Before BIGGS, GOODRICH, and McLAUGHLIN, Circuit Judges.
The Commissioner seeks in this case to sustain his inclusion in the gross estate of Abby R. Smith, who died in 1937, of the value, less a life estate, of certain property conveyed in trust by the decedent in 1919. The trust was made irrevocable in 1925. Alternate grounds are asserted by the Commissioner in support of his action. (1) It is contended that certain future interests, presently to be described, are in violation of the Pennsylvania rule against perpetuities and therefore the value of those interests is includible in the gross estate under § 302(a) of the Revenue Act of 1926, as amended by the 1934 Act, 26 U.S.C.a. Int. Rev. Acts, page 227.*fn1 (2) In the alternative it is urged that the future interests are includible in the gross estate under § 302(c) of the same Act, ibid,*fn2 as a transfer intended to take effect in possession or enjoyment at or after death. The Tax Court sustained the Commissioner on the first theory and thus did not find occasion to consider the alternative ground urged. The executors petitioned this Court for review.
The pertinent provisions of the trust indenture are:
"Fifth: To pay over the said income mentioned in the Fourth paragraph hereof, to Elizabeth Richmond Fisk for and during the period of her natural life, and on her death to pay over the income arising from said trust fund to such child or children as she may leave to survive her, as hereinafter provided. In the event of the death of any child or children of Elizabeth Richmond Fisk, leaving child or children him or her surviving, then the child or children of such deceased child shall take the portion of said income his or her parent would have taken if living.
"Sixth: After the death of Elizabeth Richmond Fisk, as her children reach the age of twenty-five years to pay over to each of them their proportion of the trust fund if in the sole discretion and judgment of said trustees it will be wise to so distribute the trust fund, and thereafter at any time if said Trustees shall in their judgment and discretion consider it wise to pay over the principal of said trust fund or any part thereof, they may do so. This clause to cover the payment to any child or children of any deceased child of Elizabeth Richmond Fisk as they reach the age of twenty-five years or thereafter, if in the judgment and discretion of said Trustees it is wise to pay the same. In the case of the death of Elizabeth Richmond Fisk without leaving child or children, or children of deceased child or children, before the corpus of the trust estate has been paid over, then and in that case the said trust fund any [sic] any unpaid interest or income shall be returned into my estate for disbribution to my heirs."
When Abby R. Smith died, the life tenant, Elizabeth Richmond Fisk, was living; likewise the latter's four daughters: Elizabeth Fisk Tyler, born July 7, 1911, Margaretta Fisk, born February 23, 1915, Ursula Fisk, born September 15, 1917, Ann Louise Fisk, born June 25, 1921. There was also a great grandson, Harvey Tyler, son of Elizabeth Fisk Tyler, born December 18, 1933.
The first question is whether the future interests following the life estate of the decedent's daughter runn afoul of the Pennsylvania rule against perpetuities. Since the decision of the Tax Court on this point turns upon an "unmistakable" question of law, this Court upon review may examine the question and reverse the Tax Court, if it finds "a clear-cut mistake of law." Dobson v. Commissioner of Internal Revenue, 1943, 64 S. Ct. 239, 247. Our basis for testing the Tax Court's decision is, as agreed upon by everyone, the Pennsylvania law. See Rogers' Estate v. Helvering, 1943, 64 S. Ct. 172.
The rule in Pennsylvania is the one usually stated; an interest which may not vest within a life or lives in being, twenty-one years and the usual period of gestation thereafter is void. Warren's Estate, 1936, 320 Pa. 112, 182 A. 396, 104 A.L.R. 1345. And, where the validity of a gift to a class is involved, the Pennsylvania cases follow the rule of the leading English case of Leake v. Robinson, 1817, 2 Mer. 363,*fn3 that if the interest of any potential member of the class can by any possibility vest too remotely, the entire gift to the class fails. Coggins' Appeal, 1889, 124 Pa. 10, 16 A. 579, 10 Am.St.Rep. 565; In re Kountz' Estate (No. 1), 1906, 213 Pa. 390, 62 A. 1103, 3 L.R.A., N.S., 639, 5 Ann.Cas. 427. The Tax Court, citing some of the Pennsylvania decisions, construed the trust indenture to provide for gifts to several classes which were to vest neither in interest nor in possession or enjoyment upon the death of the life tenant. Then it held that since, by possibility, some member of the classes specified might become entitled to take under the trust indenture at a time beyond the period specified in the rule, the gifts to the children and grandchildren were void as to all, and hence everything following the life estate was includible in the decedent's estate. The Tax Court was in error upon the Pennsylvania law. Our analysis of the Pennsylvania law and its application to the undisputed facts of this case follows.
Following the life estate to the settlor's daughter, the settlor provided for a gift to a class composed of her daughter's children, designated for convenience here as Class One. In the event that any member of Class One died before reaching the age of 25, his children, whom we may call Subclass Two, were to take his share of the income and principal as provided. Under the provisions of the trust there were possible as many Subclasses (Two, Three, Four, etc.) as there were members of Class One. In such a case it is the accepted rule that the possibility of a gift to any member of a subclass violating the rule against perpetuities and thus rendering the gift to that subclass invalid, does not invalidate gifts to other subclasses or a prior class, if they are otherwise valid.*fn4 Under such circumstances the gift to each class must be examined separately to determine its validity. The Tax Court therefore made a "clear-cut mistake of law" when it applied the rule of Leake v. Robinson, applicable in the case of "one class" gifts, to the several separate class gifts, thus in effect treating a number of distinct classes as one class. The next step is to consider the validity of the gift to the separate classes.
Under the trust indenture it is clear that the settlor did not intend the various classes mentioned to close at the time the indenture took effect. Nor was the gift by its terms only to those children and grandchildren of the daughter living upon the daughter's death. The general rule is that in the case of a gift to a class, the members of that class who are to take are ascertained at the time set for distribution.*fn5 In the case of the Class One here, the time for distribution of the corpus would be when the first member of the class (settlor's grandchildren) attained twenty-five, after the termination of the prior life estate.*fn6 If there were no provisions for income payments before that time, the gift to them would violate the rule against perpetuities. Coggins' Appeal, supra. However, we think it clear under the Pennsylvania decisions that the provision for payment of the income of the trust to the members of Class One saves their gift from invalidation under the rule.
It has long been the law in Pennsylvania that a direction that income be paid to an ascertained beneficiary of a trust until there is a distribution to him of corpus, indicates an intention that a present gift was intended.In such a case, age is not descriptive of those who are to take but of the date of payment. The particular interests vest with only possession and enjoyment postponed. In re Bilyeu's Estate, 1943, 346 Pa. 134, 29 A.2d 516; Safe Deposit & Trust Co. v. Wood, 1902, 201 Pa. 420, 50 A. 920. Here, the members of Class One will necessarily be definitely ascertained at the time the preceding life estate terminates since they are the children of the life tenant. Consequently, the number who would share the income at that date would be determinable. Since, under the trust they are to receive the income upon the termination of the life estate until the corpus is distributable, their interets vest upon the termination of the life estate. Therefore, the gift to them does not violate the rule against perpetuities, since their interests must ...