Opinion
20409-19
02-07-2023
ESTATE OF LOIS HORVITZ, DECEASED, v. COMMISSIONEROF INTERNAL REVENUE, Respondent MICHAEL HORVITZ, EXECUTOR, Petitioner
ORDER
David Gustafson Judge
Now pending before the Court in this case is petitioner's motion for partial summary judgment (Doc. 32) and the Commissioner's opposition thereto (Doc. 48), and the Commissioner's motion (Doc. 47) to compel production of documents. The Commissioner's opposition states that he "cannot, for the reasons stated in the accompanying affidavit, present facts essential to justify respondent's opposition to the Motion without further discovery" (apparently invoking Rule 121(e), which he did not cite). We will schedule oral argument on the motion to compel and will order the parties to make additional filings.
Background
This case involves a deduction claimed for estate tax purposes by the petitioner, the estate of Lois Horvitz, for its charitable contributions. As we understand the facts (subject to correction by the parties, which we invite), the contributions were made as follows:
I. Lois's life estate and power of appointment
Decedent's late husband Harry R. Horvitz executed a revocable living trust, which we refer to as the "HRH Trust Agreement", which was "ratif[ied] and reaffirm[ed]" as late as 1991. The HRH Trust Agreement created four trusts, including two that the parties call the "First QTIP Trusts". Under the terms of the HRH Trust Agreement, each of those QTIP trusts gave to Lois a life estate (Ex. 34 at 14) and a non-general testamentary power to appoint, exercisable by her will, "to and among my [Harry's] issue". Lois's power of appointment as provided in the 1971 Trust Agreement did not authorize her to appoint payments to charity.
The Trust Agreement was first executed in 1971, so the parties refer to it as the "1971 Agreement" or the "1971 Trust Agreement". However, to avoid possible confusion, we do not title it by that date. The Trust Agreement was revised and restated several times in the succeeding years, and it appears that the earliest version in our record is from 1987 (Doc. 34 at 7), and that the latest modification is from 1991 (Doc. 34 at 87). Using the 1987 version and the subsequent modifications, petitioner has created for use in this case "a composite trust instrument of the Harry R. Horvitz Revocable Trust, originally established by Harry R. Horvitz on September 27, 1971, which includes a complete recitation of the terms of the trust as amended through his death." (See Doc. 35 at 3, para. 4, and Exhibit A thereto.) The Commissioner does not dispute petitioner's composite, and it appears that the terms of the various trusts are not in dispute.
We understand that Harry's estate made both a QTIP election and a reverse QTIP election, thereby establishing the "LUH QTIP Trust" and the "LUH Reverse QTIP Trust". Consequently, Lois technically had two separate life estates and was also the holder of two separate non-general powers of appointment. Because the parties refer to Lois's life estates and powers in the singular as if they were one life estate and one power, however, we also in this order refer to both in the singular.
II. Trustees' powers
As to these First QTIP Trusts in particular, Article FIRST B(2)(b) ("Federal Marital Trust") of the HRH Trust Agreement (creating the First QTIP Trusts) gave the Trustee the following power:
[T]he Trustee may, at any time or from time to time, pay to or apply for the benefit of Lois so much or all of the principal . . . as the Trustee, in its sole discretion, deems necessary or desirable for her support, maintenance, health, comfort or general welfare, including, without limitation, for any medical emergency. [Doc. 35 at 10.]
As to all four trusts, Article THIRD B ("Permissible Uses and Applications"; Doc. 35 at 19-20) of the HRH Trust Agreement described the Trustees' powers with language that was similar but that included: (1) "education", (2) an additional parenthetical elaborating on "general welfare", and (3) an authorization to "pay principal to a trust". The powers of the Trustees for all four trusts (including the QTIP trusts) are described as follows:
Any authorization to the Trustee to pay or apply income or principal of any trust to or for the benefit of any beneficiary shall be deemed an authorization to make payments or applications of income or principal for the support, maintenance, health, education, comfort or general welfare of the beneficiary (including, but not limited to, payments or applications to enable the beneficiary to purchase a residence, invest in a business, make transfers that serve estate or tax planning objectives, or engage in any other activity deemed by the Trustee to be in the best interests of the beneficiary). An
authorization to apply principal to or for the benefit of a beneficiary shall include authority to pay principal to a trust for the benefit of that beneficiary. . . . [Doc. 35 at 19-20.]
When Harry died in 1992, his estate funded the four trusts established under the HRH Trust Agreement, as revised and restated. As we have noted, under each of the two First QTIP Trusts, Lois had a life estate and a power of appointment ("to and among my [Harry's] issue") that did not include charitable organizations as permissible appointees.
III. Second QTIP Trusts
In 2013 the trustees of the "First" trusts "decanted" the assets to the "Second QTIP Trusts". The powers of the trustees of the Second QTIP Trusts (see Doc. 34 at 103, 109) were identical to those for the First QTIP Trusts (given in the two blocked quotations in Part II above).
Under the Second QTIP Trusts, Lois had, as under the First, a life estate. But under the Second trusts her power of appointment was not identical to that of the First (i.e., "to and among my [Harry's] issue") but rather was expanded: The Second QTIP Trusts gave her the power to appoint, by her will or similar instrument, the balance "to and among Harry's issue and/or charities that are qualified to receive charitable contributions that are deductible for either federal income or federal estate tax purposes."
IV. The charitable contributions
In 2013 Lois exercised her testamentary non-general power and directed that assets be contributed to charitable organizations upon her death. (Doc. 34 at 153-154.)
When Lois died in 2015, that exercise became effective, and the trustees made transfers to the charitable organizations.
On its estate tax return, Lois's estate claimed deductions for the charitable contributions. The IRS disallowed the deductions and issued a notice of deficiency; and the estate filed a petition in the Tax Court.
V. Tax Court proceedings
As this case has proceeded, the Commissioner has undertaken discovery of the facts about the decanting. He previously filed a motion (Doc. 23) for leave to take a deposition of the trustee of the QTIP trusts, in which he stated: "At issue in this case is whether the Decanting was permissible under Ohio law. * * * [The proposed deponent] has the requisite knowledge of and involvement with the Decanting to give testimony and produce documents or electronically stored information that are discoverable within the meaning of Rule 70(b)." We initially observed (see Doc. 25 at 3) that the motion "seems to indicate that the issue about which deposition testimony is sought is legal (i.e., 'whether the Decanting was permissible under Ohio law'). We do not see how testimony on that subject would be proper. It would seem that instead we should examine the documents for their objective import and that subjective testimony about the settlor's intentions would be irrelevant." We therefore denied that motion. (See Doc. 38.)
Petitioner filed a motion (Doc. 32) for partial summary judgment, and the Commissioner filed a motion (Doc. 47) to compel discovery, seeking, first, "all documents respecting the Decanting." Petitioner has produced documents in response to this request, but has withheld certain documents pursuant to claims of irrelevance, attorney-client privilege, and attorney work product. Petitioner produced a "log" giving information about the documents withheld, and asserting that some of the documents accounted for are in fact not responsive to the document request.
In response to the claims of privilege, the Commissioner seeks, second, "the engagement letters evidencing the existence of all claimed attorney-client relationships held by petitioner and the Trustees". That is, he disputes the existence of the attorney-client relationship. He asks us to resolve the objections by viewing in camera the several thousand documents that are in dispute, and the Commissioner expresses no objection to in camera inspection.
Discussion
We are not yet ready to rule on the Commissioner's motion to compel (nor the petitioner's motion for partial summary judgment), and we will benefit from argument by the parties on the following subjects:
VI. Relevance of documents about the decanting
A. Beliefs and legal opinions
As the parties may have anticipated from our previous orders (Docs. 25, 38), we do not understand the relevance of the documents that show opinion about the effect of the 2013 decanting. As we stated before, it seems that "we should examine the documents [i.e., the 1971 Trust Agreement and its modifications, and the Second QTIP Trusts] for their objective import". The Commissioner argues that certain circumstances of the decanting show that "the Original Trustees [under the HRH Trust Agreement, i.e., Lois and the children of Lois and Harry] had reason to believe the Modification and Distribution [i.e., the decanting] was not permissible under 'the trust instrument and applicable law.'" At issue, however, is the actual effect of those documents-not the individuals' beliefs and legal opinions about the effect of the documents.
The Commissioner is correct in citing Rule 70(b) to assert that "[i]nformation is discoverable if it appears reasonably calculated to lead to discovery of admissible evidence." (Doc. 47, para. 31.) But even when we consider relevance from this broadened perspective, the discovery still seems misdirected. If under the HRH Trust Agreement and Ohio law the decanting was not permissible, then evidence showing the Trustees' mistaken belief that it was permissible would not change the outcome; it was simply not permissible. Or if the decanting was permissible, then evidence showing the Trustees' doubts about its permissibility would not change the outcome; it was simply permissible. We do not see how factual testimony or other documents such as the Commissioner seeks could affect the outcome of this case. Perhaps the Commissioner can show that our tentative conclusion is in error.
B. Intent other than the settlor's intent
Although the Commissioner seeks information about the 2013 decanting, he acknowledges that "the settlor's intent is relevant to determine whether a trustee has absolute power to distribute principal" (Doc. 55, para. 24). If that is so, then it would appear that, to the extent Harry's subjective intent is relevant, that intent must be derived from the four corners of the HRH Trust Agreement. Or perhaps, if that document reflects an ambiguity as to which Ohio law might permit parol evidence to be consulted (a legal proposition the parties have not demonstrated), then Harry's intent would have to be divined from evidence in 1971 to 1991-but not, it would seem, from documents generated at the time of the decanting in 2013, more than 20 years after his death.
But the Commissioner apparently does not seek documents created during or near the time that the settlor executed the HRH Trust Agreement and its modifications in 1971-1991, nor at any time during his life, but rather "all documents respecting the Decanting" in 2013, i.e., 21 years after the settlor died in 1992. We do not see how this relates to discovering and proving the relevant intent.
The Commissioner quotes Pack v. Osborn, 881 N.E.2d 237, 241 (Ohio 2008), which states: "When determining the settlor's intent, an inter vivos trust 'speaks from the date of its creation--not the date upon which the assets are distributed.' Thus, a trust is construed according to the law in effect at the time it was created." (Citations omitted)." (Doc. 55, para. 24.) In this case, the trust was first created in 1971, but the settlor modified, ratified, and affirmed it multiple times through 1991, so we assume arguendo that the settlor's intent over this 20-year period might be relevant.
C. Lois's intent
The Commissioner may have made one particular contention about the intention of someone other than Harry that merits particular attention. Not in his motion to compel but in his opposition to the motion for partial summary judgment, the Commissioner asserts (citing and quoting a 2013 email) that there is a factual issue as to "[w]hether the Modification and Distribution was undertaken to facilitate Lois' purported desire to leave additional assets to charity" or instead "was devised to allow Lois' children to retain control over the trust assets." (Doc. 48 at 6.) It is possible that we misunderstand this contention. There seems to be no dispute that Lois exercised her power of appointment to transfer the trust residues to charities and that, upon her death, the transfers were made, and we do not perceive any contention that Lois lacked competence to exercise the power. Instead, the contention seems to be that a charitable contribution actually made is nonetheless rendered nondeductible if it arose in conjunction with estate-planning motives. Perhaps the Commissioner can clarify this contention and can explain whether discovery is sought on the basis of it.
D. Deductibility of an improper contribution
More fundamentally, we do not see how even a demonstrated defect or error in the Trustees' exercise of their powers could be relevant here. For present purposes we assume arguendo (1) that the 2013 decanting was improper because it frustrated Harry's subjective intention, or violated the express terms of the HRH Trust Agreement, or exceeded the trustees' powers under Ohio law, or contradicted the best interests and entitlements of the remote beneficiaries, or all of the above, and (2) that therefore the 2015 charitable contributions should not have been made. Nonetheless, the Commissioner apparently does not dispute that the charitable contributions were made.
As far as our record shows, there was no contest asserted as to the 2013 decanting (accomplished almost 10 years ago) or the 2015 contributions (accomplished almost 8 years ago). Presumably, a disappointed beneficiary whose interest might have been affected by either or both of these acts could have challenged them in the appropriate Ohio court, but as far as we know, none did.We know of no authority for the proposition that, in support of disallowing an estate tax deduction for a charitable contribution, the Commissioner may advance a collateral attack (not made by anyone with standing) against the propriety of the contribution. Another sort of deduction by an estate-say, for administration expenses-might be disallowed for tax purposes, even if the expense was demonstrably incurred and paid, if the expense was not "allowable by the laws of the jurisdiction". § 2053. But we know of no such grounds for disallowance of a deduction for a charitable contribution deduction, and we would benefit from further discussion of this issue. The contribution at issue here appears to be plainly described in Section 2055(a)(2). Section 2055(e) does provide for "Disallowance of Deductions in Certain Cases", but we do not see in that subsection the circumstances of this case.
The Commissioner's filings show that Lois and Harry's three children all participated in the decanting for the purpose of facilitating the charitable contributions; and that at least one of those children communicated candidly with his own children (Harry and Lois's grandchildren) about the plan. Neither party has discussed the possibility of a contest, so neither has suggested what the statute of limitations might be for such a contest. Perhaps it is the 2-year period in Ohio Rev. Code § 5810.05 ("Limitations period for action against trustee"). If the Commissioner contends that such a challenge is still possible (or is underway) and that this might affect the allowability of the charitable contribution deduction, then we would benefit from hearing that contention.
If impropriety of a contribution is not a ground for disallowing a deduction, then it would seem that discovery undertaken to demonstrate an impropriety would be irrelevant or immaterial. If impropriety is indeed a ground for disallowing a deduction, then we would benefit from learning about this from the parties.
VII. Privilege claims
As we have noted, petitioner has withheld certain information from discovery, contending that it is subject to attorney-client privilege and/or attorney work product, and contending that some of the documents in dispute are "non-responsive" to the requests (so that the information in those documents would be irrelevant). The Commissioner disputes all these contentions. Several thousand documents are at issue. We see two possible resolutions of these disputes:
First, if we persist in our tentative conclusions suggested above in Parts VI.A-D above, then presumably none of the remaining discovery would be proper and we should deny the motion to compel. If the Commissioner disputes that hypothesis (that is, if he argues for relevance even if I.A-D are confirmed), then we will benefit from his explanation of the remaining relevance.
Second, if we conclude that discovery should continue, the daunting prospect of in camera inspection of thousands of documents inclines us to attempt to resolve or narrow the dispute by the parties' use of a "quick peek" procedure. The procedure is designed and intended to minimize the costs and delays associated with reviewing large volumes of documents that are, or might be, subject to disputed claims of privilege. Such procedure is facilitated by Federal Rule of Evidence 502(d) which provides:
(d) Controlling Effect of a Court Order. A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court--in which event the disclosure is also not a waiver in any other federal or state proceeding.
This procedure might enable the Commissioner to discern many documents that are in fact of little interest to him, and the parties could then focus on the smaller number of documents that really matter. If the parties are unable to come to full agreement, then the remaining documents for the Court to consider would be a more manageable number.
The parties should consult with each other to attempt to agree on terms that they would jointly recommend to the Court. A sample of such an order can be seen online in Guidant LLC v. Commissioner, No. 5989-11 (Order, May 24, 2016).
VII. Summary judgment merits arguments
In his reply as to his motion to compel, the Commissioner argues (see Doc. 55, ¶ 23) that "Petitioner would have the court ignore the totality of the transaction." This argument concludes with petitioner's assertion (¶ 41) that "respondent's discovery bears upon material factual issues in this case". It appears, however, that these arguments pertain to the merits of petitioner's motion for summary judgment as much as (or perhaps more than) they pertain to the motion to compel. The parties disagree about whether the HRH Trust Agreement confers on the QTIP trustees a power that is subject to an ascertainable standard, as the Commissioner contends, or that instead is non-ascertainable (or "absolute"), as petitioner contends. The Commissioner seemed to reserve to his reply in support of his motion to compel his most pointed discussion on the point.
A. Ascertainable standard
As we understand the parties' disagreement, petitioner cites Ohio Rev. Code § 5801.01(B), which defines "ascertainable standard" as "a standard relating to an individual's health, education, support, or maintenance within the meaning of section 2041(b)(1)(A) or 2514(c)(1) of the Internal Revenue Code." Petitioner considers it significant the powers given to the QTIP trustees in the HRH Trust Agreement go beyond this list of four permissible expenditures and argues that, in so doing, the HRH Trust Agreement confers a power that exceeds the "ascertainable standard" and is therefore non-ascertainable.
The Commissioner rejoins (see Doc. 55, ¶¶ 28-31) with the position (as we understand it) that, at the time Harry was creating (and revising) the HRH Trust Agreement, a different statute was in effect: Ohio Rev Code § 1340.22(B)(2) defined (until 2007) a standard that was somewhat broader but was still an "ascertainable standard":
Any power conferred upon a fiduciary that permits the fiduciary to make discretionary distributions of either principal or income and that is expressed in terms of a beneficiary's health, education, support, comfort, care, comfort and support, support in reasonable comfort, support in accustomed manner of living, maintenance, maintenance in health and reasonable comfort, or any combination of those factors, is a power conferred upon the fiduciary, the exercise of which is reasonably measurable in terms of, and limited by, an ascertainable standard related to the health, education, support, and maintenance of the beneficiary.
That is, if a trust confers power in addition to the conventional "HEMS" standard (health education, maintenance, or support), then under the law as it existed when Harry executed the HRH Trust Agreement, the power may nonetheless remain an "ascertainable standard" even if it adds "comfort", as the HRH Trust Agreement did.
However, "comfort" is not the only difficulty with the Commissioner's position. As we point out in Part II above, the HRH Trust Agreement conferred on the Trustee of the First QTIP Trusts not only the conventional HEMS standard plus "comfort" but also the power to make payments for "general welfare" and "payments or applications to enable the beneficiary to purchase a residence, invest in a business, make transfers that serve estate or tax planning objectives, or engage in any other activity deemed by the Trustee to be in the best interests of the beneficiary)." The addition of "general welfare" as broadly defined to include a catch-all of "best interests" seems to go well beyond the (now repealed) Ohio Rev. Code § 1340.22(B)(2).
The Commissioner also cites case law, but by his description, Finlay v. United States, 752 F.2d 246 (6th Cir. 1985), involved a surviving spouse who, because she was the sole trustee, was deemed under State law to be "limited to her support and maintenance" despite an ostensibly broader standard in the instrument. Likewise, he describes Toledo Trust Co. v. United States, unreported Case No. 86-7160 (N.D. Ohio, 1987), as following Finlay where the surviving spouse was not herself the sole trustee but had "the power to remove and replace the trustee," which seems to be broadly equivalent to being the trustee. He also cites "see also" cases to the same effect. In each of these cases the court seems to impose an "ascertainable standard" limitation not otherwise present where the court concludes that the situation of the surviving spouse makes her, in effect, both a beneficiary and a trustee. Lois was not in that situation. We do not see, in the Commissioner's filings, citations to statutory or case law authority that would treat as "ascertainable" the broad grants of authority in the HRH Trust Agreement for the Trustee of the First QTIP Trusts, but we invite the Commissioner's correction or supplementation.
B. Plural beneficiaries
The Commissioner argues (Doc. 55, ¶ 26) that the power of the trustees of the First QTIP Trusts is constrained (not absolute) because the HRH Trust Agreement obliges the trustees to serve the best interests of "beneficiaries", a class that, in the case of the QTIP trusts, would include not only Lois as the owner of the life interest but also the "issue" who would receive any remainder as appointees or takers in default under her power of appointment. (See Doc. 34 at 18, para. (e)(iii).) Thus, the Commissioner argues, the Trustees' power to distribute to Lois was not absolute but was constrained by the best interests of Harry's issue.
However, the specific plural "beneficiaries" provisions to which the Commissioner points in his reply (Doc. 55, para. 26)-i.e., "HRH Trust, Articles THIRD M(2) and FIRST B(2)(a)"-do not pertain to the Trustees' powers to make payments for Lois's benefit under the First QTIP Trusts (as authorized either by the QTIP provisions themselves in Article FIRST B(2)(b), or by the powers given to trustees generally in Article THIRD B, both of which are quoted above in Part II).
Rather, the "beneficiaries" provisions the Commissioner cites pertain instead to the trustees' specific power to "terminate" the First QTIP Trusts (THIRD M(2), Doc. 35 at 24) and their powers under the By-Pass Trust (FIRST B(2)(a), Doc. 35 at 8). We tentatively conclude that neither of these provisions restricts the trustees' powers (in FIRST B(2)(b) and THIRD B) to make transfers for Lois's benefit under the First QTIP Trusts.
As we understand the Commissioner, he does not argue that the 2013 decanting "terminated" the First QTIP Trusts. (As he seems to indicate, a holding of "termination" would, under § 2519, result not in estate tax liability in 2015 but in gift tax liability in 2013--a liability for which the IRS did not issue a notice of determination.) Rather, the Commissioner evidently cites this provision simply to show that the Trustees did not have absolute power under the HRH Trust Agreement. We assume it is correct that they did not have absolute power under every aspect of the HRH Trust Agreement; but we think that the issue before us now involves the question whether the Trustees had absolute power to distribute principal to Lois during her life under the specific provisions of the First QTIP Trusts quoted above, not the different powers in THIRD M(2) or FIRST B(2).
Rather, the truly relevant provisions do not in fact refer to plural "beneficiaries". Under the First QTIP Trusts, during Lois's life the trustees have the power (under FIRST B(2)(b), Doc. 35 at 10) to make payments only "for the benefit of Lois" (i.e., "for her support, maintenance, health, comfort or general welfare"). The grant of power to the trustees includes no reference to other "beneficiaries".
As we have explained, that Trustee power is defined-under the general provisions of THIRD B (Doc. 35 at 19-20), quoted above in Part II-to include the power "to make payments or applications of income or principal for the support, maintenance, health, education, comfort or general welfare of the [singular] beneficiary (including, but not limited to, payments or applications to enable the [singular] beneficiary to . . . make transfers that serve estate or tax planning objectives, or engage in any other activity deemed by the Trustee to be in the best interests of the [singular] beneficiary). An authorization to apply principal to or for the benefit of a [singular] beneficiary shall include authority to pay principal to a trust for the benefit of that [singular] beneficiary". Lois is the sole potential beneficiary of the payment power given in FIRST B(2)(b); and the explanation of that power in THIRD B includes no reference to plural "beneficiaries" and no other reason to suppose that the trustee, when acting under FIRST B(2)(b), must take account of the interests of hypothetical potential beneficiaries who did not exist under that provision.
If we misunderstand the Commissioner's argument as to plural "beneficiaries" or if we have overlooked provisions that support it, we would benefit from his further argument.
C. Other arguments
The Commissioner has asked us "to deny the Motion [for partial summary judgment] until the discovery disputes presented in the Motion to Compel have been settled" (Doc. 48 at 6), and he "requests . . . [t]hat respondent be permitted to supplement this Opposition within 30 days after the earlier of (1) the Court's denial of the Motion to Compel; or (2) the final resolution of the discovery disputes presented in the Motion to Compel and production of all discoverable materials ordered by the Court." (Doc. 48 at 8.)
We will rule on this request after conducting the hearing that we will conduct pursuant to this order. The parties will be permitted to file memoranda in advance of that hearing. If the Commissioner has other arguments he would make that he has not yet made, then he should make them in his memorandum or be prepared to make them orally at the hearing.
It is
ORDERED that, no later than February 17, 2023, counsel for the parties shall confer with one another to discuss (and counsel for petitioner shall initiate discussion of) (1) the possibility of a "quick peek" procedure for resolution of privilege and relevance disputes about documents in petitioner's log, (2) the possibility of settling this case, in light of the observations made in this order, and (3) the identification of two dates on or before March 17, 2023, on which both parties could be available for a two-hour in-person hearing at the courthouse of the Tax Court in Washington, D.C. It is further
ORDERED that counsel for the parties shall, no later than February 24, 2023, jointly place a call to the Chambers Administrator of the judge signing this order for the purpose of scheduling a hearing for argument and discussion of the Commissioner's motion to compel. It is further
ORDERED that, no later than seven days before the hearing, each party may file a memorandum of no more than 30 pages addressing the questions and issues raised in this order.