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BARTOL v. MCGINNES

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA


July 19, 1960

George E. BARTOL, Jr., George E. Bartol III, and Central-Penn National Bank of Philadelphia, Executors of the Estate of Mary Rush Bartol, Deceased, Plaintiffs,
v.
Edgar A. McGINNES, Individually and as United States District Director of Internal Revenue for the Internal Revenue District of Philadelphia, Pennsylvania, Defendant

The opinion of the court was delivered by: GRIM

In this case a father and mother *fn1" gave to their daughter a life interest in and a general power of appointment by will over two trust estates, and provided that the daughter's son was entitled to the two trust estates in default of an exercise of the powers of appointment. When the daughter died, thereby terminating the life estates, the account of the trustees was filed in the Orphans' Court of Chester County, Pennsylvania. In that court the daughter's son contended that there was a default in the exercise of the powers of appointment and that, therefore, he, the son, was entitled to the assets of the two trusts. On the other hand, certain trustees named in the daughter's will contended that the powers of appointment were exercised by the daughter's will and that under it they, the trustees, were entitled to the assets of the two trust estates.

Because of the two contentions, the Orphans' Court had before it the question of whether there was a default in the exercise of the powers of appointment, thereby entitling the daughter's son to the assets, or whether the powers of appointment were exercised by the daughter's will, thereby entitling the claiming trustees to the assets. After careful consideration the Orphans' Court decided that there was a default in the exercise of the powers of appointment and it adjudicated the assets to the daughter's son. *fn2"

 The question before this federal court is whether federal estate tax was due on the transfer of the assets from the two trust estates to the daughter's son. If the daughter exercised the powers of appointment, federal estate tax was due from her estate. If she did not exercise them, no federal estate tax was due. The daughter's estate contends that the question of whether or not the powers of appointment were exercised is no longer open to decision, even for federal estate tax purposes, because the question was determined by the Pennsylvania state court. The government contends that the question is still open for decision by this federal court and that contrary to the decision of the Orphans' Court the powers of appointment were exercised by the daughter.

 The government contends that the state Orphans' Court was in error in deciding that there was a default in the exercise of the powers of appointment, because to arrive at its conclusion the court considered extrinsic evidence. *fn3" In my opinion, the government's contention must be rejected. The Orphans' Court in the exercise of its functions had to adjudicate the property rights of the claimants before it. Since it decided these property rights and as part of its decision decided that there was a default in the exercise of the powers of appointment, the question is no longer an open one, even as to the question of whether federal estate tax was due. Gallagher v. Smith, 3 Cir., 1955, 223 F.2d 218.

 The government contends that the Orphans' Court decision is not binding here because (it contends) the decision was obtained by collusion. As evidence of collusion it points to the fact that the parties knew that if there were a default in the exercise of the powers of appointment no federal estate tax would be due on them, and also to the fact that under these circumstances none of the parties objected to the Orphans' Court's acceptance of the extrinsic evidence. In my opinion, the facts of the case do not prove collusion. There were strong reasons other than the avoidance of federal estate tax for the failure to object to the extrinsic evidence. The failure to object, in my opinion, was due as much to the fact that everyone in the family seemed to think that this would carry out the intentions of the daughter, as it was to tax considerations. Although the Orphans' Court judge was well aware of the rule forbidding the use of extrinsic evidence to determine whether or not a will exercises a power of appointment, he also was undoubtedly aware of the strong public policy that family disputes be settled, if possible. *fn4"

 Plaintiffs have also attacked the action of the government in fixing the value of 1440 shares of common stock of Insurance Company of North America at $ 125,280 (or $ 87 a share) rather than at the value stated in the return of $ 120,960 (or $ 84 a share).

 On the date of death, July 29, 1953, 100 shares of this stock were traded on the American Stock Exchange, on which the stock was and is listed. These shares were traded at a low of 86 1/2 and a high of 87 1/2. The government contends that the correct value was the mean between the high and low prices, or 87. If the stock were actively traded, there would be no dispute that the government's contention was correct. The evidence showed, however, that while there are 3,600,000 shares outstanding, trading in this stock was not active. It is traded in units of 50 shares. The sales near the date of death were: 1953 Shares July 17 50 20 150 21 200 22 250 23 200 24 50 27 400 28 50 29 100

19600719

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