries had renounced the appointments. In other words, I interpret that case as holding that, absent renunciations, there would have been a tax despite the existence of an exact equivalence.

The taxpayer, citing Rothensies v. Fidelity-Philadelphia Trust Company, 3 Cir., 112 F.2d 758, and Legg's Estate v. Commissioner, 4 Cir., 114 F.2d 760, argues thus: In the Grinnell case, the court indicated that the "reasoning and conclusions" of the courts in Wear v. Commissioner, 3 Cir., 65 F.2d 665, and Lee v. Commissioner, 61 App.D.C. 33, 57 F.2d 399, were inconsistent with its own conclusion; in each of those cases, there was (a) an exercise of the power and (b) exact equivalence but (c) there was no renunciation; consequently (says taxpayer) there could have been no inconsistency with Grinnell if the Supreme Court, in Grinnell, had regarded renunciation as in any way a relevant fact; wherefore, it is urged, the pivotal fact in Grinnell was the equivalence.

That argument seems to me to be untenable. It seems clear that the reference to "inconsistency" in the Grinnell case is explicable thus: (a) In Wear and Lee, the courts had reasoned that the interests passed to the beneficiaries by virtue of the exercise of the power, solely because the donee of the power, by designating a stranger, could have divested the beneficiaries of the interests which they would have received in default of any appointment, with the consequence that the exercise of the power extignuished this possibility of divestiture. Thus in the Wear case, the court said (65 F.2d 665, at page 667): "The generating source of the change was the death of the donee without action adverse to them. That too was the generating source of the tax." In the Lee case, the court said (57 F.2d at page 402); "It is argued that the tax should not apply to that transfer, inasmuch as without it the moiety would nevertheless have become the property of George Bolling Lee as devisee under his father's will. This view cannot be sustained. It is true that, if Robert E. Lee at the time of his decease had entirely omitted to exercise the power of which he was the donee, his brother, George Bolling Lee, would have held the moiety of the former by devise under the will of W.H.F. Lee. But, on the other hand, Robert E. Lee was entitled during his lifetime to appoint the moiety to any other person, and thus defeat the devise to George Bolling Lee. Therefore the exercise of this power by Robert E. Lee at least confirmed the title of his brother to the moiety in question."*fn1 (b) Had that reasoning been sound, renunciation of the appointments and election to take under the donor's will would not have avoided a tax; for the alleged effect of the exercise of the power - by way of extinguishing the possibility of divestiture - would still have been operative despite that renunciation and election. (c) There was, accordingly, a plain inconsistency between the "reasoning" of Wear and Lee and what I understand to be the Supreme Court's ruling in Grinnell, i.e., that it was solely the renunciation which avoided tax.*fn1 (d) There was a still further inconsistency. As suggested by the opinion of the lower court in Grinnell,*fn2 the reasoning of the courts in Wear and Lee logically compelled the conclusion that Congress intended to include in § 302(f) as "property passing under a general power of appointment exercised by the decedent," property which passed when he did not exercise the power; for the non-exercise - as well as the exercise in favor of the beneficiaries in default - would effectuate an extinguishment of the possibility of divestiture, and such an extinguishment accomplished a "passing" under the power according to Wear and Lee. But in Grinnell it was the "conclusion" of the Supreme Court that § 302(f) did not operate unless there was an "exercise of that power." (See 294 U.S. at page 155, 55 S. Ct. 354, 355, 79 L. Ed. 825.)

In support of the view that renunciation was not the key factor in Grinnell, much is made of the fact that in that case the Supreme Court cited and quoted from Matter of Lansing's Estate, 182 N.Y. 238, 74 N.E. 882, 884, referring to it as "that well-considered case" and saying that "in principle" it "cannot be distinguished." But in the Lansing case, the New York court had stressed the fact that the appointee had "elected" to take under the will of the donor, her grandfather, and not under the power of appointment exercised by her mother, the donee of the power. The court said: "There is no evidence in the record that she ever accepted the appointment or claimed title through the exercise of the power, but, on the other hand, it sufficiently appears that she elected to reject title from that source. An appointee under a power has the right of election, the same as a grantee under a deed. 'It is essential to the legal operation of a deed that the grantee assents to receive it. It cannot be imposed upon him, and there can be no delivery without an acceptance.' Jackson v. Dunlap, 1 Johns. Cas. 114, 116, 1 Am.Dec. 100; Jackson v. Phipps, 12 Johns. 418.He can accept the title tendered or reject it, in his discretion. It cannot be forced upon him against his will. He cannot be compelled to receive additional evidence of title when he does not want it, and does not need it because his title is perfect without it. his consent is necessary before the attempt to exercise the power becomes binding upon him the same as consent is necessary in making a contract or agreement. Declining or refusing to take has the same effect as incapacity to take, as in the case of a devise to a corporation which has no power to hold any more property because the statutory limit has been exceeded. The title is not affected, but remains where it was before." The Supreme Court, in Grinnell (294 U.S. at page 157, 55 S. Ct. at page 355, 79 L. Ed. 825), when referring to Lansing, noted that the state court had said "that it sufficiently appeared that she elected to reject title" through the power, and quoted from the Lansing opinion the discussion concerning "election" and "declining or refusing to take."

Notwithstanding the foregoing, I might hesitate to interpret Grinnell as I have done, because of a seemingly contrary interpretation by this court in Central Hanover Bank & Trust Company v. Commissioner, 2 Cir., 118 F.2d 270, 273, were it not for the subsequent decision in Helvering v. Safe Deposit Company, 316 U.S. 56, 62 S. Ct. 925, 930, 86 L. Ed. 1266, 139 A.L.R. 1513. There relatives of a decedent asserted a claim as appointees under his will or, in the alternative, as his heirs by intestacy. The claim was compromised and the question was whether there was any tax under § 302(f) because of the appointment. The Supreme Court held that there was such a tax and remanded the case to the Tax Board to determine how much of the property should be deemed to have passed under the appointment (with the consequence that it was taxable) and how much by intestacy (with the consequence that it was not taxable). In the course of the court's opinion, it discussed a contention that the "taxable event" occurred upon the death of the decedent and that a tax could not be based upon the compromise since it occurred after that event. Answering that contention, the court said: "Whatever may be the general urle in this respect, this Court has clearly recognized, in Helvering v. Grinnell, 294 U.S. 153, 55 S. Ct. 354, 79 L. Ed. 825, that events subsequent to the decedent's death, events controlled by his beneficiaries, can determine the inclusion or not of certain assets within the decedent's gross estate under Section 302(f). In that case the decedent had exercised a general testamentary power of appointment, an act which, under Section 302(f), brings the property subject to the power within the gross estate. The subsequent renunciation by the appointees of the right to receive by appointment and their election to take as remaindermen in default of appointment were held by this Court to place the property subject to the power outside the scope of Section 302(f)." This comment is meaningless unless the court regarded the renunciation as the significant factor in Grinnell. The minority opinion in the Safe Deposit case similarly interprets Grinnell, saying (316 U.S. at page 68, 62 S. Ct. at page 931, 86 L. Ed. 1266, 139 A.L.R. 1513): "In Helvering v. Grinnell, supra, the decedent exercised the power but the appointees, as was their right under state law, elected not to take under the appointment but to take as remaindermen directly from the estate of the creator of the power, and it was held that § 302 * * * could not be invoked to impose a tax upon the estate of the decedent."

Accordingly, I think that the Tax Court here was wrong, and that, as there were no renunciations, all the appointed interests must be included in decedent's estate under § 302(f).

The decision of the Tax Court is reversed.

L. HAND, Circuit Judge (concurring).

The donor in the case at bar made the gift in default conditional upon the failure of the donee to exercise the power, but the donee did exercise the power and the appointees accepted the appointment; it is therefore hard to see how in strict logic anything could pass under the will. A conditional interest does not take effect unless the condition is fulfilled; and indeed it can be argued that even though the appointees renounce, they should not be allowed to take under the gift in default, for renunciation after exercise of the power is not the equivalent of a failure to exercise it. But that would result in forcing the appointees to choose between taking under the power or taking nothing at all, and the Supreme Court, following In re Lansing, 182 N.Y. 238, 74 N.E. 882, refused to go so far in Helvering v. Grinnell, 294 U.S. 153, 55 S. Ct. 354, 79 L. Ed. 825, and held that when the appointees renounced, the property passed under the gift in default. There would have been nothing in that decision to contradict the theory that when they do not renounce, the property passes under the power, were it not that at the conclusion of the opinion (page 158 of 294 U.S. 153, 55 S. Ct. 354, 356, 79 L. Ed. 825) the court said that it had granted certiorari because the two cases of Wear v. Commissioner, 3 Cir., 65 F.2d 665 and Lee v. Commissioner, 61 App.D.C. 33, 57 F.2d 399, were in conflict with the decision below; and then went on to say: "The reasoning and conclusions of those courts and of the court below cannot be reconciled. We are of opinion that, to the extent of the conflict, the view of the former is wrong and that of the court below is right." In both Wear v. Commissioner, supra, and Lee v. Commissioner, supra, the appointee had not, however, renounced, and pro tanto the reasoning in neither was in conflict with what had been said below as to the effect of renunciation, nor could it be. There was indeed conflict in reasoning because the two earlier cases had held that the exercise of a general power made the property a part of the donee's estate, which the lower court in Helvering v. Grinnell, supra, denied.

The conflict in conclusion was necessarily complect, for the two earlier cases had held that the property passed under the power and not under the will, and while there was a ground of reconciliation in ...

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