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Dauphin Deposit Trust Co. v. McGinnis

decided: November 7, 1963.

DAUPHIN DEPOSIT TRUST COMPANY, CONWAY H. OLMSTED, HENRY C. OLMSTED AND SPENCER G. NAUMAN (NOW DECEASED), CO-EXECUTORS OF THE ESTATE OF GERTRUDE MCCORMICK, DECEASED, APPELLANTS,
v.
E.A. MCGINNIS.



Author: Staley

Before MCLAUGHLIN, STALEY and HASTIE, Circuit Judges.

STALEY, Circuit Judge.

This appeal requires us to determine whether plaintiffs' decedent, Gertrude McCormick, had such an interest in two separate trusts at the time of her death that they are includible in her gross estate under the applicable provisions of the Internal Revenue Code of 1939. In a suit for refund of estate taxes, the district court answered this question in the affirmative. 208 F. Supp. 228 (M.D. Pa., 1962).

The parties entered into a stipulation of the operative facts in the district court. Because a resolution of the issues presented requires an analysis of two distinct and unrelated trusts, we shall accord separate treatment to each.

THE TESTAMENTARY TRUST.

Decedent's former husband, Marlin Edgar Olmsted, died testate on July 19, 1913. The trust created by the residuary clause of his will, dated July 10, 1913, gives rise to the first issue in the present controversy. Accordingly, we set forth that clause in its entirety:

"The rest, residue and remainder of my estate, real personal and mixed, I give, devise and bequeath to my executors hereinafter named in trust, to manage and dispose of as herein directed, the said executors to have power to sell and convey any and all stocks and securities and any real estate not specifically devised herein, according to their best judgment whenever necessary or desirable and to re-invest the proceeds thereof, or any other funds, in other securities or in real estate, but except for the payment of the bequests above set forth, the estate is to remain intact until the twelfth day of June, Anno Domini One Thousand, Nine Hundred and Thirty (A.D. 1930), upon which date, or as soon thereafter as possible, my executors shall set apart and retain whatever real estate or securities may seem to them necessary to yield sufficient income to insure and protect the payment of the annuities herein provided, and the remainder of the items comprising the estate shall be separately estimated and appraised and the whole divided into eight (8) equal parts or shares, one share to be allotted to each of my five children above named and be delivered over to them absolutely, or in the event of the death of any of them before the said date, then the share of such child or children so deceased shall be delivered to or divided among the lawful heir or heirs of the child or children so deceased. The remaining three (3) parts or shares shall be retained by my said executors in trust and managed by them and the income thereof paid to my wife, Gertrude Howard Olmsted, so long as she shall live, and upon her death the said three parts or shares and the remainder of my estate, if any, after my executors shall have set apart and retained whatever real estate or securities may seem to them necessary to yield sufficient income to insure and protect the payment of any annuities herein provided and then remaining to be paid, shall again be separately estimated and appraised and shall be divided into five (5) equal shares, one share to be allotted to each of my five children above named and to be delivered over to them absolutely, or in the event of the death in the meantime of any of them, then to the lawful heirs of the child or children so deceased, as above set forth. In the divisions above provided for, the parties entitled to receive parts or shares shall, if possible, agree among themselves as to which particular part or share each one shall have, but in the event of their failure so to agree, the distribution shall be made by lot."

In accordance with the first dispositive provision of this clause, distribution of five-eighths of the residuary estate was made shortly after June 12, 1930, in equal shares to the five named children who were then all living. Pursuant to the testator's direction, three-eighths of the principal was held in trust for testator's wife for life with the remainder to be distributed on her death under the second dispositive provision of the residuary clause.

On February 8, 1931, Marlin E. Olmsted, Jr., one of the five named children, died intestate, unmarried, and without issue. As Gertrude McCormick was his only heir at law under the then intestate laws of the Commonwealth of Pennsylvania, she inherited his one-eighth share under the first dispositive provision of the residuary clause. Upon Gertrude McCormick's death on January 24, 1953, Dauphin Deposit Trust Company distributed four-fifths of the remaining principal equally to the four surviving children of testator in their own right. One-fifth of the principal was then paid in equal shares to these surviving children as the lawful heirs of Marlin E. Olmsted, Jr., as ascertained at the death of Gertrude McCormick. It is this one-fifth interest in the remainder which is the center of the present dispute. The value of that interest has been stipulated at $779,284.99. Distribution was made by the trustee with the approval of the four surviving children who executed releases in its favor. However, no formal accounting of the administration of the trust or petition for distribution was presented to the Orphans' Court of Dauphin County for approval.

Dauphin Deposit Trust Company subsequently filed a First and Final Account in the Orphans' Court of Dauphin County covering certain unadministered assets and cash which had not passed to the trustees under the will of Marlin Edgar Olmsted. The account showed a balance of $9,428.44, and the proposed schedule of distribution provided for disposition in the same manner as that used in distributing the principal in the residuary clause following the death of Gertrude McCormick. The schedule of distribution was confirmed nisi by decree of the Orphans' Court on December 18, 1958, and this decree became final when no exceptions were filed to it.

The question presented by the foregoing facts is whether at the time of her death Gertrude McCormick had a taxable interest in the remainder created by the second dispositive provision of the residuary clause as the lawful heir of Marlin E. Olmsted, Jr. As stated by the parties, the answer to that question turns upon whether the "lawful heirs" referred to in that provision were to be ascertained at the death of the life tenant, Gertrude McCormick, or at the death of the designated beneficiary, Marlin E. Olmsted, Jr. If the heirs were not to be ascertained until Gertrude died, she had no interest in the remainder upon which the estate tax could be based.*fn1 If, however, the testator intended that the heirs of a deceased child were to be ascertained at the time of that child's death, she had such an interest, for it is conceded that at the time of Marlin Jr.'s death Gertrude was his sole heir under the intestate law.

We are met at the threshold with the plaintiffs' contention that the decree of the Orphans' Court of Dauphin County holding that the life tenant under no theory was entitled to share in the distribution of the $9,428.44 in unadministered assets precludes us from considering anew the residuary clause in the will of Marlin Edgar Olmsted. It is urged that because the state court decree necessarily and expressly encompassed an interpretation of testator's will, that interpretation is not subject to collateral attack in this court under our decision in Gallagher v. Smith, 223 F.2d 218 (C.A. 3, 1955).

In Gallagher we held that a state court judgment has binding effect in a federal tax case only if "the judgment is an adjudication by the state court of a property right upon which solely the federal tax is imposed, which adjudication was and is final and binding upon the parties under the state law, and which was not obtained by collusion for the purpose of defeating the tax." 223 F.2d at 226. It is undisputed that the state court decree in the case at bar did not purport to adjudicate any rights in the property now before us; it merely adjudicated rights in the $9,428.44 in unadministered assets. Indeed, Dauphin Deposit Trust Company's petition in the Orphans' Court expressly stated, "Whether or not the foregoing interpretation of the will was correct for the purpose of distribution of the remaining portion of the three-eighths principal of said trust is not in issue here, but the same question has arisen and is in issue in the distribution of the assets which are the subject of this accounting." (Emphasis supplied.)

Nevertheless, the plaintiffs urge that the rule of Gallagher is applicable although the right to the remaining principal was never before the Orphans' Court for adjudication.But Gallagher makes it essential that the state tribunal adjudicate the rights to the specific property which is the subject of the federal tax.The necessity for such an adjudication is underscored in the present case, for plaintiffs' counsel conceded at oral argument that the decree providing for the distribution of the unadministered assets would not be binding in another proceeding to determine rights to property not covered by that decree. In re Harbison's Estate, 365 Pa. 468, 76 A. 2d 187 (1950); In re Edward's Estate, 360 Pa. 504, 62 A. 2d 763 (1949); In re Kellerman's Estate, 242 Pa. 3, 88 A. 865 (1913). ...


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