Before MARIS, KALODNER and HASTIE, Circuit Judges.
This is a petition of the Commissioner of Internal Revenue to review a decision of the Tax Court of the United States.*fn1
It poses the question whether any part of certain properties held under two trusts created by the settlor-decedent, Charles D. Marshall, a resident of Pennsylvania, for his wife, Dora, is includible in his gross estate under Section 811 (c) (1) (C) of the Internal Revenue Code.*fn2
The nub of the controversy is the provision in the trusts that in the event Mrs. Marshall did not exercise granted general powers of appointment the property was to go "to such person or persons as would be entitled thereto under the intestate law of the State of Pennsylvania if she had at that time died seized and possessed of the trust estate", and the fact that under the intestate law of Pennsylvania Marshall would have been entitled to one-third of his wife's estate.
The Tax Court, three judges dissenting, ruled against the inclusion of any part of the trust properties in Mr. Marshall's estate. In doing so it found facts establishing that the trusts for Mrs. Marshall were created by the decedent in consideration of and as restitution for property previously transferred by her to him and that the decedent had not by "express terms" retained a reversionary interest in the trust property and that the reversionary interest, if any, existed by reason of operation of law.
The pertinent facts may be summarized as follows:
Marshall died on May 16, 1945, while a resident of Pennsylvania. He was survived by Mrs. Marshall and six children.
On or about December 31, 1930, at Marshall's request and because he required them for business purposes, Mrs. Marshall and the six children transferred to him their second preferred stock holdings in the McClintic-Marshall Corporation.Marshall pledged he would make proper restitution for the stock to Mrs. Marshall and the children. On February 23, 1931, he made out a memorandum indicating that he owed Mrs. Marshall $374,790 - the value of the stock she had given him.
At or about that time Marshall submitted to his wife and children the texts of two trust instruments which he proposed to execute and asked them whether the provision of the trusts would be satisfactory restitution for the stock which they had transferred to him. They agreed that the trusts would be satisfactory restitution.
In March, 1931, Marshall created two trusts, for present purposes in identical terms, one-third of which was for the benefit of Mrs. Marshall and in consideration of and in restitution for her earlier stock transfer to him. The deeds of trust provided that the income from a specified part of each trust should be paid to Mrs. Marshall for life and at her death the trusts were to terminate as to those parts and the trustee was to
"* * * pay over and distribute the same in such manner and in such proportions as she shall by her last will and testament direct, limit, and appoint, and, in default of such appointment, shall pay over and distribute the same to such person or persons as would be entitled thereto under the intestate law of the State of Pennsylvania if she had at that time died seized and possessed of the trust estate."
The intestate law of Pennsylvania in effect at the time of the execution of the two trusts provided that a surviving spouse is entitled to one-third of the estate of a deceased spouse where more than one child or ...