Before McLAUGHLIN, KALODNER and HASTIE, Circuit Judges.
Was the appellant estate entitled to a marital deduction in respect to federal estate taxes under Section 2056(b) (5) of the Internal Revenue Code of 1954?*fn1
The issue is presented by this appeal from the Order of the District Court granting summary judgment in favor of the District Director of Internal Revenue in an action for refund of federal estate taxes and interest paid following denial of the claimed marital deduction for property passing under the will of the decedent.
In brief summary, the decedent in his will created a trust which provided that his surviving wife was given the income from the trust estate for life and "the right to use and spend any or all of the principal of my said estate, if she so desires, and upon her request or requests made to * * * [trustees] they shall pay to her from time to time any part of the principal of my estate she may desire and said trust shall cease as to that part of the principal so paid to her." The will further provided: "It is my intention that my said wife * * * shall have the whole income and interest from my estate and use and spend any part or all of the principal that she may desire during her lifetime." In still another provision the balance remaining in the estate was to be paid to named remaindermen upon the death of the decedent's wife.
The District Court held that our decision in Commissioner of Internal Revenue v. Ellis' Estate, 3 Cir., 1958, 252 F.2d 109 was "controlling in this situation" and that under Pennsylvania law, as construed in Ellis' Estate, the wife "does not possess the 'unlimited powers to invade' to qualify for the marital deduction."*fn2
Emmert D. Hoffman, the decedent, a resident of Pennsylvania, died testate on July 16, 1955, survived by his wife, Zella G. His will provided in pertinent part, as follows:
"Second. I give, devise and bequeath all of my property and estate, real, personal or mixed to my wife, Zella G. Hoffman, and the Waynesboro Trust Company, in trust, they to invest and reinvest the same and to pay the income and interest therefrom to my wife, Zella G. Hoffman, during the term of her natural life.
"In addition to the payment of said income and interest to my said wife during her lifetime, she is to have the right to use and spend any or all of the principal of my said estate, if she so desires, and upon her request or requests made to said Waynesboro Trust Company and Zella G. Hoffman, Trustees, they shall pay to her from time to time any part of the principal of my estate she may desire and said trust shall cease as to that part of the principal so paid to her.
"It is my intention that my said wife, Zella G. Hoffman shall have the whole income and interest from my estate and use and spend any part or all of the principal that she may desire during her lifetime.
"Third: Upon the death of my said wife, Zella G. Hoffman, I direct the balance remaining of my estate in the hands of said Trustees, after the payment of her debts and funeral expenses out of said fund, to be divided into two parts, one of which part, I give, devise and bequeath to my brothers and sisters, both of the whole and half blood, in equal shares, and the other one-half I give, devise and bequeath to the brothers and sisters of my wife, Zella G. Hoffman, in equal shares.
"At the time of the death of my said wife, if any of my brothers and sisters or her brothers and sisters be dead leaving issue, the share so given to that one is to be given to that issue and if any of them be dead leaving no issue, then the share which would go to that person, is to go to his or her brothers and sisters."
Mrs. Hoffman elected to take under the will. The executors of the estate filed an estate tax return deducting approximately one-half of the estate passing under the will to Mrs. Hoffman.*fn3 The deduction was premised on the theory that under the will Mrs. Hoffman was given a life estate with a power of appointment within the meaning of Section 2056(b) (5) of the 1954 Code and was therefore entitled to a marital deduction as there provided. The Commissioner of Internal Revenue denied the claimed deduction and assessed estate taxes in the amount of some $10,000. The assessment was paid by the executors and on the denial of their claim for refund they unsuccessfully sued for refund in the Court below.
On this appeal the executors urge that the provisions of the decedent's will (1) permitting Mrs. Hoffman "to use and spend any or all of the principal of my said estate, if she so desires", and (2) terminating the trust "as to that part of the principal so paid to her", vested Mrs. Hoffman with "a power of appointment" within the meaning of Section 2056(b) (5) of the 1954 Code. In making this contention the executors seek to distinguish Commissioner of Internal Revenue v. Ellis' Estate, supra, where it was held that a provision in the decedent's will authorizing the surviving wife's withdrawal from principal of such sums as she "should require" did not vest in her a power of appointment, since under Pennsylvania law the surviving wife "* * * under the terms of the will did not possess an 'unlimited' power to invade the corpus or appoint the corpus to herself as unqualified owner", in view of the will's creation of "remainder" [252 F.2d 113] interests.
The grounds of distinction urged by the estate between Ellis' Estate and the instant case may be stated as follows: (1) In Ellis' Estate the will limited withdrawals from corpus to the amounts "required" whereas here there was an "unlimited" power of withdrawal since Mrs. Hoffman could expend from corpus amounts she "desired"; (2) here the will provided that the trust "shall cease as to that part of the principal so paid to her" and such provision was absent in Ellis' Estate, and (3) "the Ellis case was decided under the provisions of the old 1939 Revenue Code", and "The case at bar is under the 1954 Code, and the 1954 Code eliminated and struck out the old requirement that the widow's power be to appoint 'free of the trust'."
In reply, the District Director contends that the facts in Ellis' Estate are "almost identical with those in the instant case" and that "the rationale of that decision is fully applicable herein"; further that the differences between the applicable provisions of the 1939 and 1954 Codes "are of no import for the purposes of this case."
Taking first the pertinent provisions of the 1954 Code:
Section 2056(b) (1) provides that no marital deduction will be allowed in cases where the surviving spouse has only a life estate or some other terminable interest.
Section 2056(b) (5), however, provides for a marital deduction if the surviving spouse has a life estate together with a "power * * * to appoint" which is "exercisable * * * in all events."
"(b) Limitation in the case of life estate or other terminable interest. -
"(5) Life estate with power of appointment in surviving spouse. - In the case of an interest in property passing from the decedent, if his surviving spouse is entitled for life to all the income from the entire interest, or all the income from a specific portion thereof, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire interest, or such specific portion (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the interest, or such specific portion, to any person other than the surviving spouse -
"(A) the interest or such portion thereof so passing shall, for purposes of subsection (a), be considered as passing to the surviving spouse, and
"(B) no part of the interest so passing shall, for purposes of paragraph (1) (A), be considered as passing to any person other than the surviving spouse.
"This paragraph shall apply only if such power in the surviving spouse to appoint the entire interest, or such specific portion thereof, whether exercisable by will or during life, is ...