Before GOODRICH, KALODNER and HASTIE, Circuit Judges.
Must the exercise of a general power of appointment, created prior to October 21, 1942, be "effective" in order for the provisions of Section 811(f) of the Internal Revenue Code of 1939, as amended,*fn1 to become operative?
That is the critical issue presented by this appeal from the judgment of the District Court for the Eastern District of Pennsylvania that appointive property of a Pennsylvania decedent was includible in her gross estate under Section 811(f) by reason of her "exercise" of her general power of appointment under the terms of the Pennsylvania Wills Act of 1947, P.L. 89, Sec. 14.*fn2
The facts are undisputed and they may be summarized as follows:
Edith K. Sands, the decedent, a resident of Pennsylvania, died testate on July 12, 1950. At the time of her death she had a life interest in and a general power of appointment by will over a fund established by the will of her grandfather, also a resident of Pennsylvania, who died in 1894. Under his will her surviving issue were entitled to the principal of the fund in default of an exercise of the power of appointment. Decedent was survived by four sons. Her will comprised only two paragraphs, one appointing executors, and the other providing:
"1. I leave all my property to my sons who shall survive me, their heirs and assigns forever."
Taxpayers, executors of Mrs. Sands' estate, in computing decedent's gross estate for Federal Estate Tax purposes, did not include in their estate tax return that portion of the trust principal over which she had a general power of appointment. The Commissioner, however, claiming that the decedent's will operated as an exercise of the power of appointment, included this fund in decedent's gross estate and assessed a tax deficiency which taxpayers paid. The taxpayers filed a claim for refund, and no notice of allowance or disallowance having been received, instituted this suit. Both parties, by cross motions, requested judgment on the undisputed facts disclosed by the pleadings and supporting affidavits, and judgment was entered for the Director.
On this appeal the taxpayers' contentions are as follows: (1) the decedent's will did not evidence an intention to exercise her power of appointment; (2) even if the will be construed to evidence such intention it did not constitute an "exercise" under Pennsylvania law and within the Internal Revenue Code; and (3) the Orphans' Court of Philadelphia in its Adjudication of the decedent's estate had stated "* * * a so-called exercise of the power of appointment in favor of the same persons to whom the original testator (donor) had given the remainder is a nullity, since their title to such remainder estate is fully effective by the terms of the will of the testator without any aid of the donee of the power of appointment" and under our decision in Gallagher v. Smith, 3 Cir., 1955, 223 F.2d 218, that Adjudication was controlling.
The sum of the Director's position is that under the Pennsylvania Wills Act of 1947 the effect of the decedent's will was to exercise her power of appointment; the Orphans' Court's holding that the exercise was a "nullity" because it appointed the property to the same persons who were entitled to take it in default of appointment was not dispositive with respect to Section 811(f) since the latter merely requires that there be an exercise of the power and there is no requirement that property pass as a result of such exercise.
Taking first the issue as to whether there was an "exercise" of the power of appointment:
The Pennsylvania Wills Act of 1947 provides inter alia:
"In the absence of a contrary intent appearing therein, wills shall be construed as to real and personal estate in accordance with the following rules:
"Sec. 14. Power of appointment. A general devise of the real estate of the testator * * * shall be construed to include any real estate * * * which he shall have power to appoint * * * and shall operate as an execution of such power. In like manner, a bequest of the personal estate of the testator, or any bequest of personal property described in a general manner, shall be construed to include any personal estate * * * which he ...