Summary
In Buehner v. Commissioner, 65 T.C. 723, 727 (1976), the grantor owned 419.46 of the 419.56 shares of voting stock in the corporation during the years before the Court.
Summary of this case from O'Neil v. Comm'r of Internal RevenueOpinion
Docket No. 6757-73.
1976-01-19
PAUL BUEHNER AND IRENE BUEHNER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Alonzo W. Watson, Jr., and Gerald T. Snow, for the petitioners.
Petitioner created four charitable remainder trusts of which he and his wife were trustees and in which they retained a life income interest. Petitioner funded these trusts and claimed a charitable contribution deduction on his individual return for the value of the remainder interest. Included in the assets transferred were limited interests in a partnership created by petitioner and his wife. The charitable trusts sold their respective assets to a profit-sharing pension trust that was created by a corporation controlled by the petitioner. Petitioner was trustee of the pension trust. These transactions were accomplished through a series of transfers between the corporation, the pension trust, and the charitable trusts in which the pension trust acquired the assets, the charitable trusts lent the proceeds of the sales to the corporation in return for unsecured notes of the corporation, and the corporation used the loan proceeds to reduce its debt to the pension trust. Respondent attacked these transactions claiming that the charitable trusts were not viable entities, that the transactions were prearranged, that petitioner, as grantor, should be taxed on the gain realized on these sales under sec. 675(3) or 675(4), and that the charitable trusts did not become bona fide partners in the partnership pursuant to sec. 704(e). Respondent also questioned the value of the limited partnership interest and the charitable intent of the charitable trusts in his determination denying petitioner's claimed charitable contributions. Held: Petitioner was accountable to a third party or disinterested authority no matter what hat he was wearing. The charitable trusts were viable entities and their charitable purpose will be fulfilled in due time. The sales transactions should be upheld. The gain realized on the sales is not attributable to petitioner under sec. 675(3) or 675(4). The assets transferred to the charitable trusts had value and petitioner is entitled to his claimed charitable contribution deduction. Alonzo W. Watson, Jr., and Gerald T. Snow, for the petitioners.
, Judge:
The respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1965 and 1966 in the amounts of $65,429.23 and $80,878.72, respectively. One issue having been conceded by the respondent, the remaining issues are whether the income realized by certain charitable remainder trusts established by petitioner Paul Buehner is attributable and taxable to the petitioner's and whether petitioners are entitled to charitable contributions deductions for the contribution of certain property to these trusts.
FINDINGS OF FACT
Most of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated by this reference.
Petitioners Paul Beuhner (hereinafter petitioner) and Irene Buehner (hereinafter Irene) are husband and wife who resided in Salt Lake City, Utah, at the time of the filing of their petition herein. Petitioners timely filed their Federal income tax returns for 1965 and 1966 with the District Director for the State of Utah. Petitioners kept their records and filed their tax returns on the cash basis method of accounting.
At the time of trial petitioner and Irene were located in Columbus, Ohio, where petitioner was serving as the Ohio-West Virginia mission president for the Church of Jesus Christ of Latter-Day Saints (hereinafter LDS Church).
In September 1962 petitioner executed the Paul Buehner Trust No. CR.-1 (hereinafter CR-1 trust), an irrevocable trust with petitioner and Irene named as trustees. The CR-1 trust was funded with property being transferred
to it by petitioner in December 1962 and January 1963. Petitioner reserved for himself a life income interest in the trust estate and then for Irene upon his death. Upon the death of the survivor, the trust's corpus was to be distributed to the Paul Buehner Foundation
Use of such terms as ‘transfer’, ‘payment’, ‘loans', or ‘indebtedness' in the Findings of Fact does not necessarily connote a finding of law, but they are used for narrative purposes only.
(hereinafter foundations) and the LDS Church. At the times relevant herein the remaindermen were charitable organizations qualifying for deductible contributions under section 170, I.R.C. 1954.
Before changing its name the foundation was known as the Otto Buehner Foundation. In the event that the foundation did not qualify as a tax-exempt entity at the time of distribution, the trustees were empowered to apply the funds available to such similar charitable purpose as determined by a court of proper jurisdiction that would fulfill the general charitable purpose of the trust.During the years 1965 and 1966 the directors of the foundation were petitioner, Irene, and Carl W. Buehner.
All statutory references are to the Internal Revenue Code of 1954, as amended, in effect for the years in issue unless otherwise indicated.
The other relevant provisions of the trust document are as follows:
ARTICLE III
PROVISIONS RELATING TO TRUSTEESHIP
3.1 The original trustees, or the survivor of them, may at all times while serving hereunder vary and determine the number of trustees required to serve this trust, and said trustees may at all times while serving hereunder appoint and discharge any of them.
ARTICLE IV
PROVISIONS RELATING TO TRUSTEES POWERS
4.1 To carry out the trust purposes of this trust indenture, and subject always to the discharge of their fiduciary obligations to the trust estate and the beneficiaries thereof and to any limitations stated elsewhere in this trust indenture, the trustees are vested with the following powers, in addition to any not by limitation of any now or hereafter conferred by common or statutory law affecting the trust or trust funds:
b. To borrow money, to mortgage, to pledge, to lease for whatever period of time the trustees shall determine, even beyond the expected term of the respective trust, and with or without option to purchase, to exchange or sell in whole or in part at public or private sale under terms as the trustees may deem advisable for the best interests of the trust estate.
d. To invest and reinvest in their absolute discretion for the best interests of the trust estate, and they shall not be restricted in choice of investments to such investments as are permissible for fiduciaries under any present or future applicable law, and notwithstanding that the same may constitute an interest in a partnership.
h. All capital gains and losses of the trust, extraordinary stock dividends and capital gain dividends of investment companies shall be considered principal. Any other determination of what is principal or income of the trust estate and the apportioning and allocating of receipts and disbursements between these accounts shall be governed by Federal Income Tax laws then in effect.
ARTICLE V
LIMITATIONS ON TRUSTEES
5.2 Notwithstanding anything stated elsewhere in this trust indenture, no power shall be exercised nor no part of the corpus or income of the trusts shall be used for any purposes except the exclusive benefit of the beneficiaries of the trusts. No loans shall be made without full and adequate security being received and full current rates of interest being charged; all sales, purchases, exchanges or other dealings with the property of the trusts shall be made for full and adequate consideration in money or money's worth; and no part of the corpu(s) or income of the trusts shall be applied to the payment of premiums on policies of insurance on the life of the Settlor.
ARTICLE VI
ACCOUNTING BY TRUSTEES
6.1 Upon the written request delivered or mailed to the trustees by an income beneficiary hereunder, the trustees shall render a written statement of the financial status of the trust. Such statement shall include the receipts and disbursements of the trust for the period requested, or for the period transpired since the last statement, and the principal of the trust at the end of such period. Statements need not be rendered more frequently than annually.
On March 16, 1963, the CR-1 trust transferred its entire trust corpus to Otto Buehner & Co. Profit Sharing Pension Trust (hereinafter the pension trust) for $109,811.92. The proceeds from this sale were loaned by the CR-1 trust to Otto Buehner & Co. (hereinafter OBC) on March 16, 1963. The loan was evidenced by a 20-year note which bore interest at the rate of 10 percent and was not secured by collateral.
In July 1963 the OBC records show a payment of $110,000 to the pension trust.
The principal amount of the note was for $110,000 which is slightly more that the amount received by the CR-1 trust from the pension trust. No principal payments were due on the note until the note matured.
At all times relevant herein, OBC was an active, operating, industrial corporation engaged in the manufacture and sale of concrete products, including concrete curtain walls. The company has existed since 1905, was reorganized in 1936, and was incorporated under its current name in 1947.
As of November 1959 all of the outstanding OBC stock was held as follows:
+--------------------------------------------+ ¦Voting stock ¦Shares ¦ +-----------------------------------+--------¦ ¦ ¦ ¦ +-----------------------------------+--------¦ ¦Otto Buehner (petitioner's brother)¦778.97 ¦ +-----------------------------------+--------¦ ¦Petitioner ¦419.46 ¦ +-----------------------------------+--------¦ ¦Carl Buehner (petitioner's brother)¦.10 ¦ +-----------------------------------+--------¦ ¦ ¦ ¦ +--------------------------------------------+
Nonvoting stock Shares Otto Buehner 69,546.03 Petitioner 33,706.54 Carl Buehner 9.90 Otto Buehner Foundation 10,442.00
Otto Buehner died in November 1959. His stock passed to his estate and his voting stock was eventually purchased by OBC so that as of January 1, 1962, all of the outstanding voting stock of OBC was held by petitioner (419.46 shares) and Carl Buehner (.10 shares).
During the years 1962 through 1966 common nonvoting stock of OBC was held as follows:
In May 1962 petitioner executed Paul Buehner Trust No. 701 (hereinafter trust No. 701), a revocable trust naming himself, Irene and Timothy Fred Buehner and Paul William Buehner (petitioner's sons) as trustees. It is stipulated that, during the years 1962 through and including 1966, trust No. 701 held all of the outstanding common voting stock of OBC.
The record does not indicate whether Carl Buehner contributed his fractional share in OBC to trust No. 701.
The relevant portions of trust No. 701 are as follows:
ARTICLE II
RIGHTS RESERVED BY SETTLOR WHILE ALIVE:
2.1 The Settlor, while he is alive, by written instrument delivered to the then serving Trustees, may amend, modify or revoke this Trust Indenture in whole or in part.
2.2 The Settlor, while alive, by written instrument delivered to the then serving Trustees, may withdraw any property he has at any time subjected to the effects of this Trust Indenture.
ARTICLE V
PROVISIONS RELATING TO TRUSTEES' POWERS:
5.1 To carry out the Trust purposes of this Trust Indenture, and subject always to the discharge of their fiduciary obligations to the Trusts and the beneficiaries thereof and to any limitations stated elsewhere in this Trust Indenture, the Trustees are vested with the following powers, in addition to and not by limitation of any now or hereafter conferred by common or statutory law, affecting the Trusts or Trust Funds:
g. To vote, in person or by proxy, or to refrain from voting any stock or securities in any trust created herein; to consent or object to action or non-action of a corporation, of of the board of directors of a corporation which issued or guaranteed any such stock or securities; to consent or object, or to united with other owners of stock or securities to carry out a plan for the reorganization of any such corporation, including any consolidation, merger, dissolution, liquidation, or the readjustment of the capital or financial structure of such corporation, or any lease, or sale, or foreclosure of any of its properties, rights, privileges, or franchises; in connection with any such reorganization, to deposit any such stock or securities with any committee, representative, agent, depositary, or trustee; to pay fees, assessments and expenses with respect to any such reorganization; to exchange any such stock or securities for new or additional stock or securities or other property issued or deliverable in connection with any such reorganization or otherwise; to exercise or sell any rights to subscribe to any new or additional stock or securities issued in connection with any such reorganization or otherwise; and to accept and retain as a proper investment hereunder, whether or not authorized by law for the investment of trust funds, any new or additional stock or securities or other property received upon any such exchange or upon the exercise of any such subscription rights; and, generally to take any action with respect to any stock or securities which, in their judgment may be necessary.
In addition to and not by limitation of the foregoing, the Trustees shall have the power to vote in person or by proxy, any shares of stock held hereunder for the following purposes: electing or appointing any or all of themselves as corporate officers, directors or employees; establishing reasonable salaries for themselves for said services; and redeeming and purchasing at their then fair value any shares of stock owned personally by them.
ARTICLE VI
PRIVILEGES OF AND LIMITATIONS ON TRUSTEES:
6.1 Should a dispute arise as to the making of any decision affecting any shares of stock of said Otto Buehner Company, and its successors, which are then subject to this Trust, while Paul Buehner is serving hereunder, his decision shall be final and conclusive.
During the years 1961 and 1962 the board of directors of OBC was composed of petitioner, Irene, and Carl W. Buehner. During the years 1963 through and including 1966, Glenn E. Edgar was a member of the board of directors.
During the years 1962 through and including 1966, the officers of OBC were:
Petitioner, President
Irene, Vice President
Carl W. Buehner, Secretary-Treasurer
Glenn E. Edgar, Vice President
In December, 1956 OBC adopted and established the Profit Sharing Pension Plan of Otto Buehner & Co. Simultaneously OBC established the pension trust for the benefit of the eligible employees of OBC in accordance with the terms and conditions of the pension plan. Under the terms of the pension trust an administrative committee was established to govern the trust which included the authority to direct investment of its funds.
During the years 1961 through and including 1966 petitioner was the trustee of the pension trust. During the years 1962 through and including 1966, the administrative committee of the trust was composed of petitioner, Carl W. Buehner, and J. Keith Weeks, an employee of OBC during these years who was neither an officer, director, nor stockholder of OBC.
Under the terms of the pension plan OBC was to contribute funds to the pension trust based on a percentage of its net profit subject to the limitations in the Internal Revenue Code. These contributions represented a deductible expense on OBC'S tax returns, but these contributions were accrued and not actually paid. The corresponding liabilities and assets (including accrued interest) were shown on the financial statements of OBC and the trust, respectively.
During the years 1961 through 1965 the liabilities of OBC to the pension trust represented a large portion of the trust's assets. This problem was a subject of concern and discussion at meetings of the board of directors of OBC during 1963 and 1964. This situation was somewhat relieved in 1966. In April, 1965, respondent began an investigation of possible prohibited transactions between OBC and the pension trust. This investigation did not result in the trust's losing its tax-exempt status.
In December 1963 petitioner executed the Paul Buehner Trust No. CR-2 (hereinafter CR-2 trust). The terms of this trust are in relevant part similar to those in the CR-1 trust. The CR-2 trust was funded with 15,000 shares of nonvoting common stock of OBC. The appropriate stock certificates were endorsed and issued to evidence the CR-2 trust's ownership of these shares.
In December 1964 petitioner executed the Paul Buehner Trust CR-3 (hereinafter CR-3 trust). The terms of this trust are in relevant part similar to those in the CR-1 trust with the exception that the LDS Church is the sole remainderman. The CR-3 trust was funded with 27,128.61 nonvoting shares of Buehner Block Co.
stock and 8,700.54 nonvoting shares of OBC common stock. The appropriate stock certificates were endorsed and issued to evidence the CR-3 trust's ownership of these shares. On December 22, 1965, petitioner contributed to the CR-3 trust a 2.06-percent interest in a limited partnership known as Hi-Ute Investment Co. (hereinafter Hi-Ute).
Buehner Block Co. is a closely held corporation located in Salt Lake City, Utah. During the years at issue petitioner was a director and officer of said corporation.
In December 1965 petitioner executed the Paul Buehner Trust No. CR-4 (hereinafter CR-4 trust). The terms of this trust are in relevant part similar to those in the Cr-1 trust with the exception that the foundation is the sole remainderman. The CR-4 trust was funded with a 12.82-percent interest in Hi-Ute.
Hi-Ute's formation was evidenced by a partnership agreement executed on December 1, 1965, by petitioner and Irene. They each received a 2-percent general partnership interest and petitioner received a 96-percent limited partnership interest. The certificate of limited partnership was not filed until January 5, 1966.
The partnership was formed to invest in real and personal properties for rental purposes. The principal asset transferred to Hi-Ute was a ranch consisting of approximately 2,100 acres of land. The ranch, which was Hi-Ute's principal asset in 1965 and 1966 had an appraised value of $2 million as of December 23, 1965, and as of December 30, 1966. The ranch was acquired by petitioner in June 1961.
The ranch was appraised by Max E. Jenson, M.A.I. A copy of his report dated December 23, 1965, which considered the various aspects of the property, was submitted into evidence. The property is easily accessible and it is near Salt Lake City, Utah, and a developing recreation center. He concluded that the highest and best use for the land would be for residential homes with acreage estates and smaller lots and highway development.
On December 1, 1965, the pension trust purchased the assets of the CR-2 trust (15,000 shares of OBC nonvoting common stock) for $87,450 and the then assets of the CR-3 trust (27,128.61 nonvoting shares of Buehner Block Co. stock and 8,700.54 shares of OBC nonvoting common stock) for.$121,529.82. The appropriate stock certificates were endorsed and created to reflect the transfer of these shares. These transactions were accomplished by an exchange of checks for the respective amounts between the pension trust, a bank account known as Ute Acceptance Co.,
and OBC and loans in the respective amounts from the CR-2 and CR-3 trusts to OBC.
Ute Acceptance Co. was not a separate business entity, but the name of a bank account of which petitioner was the authorized signatory. The records for this account could not be located.
On Dec. 1, 1965, the pension trust issued checks payable to Ute Acceptance Co. in the amounts of $87,450, and.$121,529.82, respectively. These checks were deposited by the Ute Acceptance Co. in its account. On or about Dec. 3, 1965, petitioner issued a check on the Ute Acceptance Co. account payable to OBC in the amount of $208,950. This check was deposited by OBC in its checking account, and on or about Dec. 3, 1965, it issued two checks to the pension trust in the total amount of $208,950. These checks were deposited by the pension trust in its account. The amount of $208,950 is $29.82 less than the total of $87,450 and.$121,529.82.Before the Ute Acceptance Co. check was deposited by OBC its balance was less than the amount of the checks to the pension trust. However, OBC maintained its account at the Walker Bank & Trust Co. where OBC had a line of credit.During the years in issue OBC borrowed extensively from the Walker Bank & Trust Co., a national banking association with its principal office in Salt Lake City, Utah. The borrowings were evidenced by 90-day notes and no collateral security was required by the bank. The interest rates ranged between 5 3/4 percent and 6 3/4 percent. The principal amount borrowed ranged between $25,000 and $250,000. On a long-term loan of $450,000 in part from the bank, collateral security was required and the interest rate was 7 1/2 percent.
The books and records for the CR-2 and CR-3 trusts report the receipt of these funds in their respective journals.
These books also reflect loans in the amounts of $87,450 and $121,500 made by the CR-2 and CR-3 trusts, respectively, to OBC. Notes for these loans were executed by OBC on December 1, 1965. They were 20-year notes that did not have collateral security and bore interest at the rate of 10 percent per year.
Although the receipt of these funds was recorded on the books and records of the CR-2 and CR-3 trusts, the pension trust made its payment to Ute Acceptance Co.
On January 5, 1966, the pension trust purchased the remaining asset of the CR-3 trust and the asset of the CR-4 trust (2.06-percent and 12.81-percent limited partnership interests in Hi-Ute, respectively) for $37,346.05 and $232,415.69, respectively. These transactions were accomplished by an exchange of checks between the CR-3 and CR-4 trusts, OBC, the pension trust, and loans from the CR-3 and CR-4 trusts to OBC.
On Apr. 4, 1966 (when the sale was recorded), the CR-3 and CR-4 trusts issued checks payable to OBC in the amounts of $37,300 and $232,400, respectively. These checks were deposited by OBC in its account. On Apr. 4, 1966, OBC issued a check payable to the pension trust in the amount of $269,700 (the total of the above two checks) which was deposited in its account. On Apr. 4, 1966, the pension trust issued checks payable to the CR-3 and CR-4 trusts in the amount of $37,346.05 and $232,415.69, respectively.Before the checks from the CR-3 and CR-4 trusts were deposited by OBC, the balance in its account was less than the amount of OBC'S check to the pension trust. However, OBC maintained its account at the Walker Bank & Trust Co. where the corporation had a line of credit. See n. 9 supra.
The books and records for the CR-3 and CR-4 trusts report the receipt of these funds in their respective journals. These books also reflect loans from the CR-3 and CR-4 trusts to OBC in the amounts of $37,300 and $232,400, respectively. Notes for these loans were executed by OBC in April 1966. They were 20-year notes that did not have collateral security and bore interest at the rate of 10 percent per year.
The receipt of these limited partnership interests had been reported by the CR-3 and CR-4 trusts in their respective books and records. Petitioner and Irene, as the general and limited partners, executed a document in December 1965 consenting to the partial assignment of petitioner's limited partnership interest in Hi-Ute to the CR-3 and CR-4 trusts. An amended certificate of limited partnership for Hi-ute was executed on January 5, 1966, which reflected the new ownership of Hi-Ute. This document, which was not formally filed, reflects the pension trust as the owner of a 14.88-percent (the total of the 2.06-and 12.82-percent interests acquired from the CR-3 and CR-4 trusts) limited partnership interest in Hi-Ute.
All of the funds paid by the pension trust in the above-described purchases from the CR-1, CR-2, CR-3, and CR-4 trusts were lent to OBC by each CR trust. The loans made in December 1965 by the CR-2 and CR-3 trusts and the loans made in April 1966 by the CR-3 and CR-4 trusts to OBC in the amounts of $208,950 and $269,700, respectively, were used by OBC to reduce a portion of its indebtedness to the pension trust. At no time during the administration of these CR trusts did the trustees render an accounting before a court, nor was there any outstanding court order requiring such an accounting.
In December 1966 petitioner transferred an additional 3.33 percent of his limited partnership interest in the Hi-Ute to the CR-2 trust. The then general and limited partners executed a document consenting to this assignment. An amended certificate of limited partnership was executed, which was formally recorded in December 1966 reflecting the CR-2 trust's ownership interest.
In January 1963, December 1965, and December 1966, the LDS Church was notified of the transfers by petitioner of the property of the CR-1 trust, the 2.06-percent limited partnership in Hi-Ute to the CR-3 trust, and the 3.33-percent limited partnership interest in Hi-Ute to the CR-2 trust, respectively. These written notifications generally described the provisions of these trusts, the identity of the income beneficiaries, and that the LDS Church was at least a partial remainderman. The value of the property transferred and the value of the remainder interest was also described. The LDS Church also received a copy of the trust instruments.
As of December 31, 1966, the corpora of the CR trusts were as follows:
CR-1 OBC note, unsecured by collateral, in the amount of $110,000. Cash of $11.92.
CR-2 OBC note, unsecured by collateral, in the amount of $87,450. 3.33 percent Hi-Ute interest with a recorded tax basis of $489.01. No cash.
CR-3 OBC notes, unsecured by collateral, in the amounts of $121,500 and $37,300, total of $158,800. Cash of $71.05.
CR-4 OBC note, unsecured by collateral, in the amount of $232,400. Cash of $40.69.
Under the terms of these notes, no principal payments were required prior to maturity date and as of December 31, 1966, no principal payments had been made. The CR trusts filed U.S. Fiduciary Income Tax Returns (Form 1041) for the years 1965 and 1966.
The CR-1 trust reported interest income in 1965 and all of the CR trusts reported interest income in 1966. The Federal tax returns for OBC for the years 1963, 1964, 1965, and 1966 reflect a deduction for interest paid on the CR trust notes.
The Form 1041 for the CR-2 trust for 1965 is not part of the record. No income was reported by the CR-2 trust for that year.
In 1967 and 1968, petitioner transferred two additional portions of his limited partnership interest in Hi-Ute to the CR-2 trust. The appropriate documents effecting the transfer— the consent of the then general and limited partners and the amended partnership agreement— were executed. Such interests were still retained by the CR-2 trust at the time of trial. The LDS Church was notified of these transfers.
The 1968 transfer purports to convey a 4.11-percent limited partnership in Hi-Ute although the notification to the LDS Church informs it that a 5.52-percent interest was transferred.
In January 1968 OBC executed new notes to replace those previously executed by OBC to the CR trusts in 1963, 1965, and 1966. These notes provided as collateral security a second mortgage, which was unrecorded, on land and buildings of OBC. The value of this property was sufficient during the period January 1, 1972, to cover the outstanding indebtedness represented by these notes, as well as the indebtedness represented by the first mortgage on the property.
In September 1972 OBC executed new notes to the CR trusts which replaced the notes described above. These notes provided as collateral security first and second mortgages, all of which were recorded, on different portions of land and buildings of OBC and a security agreement on certain equipment of OBC. The value and liquidity of this property was such that, during the time period from September 1, 1972, to the time of trial, it could be reasonably anticipated that the loss of principal or interest on these notes would not occur.
Petitioner on his 1965 Federal tax return claimed a charitable contribution deduction of $15,426.02 and $96,000.74 for the contribution of his 2.06-percent and 12.82-percent limited partnership interest in Hi-Ute to the CR-3 and CR-4 trusts, respectively. These interests were valued at $37,346.05 and $232,425.69, respectively. Petitioner on his 1966 Federal tax return claimed a charitable contribution deduction of $8,787.62 for the contribution of his 3.33-percent limited partnership interest in Hi-Ute to the CR-2 trust.
This interest was valued at $61,605.
The 1966 Federal tax return and the notice of deficiency erroneously state that the transfer of this interest was to the CR-3 trust. The transfer was made to the CR-2 trust.
The computation of the value of these remainder interests resulting from the transfers in controversy should be made in accordance with Table III (showing the present worth of $1 due at the death of the survivor of two persons, 3 1/2 percent) of Actuarial Values for Estate and Gift Tax, Internal Revenue Service Publication No. 11 (Rev. 5-59), as referred to in section 1.170-2(d) (2), Income Tax Regs. For purposes of determining the ages for use in applying the factors in this table, petitioner was born on April 30, 1912, and Irene was born on August 16, 1913. Respondent stipulates that, if we should find that the Hi-Ute limited partnership interest had any value in excess of zero, the values as noted above are correct.
Respondent in his deficiency notice disallowed petitioner's claimed charitable contribution deduction as follows:
The deduction of $43,197.28* claimed on your 1965 income tax return as itemized deductions-contributions is not allowed to the extent of $42,872.28 because it has not been established that you are entitled to a deduction in excess of $325.00. The deduction of $23,548.12* claimed on your 1966 income tax return as itemized deductions-contributions is not allowed to the extent of $22,938.12 because it has not been established that you are entitled to a deduction in excess of $610.00. It has been determined that no deduction is allowable for the limited partnership interests in the Hi-Ute Investment Company or any other property interests transferred to the Paul Buehner Trust No. CR-3 and Paul Buehner Trust No. CR-4 during the taxable year 1965 and 1966.
The Paul Buehner Trust No. CR-3 and the Paul Buehner Trust No. CR-4 are not organizations to which contributions are deductible. You have not established the monetary value of the remainder interest in the property on the date of transfer nor that any qualified organization will ever receive the beneficial enjoyment of any interest in the properties.
See n. 14, supra.
* Petitioner's total claimed charitable contribution deduction for both 1965 and 1966 exceeded the limitations provided in section 170. The excess was preserved as a carryforward to 1966 and 1967, respectively.
Petitioner on his 1965 and 1966 Federal tax returns did not report the long-term capital gain realized by the CR-2, CR-3, and CR-4 trusts on the sales of their respective assets to the pension trust. Respondent determined that this income was attributable and taxable to the petitioner in 1965 as follows:
It is determined that during the taxable year 1965 you realized a long-term capital gain in the amount of $79,075.34 resulting from the sale of property by Paul Buehner Trust No. CR-2 and Paul Buehner Trust No. CR-3 to the Otto Buehner and Company Profit Sharing Pension Trust, which was not reported on your income tax return for 1965. Paul Buehner was the grantor of the trust and is determined to be the substantial owner as that term is used in sections 671 through 677 of the Internal Revenue Code of 1954. Therefore, it is determined that the income of Paul Buehner Trust No. CR-2 and Paul Buehner Trust No. CR-3 is attributable to and taxable to Paul Buehner. The gain is taxable income subject to the 50% deduction provided in section 1202 of the Internal Revenue Code of 1954.
and in 1966 as follows:
It is determined that during the taxable year 1966 you realized a long-term capital gain in the amount of $132,774.22 resulting from the sale of property by Paul Buehner Trust No. CR-3 and Paul Buehner Trust No. CR-4 to the Otto Buehner and Company Profit Sharing Trust, which was not reported on your income tax return for the taxable year 1966. Paul Buehner was the grantor of the trust and is determined to be the substantial owner as that term is used in sections 671 through 677 of the Internal Revenue Code of 1954. Therefore, it is determined that the income of Paul Buehner Trust No. CR-3 and Paul Buehner Trust No. CR-4 is attributable to and taxable to Paul Buehner. The gain is taxable income subject to the 50% deduction provided by section 1202 of the Internal Revenue Code of 1954.
The respondent made the necessary computations to effect his determination. The respective bases for these assets deemed sold by the petitioner were $15,000 for the 15,000 nonvoting shares of OBC (CR-2 trust), $35,829.15 for the 27,128.61 nonvoting shares of Buehner Block Co. stock and 8,700.54 nonvoting shares of OBC stock (CR-3 trust), $583.30 for the 2.06-percent limited partnership interest in Hi-Ute (CR-3 trust), and $3,630 for the 12.82-percent limited partnership interest in Hi-Ute (CR-4 trust).
OPINION
The case at bar requires us to consider the tax consequences flowing from the events that occurred between petitioner, OBC, the pension trust, and the CR trusts. Specifically, we must determine whether the income realized by the CR trusts on the transfers of its assets to the pension trust is attributable and taxable to the petitioner, and whether the petitioner is entitled to charitable contribution deductions for the contribution of these assets to the CR trusts.
Respondent's first argument is that the CR trusts were not independent entities, but rather were devices used by the petitioner to accomplish goals other than those formally stated. He points to petitioner's constant position of authority and control over the entities involved, an alleged inconsistent manner (i.e., inconsistent with the asserted charitable purposes of the CR trusts) in which the transactions occurred, and the noncharitable benefits that accrued to OBC and the pension trust. Respondent believes that, when viewed in its entirety, the creation of the CR trusts must fail for lack of economic reality and charitable purpose.
We have been presented with four duly executed trust documents. Respondent does not question their validity under State law. However, as this Court said in Irvine K. Furman, 45 T.C. 360, 364 (1966), affd. per curiam 381 F.2d 22 (5th Cir. 1967):
A finding of validity under State law, however, does not mean that the trust will necessarily be recognized for tax purposes. It cannot be gainsaid that a taxpayer has ‘the legal right * * * to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits.’ See Gregory v. Helvering 293 U.S. 465, 469 (1935). While this may be doctrine, it is not dogma and certainly it does not confer a license to substitute form for substance. As has recently been stated: ‘It is always open to the Commissioners to assess deficiencies on the ground that regardless of regularity of form as a matter of plutological reality, there was no substantial change in economic ownership.’ Burde v. Commissioner, 352 F.2d 995 (C.A. 2, 1965).
In Furman the ultimate conclusions was not premised upon the retention of dominion and control over the trust by (the taxpayer), but on the absence of economic reality.' Irvine K. Furman, 45 T.C. at 366.
The four irrevocable CR trusts were established by petitioner between 1962 and 1965. In each petitioner and Irene were named as trustees, a life income interest in the trust corpus was reserved for them, and upon the death of the survivor the remainder was to be distributed to either the foundation or the LDS Church. The stated purpose of each of these CR trusts is to provide for charitable contributions for the remaindermen who at all times relevant herein were charitable organizations qualifying for deductible contributions under section 170.
In the case at bar although petitioner, as trustee, retained control over the corpus we believe that he effectively relinquished the remainder interest in the contributed property. It seems clear that these interests were irrevocably committed to the charitable remaindermen. One of the remaindermen, the LDS Church, was notified of some of the transfers to the CR trusts and did receive copies of the trust instruments. We believe these circumstances indicate that the CR trusts were independent entities created for a valid charitable purpose and cannot be ignored. See Alden B. Oakes, 44 T.C. 524, 530 (1965).
Respondent argues that the manner in which petitioner, who was in control in varying capacities of the entities involved, conducted the questioned transactions clearly shows that the CR trusts were not created for their stated charitable purpose. He points mainly to the fact that the CR trusts accepted the unsecured notes of OBC in violation of the CR trusts' terms.
Administrative irregularities committed by the trustee do not necessarily mean that the trusts do not have substance. We believe that the CR trusts were valid when they were created and that they effectively conveyed the remainder interest in the corpus to the charitable remaindermen. Petitioner, as trustee, might well have been liable to the beneficiaries of the CR trusts if such irregularities impaired their interests, but it does not follow that such activity causes the petitioner as grantor of the CR trusts to be taxed on the income of the CR trusts. Hamiel's Estate v. Commissioner, 253 F.2d 787 (6th Cir. 1958), remanding a Memorandum of Opinion of this Court.
In Litta Matthaei, 4 T.C. 1132, 1139 (1945), this Court said with respect to this point:
While it may have been violative of the grantors' fiduciary obligations, if not of the laws of the State of Michigan regulating the administration of trusts, for the trustees to commingle the trust funds with their personal funds as they did prior to the establishment of the trust accounts, and on occasions to borrow or appropriate trust funds for their own use, it does not follow that the trusts were without substance. The final accounting of the trust funds after the death of Emma in 1943 found the trust funds all intact. The actual accretions to the original corpora of the trusts in the form of dividends and interest were readily ascertainable and all of such income has been accounted for in the trust portfolios and bank accounts.
Although, as of the time of trial, a final accounting had not been necessary, we do note that the unsecured notes were later replaced with notes secured by adequate collateral, and that during the years in issue appropriate records were kept and corresponding tax returns were filed reflecting the various interests in the CR trusts.
Respondent also argues that the true nature and purpose of the CR trusts are revealed when the benefits that accrued to OBC and the pension trust are considered. In this light respondent's position is that the CR trusts were created for tax-avoidance purposes and have no independent significance of their own. With respect to this question, we are faced with the seemingly conflicting interpretations of Gregory v. Helvering, 293 U.S. 465 (1935), and other cases. See Irvine K. Furman, 45 T.C. at 364; Alden B. Oakes, supra at 532.
In Estelle Morris Trusts, 51 T.C. 20 (1968, affd. 427 F.2d 1361 (9th Cir. 1970), this Court found that 20 trusts established by two documents were created primarily for tax-avoidance (income-splitting) purposes, but that this finding was not enough to invalidate the multiple trusts. This conclusion was in part based on ‘the realization that the Internal Revenue Code, by recognizing even one trust for tax purposes, sanctions to some degree income splitting and the resulting lessening of taxes,‘ Estelle Morris Trusts, 51 T.C. at 39.
The CR trusts, then, as recognized entities for tax purposes are certainly able to enter into transactions with other entities. The fact that tax advantages accrue from these transactions should have no effect on the viability (for tax purposes) of the CR trusts. Nor do we believe that the respondent's position, in this regard, is enhanced by emphasizing the petitioner's position with respect to the CR trusts and the other entities involved. As a cotrustee he was subject to the responsibilities and duties imposed by that relationship and there is no indication that the interests of the income or remainder beneficiaries were ever impaired. S. C. Johnson & Son, 63 T.C. 778, 789 (1975), on appeal (7th Cir. Oct. 28, 1975); Daniel D. Palmer, 62 T.C. 684, 693-694 (1974), affd. on another issue 523 F.2d 1309 (8th Cir. 1975).
Throughout this phase of his argument the respondent has attacked the validity of the CR trusts by relying on the petitioner's position with respect to the entities involved and the alleged improprieties that characterized the questioned transactions. As we have discussed we do not believe that these points affect the validity of the CR trusts. Such factors, however, may bring the CR trusts within the provisions of sections 671 through 677 and cause the petitioner to be liable for the income earned by the CR trusts. These considerations and others will be more fully discussed infra.
In the event that we were to uphold the validity of the CR trusts, respondent argues in the alternative that the transfers of property to, and the subsequent sales by, the CR-2, CR-3, and CR-4 trusts were prearranged by petitioner and as such represent sales by him in his individual capacity. Respondent points to the position of authority and control that the petitioner maintained with respect to the entities involved and the short period of time the CR trusts held the property contributed to them.
In Humacid Co., 42 T.C. 894 (1964), the promissory notes of a corporation were contributed by the taxpayer, who held the notes and controlled the corporation, to a charitable organization. When these notes were contributed, on December 2, 1958, it was contemplated that they would be redeemed by the corporation. The redemption occurred on December 24, 1958.
Respondent argued that the charitable organization served merely as a conduit for the collection of income that belonged to the taxpayer. In denying the respondent's position with respect to this issue, the Court found that the taxpayer had on December 2, 1958, given up all right, title, and interest in these notes.
The Court went on to hold in Humacid Co., supra at 913, that:
The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of a sale.
The fact that notes were held by the charitable organization for only a short period and that the petitioner controlled the redeeming corporation did not affect the result. The Court also noted that despite the fact that the redemption was contemplated, there was no evidence that it had been prearranged.
In DeWitt v. United States, 204 Ct. Cl. 274, 298-299 (1974), the court said:
The Commissioner of Internal Revenue and the courts have been at odds in gift-and-repurchase situations such as confronts us here. While the Commissioner has emphasized the ‘prearrangement,’ ‘understanding’ of the Parties and common identity' of donor and repurchaser aspects relative to gifts of stock, the courts have tended to focus on the narrow circumstances surrounding the actual delivery of the stock. The thrust of decisions involving gift-and-repurchase of stock is that a completed gift takes place when there is donative intent and physical delivery of the stock to the donee—which, without more, implies relinquishment of dominion and control by the donor over such stock * * * These decisions disclose that courts will attach conclusive substance to the form chosen by the parties unless one can demonstrate rather clearly that the form chosen is not an accurate reflection of its substance. Further, they reveal that courts are generally not concerned with what a donee does with the gift thereafter, even if the gift is repurchased shortly after it is given by the donor's controlled corporation, providing there is no agreement between the donor and donee such as to render the gift a sham, and the donor risks the possibility, however small, that the donee may sell the gift elsewhere. Prearrangements understandings or tentative planning between the involved parties which do not impose legal obligations on them to either sell or purchase the gift after it is given, will not invalidate the gift.
This statement is representative of the factors considered by courts with respect to this issue and we believe it is applicable to the issue at hand. See Carrington v. Commissioner, 476 F.2d 704 (5th Cir. 1973); Daniel D. Palmer, supra; Glenn E. Edgar, 56 T.C. 717 (1971); Sheppard v. United States, 362 F.2d 972 (Ct.Cl. 1966).
We have found that the petitioner made valid gifts of the property to the CR trusts. Although petitioner was in control of the entities involved, evidence in this record does not appear to be substantially different from the facts considered in the case cited above. Daniel D. Palmer, supra at 689-690 693-694. Petitioner is certainly free to plan his transactions and he is not obligated to choose an option that produces unfavorable tax results. Respondent's arguments with respect to this issue must be denied.
In the event that we were to find that the CR trusts were neither shams nor conduits used merely for petitioner's purposes, respondent argues that the petitioner should be treated as the owner of the CR-2, CR-3, and CR-4 trusts' corpora pursuant to section 675(3). This section provides that:
SEC. 675. ADMINISTRATIVE POWERS.
The grantor shall be treated as the owner of any portion of a trust in respect of which
(3) BORROWING OF THE TRUST FUNDS— THE grantor has directly or indirectly borrowed the corpus or income and has not completely repaid the loan, including any interest, before the beginning of the taxable year. The preceding sentence shall not apply to a loan which provides for adequate interest and adequate security, if such loan is made by a trustee other than the grantor and other than a related or subordinate trustee subservient to the grantor.
Respondent points out that this provision deals with an event that has occurred and does not require a determination with respect to the petitioner's motives or intent. His position is based on the events that occurred— the sale of the CR trusts' assets and the simultaneous loan of the proceeds to OBC— AND the fact that the petitioner was the grantor of the CR trusts and in control of 100 percent of the voting stock of OBC, and that the loans were outstanding during the years in issue.
Although respondent's recitation of the events is accurate we do not agree with the legal conclusion he draws from them. This section prohibits the grantor from directly or indirectly borrowing the corpus or income from the trust. In the instant case funds were borrowed by OBC, not the petitioner-grantor.
OBC is a corporation that has been in active existence for many years. The financial statements provided in the record show it to be a corporation with substantial assets. The respondent has not questioned its status as an active corporation and we do not believe that its existence can be ignored.
The debt in question is reflected by OBC on its financial statements. The funds acquired were used by OBC for internal corporate purposes. There is no indication that any of these funds were indirectly diverted for petitioner's benefit. Certainly, as a shareholder, petitioner received a benefit from this loan but not to any degree greater than the benefit that accrued to the other shareholders, creditors, and employees of OBC.
Respondent has cited the recent case of Mau v. United States, 355 F.Supp. 909 (D. Hawaii 1973), in support of his position. In that case the taxpayer-grantor borrowed directly from the trust's funds. We do not believe that it provides adequate precedent which can be applied to the circumstances at hand. Respondent's argument must be denied.
Respondent's next argument is that the petitioner should be treated as the owner of that part of the corpora of the CR-2 and CR-3 trusts that consists of the nonvoting stock of OBC under section 675(4)(B). This section provides:
SEC. 675. ADMINISTRATIVE POWERS.
The grantor shall be treated as the owner of any portion of a trust in respect of which
(4) GENERAL POWERS OF ADMINISTRATION— A power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term ‘power of administration’ means any one or more of the following powers: * * * (B) a power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvestments, to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control * * *
Under the trust instruments all powers with respect to investments of its assets were delegated to the trustees which included the petitioner- grantor. Accordingly under section 1.675-1(b)(4), Income Tax Regs:
If a power is exercisable by a person as trustee, it is presumed that the power is exercisable in a fiduciary capacity primarily in the interests of the beneficiaries. This presumption may be rebutted only by clear and convincing proof that the power is not exercisable primarily in the interests of the beneficiaries. * * *
Respondent argues that this presumption has been rebutted by the fact that the CR trusts made an investment in the form of an unsecured loan, and the course of repetitious conduct clearly indicates that the transactions occurred primarily for the benefit of OBC and not for charitable purposes attributable to the CR trusts.
Sec. 1.675-1. Administrative powers.(a) General rule. Section 675 provides in effect that the grantor is treated as the owner of any portion of a trust if under the terms of the trust instrument or circumstances attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiaries of the trust. * * *
As provided by the trust instrument the trustees did not have the power to make loans without receiving full and adequate security. Even assuming that such a loan was made and that it represented a breach of the trusts' terms, we believe that it is irrelevant with respect to the application of section 675(4). As we have noted, any possible violation of the trusts' terms could cause the trustees to be liable to the beneficiaries, but since the trustees did not have this power under the trust instruments we do not believe that section 675(4) is applicable.
Principally, however, we cannot say that the transaction occurred ‘primarily for the benefit of the grantor’ or OBC. The CR trusts received notes from an existing, active corporation. There is no indication that OBC was not able to meet its commitments and in fact interest was paid on these notes. Also, as stated previously, these notes were later secured by adequate collateral. Consequently, we cannot say that the stated charitable purposes of the CR trusts would not be carried out in due course or that the charitable remaindermen were in any way damaged by petitioner's actions.
Respondent next argues that the transfer by petitioner of the 2.06-percent and 12.82-percent limited partnership interests in Hi-Ute to the CR-3 and CR-4 trusts, respectively, did not cause the trusts to become bona fide partners in Hi-Ute pursuant to section 704(e).
Petitioner then should be treated as the owner of these interests and taxed upon the gain realized from the sales that occurred in 1966.
Respondent has also determined that petitioner is not entitled to a charitable contribution deduction for the transfer of the 3.33-percent limited partnership interest to the CR-2 trust which has not been sold. This issue will be discussed separately, infra.
Section 704(e)(1) provides:
(e)FAMILY PARTNERSHIPS
(1) RECOGNITION OF INTEREST CREATED BY PURCHASE OR GIFT— A person shall be recognized as a partner for purposes of this subtitle if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by purchase or gift from any other person.
Under this section we must examine all of the facts and circumstances and determine whether the CR trusts became the true owners of the limited partnership interest. Adolph K. Krause, 57 T.C. 890, 896-897 (1972), affd. 497F.1d 1109 (6th Cir. 1974); Ginsberg v. Commissioner, 501 F.2d 965 (6th Cir. 1974), affg. a Memorandum Opinion of this Court.
We believe that much of what we said with respect to the validity of the CR trusts is applicable here. Suffice it to say that the remainder interests attributable to these limited partnership interests were effectively conveyed to the CR trusts and irrevocably committed to charitable purposes.
Under the limited partnership agreement a limited partner had the power to assign his interest. This event did occur, but as we have commented previously, we cannot say that it was done primarily for the petitioner-grantor's benefit or that it harmed the interests of the charitable beneficiaries. All of the appropriate documents affecting the transfer of the limited partnership interests were properly executed. We also note that additional limited partnership interests were subsequently transferred to the CR trusts and that these interests are still being held by the trusts. Secs. 1.704(e)(1)(iii) and 1.704-1(e)(2)(i), Income Tax Regs.
Respondent has cited other sections of the regulations which serve as guidelines in making the ultimate decision. Under section 1.704-1(e)(2)(ii), Income Tax Regs., respondent objects to the management powers retained by the petitioner, as trustee, subject to his fiduciary responsibility. The sale of these interests is a reflection of the ability of the trustee to manage the interests contributed to the trusts.
Under section 1.704-1(e)(1)(vii), Income Tax Regs., respondent objects to the lack of participation by the CR trusts in the conduct of Hi-Ute's affairs referring to the fact that these interests were quickly sold. We do not know whether the regulation is intended to require actual participation as distinguished from the right to participate. However, the trusts' ownership of Hi-Ute's interest was established by their quick sale of such interests. We have previously found that these sales were not legally preconceived so that the existence of these powers was a mere sham.
Under section 1.704-1(e)(2)(ix): ‘The absence of services and participation in management by a donee in a limited partnership is immaterial if the limited partnership meets all the other requirements prescribed in this paragraph.’ One such requirement is that the limited partnership must be organized under the applicable State limited partnership law. Respondent argues this condition was not met until January 1966 when the certificate of limited partnership was filed.
The filing of this certificate is not a mere formal requirement. In order for the liability of partners to be limited there must be substantial compliance with the statute. However, this does not mean that the partnership relationship has not been created. Bergeson v. Life Insurance Corp. of America, 170 F.Supp. 150, 158-159 (D. Utah 1958), modified 265 F.2d 227 (10th Cir. 1959), cert. denied 360 U.S. 932 (1959). We do not believe that noncompliance affects the issue at hand.
Respondent also attacks the status of Hi-Ute as a limited partnership claiming that it was not formed to carry on business for a profit. Utah Code Ann., sec. 48-1-3 (1953), as amended. He claims that the ranch, Hi-Ute's principal asset, was operated by the petitioner for his personal pleasure.
There is no indication in the record that the petitioner used the property in this manner. The appraisal report does note that the property is near recreation areas, but that was a factor in the assessment of the ranch's fair market value, not an indication of how the petitioner used the property. Furthermore, the record indicates that at the time of trial, negotiations were in progress for the sale of this property at a substantial price. We see no merit in respondent's position.
With respect to this and the preceding issues respondent has strenuously objected to pervasive control petitioner has had over these transactions and the alleged violation of his fiduciary responsibility as trustee of the CR trusts. There is no doubt that petitioner, wearing a hat suitable to the occasion, was on all sides of every transaction at issue. Such undisputed fact is not of itself fatal to petitioner's case but it has demanded that we take a hard look at each transaction to insure that it possessed economic reality.
In analyzing the economic reality of these transactions a gut question has been whether petitioner was in every instance accountable to an adverse party or a disinterested authority. We have found that he was.
When acting as a trustee he was responsible to other trustees and to the beneficiaries. When acting as a member of the administrative committee on the pension trust, he was accountable to the other members of the committee and to the beneficiaries of the trust. If acting as majority shareholder, he could be held accountable by the minority shareholders if he operated in derogation of their rights. When performing as chief executive officer, he was responsible to the board of directors and the shareholders. In all these instances petitioner could ultimately be held accountable in the courts for any violation of his fiduciary obligations. Pepper v. Litton, 308 U.S. 295 (1939); Grace v. Grace National Bank of New York, 465 F.2d 1068 (1972); S. C. Johnson & Son, inc., 64 T.C. 778 (1975); Daniel D. Palmer, 62 T.C. 684 (1974); Hansen v. Granite Holding Co., 218 P.2d 274, 117 Utah 530 (1950). These elements of accountability lend assurances to a conclusion that things will remain what they seem to be.
Several different entities have been involved in these transactions—petitioner, the CR trusts, OBC, and the pension trust. Respondent has not questioned the status of the pension trust, and we have found the CR trusts and OBC to be valid entities. We do not believe that petitioner, despite his connection with these entities, is the alter ego of any of them.
It does appear that petitioner planned the transactions that occurred; however, that does not necessarily mean that they were prearranged or that any binding commitments were made. Petitioner is certainly permitted to consider various options before the acts, and he is not obligated to select the method that best suits the respondent. There is also no indication that the consideration paid for the properties involved did not represent fair market value, or that it has not been subsequently respected.
We have said before, even assuming that petitioner violated his fiduciary responsibility as trustee of the CR trusts, that does not mean he is subject to taxation on the income realized. Violation of the CR trusts' terms could cause petitioner, as trustee, to be liable for the consequences of his actions. However, we do not believe that it causes him to be owner of the trusts' corpora.
We have also found that the property contributed was irrevocably committed to charitable purposes. One of the charitable remaindermen was notified of some of the contributions and received copies of the trust instruments. Further, we have found that the transactions were not conducted for petitioner's benefit, nor were they carried out, assuming a breach of petitioner's fiduciary responsibility, in a manner that effectively denied the charitable purposes of the CR trusts.
Consequently, we hold that the CR trusts as valid entities for tax purposes owned the property contributed to them, made the sales in question to the pension trust, and petitioner-grantor did not possess the requisite power over the CR trusts to cause him to be treated as the owner of the CR trusts' corpora. The petitioner then is not to be taxed on the gain realized by the CR trusts on the transactions in question.
During the years in issue petitioner contributed portions of his limited partnership interest in Hi-Ute to the CR trusts. He claimed on his individual tax returns a charitable contribution deduction equal to the value of the remainder interest in these partnership interests. Respondent has disallowed these deductions claiming that the contributions were not real, that the assets transferred were not paid or set aside for charitable purposes, and that if made for charitable purposes the value of the gift was not ascertainable.
With respect to his first position respondent has made basically the same arguments that were advanced previously. We do not believe it necessary to repeat them or our response at this time. We have found the CR trusts to be valid entities and that the property contributed was irrevocably committed to charitable purposes. We believe the transfer of ownership was real and that the subsequent transactions did not alter or affect the intended charitable purposes or the ultimate fruition thereof.
Respondent next argues that the CR trusts were established and administered in a manner that belied their stated charitable purposes. These factors, then, indicate that the contributions were not paid or set aside for the benefit of charity. Respondent does not question the fact that these contributions were made to the CR trusts or that a remainder interest is the subject of the charitable contribution.
The regulations, sec. 1.170-1(e), provide:
(e) Transfers subject to a condition or a power. If as of the date of a gift a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. If an interest passes to or is vested in charity on the date of the gift and the interest would be defeated by the performance of some act or the happening of some event, the occurrence of which appeared to have been highly improbable on the date of the gift, the deduction is allowable. The deduction is not allowed in the case of a transfer in trust conveying a present interest in income if by reason of all the conditions and circumstances surrounding the transfer it appears that the charity may not receive the beneficial enjoyment of the interest. * * *
In United States v. Gates, 376 F.2d 65, 75 (10th Cir. 19673, the latter part of these provisions was interpreted to provide a test as to:
Whether the assurance of certainty that the Foundation would receive such beneficial interest was such that an ordinarily prudent person possessed of the same assurance of certainty with respect to a like future event in the ordinary affairs of life and business, would regard the occurrence of such event sufficiently certain to warrant his acting in reliance on its occurrence, and would believe that in so doing he would risk only ‘the general uncertainty that attends human affairs.’
This Court has stated its interpretation in terms of whether the charity is likely to receive the beneficial use of the contribution. Seymour Seder, 60 T.C. 49, 53 (1973). These considerations have been applied to remainder interests as well. James L. Darling, 43 T.C. 520 (1965).
Respondent relies on James L. Darling, supra, citing the Court's reliance on the disregard of the trust's terms and personal benefits derived by the grantor-taxpayer from his use of the trust's assets. We believe, however, that Darling is readily distinguishable.
In that case the taxpayer-grantor transferred property to a trust, but he retained the power in his individual capacity, not as a trustee, to have the trust property sold, to approve the terms of the sale, and to receive the sales proceeds. James L. Darling, supra at 534.
Subsequently the trust's terms were amended but the Court concluded:
that there is considerable doubt as to the proper allocation or distribution of profits derived from the sale or exchange of trust assets and as to the value to be ascribed to replaced property for the purpose of valuing the interest to be received in the exchange. Petitioners may have reserved to themselves all increment in value of property contributed to the trust; depending upon how the entire trust agreement is construed. Since petitioners have the sole discretion to determine whether trust property should be sold and the terms of sale, they could at any time direct a sale or exchange of trust assets at a profit to be received by them if in fact the trust reserved to them such gains. The remainder interest under such circumstances can therefore at best remain constant depending upon the action taken by the petitioners, and the remainder interest may never appreciate in value beyond the date of gift valuation. (James L. Darling, supra at 536.)
Subsequently the Court found that trust property was exchanged for other property in a manner in which the value of the remainder interest was reduced. This was done despite the trust's terms that provided in the event of an exchange the remainder interest would not be diminished. Based on this transaction the Court concluded that obviously the trust's terms had been ignored and that the taxpayer-grantor had derived a personal benefit from the use of the trust.
In the instant case petitioner-grantor was also a trustee of the CR trusts and retained the management powers in that capacity. The CR trusts' terms clearly indicate that the capital gains were allocable and attributable to corpus. Further, as frequently observed, we cannot say that the petitioner derived any personal benefit from the transactions that occurred.
In William D. O'Brien, 46 T.C. 583, 593 (1966), this Court noted that the grant of broad management powers to the taxpayer-trustee did not necessarily preclude the trust from being organized and operated for charitable purposes. The question to be resolved was whether the power retained by the taxpayer-grantor as trustee was so complete that he could render the remainder interest valueless. In resolving this question in the taxpayer's favor, the Court, in the absence of any showing that the trust terms had been violated, would not assume that they would be violated.
In this case, respondent again points to the violation of the CR trusts' terms that occurred when petitioner, as trustee, accepted the unsecured notes of OBC. However we do not believe that this action, although a technical violation of the terms of the CR trusts, represented a concerted effort to strip the CR trusts of their charitable purposes.
We have found that OBC was an active corporation fully capable of meeting its commitments. We note that interest payments were made on the notes and that subsequently they were replaced with notes that were secured with adequate collateral. There is also an absence of related activity that evidences a conscious intention to disregard the terms of the CR trusts. We cannot say that this action rendered the remainder interest valueless or made it any less likely that the charitable remaindermen would not benefit from these contributions.
Respondent's final argument is that the limited partnership interests did not have an ascertainable value. The parties have agreed that if we should find that these interests had a value in excess of zero then the values used by petitioner are correct. We believe the record clearly indicates these interests had value and respondent in his reply brief agrees that Hi-Ute and its underlying assets had value.
Respondent also argues that the limited partnership interests are not susceptible of valuation considering petitioner's position of control and the failure of Hi-Ute to qualify properly as a limited partnership under Utah law. We do not believe that respondent has raised any matters that have not been discussed previously.
We believe that the transfer of the partnership interests effectively conveyed a remainder interest to the charitable remaindermen, that these interests were set aside for charitable purposes; that the charitable remaindermen were likely to benefit from these contributions, and that these interests had value. Petitioner then is entitled to deduct the value of the remainder interests as determined by reference to the actuarial tables as agreed to by the parties.
In the event that we were to find that petitioner was entitled to a charitable contribution deduction, respondent argues that this deduction is disallowed by section 681(b) as it existed during the years in issue. This section provided in relevant part:
SEC. 681. LIMITATION ON CHARITABLE DEDUCTION
(b) OPERATIONS OF TRUSTS
(1) LIMITATION ON CHARITABLE, ETC. DEDUCTION— THE amount otherwise allowable under section 642(c) as a deduction shall not exceed 20 percent of the taxable income of the trust * * * if the trust has engaged in a Prohibited transaction, as defined in paragraph (2).
(2) PROHIBITED TRANSACTIONS.— For purposes of this subsection, the term ‘prohibited transaction’ means any transaction * * * in which any trust while holding income or corpus which has been permanently set aside or is to be used exclusively for charitable or other purposes described in section 642(c)
(A) lends any part of such income or corpus, without receipt of adequate security and a reasonable rate of interest, to;
the creator of such trust; * * * or a corporation controlled by such creator * * * through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.
(3) TAXABLE YEARS AFFECTED.— The amount otherwise allowable under section 642(c) as a deduction shall be limited as provided in paragraph (1) only for taxable years after the taxable year during which the trust is notified by the Secretary that it has engaged in such transaction, unless such trust entered into such prohibited transaction with the purpose of diverting such corpus or income from the purposes described in section 642(c), and such transaction involved a substantial part of such corpus or income.
(5) DISALLOWANCE OF CERTAIN CHARITABLE, ETC., DEDUCTIONS.— No gift or bequest for religious, * * * otherwise allowable as deduction under section 170, 545(b) (2), 642(c), 2055, 2106(a)(2), or 2522, shall be allowed as a deduction if made in trust and, in the taxable year of the trust in which the gift of bequest is made, the deduction allowed the trust under section 642(c) is limited by paragraph (1). With respect to any taxable year of a trust in which such deduction has been so limited by reason of entering into a prohibited transaction with the purpose of diverting such corpus or income from the purposes described in section 642(c), and such transaction involved a substantial part of such income or corpus, and which taxable year is the same, or before the taxable year of the trust in which such prohibited transaction occurred, such deduction shall be disallowed the donor only if such donor * * * was a party to such prohibited transaction.
Under the terms of section 681(b)(2)(A) it appears that the unsecured loans by the CR trusts represent a prohibited transaction that could affect the deductibility of the contributions made by petitioner to the CR trusts. Petitioner argues that these loans were adequately secured since their make, OBC, was an existing, active, solvent corporation. However, this Court has held that adequate security means more than the mere promise of the debtor to repay. Van Products, Inc., 40 T.C. 1018, 1024-1025 (1963).
The limitations of section 681(b)(1) are imposed in the taxable year after the trust has been notified of participation in a prohibited transaction unless the transaction was for the purpose of diverting the corpus from charitable purposes and the transaction involved a substantial part of the trust's corpus. Sec. 681(b)(3).
The parties have stipulated that neither the CR trusts nor their respective trustees were ever notified of participation in a prohibited transaction. Respondent argues that such notification was unnecessary to impose the limitations of section 681(b)(1) considering petitioner's level of involvement in the entities connected with the transaction in question. We do not agree with respondent's conclusion.
For the limitations of section 681(b)(1) to be imposed on the CR trusts without their having received such notice, we must determine that the unsecured loans from the CR trusts to OBC were made for the purpose of diverting the CR trusts' corpora from their intended charitable purposes. Although the solvency of OBC may not represent adequate security for its notes in the meaning of section 681(b)(1)(A), that does not necessarily mean that the unsecured loans evidence the prohibited purpose. We do not believe that this conclusion is inconsistent.
We have found OBC to be an active, solvent corporation capable of meeting its requirements. We have found that adequate consideration was received by the CR trusts and that during the years in issue and after, it has been properly respected. Further the subsequent action by OBC of replacing its notes with those secured by adequate security evidences the opposite intention than that with which we are concerned.
Despite the tax benefits that have accrued to the other entities involved and petitioner's position with respect to them, we do not believe that the terms or the vitality of the CR trusts have been used or abused. We cannot say that the acquisition of OBC'S notes made the achievement of its charitable purposes any less likely. Consequently, we do not believe that the prohibited transactions were for ‘the purpose of diverting such corpus or income from the purposes described in section 642(c).’
From the above determination it follows that the CR trusts are not subject to the limitations imposed by section 681(b)(1). The contributions then by the petitioner are not disallowed by the provisions of section 681(b)(5). Respondent's argument must be denied.
Decision will be entered for the petitioners.
+--------------------------------------------------------------------+ ¦ ¦1962 ¦1963 ¦1964 ¦1965 ¦1966 ¦ +------------------+---------+---------+---------+---------+---------¦ +------------------+---------+---------+---------+---------+---------¦ ¦Carl W. Buehner ¦9.90 ¦9.90 ¦9.90 ¦9.90 ¦9.90 ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Walter Buehner ¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦(petitioner's ¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦nephew) ¦100.00 ¦100.00 ¦100.00 ¦100.00 ¦100.00 ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Paul Buehner ¦23,701.54¦8,701.54 ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Paul Buehner ¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Foundation ¦13,802.00¦13,802.00¦13,802.00¦13,802.00¦13,802.00¦ +------------------+---------+---------+---------+---------+---------¦ ¦Otto Buehner & Co.¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Profit Sharing ¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Trust ¦1,680.00 ¦1,680.00 ¦1,680.00 ¦25,380.54¦25,380.54¦ +------------------+---------+---------+---------+---------+---------¦ ¦Buehner Brothers' ¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Foundation ¦3,300.00 ¦3,300.00 ¦3,300.00 ¦3,300.00 ¦3,300.00 ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Paul Buehner Trust¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦No. CR-2 ¦ ¦15,000.00¦15,000.00¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦Paul Buehner Trust¦ ¦ ¦ ¦ ¦ ¦ +------------------+---------+---------+---------+---------+---------¦ ¦No. CR-3 ¦ ¦ ¦8,700.54 ¦ ¦ ¦ +--------------------------------------------------------------------+
All figures as stipulated by the parties.
42,593.44 42,593.44 42,953.44 42,592.44 42,592.44