No. 37 January Term, 1979, No. 45 January Term, 1979, Appeal from Final Decree of the Court of Common Pleas of Luzerne County, Orphans' Court Division, dated January 11, 1979 - No. 33 of 1957.
James R. Ledwith, Francis M. Richards, Jr., Edward J. Lentz, Philadelphia, for Murray et al.
Linda A. Fisher, Robert L. Freedman, Philadelphia, for Haines et al.
James E. Davis, Tunkhannock, for United Penn Bank of Wilkes-Barre.
O'Brien, C. J., and Roberts, Nix, Larsen, Flaherty and Kauffman, JJ.
This appeal from a final decree of the Court of Common Pleas of Luzerne County, Orphans' Court Division, presents the question whether 15,667 shares of stock received by the trustee of a testamentary trust as part of a 3-for-2 stock distribution should be treated as income, as contended by appellants, or allocated to principal. The orphans' court held the distribution to be controlled by the Principal and Income Act, 20 Pa.C.S. § 8105(a), which provides:
"Corporate distributions made to a trustee in the shares of the distributing corporation, however described or designated by the distributing corporation, shall be deemed principal but if the number of shares . . . is 6% or less of the number of shares . . . outstanding . . . the shares so distributed shall be deemed income."
The court accordingly decreed that the shares be allocated to trust principal. For the reasons set forth below, we agree and affirm.
The parties to this appeal, settlor's two surviving children (appellants at No. 37) and the three children of settlor's deceased son (appellants at No. 45; hereafter "appellees"), have stipulated to all relevant facts. Settlor William N. Reynolds, Jr., died on January 2, 1957, leaving a will and a trust agreement dated August 11, 1955. Settlor, who never married, was survived by three adopted children (his nieces and nephew), seven grandchildren, and nine great-grandchildren. Paragraph EIGHTH of settlor's will directs that the
residue of his estate be placed in trust with Miners National Bank of Wilkes-Barre (now United Penn Bank), in accordance with the trust agreement, which is incorporated into the will.
Paragraph FIRST of the trust agreement provides that the trustee shall pay trust income in equal shares to settlor's three children during their lives. Upon the death of each of these children, the principal supporting his or her one-third share of income is to be divided per capita among all living grandchildren of settlor and distributed to those who have reached age thirty-five. The share of any grandchild who has not reached the age of thirty-five at the time of such division is to be held in a separate trust until he or she becomes thirty-five. If any grandchild dies before the trust terminates, his or her issue is to receive, per stirpes, the grandchild's share of trust income and principal. The share of a grandchild who dies without issue is to be divided among the surviving grandchildren. The trust agreement does not authorize the trustee to invade principal.
Paragraph THIRD of the trust agreement provides:
"In distinguishing between principal and income hereunder, the Trustee need not amortize premiums paid for or charged in respect of investments and shall take no account of discounts. The Trustee may so apportion between principal and income, any expenditures, which in its opinion should be apportioned, notwithstanding any legal rules to the contrary. Any and all dividends shall be considered as income. (Emphasis supplied.)
There is no comparable provision in the will.
At the time of his death in 1957, settlor, an attorney, owned 12,400 shares of the common stock of United States Fidelity and Guarantee Company ("U.S.F. & G.") and had served on its Board of Directors since 1934. The stock of U.S.F. & G., a Maryland corporation, was traded over the counter from 1952 to 1970. Since July 27, 1970, it has been traded on the New York Stock Exchange.
During the administration of settlor's estate and prior to the funding of the trust, U.S.F. & G. announced a 2-for-1
stock split and a 10% stock dividend, resulting in an increase in the shares held by the estate to 27,280. These shares were distributed to the trustee on June 14, 1960. In 1962, 1965, and 1966, U.S.F. & G. issued stock "dividends" of 10%, 5%, and 10%, respectively, and in 1970 it paid a 2-for-1 stock split, reducing the par value of its shares from $5.00 to $2.50. The trustee allocated the shares received in the first three distributions to income and added the shares received through the 1970 split to principal.
Settlor's son, Stewart Reynolds, died on June 19, 1975. After the filing and confirmation of a first and partial account, to which no objections were taken, the trustee distributed one third of the trust principal, including 15,666 of the 47,000 U.S.F. & G. shares then held by the trust, to settlor's six surviving grandchildren.*fn1
On May 3, 1977, the trustee received an additional 15,667 shares of U.S.F. & G. stock, together with a letter from the President and Chairman of the Board of the company, advising the trustee that, as a stockholder, the trust was entitled to participate "in the 3-for-2 stock split up declared by the Board of Directors on February 23, 1977, at the rate of one share of common stock for each two shares held of record at the close of business on April 1, 1977." The letter further advised that the regular quarterly cash dividend would be mailed separately.
The trustee treated the "split up" as a dividend and allocated all of the resulting 15,667 shares to trust income, in accordance with its interpretation of the direction in paragraph THIRD of the trust agreement that "any and all dividends shall be considered as income." At the same time it filed a second and partial account of trust assets and a petition for adjudication ...