United States v. O'Shaughnessy

When the government (plaintiff) assessed a $412,921 federal income-tax deficiency against Lawrence O’Shaughnessy (defendant), he was beneficiary of two identical discretionary trusts that his grandparents set up for their grandchildren. The trust agreements said that the trustees “may pay” as much principal or income to Lawrence as the trustees “shall see fit.” The agreements reiterated that the trustees had “sole discretion” over distributions that was “absolute and binding on all persons in interest.” The trustees could pay out all the trust income and principal to Lawrence’s father instead, terminating the trust and technically excluding Lawrence from receiving any trust assets. The agreements also gave Lawrence a testamentary power of appointment to will his share to a limited class of people. The government served the trustees with a notice of levy upon property rights or property belonging to Lawrence to collect the tax deficiency and sued to enforce the levy. No distributions from the trusts were pending at the time. The trustees moved to dismiss, arguing they did not hold property rights or property belonging to Lawrence. Because that issue turned on whether the beneficiary of a discretionary trust with those provisions has property or property rights in undistributed trust assets under Minnesota law, the federal judge certified that question to the Minnesota Supreme Court.