On Petition for Review from the United States Board of Tax Appeals.
Before MARIS, CLARK, and BIDDLE, Circuit Judges.
This case involves the construction of the will of John Gilbert, who died in Pennsylvania on June 28, 1877. The Commissioner of Internal Revenue made an additional assessment against Gilbert's granddaughter, Catharine D. Sharpe, in the amount of $46,970.63. The Board of Tax Appeals sustained the Commissioner (38 B.T.A. 502), and this proceeding is on a petitioner to review that decision.
A construction of John Gilbert's will is involved. Under the third item of his will, after placing his coal lands in trust, he provided that the rents therefrom should be paid as follows:
"2. To pay to my beloved wife an annuity of fifteen thousand dollars * * * during her natural life * * * and at her death the payment of this annuity is to be continued and distributed pro rata * * * to my children and grandchildren."
"3. To pay to each of my children an annuity of two thousand dollars * * * during each of their natural life or lives, and in the event of the death of any of my children, the share of such deceased child or children to be paid to the child or children of such deceased child or children."
"4. * * * And lastly, the balance from this source (if any), after the payment of taxes and other expenses incident to these coal lands, I direct to be distributed at the expiration of each year to my wife and children, share and share alike, or to the child or children of any deceased child or children."
The residuary item is also involved. This provides: " * * * And the net proceeds of such rest and residue of my estate, I order and direct to be invested * * * and the interest accruing therefrom to be paid semi-annually one-third thereof to my wife, and the other two-thirds to my child or children, or the lawful issue of any deceased child then surviving, to all intents and purposes as is provided by the intestate laws of this Commonwealth."
In all of these provisions Mr. Gilbert dealt with the income, but did not indicate how the principal forming the trust estate should pass. Where there is a gift of income of a trust without limitation as to time, or without gift over, the Pennsylvania courts have construed the gift to be in perpetuity, and have held that it carried principal with income. But this rule, which the courts have perhaps tended to restrict in recent decisions,*fn1 is at best but a rule of construction in aid of discovering the testator's intention. Rogers' Estate, 245 Pa. 206, 91 A. 351, L.R.A. 1917A, 168; Gibbons' Estate, 317 Pa. 465, 177 A. 50. It is bounded by definition to cases where there is no limitation in time of the gift of income, and where there is no gift over Millard's Appeal, 87 Pa. 457; Mifflin's Estate, 232 Pa. 25, 81 A. 129; Wood's Estate, 261 Pa. 480, 104 A. 673; Gibbons' Estate, supra; Roberts' Estate, supra; Paine's Estate, 13 Pa. Dist. & Co. R. 629; and Id., 26 Pa. Dist. & Co. R. 281.
The judicial construction of the will by the state court determines not only legally but practically the extent and character of the interests taken by the legatees. Uterhart v. United States, 240 U.S. 598, 603, 36 S. Ct. 417, 60 L. Ed. 819. This court is bound by the decision of the State court. Freuler v. Helvering, 291 U.S. 35, 54 S. Ct. 308, 78 L. Ed. 634; Blair v. Commissioner, 300 U.S. 5, 57 S. Ct. 330, 81 L. Ed. 465. We must first therefore discover how the Orphans' Court of Philadelphia County, which had jurisdiction, construed Mr. Gilbert's will.
When Gilbert died his wife and five children were living. The widow died on March 23, 1880, but it does not appear from the record whether or not she left a will. Fannie G. Dixon, the mother of the petitioner, and the last surviving child of John Glbert, died in 1931. An account of the executors and trustees of the Gilbert Estate was confirmed by the Orphans' Court of Philadelphia County in 1923, and Judge Thompson, the auditing judge, pointed out that the will disposed only of income, not of principal, and raised, without deciding the question as to whether "the gift of income without limitation of time or gift over * * * " was "a gift of the principal. * * * " All of those entitled to take joined in requesting that the principal be awarded to the trustees, pending the death of Fannie G. Dixon and the construction of the will at that time, and the auditing judge accordingly made such an award.
Of the original five children Kate and Clara had died leaving no issue; Ida had died leaving one child, Clayton Gilbert Dixon; Samuel H. Gilbert had died leaving two children, John Gilbert and Gertrude Gilbert (now Loening). On August 18, 1924, Mrs. Dixon, who was the last surviving child, and the three living grandchildren referred to, joined in a deed of trust which, after reciting the provisions of the will, in effect provided that the trust of the coal lands should be carried on in the manner provided in the will.
Fannie G. Dixon died on April 2, 1931, leaving a will under which letters were granted to her daughter, Catharine D. Sharpe, the petitioner, to whom the residue of Mrs. Dixon's Estate was given. An account and petition for distribution were then filed in the Gilbert Estate, and Judge Stearne, of Orphans' Court of Philadelphia County, approved the account in an adjudication in which, after describing the three items of the will to which we have referred, and referring to Judge Thompson's adjudication, he said: "It therefore would appear that the trust was kept alive until the death of the last surviving of testator's five children (which has now occurred) by agreement of the parties in interest. I now find that the trust consisted of a gift of income only, without any limitation of time or gift over of principal, and under the cases cited in Judge Thompson's Adjudication quoted as above, there is no alternative than that those entitled to income are now entitled to principal outright. The rule has always been that a gift of income without ...