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Commissioner of Internal Revenue v. Henry's Estate

decided: April 17, 1947.


Author: Goodrich


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,*fn1 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.

In 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 H. 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.*fn4 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 two serious questions arose. During the period between the deaths of Grandfather and Grandmother Houston the trustees under the will of Henry H. Houston received a large number of "extraordinary distributions" on the Standard Oil securities. Subsequently, the trustees received from time to time "extraordinary distributions"*fn5 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.*fn6

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.*fn7

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 ; (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.*fn8 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."*fn9

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*fn2 and the many authorities proliferating from it are applicable. In such a case the Tax Court's conclusion, if not an 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."*fn3

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.*fn4a 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.*fn5a

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 view*fn6a 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 ...

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