The opinion of the court was delivered by: MILLER
The above-entitled case was tried by this court without a jury.
1. This is a suit for the recovery of Federal estate taxes in the amount of $ 197,162.51 and interest thereon in the amount of $ 13,794.41, or a total of $ 110,956.82, together with interest from the date of payment as provided by law.
2. Harry C. Stackpole (decedent herein) died on February 3, 1945, at the age of sixty-nine, a resident of St. Marys, Pennsylvania.
3. Plaintiffs are the duly appointed and acting executors of the last will and testament of the decedent dated February 20, 1942. Plaintiff J. Hall Stackpole is, and at all times hereinafter mentioned was, a citizen of the United States residing in St. Marys, Pennsylvania. Plaintiff, St. Marys Trust Company is, and at all times hereinafter mentioned was, a corporation organized and existing under and by virtue of the laws of the Commonwealth of Pennsylvania.
4. Stanley Granger, defendant, was the duly appointed, qualified and acting Collector of Internal Revenue for the Twenty-third Collection District of Pennsylvania at the time the complaint was filed, and all taxes at issue herein were paid to him.
5. Prior to 1930 decedent was married to Sara Hall Stackpole. They had three children: James Hall Stackpole, Harrison Clinton Stackpole, and Lyle Hall Stackpole, later Kitching and now Townsend.
6. On March 31, 1930 by indenture of trust decedent transferred to James Hall Stackpole, trustee, 210 shares of the common stock of Stackpole Carbon Company. The indenture of trust provided that the net income of the trust should be paid to the use of decedent so long as he lived, and that the trust should terminate and the trust property be paid over upon his death to his son James Hall Stackpole. James Hall Stackpole was over the age of twenty-one years on March 31, 1930 when said indenture of trust was executed and was alive and more than thirty years of age on February 3, 1945, the date of decedent's death.
7. On March 31, 1930 by indenture of trust decedent transferred to James Hall Stackpole, trustee, 210 shares of the common stock of Stackpole Carbon Company, a Pennsylvania corporation. The indenture of trust provided that the net income of the trust should be paid to the use of decedent during his lifetime, and upon his death to his son Harrison Clinton Stackpole until he arrived at the age of thirty years, at which time the said son was to receive the property discharged of the trust if he was then living. Harrison Clinton Stackpole was born on June 9, 1914, and on March 31, 1930 he was fifteen years of age, and he was alive and more than thirty years of age on February 3, 1945, the date of decedent's death.
8. On March 31, 1930 by indenture of trust decedent transferred to James Hall Stackpole, trustee, 210 shares of the common stock of Stackpole Carbon Company, a Pennsylvania corporation. The indenture of trust provided that the net income of the trust should be paid to the use of decedent so long as he lived and upon his death to his daughter Lyle Hall Kitching (now Lyle Hall Townsend) during her lifetime, and that the trust 'shall terminate upon the death of the Beneficiary, unless the Beneficiary shall predecease the Settlor, in which event the trust shall terminate upon the death of the Settlor.' Upon termination of the trust the corpus was to be conveyed and paid over to such person or persons as decedent's daughter might by a last will and testament appoint to receive the same, and in default of such appointment, then over to other persons. Since decedent's death the trustee has held the trust property for the benefit of the beneficiary, Lyle Hall Kitching (now Lyle Hall Townsend). The daughter was living at the date of the death of the decedent.
9. Each of the indentures of trust contains the following language:
'Any and all stock dividends which shall be received by the Trustee with respect to any securities at any time held in the trust shall be deemed to constitute principal of the trust and shall be treated accordingly.'
10. By a decree of the Court of Common Pleas of Elk County, Pennsylvania, dated April 1, 1930, entered at No. 26 April Term, 1930, decedent and Sara Hall Stackpole were divorced.
11. On May 9, 1930 decedent married Adelaide Wittman. Jude Stackpole, born July 4, 1936, was adopted by decedent and his wife in 1937.
12. On December 31, 1936 Stackpole Carbon Company issued 40 shares of its common stock in exchange for each share of common stock then outstanding in accordance with a resolution of the Board of Directors dated December 21, 1936 and a resolution of the stockholders dated December 22, 1936. Each of the three trusts received 8,400 shares of the new common stock for the 210 shares then held. The three trusts thus received 25,200 shares for the 630 then held.
13. In December 1939 Stackpole Carbon Company distributed nine additional shares of common stock for each 16 shares then outstanding in accordance with resolution of the Board of Directors dated December 12, 1939. As a result thereof, each of the trusts received 4,725 shares, and the three trusts received a total of 14,175 additional shares, thus increasing to 39,375 shares of common stock, the shares in the trusts.
14. On decedent's death on February 3, 1945 the trustee held for each trust 13,125 shares of the common stock of Stackpole Carbon Company or a total of 39,375 shares for the three trusts.
15. In his will, decedent devised and bequeathed his residuary estate one-fifth outright to each of the following: his wife, Adelaide W. Stackpole, his son, J. Hall Stackpole, and his son, Harrison C. Stackpole, and one-fifth in trust to each of the following: his daughter, Lyle Hall Townsend, and his adopted son, Jude Stackpole. His wife, Adelaide W. Stackpole elected to take against the will and, therefore, was entitled to one-third of his residuary estate, and each of the remaining residuary legatees was entitled to one-sixth of the residuary estate.
16. On April 4, 1946 plaintiffs filed with defendant, Stanley Granger, Collector of Internal Revenue for the Twenty-third Collection District of Pennsylvania, a federal estate tax return (Form 706) for the Estate of Harry C. Stackpole, Deceased, showing a federal estate tax liability of $ 86,072.84, which amount was on April 8, 1946 duly paid by plaintiffs to said defendant as Collector.
17. Plaintiffs, in preparing decedent's federal estate tax return, did not include in decedent's gross estate any of the shares of stock of the company held by the three trusts.
18. The Commissioner of Internal Revenue, following an examination of the federal estate tax return, on May 4, 1948 issued a notice of deficiency in which he determined that 11,451 shares of stock of Stackpole Carbon Company held by the trustee of the three trusts created by decedent on March 31, 1930 were includible in decedent's estate for federal estate tax purposes at $ 20 per share or a total value of.$ 229,020. The basis for this determination was the contention that under the Pennsylvania statute against accumulations, Act of April 18, 1853, P.L. 503, 9, as amended, 20 P.S. 3251, the provisions of the trusts that all stock dividends should be considered principal were invalid and that consequently under the so-called 'intact value' rule, 11,451 shares should have been distributed to decedent as income.
19. In August 1948 the Commissioner of Internal Revenue assessed a federal estate tax deficiency against plaintiffs in the amount of $ 97,162.51 and interest thereon in the amount of $ 13,794.41, and defendant demanded payment of $ 110,956.82 from plaintiffs, which amount plaintiffs paid to defendant on October 22, 1948.
20. On or about June 23, 1948 James Hall Stackpole, the trustee, filed his accounts for the Lyle Hall Kitching Townsend trust, the James Hall Stackpole trust and the Harrison Clinton Stackpole trust in the Orphans' Court of Elk County, Pennsylvania, at Nos. 2, 3 and 4 June Term 1948 respectively. These accounts included all the stock ...