The opinion of the court was delivered by: WEBER
This case involves an action in the United States District Court to recover estate taxes paid by decedent's estate on the corpus of a testamentary trust established under the will of decedent's husband. The government claims that the tax is due under the provisions of § 2041(a)(2) of the Internal Revenue Code of 1954, 26 U.S.C.1958 Ed. § 2041; 26 U.S.C.A. § 2041.
Decedent, Edna Buhl Putts, died testate June 7, 1960, a resident of Erie, Pennsylvania. A deficiency in estate taxes was assessed against her estate by the Internal Revenue Service by reason of its inclusion in her estate of the corpus of the trust in question. This was paid, a timely claim for refund was made and disallowed, and this action followed.
A trial was held before this Court without jury. Most of the matters in evidence were stipulated between the parties. Taxpayer produced two witnesses, trust officers of plaintiff bank, to testify as to the computation of the refund claimed by plaintiff, and to testify, under objection by the government, that there had been no invasion of the principal of the trust fund during decedent's life, and no request from decedent for such invasion, that the trustee was familiar with the extent of decedent's own estate which was approximately four and one-half times as large as the trust estate, that her income from the trust estate was approximately twelve percent of her total income, that her income exceeded her expenditures and she increased the corpus of her own estate, and that the trustee was personally familiar with her manner of living. The Government objected that such evidence was irrelevant and immaterial to the legal issues involved here.
' § 2041. POWERS OF APPOINTMENT
'(a) In General. -- The value of the gross estate shall include the value of all property. --
'(2) Powers created after October 21, 1942. -- To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942, * * *.
'(b) Definitions. -- For purposes of subsection (a) --
'(1) General power of appointment. -- The term 'general power of appointment' means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate; except that --
'(A) A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment. '* * *' (26 U.S.C. 1958 Ed. § 2041)
Decedent's husband, B. Swayne Putts, predeceased his wife on January 31, 1952. By his will, executed on October 4, 1948, except for personal effects given to his wife, he left his entire estate to the Security-Peoples Trust Company in trust.
The Treasury Regulations on Estate Tax (1954 Code) § 20.2041-1(b)(1), further defines a power of appointment to include 'all powers which are in substance and effect powers of appointment regardless of the nomenclature used in creating the power and regardless of the local property law connotations.' § 20.2041-1(c) of the Regulations defines a general power of appointment as a power 'exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.'
The legislative history of § 2041 may throw some light on the intention of Congress in adopting the above definition.
§ 2041 of the Internal Revenue Code of 1954 originated in the Powers of Appointment Act of 1951, which amended the prior Act of 1942. The Senate Committee on Finance reported on the bill (H.R.2084), Senate Report No. 382, June 4, 1951:
This bill simplifies sections 811(f) and 1000(c) of the Internal Revenue Code, relating to estate and gift tax on powers of appointment.
The present law taxes all powers to appoint, whether exercised or not, except two specified classes of powers. One of these exempts powers to appoint to certain near relatives. The other is intended to exempt fiduciary powers but has proved inadequate for the purpose. (Emphasis supplied.) (p. 1530)
'The provisions of the 1942 act, taxing the exercise of limited powers of appointment and the mere possession of unexercised powers, were new to the Federal tax system. They extended, or might be construed to extend, to emergency powers to invade principal, discretionary powers given to trustees, and other types of powers which had theretofore not been regarded as powers of appointment. * * * (Emphasis supplied.) (p. 1531)
'* * * Your committee believes that the most important consideration is to make the law simple and definite enough to be understood and applied by the average lawyer, and that the present bill will accomplish that purpose. (p. 1531) 'Discussion of Specific Provisions
'The definition provides that, if certain limitations or restrictions are present, a power is not a general power even though exercisable by the decedent in his own favor. (p. 1533)
'If the holder of a power is legally accountable for its exercise of non-exercise, the power is not deemed to be a general power. However, a power which is exercisable in favor of the holder, his estate, his creditors, or the creditors of his estate, is not regarded as a power for which the holder is legally accountable.' (Emphasis supplied.) (p. 1534) 2 U.S. Code Congressional and Administrative Service, 82nd Congress 1st Session 1951, p. 1530 et seq.
From these statements, we draw the conclusion that Congress intended to tax as part of the estate of a decedent any property over which the decedent had such a power of control as to be able to apply it to his own benefit, or the benefit of his creditors, to dispose of it by will, or to appoint it to his estate or the creditors of his estate, or to consume it without restriction. This fits the ordinary definitions of what lawyers call a 'general power of appointment.' 41 Am.Jur. 'Powers', §§ 3, 4, pp. 807, 808; 72 C.J.S. Powers § 1, p. 401.
The Senate report indicates a different treatment where the holder is not completely free from legal control or restraint in the disposition of the property. It states that where the holder of the power is 'legally accountable' for its exercise it is not deemed a general power. This can only refer to fiduciary powers which are always subject to the control of the courts and for which the holder is always under a legal duty to account. The Senate speaks of its intention, in passing the Act, of making the intended exemption of fiduciary powers in the prior law more adequate.
The decided cases which have construed this section of the Internal Revenue Code,
as well as those cases which construed the provisions relating to powers of appointment for determining the right to a charitable deduction ( § 2055), and the right to the marital deduction ( § 2056), all resort to an examination of the scope or breadth of the power under local law.
'The initial step is to determine in light of local law, the interest conveyed to the decedent under this trust, i.e., the extent to which, consonant sonant with testamentary trust provision, the decedent could invade and consume the principal. Morgan v. Commissioner, 309 U.S. 78, 60 S. Ct. 424, 84 L. Ed. 585 (1940); Commissioner of Internal Revenue v. Ellis' Estate, 252 F.2d 109, 113 (3 Cir. 1958); Hoffman v. McGinnes, 277 F.2d 598, 602 (90 A.L.R.2d 405) (3 Cir.1960).' Strite v. McGinnes, 330 F.2d 234, at pp. 238 and 239, (3d Cir.1964).
In Pennsylvania the cardinal rule of construction is that the true intention of the testator must govern, as that intention may be found within the four cornes of the will. Fox Appeal, 99 Pa. 382, Anderson's Estate, 243 Pa. 34, 89 A. 306; In re Keefer's Estate, 353 Pa. 281, 45 A.2d 31, 165 A.L.R. 1277.
'This is but one of the hundreds of expressions of the cardinal rule in the interpretation of wills to find the testator's intent, and by that is meant his actual, personal, individual intent, not a mere presumptive conventional intent inferred from the use of a set phrase or a familiar form of words.' Tyson's Estate, 191 Pa. 218 at p. 225, 43 A. 131 at 132 (1899).
With this in mind let us examine the instrument by which this power was created. From it ...