Morris v. Commissioner ( 1938 )

ESTATE OF MARY ADELE MORRIS, DECEASED, EVAN MORRIS WILSON, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Morris v. Commissioner

Docket No. 89458.

United States Board of Tax Appeals

38 B.T.A. 408; 1938 BTA LEXIS 868;

August 30, 1938, Promulgated

---

Power of appointment required by donor to be exercised by will or instrument in the nature thereof, held, validly exercised under the law of Pennsylvania where donee, relinquishing power of disposition, transferred to trustees the remainder interest which was the subject of the power, and the Orphans' Court distributed donor's estate in accordance therewith; held, further, property subject to the power is includable in donee's gross estate where beneficiary expressly claims thereunder. Helvering v. Grinnell,294 U.S. 153">294 U.S. 153, and James C. Webster et al., Executors,38 B.T.A. 273">38 B.T.A. 273, distinguished.

Wm. Morris Maier, Esq., for the petitioner.

Harold F. Noneman, Esq., for the respondent.

---

OPPER

This proceeding involves a deficiency in estate tax of $3,616.74. The only issue is whether securities of a value of $114,951.13 passed under a power of appointment exercised by the decedent, within the meaning of section 302(f) of the Revenue Act of 1934.

FINDINGS OF FACT.

A stipulation of facts, with appended documents, filed by the parties is adopted as our findings of fact, of which the following is a summary:

1. The petitioner, Evan Morris Wilson, is the sole executor of the will of Mary Adele Morris, deceased.

2. Evan Morris, grandfather of the petitioner, died November 2, 1892, a resident of Philadelphia, Pennsylvania, and was survived by his wife, Mary G. Morris, and two daughters, Mary Adele Morris and Elizabeth Cutter Morris.

3. The last will and testament of Evan Morris, dated May 14, 1889, was duly probated in the office of the register of wills of Philadelphia County, December 7, 1892. In that instrument he appointed his wife, Mary G. Morris, and his daughters, Mary Adele Morris and Elizabeth Cutter Morris, and one George Sergeant as executrices and executor of his will and trustees of his estate. After bequeathing his household furniture, works of art, and other chattels to his wife, and $500 to an employee, he devised and bequeathed the remainder of his estate in trust for the following purposes:

A. To pay annual sums of $500 to each of three relatives for life.

B. "To pay the full half part of the residue or balance of the net income and profits of my said estate to my said wife, Mary G. Morris, for her sole and separate use, for and during all the term of her natural life; and to pay the other half part thereof to my said daughters, Mary Adele Morris, and Elizabeth Cutter Morris, and the whole of said net income and profits, in case they or either of them survive their mother, in equal shares, for and during all the term of their natural lives - and at the death of either one of my said daughters, then her share of said income and profits to be paid to her children, if any, and the issue of any deceased child, or children, then living, * * * and if said daughter so dying leaves no children, or issue her surviving, then her share of said income or profits shall be paid to her surviving sister, for and during all the term of her natural life; and if her said sister be then dead leaving children, or issue, then the same to be paid to said children, and the issue of any deceased child, or children then living * * *. Provided however that if my said daughters, or either of them shall survive their said mother, in that event I hereby authorize and empower said daughter, or daughters, so surviving their said mother, by last Will and Testament, or any instrument in writing in the nature thereof, duly executed, to absolutely dispose of the portion or share of my said estate, so held in Trust for them, in such manner, and to such person or persons, as they shall direct, limit and appoint; and the above provision in favor of children or issue of my said daughters, so surviving their said mother, is only to take effect in case of failure to so appoint."

C. If his daughters should die without issue before his wife, all the income was to be paid to the wife for life.

D. "The payments of income to my said wife, and my said daughters or their children and issue, under the above provisions of my said Will, are to be paid to them quarterly * * * the said income to be paid to said children and issue of my said daughters, during the life of the survivor of my said daughters, and until such children or issue shall arrive at the age of Twenty-one years respectively, when the portions or share of my estate so held in trust for them respectively, under the foregoing provisions of my said Will, shall be conveyed and transferred to them absolutely."

Other provisions were made for the disposal of the property upon conditions not here material.

4. Mary G. Morris died on January 10, 1913.

5. Elizabeth Cutter Morris Wilson, daughter of Evan Morris, died November 29, 1929, having intermarried with Charles Wilson and leaving to survive her an only child, Evan Morris Wilson, the petitioner, born January 20, 1910. Upon the death of Elizabeth Cutter Morris Wilson an account was filed in the Orphans' Court of Philadelphia CountyIn the Matter of Evan Morris (No. 477, April 1906), by Mary Adele Morris, sole surviving trustee, and Charles Wilson and Mary Adele Morris, executors of Elizabeth Cutter Morris Wilson, deceased.

6. Mary Adele Morris executed an instrument to herself and the Girard Trust Co., trustees, dated November 16, 1931, which provided as follows:

That the Grantor for and in consideration of the trusts hereby assumed by the said Trustees, as well as of the sum of One Dollar, lawful money unto her in hand paid, the receipt whereof is hereby acknowledged, hath bargained, sold, assigned, transferred and set over and by these presents doth bargain, sell, transfer, assign and set over unto the Trustees, their heirs, executors, successors and assigns, all her right, title and interest in and to the stocks, bonds, securities, investments, monies or other property shown to be held in trust for her by the Account as filed by the Trustees under the Will of Evan Morris, deceased, and as may be awarded by the Orphans' Court of Philadelphia County in the adjudication of said account, as of April Term, 1906, No. 477, together with any remainder or other interest of whatsoever nature that the Grantor has or may hereafter become entitled to under the Will of the said Evan Morris, dated May 14, 1889, and recorded in the Office of the Register of Wills of Philadelphia County;

AND WHEREAS, the Will of Evan Morris, by Item Fifth, Section B, directed inter alia as follows: [quoting the proviso granting the power of appointment which is set out at Finding No. 3(B), supra.]

The Grantor, Mary Adele Morris, one of the donees of the power so given, hereby releases, relinquishes and extinguishes any power of appointment or disposition she may have over the property above described or intended to be included under and by virtue of the above mentioned Will of Evan Morris, deceased, and she further covenants and agrees with the Trustees that she will never under any circumstance or at any time exercise any such power of disposition or appointment or otherwise do any act or thing that will in any way cut down, detract from or affect the absolute indefeasible fee simple title to the property, which is hereby conveyed to the said Mary Adele Morris and the Girard Trust Company, Trustees, TO HAVE AND TO HOLD, receive and take the securities, investments, monies or other properties hereby assigned or mentioned or intended so to be, together with any additional sum of money or securities or other property to which the Grantor may become entitled under the Will of the said Evan Morris, to be held under the terms hereto unto them the said Trustees, their heirs, successors and assigns, to and for their only proper use, benefit and behoof forever, IN TRUST NEVERTHELESS to hold, manage, invest, reinvest and keep invested the corpus or principal thereof with power over and concerning the same in addition to the usual powers of trustees, as is hereinafter particularly set forth, and to demand, take and receive the interest, dividends, income and royalties therefrom and after the deduction of all proper or necessary charges and expenses to pay over the net income to the Grantor for life, in monthly instalments or at such other periods as she may request.

AND IN FURTHER TRUST, upon the death of the Grantor, to pay out of the Principal of this Trust fund:

a. [Just debts and funeral expenses.]

b. [$300 to a cemetery company for perpetual care.]

c. [$150 to another cemetery company for perpetual care.]

d. IN FURTHER TRUST to hold, manage, invest, reinvest and keep invested the balance of the principal of this fund, and after deducting all necessary charges and expenses to pay over the net income to EVAN MORRIS WILSON for and during the term of his natural life; and upon the death of the said Evan Morris Wilson, should he be married and/or leave lawful issue, to pay over the principal of this trust and any accrued income to his widow and/or issue, in such shares and for such estates as he shall direct by last Will and Testament or other written instrument. Should the said Evan Morris Wilson fail to leave a Will, exercising this power of appointment, he being married and/or leaving lawful issue, then to distribute the principal of this trust fund as though same was vested in him in fee, together with any accrued income, in accordance with the Intestate Laws of the State of Pennsylvania.

[Then follows provision for disposal of the corpus for the benefit of certain individuals and institutions in the event of the death of Evan Morris Wilson unmarried and without issue. The instrument was declared to be made without any right of revocation or recall. Among the broad powers granted to the trustees is the following:]

To sell any securities or other personal property, which may at any time form part of this trust, for such prices, upon such terms, in such way and manner, and for such interests and estates as may be deemed wise, and to make good transfers and assignments therefor to the purchaser or purchasers thereof, without any liability on the latter to see to or be responsible for the application of the purchase money.

[The instrument recites that it was "SEALED AND DELIVERED in the presence of" two witnesses whose names are subscribed.]

7. On December 3, 1931, an adjudication was handed down on the account referred to in finding No. 5, supra, by the auditing judge (Gest, J), which in due course became confirmed absolutely. It recites the terms of the will of Evan Morris, the death of Mary G. Morris, his wife, the death of Elizabeth Cutter Morris Wilson and her exercise of her power of appointment in favor of a trust. It states that "Mary Adele Morris is still living, and is now sole surviving trustee under the will of Evan Morris." It states that $17,000 will be awarded to her as trustee to secure the last remaining annuity under the will of Evan Morris. It recites overdrafts by both Elizabeth Cutter Morris Wilson and Mary Adele Morris. It then states:

There was also presented to the Court an Indenture or Deed of Trust dated November 16, 1931, by Mary Adele Morris, as grantor, to Mary Adele Morris and Girard Trust Company, as grantees and trustees, by which said Mary Adele Morris transferred to said trustees all her interest in the estate of Evan Morris, the same being in execution by said Mary Adele Morris of her power of testamentary appointment, it being therein convenanted and agreed by the said Mary Adele Morris that her overdraft of income, amounting to $54,536.50, be charged against her one-half interest in the principal of the estate of Evan Morris, and that she releases, relinquishes and extinguishes any power of appointment or disposition she may have over her interest in the said estate of Evan Morris, deceased, and she further covenanted and agreed with the trustee that she will never exercise any such power of disposition or appointment, or otherwise do any act or thing that will in any way cut down, detract from or affect the absolute indefeasible fee simple title to the property thereby conveyed to the said Mary Adele Morris and Girard Trust Company, as trustees. And she did thereby transfer, assign and set over to the said trustees all of her right, title and interest in the estate of the said Evan Morris, in trust to pay over the income to the said grantor for life, with remainder after her death as fully set forth therein. The said Deed of Trust is accepted in writing by the said Mary Adele Morris and Girard Trust Company, grantees and trustees.

This Deed operates as an extinguishment of the power of appointment vested in said Mary Adele Morris, as appears from the recent case of , the phraseology of the deed of trust being identical with that passed upon by the Supreme Court in Lyon v. Alexander, so the award will be made accordingly.

The balance of principal, composed as stated, is $430,376.76 from which there is awarded to Mary Adele Morris, surviving trustee, $17,000. in trust for the payment of the annuity of $500. to Evelyn M. Bode, and the remainder is awarded one-half to Mary Adele Morris and Girard Trust Company, trustees under the deed of trust of Mary Adele Morris, dated November 16, 1931, less overdraft of $54,536.50 and the remaining one-half is awarded to Charles Wilson and Integrity Trust Company, trustees under the will of Elizabeth Cutter Morris Wilson, less overdraft of $77,391.61.

The balance of income is awarded in equal shares to Mary Adele Morris and Charles Wilson and Integrity Trust Company, trustees under the will of Elizabeth Cutter Morris Wilson.

8. Mary Adele Morris died April 17, 1935, single and without issue, a resident of Montgomery County, Pennsylvania, having executed a will dated October 15, 1934, which was duly probated at the office of the register of wills in and for Montgomery County, Pennsylvania, April 23, 1935. After disposing of her personal belongings and household effects, that will provides:

ITEM SECOND: All the rest, residue and remainder of my Estate, whatsoever and wheresoever Situate, including all my right, title and interest in my property on Montgomery Avenue, Rosement, Pennsylvania, which I inherited from my Mother, and an estate in which I may have an interest or over which I may have a power of appointment, I give devise and bequeath to my Nephew, EVAN MORRIS WILSON, absolutely and in fee.

Evan Morris Wilson is named as executor of her estate.

9. The Girard Trust Co. accepted the trust under the instrument of November 16, 1931, set out in finding No. 6, supra, undertook the administration of same, and is still acting in that capacity and paying income to Evan Morris Wilson; the said trust company has made no distribution of the principal or corpus to Evan Morris Wilson.

10. Evan Morris Wilson, petitioner, addressed on December 14, 1935, a letter to the Girard Trust Co., Philadelphia, Pennsylvania. It stated that he had been advised by counsel that the deed of November 16, 1931, is void and of no effect. It concludes:

I therefore acknowledge receipt of, and retain the said payments of income from you by reason of the fact that I am entitled to them under the original will of Evan Morris, deceased, and I respectfully request that my claim, above outlined, be submitted to the proper Court for decision.

In making this request, I expressly reserve and claim any and all property, rights and benefits that I may have:

First - under the provisions of the said Deed of Trust, should the same be adjudicated to be valid in whole or in part, and

Second - under the Will of Evan Morris, deceased.

11. No proceedings have been instituted in the Orphans' Court of Philadelphia County to determine finally the status of the Girard Trust Co. and the fund now being administered under the instrument of November 16, 1931.

12. All of the property involved in this case, consisting of $114,951.13 worth of securities, is derived from Evan Morris, who died a resident of Pennsylvania, and its locus continues to be in that state.

OPINION.

OPPER: The question here is whether anything "passed" ^{*882 appointment, and, second, because even if she did the beneficiary took under the will creating the power and no property passed by virtue of the exercise thereof.}

It seems to us neither of these contentions can be sustained. Petitioner asserts that it is our duty to resolve the questions of property law in accordance with the principles adopted by the courts of decedent's domicile. Union & People's National Bank of Jackson et al.,. In this position we concur and accordingly, although with some reluctance, we feel obliged in the present posture of this proceeding to interpret the respective relevant instruments according to our understanding of the law of the State of Pennsylvania. We regard this as unfortunate, particularly since the circumstances giving rise to the question before us were ascertained as early as 1935 and could readily have been litigated long ago had the parties so desired. But we see no alternative, in the absence of submission of the question to the Pennsylvania Courts, to an attempt on our own part of forecast what their determination will be should the question ever be presented in that forum.

We conclude that by the instrument of November 16, 1931, decedent effectively exercised the power of appointment conferred upon her by her father's will. She purported to dispose in that instrument of rights to income and corpus not only during the period of her life but specifically and in a fundamentally different manner after her death. Had she been dealing only with her life estate this would of course have been impossible. The instrument was subscribed with all formality. It was executed under seal and apparently before two witnesses. It specifically describes decedent as the donee of the power of appointment and purports to deal with "any remainder or other interest of whatsoever nature that the Grantor has or may hereafter become entitled to under the Will of the said Evan Morris." Most significantly of all perhaps it confers upon the transferees the power to sell any securities or other personal property "and to make good transfers and assignments therefor to the purchaser or purchasers thereof." Had the instrument been effective to transfer only decedent's life interest it seems elementary that the transferees could have disposed of no greater interest in the personal property than they were receiving, that is, an interest for decedent's life. The reference to the transfer of good title would have been futile. To borrow the language of Judge (later Chief Justice) Taft, discussing a power of sale in :

* * * The deeds were, on their face, conveyances of the fee simple. They purported to convey, therefore, an interest which the grantor, as owner, had no power to convey. She had power to convey that interest only by virtue of the power conferred in the will. There can be no question, therefore, that the grantor intended to exercise, and was exercising, the power conferred by the will.

Petitioner contends that in Pennsylvania the donee of a power coupled with a life estate does not thereby obtain a fee. ; . But that case merely held that the donee does not actually have a fee for purposes of the application of the rule against perpetuities. It does not follow that the donee can not create the equivalent of a fee in some third person - that the original disposition of the estate has not "placed it for all practical purposes as completely within the control of the donee of the power as though a fee had been created in" her. ; , and see cases there cited; ; ; ; .

Petitioner contends that decedent did not purport to exercise her power, but only to relinquish it. He points to the language of the instrument: "releases, relinquishes and extinguishes any power of appointment or disposition she may have over the property above described." We think those words must be construed in connection with their use and in the light of the other provisions of the document. They must be coupled with the following language: "and she further covenants and agrees with the Trustees that she will never under any circumstances or at any time exercise any such power of disposition or appointment or otherwise do any act or thing that will in any way cut down, detract from or affect the absolute indefeasible fee simple title to the property, which is hereby conveyed * * *." The relinquishment and the covenant must, it seems to us, be read together and apply from and after the exercise of the power which by the same instrument the decedent intended to effect. Only by such an interpretation could all of decedent's directions be consummated. "The general rule in determining the validity of the execution of powers is that the intention of the donee to execute is the turning point. * * * The reference to the will * * * is evidence * * * that the will and the donee's power under it were in her mind when making the deed, and, in connection with the fact of conveyance in fee with general warranty, evinces the intent to execute the power." ; (referring to a power of sale). And only by such an interpretation can the action of the Orphans' Court of Philadelphia County in the settlement of the Evan Morris estate by supported. For not only did the order of that court of December 2, 1931, confirm to decedent's transferees the entire title, remainder as well as life interest, to that part of the Evan Morris estate, but the court characterized the November 16, 1931, transfer as "being in execution by said Mary Adele Morris of her power of testamentary appointment." It is evident that the reference to that document "as an extinguishment of the power of appointment" is a recognition of the interpretation we have suggested for it is followed by the words "so the award will be made accordingly." The award was to decedent's transferees, although decedent was still living, presumably in acknowledgment of the fact that the power had not only been exercised, but irrevocably exercised and thereupon extinguished.

What has been said we think sufficiently disposes of petitioner's further contention that decedent could not have exercised the power of appointment on November 16, 1931, because the appointment could be made, under the will of the donor, only "by last Will and Testament, or any instrument of writing in the nature thereof." We see no reason why the document executed November 16, 1931, was not, to some extent at least, decedent's last will and testament, why it is impossible that "the instrument was valid as an inter vivos conveyance and also valid as a will" (Boal v. Metropolitan Museum of Art, infra ) - "that the trust instrument, although executed to operate in praesenti as to property transferred to the trustee, was executed animo testandi as to the residue mentioned in the will." ; . It was in any event "any instrument of writing in the nature thereof", being "a writing, if not with the formalities requisite for a will, at least containing a disposition of property to take effect at the death of the donee." Trust under Deed of Levering et al., 9 D. & C. (Penn.) 328, 331. It could not otherwise have been regarded by the Orphans' Court as an execution of the power of "testamentary appointment." And as petitioner contends, and we have agreed, the views of the courts of Pennsylvania charged with the determination of these questions are the authorities we should follow wherever ascertainable; to say nothing of the further circumstance that the parties necessary to that accounting and the questions presented were such as, in all probability, to make the determination there res adjudicata.

To petitioner's further contention that any instrument, and particularly that of November 16, 1931, can not be both a will and a deed, we make the same reply. See , and cases there cited; ; ; ; . And we have been referred to no Pennsylvania authority to the contrary. Trus, the instrument was apparently not probated. But it may none the less be either the "will or deed * * * intended to take effect in * * * enjoyment at" her death by which decedent's power of appointment was exercised. It was made effective by the action of the Orphans' Court in the final accounting and distribution of the donor's estate. By its terms it disposed of the estate over which decedent had the power and this disposition became, and was intended to become, operative as of her death. It is stipulated that her transferee continues to hold the corpus on the very trusts she established. Whatever its reasoning, the Orphans' Court has, it seems to us, effectuated her exercise of the power; if by will, it must be assumed probate was unnecessary; if by deed, then it was "a substitute for * * * a disposition by will" and took, and was intended to take, effect at her death. See Klein v.United States and Helvering v.St. Louis Union Trust Co., infra.

On October 15, 1934, decedent executed a "last will and testament." In it she said: "I hereby revoke all former and other Wills by me at any time heretofore made, * * *." It is suggested that if the instrument executed November 16, 1931, was a prior will, it was revoked by the later instrument. Even if this were so, petitioner's argument would not be advanced for then, presumably, the relinquishment of the power contained in that prior will would also be revoked, and decedent by the 1934 will bequeathed "an estate in which I may have an interest or over which I may have a power of appointment" to the chief beneficiary under the 1931 instrument. We prefer, however, to follow the authority cited by petitioner (, and other cases cited) and to say, in the language of petitioner's brief, "once having irrevocably extinguished her power to appoint she could not later exercise it by her will or any other instrument, there being none left to exercise." No more could she by that later will revoke any testamentary disposition which she had, for a consideration, declared to be irrevocable. ; ; see ; .

We come then to a consideration of the applicability of In that case the beneficiaries expressly repudiated the appointment and elected to take under the original will. Since then we have held (), that a specific renunciation may not be necessary. But here the action taken by the beneficiary was the direct opposite of that in the Grinnell case, for in his letter of December 14, 1935, to the corporate trustee under the instrument of November 16, 1931, he said:

* * * I expressly reserve and claim any and all property, rights and benefits that I may have:

First - under the provisions of the said Deed of Trust [of November 16, 1931], should the same be adjudicated to be valid in whole or in part, and

Second - under the Will of Evan Morris, deceased.

Since there was here an express election to take under the power, it cannot under the doctrine of the Grinnell case be said that its exercise was ineffective or that no property passed thereunder. Except where there is an express election to renounce the appointment it has, so far as we know, never been doubted that as a matter of property law anelection remains with the beneficiary expressly to invoke the protection flowing from the appointment. In , the Supreme Court quoted with approval from the opinion of the New York Court of Appeals in ; , as follows: "'An appointee under a power' the Court continued, 'has the right of election, the same as a grantee under a deed. * * * He can accept the title tendered or reject it in his discretion. * * * His consent is necessary before the attempt to exercise the power becomes binding upon him * * *.'" (Italics added.) For this reason and regardless of subsequent pronouncements by the New York courts in litigation involving the construction of state taxing statutes (see e.g. ; ; affirmed without opinion, ; ), we regard the Grinnell case as recognizing the existence of the right of election and as establishing the exercise of that election as the test for purposes of estate taxation under the Federal revenue acts.

The absence of any election distinguishes our decision in One other difference in the facts in the two proceedings may be worth mentioning. The codicil in the Webster case gave decedent a power of appointment, following which the donor gave and bequeathed "the remainder of said trust fund from and after her death to her children to whom I now give and bequeath the same subject to such exercise of said power." (Emphasis added.) In the present proceeding the will provides "the above provision in favor of children or issue of my said daughters, so surviving their said mother, is only to take effect in case of failure to so appoint." (Emphasis added.) This may be a narrow distinction and one in all probability not always easy to apply. Nevertheless it can not be said to be without significance, for in the Lansing case a portion of the opinion not quoted in Helvering v. Grinnell, discussing ; , which was decided on the same day, reads as follows: "Moreover, title to the remainder was to vest in them only upon the failure of the mother to appoint. If she exercised the power, they could take under that source only, for they could not take under the will of the grandfather, as Judge Haight shows in his opinion." Apparently then, although this principle was presumably not called to the Supreme Court's attention and certainly is not discussed in its opinion in Helvering v. Grinnell, there is authority for distinguishing between an estate which is vested but subject to be divested by the appointment of the estate elsewhere, and a remainder or expectant interest which is destroyed by the condition specified, that is, the making of the appointment. In the latter case, the appointment having been the condition and the condition having been fulfilled, there is nothing left for the estate in expectancy; the beneficiaries must take under the power if they take at all; that is the "generating source of the title." See ; and cf. . Whether this principle affords a further distinction from our decision in , or whether in the absence of any election we should, on such facts, be compelled to follow the Grinnell case, it is not now necessary to determine. Suffice it to say that nothing that is said in the Webster case may be regarded as purporting to pass upon the questions here presented or as going beyond what we now indicate.

We therefore conclude that decedent validly exercised the power of appointment conferred upon her by the donor thereof, that the beneficiary specifically elected to accept its benefits, and accordingly that the property in question passed by the power and is includable in decedent's gross estate.

Decision will be entered for the respondent.

---

Footnotes

• 1. . ↩

• 2. [Revenue Act of 1926.] SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated -

  * * *

  (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth; and

  * * * ↩