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HALLOWELL TRUST (10/03/68)

decided: October 3, 1968.

HALLOWELL TRUST


Appeal from decree of Orphans' Court of Montgomery County, No. 67272, in re trust estate of Howard T. Hallowell, settlor under deed of trust dated December 23, 1935.

COUNSEL

Philip A. Bregy, with him MacCoy, Evans & Lewis, and Duane, Morris & Heckscher, for appellant.

H. Ober Hess, with him Benjamin R. Neilson, and Ballard, Spahr, Andrews & Ingersoll, for appellee.

A. Evans Kephart, amicus curiae, in propria persona, filed a brief.

Robert L. Kirkpatrick, and Austin W. Scott, of the Massachusetts Bar, and Kirkpatrick, Pomeroy, Lockhart & Johnson, filed a brief for amicus curiae.

Cuthbert H. Latta, amicus curiae, in propria persona, filed a brief.

Bell, C. J., Musmanno, Jones, Eagen, O'Brien and Roberts, JJ. Opinion by Mr. Justice Jones. Mr. Justice Cohen took no part in the consideration or decision of this case. Concurring Opinion by Mr. Justice Roberts. Dissenting Opinion by Mr. Chief Justice Bell. Mr. Justice Musmanno joins in this dissenting Opinion.

Author: Jones

[ 432 Pa. Page 186]

An inter vivos trust was created in 1935 by H. T. Hallowell (settlor) by transferring to his son, H. T. Hallowell, Jr., as trustee, 1,000 shares of Standard Pressed Steel Company common stock. In the trust agreement, the settlor directed that: the trustee "shall hold the said shares of stock and any stock dividends paid thereon intact";*fn1 the net income to be paid to settlor's wife during her life; upon the life tenant's death, one-half of the trust fund be distributed to settlor's son*fn2 and the other one-half be held in trust for settlor's daughter. Settlor died in 1955. Upon the life tenant's death in 1966, the trustee filed his account and, upon the filing of that account, the instant controversy arose.

In the years 1955 through 1961 -- that is, subsequent to settlor's death and during the life tenant's lifetime --

[ 432 Pa. Page 187]

    the trustee received certain dividends from Standard Pressed Steel Company which dividends were paid in common stock of said company, were of the same class and were all at the rate of 6% or less when paid. Upon receipt of such stock dividends, the trustee, acting in accordance with settlor's direction in the trust instrument, allocated such dividends to principal. Those dividends, totaling 24,684.83 shares, had a market value at the time of the life tenant's death of $433,527.33. The instant controversy, between the life tenant's estate and the settlor's son and daughter, remaindermen under the trust, arises over the allocation of these dividends. The life tenant's estate contends it is entitled to such dividends as income by reason of the operation of the Statute Against Accumulations,*fn3 and our decision in Pew Trust, 411 Pa. 96, 191 A.2d 399 (1963), despite the settlor's expressed direction such dividends be treated as principal ; the trust remaindermen contend neither Pew nor the Statute Against Accumulations, supra, proscribes the treatment of such dividends as principal while the clearly expressed intent of the settlor and the provisions of the Principal and Income Act of July 3, 1947 (P. L. 1283, § 5, 20 P.S. § 3470.5) dictate that such dividends be deemed principal.*fn4

The Orphans' Court of Montgomery County decided the stock dividends should be treated as income and not principal and awarded the dividends to the life

[ 432 Pa. Page 188]

    tenant's estate. The court's opinion summarizes its reasons: "(1) the Principal and Income Act does not apply to stock dividends of six per cent or less; (2) stock dividends of six per cent or less are income, except that the testator or settlor may direct to the contrary if such direction is valid otherwise ;*fn5 (3) a direction to accumulate stock dividends of six per cent or less is not valid if and when it violates the Act of 1853."*fn6 We believe that such decree is erroneous and must be reversed.

Certain facts are undisputed: (a) this trust antedated the 1945 and the 1947 Principal and Income Acts; (b) the dividends involved are at the rate of six per cent or less, payable in stock of the same class of the same company; (c) all the dividends were received at times when the 1947, i.e., the second, Principal and Income Act*fn7 was in effect; (d) that statute declared that " All dividends on shares of a corporation forming a part of the principal which are payable in the shares of the corporation itself of the same kind and rank as the shares on which such dividend is paid shall be deemed principal."*fn8 (Emphasis supplied); (e) the settlor clearly and unequivocally expressed his intent that all stock dividends -- large or small, ordinary or extraordinary -- of Standard Pressed Steel Company be treated as principal and not income. The result reached by the court below ignores the settlor's

[ 432 Pa. Page 189]

    clear direction and intent and the explicit language of the 1947 statute; it would overrule, in large measure, the rationale of our recent decisions in Catherwood Trust, 405 Pa. 61, 173 A.2d 86 (1961), McEldowney Estate, 415 Pa. 87, 202 A.2d 100 (1964), Norvell Estate, 415 Pa. 427, 203 A.2d 538 (1964), cert. denied, 380 U.S. 913, 85 S. Ct. 900 (1965), Reznor Estate, 419 Pa. 188, 213 A.2d 791 (1965) and Arrott Estate, 421 Pa. 275, 217 A.2d 741 (1966) and would create in this area of the law the confusion and chaos which we have studiously endeavored to avoid.

The "rules in regard to allocation [of stock dividends] were devised to achieve a fair apportionment between beneficiaries and remaindermen, for the purpose of carrying out the putative intent of the settlor of the trust " and these "same rules should not be used where the settlor's intent has been expressed with sufficient clarity, and where the question is whether the settlor's expressed intent is to be defeated." See: 44 Cornell Quarterly 284, 290 (1959).

It was the theory of the court below that all small stock dividends, i.e., at the rate of six per cent or less, whether received prior to the passage of the 1945 and 1947 Principal and Income statutes when the so-called Pennsylvania Rule of Apportionment prevailed or subsequent to the passage of and during the time when the 1945 and 1947 Principal and Income statutes were in effect, must be considered income not principal, and that, despite what these statutes declare and, even though the settlor has clearly expressed his intent such dividends be considered principal and not income, the Act Against Accumulations strikes down the settlor's intent because such intent contravenes the public policy expressed in the accumulations statute. Both premises, in our opinion, are erroneous.

With certain inapplicable exceptions, the Act Against Accumulations strikes down the accumulation

[ 432 Pa. Page 190]

    of "rents, issues, interest or profits" and, although not specifically mentioned or stated in the statute, the statutory phraseology embraces "income". See: Catherwood Trust, supra, at P. 68. However, unless an item is "income", an accumulation thereof is neither illegal nor unlawful. In this posture, we must, therefore, initially, determine whether, when these dividends were received, such dividends were deemed income or principal in deciding what, if any, impact the accumulations statute had on these dividend distributions. In Maris Estate, supra (1930), the testator, providing for the division of his residuary estate into three parts upon the life tenant's death, stated that "all stock dividends consisting of shares of stock of the corporation issuing them shall be considered as principal." This Court, concluding that such a testamentary provision did violate the Act Against Accumulations, supra, stated: "No one can be permitted to set aside the public policy of the State by the simple expedient of designating by another name that which the courts have repeatedly decided to be income" (p. 23). However, the Maris Court clearly indicated that its ruling was dictated by the fact that, at that time, the Pennsylvania Rule of Apportionment (now abolished by Catherwood) was in effect. Illustrative that such apportionment rule motivated the result is the following language from Maris (pp. 24, 25): "This provision, so far as the items now in controversy are concerned, runs counter to our ...


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