Before MARIS and MCLAUGHLIN, Circuit Judges, and FOLLMER, District Judge.
MCLAUGHLIN, Circuit Judge.
This is an income tax matter in which suit was brought to recover certain amounts paid under protest for deficiency assessments. The District Court on motion for summary judgment decided in favor of the taxpayers*fn1 and the government appeals.
The executors of the estate of Eric T. Franzen, deceased, were also named as trustees in the will which directed that the residue of the estate be held in three trusts. On this appeal we are concerned with sales by them in 1935, prior to the final settlement of the estate, of blocks of stock in two different companies. The main question is whether the gains from those sales are taxable against the trusts as held below or against the estate under Section 161 of the Revenue Act of 1934 as the government asserts.*fn2
Mr. Franzen died on August 15, 1933, resident in Essex County, New Jersey, where his will was probated August 28, 1933. By the seventh paragraph of the will, after specific bequests and devises, he left the residue of his estate "to my executores * * * in trust, nevertheless, * * *" to be divided into two equal shares, one-half to his widow and the other half in equal parts to his two children. Then followed powers to the executors to invest the shares of the beneficiaries and to distribute the income as provided. The eighth paragraph among other things authorized "my executors to retain any investments made by me in my lifetime and the securities representing the same forming part of my estate and to deliver the same to themselves as trustees, * * *."
The named executors and trustees, E. Frank Britten, Jr., and Savings Investment Trust Company, entered upon their duties immediately after the probate of the will. These included management of the Shu-Milk Products Corporation which had been largely owned and controlled by decedent. In January and February 1935, during the course of an efficient administration of the estate assets, they sold stock in that corporation and in another company for a large profit. On October 21, 1935, they filed an inventory and account with the Surrogate of Essex County. The inventory was made by them as executors and by appraisers. It included the two mentioned blocks of stock. The account is stated to be that of the executors and trustees but the supporting affidavits were by the appellees as executors. Various claims were listed for which allowance was prayed. The accountants charged themselves as executors with the assets set out in the inventory and with income received from September 8, 1933, to September 19, 1935. All changes in the investments made by the accountants "since their qualification as executors" were detailed and embraced the Shu-Milk stock sale. The agreement for the sale of that stock, executed January 31, 1935, showed Britten and the bank participating as executors of the Franzen estate and signing as such executors. The account was approved by the Essex County Orphans Court on November 26, 1935, with commissions to the appellees as executors and a counsel fee to their attorney. The commissions and counsel fee were claimed as deductions on the federal estate tax return and were so allowed. On April 14, 1939, appellees filed their first account as trustees. This covered the period from September 30, 1935, to September 23, 1938. On November 18, 1941, the appellees as trustees petitioned for commissions and counsel fees. In their petition they admitted that prior to October 25, 1938, the trust funds had not been segregated but said that such segregation had been made on that date. There were various payments for federal and state taxes, filing and counsel fees by the appellees in their administration of the estate.*fn3
Referring to the stock in question, the petition and complaint alleges that during 1935 "Plaintiffs sold a portion of the corpus of the said three trusts and realized therefrom a capital gain." It then goes on to say "Said capital gains were not distributed to the beneficiaries of said trusts but were retained and invested by the plaintiffs in accordance with the terms of said trusts."
The issue was submitted as a question of law to the District Court on the motion for summary judgment and so passed upon by that Court which made no findings of fact. The Court concluded, "that by his will the testator intended that his widow and children would be entitled to the income of the trusts from the date of his death," therefore that "the equitable titles to the respective trusts actually vested in the cestuis qui trustent immediately on the testator's death" and that "the trustees then also became vested with the legal titles to the trusts at the death of testator." A supplementary opinion by the Court on motion to reconsider reiterated this. On this appeal, appellees make the same contention as below, saying in their brief that "Physical segregation and division of the trust assets among the three trusts is an administrative matter having no bearing upon the creation of the trusts and the time when they took effect. The trusts were created by the will They took effect at testator's death because that was the testator's intent as expressed in his will and interpreted by the courts." Whether stronger factual evidence in support of appellees' theory as to the profits from the stock sales could have been produced and, if so, the effect thereof, is not before us and not considered.
If the trusts did take effect under New Jersey law immediately upon the death of the testator, the decision below allocating the tax to the trusts is proper. Helvering, Commissioner v. Stuart, 317 U.S. 154, 63 S. Ct. 140, 87 L. Ed. 154. Our examination of the New Jersey cases indicates the contrary. In passing it should be observed that federal tax law would frown on such a result, giving trusts a wholly illogical tax advantage over ordinary bequests which would have to submit to administration and consequent taxation.*fn4 Aside from that, New Jersey law does not support the proposition.
The most the New Jersey cases can be said to hold is that a residuary legatee or beneficiary is entitled to income accruing from the date of death. That rule and its reason are set forth in Van Blarcom v. Dager, Court of Errors and Appeals, 1879, 31 N.J. Eq. 783, at page 794:
"At what time did the income to the widow begin to accrue? It was decreed by the vice-chancellor, to begin at the expiration of one year from the testator's death. To the correctness of the decree in this particular, I am unable to assent. It is grounded on the general rule, that legacies bear interest from the time they are payable, and upon the statutory provision, that the executor or administrator shall have a year after probate in which to pay legacies, where no time for their payment is fixed by the will. This general rule has been expressed and applied in cases adjudged in this state. [Citing cases.]
"In all these cases, the legacies were specific sums, or the interest of such sums, and differ from bequests of the residuary personal estate made to a legatee for life.This distinction is explained and enforced by the chancellor in the recent case of Green v. Green, 3 Stew., 30 N.J. Eq., 451, 452, in which the opinion was delivered after the decision of the present case. The rule that, where the residuary personal estate is given to a legatee for life, the interest thereon accruing from the testator's death, shall, in the absence of any direction to accumulate, go to the tenant for life, is declared, by the chancellor, to be established.It is placed, not on the presumption that the life interest was given for support, but on the equity which seeks, as between the life tenant and the remainderman, to give to each his due. To give the interest for the first year to the remainderman by treating it as part of the principal, is correctly said to be injustice to the tenant for life."
Plainly the above case decides that the right to the income is founded not on the vesting of the trust but on the equity between beneficiary and remainderman. No cases in New Jersey (except those discussed below) have been found stating that testamentary trusts vest at the testator's death. See Green v. Blackwell, 32 N.J. Eq. 768, 773; Berger v. Burnett, 95 N.J. Eq. 643, 648, 123 A. 879; Gaede v. Carroll, 114 N. J. Eq. 524, 530, 169 A. 172; Gates v. Plainfield Trust Co., 121 N.J. Eq. 460, 470, 191 A. 304; First National Bank of Toms River v. Levy, 123 N.J. Eq. 21, 29, 195 A. 820, together with the cases discussed in those cited. Berger v. Burnett, supra, one of the decisions strongly stressed by the appellees, would seem expressly to hold that a residuary trust cannot come into existence until after administration, the Court saying at page 646 of 95 N.J. Eq., at page 880 of 123 A.: "It seems ...