Commissioner of Internal Revenue v. Henry's Estate , 161 F.2d 574 ( 1947 )

GOODRICH, Circuit Judge.

This is an appeal from a decision of the Tax Court which found against the Commissioner in a dispute involving an estate tax 'upon certain portions of the estate of Sallie Houston Henry. The case has been twice argued in this Court, the second time before the full Court following the granting of a petition for rehearing after the entry of our original judgment on June 11, 1946.

The controversy can be very simply stated. It turns upon the effect of a document which bears date of December 31, 1915. If this document became legally effective on that date or before Congressional Joint Resolution of March 3, 1931,¹ the Commissioner concedes that no tax is due. If, as he argues, it became effective or complete after that date, the tax is due and the respondents admit it. No dispute upon the question of the tax laws of the United .States arises. The sole question is concerned with the transaction of December 31, 1915.

Following the original argument of this case the Court on June 11, 1946 reversed the decision of the Tax Court. Upon the petition of the respondents rehearing was granted and the case has now been argued before the full Court. Before proceeding to consider the questions which the appeal raises we repeat the facts as we originally stated them. They are as follows:

We are not confronted with a dispute over the facts. Henry H. Houston was a prominent Philadelphia citizen. He was the head of a family which included his wife, Sallie Houston, and their three children, Samuel F., Gertrude and Sallie, all of whom married and had children.

Irl 1895, Grandfather Houston died, leaving a substantial estate consisting principally of real property and securities, with part of which we are here concerned. These were of two types. Some were stocks in the several companies which had grown out of the Standard Oil Trust. Others were shares in different corporations. Grandfather Houston left the residue of his estate in trust. The life tenant beneficiaries of this trust were Grandmother Houston, Samuel F. Houston, Sallie Houston Henry, and Gertrude Houston Woodward. The remaindermen were grandchildren of Henry II. Houston.

Grandmother Houston died in 1913, leaving a large estate of her own. By her will, she disposed of the residue of her estate, giving it in trust for the benefit of her grandchildren.4 She divided her residuary estate into twenty-one equal parts but disposed of these in unequal proportions. She gave 3/21 to the children of Sallie Houston Henry and 18/21 to the children of Samuel F. Houston and Gertrude H. Woodward. The net income was to be paid over (in those proportions) to “each of * * * said grandchildren until he or she shall have attained the age of 30 years,” when the respective share of each was to be paid over to him or to his issue, surviving spouse, or surviving brothers and sisters.

In the administration of the Grandfather Houston and Grandmother Houston estates tw-o serious questions arose. During the period between the deaths of Grandfather and Grandmother Houston the trustees under the will of Henry II. Houston received a large number of “extraordinary distributions” on the Standard Oil securities. Subsequently, the trustees received from time to time “extraordinary distributions” ⁵ on the securities other than those of Standard Oil origin. The trustees followed the practice of adding all these distributions to the principal of the trust estate. Did all or any part of these “extraordinary distributions” constitute distributable income to the life tenants?

The other question which arose followed Grandmother Houston’s death. Was her gift of the residue to her grandchildren void because it violated the Rule against Perpetuities? This question attained special importance because the residue of Grandmother Houston’s estate'was $1,700,000, exclusive of her share in the “extraordinary distributions,” rather than $630,000 as she had supposed.⁶

In 1913, following Grandmother Houston’s death, the three Houston children had, therefore, two strongly supportable claims. One embraced the “extraordinary distributions” (as life tenants of the Grandfather Houston trust). The other was the right to the entire residue of Grandmother Houston’s estate if its gift violated the Rule against Perpetuities.⁷

On the other hand, the Houston grandchildren, as remaindermen under Grandfather Houston’s trust, had a claim to all or part of the “extraordinary distributions” and, of course, to the $1,700,000 plus in the residuary estate of Grandmother Houston.

This, then, was the situation which prevailed on December 31, 1915. To understand better the events which occurred on that significant date it would be well to enumerate the interested parties in both Houston estates. These were (a) Sallie Houston Henry and her children, (T. Charlton Henry, Gertrude H. Henry, and Elizabeth W. Henry); (b) Samuel F. Houston and his children (Edith C. Houston Brown, Margaret C. Houston Meigs, Henry H. Houston 2nd, Eleanor Houston Smith); (c) Gertrude Houston Woodward and her children (H. H. Houston Woodward, 'George Woodward, Stanley Woodward, Charles H. Woodward, and Gertrude Woodward). In addition, there were also Samuel F. Houston’s wife, Charlotte H. S. Houston, and Gertrude H. Woodward’s husband, George Woodward. Sallie Houston Henry’s husband died prior to 1915. Of these twelve grandchildren, seven were minors and therefore incapable of- binding themselves with respect to the legal questions outstanding.

Both Grandfather and Grandmother Houston had expressed in their wills the desire that their estates be administered without the filing of Inventories or Accounts in the Orphans’ Court This strengthened the desire of the parties concerned to settle all outstanding questions inter se without resort to court proceedings.

Accordingly, an elaborate document entitle “Deed of Family Settlement and Trust” was prepared by eminent Philadelphia lawyers.⁸ . On December 31, 1915, it was' signed by the three Houston children, their spouses and those grand children who were of age (and their spouses), by the corporate trustee under Grandfather Houston’s will, and by the executor and trustee under Grandmother Houston’s will. From December 31,' 1915 on, the trustees held the questioned securities as part of the principal of Grandfather Houston’s trust, paying the income therefrom to the Houston children. The residue of Grandmother Houston’s estate was administered in accordance with her will as to $630,000 but as to the balance, equal distributions were made to the grandchildren.

In 1922, Sallie Houston Henry, Samuel F. Houston and Gertrude Houston Woodward executed a “deed of confirmation” under which they confirmed the deed of 1915 and released and quitclaimed to the trustees under the will of Grandfather Houston all their “right, title, interest or claim” to the Standard Oil securities, “it being expressly understood, however, that nothing herein contained shall affect the right of said life tenants to all cash dividends or income paid or to be paid in cash on any of said shares or securities, nor shall affect their rights as reserved to them by the sixth paragraph of said deed of family settlement.”

Sallie Houston Henry died in 1938. The Commissioner attempted to lay the estate tax on her share of the life tenants’ rights in the Standard Oil and other securities received by Grandfather Houston’s trustee as “extraordinary distributions.” ⁹

Following a thorough presentation on the reargument of the matter our own further reflections have convinced the majority of us that we were mistaken in treating the question presented as that kind of “clear-cut question of law” in which we may exercise independent judgment. We conclude, rather, that this is the type of question to which the doctrine of the Dobson case ² and the many authorities proliferating from it are applicable. In such a case the Tax Court’s conclusion, if not ail egregious mistake, is to be accepted as final. It is one of those situations such as the Court speaks of in Commissioner v. Scottish American Co., 1944, 323 U.S. 119, 65 S.Ct. 169, 89 L.Ed. 113, where it is the business of the Tax Court to choose “from among conflicting factual inferences and conclusions those which it considers most reasonable.” ³

As stated at the outset, the controversy arises from the elaborate “Deed of Family Settlement and Trust” executed on December 31, 1915, as described above. No one suggests that back of this deed was any thought of tax evasion or avoidance. There are no facts to show it and judicial knowledge of the history of federal tax legislation indicates that, as of that time, any change of the impact of taxation growing out of the deed would have been a minor matter. Nor is the document in question one of the type in which the use or omission of certain terms by the parties carries, irrespective of their state of mind, a given legal effect. Thus it is not comparable to the necessary appearance of the term “heirs” in a deed of conveyance in order to create a fee simple at common law. Instead, we have facts, on which there is no dispute, showing complications in a good sized estate in which many members of a family are concerned. We have a submission of the problems to eminent counsel to draw the document which, in their informed judgment, will be effective to clear up the doubts and difficulties which have arisen. We also have undisputed facts as to what the various members of the family did with reference to the transaction subsequently. Now the question that presents itself in litigation is, assuming that the document had the desired effect, when did that effect take place? Insofar as the problem is one of inferring the actual intent in the minds of the various parties from the undisputed facts which occurred before and after the settlement, that inference is indisputably for the Tax Court to make. Insofar as the question is one of effect to be gathered from the four corners of the document, the inference is not so clearly a question of fact, but involves what we call mixed fact and law, for want of a better term.^4. The inference to be drawn varies, obviously, in every case of either a factual nature or one of mixed law and fact, according to the features which one stresses and the features which one disregards as unimportant This matter of factual inference, we are told clearly by the Supreme Court, is one for the Tax Court to draw. Its conclusion is to stand, we are told further, unless clearly unsupported by fact or reason.⁵

We cannot say in this case that the conclusion reached by the Tax Court here is unreasonable. The very fact that all the Tax Court concurred in one view⁶ and this Court, following the first hearing, reached a different conclusion, shows, we think, that the question is a close one and the facts are reasonably susceptible of differing conclusions. This is further proved by the presence of concurring and dissenting opinions among the members of this Court after two very able arguments.

From all this we conclude that this is the type of situation where we have been instructed to follow the “hands off” policy with regard to results reached by the Tax Court The present case is not one where we must choose between the view of Judge Learned Hand and Judge Augustus Hand, expressed in Brooklyn National Corporation v. Commissioner, 2 Cir., 1946, 157 F.2d 450. It seems to us that the Supreme Court decision in Choate v. Commissioner, 1945, 324 U.S. 1, 65 S.Ct. 469, 89 L.Ed. 653, is too close to the type of problem presented here to leave us room for choice.⁷ To this may be added, for good measure, the decisions in John Kelley Co. v. Commissioner, 1946, 326 U.S. 521, 698, 66 S.Ct. 299, and Talbot Mills v. Commissioner, 1946, 326 U.S. 521, 698, 66 S.Ct. 299.⁸

The decision of the Tax Court is affirmed.

1 46 Stat. 1516, March 3, 1931, 26 U.S.C.A. Int.Rev.Code, § 811(c).

4. The description of the grandchildren of the testatrix was “all the children which (the named child of the testatrix) has or may hereafter have.”

5 The term “extraordinary distribution” includes stock dividends, stock rights, securities acquired upon the exercise of rights and the proceeds of rights which were sold.

6 The parties seemed to think that had she known of this marked increase in her residuary estate, Sallie Houston would not have made such unequal disposition hereof.

7 The Orphans’ Court in its adjudication filed by Judge Sinkler on October 8, 1941, indicated that, under Pennsylvania law, these extraordinary distributions had been properly distributable as income io life tenants. Counsel consulted by the intei'ested parties expressed the opinion that Grandmother Houston’s gift of the residue was, under Pennsylvania law, invalid.

8 Joseph deF. Junkin, Esq., and John G. Johnson, Esq.

9 Decedent’s rights stem from both her father’s and her mother’s estate. As an heir of Sallie Houston, she would have an interest in Sallie Houston’s rights to the “extraordinary distributions.”

2 Dobson v. Commissioner, 1943, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248.

3 1944, 323 U.S. 119, at page 124, 65 S.Ct. 169, at page 171, 89 L.Ed. 113.

5 Accord, Trust of Bingham v. Commissioner, 1945, 325 U.S. 365, 65 S.Ct. 1232, 89 L.Ed. 1670; Commissioner v„ Scottish American Co., 1944, 323 U.S. 119, at page 123, 65 S.Ct. 169, at page 171, 89 L.Ed. 113: “The answer [to the problem of judicial reviewability of Tax Court determinations] is to be found in a proper realization of the distinctive functions of the Tax Court and the Circuit Courts of Appeal in this respect, The Tax Coui’t has the primary function of finding the facts in tax disputes weighing the evidence, and choosing from among conflicting factual inferences and conclusions those which it considers most reasonable. The Circuit Courts of Appeal have no power to change ox-add to those findings of fact or to reweigh the evidence. And when the Tax Court’s factual inferences and conclusions ■ are determinative of compliance with statutory requirements, the appellate courts are limited, to a determination of whether they have any substantial basis in the evidence. The judicial eye must not in the first instance rove about searching for evidence to support other conflicting inferences and conclusions which the judges or the litigants may consider more reasonable or desirable. It must be cast directly and primarily upon the evidence in support of those made by the Tax Court. If a substantial basis is lacking the appellate court may then indulge in making its own inferences and conclusions or it may remand the case to the Tax Court for further appropi-iate proceedings. But if such a basis is present the process of judicial review is at an end. [Citing cases.]”

6 Estate of Henry v. Commissioner, 1944, 4 T.C. 423.

7 This case involved a partnership income tax problem and revolved about the question of whether a transaction of the partnership was a sale or a lease for tax purposes. In 1945, 324 U.S. 1, at page 3, 65 S.Ct. 469, at page 470, 89 L. Ed. 653 the Court stated: “ * * * In the second place, the Tax Court found that the parties intended a cash sale of the equipment. That question is argued here as if it were open for redetermination by us. It is not. It is the kind of issue reserved for the Tax Court under Dobson v. Commissioner, 320 U. S. 489, 64 S.Ct. 239, 88 L,Ed. 248, and Wilmington Trust Co. v. Helvering, 316 U.S. 164, 167-168, 62 S.Ct. 984, 985, 986, 86 L.Ed. 1352. * * * ”

8 We are aware of the confusion and displeasure that followed the publication of the Dobson doctrine. Proof of this reaction can be noted in Paul, 1946 Supplement to Federal Estate and Gift Taxation (1946) pp. 492-605, inclusive, which contains the most exhaustive survey of the Dobson doctrine up to tho publication date of approximately December 15, 1945. Since the Dobson case, however, the policy of review announced by the Supreme Court has been strengthened by later decisions, and is becoming better understood. H. Ober Hess in a Book Review of Paul’s 1946 Supplement (supra) in 94 U. of Pa.L.Rev. 444 (1946) questions Mr. Paul's conclusions concerning the effect of the Dobson doctrine subsequent to the Kelley and Talbot Mills cases. 9 Mertens, Law of Federal Income Taxation § 51.19 (1943), the 1946 Cumulative Pocket Supplement, the Deeember 1946 Quarterly Issue pamphlet and the January 1947 Monthly Issue pamphlet contain discussions of the problem of review of Tax Court determinations and -case collections. See also Gordon, Reviewability of Tax Court Decisions (Dec. 1946-Jan. 1947) 2 Tax L.R. 171; Nelson, The “Dobson” Rule Reaffirmed by the “Kelley” Case, 1946, 24 Taxes 105; Note, The Dobson Rule in the Circuit Courts, 60 Harv.L.Rev. 448 (1947); and Recent Case, Judicial Review of Tax Court Decisions (1946) 94 U. of Pa.L. Rev. 339.

The following footnotes are in the exact order in which they appeared in the original statement :

4 Accord, Trust of Bingham v. Commissioner, 1945, 325 U.S. 365, at page 370, 65 S.Ct. 1232, at page 1235, 89 L. Ed. 1670: “ * * * Ordinarily questions of reasonableness and proximity are for the trier of fact, here the Tax Court. [Citing cases.] And even when they are hybrid questions of ‘mixed law and fact,’ their resolution, because of the fact element involved, will usually afford little concrete guidance for future cases, and reviewing courts will set aside the decisions of the Tax Court only when they announce a rule of general applicability, that the facts found fall short of meeting statutory requirements. [Citing cases.] * * • ”