Sarah A. Wilson, Now Known As S. A. W. Hooker, and George C. Wilson, Executors of The Estate of George C. Wilson JR., Deceased v. United States, 372 F.2d 232, 3rd Cir. (1967)

372 F.
2d 232
Sarah A. WILSON, now known as S. A. W. Hooker, and

George C. Wilson, Executors of the Estate of George C. Wilson
Jr., Deceased,
v.
UNITED STATES of America, Appellant.
No. 16146.
United States Court of Appeals Third Circuit.

Argued January 5, 1967.
Decided February 7, 1967.
Rehearing Denied February 28, 1967.
Jonathan S. Cohen, Atty., Dept. of Justice, Tax Division, Washington, D.

C. (Mitchell Rogovin, Asst. Atty. Gen., Drew J. T. O'Keefe, U. S. Atty.,
Myrna B. Marshall, Asst. U. S. Atty., Lee A. Jackson, Gilbert E.
Andrews, Attys., Dept. of Justice, Washington, D. C., on the brief), for
appellant.
Alphonsus R. Romeika, Philadelphia, Pa. (Romeika, Hedner, Fish &
Scheckter, Philadelphia, Pa., on the brief), for appellee.
Before McLAUGHLIN, SMITH and FREEDMAN, Circuit Judges.
OPINION OF THE COURT
McLAUGHLIN, Circuit Judge.
In this estate tax case the Commissioner assessed a deficiency in the amount of
$22,279.94. The estate executors paid the tax with interest and sued for a
refund. The District Court upheld their claim and allowed the refund. The
Government appeals from that decision.
The litigation derives from a Pennsylvania spendthrift trust which had been
settled upon George C. Wilson, Jr. by his father in 1930. The trust was inter
vivos to Wilson, Jr. for life, terminating at the latter's death with the corpus to
go to those named by him in his will. Wilson, Jr. was a Pennsylvania resident at
the time of his decease on October 26, 1951. Under Pennsylvania law no part of
the trust could be seized for the payment of the debts of the deceased. Wilson,
Jr. in his will gave, devised and bequeathed the spendthrift trust fund "* * * to
my wife for and during the term of her natural life. On her death I give, devise
and bequeath the said trust fund to my children above named, share and share
alike." The District Court concluded that decedent's power of appointment
under the original trust was a general power and that the amount of the trust
was to be included in his estate. There was no appeal by the executors from that
decision.
3
This brings us to the one point in dispute, whether the assets of the trust estate
are subject to the claims against the general estate within the meaning of
Section 812(b) of the 1939 Code. The District Court so held. That ruling had
material results in favor of the taxpayers. Excluding the value of the spendthrift
trust the Wilson, Jr. estate totaled $246,304.62. The estate debts and expenses
amounted to $274,947.31. The Commissioner of Internal Revenue determined
that a tax deficiency of $22,279.48 existed. It is very clear that in so acting, the
Commissioner was in full compliance with both the letter and spirit of Section
812(b), which reads as follows:
"(b) [As amended by Sec. 405, Revenue Act of 1942, c. 619, 56 Stat. 798, and
Sec. 502, Revenue Act of 1950, c. 994, 64 Stat. 906] Expenses, Losses,
Indebtedness, and Taxes.
***
"There shall be disallowed the amount by which the deductions specified in

paragraphs (1) [funeral expenses], (2) [administration expenses], (3) [claims
against the estate], and (4) [`unpaid mortgages] exceed the value, at the time of
the decedent's death, of property subject to claims. For the purposes of this
section the term `property subject to claims' means property includible in the
gross estate of the decedent which, or the avails of which, would, under the
applicable law, bear the burden of the payment of such deductions in the final
adjustment and settlement of the estate; * * *." (26 U.S.C.1952 ed., Sec. 812).
Under 812(b) there is no deduction allowable to the estate for that part of
claims against it which exceeds the value of the estate at the time of decedent's
death. No part of the spendthrift trust "* * * would under the applicable law,
bear the burden of the payment of such deductions in the final adjustment and
settlement of the estate, * * *."
Treasury Regulations 105 (1939 Code) Section 81.29 follows 812(b) precisely.
One of its specific examples of the statute's effect is the exact same type of
situation as this appeal presents: "Likewise, in such a case where the gross
estate is composed of real estate valued at $100,000, and proceeds of life
insurance in the amount of $100,000 exempt from general claims, if the only
deductions under section 812(b) are claims of creditors totaling $200,000, only
$100,000 of such claims is allowable as deductions. * *."
The legislative history of the 1942 amendment to Section 812(b) expressly

shows its purpose. The House Ways and Means Committee Report, (H.Rep.
#2333, 77th Cong. 2d Sess. pp. 163-164 (1942-2 Cum.Bull. 372, 492)) inter
alia states:
10
"Under section 812(b), as amended by this section, amounts otherwise

deductible under section 812(b) are disallowed to the extent that they exceed
the value at the time of the decedent's death of property subject to claims.
`Property subject to claims' is defined as property includible in the gross estate
of the decedent which, or the avails of which, would, under the applicable law,
bear the burden of the payment of such deductions in the final adjustment and
settlement of the estate."
11
That we are dealing with a true spendthrift trust has been found by the District
Court and is conceded by appellees. Even so it would not be amiss to quote the
plenary provisions of the document itself:
12
"NINTH: Neither the principal nor the income of this trust fund shall be liable
for the debts of any beneficiary nor shall the same be subject to seizure by any
creditors or any beneficiary under any writ or proceeding at law or in equity,
and no beneficiary hereunder shall have any power to sell, assign or transfer,
encumber or in any other manner to anticipate or disperse of his or her interest
in the trust fund or in the income produced thereby."
13
The validity of the trust under Pennsylvania law was also accepted below by
both Court and appellees. There can be no possible doubt of the soundness of
that proposition. In Keeler's Estate, 334 Pa. 225, 229, 3 A.2d 413, 415, 121
A.L.R. 1301 (1939) the Supreme Court of Pennsylvania held "Such a trust
exists where there is an express provision forbidding anticipatory alienations
and attachments by creditors." To same effect C. I. T. Corporation v. Flint, 333
Pa. 350, 5 A.2d 126, 121 A.L.R. 1022 (1939); Re Heyl's Estate, 352 Pa. 407, 43
A.2d 130 (1945); Re Borsch's Estate, 362 Pa. 581, 67 A.2d 119 (1949); Mellon
v. Driscoll, 117 F.2d 477 (3 Cir. 1941).
14
Appellees contend that the position taken by the Government was not before
the District Court. The latter's opinion itself fails to bear this out. The
suggestion, however, does emphasize counsel's comment at oral argument to
the effect that the issue had not been presented precisely enough to the Judge
who eventually decided it. It happened that the litigation had been before Judge
Grim. The latter died prior to it being resolved. The suit was necessarily
reassigned. The decisional Court did recognize, despite the objection of
appellees, that Wilson, Jr. possessed a general power of appointment over the
trust involved. The Court therefore included the trust assets in the estate. That
action by the Court however did not of itself in any respect make the trust assets
subject to the claims of the estate's creditors under Section 812(b). By the
stipulation between the parties that was the very problem to be passed upon by
the Judge. Under 812(b) the only property in the gross estate for which the
latter could claim deductions was that "subject to claims" i. e. which under the
applicable law would "bear the burden of the payment of such deductions in the
final adjustment and settlement of the estate." The applicable law was and is
that of Pennsylvania under which the spendthrift trust here is not subject to the
claims against the estate. Despite this it is argued by appellees that the
spendthrift provision properly interpreted really sanctioned the appointment of
deceased's creditors by him to the spendthrift trust to which he had been the
beneficiary. In arriving at that conclusion it would seem that appellees simply
ignore the vital ninth paragraph of the trust. By its terms the language of the
ninth paragraph definitively eliminates creditors of the deceased beneficiary
from touching the principal or income of that trust under any circumstances
whatsoever. Since the assets of the trust were not liable for creditors' claims,
those assets were not blended with the general estate funds. Decedent of course
had no authority to exercise his appointment in favor of the very group the trust
was designed to, and did, exclude. Morgan v. Commissioner of Internal
Revenue, 309 U.S. 78, 626, 60 S.Ct. 424, 84 L.Ed. 585, 1035 (1940) is sound
law but it is not the law governing this appeal. As the Pennsylvania Supreme
Court held in Terppe's Estate, 224 Pa. 482, 486, 73 A. 922 (1909):
15
"* * * we turn to the will of his widow to ascertain from it whether she
intended to blend with her own separate estate, for the payment of her debts,
that portion of the appointed property which her executor sold under an order of
court to the appellant. Her intention in exercising her power of appointment is
to be gathered from her will, and as it there appears it must prevail."
16
To the same effect Stannert's Estate, 339 Pa. 439, 15 A.2d 360 (1940). A
strikingly similar Tax Court case should be noted, Estate of Lande, 21 T.C.
Reports 977 (1954). There decedent was the beneficiary of a spendthrift trust
with the power by will to dispose of the principal of that fund remaining at the
time of his death after payment of certain specified items. Decedent did exercise
his power of appointment. His separate estate, exclusive of the trust property,
was not sufficient to pay all of his funeral and administration expenses or any
part of the charitable bequests made by him in his will. Petitioner asserted that
those items were payable out of the trust and that the claimed deductions for
them should be allowed. The Court found that under New York probate law the
trust assets "subject to a power as defined in the local statute, do not constitute
assets of the decedent's estate for local probate purposes." The Tax Court held
pp. 986-987:
17
"For the reasons stated, it is our opinion that the trust corpus subject to
decedent's general testamentary power of appointment did not constitute
property includible in the decedent's gross estate which, or the avails of which,
under the applicable local law, would bear the burden of the payment of such
claims in the final adjustment and settlement of the decedent's estate within the
meaning of section 812(b), Internal Revenue Code. Accordingly the respondent
did not err in limiting the deduction claimed for funeral and administration
expenses and debts. Estate of Herbert Jermain Slocum, 21 T.C. 465."
18
We find no justification for the inclusion of the spendthrift trust of which

Wilson, Jr. was the beneficiary, in the total allowable as a deduction for claims
and expenses and that the maximum amount so allowable to the deceased's
estate is $246,304.62 as determined by the Commissioner.
19
The judgment of the District Court will be reversed and the case remanded to
that Court for entry of judgment in favor of the United States of America.

Sarah A. Wilson, Now Known As S. A. W. Hooker, and George C. Wilson, Executors of The Estate of George C. Wilson JR., Deceased v. United States, 372 F.2d 232, 3rd Cir. (1967)

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Sarah A. Wilson, Now Known As S. A. W. Hooker, and George C. Wilson, Executors of The Estate of George C. Wilson JR., Deceased v. United States, 372 F.2d 232, 3rd Cir. (1967)

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372 F.

Sarah A. WILSON, now known as S. A. W. Hooker, and

United States Court of Appeals Third Circuit.

Jonathan S. Cohen, Atty., Dept. of Justice, Tax Division, Washington, D.

"There shall be disallowed the amount by which the deductions specified in

The legislative history of the 1942 amendment to Section 812(b) expressly

"Under section 812(b), as amended by this section, amounts otherwise

We find no justification for the inclusion of the spendthrift trust of which

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