Before BIGGS, Chief Judge, and GOODRICH and HASTIE, Circuit Judges.
On this review we are called upon to determine the application of Section 812 (e)(1)(F), and, alternatively, that of Section 812(e)(1)(A) of the Internal Revenue Code of 1939,*fn1 in respect to federal estate taxes. Ellis, the decedent, a resident of Pennsylvania, died testate on July 30, 1951, survived by his wife, Helen. His will provided in pertinent part, as follows:
"All the rest, residue and remainder of my estate, real and personal, more particularly my interest in the partnership by and between Albert E. Hughes, Jr., and myself, trading as Philadelphia Distributors, I give, devise and bequeath to my trustees hereinafter named, in trust, to hold, invest and reinvest the same, to collect the income, and, after paying all expenses incident to the management of the trust, to pay over the net income to my beloved wife, Helen R. Ellis, for and during the term of her natural life, in monthly installments. I direct that there be paid to my wife not less than the sum of Five Thousand Dollars ($5,000.00) per annum, and should the income be less than that sum, I direct that the deficiency shall be made up out of the principal of the trust. I further direct that, should my dear wife, Helen R. Ellis, require sum or sums in excess of Five Thousand Dollars ($5,000.00) per annum, that she, and she alone, shall be the judge of how much shall be required and the same shall be paid to her monthly, and should the said sum in excess of Five Thousand Dollars ($5,000.00) be less [more?] than the income, I direct that the deficiency be applied against the principal of my trust; that upon the death of my wife, this trust shall terminate and I give, devise and bequeath one-half the principal, absolutely, unto the estate of my beloved wife, Helen R. Ellis, and the other half unto my dear children, Anita C. Denenberg and Marjorie J. Largman, and their heirs, share and share alike."
The will contained the following spendthrift provision:
"I direct that all legacies and all shares and interests in my Estate, whether principal or income, while in the hands of my Executors or Trustees, shall not be subject to attachment, execution or sequestration, for any debt, contract, obligation or liability of any legatee or beneficiary, and shall not be subject to pledge, assignment, conveyance or anticipation and the personal receipt by such legatee or beneficiary shall be the suffi cient and only discharge of my Executors or Trustees."
Mrs. Ellis elected to take under the will and the estate was distributed in accordance with its terms. The Commissioner disallowed the claimed marital deduction, and the Tax Court three judges dissenting, overruled the Commissioner's determination, holding that the bequest qualified for the marital deduction. 26 T.C. 694.
The pertinent provisions of Section 812(e) are set out below.*fn2
We will now discuss the theories upon any one of which the taxpayers insist they are entitled to prevail.
(1) The Taxpayers' Contention Under Section 812(e)(1)(F). The marital deduction provisions according to the Report of the Senate Committee on Finance (1948-1 Cum. Bull. 305-06, 332 et seq.) was enacted in order to give to estates of decedents in common law states the same favorable treatment, as nearly as might be effected, as that which is accorded to estates of decedents in community-property states. The marital deduction may be allowed in an amount equal to the value of any interest in property which passes from the decedent to his surviving spouse to a maximum of 50 percentum of the value of the adjusted gross estate, subject to certain limitation. Subparagraph (A) of Section 812(e)(1) sets out the basic rule for the marital deduction which may be an amount equal to the value of any property which passed from the decedent to the surviving spouse to the extent that that interest is included in determining the value of the decedent's gross estate. But subparagraph (B) qualifies the operation of the rule set out in subparagraph (A) because it disallows the marital deduction where, by lapse of time, or on the occurrence of an event or contingency, or on the failure of an event or contingency to take place, the interest going to the surviving spouse will terminate.
If, however, subparagraph (B) be read literally it is obvious that a life estate to the surviving spouse, coupled with a general power of appointment, by deed or will with a devise over in the event of a failure to appoint, would fail to meet the test provided for the marital deduction by the subparagraph. Subparagraph (F) was enacted to provide for the marital deduction when there is such a transfer. Subparagraph (F) creates an exception to the terminable interest provisions of subparagraph (B).This appears from the legislative history of the statute. The Report of the Senate Committee on Finance, id. supra, at p. 342 states: "These provisions have the effect of allowing a marital deduction with respect to the value of property transferred in trust by or at the direction of the decedent where the surviving spouse, by reason of her right to the income and a power of appointment, is the virtual owner of the property. This provision is designed to allow marital deduction for such cases where the value of the property over which the surviving spouse has a power of appointment will (if not consumed) be subject to either the estate tax or the gift tax in the case of such surviving spouse."
The Tax Court lays much emphasis, 26 T.C. at page 697, on the portion of the Senate Report last quoted and particularly on its final sentence. The Court also emphasized the provisions of Section 811(f)(2)(3)(A) of the Internal Revenue Code of 1939, relating to the ascertainment of the gross estate, and quoted Treasury Regulations 105, Section 81.24, relating to property subject to power of appointment by the decedent: for example, subparagraph (2): "[If] a transfer in trust provides that the beneficiary may appropriate or consume the principal of the trust, such power to consume or appropriate is a power of appointment * * *", but also subparagraph (3): "A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard * * * shall not be deemed a general power of appointment * * * [and] A power to consume, invade, or appropriate property for comfort, pleasure, desire, or happiness is not a power limited by an ascertainable standard."
The Tax Court also quoted Treasury Regulations 105, Section 81.47a, relating to bequests to surviving spouse, setting out the five conditions prerequisite to the applicability of subparagraph (F). It is conceded, we believe, that the fourth condition is pertinent to the instant review, that "The power must be exercisable by * * * [the surviving spouse] alone, and in all events.".The third condition is also pertinent. It provides that "The spouse must have the power to appoint the entire corpus free of the trust, exercisable in her own favor or that of her estate * * *."
Ellis's will left the residue of the estate in trust, all income therefrom being payable to his widow for life. The will granted Mrs. Ellis the power to invade the corpus if she should so "require", "she and she alone to be the [sole] judge of how much shall be required * * *." The Tax Court construed the bequest and interpreted the will as giving Mrs. Ellis an unlimited power to consume the corpus. It also agreed with the respondents that the value of any part of the trust corpus remaining unconsumed at Mrs. Ellis's death would be includible as a part of her estate for the purposes ...