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 she died.
  • 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 appealed.
  • 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?