Commissioner of Internal Revenue v. Estate of Bosch
387 U.S. 456, 87 S. Ct. 1776 (1967)
Bosch wrote a will that
created a revocable trust for his
wife. It also gave her a general power of appointment.
A general power of
appointment means that the wife could
only get the interest from the assets in the trust. But, she had the
power to give the assets (aka the remainder) to whomever she wanted to give them to after
Years later, the wife had the
power converted to a special power.
A special power of
appointment is the same, except you
are limited to who you can give the assets too (usually a limited class
of people such as 'relatives' or 'descendents')
Bosch died, and the wife
claimed a marital deduction for the
money in the trust.
The IRS balked.
The marital deduction was only allowable if there was a general
power of appointment, so the wife
argued that the release she signed converting it was invalid.
Mrs. Bosch went to State Court
in New York and had them agree that the release was invalid. The IRS
appealed in Federal Court.
The IRS argued that a State
Court decision did not bind them.
The Federal Appellate Court
agreed that the State Court decision was binding on the IRS. The IRS
The US Supreme Court reversed.
The US Supreme Court found
that where Federal estate tax liability turns upon the character of a
property interest held and transferred by the decedent under State law,
Federal authorities are not bound by the determination made of such
property interests by a State trial court.
The Federal Taxing Code
can't be influenced by State decisions. If it were, then the Federal
law would be applied differently in different States.
In this same decision, the US
Supreme Court also heard an appeal of the case of Second National Bank
of New Haven, Executor v. United States
(351 F.2d 489).
That case had similar facts
and also turned on whether a widow's trust could be claimed as part of
the marital deduction.
The basic reasoning in both
cases was that the IRS was not a party to the State Courts' decisions and
so was not bound by collateral estoppel from re-arguing the issue in Federal Court.
In a dissent, it was argued
that this wasn't a case of a Federal agency being bound by a State court
decision, but a case of how property law is decided. Property law is a
State function, and States have the right to decide how they want to
adjudicate property law issues.
Federal Courts are supposed
to use the State law of the State in which they sit when deciding cases.
How is this different?