Rothensies v. Fidelity-Philadelphia Trust Co.

• Decision Date: 23 April 1940
• Docket Number: No. 7042.,7042.
• Citation: Rothensies v. Fidelity-Philadelphia Trust Co., 112 F.2d 758 (3rd Cir. 1940)
• Parties: ROTHENSIES, Collector of Internal Revenue, v. FIDELITY-PHILADELPHIA TRUST CO. et al.
• Court: U.S. Court of Appeals — Third Circuit

112 F.2d 758 (1940)

ROTHENSIES, Collector of Internal Revenue, v. FIDELITY-PHILADELPHIA TRUST CO. et al.

No. 7042.

Circuit Court of Appeals, Third Circuit.

April 23, 1940.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and Lyle M. Turner, Sp. Assts. to the Atty. Gen., for appellant.

George P. Orr, Orr, Hall & Williams, and Madison S. DuBois, all of Philadelphia, Pa., for appellees.

Before MARIS, CLARK, and JONES, Circuit judges.

JONES, Circuit Judge.

The question raised by this appeal is whether property bequeathed by a donee in the exercise of a general power of appointment, to the same persons in lesser estates who would have taken the property in its entirety under the will of the donor in default of appointment, passes in virtue of the exercise of the power within the meaning of § 302(f) of the Revenue Act of 1926, as amended, 26 U.S.C.A.Int.Rev. Code, § 811(f).

William Bucknell, a resident of Pennsylvania, died testate in 1890. He bequeathed to his daughter, Harriet M. Hopper, a share of the income for life from a trust fund with a general power of appointment by will as to a proportionate share in the corpus of the trust. In default of appointment by Mrs. Hopper, the trustees were to assign and convey the share of principal in the trust upon her death to her children in equal shares and to the children of any deceased child of hers, per stirpes.¹

Harriet M. Hopper, the daughter, also a resident of Pennsylvania, died May 11, 1934. By her last will, she devised and bequeathed the property, over which she had a power of appointment under her father's will, in trust with directions to her trustees to divide the income therefrom into a sufficient number of equal shares to pay one share to each of her children surviving her or to the issue of any deceased child, per stirpes, and one share to her surviving grandchildren and the issue of any deceased grandchild. Her will further provided that this distribution of income should continue until the death of her last surviving child, at which time the principal of the trust was to be divided equally among her then surviving grandchildren per capita and the surviving issue of any deceased grandchild per stirpes.² Mrs. Hopper left surviving her four children and no issue of any deceased child. By the limitations of her will, each of her four children took a one-fifth interest for life in the income from the trust and her grandchildren, as a class, took the remaining one-fifth of the income for the duration of the trust and the whole of the corpus in remainder as already stated.

The executors of Mrs. Hopper's will filed a federal estate tax return in which they included in her gross estate the full value of the property over which she had a general power of appointment and paid the federal tax on the corresponding net estate. Thereafter, the executors filed a claim for refund, alleging that the value of the beneficial interests which Mrs. Hopper's children took in the Bucknell property as restricted by the appointment in her will was improperly included as a part of her gross estate for federal estate tax purposes.

The claim for refund having been rejected, the executors of Mrs. Hopper's will instituted suit in the court below against the Collector for the recovery of the portion of the tax alleged to have been improperly assessed and collected. The plaintiffs' claim did not seek a refund of the tax paid in respect of the interests of Mrs. Hopper's grandchildren under her appointment, either as to their share of the income from the trust or the corpus in remainder. The amount of the plaintiffs' claim is not in dispute but merely their right to any refund. For want of a sufficient affidavit of defense, the court below entered judgment in favor of the executors for the amount of their claim with interest. From that judgment, the Collector took the present appeal.

The executors contend that, because of the devise over to the Hopper children under the will of William Bucknell in default of appointment by their mother, what the children received after the limitation placed upon the disposition of the property by the will of Mrs. Hopper, passed to them from the will of the donor and is, therefore, not to be included as a part of the donee's gross estate in determining her estate's liability for federal estate tax.

Section 302 of the Revenue Act of 1926, c. 27, 44 Stat. 70, as amended, 26 U.S.C.A. Int.Rev.Code, § 811, which prescribes the basis for determining the value of the gross estate of a decedent for federal estate tax purposes, provides, inter alia, that there shall be included the value at the time of death of all property, real or personal, "* * * (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, * * *."

In Helvering v. Grinnell, 294 U.S. 153, 55 S.Ct. 354, 79 L.Ed. 825, where the donee exercised a general power of appointment by appointing to the same persons who, as the remaindermen under the donor's will, would have taken the property in the same estates and interests had the power not been exercised, and where the appointees also elected to reject the donee's appointment, the Supreme Court held that nothing had passed in virtue of the exercise of the power within the meaning of § 302 (f) of the Revenue Act of 1926 and that the property so appointed was, therefore, not to be included in the gross estate of the donee.

The appellant argues that the decision in the Grinnell case, supra, depends upon the fact that the appointees there rejected the donee's appointment, as they were permitted to do under the law of New York (Matter of Lansing's Estate, 182 N.Y. 238, 74 N.E. 882) which governed the question of title in that case. Grinnell v. Commissioner of Internal Revenue, 2 Cir., 70 F.2d 705, 706. While the appointees' renunciation of the donee's bequest was of importance in doubly assuring that the property had not passed under the power, we think it is implicit in the opinion of the Supreme Court that, had the appointees in the Grinnell case not taken occasion to reject the appointment, the decision would have been the same because of the property law of New York governing the question of title. In Matter of Lansing's Estate, supra, which both the Supreme Court and the Circuit Court of Appeals for the Second Circuit cite and quote from with approval in the Grinnell case the New York Court of Appeals said, at page 243 of 182 N.Y., at page 884 of 74 N.E., that "The attempt to execute the power was not effective, because it did nothing," and that it was "a mere form, with no substance". See 294 U.S. at page 157, 55 S.Ct. at page 355, 79 L.Ed. 825 and 70 F.2d at page 707 (Grinnell cases). If, therefore, the donee's exercise of the power was ineffectual, it can hardly be that the appointees' rejection of the donee's useless action was of controlling effect in determining whether the property passed in virtue of the donee's exercise of the power. The local law ruled the question as to the passage of the title regardless of the appointees' rejection of the donee's bequest.

As we view it, the thing of general and fundamental importance under the decision in the Grinnell case is whether the donee, in the exercise of a general power of appointment, appoints to the same persons who are the remaindermen under the donor's will in default of appointment where, under local law, property so appointed passes under the donor's will and not under the appointment. This conclusion, we believe comports with the decision of the Supreme Court in the Grinnell case, particularly in the light of the prior conflicting decisions among the courts of appeal.

It had been held by the Court of Appeals of the District of Columbia in Lee v. Commissioner of Internal Revenue, 61 App.D.C. 33, 57 F.2d 399, that a donee's appointment of property by will, in the exercise of a general power of appointment, to the same persons who would have taken the property under the will of the donor had the power not been exercised, constituted a "passing" of property within the meaning of § 402(e) of the Revenue Act of 1921, 42 Stat. 278 (similar to § 302 (f) of the Revenue Act of 1926) and that, accordingly, the property so appointed was to be included in the gross estate of the donee for the purpose of determining the federal estate tax. There was no rejection by the appointees of the donee's bequest in the Lee case.

Several years later, in Wear v. Commissioner of Internal Revenue, 3 Cir., 65 F.2d 665, this court, under testamentary circumstances substantially similar, held to the same effect as the ruling in the Lee case, with respect to § 302 (f) of the Revenue Act of 1926, notwithstanding that, by the law of Pennsylvania (the situs of the property), the appointees took a vested remainder by the devise over under the donor's will in default of appointment, subject to its being divested by the donee's exercise of the power. Freeman's Estate (No. 1), 35 Pa.Super. 185, 189, approved by the Supreme Court of Pennsylvania in Freeman's Estate, 281 Pa. 190, at page 194, 126 A. 270; see, also, Potter's Estate, 13 Pa.Dist. & Co.R. 667, 669. The appointees in the Wear case likewise made no effort to elect as between the appointment and the devise over in default of appointment.

Then followed Grinnell v. Commissioner of Internal Revenue, 70 F.2d 705, where the Circuit Court of Appeals for the Second Circuit, in recognized disagreement with the decisions in the Wear and Lee cases, supra, held that the donee's bequest, in the exercise of a general power of appointment, to the same persons who would take as remaindermen under the donor's will in default of appointment did not constitute a passing of the property under the power within the meaning of § 302 (f) of the Revenue Act of 1926, the appointees also having rejected the donee's bequest.

Upon a writ of certiorari the foregoing conflict was resolved in...