363 F.

2d 1009
66-2 USTC P 12,412

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

v.
ESTATE of Herman J. BOSCH, Deceased, Irving Trust
Company,
Executor,Respondent.
No. 306, Docket 29883.

United States Court of Appeals Second Circuit.

Argued May 25, 1966.
Decided July 6, 1966.

Benjamin M. Parker, Atty., for the Dept. of Justice, Washington, D.C.

(Mitchell Rogovin, Asst. Atty. Gen., Richard M. Roberts, Acting Asst.
Atty. Gen., Lee A. Jackson and Robert N. Anderson, Attys., Washington,
D.C., on the brief), for petitioner.
John W. Burke, New York City (John A. Clark, Dermod Ives and Davies,
Hardy & Schenck, New York City, of counsel), for respondent.
Before FRIENDLY, HAYS and FEINBERG, Circuit Judges.
HAYS, Circuit Judge.

The Commissioner petitions for review of a decision of the Tax Court which
held that the Commissioner had erroneously disallowed the sum of $70,222.04
as a marital deduction under Section 2056(b)(5) of the Internal Revenue Code
of 1954, 26 U.S.C. 2056(b)(5).1 We affirm the Tax Court.

The facts are fairly simple and are not in dispute.

On April 9, 1930 the decedent set up a trust by the terms of which the income
was to be paid to his wife during her lifetime. Upon the death of the wife the
corpus was to be paid to the grantor or his estate. The trust was amendable and
revocable.

On February 6, 1931 decedent amended the trust instrument to grant to his wife
a general power of appointment. She was empowered to appoint by her will the
corpus of the trust to any 'persons and/or corporations.' The amendment
provided for a disposition over in the event the wife failed to exercise her power
of appointment.

On October 25, 1951, the wife executed a document by which she purported to
release a portion of her general power of appointment under the trust and to
convert it into a special power of appointment.2

It appears from the document itself and it is readily conceded by the trustee,
which proposed to Mr. and Mrs. Bosch the execution of the release, that the
purpose of the release was to take advantage of the Powers of Appointment Act
of 1951, Ch. 165, 65 Stat. 91, amending Int. Rev. Code of 1939, 811(f) (now
Int. Rev. Code of 1954, 2041), then recently enacted, and thus 'to prevent the
assets of the trust being taxed as part of Margaret Bosch's estate.'

On April 6, 1957 Herman Bosch died. His executor claimed a marital

deduction for the value of the trust. The Commissioner determined that the trust
did not qualify for the marital deduction and asserted a federal tax deficiency
based upon the disallowances of the amount of $70,222.04, the value of the
corpus of the trust.

The executor filed a petition in the Tax Court for a redetermination of the
deficiency. While the action was pending in the Tax Court, the trustee, which
was also executor of the estate of Herman Bosch, brought a proceeding in the
New York Supreme Court for a settlement of its account as trustee. In
connection with the proceeding in the New York Supreme Court, the trustee
asked for a determination of the validity of Mrs. Bosch's release of part of her
power of appointment. Respondent stipulated and conceded that the New York
proceeding was instituted 'at least in part for the purpose of affecting (the)
outcome of the case before the Tax Court. The trustee's petition in the New
York court described the proceedings then pending in the Tax Court, and stated
the position taken in that proceeding by the executor.

The issue in the state proceeding was whether the release executed by Mrs.
Bosch on October 25, 1951 was effective. Three briefs were filed in the New
York proceeding, one for Mrs. Bosch, one for the trustee, and one by a
guardian ad litem in behalf of a minor interested in the trust by reason of being
a possible beneficiary in the event Mrs. Bosch died without exercising her
power of appointment. All three briefs argued that the release was a nullity. No

argument for the validity of the release was presented to the court.
10

There were twenty-two persons having the same interest as the infant who was
represented by the guardian ad litem. Although they received notice of the
proceeding, none of them appeared.

11

The state court held that Mrs. Bosch's purported release was a nullity.3

12

The Tax Court decided to accept the New York decision and gave the following
reasons for doing so:

13

1. The New York court had jurisdiction over the parties and subject matter of
the proceeding, and its judgment was final and conclusive as to those parties.
Therefore, Mrs. Bosch now has a general power of appointment which she
could exercise in favor of herself, her estate, her creditors, or the creditors of
her estate.

14

2. Decisions of the Supreme Court of the State of New York represent legal
precedent for courts throughout the state, unlike decisions of local courts with
limited geographical jurisdiction whose decisions are not binding upon other
courts of the state.

15

3. The Commissioner was fully aware of the proceeding in the New York court
and could have sought the opportunity to present his views to that court.
Indeed, he agreed to the continuance of the hearing before the Tax Court so that
the New York proceeding might be brought to a conclusion.

16

4. The New York court rendered a reasoned opinion and reached a deliberate
conclusion.

17

5. The New York court's decision, which is binding upon Mrs. Bosch, may
have certain offsetting tax consequences in respect to her own estate tax. The
New York decree establishing that she has a general power of appointment will
result in the inclusion in her gross estate of any property passing under her
exercise of that power, and the record indicates that it is not reasonable to
assume that this power of appointment will remain unexercised.* Thus, the
state court decree *The Tax Court said 'We cannot reasonably assume that she
will permit that power to remain unexercised, for there are indications in the
record that the immediate natural objects of her bounty do not include all of the
many relatives of her husband who would take in default of her exercise of the

power.' was more than 'a label for past events that would affect the present
litigation; it authoritatively determined the nature of the power of appointment
with potentially adverse tax consequences at a later date.'
18

The Tax Court stated that it was not necessary for it to say that it was 'bound' by
the New York decision. It held that it was sufficient to state, for all of the above
reasons, that it would accept the New York decision 'as an authoritative
exposition of New York law and adjudication of the property rights involved.'

19

In deciding whether the Tax Court ascribed proper effect to the state decision, a
few preliminary observations may be helpful. We believe that much of the
confusion in the cases is caused by the failure of the courts carefully to
formulate the issue. For example, it is quite clear that the state decision is not
binding upon the federal courts because the situation is covered by the
principle of res judicata. See Freuler v. Helvering, 291 U.S. 35, 43, 54 S.Ct.
308, 78 L.Ed. 634 (1934). Obviously the Commissioner is not bound by the
state decision in a res judicata sense, since he was not a party to the litigation
which resulted in the decision. It may be that it would be desirable to hold the
Commissioner bound when he has received notice and an opportunity to appear
as in this case, but that is clearly not the law now, and any such change in the
law would no doubt require legislative action. Similarly the federal courts are
not bound in this situation by the rule of Erie R.R. Co. v. Tompkins, 304 U.S.
64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). It is for this reason that most of the
Commissioner's argument must be considered to be beside the point. The task
here is not to discover the general New York law applicable to releases of
powers of appointment. That may well be the subject of the required search in a
case which concerns a taxpayer whose own special status under New York law
has never been authoritatively determined by a New York tribunal. In the
determination of the present case we are not required to take issue with our
learned colleague, Judge Friendly, whose brilliant lecture In Praise of Erie-And of the New Federal Common Law, 39 N.Y.U.L.Rev. 383 (1964) is quoted
in the Commissioner's Reply Brief. We may indeed agree with him that the
correct view, that 'the Erie doctrine applies, whatever the ground for federal
jurisdiction, to any issue or claim which has its source in state law,' is set forth
by Judge Waterman in Maternally Yours, Inc. v. Your Maternity Shop, Inc.,
234 F.2d 538, 541 n. 1 (2d Cir. 1956). The reference in the quoted passage is to
the great run of cases in which the federal courts are obliged to search out the
general principle of state law in order to apply that principle to a case under
consideration. It does not refer, and was never intended to refer, to the question
of whether or not a federal court is to accept a state determination of the rights
under state law of a party to a federal action. In the latter situation, which is that
in the case at bar, the party comes into the federal court with his rights already

fixed by a decision of a state tribunal. There is no occasion to inquire into the

general law of the state to ascertain what those rights are.
20

The issue is, then, strictly speaking, not whether the federal court is 'bound by'
the decision of the state tribunal, but whether or not a state tribunal has
authoritatively determined the rights under state law of a party to the federal
action.

21

This is clearly the effect of Sharp v. Commissioner, 303 U.S. 624, 58 S.Ct. 748,
82 L.Ed. 1087 (1938), reversing, 91 F.2d 802 (3d Cir. 1937), Blair v.
Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465 (1937) and Freuler v.
Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634 (1934). In the Blair case,
the issue was whether a certain trust was a spendthrift trust under the law of
Illinois. The Circuit Court of Appeals, examining the general law of Illinois on
the subject, held it to be a spendthrift trust. The trustees thereupon brought an
action in the Illinois courts to obtain a construction of the will and the Appellate
Court of Illinois, an intermediate appellate court, held that the trust was not a
spendthrift trust. The United States Supreme Court ruled that the Commissioner
was required to accept the Illinois decision as dispositive. The Court said:

22

'In this instance, it is not necessary to go beyond the obvious point that the
decision was in a suit between the trustees and the beneficiary and his
assignees, and the decree which was entered in pursuance of the decision
determined as between these parties the validity of the particular assignments.'
300 U.S. at 10, 57 S.Ct. at 332.

23

In deciding whether the determination of the rights under state law of a party to
a federal action has been authoritative, the majority of federal courts in which
the question has been raised have refused to accept the result in cases which
were non-adversary. 4 However, there is very respectable authority for the
proposition that, if the state decision is binding on the parties as to their rights
under state law (as it would not be if it resulted from fraud or collusion), it is
conclusive as to those rights for purposes of federal taxation. In Gallagher v.
Smith, 223 F.2d 218, 223 (3d Cir. 1955), the court said:

24

'An adjudication of such a question of title by a court of the state must

accordingly be given effect, not because it is res judicata against the United
States, but because it is conclusive of the parties' property rights which alone
are to be taxed. So far as those parties are concerned the law of the state is what
the state court has declared and applied in their case. If the state court's
judgment has binding final effect under the state law the rights of the parties

can only be what the court has held them to be. It is for this reason that the
federal court should not in a case of this kind make an independent examination
and application of state law. For if it reaches a different conclusion from the
state court as to what the parties' rights should be under the state law its
decision will not change those rights which will necessarily remain what the
state court has declared them to be.'
25

See Flitcroft v. Commissioner, 328 F.2d 449 (9th Cir. 1964); Estate of
Darlington v. Commissioner, 302 F.2d 693 (3d Cir. 1962); Eisenmenger v.
Commissioner, 145 F.2d 103 (8th Cir. 1944); Sharpe v. Commissioner, 107
F.2d 13 (3d Cir. 1939), cert. denied, 309 U.S. 665, 60 S.Ct. 591, 84 L.Ed. 1013
(1940).

26

It may fairly be said, we think, that the question is an open one in this circuit.
(However, compare Kelly's Trust v. Commissioner, 168 F.2d 198 (2d Cir.
1948). The decision in Second National Bank v. United States, 351 F.2d 489
(2d Cir. 1965), was based, as the court makes clear,5 on the holding that the
determination of the Connecticut Probate Court was not authoritative in
Connecticut.

27

An able Tax Court judge quite explicitly undertook to balance several relevant
factors (see pp. 2494-2495 supra) before deciding to accept the New York
judgment as authoritative of the rights of parties. We, too, have considered all
of the circumstances and feel that the decision below was correct. We hold that
the New York judgment, rendered by a court which had jurisdiction over
parties and subject matter, authoritatively settled the rights of the parties, not
only for New York, but also for purposes of the application to those rights of
the relevant provisions of federal tax law. Mrs. Bosch now has a general power
of appointment under the trust. The corpus of the trust therefore qualifies for
the marital deduction.

28

The decision of the Tax Court is affirmed.

29

FRIENDLY, Circuit Judge (dissenting).

30

The Commissioner's appeal concerns an important problem in the

administration of the revenue laws-- the conclusiveness of a judgment of a
lower state court, typically in an intra-family setting, that determines property
interests entailing federal tax consequences. The Supreme Court has not spoken
to the point for nearly thirty years. Difficulties arise because of the practical
unacceptability of the strictly logical polar positions; that the judgment of an

inferior state court not binding as res judicata can never be more than rebuttable
evidence of state law, and that any such judgment which is effective as a
determination of property rights among the parties is conclusive upon the
federal fisc. The former position could operate unfairly in the many cases
where persons having a genuine controversy over property rights desire
resolution by an appropriate local tribunal without wishing to press their
differences to the highest court of the state. The latter would permit citizens,
unwilling to accept the tax consequences of actions taken by them or their
decedents, to evade federal taxes by taking advantage of an unwitting lower
state tribunal.
31

The compounding of factual variables, the somewhat intractable nature of the

problem, and the cryptic character of the Supreme Court's rather dated
pronouncements, see Freuler v. Helvering, 291 U.S. 35, 43-47, 54 S.Ct. 308, 78
L.Ed. 634 (1934); Blair v. C.I.R., 300 U.S. 5, 9-10, 57 S.Ct. 330, 81 L.Ed. 465
(1937); and Sharp v. C.I.R., 303 U.S. 624, 58 S.Ct. 748, 82 L.Ed. 1087 (1938),
have created widespread conflict among the circuits. Contrast, e.g., Saulsbury
v. United States, 199 F.2d 578 (5 Cir. 1952), cert. denied, 345 U.S. 906, 73
S.Ct. 645, 97 L.Ed. 1342 (1953); Stallworth's Estate v. C.I.R., 260 F.2d 760 (5
Cir. 1958); Sweet's Estate v. C.I.R., 234 F.2d 401 (10 Cir.), cert. denied, 352
U.S. 878, 77 S.Ct. 100, 1 L.Ed.2d 79 (1956); and Faulkerson's Estate v. U.S.,
301 F.2d 231 (7 Cir.), cert. denied, 371 U.S. 887, 83 S.Ct. 182, 9 L.Ed.2d 121
(1962), refusing to give effect to state judgments, with Gallagher v. Smith, 223
F.2d 218 (3 Cir. 1955); Darlington's Estate v. C.I.R., 302 F.2d 693 (3 Cir.
1962), and Goodwin's Estate v. C.I.R., 201 F.2d 576 (6 Cir. 1953), doing the
opposite. The Fourth Circuit has declined to give effect to a lower state court
judgment with respect to a widow's power of appointment rendered under
circumstances quite similar to those here, Pierpont's Estate v. C.I.R., 336 F.2d
277, 281-282 (1964), cert. denied, 380 U.S. 908, 85 S.Ct. 890, 13 L.Ed.2d 795
(1965), distinguishing its earlier decision in Pitts v. Hamrick, 4 Cir., 228 F.2d
486 (1955), and expressly refusing to follow the rule of the Third Circuit which
my brothers adopt. The Eighth Circuit seems to be less deferential to state
judgments now than it used to be. Contrast Straight's Trust v. C.I.R., 245 F.2d
327 (1957), and Peyton's Estate v. C.I.R., 323 F.2d 438 (1963), with Helvering
v. Rhodes' Estate, 117 F.2d 509 (1941); and Eisenmenger v. C.I.R., 145 F.2d
103 (1944). The Ninth Circuit appears to be more so. Contrast Flitcroft v.
C.I.R., 328 F.2d 449 (1964), with Newman v. C.I.R., 222 F.2d 131 (1955), and
Wolfsen v. Smyth, 223 F.2d 111 (1955). The conflict among the judges is
echoed among the commentators. Most of them disapprove the acquiescent
attitude now identified with the Third Circuit. See, e.g., Cardozo, Federal Taxes
and the Radiating Potencies of State Court Decisions, 51 Yale L.J. 783 (1942);
Cahn, Local Law in Federal Taxation, 52 Yale L.J. 799, 818-19 (1943); Oliver,

The Nature of the Compulsive Effect of State Law in Federal Tax Proceedings,
41 Calif.L.Rev. 638 (1953); Stephens and Freeland, The Role of Local Law and
Local Adjudications in Federal Tax Controversies, 46 Minn.L.Rev. 223, 242-51
(1961); Braverman & Gerson, The Conclusiveness of State Court Decrees in
Federal Tax Litigation, 17 Tax L.Rev. 545 (1962); Note, Effect of State Court
Decrees in Federal Tax Litigation: A Proposal for Judicial Reform, 30
U.Chi.L.Rev. 569 (1963); Sacks, The Binding Effect of Nontax Litigation in
State Courts, N.Y.U. 21st Inst. on Fed. Tax. 277 (1963). But the Third Circuit
also has a defender. See Note, The Binding Effect of a Nonadversary State
Court Decree in a Federal Tax Determination, 33 Fordham L.Rev. 705 (1965).
With our own court uncommitted,1 I regret my brothers' vote to align ourselves
with the rather mechanical view of the Third Circuit rather than the more
realistic one of the Fourth and Fifth, thereby needlessly handicapping the
Commissioner in the fair and equal enforcement of the federal revenue laws. I
would hold that when it is evident that state court litigation has been brought
primarily to have an effect on federal taxes, the judgment of an inferior state
court adjudicating property rights is entitled to little weight, and that when the
state court has not had the banefit of a fair presentation of both sides of
thecontroversy, it is entitled to none. While these principles will not resolve all
cases, they are ample to decide this one.
32

When Herman Bosch died in 1957, the critical date for determining taxes on
his estate, his wife had only a special power of appointment over the trust
whose status is here is question. Admittedly this was all she purported to have
and all she or her husband thought she had. So long as Mr. Bosch lived, no one
had questioned the validity of the partial release of the quondam general power,
least of all the experienced attorneys who had recommended it. Nor was there
any basis for doing so. There had indeed been New York decisions that a power
of appointment by will, whether or not contingent on the donee's surviving the
donor, could not be released since this would defeat the purpose of preserving
the donee's freedom of action until death. Learned v. Tallmadge, 26 Barb. 443
(1856); Farmers' Loan and Trust Co. v. Mortimer, 219 N.Y. 290, 114 N.E. 389
(1916). But, upon enactment of the Revenue Act of 1942, thenceforth taxing all
property subject to a preexisting general power of appointment unless this was
released by a specified date,2 New York's legislature moved swiftly to permit
holders to rid themselves of such powers in whole or in part. The statute, Real
Property Law 183, was phrased in the broadest terms:

33

'Any power which is exercisable by deed, by will, by deed or will, or otherwise,

whether general or special, other than a power in trust which is imperative, is
releaseable * * * with respect to the whole or any part of the property subject to
such power and may also be released in such manner as to reduce or limit the

persons or objects, or classes of persons or objects, in whose favor such power

would otherwise be exercisable.'
34

Nothing in the language suggests a desire to except powers that were, like Mrs.
Bosch's, contingent on the donee's surviving the settlor or destructible by the
settlor's amending or revoking the trust;3 'exercisable' would not normally be
read as including only cases where the exercise would be effective if the donee
died the next minute. And there was no reason why New York's legistlature
should thus fail in part to enable its citizens to do what Congress contemplated
they might. Unless such a contingent power was partially released before the
end of the grace period accorded by Congress, the settlor's death would leave
the donee in the same unenviable position as any other holder of a general
power created on or before October 21, 1942, where any exercise, although in
favor of persons other than the donee, his estate, or their creditors, would result
in the inclusion in his estate of the property over which he held the power-- just
what the release here suggested by the trustee in October 1951 was meant to
avoid. Since there is no apparent reason why the New York legislature should
have wished to discriminate against holders of contingent or revocable powers
and the language affords no indication that it did, it is not surprising that what
appears to be the only New York case raising the problem in a truly adversary
context held that the contingent nature of a power of appointment, in that
instance upon death of the donee without issue, did not prevent release under
183, In re Woodcock's Will, 19 Misc.2d 268, 186 N.Y.S.2d 447, 450 (Surr.Ct.
Westchester Co. 1959).4 This was the unpropitious background in which the
attorneys who had counseled that Mrs. Bosch convert her general power into a
special one in 1951 determined to engage in what the Commissioner has aptly
characterized as post mortem estate planning, regaining for her through the
New York courts a general power she no longer had at Mr. Bosch's death.

35

The only reason advanced by the trustee for seeking a declaration as to the
validity of the release was the effect on the trust's liability for its share of the
taxes on Mr. Bosch's estate-- allegedly only $930 if the release was not valid
but $21,479 if it was. The trustee's petition to the New York court gave no
reason why determination of that question by the Tax Court in the litigation
there pending would not fully protect it. The brief for Mrs. Bosch, joining in the
trustee's request that the release be declared invalid, made no suggestion that
she desired to avail herself of the released power to appoint by will to herself,
her estate or her creditors. Indeed, her regaining the general power made it less
likely that she would exercise it in any respect. Under the Internal Revenue
Code of 1954, 2041(a)(1), while any exercise of the power would cause the
trust property to be included in her estate, failure to exercise it would produce
the optimum result of availability of the trust property for the marital deduction

in Mr. Bosch's estate and freedom from taxation in his widow's-- a feat which
could not have been accomplished by revocation of the trust during Mr. Bosch's
life. In default of appointment the trust was to be divided equally between the
then next of kin of the two spouses; the interest of the many persons cited as
presumptive remaindermen, taken as a class, thus also favored a declaration of
invalidity which would make exercise in favor of Mrs. Bosch's relatives less
likely, as was conceded in the brief filed by a guardian ad litem for a relative of
Mr. Bosch, the only remainderman to take a position. Mrs. Bosch in no way
indicated that if the release was held valid, she would exercise her special
power in favor of any particular person, who might thus be interested in urging
validity. The briefs, filed by the trustee, Mrs. Bosch and the guardian, treated
the invalidity of the release as almost beyond reasonable debate. The attorneys
for the trustee did not inform the court on what basis they had recommended
action in 1951 which they now considered so plainly a nullity-- something as to
which they would have been questioned sharply in a truly adversary
proceeding. The sole relevant authority, In re Woodcock's Will, supra, was not
cited, and the legislative purpose behind 183 was not explored. Under these
circumstances it is not to be wondered that a judge sitting in the busy motion
part of the Supreme Court for New York County should have erroneously
ratified the parties' unanimous contention, citing only the inapposite decision of
In re Piffard, see n. 3.
36

The case thus fits perfectly the description cited by way of contrast in Freuler v.
Helvering, supra, where 'all the parties joined in a submission of the issues and
sought a decision which would adversely affect the Government's right to
additional * * * tax.' 291 U.S. at 45, 54 S.Ct. at 312. The problem in this area
has been bedeviled by iteration of terms such as 'collusive' or 'non-adversary.'
To require proof of collusion in the normal sense of prearrangement would
impose a nigh impossible burden on the Commissioner; yet a court shrinks
from using such an opprobrious epithet when no prearrangement has been
shown. Again, while a proceeding in which, for example, a life tenant with
what appears to be a limited right to invade principal seeks a declaration of
absolute ownership is surely 'adversary' in a formal sense, it may not be in a
practical one, as when the life tenant is an aged mother seeking to qualify a
bequest for the marital deduction and the remaindermen are her adult sons. See
Peyton's Estate v. C.I.R., supra, 323 F.2d 438. What makes this case so easy is
that the state court proceeding had no significant purpose other than the
reduction of tax liabiluty; Mrs. Bosch was not shown to have the slightest
intention of using the general power the New York court was led to thrust upon
her, or even the special one if she was held to have only that. In a practical
sense the decision was thus devoid of any effect except on taxes.5 There was no
question affecting the integrity of the corpus, as a Freuler, or the assignability

of the beneficiary's right to income, as in Blair v. C.I.R., supra. In such a case

the considerations for respecting the determination of a lower court which is
not the product of a weighing of opposing arguments approach zero.6 One
well-considered article has said: 'Whenever all parties to the state court
proceeding approve and have never opposed the proffered result, and the
decree embodying it appears to serve no purpose other than to avoid federal
taxation, the decree should not be regarded as determinative of the state law
property rights purportedly adjudicated.' Braverman & Gerson, supra, 17 Tax
L.Rev. at 576. Another comment suggests that 'if a taxpayer, intending to avoid
tax liability, institutes a state suit, and if no interested party presents the
argument urged by the Commissioner, then the state court judgment should be
considered to have been collusively obtained.' Note, supra, 30 U.Chi.L.Rev. at
581. A third proposes that a state court adjudication of property rights be
respected 'unless it was obtained by collusion, i.e., for the sole and single
purpose of defeating the federal tax imposed upon those rights.' Sacks, supra,
N.Y.U. 21st Inst. on Fed.Tax. at 295. It is unnecessary to choose among these
formulations; all call for reversal here.

'(5) Life estate with power of appointment in surviving spouse.-- In the case of
an interest in property passing from the decedent, if his surviving spouse is
entitled for life to all the income from the entire interest, * * * with power in
the surviving spouse to appoint the entire interest, * * * (exercisable in favor of
such surviving spouse, or of the estate of such surviving spouse, or in favor of
either, whether or not in each case the power is exercisable in favor of others),
and with no power in any other person to appoint any part of the interest, or
such specific portion, to any person other than the surviving spouse-(A) the interest * * * thereof so passing shall, for purposes of subsection (a), be
considered as passing to the surviving spouse, and
(B) no part of the interest so passing shall, for purposes of paragraph (1) (A), be
considered as passing to any person other than the surviving spouse. This
paragraph shall apply only if such power in the surviving spouse to appoint the
entire interest, or such specific portion thereof, whether exercisable by will or
during life, is exercisable by such spouse alone and in all events.'

'KNOW ALL MEN BY THESE PRESENTS:

WHEREAS I, MARGARET BOSCH, am the life beneficiary of the trust
created by a certain Agreement of Trust dated April 9, 1930 between Herman J.
Bosch, as Grantor, and Irving Trust Company, as Trustee, which trust is now
being administered by said Irving Trust Company as such Trustee; and

WHEREAS, by an amendment of said Agreement of Trust, dated February 6,

1931, made by said Grantor pursuant to the power thereby preserved to him, it
is provided that in the event that said Grantor shall not survive me, the
beneficiary therein named-'then upon the death of said Margaret Bosch the Trustee shall pay, transfer and
deliver the principal of the trust fund to the persons and/or corporations
appointed to receive the same by the Last Will and Testament of Said Margaret
Bosch, * * *,
and
WHEREAS I desire to release in part my contingent power of appointment
under said Agreement of Trust in the manner contemplated by the 'Powers of
Appointment Act of 1951' amending Section 811(f) and Section 1000(c) of the
Internal Revenue Code of the United States of America, so that my said
contingent power of appointment under said Agreement of Trust shall not be a
general power of appointment,
NOW, THEREFORE, I, said Margaret Bosch, hereby renounce, relinquish,
surrender and release my said contingent power to appoint all or any part of
said trust fund by said Agreement of Trust dated April 9, 1930 made by
Herman J. Bosch, as amended by instrument dated February 6, 1931, or any
property which may hereafter form a part of said trust fund, in favor of myself,
my estate, my creditors or the creditors of my estate.
Any attempted exercise of said power made by my Will which is inconsistent or
in any way in conflict with this release and limitation by me of said power shall
be void.
IN WITNESS WHEREOF, I have executed this instrument in duplicate this 25
day of October, 1951.
/s/ MARGARET BOSCH (L.S.) Margaret Bosch'
3

'Matter of Irving Trust Co. (Bosch)-- In this proceeding to judicially settle and
allow the intermediate account of the trustee under an inter vivos trust, a ruling
is requested respecting the validity of an instrument executed by Margaret
Bosch, wife of the Settlor of the trust, dated October 25, 1951, purportedly
partially releasing her contingent power of appointment. On April 9, 1930,
Herman J. Bosch created a trust which provided for the payment of income to
his wife for her life with a reversion to the grantor if his wife should predecease
him, or to his estate if he should predecease his wife, leaving a will, or to his
next of kin if he should die intestate. The trust instrument reserved to the

grantor the right to alter or amend the trust at any time during his life with the
consent of the trustee, and the further right without the consent of the trustee or
any other person to revoke the trust in whole or in part. On February 6, 1931,
the grantor exercised his right to amend the trust to provide that his wife,
Margaret Bosch, should have a general power of appointment over the property
of the trust exercisable by Will if she survived the grantor. The power in the
grantor to further alter, amend or revoke the trust in his lifetime was
undisturbed by this amendment. On October 25, 1951, during the lifetime of
the grantor, his wife, Margaret Bosch, executed an instrument by which she
purported to effect a partial release of the general power of appointment granted
to her by the trust instrument as amended. The grantor, Herman Bosch, died on
April 6, 1957. The applicable provision of the law is section 183, subdivision 1,
of the Real Property Law (McKinney's Consol.Laws, c. 50), which stated: 'Any
power which is exercisable by deed, by will, by deed or will, or otherwise,
whether general or special, other than a power in trust which is imperative, is
releasable, either with or without consideration, by written instrument signed by
the grantee and delivered as hereinafter provided.' This section, although a part
of the Real Property Law, applies to powers of appointment over personal
property as well as to powers over real property (Matter of N.Y. Title &
Mortgage Co., 150 Misc. 488 (270 N.Y.S. 473); In re Goldwitz Will, 145 Misc.
300 (259 N.Y.S. 900); Matter of Cooksey's Estate, 182 N.Y. 92 (74 N.E. 880)).
In order that the donee of a power of appointment release any rights under that
power, the donee must have the right to exercise the power at the time the
purported release is made. It seems clear that the donee of power of
appointment cannot exercise it prior to its creation (Matter of Piffard, 111 N.Y.
410 (18 N.E. 718, 2 L.R.A. 193)). In the instant case, Margaret Bosch, on
October 25, 1951, sought to effect a partial release of the power of appointment
over the property of the trust. At that time she lacked the power to exercise any
rights under the trust instrument. Her power with respect to the trust instrument
came into being upon the death of the grantor on April 6, 1957. A power of
appointment created under a revocable deed of trust, which power shall be
exercised by will, may not be exercised while the settlor of the trust is still
alive. Since she could not have exercised the power of appointment on October
25, 1951, she could not have effected a valid partial release of the power on that
date. Hence her purported partial release of the power of appointment on
October 25, 1951, was a nullity (Matter of Piffard, supra). Accordingly, the
purported partial release by Margaret Bosch on October 25, 1951, of the power
of appointment granted to her by the trust instrument was a nullity. Settle order.'
N.Y.L.J., November 15, 1963
4

See the discussion and the cases cited in the following:

10

Mertens, Law of Federal Income Taxation, Ch. 61 (Zimet Revision 1964);

Braverman and Gerson, The Conclusiveness of State Court Decrees in Federal

Tax Litigation, 17 Tax L.Rev. 545 (1962); Colowick, The Binding Effect of a
State Court's Decision in a Subsequent Federal Income Tax Case, 12 Tax
L.Rev. 213 (1957); Holzman, Impact of State Law upon Fed. Tax., 42 Taxes
240 (1964); Sacks, Binding Effect of Nontax Litigation in State Courts, N.Y.U.
21st Inst. on Fed. Tax., 277 (1963); Stephens & Freeland, The Role of Local
Law and Local Adjudication in Federal Tax Controversies, 46 Minn.L.Rev. 223
(1961); Note, Binding Effect of a Nonadversary State Court Decree in a Federal
Tax Determination, 33 Fordham L.Rev. 705 (1965); Note, Effect of State Court
Decrees in Federal Tax Litigation, 30 U. of Chi.L.Rev. 569 (1963); Note, The
Role of State Law in Federal Tax Determination, 72 Harv.L.Rev. 1350 (1959)
5

'The trial court after carefully considering the arguments and the many relevant
decisions concluded that 'the decrees of the Connecticut Probate Court-- which
is not a court of record and most of the judges of which are laymen, not
lawyers-- under no circumstances can be construed as binding and conclusive
upon a federal court in construing and applying the federal revenue laws.' 222
F.Supp. (446,) at 457. This court is in accord with the trial court's conclusion as
to the effect of the state decree, see Estate of Peyton v. Commissioner, 323 F.2d
438 (8th Cir. 1963), since under Connecticut law the Probate Court's decisions
are not binding on the state's higher courts, Heiser v. Morgan Guaranty Trust
Co., 150 Conn. 563, 192 A.2d 44 (1963), and are even subject to collateral
attack in another probate district, Culver's Appeal from Probate, 48 Conn. 165,
172-174 (1880). Under the circumstances, it was unnecessary 'to make a
finding as to whether the proceedings in the Probate Court were collusive or
nonadversary in nature' and the court properly refrained from so doing.' 351
F.2d at 494

The decision in Kelly's Trust v. C.I.R., 168 F.2d 198 (2 Cir. 1948), is inapposite
in my view since the deference given to the state court adjudication was on the
basis the its 'appeal made it adversary, * * * especially as, on appeal from the
state-court judgment, one judge dissented.' 168 F.2d at 198-199

Initially this was January 1, 1943, 56 Stat. 944. Later Congress successively
granted postponements until November 1, 1951, and made clear that a partial
release would qualify. See Powers of Appointment Act of 1951. 65 Stat. 91;
S.Rep. No. 382, 82d Cong., 1st Sess. 2-8, 1951 U.S.Code Cong. & Ad.News
1530-1537; Int.Rev.Code of 1954, 2041(a)(1)

We have been cited to no New York cases that had ever drawn this distinction.
The one New York case cited by the Supreme Court Justice, In re Piffard, 111
N.Y. 410, 18 N.E. 718, 2 L.R.A. 193 (1888), held that although a power of
appointment granted by will could not have been exercised as such by a donee

who predecesased the testator, the latter's will should be read as incorporating
the legatee's disposition
4

Any shadow of doubt has been dissipated by 146 of the new Article 5 of the
Real Property Law, added by Laws 1964, c. 864, effective June 1, 1965, which
was not called to the attention of the Tax Court-- or to us. This section provides
that the donee of a power not presently exercisable cannot contract to make an
appointment but 'the provisions of this section shall not, in any way, abridge the
ability of the donee of a power of appointment not presently exercisable, to
release his power, in whole or in part, pursuant to the provisions of section one
hundred and fortythree * * *.' Section 143 is old 183. It is thus apparent that no
other New Yorker in Mrs. Bosch's situation can ever obtain a ruling like that
made here

It is immaterial that if Mrs. Bosch should choose to exercise the power in favor
of her own relatives, she would subject her estate to a tax--apparently much
smaller than the sum here at issue-- which would have been saved if the release
had not been attacked. The post mortem estate planning condemned in
Pierpont's Estate v. C.I.R., supra, 336 F.2d 277, and Peyton's Estate v. C.I.R.,
supra, 323 F.2d 438, would also have increased the estate tax payable on the
widow's death

I fail to see the significance attributed by my brothers to the Commissioner's

knowledge of the New York proceeding or his courtesy in awaiting its outcome.
For twenty years the announced policy of the Internal Revenue Service, surely
well known to the appropriate committees of Congress, has been not to
intervene in such suits and to move to dismiss if made a party. Mim. 6134
(1947). The reasons are obvious-- insufficient staff, unfamiliarity with state
procedures, and lack of standing to intervene and thus to appeal unless, indeed,
the Commissioner were to concede the very point of the conclusiveness of the
state judgment which he properly disputes. In the absence of contrary
congressional direction the United States is entitled to litigate liability for
federal taxes in its own courts. Compare Leiter Minerals, Inc. v. United States,
352 U.S. 220, 77 S.Ct. 287, 1 L.Ed.2d 267 (1957)