Appeals from decrees of Court of Common Pleas, Orphans' Court Division, of Philadelphia, Nos. 1238 and 1239 of 1967, in re estate of Sidney F. Tyler, settlor; appeals of R. Alexander Montgomery and Robert Montgomery Scott, executors of the estate of Hope B. T. Montgomery, deceased.
Oscar M. Hansen, with him William T. Dyer, Richard P. Brown, Jr., John Russell, Jr., and Morgan, Lewis & Bockius, for appellants.
Samuel S. Logan, Jr., Maurice Heckscher, Montgomery, McCracken, Walker & Rhoads, and Duane, Morris & Heckscher, for appellee.
Richard B. Klein, for appellee.
Bell, C. J., Jones, Eagen, O'Brien, Roberts, Pomeroy and Barbieri, JJ. Opinion by Mr. Chief Justice Jones. Mr. Justice Eagen and Mr. Justice Roberts concur in the result. The former Mr. Chief Justice Bell and the former Mr. Justice Barbieri took no part in the decision of this case.
These appeals, which stem from two inter vivos trusts created by Sidney F. Tyler (settlor), present questions of apportionment between principal and income of certain corporate stock distributions, shares of stock acquired by exercise of stock subscription rights, proceeds of sales of stock subscription rights,
their accretions and proceeds thereof and the proceeds of sales of stock allocated to principal by the trustee.
On May 30, 1917, the settlor created, and subsequently funded, a revocable inter vivos trust wherein settlor was the named income beneficiary during his lifetime and, upon his death, his children were to receive the income during their lives. By an amendment dated April 5, 1932, the settlor relinquished his life interest in favor of his children and made the trust irrevocable. Prior to settlor's death on June 3, 1935, he created a second irrevocable trust on December 15, 1933.
Following the 1932 amendment to the 1917 trust the pertinent provisions in both trusts were identical:*fn1 the net income was payable one-half to his son and one-half to his daughter for their respective lives; upon the death of either of settlor's children, it was provided that such child's share of income should be paid per stirpes to his or her descendants for twenty-one years after the death of the last survivor of settlor's descendants living at the date of the deeds of trust; upon the termination of the trusts, the settlor directed that the principal should be distributed in equal shares to settlor's grandchildren then living and to the descendants then living of settlor's deceased grandchildren per stirpes.
Settlor's son died leaving three children all of full age and sui juris.*fn2 The appellant -- settlor's daughter -- died during the pendency of these appeals leaving four children all of full age and sui juris, and appellant's personal representatives have been substituted (appellants). The trustee filed its first account on May 2,
, for judicial adjudication of the rights of the respective parties and a division of the trusts. By decree of the Orphans' Court Division of the Court of Common Pleas of Philadelphia dated December 10, 1968, the corpus of each trust was divided in half between appellants' decedent's line and her brother's line.*fn3 Appellants challenged the trustee's account by filing a claim for allocation and this litigation commenced. The auditing judge confirmed both accounts, see, Tyler Trust, 48 Pa. D. & C. 2d 437 (C.P. Phila. 1969), for the reported adjudication of the 1917 trust, and appellants filed exceptions. After argument before the court en banc, the exceptions were dismissed and the adjudication of the auditing judge was confirmed absolutely.*fn4 Appeals having been taken from decrees of the court below, we have consolidated both appeals for purposes of brevity.
Initially, we will examine the law in this area before any recitation of other pertinent facts. Such examination begins with a discussion of the so-called Pennsylvania Rule of Apportionment (hereinafter "Rule"). Beginning with this Court's decision in Earp's Appeal, 28 Pa. 368 (1857), upon the occurrence of an "apportionable event" -- (1) the distribution by a corporation of an extraordinary cash or stock dividend; (2) the liquidation of the corporation; (3) the sale of the stock by the trustee; and (4) the issuance of stock rights*fn5 -- an allocation was made between income beneficiaries and remaindermen depending upon the source of the item in question. See, generally, Bogert,
Trusts and Trustees § 847 (2d ed. 1962); 3 Scott on Trusts § 236.3 (3d ed. 1967); Restatement (First) of Trusts § 236 (1935); Brigham, Pennsylvania Rules Governing the Allocation of Receipts Derived by Trustees from Shares of Stock, 85 U. Pa. L. Rev. 358 (1937); Note, 83 U. Pa. L. Rev. 773 (1935). The Rule was not applied specifically to ordinary*fn6 stock dividends payable at the rate of 6% or less, these dividends being allocated to income.
When dealing with stock dividends in excess of 6%, an apportionment was made between the life tenant and remainder interests in order to preserve the "intact value" of the trust investment. Flinn's Estate, 320 Pa. 15, 181 Atl. 492 (1935); Flinn's Estate, 310 Pa. 206, 165 Atl. 31 (1932); Baird's Estate, 299 Pa. 39, 148 Atl. 907 (1930); Packer's Estate (No. 1), 291 Pa. 194, 139 Atl. 867 (1927); Nirdlinger's Estate, 290 Pa. 457, 139 Atl. 202 (1927). Contrary to the weight of authority in other jurisdictions which adopted the
Rule, 3 Scott on Trusts § 236.12 (3d ed. 1967), this Court required an apportionment of the proceeds derived from a sale of stock between principal and income so as to preserve for principal the intact value of the investment and gave the excess to the life tenant as income. Nirdlinger's Estate, 290 Pa. at 475-76, 139 Atl. at 208. Because the issuance of stock rights was an "apportionable event" under the Rule, when shares were acquired by the exercise of stock subscription rights, a portion of those shares was allotted to principal in order to maintain the "intact value" of the stock and the balance was awarded to the income beneficiary. Hostetter's Trust, 319 Pa. 572, 181 Atl. 567 (1935); Jones v. Integrity Trust Co., 292 Pa. 149, 140 Atl. 862 (1928). "Proceeds arising from the sale of stock rights should be distributed in the same manner . . . as in the sale of stock. They are a species of stock." Waterhouse's Estate, 308 Pa. 422, 429-30, 162 Atl. 295, 297 (1932). See, also, Bard's Estate, 339 Pa. 433, 13 A.2d 711 (1940). See, generally, 3 Scott on Trusts § 236.9 (3d ed. 1967).
While the Rule, based on the source of the dividend rather than the form (Massachusetts Rule) or date (Kentucky Rule) of the dividend, was adopted by a majority of jurisdictions in the United States, see, Annot., 24 A.L.R. 9 (1923), and acclaimed by the First Restatement of Trusts, the complexity of modern corporate structure, see, Cohan & Dean, Legal, Tax and Accounting Aspects of Fiduciary Apportionment of Stock Proceeds: The Non-Statutory Pennsylvania Rules, 106 U. Pa. L. Rev. 157 (1957), led to the rejection by the National Conference of Commissioners on Uniform State Laws of the Rule in favor of the uncomplicated Massachusetts version. See, Uniform Principal and Income Act §§ 1-17 (1931). See, also, Restatement of Trusts § 236(b) (Supp. 1948). Finally,
the General Assembly of this Commonwealth enacted the Uniform Principal and Income Act which had been promulgated by the National Conference of Commissioners on Uniform State Laws. Uniform Principal and Income Act of 1945, Act of May 3, 1945, P. L. 416, § 1 et seq. Although repealed, that legislation was substantially re-enacted by the Principal and Income Act of 1947, Act of July 3, 1947, P. L. 1283, § 1 et seq.*fn7
The provisions of the 1947 Act pertinent to our consideration of these appeals are Sections 2, 3(2), 5(1), 5(2) and 15:
"Section 2. Application of the Act; Powers of Settlor. -- This act shall govern the ascertainment of income and principal . . . between tenants and remaindermen in all cases where a principal has been established with . . . the interposition of a trust: Provided, That the person establishing the principal may himself direct the manner of ascertainment of income and principal . . . or grant discretion to the trustee or other person, to do so and such provision and direction, where not otherwise contrary to law, shall control, notwithstanding this act.
"Section 3. Income and Principal; Disposition. --
"(2) All receipts of money . . . paid or delivered as the consideration for the sale . . . of property forming a part of the principal . . . shall be deemed principal, unless otherwise expressly provided in this act. Any profit or loss, resulting from any change in form of principal, shall enure ...