Legg's Estate v. Commissioner of Internal Revenue, 4649.

• Citation: 114 F.2d 760
• Decision Date: 21 September 1940
• Docket Number: No. 4649.,4649.
• Parties: LEGG'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

114 F.2d 760 (1940)

LEGG'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 4649.

Circuit Court of Appeals, Fourth Circuit.

September 21, 1940.

COPYRIGHT MATERIAL OMITTED

Robert D. Bartlett and Edgar Allan Poe, both of Baltimore, Md., for petitioner.

Berryman Green, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before PARKER and SOPER, Circuit Judges, and H. H. WATKINS, District Judge.

PARKER, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals, assessing deficiency estate taxes in the sum of $33,027.20 with respect to property held to have passed under a general power of appointment, exercised by the will of one Mildred Sheppard Legg. Three contentions are made by petitioner: (1) that the power of appointment was not general but special; (2) that its exercise by the donee, with respect to a remainder interest covered, was void as contravening the rule against perpetuities; and (3) that, with respect to the life estate taken by the daughter of the donee of the power, this did not pass under the power, but under the will of the donor.

The donor of the power was one A. Maxwell Sheppard, a citizen of Pennsylvania, who died domiciled in that state on March 26, 1924. Mildred Sheppard Legg was one of his three daughters. Provisions of his will, so far as material hereto, place a portion of his estate in trust to pay the income to his wife for life and thereafter in equal portions to his daughters for life. His will gave the daughters the power by will "to give, devise and bequeath the principal which supported their respective shares of the income of my estate, unto such person or persons, and upon such terms and conditions as they shall respectively limit, appoint and direct to receive the same". In default of such appointment, the will provided that "the principal of the share" of the child failing to exercise the power of appointment should go to "her lawful issue absolutely in fee." The will contained the following provision: "I direct that the payments to be made to my wife and children under the provisions of my will shall be without any power of anticipation or assignment by them or either of them and free and discharged from any claim or liability for any debt, contract or engagement which they or any of them may now owe, or may hereafter contract, and from all judgments, levies or executions thereon which may be issued against them or any of them."

Mildred Sheppard Legg, who was a resident of Maryland, died in the year 1934, survived by her husband and one child, Mildred Webster Legg, who was born in the year 1923 prior to the death of the original donor, A. Maxwell Sheppard. Mrs. Legg left a will in which she set forth that she was exercising the power of appointment vested in her by the will of her father. She placed in trust the share of his estate allotted to her, with direction that the corpus be divided into a one-third and a two-thirds portion; that the net income from the one-third portion be paid to her husband for life; that the two-thirds portion be divided into as many equal parts as the number of her children and one such part held for each child and the income therefrom used for or paid to such child for life; that, upon the death of her husband, the one-third set apart for him for life be added to the shares of the children; that, if any child should die without issue, his share should be added to the others; and that, if any child should die leaving children surviving, the income of that child's part should be paid equally to the children until the youngest of them should arrive at the age of twenty-one years, at which time the corpus of that part should be divided equally among them.

The contentions of petitioner, stated with reference to these facts, are: (1) that the power of appointment is a special power and not a general power subject to the estate tax, for the reason that the spendthrift trust provisions, quoted above, forbid appointment to the creditors of the donee of the power; (2) that the will of the donee, to the extent of remainder interest given her children's children, is violative of the rule against perpetuities because of the possibility that she might have had children born to her after the death of her father, the original donor, the argument being that the exercise of the power speaks as of the time of the death of the donor, and that, when so considered, the provisions of the exercise of the power are not limited to a life or lives in being and twenty-one years; (3) that to the extent of the value of the life estate of Mildred Webster Legg, daughter of the donee of the power, nothing passed under the appointment, since the entire property was vested in her, subject to the power of appointment, by the will of the donor, and the exercise of the power merely reduced the estate previously vested.

The questions raised by the foregoing contentions, i. e., questions as to the nature of the power of appointment and as to the property passing by the exercise of the power, must be answered by applying the law of Pennsylvania, as that is the state of the domicile of the donor of the power and the state wherein the property subject to its exercise is situate. The rule is that, with respect to personalty, the validity and sufficiency of the execution of a power created by will are to be determined generally by the law of the domicile of the donor of the power, and, with respect to realty, by the law of the place where the realty is situate. A.L.I. Restatement of Conflict of Laws, Secs. 234, 284, 285, 287; 49 C.J. 1298; Pearce v. Lederer, D.C., 262 F. 993, 996, affirmed, 3 Cir., 266 F. 497. And the application of this rule is not affected by the fact that a question of federal taxation is ultimately involved; for while we look to federal decisions as authoritative in interpreting the federal statute imposing the tax, we look to the law of the state as laid down by its courts in determining whether there has been such a transfer of property as is subject to the tax under that interpretation. "State law creates legal interests and rights. The federal revenue acts designate what interests or rights, so created, shall be taxed." Morgan v. Commissioner, 309 U.S. 78, 626, 60 S.Ct. 424, 426, 84 L.Ed. 585; Leser v. Burnet, 4 Cir., 46 F.2d 756; Dayton & Michigan R. Co. v. Commissioner, 4 Cir., 112 F.2d 627, 630.

On the first question, we think that the Board was correct in holding that, under the law of Pennsylvania, the power of appointment was a general and not a special power. The limitations imposed upon the wife and children of the donor by the spendthrift trust clause above quoted, had relation merely to the payments to be made them during their lives from the income of the trust. Nothing therein contained limited the general power to appoint to creditors at death; and the law seems to be perfectly well settled in Pennsylvania that a general power of appointment is not converted into a special power by reason of spendthrift provisions protecting the income during the lifetime of the donee. In re Miller's Trust, 313 Pa. 18, 169 A. 362; In re Wilbur's Estate, 334 Pa. 45, 5 A.2d 325, 330.

On the second question, involving the rule against perpetuities, the point of petitioner is that the instrument exercising the power of appointment must be read as though it were a part of the instrument creating the power; that possibilities and not actual conditions must be considered in determining whether it violates the rule against perpetuities; and that, when the will of the donee here is read as a part of the will of the donor, there is a possibility of the appointment's embracing lives not in being, since the appointment was to the children of the donee and there was a possibility at the time of the death of the donor that the donee might have children other than Mildred Webster Legg. It is true that the instrument exercising the power of appointment must be read as though a part of the instrument creating the power; but in such case there is an exception to the general rule that possibilities and not actual conditions must be considered in determining whether the rule against perpetuities is violated. "The determination of the validity of the appointment in such cases depends upon the facts as they actually exist at the time the appointment is made and not possibilities". In re Warren's Estate, 320 Pa. 112, 182 A. 396, 397, 104 A.L.R. 1345; In re Boyd's Estate, 199 Pa. 487, 49 A. 297. As Mildred Webster Legg, the only child of the donee who could take under the power of appointment, was living at the time of the death of the donor of the power, there can be no question as to the validity of the appointment under this rule. The remainder over after her death was to take effect eo instante upon the termination of her estate and would vest, therefore, within twenty-one years of the termination of a life in being at the time of the creation of the power. In re Lawrence's Estate, 136 Pa. 354, 20 A. 521, 11 L.R.A. 85, 20 Am.St.Rep. 925.

Petitioner relies upon Smith's Appeal, 88 Pa. 492, and Cox v. Dickson, 256 Pa. 510, 100 A. 947; but, as pointed out in the Warren case, the Smith case has been overruled and the case of Cox v. Dickson is clearly distinguishable. Petitioner argues that the Warren case was not decided until 1936 and cannot be taken as evidence of what the law in Pennsylvania was in 1934. As we interpret the Pennsylvania decisions, the Smith case had ceased to be regarded as law in that state long prior to 1934, but this is immaterial. Decisions are mere evidences of the law, not the law itself; and an overruling decision is not a change of law but a mere correction of an erroneous interpretation. We accept this latest expression of the courts of Pennsylvania in the Warren case, therefore, not as a change in the law, but as the...