Pennsylvania Co. for Insurances on Lives & Granting Annuities v. United States

delivered the opinion of the court.

The issue in this estate tax case is whether the Commissioner of Internal Eevenue properly included in the gross estate of the decedent, Edward C. Knight, Jr., certain property transferred by him in trust June 28,1912. The basis of the Commissioner’s action was that under the trust instrument there was a possibility of reverter which could not terminate until decedent’s death and therefore the transfer was intended to take effect at decedent’s death.

The trust instrument gave successive life interests to Edward C. Knight, Jr., and to his daughter, Clara W. K. Colford. It then provided for the further disposition of the trust property upon the death of Mrs. Colford under three different described conditions; (1) her death, after *789Knight’s death, leaving children or descendants of children; (2) her death, in Knight’s lifetime, without descendants; (3) her death, after Knight’s death, without descendants. In situation (1) the property was to go to the descendants living at Mrs. Colford’s death, per stirpes; in (2) it was to go back to Knight; and in (3) it was to go as Knight might have appointed by a testamentary disposition.

In fact, Mrs. Colford died before Knight, and left two children, so that no one of the three described conditions covered by the trust instrument occurred.' The consequence was that the trust instrument made no disposition of the property at all except that of the life estates to Knight and Mrs. Colford, in the circumstances which in fact occurred. This may well have been an oversight on Knight’s part. But we think it is not permissible for the court to fill in a complete gap in a deed in order to make a disposition of property which the grantor did not, by his language, make, but which he probably would have made if be had thought of it.

It is true that, as shown in finding 11, the Pennsylvania court having supervision of the trust approved a distribution of the property as if it had been covered by the trust deed. But this approval was in response to a petition presented by all interested parties, including the executor of Knight’s estate, and was nothing more than a consent decree. It represents no determination at all by a Pennsylvania court that it is the law of Pennsylvania that complete gaps in a trust deed will be filled by writing into them what would probably have been the intent of the grantor if he had given thought to the matter. We cannot, therefore, agree that the Pennsylvania court’s decree binds the Government, with regard to the taxability of this transaction, or binds this court in this contested case between different parties, to follow the Pennsylvania court’s consent decree.

The trust deed made no disposition of the property beyond the two life estates, in the event which occurred, and accordingly, from the time that Mrs. Colford’s life estate was extinguished in 1924, Knight had a life estate by the terms of the deed and a resulting trust of the undisposed *790of reversion. He was therefore, in equity, the complete owner of the property at the time of his death and the estate tax should apply.

If the court should seek to fill the gap in the trust deed with some gift of a remainder to Mrs. Colford’s issue, it still would have the task of formulating the language to be inserted. It must determine whether to make, for the creator of the trust, a gift of a remainder to the descendants of Mrs. Colford who should be living at her death, or to those who should be living at the death of Knight, the time at which the interest of Mrs. Colford’s descendants would take effect in possession.

A reasonable construction of the trust instrument is that if Knight had made provision for the event which in fact occurred, he would have provided, as he did in the parts of the deed which he wrote, that the interests of the descendants of Mrs. Colford should not vest until they vested in possession, upon his death. For instance, if one of the two daughters of Mrs. Colford who survived her had died before Knight, leaving a child, and creditors, Knight’s intention, as shown by the provisions of his deed, would have been that the child should get the property, when Knight died, and not the creditors. Family settlements in general keep the interests contingent, SO' that those of the family who are alive when the time for enjoyment arrives may not find their inheritance has been dissipated without ever being enjoyed.

It is reasonable theref oi’e to conclude that if a provision is to be written into the deed it should be that upon the expiration of the life estates of both Knight and his daughter, no matter which died first, the trustee should “pay, assign, transfer and set over the principal to and among the children of the said Clara W. K. Colford, then living, and the descendants of any child then dead, share and share alike, per stirpes, upon the principal of representation.” The quoted language is the language actually used by Knight for one of the situations which he foresaw and provided for. If his deed is so read, the gift would have failed if the two daughters who survived Mrs. Colford had died without issue before Knight died. Until that question was resolved by Knight’s death, he had an equi*791table reversion in the property, and an estate tax was payable thereon upon his death.

The decree of the Pennsylvania court, even if it had been a decision in a contested case, would have been of no assistance in this latter question of construction. The daughters who survived Mrs. Colford in 1924 survived Knight in 1936 and the court would have had no occasion, after Knight’s death, to determine whether their interests had vested in 1924 or not until 1936.

It follows that the petition should be dismissed. It is so ordered.

dissenting:

The controversy in this case arises over the inclusion within the gross estate of the deceased, Edward C. Knight, Jr., of property transferred by him in trust on the 28th day of June, 1912. The Commissioner of Internal Revenue included it in the decedent’s gross estate on the theory that under the trust instrument the grantor retained a possibility of reverter and, therefore, that the transfer was “intended to take effect in possession or enjoyment at or after” the death of the decedent.

The trust instrument was executed at Philadelphia, Pennsylvania. The trustees were directed to pay the. net income to the grantor for life, and upon his death to pay the net income to his daughter Clara W. K. Colford for her life, and upon the death of his daughter, the grantor then being dead, to divide the principal among his daughter’s children then living, and the descendants of any child who was dead, per stirpes. If, however, his daughter should die during the lifetime of the grantor “without leaving descendants her surviving,” the property was to revert to the grantor; and if the daughter should die after the decease of the grantor “without leaving descendants her surviving,” the principal was to be paid to such persons and in such proportions as the grantor should by last will and. testament provide.

*792The grantor-died on July 23,1936; his daughter Mrs. Col-ford died on December 18, 1924, leaving surviving her two children, aged 15 and 11, respectively. These children survived the grantor.

No provision was made in the trust instrument for the contingency that the daughter might die before the grantor leaving issue, and her issue should later die during the lifetime of the grantor. .In this event, defendant says the property would by operation of law revert to the grantor, and it says this possibility of reverter justified the Commissioner in including the value of the property in the grantor’s gross estate.

Defendant says that the right of the grandchildren to receive any part of the estate was contingent upon their surviving their mother and the grantor because the trust provided that on the death of the grantor the principal should be transferred only to such children of the daughter as should be living at her death, or, if dead, to their descendants. Therefore, it says that if the daughter’s children died without issue after the mother’s death, but before the grantor’s death, there was no one to whom the principal could be paid and, therefore, it would revert to the estate of the grantor.

In support of this defendant cites the case of Battenfield v. Kline, 228 Pa. 91, 77 Atl. 416. In this case the will under construction directed that the estate “shall be divided in equal shares between such of the children” of the testatrix and her husband “as shall then be living,” and that “if any one or more of the said children shall then be dead leaving issue, such issue shall stand in the place of and be entitled to the share to which such child would have been entitled if such child had survived. * * *” The court held that the children’s interest was a contingent, and not a vested one, and that it did not vest until the death of the life tenants. The court said, however: “Of course this rule may be overborne by the addition of words of limitation showing that the testator’s intention was that the children should take a transmissible interest; as where the gift is implied from a direction to divide among them or their heirs. Muhlenberg’s App., 103 Pa. 587.”

*793If, therefore, tbe trust instrument in the case before us discloses an intention that the grantor’s grandchildren should receive a vested interest upon the death of their mother during the lifetime of the grantor, there was no further possibility of reverter after the death of the grantor’s daughter leaving issue. I think it does.

After having provided for the payment of the income from the trust to him for his life and to his daughter for her life, with remainder to the daughter’s children living at the time of her death, the grantor then provided for the contingency that his daughter should die without leaving descendants surviving her, either in his lifetime or after his death. If she died during his lifetime, it was provided that the property should revert to his estate free from all trusts; if she died after he did, it was provided that the property should be disposed of as he should by will direct. No provision was made for the disposition of the remainder if at the time of the daughter’s death she left issue surviving her and her issue died before the grantor did.

What conclusion is to be drawn from this? Is it not that if she died leaving issue the remainder was then to vest in her issue? And since he made no provision for the contingency of the death of her issue after his daughter’s death but before his death, is it not to be supposed that he meant the remainder to vest in them upon his death? If he had not wanted it to vest in them upon her death, would he not have made provision for the disposition of the remainder in case of their death after their mother’s death but before his ? His mind was on the subject of the disposition of the property in case of the daughter’s death without issue both in his lifetime and after his death, and he made provision for both. He must have thought of the contingency that his daughter might die during his lifetime leaving issue and that her issue might later die during his lifetime; but he made no provision for the disposition of the remainder in that event. Why not? Because the remainder had already gone where he wanted it to go? It would seem so. He must have thought: The remainder would immediately vest in my daughter’s issue, and, hence, there is nothing for me to dis*794pose of at their death; the remainder becomes theirs on their mother’s death.

If he had had in mind reserving to himself the disposition of the property if both his daughter and her issue should die before he did, there was as much reason for him to have provided for the termination of the trust in the case of the daughter’s death leaving issue, and their later death in his lifetime, as in the case of his daughter’s death without leaving issue surviving her. But it seems he was not concerned with disposing of the remainder if his daughter died leaving issue, but only in the case of her death without issue surviving her. This must have been because, once her issue survived her, he intended the remainder to vest in them.

Now, it is quite true that the trust instrument made provision for the disposition of the remainder only in the event that his daughter should outlive him, but the probate court entered a decree based upon a construction of the instrument under which her issue got the remainder although she predeceased him. In other words, he was understood to have intended that upon his daughter’s death, whether before or after his death, the remainder interest should go to her children. I think we are bound by this decree.

If I have properly divined the intention of the grantor, he could not have intended this remainder interest to take effect in possession or enjoyment only on his death. It seems to me that what has been said belies an intention that he should part with all possession and control over the property only on his death. But suppose the grantor merely failed to take into consideration the contingency that his daughter might die before he did leaving issue surviving her, and that her issue might later , die before he did, and so did not provide for the disposition of the estate in that event, can it be said that he “intended” to reserve a possibility of reverter? He could not have intended this if he did not think of this contingency. It is only when the transfer is “intended” to take effect at his death that it is properly includible in a decedent’s estate. Central Hanover Bank and Trust Company v. United States, 103 C. Cls. 210, opinion on motion for a new trial, decided February 5, *7951945 (58 F. Supp. 565); Estate of Mary B. Hunnewell, 4 T. C. 1128.

In the view I take of the intention of the grantor, the case of Fidelity-Philadelphia Trust Co. et al. v. Rothensies, 324 U. S. 108, and the other cases cited by defendant are not in point.

I must respectfully dissent.