Allis' Will, In re

• Decision Date: 02 January 1959
• Citation: 94 N.W.2d 226,6 Wis.2d 1,69 A.L.R.2d 1128
• Parties: , 69 A.L.R.2d 1128 In re WILL of Mary S. ALLIS, Deceased. Glenda L. KUDER er al., minors by Ralph M. Hoyt, Gdn. ad Litem, Appellants, v. Elizabeth Allis SAWYER, Respondent, First Wisconsin Trust Co., Trustee, Petitioner.
• Court: Wisconsin Supreme Court

Page 226

94 N.W.2d 226

6 Wis.2d 1, 69 A.L.R.2d 1128

In re WILL of Mary S. ALLIS, Deceased.

Glenda L. KUDER er al., minors by Ralph M. Hoyt, Gdn. ad

Litem, Appellants, v. Elizabeth Allis SAWYER, Respondent, First Wisconsin Trust Co., Trustee, Petitioner.

Supreme Court of Wisconsin.

Jan. 2, 1959.

Ralph M. Hoyt, Milwaukee, Shea & Hoyt, Milwaukee, of counsel, for appellants.

Arthur T. Spence, Milwaukee, Spence & Connolly, Milwaukee, of counsel, for respondent.

William H. Spohn, Madison, Robert B. McConnell, Madison, of counsel, amicus curiae.

CURRIE, Justice.

That part of the order appealed from, which directs that $83.75 of bond interest be allocated to principal in order to amortize the premium paid above par in the purchase of the bonds, is in favor of the remaindermen beneficiaries and against the interests of the life beneficiary. Therefore, the guardian ad litem is not a 'party aggrieved' by such portion of the order, and cannot appeal therefrom. Sec. 274.10, Wis.Stats., and In re Estate of Bryngelson, 1941, 237 Wis. 7, 11, 296 N.W. 63.

We deem that the only remaining issue before this court is whether sec. 231.40(12), Stats., which makes Wisconsin's Uniform Principal and Income Act applicable to estates of remaindermen in existence at the time of the passage of the Act, is unconstitutional as applied to stock dividends received subsequent to the passage of the Act by the trustee of a previously existing trust. Counsel for the life beneficiary, Mrs. Sawyer, contend that such subsection is unconstitutional as applied to such stock dividends on the ground that it impairs vested property rights of the life beneficiary contrary to the 'due process' clause of the Fourteenth Amendment of the United States constitution. ¹

Over the years there has been a wide divergence of opinion among the courts of this country as to whether stock dividends received by a trustee of a trust constitute income or corpus. The two principal rules for allocating stock dividends that have competed for acceptance by courts of the various jurisdictions are the so-called Massachusetts and Pennsylvania rules.

This court in the case of Soehnlein v. Soehnlein, 1911, 146 Wis. 330, 131 N.W. 739, in a four to three decision adopted the Pennsylvania rule in preference to the Massachusetts rule. Such rule has been applied in a number of subsequent decisions. ²

The Pennsylvania rule inquires as to the time relative to the commencement of the life interest covered by the accumulation of earnings from which the stock dividend was made; and, if it is ascertained that the entire dividend was earned before the commencement of the life interest, the entire dividend is awarded to corpus; and, if it is ascertained that the entire dividend was earned after the commencement and during the continuance of the life interest, the entire dividend is awarded to income; and, if it is ascertained that the dividend was paid from a fund accumulated partly before and partly after the commencement of the life interest, the dividend is apportioned between the life tenant and the remaindermen. It will thus be seen that such rule places great importance upon corporate bookkeeping. Under such rule it becomes incumbent upon the trustee to obtain balance sheets of the corporation of a date immediately preceding and immediately following the declaration of each stock dividend received to see how much of the dividend has been charged to capital and capital surplus and how much to earned surplus and undivided profits. If any part was charged to earned surplus or undivided profits, then it will become the duty of the trustee to obtain corporate balance sheets and profit and loss statements covering the entire period that the particular corporate stock has constituted an asset of the trust. This likely may prove to be an onerous burden in many cases.

On the other hand, under the Massachusetts rule, as now embodied in sec. 231.40(5)(a), Stats., all stock dividends received by a trustee are deemed to be principal. The reasons which prompted the National Conference of Commissioners on Uniform State Laws to adopt the Massachusetts rule in drafting the Uniform Principal and Income Act are stated in the Commissioners' Prefatory Note as follows (9BULA, p. 366):

'The aim followed in the act is that of as simple and convenient administration of the estate as is consistent with fairness to all beneficiaries. It is felt, too, that workable rules are after all nearest the settlor's probable intent, for he has not probably contemplated extensive and detailed bookkeeping adjustments of the property he has destined for his donees. When the first draft of the act was presented, the Conference voted to follow the socalled Massachusetts rule of awarding cash dividends on corporate stock to income and share dividends to principal, thereby rejecting the Pennsylvania rule, or one of the several variations of it, requiring some apportionment between the two funds. Experience has shown that, however praiseworthy the intent, the latter rule is unworkable, since neither trustee nor court has the means to value the corporate assets in such way as to secure the fair adjustment aimed at. Consequently the majority of the large commercial states have already favored the former and more convenient rule, which is stated in section five below.'

The American Law Institute adopted the Pennsylvania rule in the original Restatement, 1 Trusts, p. 701, sec. 236(b), issued in 1935. By 1947 the trend away from the Pennsylvania rule and toward the Massachusetts rule was so strong that the Institute reversed its position and promulgated a revised sec. 236(b) adopting the Massachusetts rule. 1948 Supp.Restatement, p. 940, Trusts, sec. 236(b).

If this court had seen fit by court decision to reverse the rule of the Soehnlein case and adopt the Massachusetts rule, without a caveat that the newly adopted rule should not apply to pre-existing trusts, no constitutional problem would be presented. This was made clear by the United States supreme court in an opinion written by Mr. Chief Justice Taft in Tidal Oil Co. v. Flanagan, 1924, 263 U.S. 444, 44 S.Ct. 197, 68 L.Ed. 382. It was therein held that the mere fact, that a state supreme court decides against a party's claim of property or contract right by reversing its earlier decision of the law applicable to such cases, does not deprive him of his property without due process of law nor amount to the passing of a law impairing the obligation of a contract. ³

Does the fact, that the prior rule adopted by court decision is reversed by a later legislative enactment made applicable to existing trusts, result in an unconstitutional impairment of existing property rights? We think not if the prior rule related to a matter of future trust administration and lay in a debatable field where there existed a divergence of opinion as to which of two or more rules is the better or more socially desirable. For the purpose of illustrating the convincing argument which can be advanced in favor of the contention that a stock dividend constitutes principal and not income, we quote from a recent decision by the Oregon supreme court in Stipe v. First National Bank of Portland, 1956, 208 Or. 251, 301 P.2d 175, 186, as follows:

'Generally speaking, stock dividends are treated as principal accretions rather than as income. * * *

'A stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the shareholders. The property of the corporation is not diminished. The stockholders' interests are not increased. Their proportional interests remain the same. The only change is in the evidence which represents a given stockholder's interest, that is, the new shares representing the same proportional interest that the original shares represented before the issue of the stock dividend. In short, the corporation is no poorer and the stockholder is no richer than they were before. A stock dividend is, therefore, not in any true sense a dividend at all. Its issuance is, in the last analysis nothing more than an incident or process is corporation bookkeeping.'

A similar view had been expressed in a number of court decisions prior to the execution by testatrix in 1921 of her will in the instant case. One instance of such is Eisner v. Macomber, 1920, 252 U.S. 189, 211, 40 S.Ct. 189, 64 L.Ed. 521. With the widely diveragent views prevailing as to the respective merits of the Pennsylvania and Massachusetts rules, we do not believe that the testatrix by using the term 'income' in her will thereby adopted the Pennsylvania rule with respect to stock dividends. If she, or the draftsman of the will, gave any thought to the question of the allocation of stock dividends between the life...