Opinion
No. 226.
April 22, 1946.
Petition to Review a Decision of the Tax Court of the United States.
Petition by the estate of Joseph F. deCastro, deceased, Kings County Trust Company, executor, to review a decision of the Tax Court of the United States redetermining a deficiency in the tax imposed by the Commissioner of Internal Revenue.
Decision affirmed.
The Internal Revenue Code, § 812, 26 U.S.C.A. Int.Rev.Code, § 812, provides: "For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate * * * (d) Transfers for public, charitable, and religious uses. The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. * * *"
Treasury Regulations 105, promulgated under the Internal Revenue Code, provide:
"Sec. 81.44. Transfers for public, charitable, religious, etc., uses. If a trust is created for both a charitable and a private purpose, deduction may be taken of the value of the beneficial interest in favor of the former only insofar as such interest is presently ascertainable, and hence severable from the interest in favor of the private use. * * * Sec. 81.46. Conditional bequests. If as of the date of decedent's death the transfer to charity 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 charity will not take is so remote as to be negligible. If an estate or interest has passed to or is vested in charity at the time of decedent's death and such right or interest would be defeated by the performance of some act or the happening of some event which appeared to have been highly improbable at the time of decedent's death, the deduction is allowable.
"If the legatee, devisee, donee, or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, devised, or given by the decedent, deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of such power."
The Tax Court found the following facts: Joseph deCastro died on November 2, 1941. In his will he provided for a division of his residuary estate into two equal parts, one of which, referred to as Trust A, was to be held in trust for the benefit of his wife, Fannie deCastro, for life and after her death for the benefit of her nephew, Louis J. Murphy, for life. Upon the death of the survivor of them the trust was to terminate and 90 percent of the then remaining principal was to be paid to certain named charitable, educational and religious organizations. The remaining 10 percent was to go to a named individual, if living at that time, or, if not, the whole remainder was to go to the charities named. The other one-half of the residuary estate, referred to as Trust B, was to be held in trust for the benefit of the wife for life and after her death for the benefit of her niece, Irene Murphy, for life. That trust was to terminate upon the death of the survivor of them and the remaining principal was to be paid to certain named charities. Article Third of the will contained the following provision for the invasion of the corpus of the respective trusts: "Notwithstanding any of the provisions hereinbefore made, if, during the life of my wife, Fannie deCastro, due to her illness, accident or other unforeseen emergency, the income of the two (2) trusts shall not be sufficient to amply provide for her needs, then and in that event I authorize and absolutely direct my Trustee to apply from the principal of the two (2) trusts, in equal proportions, such sum or sums as, in the sole discretion of my Trustee, will amply provide for her needs. I especially direct that no one shall have the right to call in question the propriety or the amount so applied for my wife. Upon the death of my wife I direct that my Trustee shall pay her funeral expenses and charge them against the two trusts, in equal proportions."
Kings County Trust Company, the taxpayer-petitioner, was named trustee of both trusts. The trustee was authorized to continue to hold any securities owned by the decedent at the time of his death or securities received in exchange therefor as long as it seemed for the best interests of the trusts.
At the date of testator's death his wife was 75 years of age, Louis J. Murphy, her nephew, was 41 years of age, and Irene Murphy, her niece, was 45 years of age. The net income of the trusts for the years 1942, 1943 and 1944 was as follows:
Year Trust A Trust B
1942 .......... $2,208.89 $2,206.40 1943 .......... 2,367.93 2,390.40 1944 .......... 2,322.28 2,378.32 _________ __________ $6,899.10 $6,975.12
Since decedent's death his wife has lived within the income distributed to her by the trustee and has accumulated about $600 of such income. With a cash bequest of $2,500, which she received under decedent's will, she had on hand in February, 1945, about $1,250 in United States bonds, $1,000 in a savings bank, and about the same amount in a checking account. There was also approximately $1,700 of undistributed income in the trusts. She has no other property or income of any substantial amount. The combined assets of the trusts had a value of $83,166.74 at the time of decedent's death and a value of $117,354.81 at March 1, 1945. The trust investments consisted principally of mortgages, stocks and bonds. Since decedent's death his wife has lived at a hotel where she pays $120 per month for her room. Her meals cost about $3 a day. She dresses moderately and goes out but little. A deduction was claimed in the estate tax return of $31,960 on account of the bequests to charity. The Commissioner disallowed the deduction. The net estate as determined by the Commissioner was $44,957.60.
The Tax Court said:
"We think that the question here is controlled by the decision of the Supreme Court in Merchants National Bank of Boston v. Commissioner, 320 U.S. 256 [64 S.Ct. 108, 88 L.Ed. 35]. In that case the decedent (Ozro M. Field) left the residue of his estate in trust for the benefit of his wife for life and upon her death the major portion of the trust estate was to go to certain named charities. The trustee was given the discretionary power to invade the corpus, `for the comfort, support, maintenance, and/or happiness of my said wife.' It was held that because of the power of the trustee to invade the corpus the amount of the charitable bequests was unascertainable and therefore unallowable. The court pointed out that the Commissioner's regulations, articles 44 and 47 of Regulations 80, properly limit the deductions available to `charitable donors who wished to combine some private benefaction with their charitable gifts' to those `presently ascertainable, and hence severable from the interest in favor of the private use,' and `to that portion, if any, of the property or fund which is exempt from an exercise of such power.' The court said in its opinion: `Whatever may be said with respect to computing the present value of the bequest of the testator who dilutes his charity only to the extent of first affording specific private legatees the usufruct of his property for a fixed period, a different problem is presented by the testator, who, preferring to insure the comfort and happiness of his private legatees, hedges his philanthropy, and permits invasion of the corpus for their benefit. At the very least a possibility that part of the principal will be used is then created, and the present value of the remainder which the charity will receive becomes less readily ascertainable. Not infrequently the standards by which the extent of permissible diversion of corpus is to be measured embrace factors which cannot be accounted for accurately by reliable statistical data and techniques. Since therefore neither the amount which the private beneficiary will use nor the present value of the gift can be computed, deduction is not permitted. Cf. Humes v. United States, 276 U.S. 487 [48 S.Ct. 347, 72 L.Ed. 667] * * * The salient fact is that the purposes for which the widow could, and might wish to have the funds spent do not lend themselves to reliable prediction. This is not a `standard * * * fixed in fact and capable of being stated in definite terms of money.' Cf. Ithaca Trust Co. v. United States, 279 U.S. 151 [49 S.Ct. 291, 73 L.Ed. 647]. Introducing the element of the widow's happiness and instructing the trustee to exercise its discretion with liberality to make her wishes prior to the claims of residuary beneficiaries brought into the calculation elements of speculation too large to be overcome, notwithstanding the widow's previous mode of life was modest and her own resources substantial. We conclude that the commissioner properly disallowed the deduction for estate tax purposes.'
"While the conditions under which the corpora of the trusts here might be invaded, that is, in the event of `illness, accident or other unforeseen emergency,' were somewhat more restricted than in the Merchants National Bank of Boston case, still we can not say that they were, or are, so highly improbable of occurrence as to leave no uncertainty as to the vesting of or the amount of the charitable bequests. And once the way to the invasion is open it is entirely in the discretion of the trustee as to what amounts `will amply provide for her (the wife's) needs.' Here there is no standard of measure of the amounts that might be withdrawn, as in Ithaca Trust Co. v. United States, 279 U.S. 151 [49 S.Ct. 291, 73 L.Ed. 647].
"The fact that the income of the trusts so far has proven ample for the wife's needs and that there has not yet occurred any sickness, accident or other emergency requiring additional funds for the wife is, of course, no guaranty that these good fortunes will continue for her lifetime."
Laurence Graves, of New York City, for petitioner.
Sewall Key, of Washington, D.C., (Helen R. Carloss and Muriel S. Paul, both of Washington, D.C., of counsel), for respondent.
Before L. HAND, SWAN and FRANK, Circuit Judges.
In Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647, the will gave the wife a life estate with authority to use from the principal any sum "that may be necessary to suitably maintain her in as much comfort as she now enjoys." In Merchants National Bank of Boston v. Commissioner, 320 U.S. 256, 64 S.Ct. 108, 88 L.Ed. 35, the Court purported to distinguish the Ithaca Trust case. Whether, in doing so, the Court so narrowed its scope as virtually to overrule it sub silentio we need not here consider. For we agree with the Tax Court that the instant case is controlled by Merchants National Bank.
Affirmed.