Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Guy K. Bard, Judge.
Before JONES, and GOODRICH, Circuit Judges, and KALODNER, District Judge.
The facts having bearing on the question here involved are that Algernon R. Clapp, who died in 1938 resident in Pennsylvania, appointed by will in trust for his wife for life and after her death to their two daughters outright in remainder certain property over which he had a general testamentary power of appointment under the will of his father, B. Frank Clapp, who had died in 1914 also resident in Pennsylvania. The property dealt with in Algernon R. Clapp's appointment embraced a portion of the corpus of a trust which B. Frank Clapp had created bY his will for the life benefit of his widow and their son.The will of the father provided that the trust which he so created should terminate upon the death of his widow, the death of his son and the attainment by the children of the latter of the age of twenty-one years; and it further directed that, upon the termination of the B. Frank Clapp trust, the trustee should grant and convey to the then surviving issue of the son, per stirpes, the whole of the trust estate "excepting thereout, however, such portion or portions thereof as may have been disposed of bY my surviving son * * * by his * * * Will(s) made in pursuance of the powers hereinbefore conferred * * * ."
The material portions of the respective will of the father and son are set out in the margin.*fn1 B. Frank Clapp left to survive him his widow, Clara B. Clapp, and his son and only child, algernon R. Clapp, and the latter left to survive him his mother (Clara B. Clapp), then eighty years old, his wife and his two daughters, aged sixteen and seventeen years at the time of their father's death.
The question for determination is whether the property appointed by Algernon R. Clapp, deceased, to his two daughters in remainder, and whereof they were already the remaindermen under the will of their grandfather subject to such appointment as their father might make, constituted a passing of the property through algernon R. Clapp's exercise by will of a general power of appointment within the meaning of Sec. 302(f) of the Revenue Act of 1926 as amended. 26 U.S.C.A. Int. Rev. Acts, pages 227, 230.*fn2 The question arises in the suit of the executor of the will of Algernon R. Clapp, deceased, against the Collector for the recovery of the portion of federal estate tax paid on account of the inclusion in Algernon R. Clapp's gross estate, as required by the Commissioner of Internal Revenue, of the property appointed by him to his two children. All material facts were stipulated at trial. The District Court entered judgment for the executor in an amount appropriate to the claim and the Collector took the present appeal.
As justification for its action, the District Court relied upon our decision in Rothensies v. Fidelity-Philadelphia Trust Co. et al., 3 Cir., 112 F.2d 758. There, as in the instant case, the law of Pennsylvania governed the devolution of the property involved. Under the law of that state a devisee or legatee of property appointed in the exercise of a general power of appointment, who would have taken the property in the same, or even larger, estate under the will of the donor in default of appointment, takes the propertY, so appointed, by virtue of the donor's will and not under the will of the appointing donee. Thus, it has been held in Pennsylvania that "In the absence of an expressed contrary intention a legacy bequeathed in default of appointment, vests in the legatee on the death of the [donor] testator, subject to be divested by the exercise of the power of appointment." In re Freeman's Estate (No. 1), 35 Pa.Super. 185, 189, expressly approved by the Supreme Court of Pennsylvania in Re Freeman's Estate, 280 Pa. 273, 277, 124 A. 435, and again in 281 Pa. 190, 194, 126 A. 270. See also In re Potter's Estate, 13 Pa. Dist. & C.R. 667, 669. The rule is also applicable pro tanto to the extent that the donee by the exercise of his power leaves in the legatee but a portion of the property whereof the latter was vested under the donor's will subject to divestment through an exercise of the power. Cf. In re Freeman's Estate (No. 1), loc. cit. supra. As cited in In re Freeman's Estate, the rule originated at common law.*fn3 It has been widely followed and, subject to certain specified limitations, is now incorporated in the Restatement of Property (1940) § 369.
Such being the controlling local law with respect to the devolution of the particular property appointed in the Fidelity-Philadelphia Trust Co. case, we there held on a parity of reasoning with Helvering v. Grinnell, 294 U.S. 153, 55 S. Ct. 354, 79 L. Ed. 825, that a bequest to a legatee through the exercise of a general power of appointment of a portion of the property to which he was entitled under the will of the donor in default of appointment did not constitute a passing of the property through the exercise of the power and that, consequently, that requisite to the applicability of Sec. 302(f), 26 U.S.C.A. Int. Rev. Acts, pages 227, 230, as recognized in Helvering v. Grinnell, supra, 294 U.S. at page 155, 55 S.Ct at page 354, 79 L. Ed. 825, was wanting. Accordingly, we held that the property so appointed was not to be included in the donee's estate, under Sec. 302(f), as property subject to tax.
It is true that in the Grinnell case the appointees renounced the appointment and elected to take under the donor's will as in default of an appointment, whereas in the Fidelity-Philadelphia Co. case, as in the instant case also, there was no renunciation. Quite incidentally, it is our belief that renunciations in such circumstances are unknown to the law of Pennsylvania. However that may be, they add nothing to what the particular local law otherwise confers.
We deemed it to be a matter of importance to the decision in the Grinnell case that the property had not passed by the decedent's exercise of the power within the meaning of Sec. 302(f) and concluded that the pertinent Pennsylvania rule of property created, under the circumstances obtaining in the Fidelity-Philadelphia case, notwithstanding there was no renunciation, the material legal situation present in the Grinnell case, hence, our ruling as above stated. The decision in Rothensies v. Fidelity-Philadelphia Trust Co. was later followed by the Court of appeals for the Fourth Circuit in Legg's Estate v. Commissioner, 114 F.2d 760, and cited with apparent approval by the Court of Appeals for the Second Circuit in Central Hanover Bank & Trust Co. v. Commissioner, 118 F.2d 270, 273, both times as to the absence, under materially similar circumstances, of a passing of the subject property in the exercise of a power of appointment.
As the Fidelity-Philadelphia Co. case and the instant case cannot be distinguished, at least not to the disadvantage of the taxpayer, the Collector frankly disputes the correctness of our former decision and with equal candor asks that we overrule it. In support of the action which he thus urges us to take, he cites a recent decision by the Court of Appeals for the Second Circuit (Commissioner v. Estate of Rogers et al., 135 F.2d 35, decided April 2, 1943), which he says rules oppositely to our former decision. We are unable so to construe the net result of the court's ruling in the Rogers case, as will later appear. Furthermore, the Collector presses upon us the decision of the Supreme Court in Helvering v. Safe Deposit & Trust Co., 316 U.S. 56, 62 S. Ct. 925, 930, 86 L. Ed. 1266, as making certain that our former ruling was wrong in respect of our construction of the decision in the Grinnell case. Certiorari has been granted in the Rogers case but, as we are unable to perceive any conflict between the decision in taht case and our own in the Fidelity-Philadelphia case, we have nought to do but dispose of the instant appeal on the basis of the law which we deem to be applicable.
In the Safe Deposit & Trust Co. case, supra, Mr. Justice Black, speaking for the majority of the Court, said of Helvering v. Grinnell, supra, that: "The subsequent renouncement by the appointees of the right to receive by appointment and their election to take as remaindermen in default of appointment were held by this Court to place the property subject to the power outside the scope of Section 302(f)." The minority of the Court treated the Grinnell case as holding to substantially the same effect. It is manifest that the legatees in the Grinnell case renounced the appointment, as was their right under local law, and it is equally certain that the Supreme Court held in that case that the renouncement of the appointment determined conclusively that nothing had passed within the contemplation of Sec. 302(f) by virtue of the exercise of the power. But neither in the majority nor the minority opinions in the Safe Deposit Co. case is there any suggestion of the proposition, now advanced by the Collector, that a renunciation of an appointment is a sine qua non to excluding property dealt with in the exercise of a power from the operation of Sec. 302(f) even where, under local law, property which is appointed to persons who would have taken it in the same or larger estates under the donor's will in default of appointment passes under the will of the donor and not by virtue of the donee's exercise of the power. The question as to what, if anything, passes in the exercise of a power in such a manner was neither present nor discussed in the Safe Deposit Co. case. And the reference there to the Grinnell case was for the purpose of illustrating how action taken by beneficiaries after their testator's death can affect the liability of the decedent's estate for federal estate taxes. This was material by way of answering the taxpayer's contention in the Safe Deposit Co. case that matters "occurring after the decedent's death, which is the 'taxable event' under an estate tax, should not be considered." See Helvering v. Safe Deposit & Trust Co., supra, 316 U.S. at page 65, 62 S. Ct. at page 930, 86 L. Ed. 1266. And, for that purpose, the conclusive effect accorded the renunciation in the Grinnell case was a pointed and an effective answer.
But we think that the Grinnell case also decided that where, according to local law, nothing passes in the exercise of a general power of appointment when the donee appoints to the same persons who would have taken the property in default of appointment, there is not in such circumstances a "passing" of the property so as to render it subject to the provisions of Sec. 302(f).*fn4 That this is so, we think the record in the Grinnell case clearly demonstrates. In support of the judgment below in Grinnell v. Commissioner, 70 F.2d 705, 708, the Court of appeals for the Second Circuit had held, inter alia, that: "The appointees not only declined to take the gift, but the appointment when exercised in favor of the same persons who would take irrespective of it was 'a mere form with no substance' which the law of New York that regulates the passage of title had refused to recognize." In relevant connection, the Supreme Court, after denominating as "well considered" the case of Matter of Lansing's Estate, 182 N.Y. 238, 74 N.E. 882, upon which the Court of appeals had "leaned confidently", added that, - "We think the reasoning of the New York court as to the meaning and application of the state law equally applies to the federal statute here in question. There, as here, the contention of the taxing authorities (there under the state act, here under the federal act) was that the appointee named in the will of the donee of the power took her property thereunder and not under the will of the creator of the power, notwithstanding the property had been given to her by the will of the latter subject to the power of appointment." [294 U.S. 153, 55 S. Ct. 355, 79 L. Ed. 825.] After referring to the state court's further answer in Matter of Lansing's Estate that the legatee had the right to renounce the appointment and to elect to take under the donor's will, the Supreme Court significantly quoted from the state court's opinion with respect to the local property law wherein it was said that "Although the power was exercised in form, her [the appointee's] title was perfect without it, and she derived no benefit from it." This treatment of the local law was, in our opinion, the basis of a decision in the Grinnell case that, where under local law there is no passing of property in the exercise of a power because the appointment is to the same persons who would have taken in default of appointment, the requirements of Sec. 302(f) have not been met. This view is further confirmed, and we think conclusively, by the opinion in the Grinnell case.
Certiorari was granted in the Grinnell case because of an asserted conflict with the case of Wear v. Commissioner, 3 Cir., 65 F.2d 665, and Lee v. Commissioner, 61 App.D.C. 33, 57 F.2d 399. In resolving the conflict the Supreme Court said 294 U.S. at page 158, 55 S. Ct. at page 356, 79 L. Ed. 825 that: "The reasoning and conclusions of those courts [in the Wear and Lee cases] and of the court below [in the Grinnell case] cannot be reconciled. We are of opinion that, to ...