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Estat of Kate B. Leggett v. United States

December 2, 1969


McLaughlin, Forman and Aldisert, Circuit Judges.

Author: Aldisert


ALDISERT, Circuit Judge.

Before us is an appeal from the denial of a claim for refund of an estate tax. The district court held that a life bequest of personalty to Kate B. Leggett under the will of her husband, William T. Leggett, created a debtor-creditor relationship between the life tenant and remaindermen, thereby subjecting her estate to a tax on all increments to the value of her husband's bequest occurring from 1909, the date of his death, to 1960, when she died.*fn1

Kate's executor, appellant in these proceedings, argues that by affirmative actions of the life tenant, she constituted herself as a trustee and not a debtor to the remaindermen. Thus, it is urged that the increases in the value of William's bequest passed directly to the remaindermen under his will, never having become a part of Kate's own taxable estate.

The apparatus of two trial courts, one state and one federal, have been employed to resolve this issue, with divergent results. The Orphans' Court of Allegheny County, Pennsylvania, in an estate proceeding of which the Commissioner had notice but in which he did not intervene as a party, held that "a debtor-creditor relationship did not exist at any time between Kate B. Leggett and the decedent's estate." Estate of Leggett, No. 913 of 1963.

Prior to the decision of the United States Supreme Court in Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 87 S. Ct. 1776, 18 L. Ed. 2d 886 (1967), the judicial determination of the state trial court would have been binding in this circuit.*fn2 But by virtue of the Bosch holding, when the Commissioner is not a party to state proceedings involving the application of a federal statute, "the decision of a state trial court as to an underlying issue of state law should a fortiori not be controlling." 387 U.S. at 465, 87 S. Ct. at 1782. And, as in diversity cases, "the State's highest court is the best authority on its own law. If there be no decision by that court then federal authorities must apply what they find to be the state law after giving 'proper regard' to relevant rulings of other courts of the State." Id.

Consequently, when appellant filed his claim for refund the district court was free to differ from the conclusion reached by the state court. And it did. Interpreting what it believed to be the Pennsylvania law as announced by the state supreme court, the district court held that the status of debtor-creditor "is thrust upon [the life tenant] by the very nature of the bequest, unless the terms of the will provide otherwise by naming him a trustee for the remainderman's interest or unless he petitions the court to appoint a trustee."

Our task is now to decide which of the diametrically opposed trial court decisions on the same subject would prevail under review by the Pennsylvania Supreme Court. Because our research has uncovered no Pennsylvania case embodying a similar factual complex, we turn to the relevant fundamental principles which constituted settled decedent's estate law of Pennsylvania in effect at the time of testator's death.*fn3

At the time of William's death in 1909, where a legal life estate was given without power of consumption, the life tenant received absolutely and as his own all the personal property given in the life estate, thereby creating a debtor-creditor relationship between himself and the remainderman for the value of the property actually received at the date of distribution. This amount, and only this amount, was payable to the remainderman upon the death of the life tenant.*fn4 "The life tenant became a debtor to the remainderman in the amount originally received by the life tenant and the remainderman became a creditor of the life tenant or his estate for the value of the personalty when received."*fn5 By the enactment of legislation effective in 1909,*fn6 security was required to be given by the life tenant of personalty for the protection of the remainderman. The failure of the life tenant to post security did not, however, without more, convert the debtor relationship of the life tenant to that of trustee for the remainderman.*fn7

This debtor-creditor relationship, although recognized as "a well established although artificial rule of construction," was nonetheless "subject to the paramount rule that the intent of the testator must prevail, unless it is unlawful."*fn8 Moreover, the rule assumed no "intervention of or the creation of a trust" during the period of the life tenancy.*fn9

It is also hornbook law in Pennsylvania that a legatee may renounce a legacy in its entirety or in part.*fn10 An express trust may be created by conduct and is enforceable.*fn11 Such a trust "must be created by clear and unambiguous language or conduct [and] cannot arise from loose statements admitting possible inferences consistent with other relationships."*fn12 A trust in personalty can be established by oral evidence "if it is sufficiently clear, precise and indubitable."*fn13

Against the backdrop of these principles of Pennsylvania law we now examine the facts which were ...

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