The opinion of the court was delivered by: LUONGO
This is an action for refund of estate taxes and is before the court on the motions of both the plaintiff and the defendant for summary judgment upon these stipulated facts:
On December 31, 1934, Harold H. Kynett, as Settlor, executed an indenture of trust to himself and Girard Trust Company as Trustees by which he conveyed certain securities in trust, and, at the same time, entered into an agreement of trust with his wife, Edna Gallagher Kynett, and the Girard Trust Company as Trustees by which he made the proceeds of certain policies of insurance on his life subject to that trust. Under each of the trusts income was payable for life to Settlor's wife (hereinafter referred to as Decedent), and upon her death the income was to be payable to the Settlor's daughter, Mary Elizabeth Kynett (hereinafter referred to as Daughter). Upon the death of Daughter, the principal of the trusts was to be payable to such persons as Daughter, by her last will and testament, might appoint. In default of the exercise of the power of appointment by Daughter, the corpus of the trusts was to be payable to the issue of Daughter, per stirpes, upon the attainment by such issue of the age of twenty-one years; and in default of the exercise of the power of appointment by Daughter and the failure of surviving issue, the corpus was to be paid over and distributed to the University of Pennsylvania. Settlor further provided that in the event Daughter pre-deceased Decedent without Daughter's having exercised the power of appointment and without surviving issue, then Decedent was given the power to appoint, failing the exercise of which the corpus of the trusts was to be paid to the University of Pennsylvania. The trusts were irrevocable by Settlor but Decedent was given the power to revoke or to alter and amend at anytime and in all respects. It is agreed by the parties that this provision gave Decedent a general power of appointment.
On December 22, 1942, Decedent executed amendments to each of the trust instruments. By the amendments, Decedent changed the general testamentary power of appointment which had been given by Settlor to Daughter to a special power of appointment to designate for the benefit of Daughter's spouse or to or for the benefit of Daughter's descendants or spouses of such descendants, and in default of the exercise of such power of appointment, the corpus of the trusts was to be paid to Daughter's issue, per stirpes, upon the attainment of the age of twenty-one years, and, if Daughter died without issue, then to her heirs at law. By the amendments Decedent also gave the trustees power to invade principal for the proper maintenance, support, health, welfare and happiness of Daughter during the time Daughter was entitled to receive the income. Having executed the amendments, Decedent then made the instruments irrevocable. Decedent died on January 26, 1954.
On April 19, 1955, plaintiff filed with the District Director of Internal Revenue for the District of Philadelphia, an estate tax return on Decedent's estate and paid the tax shown to be due thereon in the amount of Fifty-three Thousand Nine Hundred Eighty-five Dollars and Ninety-six Cents ($ 53,985.96). On the return plaintiff did not include the full value of the assets contained in the two trusts. After an audit, the Commissioner of Internal Revenue determined that the full value of the trusts should have been included in Decedent's taxable estate and assessed a tax deficiency against the estate in the amount of Nine Thousand Three Hundred Ninety-three Dollars and One Cent ($ 9,393.01). Plaintiff paid the deficiency in full, plus interest in the amount of Seven Hundred Eighteen Dollars and Thirty-seven Cents ($ 718.37), on October 24, 1956. On September 18, 1958, the plaintiff, as Executor, filed a claim for refund of taxes and interest in the amount of Thirteen Thousand Two Hundred Twenty-three Dollars and Fifty-eight Cents ($ 13,223.58), contending that none of the value of the two trusts referred to above should have been included in the estate. The claim for refund was disallowed by the District Director of Internal Revenue on March 18, 1960. Plaintiff agrees that the applicable Statute of Limitations bars him from claiming any but the amount of tax he paid on October 24, 1956.
Involved are three periods in the development of tax law on powers of appointment:
(1) Prior to October 21, 1942, property subject to a general power of appointment was not included in the gross estate and was not taxable unless the power was exercised and property passed.
(2) Under amendments contained in the Revenue Act of 1942 (adopted October 21, 1942), mere possession of a power of appointment, regardless of exercise or whether property 'passed', subjected the property to tax unless such power theretofore created was released on or before January 1, 1943. In the 1942 amendment, however, 'power of appointment' was defined to exclude, inter alia, a power to appoint within a class consisting, generally, of members and descendants of the donee's immediate family, and members and descendants of donor's immediate family (excluding decedent). By successive Acts of Congress, the time within which to release powers created prior to October 21, 1942 was extended to June 30, 1951.
(3) On June 28, 1951, the Powers of Appointment Act of 1951, 65 Stat. 91, was enacted, as a result of which the law with respect to powers of appointment created prior to October 21, 1942 was returned substantially to that in effect prior to the adoption of the 1942 amendment, i.e. taxability of property subject to power of appointment was made to depend upon the exercise of the power, although the requirement of passing was eliminated. The 1951 Act contained a provision for tax free periods within which existing powers of appointment, which would result in the imposition of estate and gift taxation, could be released tax free. The incidence of estate taxation on pre-existing powers under the 1951 Act was made to depend on the exercise of general powers only, as that term was defined in the 1951 Act, i.e. one exercisable in favor of the donee, his estate or his creditors. The 1951 Act provided that the amendments therein contained were to take effect as to estates of decedents dying after October 21, 1942 as though the 1942 Revenue Act had never been enacted. The 1951 Act further provided that where a pre-existing general power of appointment is partially released before November 1, 1951, or within the time fixed by paragraph 2 of § 403(d) of the 1942 Revenue Act, so that it is no longer a general power of appointment, its subsequent exercise would not be deemed an exercise of such power for federal estate and gift taxation.
The case before us is touched by the law of each of the three periods in the development of tax law on powers of appointment mentioned above. The original Deed of Trust was executed in 1934, under what we may describe as the pre 1942 law. Amendments to the trust instrument were executed by Decedent in December 1942 in an apparent effort to take advantage of the grace period permitted by the 1942 Act. Decedent died in 1954 which was after the passage of the 1951 Act.
The Government has taken the position that, in making the amendments to the general power of appointment, she did general plower of appointment, she did not release it. The Government's argument generally is: The Powers of Appointment Act of 1951 was effective as if enacted on October 21, 1942; the 1951 Act permitted a partial release and a subsequent exercise within a special class to escape taxation; Treasury regulations thereafter adopted and which were controlling at the time of Decedent's death, provided that if, at the time of relinquishment of a general power, a power was exercised in such a manner as to result in any change in the beneficial interests in the property, such relinquishment is an exercise and not a release of the power; Decedent changed beneficial interests in the property by amendments in the same instrument by which she released her general power, therefore, Decedent's actions fail to qualify for exempt status tested both by the words of the Act of 1951 and the regulations thereafter adopted.
The thrust of Government's argument is that the Decedent's acts must be judged by the procedural standards of the 1951 Act and since she failed to conform, she is not entitled to the exemption. The Government concedes that under the 1951 Act a partial release of a taxable power may convert that power into a nontaxable power, the subsequent exercise of which is not a taxable act, but it asserts that since Decedent made changes in the same instrument in which she gave up (by making the trust irrevocable) her general power of appointment, what she did constituted an exercise, rather than a release of a taxable power.
In support of its argument that there was an exercise of a power of appointment, the Government points to Keating v. Mayer, 236 F.2d 478 (3d Cir. 1956) to illustrate that the exercise of a general power, no matter how small the amount of exercise, or indeed even if it is ineffective, will result in taxation. In Keating, decedent, by will, made a general disposition of all her property to her sons, her only issue. At the time of her death she possessed a life interest in and a general power of appointment over a trust estate established by the will of her grandfather which provided for a gift to decedent's issue in default of decedent's exercise of her general power. Notwithstanding that under Pennsylvania law decedent's general disposition of her estate to her sons was an ineffective exercise of the power in that the sons were regarded as having received their interest from great-grandfather-donor's will, it was nevertheless held to be an exercise of a general power of appointment which subjected the property to tax since both the Revenue Act of 1942 and the Powers of Appointment Act of 1951 had eliminated the requirement of 'passing'. The Court of appeals pointed out that the holding that the general disposition of all her property by decedent constituted an 'exercise' of the general power, was compelled by operation of the Pennsylvania Wills Act of 1947 which provided that, in the absence of a contrary intent expressed in the will, a general disposition of property by a testator 'shall' be construed to include any property over which testator had a general power to appoint and 'shall operate' as an execution of such power.
In our view, therefore, Keating does not control the instant case and indeed furnishes very little guidance except to make clear that the requirement of 'passing' had been ...