## Facts

- A testamentary trust created in 1951 gave Minnie C. Blagen a yearly right to demand all or part of the trust’s net income; any unclaimed income was added to corpus for remainder beneficiaries (the grandchildren).
- Minnie never exercised or formally released her annual right to demand income and died in 1960.
- The IRS treated each year’s nonexercise as a “lapse” of a general power of appointment under I.R.C. § 2041(b)(2) and included in her gross estate the trust’s net income (minus allowable exemptions) accumulated in 1955–1959.
- The inclusion increased the reported gross estate by $116,045.36 and resulted in a deficiency the estate paid.
- The estate sought a refund, contending the § 2041(b)(2) “$5,000 or 5 percent” limitation should be computed using the full trust corpus as the base, which would sharply reduce inclusion.
- The district court denied the refund, and the estate appealed.

## Issues

1. Whether Minnie’s yearly right to demand trust income constituted a general power of appointment whose annual nonexercise was a “lapse” treated as a release under I.R.C. § 2041(b)(2).
2. For the § 2041(b)(2) limitation, whether the “aggregate value of the assets” base is (a) the annual net income subject to the lapsed power, or (b) the entire trust corpus from which the demand could be satisfied.

## Decision

- The Ninth Circuit affirmed judgment for the United States and denied the refund.
- The court treated Minnie’s annual nonexercise as lapses of a general power of appointment deemed releases under § 2041(b)(2).
- In applying the § 2041(b)(2) limitation, the court accepted computing the exception by reference to the property actually subject to the annual power (the year’s net income), not the entire trust corpus.
- The IRS’s inclusion of $116,045.36 of accumulated income in the gross estate was upheld.

## Legal Principles

- A beneficiary’s failure to exercise a general power of appointment within the period it is exercisable can be a “lapse” treated as a release for estate-tax purposes under I.R.C. § 2041(b)(2).
- The § 2041(b)(2) “greater of $5,000 or 5 percent” limitation may be applied to the property actually subject to the lapsed power in the relevant calendar year.
- Where a withdrawal power effectively pertains to annual income, repeated lapses can cause estate inclusion of accumulated income added to principal for remaindermen.

## Conclusion

The court upheld estate-tax inclusion based on Minnie’s repeated lapses of an annual income-withdrawal power and approved computing the § 2041(b)(2) limitation using the yearly income subject to the power rather than the full trust corpus, leaving the estate without a refund.


Fish v. United States, 432 F.2d 1278 (9th Cir. 1970)