COMMISSIONER OF INTERNAL REVENUE v. Henry's Estate

• Decision Date: 17 April 1947
• Docket Number: No. 9024.,9024.
• Citation: 161 F.2d 574
• Parties: COMMISSIONER OF INTERNAL REVENUE v. HENRY'S ESTATE et al.
• Court: U.S. Court of Appeals — Third Circuit

161 F.2d 574 (1947)

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

No. 9024.

Circuit Court of Appeals, Third Circuit.

Reargued January 22, 1947.

Decided April 17, 1947.

Muriel S. Paul, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

Henry S. Drinker and Richard K. Stevens, both of Philadelphia, Pa. (Frederick E. S. Morrison, of Philadelphia, Pa., on the brief), for respondents.

Wm. Clarke Mason, Frederick C. Newbourg, Jr., Joseph H. Grubb, Jr. and John Russell, Jr., all of Philadelphia, Pa., for amici curiæ.

Before BIGGS, MARIS, GOODRICH, McLAUGHLIN, O'CONNELL, and KALODNER, Circuit Judges.

GOODRICH, Circuit Judge.

This is an appeal from a decision of the Tax Court which found against the Commissioner in a dispute involving an estate tax upon certain portions of the estate of Sallie Houston Henry. The case has been twice argued in this Court, the second time before the full Court following the granting of a petition for rehearing after the entry of our original judgment on June 11, 1946.

The controversy can be very simply stated. It turns upon the effect of a document which bears date of December 31, 1915. If this document became legally effective on that date or before Congressional Joint Resolution of March 3, 1931,¹ the Commissioner concedes that no tax is due. If, as he argues, it became effective or complete after that date, the tax is due and the respondents admit it. No dispute upon the question of the tax laws of the United States arises. The sole question is concerned with the transaction of December 31, 1915.

Following the original argument of this case the Court on June 11, 1946 reversed the decision of the Tax Court. Upon the petition of the respondents rehearing was granted and the case has now been argued before the full Court. Before proceeding to consider the questions which the appeal raises we repeat the facts as we originally stated them. They are as follows:

We are not confronted with a dispute over the facts. Henry H. Houston was a prominent Philadelphia citizen. He was the head of a family which included his wife, Sallie Houston, and their three children, Samuel F., Gertrude and Sallie, all of whom married and had children.

In 1895, Grandfather Houston died, leaving a substantial estate consisting principally of real property and securities, with part of which we are here concerned. These were of two types. Some were stocks in the several companies which had grown out of the Standard Oil Trust. Others were shares in different corporations. Grandfather Houston left the residue of his estate in trust. The life tenant beneficiaries of this trust were Grandmother Houston, Samuel F. Houston, Sallie Houston Henry, and Gertrude Houston Woodward. The remaindermen were grandchildren of Henry H. Houston.

Grandmother Houston died in 1913, leaving a large estate of her own. By her will, she disposed of the residue of her estate, giving it in trust for the benefit of her grandchildren.4 She divided her residuary estate into twenty-one equal parts but disposed of these in unequal proportions. She gave 3/21 to the children of Sallie Houston Henry and 18/21 to the children of Samuel F. Houston and Gertrude H. Woodward. The net income was to be paid over (in those proportions) to "each of * * * said grandchildren until he or she shall have attained the age of 30 years," when the respective share of each was to be paid over to him or to his issue, surviving spouse, or surviving brothers and sisters.

4 The description of the grandchildren of the testatrix was "all the children which (the named child of the testatrix) has or may hereafter have."

In the administration of the Grandfather Houston and Grandmother Houston estates two serious questions arose. During the period between the deaths of Grandfather and Grandmother Houston the trustees under the will of Henry H. Houston received a large number of "extraordinary distributions" on the Standard Oil securities. Subsequently, the trustees received from time to time "extraordinary distributions"5 on the securities other than those of Standard Oil origin. The trustees followed the practice of adding all these distributions to the principal of the trust estate. Did all or any part of these "extraordinary distributions" constitute distributable income to the life tenants?

5 The term "extraordinary distribution" includes stock dividends, stock rights, securities acquired upon the exercise of rights and the proceeds of rights which were sold.

The other question which arose followed Grandmother Houston's death. Was her gift of the residue to her grandchildren void because it violated the Rule against Perpetuities? This question attained special importance because the residue of Grandmother Houston's estate was $1,700,000, exclusive of her share in the "extraordinary distributions," rather than $630,000 as she had supposed.6

6 The parties seemed to think that had she known of this marked increase in her residuary estate, Sallie Houston would not have made such unequal disposition hereof.

In 1913, following Grandmother Houston's death, the three Houston children had, therefore, two strongly supportable claims. One embraced the "extraordinary distributions" (as life tenants of the Grandfather Houston trust). The other was the right to the entire residue of Grandmother Houston's estate if its gift violated the Rule against Perpetuities.7

7 The Orphans' Court in its adjudication filed by Judge Sinkler on October 8, 1941, indicated that, under Pennsylvania law, these extraordinary distributions had been properly distributable as income to life tenants. Counsel consulted by the interested parties expressed the opinion that Grandmother Houston's gift of the residue was, under Pennsylvania law, invalid.

On the other hand, the Houston grandchildren, as remaindermen under Grandfather Houston's trust, had a claim to all or part of the "extraordinary distributions" and, of course, to the $1,700,000 plus in the residuary estate of Grandmother Houston.

This, then, was the situation which prevailed on December 31, 1915. To understand better the events which occurred on that significant date it would be well to enumerate the interested parties in both Houston estates. These were (a) Sallie Houston Henry and her children, (T. Charlton Henry, Gertrude H. Henry, and Elizabeth W. Henry); (b) Samuel F. Houston and his children (Edith C. Houston Brown, Margaret C. Houston Meigs, Henry H. Houston 2nd, Eleanor Houston Smith); (c) Gertrude Houston Woodward and her children (H. H. Houston Woodward, George Woodward, Stanley Woodward, Charles H. Woodward, and Gertrude Woodward). In addition, there were also Samuel F. Houston's wife, Charlotte H. S. Houston, and Gertrude H. Woodward's husband, George Woodward. Sallie Houston Henry's husband died prior to 1915. Of these twelve grandchildren, seven were minors and therefore incapable of binding themselves with respect to the legal questions outstanding.

Both Grandfather and Grandmother Houston had expressed in their wills the desire that their estates be administered without the filing of Inventories or Accounts in the Orphans' Court. This strengthened the desire of the parties concerned to settle all outstanding questions inter se without resort to court proceedings.

Accordingly, an elaborate document entitle "Deed of Family Settlement and Trust" was prepared by eminent Philadelphia lawyers.8 On December 31, 1915, it was signed by the three Houston children, their spouses and those grand children who were of age (and their spouses), by the corporate trustee under Grandfather Houston's will, and by the executor and trustee under Grandmother Houston's will. From December 31, 1915 on, the trustees held the questioned securities as part of the principal of Grandfather Houston's trust, paying the income therefrom to the Houston children. The residue of Grandmother Houston's estate was administered in accordance with her will as to $630,000 but as to the balance, equal distributions were made to the grandchildren.

8 Joseph deF. Junkin, Esq., and John G. Johnson, Esq.

In 1922, Sallie Houston Henry, Samuel F. Houston and Gertrude Houston Woodward executed a "deed of confirmation" under which they confirmed the deed of 1915 and released and quitclaimed to the trustees under the will of Grandfather Houston all their "right, title, interest or claim" to the Standard Oil securities, "it being expressly understood, however, that nothing herein contained shall affect the right of said life tenants to all cash dividends or income paid or to be paid in cash on any of said shares or securities, nor shall affect their rights as reserved to them by the sixth paragraph of said deed of family settlement."

Sallie Houston Henry died in 1938. The Commissioner attempted to lay the estate tax on her share of the life tenants' rights in the Standard Oil and other securities received by Grandfather Houston's trustee as "extraordinary distributions."9

9 Decedent's rights stem from both her father's and her mother's estate. As an heir of Sallie Houston, she would have an interest in Sallie Houston's rights to the "extraordinary distributions."

Following a thorough presentation on the reargument of the matter our own further reflections have convinced the majority of us that we were mistaken in treating the question presented as that kind of "clear-cut question of law" in which we may exercise independent judgment. We conclude, rather, that this is the type of question to which the doctrine of the Dobson case² and the many authorities proliferating from it are applicable. In such a case the Tax Court's conclusion, if not an egregious mistake, is to be accepted as final. It is one of those situations such as the Court speaks of in Commissioner v. Scottish American Co., 1944, 323 U.S. 119, 65 S.Ct. 169, 89 L.Ed. 113, where it is...