Fish v. United States

Clarence Blagen had a testamentary trust under which his wife, Minnie, possessed the right to demand payment to herself of all or part of the net income of the trust for any year, and any income not claimed would become part of the corpus of the trust. When Minnie died, the trust corpus was to pass to Clarence’s grandchildren. Clarence died in 1951, and Minnie died in 1960. Minnie never exercised her power over the trust income during her life. This constituted a lapse of the power every year, which was treated for tax purposes as a release of the power. The Commissioner of Internal Revenue (the commissioner) (defendant) assessed a deficiency against Minnie’s estate (plaintiff), including in the gross estate the net trust income from 1955 to 1959 inclusively, less allowable deductions, for a total increase to Minnie’s estate of $116,045.36. The commissioner counted the lapsed power of appointment for each year like a transfer with a retained life estate, because each additional year’s income generated additional income subject to Minnie’s lifetime power of appointment. That amount was then counted as part of her gross estate. The estate opposed this conclusion, although it did agree that Minnie had a general power of appointment and that the non-exercise could be counted as a transfer with a retained life estate. However, the estate argued that the commissioner’s mistake was computing the exemption allowed under Internal Revenue Code § 2041(b)(2) on the basis of 5 percent of the net income of the trust instead of 5 percent of the total trust assets. The commissioner had calculated the increase in Minnie’s estate by crediting her with $5,000 rather than 5 percent of the trust income for each year, as $5,000 was the larger sum. But the total trust assets were more than $5,000, and if the calculation was made based on the total trust assets, the increase in Minnie’s estate would be $15,858.47 instead of $116,045.36. The estate posited that since Minnie could have taken her money from either the corpus or income, the entire trust represented assets from which her power could be satisfied.