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White v. United States

decided: June 14, 1982.


Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 79 C 536 -- William E. Steckler, Chief Judge.

Before Cummings, Chief Judge, Bauer, Circuit Judge, and Doyle, Senior District Judge.*fn*

Author: Bauer

This tax refund suit concerns the federal estate tax consequences of decedent Theodore N. Townsend's failure to mention his general power of appointment over certain trust assets in his will. The district court granted summary judgment in favor of decedent's estate, concluding that the Internal Revenue Service (IRS) erroneously included the trust-assets' value in Townsend's estate. White v. United States, 511 F. Supp. 570 (S.D.Ind.1981). The United States now appeals. We affirm.


Settlor-donor Charlotte K. Townsend, a resident of Le Roy, New York, established several testamentary trusts upon her death in 1931. Item Seventh*fn1 of her will gave her son, decedent-donee Theodore N. Townsend, a life income interest in one of the trusts and a general power of appointment*fn2 over any interest remaining in that trust upon his death. In the event decedent failed to exercise his unrestricted appointment power, Item Seventh provided that the trust property would pass to decedent's issue. Item Seventh was silent, however, as to whether the law of the donor's or that of the donee's domicile would govern if a dispute arose over whether the donee had exercised his appointment power.

On November 9, 1973, decedent died testate in Indianapolis, Indiana, his residence and domicile since 1946. Decedent's will, which was admitted to probate in Marion County, Indiana, specifically bequeathed $45,000 to several educational institutions. A general residuary clause then divided the remainder of decedent's estate equally among his three children. The will mentioned neither decedent's life income interest in the 1931 trust fund nor his appointment power.

As part of his duties as executor of decedent's estate, George S. Olive, Jr., filed a federal estate tax return reflecting decedent's interests in the other testamentary trusts created by Charlotte K. Townsend in 1931. As to the trust over which decedent held the appointment power, Olive included the following notation in Schedule H of Form 706:

Powers Created Prior to October 21, 1942, but Not Included in Gross Estate: Securities held by the Marine Midland Bank-Western, Buffalo, New York, in a trust created by Charlotte K. Townsend, under Item 7th of her Will, subject to general power of appointment, are not included in decedent's gross estate under the provisions of Sec. 2041, I.R.C., because decedent never exercised power. (Copy of C.K. Townsend Will follows Sch. F)

At the time decedent died the trust assets subject to his appointment power were valued at $352,760.64.

An IRS agent auditing the estate's tax return considered decedent's power exercised and therefore included the trust-assets' value in decedent's estate. The agent relied on New York law, under which a testate decedent is presumed to have exercised his general power absent clear proof to the contrary. Olive objected to this decision, but the IRS rejected his timely protest. As a result, Olive paid the asserted $99,727.39 estate tax deficiency and $12,489.13 additional interest with funds advanced by Midland Marine Bank-Western of Buffalo, New York (Midland). Midland, the original and continuous trustee of the 1931 trust fund subject to decedent's power, deducted the sum advanced for the estate tax and then paid the balance of the trust proceeds to decedent's three children. Thereafter the Marion County probate proceedings were closed, with the exception of John F. White's appointment as successor administrator for the purpose of filing a tax refund claim. The claim was disallowed and White filed this suit.

After considering the parties' cross-motions for summary judgment, the district court decided that the $352,760.64 should not have been included in decedent's gross estate and that a refund was therefore due. This appeal followed.


Under section 2041(a)(1) of the Internal Revenue Code of 1954,*fn3 appointive trust*fn4 assets are included in a decedent's estate only if the decedent exercised his general appointment power over them. In cases such as this one, where a decedent disposes of all his property through a residuary clause but fails to mention his general power, a question arises as to whether the residuary clause operates as an exercise of the power. New York law presumes that a testate decedent has exercised his power unless a different testamentary intent appears expressly or by necessary implication. N.Y.Est., Powers & Trusts Law (McKinney) § 10-6.1(a)(4).*fn5 Indiana law creates the opposite presumption by deeming a power unexercised absent some specific testamentary indication that the decedent intended to exercise his power. Ind.Code.Ann. § 29-1-6-1(f) (Burns).*fn6

The parties agree that decedent's silence as to his intent raises a question of law, but divide over which state's law should govern. The government contends that New York law controls because the trust was created, located, and administered in New York. Proper application of New York's presumption, the government asserts, requires judgment in favor of the United States. Decedent's estate representative, however, argues that Indiana law governs and dictates a ...

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