BLACKMUN, Circuit Judge.
This estate tax petition for review concerns the qualification of an estate's residue for the marital deduction under § 2056 of the Internal Revenue Code of 1954. The Tax Court, in an opinion not reviewed by the full court and not officially reported, resolved the issue against the estate. T.C. Memo. 1962-205.
The case was submitted on stipulated facts and exhibits. These disclose:
The decedent, Hamilton H. Peyton, died testate on June 15, 1957, domiciled in Duluth, St. Louis County, Minnesota. He was 80 years old. He was survived by his wife, age 79, and by 3 adult sons, one of whom has since died, but by no issue of any then deceased child. His estate consisted of real and personal property situated in Minnesota.
The decedent's will, dated February 10, 1947, and executed more than 10 years before his death, was admitted to probate in St. Louis County. The widow and the eldest son were duly appointed as executors. Those paragraphs of the will having to do with the residue are quoted in the margin.
On July 21 the widow filed with the probate court a "Petition for Interpretation of Provisions of Will". This recited that the widow "does not know how the Court will decree said property" and that "in order for your petitioner to file a Federal Estate Tax return and take the proper marital deductions, it is necessary that an interpretation of said Will be given by the Court". The petition was set for hearing on August 4 upon notice to the heirs, will beneficiaries, and the Minnesota Commissioner of Taxation. This notice was given.
At the hearing only the widow and Mr. Bouschor, then appearing for her, were present. There was no appearance by any tax authority or by or on behalf of any of the adult sons of the decedent or of any issue of those sons. The hearing was short. Mrs. Peyton was the sole witness. After identifying herself as the
The probate judge asked counsel whether he intended to file a memorandum. After receiving an affirmative reply and after being advised that the estate tax return had to be filed before September 15, the court said: "File a brief, and after receiving the same we will issue an order as to the interpretation within five days".
The memorandum was filed. It suggested that the will was capable of two interpretations; that the first was that the decedent intended to grant the widow the "absolute property in his residual estate"; that the second was that the decedent provided for her only a limited estate in the residue during her life; that the first interpretation would result in a full marital deduction and a federal estate tax of $10,721; and that the second interpretation would provide the petitioner with no marital deduction and the tax would be $45,344. It was then argued that if the widow took "as a trustee for the remaindermen", the trust "is suspect for indefiniteness"; that M.S.A. § 502.78
On September 10 the probate court entered its order reading
The widow then did not renounce the will.
Five days later the estate tax return was filed. The full marital, attributable in large part to the probate residue, was claimed.
Without waiting for the audit of the return the executors proceeded with the probate. A petition for settlement and distribution was filed and heard. The Minnesota inheritance tax was determined by the court on the basis that the entire residue passed to the widow. That tax was paid. A final decree of distribution was entered on January 8, 1959. This referred to the interpretation order of September 10, found that the widow was entitled to the residue, and assigned that residue to her. There was no opposition to the entry of the tax order or the decree. No appeal was taken from either and the time for appeal has expired.
The Commissioner in due course disallowed the marital deduction to the extent of the probate residue. This again was on the ground that the widow's residuary interest was terminable. The estate petitioned the Tax Court for redetermination. Judge Scott, in upholding the Commissioner, said:
We affirm. We recognize, as the estate urges, that
Helvering v. Stuart, 317 U.S. 154, 161-162, 63 S.Ct. 140, 87 L.Ed. 154 (1942); Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). In this case it is Minnesota law which determines the nature of the property interest passing to Mrs. Peyton. Estate of Awtry v. Commissioner, 221 F.2d 749, 753 (8 Cir., 1955); Poage v. Phillips, 202 F.Supp. 267, 269 (S.D.Iowa 1961). Further, an adjudication of property rights by a state court of competent jurisdiction is ordinarily conclusive for the determination of federal estate tax consequences flowing from those property rights. Blair v. Commissioner, 300 U.S. 5, 9-10, 57 S.Ct. 330, 81 L.Ed. 465 (1937); Freuler v. Helvering, 291 U.S. 35, 43-45, 54 S.Ct. 308, 78 L.Ed. 634 (1934); Helvering v. Rhodes' Estate, 117 F.2d 509, 510 (8 Cir., 1941). Nevertheless, although it is state law which "creates legal interests and rights", the federal statutes "designate what interests or rights, so created, shall be taxed" and "must prevail no matter what name is given to the interest or right by state law". This is a matter of congressional intent. Morgan v. Commissioner, 309 U.S. 78, 80-81, 60 S.Ct. 424, 425-426, 84 L.Ed. 585 (1940); Helvering v. Stuart, supra, pp. 161-162 of 317 U.S., pp. 144-145 of 63 S.Ct. 87 L.Ed. 154; Doll v. Commissioner, 149 F.2d 239, 241-242 (8 Cir., 1945), cert. denied 326 U.S. 725, 66 S.Ct. 30, 90 L.Ed. 430. Compare Mississippi Valley Trust Co. v. Commissioner, 72 F.2d 197 (8 Cir., 1934), cert. denied 293 U.S. 604, 55 S.Ct. 119, 79 L.Ed. 695.
The estate points out, too, that by the Minnesota Constitution, as amended in 1956, Article 6, § 6, the county probate court "has unlimited jurisdiction in law and equity for the administration of estates of deceased persons." It is a court of record. M.S.A. § 525.01. Its jurisdiction, although limited, is exclusive and in rem. "Its decrees of distribution are binding on everyone interested in the estate, at least if such decree covers a subject over which the court has jurisdiction". The court's principal function in administering a decedent's estate is "to determine who is entitled to share therein, the proportions in which they take, and to assign to each his share". The decree is res judicata and not subject to collateral attack. Bengtson v. Setterberg, 227 Minn. 337, 347-349, 35 N.W.2d 623, 628-629 (1949), and cases cited. This is so whether the decree is right or wrong for, as this court said in Hardenbergh v. Commissioner, 198 F.2d 63, 67 (8 Cir., 1952), cert. denied 344 U.S. 836, 73 S.Ct. 45, 97 L.Ed. 650, "the probate court having jurisdiction of the property of the estate * * * has jurisdiction to make a wrong decision".
It follows that the widow and the adult sons of the decedent, having taken no appeals from the tax order and the decree of distribution, are bound thereby. They could not now complain of the assignment of the entire estate to the widow.
There is no real controversy as to all this. It takes us, however, only up to and does not resolve the fundamental question which here confronts us, namely, whether this particular Minnesota probate decree, binding on the widow and the adult sons in its fixing of property rights as among them, forecloses the Commissioner with respect to federal
Certain observations are to be made at this point:
1. The state court. As a federal tribunal we naturally hesitate to question or to disagree with any state court's conclusion as to applicable state law. Under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), we would be bound, in the absence of fraud or collusion, by a determination of Minnesota law made by the Supreme Court of Minnesota, regardless of how appealing to us an opposite result might be. Here, however, the will's interpretation is one made by a probate court. This is a court inferior, despite the exclusiveness of its jurisdiction, to both the state district court, which in Minnesota is the one of original jurisdiction, Minn.Const. Art. 6, § 5, and to the state supreme court. Thus, while entitled to respect, the probate court's decision is not necessarily an authoritative one for us. King v. Order of United Commercial Travelers of America, 333 U.S. 153, 68 S.Ct. 488, 92 L.Ed. 608 (1948); Village of Brooten v. Cudahy Packing Co., 291 F.2d 284, 294 (8 Cir., 1961).
2. The state court proceeding. It is clear, and conceded, that the probate hearing on the interpretation of the will, which led into the state inheritance tax determination and the decree of distribution, was conducted in a non-adversary atmosphere. Although notice was given to the adult sons (but not to their issue) and to the Minnesota Commissioner of Taxation, none of these appeared. No notice was given to the federal tax authorities. Estate counsel this time represented the widow. While their memorandum did suggest a limited life estate as a possible alternative interpretation of the will, there was no expressed or real opposition to the advocated fee simple absolute.
The estate says, however, that the state proceeding is conclusive for federal tax purposes even though it was not adversary in nature, and it points out that in this case formal conflict would have presented the spectacle of mature sons in public contest with their aged mother.
There is language in some opinions which at first reading seems to imply that mere non-adversary character of the state proceeding vitiates it as precedent on a federal tax issue. See, for example, Estate of Stallworth v. Commissioner, 260 F.2d 760, 763 (5 Cir., 1958); Wolfsen v. Smyth, 223 F.2d 111, 113-114 (9 Cir., 1955); Brodrick v. Moore, 226 F.2d 105, 108 (10 Cir., 1955); Brodrick v. Gore, 224 F.2d 892, 896 (10 Cir., 1955). But we suspect that a close analysis of most of these opinions will disclose that they were concerned not so much with simple non-adverseness as with collusion of the type referred to in our next numbered paragraph. In any event, we certainly may say, so far as this case is concerned, that the non-adversary character of the probate proceeding does not by itself suffice to defeat its precedential value. This court has already indicated this much in Eisenmenger v. Commissioner, 145 F.2d 103 (8 Cir., 1944), which concerned an inter vivos trust's interpretation by a state court under Minnesota's in rem trust statutes, M.S.A. §§ 501.33-501.38. Direct holdings to this effect are Janes v. Reynolds, 57 F.Supp. 609, 613 (D.Minn.1944), Lindley v. United States, 57-2 U.S.T.C. Par. 9893 (D.Minn.1957), the Third Circuit cases of Gallagher v. Smith, 223 F.2d 218 (1955); Beecher v. United States, 280 F.2d 202, 204 (1960); and Estate of Darlington v. Commissioner, 302 F.2d 693, 694-695 (1962), and, seemingly, Henricksen v. Baker-Boyer Nat'l Bank, 139 F.2d 877, 881 (9 Cir., 1944) and Nashville Trust Co. v. Commissioner, 136 F.2d 148 (6 Cir., 1943). See, also, Commissioner v. Blair, 83 F.2d 655, 657 (7 Cir., 1936), reversed on other aspects, Blair v. Commissioner, supra, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465; Regulations § 20.2056(e)-2(d) (2). Judge Maris, speaking for the Third Circuit, en
These very cases, however, also recognize, most of them specifically, that a state court determination obtained by collusion is not conclusive for the federal tax issue. Eisenmenger v. Commissioner, supra, p. 107 of 145 F.2d; Gallagher v. Smith, supra, pp. 225-226 of 223 F.2d; Estate of Darlington v. Commissioner, supra, p. 695 of 302 F.2d; Pitts v. Hamrick, 228 F.2d 486, 490 (4 Cir., 1955). And the non-adversary character of the state suit is relevant evidence of collusion. Gallagher v. Smith, supra, p. 225 of 223 F.2d.
3. Collusion. As already noted, the cases disclose that, despite the usual controlling character of the state result, circumstances may exist where it is not conclusive. Sheer fraud, of course, is an obvious instance. See Chicago, R. I. & P. Ry. v. Callicotte, 267 F. 799, 16 A.L.R. 386 (8 Cir., 1920), cert. denied 255 U.S. 570, 41 S.Ct. 375, 65 L.Ed. 791. But it is not the only one. The Supreme Court, on at least two occasions, has intimated that the state proceeding is not controlling where it is collusive "in the sense that all the parties joined in a submission of the issues and sought a decision which would adversely affect the Government's right to additional * * * tax". Freuler v. Helvering, supra, p. 45 of 291 U.S., p. 312 of 54 S.Ct. 78 L.Ed. 634; Blair v. Commissioner, supra, p. 10 of 300 U.S., p. 332 of 57 S.Ct. 81 L.Ed. 465. See Botz v. Helvering, 134 F.2d 538, 545 (8 Cir., 1943). There are specific holdings to this effect in the lower federal courts.
Newman v. Commissioner, 222 F.2d 131, 136 (9 Cir., 1955); Estate of Sweet v. Commissioner, 234 F.2d 401, 404 (10 Cir., 1956), cert. denied 352 U.S. 878, 77 S.Ct. 100, 1 L.Ed.2d 79; First Nat'l Bank of Montgomery v. United States, 176 F.Supp. 768, 773-775 (M.D.Ala. 1959), affirmed 285 F.2d 123 (5 Cir., 1961).
In appropriate fact situations courts have not hesitated to conclude that disqualifying collusion did not exist and to recognize the state court decree as final. Examples are Northwest Security Nat'l Bank of Sioux Falls v. Welsh, 203 F.Supp. 263, 266-267 (D.S.D.1962), appeal dismissed on stipulation, 308 F.2d 367 (8 Cir., 1962) [appearance of counsel on both sides; "a valid motive, aside from the tax implications"]; Bartol v. McGinnes, 185 F.Supp. 659, 660-661 (E. D.Pa.1960) [existence of "strong reasons other than the avoidance of federal estate tax"]; Weyenberg v. United States, 135 F.Supp. 299,
4. The Minnesota law. We are persuaded, too, that the probate court was not correct in its enunciation of the Minnesota law. A testator's intention of course "shall prevail, if it is not inconsistent with the rules of law"; this intention "is to be gathered from everything contained within the four corners of the will, read in the light of the surrounding circumstances". In re Ordean's Will, 195 Minn. 120, 125, 261 N.W. 706, 708-709 (1935); In re Tuthill's Will, 247 Minn. 122, 125-126, 76 N.W.2d 499, 501-502 (1956). The decedent here gave the residue to his wife "for and during her natural life". He gave her powers of sale and investment "using the income derived therefrom during her lifetime". He authorized principal invasions but only when "it should be necessary in her judgment for the comfortable maintenance" not only of herself but of the children as well. And he provided for a gift over of what remained at her death. This smacks of something less than a fee simple absolute and equates, instead, with a life estate plus a limited power of invasion, on an ascertainable standard, for maintenance of herself and the children. Thus, on its face at least, the will falls short of establishing a fee in the residue.
The estate does not argue the state law on this review but contents itself with the comment that "Right or wrong, the Probate Court finally established the law and the property rights of the parties insofar as the estate is concerned". In its memorandum to the probate court — introduced in evidence in the Tax Court trial — the estate seems to pin its fee simple argument on the provisions of M.S.A. § 502.78, quoted in footnote 5, supra. That, however, applies to an "absolute power of disposition", unaccompanied by any "remainder, or gift in default" such as is present here.
Section 502.78 first appeared in the Session Laws of 1943, Ch. 322, § 18. It was in effect when the decedent's will was executed. This act replaced and changed the powers statutes theretofore existing. As a consequence, Minnesota decisions having to do with the old statutes
So also is the inheritance tax case of In re Bradley's Estate, 241 Minn. 394, 396-397, 63 N.W.2d 374, 376 (1954). There, although the court upheld an assessment of state inheritance tax against the life tenant upon the full value of the residue because of "sufficient economic benefits * * * to justify the tax", it also said, making no reference to § 502.78,
What, then, in the light of all this, do we have here? We have a situation
What has been said also disposes of any possible contention that the widow possessed a sufficient power of appointment which in itself qualified her residuary interest for the marital deduction under the particular provisions of § 2056 (b) (5). United States v. Lincoln Rochester Trust Co., 297 F.2d 891 (2 Cir., 1962), cert. denied 369 U.S. 887, 82 S.Ct. 1160, 8 L.Ed.2d 287; Commissioner v. Estate of Ellis, 252 F.2d 109, 113-114 (3 Cir., 1958); Estate of Tarver v. Commissioner, 255 F.2d 913, 918-920 (4 Cir., 1958); Estate of Semmes v. Commissioner, 288 F.2d 664 (6 Cir., 1961); Piatt v. Gray, 201 F.Supp. 401 (W.D.Ky.1961); Regulations § 20.2056(b)-5(g) (3).
"5th: I hereby authorize my said wife, Olive Peyton, at any time during her life, to sell, assign, transfer, mortgage and convey any and all of said property — real, personal or mixed — upon such terms and to such persons as in her judgment may seem best, and to execute proper deeds, contracts, bills of sale, mortgages, or other written instruments and to invest and reinvest the proceeds thereof using the income derived therefrom during her lifetime; and in the event it should be necessary in her judgment for the comfortable maintenance of my said wife and children, my said wife is hereby authorized from time to time to use portions of the principal monies or such property for such purposes; and I hereby request that my said wife shall consult with my son, John Peyton, one of the executors of this, my Last Will and Testament, hereinafter named, before making any investments or changes in investments.
"6th: I hereby give, devise and bequeath all the rest, residue, and remainder of my property which is remaining after my wife's death to my three sons: JOHN L. PEYTON, NEWTON H. PEYTON, and LOUIS R. PEYTON, each an undivided one-third (1/3) thereof, share and share alike.
"7th: Should any such child die prior to the death of myself and my said wife, leaving any child or children, such surviving child or children shall take the same share of income and principal and at the same time, that their deceased parent would have received of such income or principal if living."