Opinion
Docket Nos. 396-69, 397-69.
Filed April 16, 1970.
1. The order of abatement of bequests under decedent-husband's will determined for the purpose of computing the marital deduction under sec. 2056, I.R.C. 1954.
2. Bequests to the trustees of the Palladium Fund to be used primarily as a pension, unemployment, and insurance fund for the employees of the Palladium-Item, a newspaper, and the wives and minor children of such employees are not deductible under sec. 2055, I.R.C. 1954, as "charitable" bequests. Estate of Leonard O. Carlson, 21 T.C. 291 (1953), overruled.
Lester M. Ponder, Anton Dimitroff, and Edward W. Harris III, for the petitioners.
Bernard J. Boyle and Wayne I. Chertow, for the respondent.
The Commissioner determined deficiencies of $112,858.70 and $351,156.89 in the estate taxes of Estate of Rudolph G. Leeds and Estate of Florence Smith Leeds, respectively. We must decide whether, for the purpose of determining the amount of the marital deduction which may be allowed the Estate of Rudolph G. Leeds under section 2056, I.R.C. 1954, a bequest to his surviving wife abates for the payment of debts, administration and funeral expenses, the Indiana inheritance and Federal estate taxes. Also, for the purpose of determining whether decedents' estates may be allowed charitable deductions under section 2055 for bequests to the trustees of the Palladium Fund, we must decide whether such bequests are to be used by such trustees exclusively for charitable purposes.
All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by this reference.
Rudolph G. Leeds died a resident of Richmond, Ind., on November 21, 1964. The Federal estate tax return for the Estate of Rudolph G. Leeds was filed with the director of internal revenue for the district of Indiana, Indianapolis, Ind.
Florence Smith Leeds, the wife of Rudolph G. Leeds, died a resident of Richmond, Ind., on June 4, 1966. The Federal estate tax return for the Estate of Florence Smith Leeds was filed with the director of internal revenue for the district of Indiana, Indianapolis, Ind.
The Second National Bank of Richmond, Ind. (hereinafter petitioner) is the duly appointed, qualified, and acting successor executor of the Estate of Rudolph G. Leeds and of the Estate of Florence Smith Leeds. Edward H. Harris, Jr., was the original executor of each such estate until his death on May 3, 1969.
The will of Rudolph G. Leeds, executed on June 30, 1949, and admitted to probate by the Wayne County, Ind., Circuit Court, consisted of 11 items, and disposed of his estate as follows:
ITEM I: I direct my Executor, hereinafter named, to pay all of my just and lawful debts, including costs of my last sickness, proper burial, and all pledges made by me to any charitable, educational, religious, or community organizations. My said Executor shall also pay from my estate all federal estate tax from whomsoever due and however assessed, and all estate, succession, legacy, and inheritance tax, but in so doing said taxes shall be paid from other property than that given and devised to my wife or from life insurance received by her, so that any property received by her as the result of my death will not be reduced by the payment of said taxes, and for the further reason that my estate may get the full benefit of the marital deduction as defined in the Federal Tax Reduction Act of 1948.
ITEM II: I give and bequeath to my beloved wife, Florence S. Leeds, absolutely, the following described personal property: any automobile owned by me at my death, all my household goods and furnishings, whether the same be in our home at Number 131 South Eighteenth Street, or at the late residence of my mother, Number 115 North Tenth Street, both in the City of Richmond, Indiana, all watches, pins, jewelry, and silverware as not specifically hereinafter bequeathed, my books, pictures, and any other tangible personal property owned by me at said residences, or at my office.
ITEM III: I make specific bequests, as follows:
(a) To William Bateman Leeds, my brother, of New York City, my emerald and sapphire tie pin which his mother gave me, and my pearl tie pin which belonged to our father;
(b) To Nancy Leeds Wynkoop, my niece, of New York City, the sum of One Thousand Dollars ($1,000.00);
(c) To Edward J. Wynkoop, husband of my niece, Nancy, the sum of One Thousand Dollars ($1,000.00);
(d) To Stanton B. Leeds, my first cousin of 89 Taconic Avenue, Great Barrington, Massachusetts, the sum of One Thousand Dollars ($1,000.00);
(e) To Linda Leeds Bassett, my first cousin, of New York City, One Thousand Dollars ($1000.00);
(f) To Luther M. Feeger, my friend and business associate, the sum of One Thousand Dollars ($1000.00);
(g) To Dolores Dickman, my secretary, the sum of One Thousand Dollars ($1000.00);
(h) To Joseph H. Hill, my friend, my Masonic diamond and platinum ring, two pearl studs and pearl cuff links, my platinum and pearl watch chain and gold cigarette case and match set, and my pearl tie clips;
(i) To Lucile G. Hill my diamond wheel pin that belonged to my mother;
(j) To Joanna Hill Mikesell my small diamond encrusted watch and chain that belonged to my mother;
(k) To Leslie L. Williams, 117 North 20th Street, Richmond, Indiana, my gold chime watch and platinum chain;
(l) To Violet Hawkins Williams, of 117 North 20th Street, Richmond, Indiana, the sum of Five Hundred Dollars ($500.00);
(m) To Charles M. Hawkins, my houseman, the sum of Five Hundred Dollars ($500.00);
(n) To John C. Bland, my cousin, the sum of One Thousand Dollars ($1000.00), and my Gaar crest gold ring;
(o) To Mrs. Agnes Helems, Comstock Building, Richmond, Indiana, my mother's companion, the sum of Five Hundred Dollars ($500.00);
(p) To Roy Woods, my farm manager, the sum of Two Hundred Dollars ($200.00);
(q) To Mrs. Milton B. Craighead, my mother's pink enameled watch;
(r) The sum of Three Thousand Dollars ($3000.00) to Earlham Cemetery. Richmond, Indiana, the same to be held, invested and reinvested by the Trustees thereof as a perpetual upkeep fund for the John M. Gaar burial ground and all graves, grass, and monuments thereon, and the income therefrom is to be used for the care and preservation thereof. Said burial ground is described as Lots Numbered One Hundred Ten (110) to One Hundred Thirteen (113) inclusive, Section Five (5), in said cemetery.
ITEM IV: I give, devise and bequeath to my wife, Florence S. Leeds, such an amount of my property, real or personal, which when added to my life insurance paid to my wife, and the bequests made to her in Item II above, shall total an amount in value equal to fifty percent (50%) of my adjusted gross estate, as such term is used in the Federal Tax Reduction Act of 1948.
I expressly authorize my wife to select the property that shall make up such amount, on the basis of values finally determined for Federal Estate Tax, such selection to be made from property not specifically bequeathed by any item of my will.
Such property so selected shall belong to my wife absolutely and in fee simple.
ITEM V: I give and bequeath to my wife, Florence S. Leeds, three hundred and fifty (350) shares of common stock of Palladium Publishing Corporation, and three hundred and fifty (350) shares of common stock of Palladium Realty Inc., both of the same being Indiana corporations, with offices at Richmond, Indiana, for her lifetime, and at her death to Edward H. Harris, Jr., my friend and business associate, absolutely and in fee simple, and if he be dead, then to his estate, to be disposed of by his will, and if he have no will, then to his heirs as fixed by law in the State of Indiana. Any stock dividends declared on said shares of stock, or shares received in any split up thereof, or profits from the sale thereof, shall be treated as principal and not income, and shall pass under this bequest.
ITEM VI: I give and bequeath to Edward H. Harris, Jr. and Luther M. Feeger, as Trustees, one hundred (100) shares of preferred stock and three hundred (300) shares of common stock of Joseph H. Hill Company, an Indiana corporation, with its office at the City of Richmond, Indiana, the same to be held in trust for my cousin. Elizabeth Kolp Popp, during her lifetime, and the net income therefrom shall be payable to her as often as dividends are declared and paid on said stock. At her death the income therefrom shall be payable to my wife, Florence S. Leeds, during her lifetime, and at her death the property then remaining in said trust I give, devise, and bequeath to the charitable trust created in Item VII of my will, and all of such property then remaining shall be transferred to the Trustees for said charitable trust to be held, administered, and disposed of according to the terms thereof.
ITEM VII: I give, devise and bequeath three hundred (300) shares of common stock of said Palladium Publishing Corporation and three hundred (300) shares of common stock of said Palladium Realty Inc., together with all the rest, residue, and remainder of my property, real or personal, and wheresoever situate, to Edward H. Harris, Jr., and Luther M. Feeger, as Trustees, and in trust, for the uses and purposes hereinafter stated:
1. Until the death of my wife, the annual net income therefrom shall be distributed as follows:
(a) Fifty per cent (50%) thereof to my wife, Florence S. Leeds;
(b) Thirty per cent (30%) thereof to Edward H. Harris, Jr., not exceeding, however, Three Thousand Dollars ($3000.00) to him per annum;
(c) Twenty per cent (20%) thereof to Luther M. Feeger, not exceeding however, Two Thousand Dollars ($2000.00) to him per annum.
(d) At the death of either of the last two of said beneficiaries, his share shall thereafter be payable to my wife.
(e) To the extent that the annual net income exceeds Ten Thousand Dollars ($10,000.00), it shall be paid to my wife.
2. (a) At the death of my wife, Florence S. Leeds, all property then in this trust, together with all undistributed income, plus any property that may be left thereto by my wife or others, plus the remainder of the Elizabeth Kolp Popp Trust created in Item VI, subject to the right of said Elizabeth Kolp Popp to the income therefrom for her life, shall be combined and all of the same shall be and constitute a charitable fund to be known as the PALLADIUM FUND, and all of said property and said trust fund I give, devise, and bequeath to Edward H. Harris, Jr. and Luther M. Feeger, as Trustees, or to their successor Trustees, in trust, and all of said property constituting said Palladium Fund, and all accrued income thereon, shall be held, invested, and reinvested, administered, and disposed of by said Trustees, and their successors, primarily as a pension, unemployment, and insurance fund for the employees of the Palladium Publishing Corporation engaged in the publication of the Richmond, Indiana, Palladium-Item, and the wives and minor children of said employees.
(b) Said fund and the proceeds therefrom shall be used for the benefit of said beneficiaries, exclusively for charitable purposes, as herein described, and no person shall be lawfully entitled to receive any pecuniary benefit from the operation or administration of said fund, except reasonable compensation for his services, either as a Trustee or an employee, in the administration of said fund, and said Trustees shall not carry on any propaganda, or otherwise attempt to influence legislation, nor shall any of said fund or its income be used for such purposes.
(c) The purpose of said PALLADIUM FUND is to secure regular employees of the Palladium-Item and their dependents against the hazards of unemployment, over which they have no control, due principally to sickness, accident, disability, death and old age.
(d) The amount of benefits and pensions, to whom, when, and under what conditions they shall be paid, are to be determined from time to time by said Trustees, but in so doing these general principles shall control:
(1) All regular employees of said Palladium Publishing Corporation engaged in the publication of said Palladium-Item shall be eligible for benefits irrespective of their type of employment.
(2) A reasonable [sic] period of employment may be required before eligibility begins.
(3) Although reasonably uniform standards shall be established for the payment of benefits, said Trustees may vary the same, due to the conditions of the particular case and the adequacy of available funds.
(4) Benefits may be paid when unemployment is due to sickness, accident, disability, or any other good cause, including lack of work which the employee is capable of performing.
(5) Employees, sixty years of age, who have been regularly employed by said newspaper for at least twenty years, shall be eligible to retirement pensions.
(6) No annual retirement pension shall exceed more than one-half of the annual average wage or salary paid to said employee during his last ten years of service.
(7) Net income only shall be used in the payment of benefits and pensions, except upon the termination of said trust as hereinafter provided for.
(8) Said Trustees may use the income for the purchase of life insurance for said employees, individually or as a group, or for such other insurance or annuities as they deem proper for the carrying out of the purposes of said trust, or for making contributions to such purchases.
(9) Information concerning said trust and the rules and regulations adopted by the Trustees for the carrying out of the same, shall be printed and furnished to the employees. Said rules and regulations may be amended from time to time as said Trustees deem necessary, and when amended they shall be republished.
3. Termination of Trust. This trust shall cease and terminate upon the happening of the first of the following contingencies:
(a) Upon the majority ownership of the stock in said Palladium Publishing Corporation passing to a person or persons who are not bona fide legal residents of, and actually living in Wayne County, Indiana;
(b) Upon the majority ownership of the stock in said Palladium Publishing Corporation passing to a person or persons irrespective of their residence, or to a corporation owning another newspaper or newspapers so that said Palladium-Item becomes part of what is commonly designated as a chain owned newspaper.
(c) Upon said Palladium-Item ceasing to be published at Richmond, Indiana, as a daily newspaper.
4. In the event of the happening of any of the aforesaid contingencies whereby said trust is terminated, then and in such event I give, devise and bequeath all property remaining in said trust absolutely and in fee simple to Reid Memorial Hospital of Richmond, Indiana. Said property shall be held by the Trustees of such hospital as an endowment fund, or used for capital improvements, and none of the principal of the same shall be used for the operating expenses of said hospital.
5. If at the time of the termination of the said PALLADIUM FUND and the trust for the administration thereof, any employee of the Palladium Publishing Corporation, who was in the employ of said corporation and engaged in the publication of said Palladium-Item, at the time of my death, shall be drawing a retirement pension, or be eligible therefore, then said trust shall be continued for such length of time as necessary to pay said pensions in full.
Said Trustees in order to expedite the distribution of said trust estate to said hospital, may make settlement with any of the aforesaid pensioners entitled to share in said trust estate, or may purchase such annuity insurance for said employees as will provide an adequate substitute for said pensions. For such purpose the principal of said trust may be used, if insufficient income be available.
ITEM VIII: If at any time there be a vacancy among my Trustees due to death, resignation or incapacity, then and in such event the other Trustee shall fill such vacancy or vacancies, and such self-perpetuation of trustees shall continue throughout the life of said trust. Each successor Trustee shall have all of the powers given to said Trustee named herein. Any set of Trustees while serving said trust shall keep full minutes, records and accounts of their doing.
ITEM IX: Said Trustees shall have full power to do any and all things necessary to the full carrying out of the provisions of each of said trusts by whichever item created, and without limiting the powers thereof, said Trustees and their successors shall specifically have powers, as follows:
(a) Said Trustees may hold and keep in said trust estate any property owned by me at the time of my death, even though the same do not conform to the statutes and the rules of court governing trust investments. But the proceeds of any property disposed of by said Trustees shall be invested and reinvested in property and securities which conform to the limitations concerning trust investments.
(b) Said Trustees shall have full power to hold, manage, direct, conserve, invest and reinvest said trust property, borrow money when required, transpose investments, sell, assign, transfer, pledge, mortgage, and convey any and all property in said trust estate of whatsoever kind, make contracts, vote stock, and exercise all of their powers without the consent or confirmation of the court, and all to the end that the purposes of said trusts may be carried out and the net income and principal thereof be used for the purposes as herein defined.
(c) In making sale or disposition of any property, real or personal, in said trust estates said Trustees shall not be required to secure a court order, nor court confirmation, and any and all sales of property, either real or personal, may be made, without appraisement, at private sale without notice, or at public sale upon such notice as said Trustees may determine, and all sales shall be made upon such terms and conditions as said Trustees may fix.
(d) My Trustees shall furnish bond with a sound surety company thereon, in such an amount as is reasonably necessary to protect said trust, and the cost of such bond shall be paid for by said trust.
(e) Said Trustees shall not be required to file any inventory with, nor to make any reports to, the court concerning their doings, but instead thereof they shall keep written complete minutes, records and accounts of all of their doings, which shall be available to my wife, and following the death of my wife they shall make a written or printed annual report to the employees of said Palladium-Item Newspaper.
(f) Stock dividends and profits from the sale of any stock, securities, or other property, shall not be treated as income by my Trustees, but the same must be held or reinvested as part of the principal of said trust estate, and the income therefrom to be used for the purposes of said trust, and in the manner as hereinabove directed.
(g) Said Trustees shall have the right to receive property from my wife, or any other person, firm or corporation by gift or devise, and the same when so received shall be held, administered, and disposed of according to the terms and provisions of said PALLADIUM FUND.
(h) If my wife predecease me, and if her will shall provide for a trust for the benefit of the Palladium-Item employees similar to the trust created by me, then I direct that the two trusts be combined, and that they be administered as one trust and by the same Trustees.
(i) Nothing herein shall prevent my Trustees from selling all or any part of the stock in the Palladium Publishing Corporation, and the Palladium Realty Inc., if and when they deem the same advisable, but if sale is to be made of any such stock, then I direct my Trustees to first acquaint all other stockholders of said corporations with the terms and conditions of the proposed sale, so that the other stockholders may have opportunity to sell their stock on the same basis, if they desire so to do.
(j) That Edward H. Harris, Jr. is a Trustee shall not prevent him from purchasing stock in either the Palladium Publishing Corporation or the Palladium Realty Inc., provided he pays as much for the same as can be secured by said Trustees elsewhere.
ITEM X: I hereby nominate and appoint Edward H. Harris, Jr. as Executor of my Will, and if he be dead, or is unable to act, then The Second National Bank of Richmond, Indiana, shall serve as Executor.
My Executor shall have full power to sell any real or personal property as may be necessary to pay bequests, debts, taxes, or expenses, and in so doing shall not be required to get the approval or confirmation of the Court. Sales may be made at private sale without notice, or at public sale upon such notice as said Executor may fix, and all at such prices, without appraisement, and on such conditions as he shall deem best.
ITEM XI: If my wife predeceases me, then I give, devise and bequeath all of my property, both real and personal, owned by me at my death, and not otherwise disposed of herein, to said PALLADIUM FUND and the Trustees thereof, as described in Item VII of my will, the same to be held, administered, used and disposed of in the same manner as if my wife had survived me and said PALLADIUM FUND and trust had become effective at her death.
The will of Florence Smith Leeds, executed on April 13, 1949, and admitted to probate by the Wayne County, Ind., Circuit Court, disposed of her estate as follows:
ITEM X: If my husband, Rudolph G. Leeds, shall predecease me, then and in such event I give, devise and bequeath all of my property, both real and personal, and not otherwise disposed of by me herein, as follows:
* * * * * * * *
(d) All the rest, residue and remainder of my property I give, devise and bequeath as follows:
(1) One-half thereof to * * *
(2) One-half thereof to the Palladium Fund of Richmond, Indiana, a charitable trust created by my husband, Rudolph G. Leeds, in his Will for the benefit of employees of the Palladium Publishing Corporation, engaged in the publication of the Palladium-Item newspaper, said share and all property therein to be held, administered, used and disposed of by the Trustees of said Fund for the same purposes and in the same manner as provided for by my husband's Will, with the exception, however, that upon the termination of said Palladium Fund as provided for in my husband's Will, or if said Palladium Fund is not in existence at my death, then and in either of such events I give, devise and bequeath all of the balance and remainder of said property to said Reid Memorial Hospital for the uses and purposes described in Item IX of my Will.
Reid Memorial Hospital of Richmond, Ind., is a charitable organization within the meaning of that term as it is used in the Internal Revenue Code of 1954, as amended.
At the time of his death, Rudolph G. Leeds was the copublisher, with Edward H. Harris, Jr., of the Palladium-Item, a newspaper of Richmond, Ind., which was owned by Palladium Publishing Corp. The issued and outstanding shares of common stock (the only stock authorized) of Palladium Publishing Corp., at the date of Rudolph G. Leeds' death, were held as follows:
Number of Stockholder shares
Rudolph G. Leeds ........................ 602 Edward H. Harris, Jr. ................... 48 Trust under the will of Edward H. Harris (died 1937) ....... 350 ---- Total ............................... 1,000
In December of each of the years 1952 through 1963, Rudolph G. Leeds transferred to Edward H. Harris, Jr., by gift, 4 shares of Palladium Publishing Corp. stock, aggregating the 48 shares above listed. Such stock is now held by the Estate of Edward H. Harris, Jr. Of the 602 shares held by Rudolph G. Leeds at the date of his death, 350 shares thereof were distributed to Edward H. Harris, Jr., under the will of Rudolph G. Leeds, and such shares are now held by the Estate of Edward H. Harris, Jr.; 100 shares thereof were purchased from the Estate of Rudolph G. Leeds by the Palladium Fund on or about August 10, 1967; and the remaining 152 shares are now held by the Estate of Rudolph G. Leeds. The 350 shares held by the trust under the will of Edward H. Harris (died 1937) continue to be so held.
Rudolph G. Leeds first became active in the Palladium Publishing Corp. in 1937 after the death of Edward H. Harris, Sr. who had been the publisher. Edward H. Harris, Jr., the son of Edward H. Harris, Sr., first started working for the Palladium Publishing Corp. after the death of his father. The relationship between Edward H. Harris, Jr., and Rudolph G. Leeds was very close and similar to a father-son relationship. From the date of Edward H. Harris, Sr.'s death it has Rudolph G. Leeds' desire to have Edward H. Harris, Jr., follow in the footsteps of his father. The bequests under Items II, III, V, and VI of the will of Rudolph G. Leeds have been distributed as directed in Rudolph G. Leeds' will without abatement.
The Commissioner disallowed the Estate of Rudolph G. Leeds the maximum allowable marital deduction of 50 percent of the adjusted gross estate, which was claimed under section 2056 on the estate tax return, for the stated reason that less than 50 percent of the adjusted gross estate passes from the decedent to his surviving spouse. The Commissioner's determination of deficiencies in the Estate of Rudolph G. Leeds and in the Estate of Florence Smith Leeds reflects his disallowance of charitable deductions claimed under section 2055 for the bequests to the Palladium Fund.
OPINION Issue 1. The Marital Deduction
Section 2056 provides generally that, for purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes from the decedent to the decedent's surviving spouse. Section 2056(c)(1) limits the deduction to an amount not exceeding 50 percent of the value of the "adjusted gross estate."
We must decide whether 50 percent of the value of Rudolph's "adjusted gross estate" passes to Florence, his surviving wife, as provided by Item IV of his will.
Rudolph directed his executor to pay all estate taxes from his estate, i.e., out of the property passing under his will. Because that property is not sufficient to pay all Federal estate taxes and also to distribute the bequests provided under Items II, III, IV, V, and VI, some portion of the Federal estate taxes must be paid out of one or more of those bequests. If any amount must be paid out of the bequest under Item IV, then the amount of property passing to Florence — and the allowable marital deduction — will be reduced by such amount.
Our question, then, is simply, what bequests are to be invaded first for the payment of the Federal estate tax. The answer is found, in this case, in the law of Indiana. Riggs v. Del Drago, 317 U.S. 95 (1942).
The applicable statutory provision, sec. 7-1103, Ind. Ann. Stat. (1953), provides:
7-1103. Order in which assets appropriated — Abatement — General rules — Contrary provisions, plan or purpose. — (a) Except as provided in subsection (b) hereof, shares of the distributees shall abate, for the payment of claims, legacies, the widow's or family allowance, the shares of pretermitted heirs or the share of the surviving spouse who elects to take against the will, without any preference or priority as between real and personal property, in the following order:
(1) Property not disposed of by the will;
(2) Property devised to the residuary devisee;
(3) Property disposed of by the will but not specifically devised and not devised to the residuary devisee;
(4) Property specifically devised.
A general devise charged on any specific property or fund shall, for purposes of abatement be deemed property specifically devised to the extent of the value of the thing on which it is charged. Upon the failure or insufficiency of the thing on which it is charged, it shall be deemed property not specifically devised to the extent of such failure or insufficiency.
(b) If the provisions of the will or the testamentary plan or the express or implied purpose of the devise would be defeated by the order of abatement stated in subsection (a) hereof, the shares of distributees shall abate in such other manner as may be found necessary to give effect to the intention of the testator.
A careful reading of the entire will of Rudolph G. Leeds persuades us that in order to give effect to the intention of the testator, the marital share must abate last. By Item I the decedent directed that his estate taxes be paid from other property than that given and devised to his wife or from life insurance received by her so that any property received by her would not be reduced by the payment of such taxes, and for the further reason that his estate might get the full benefit of the marital deduction. By Item IV the decedent gave and devised to his wife such an amount of his property, real or personal, which when added to his life insurance paid to his wife and the bequests made to her in Item II above, shall total an amount in equal value to 50 percent of his adjusted gross estate, as such term is used in the Federal Tax Reduction Act of 1948.
We think the decedent's intention to give 50 percent of his adjusted gross estate to his wife was predominant over his intention to make the bequests under Items V and VI. Accordingly, we hold the bequests under Items V and VI abate first for the payment of Federal estate taxes and the amounts given to his wife, last.
Issue 2. The Charitable Deduction
Section 2055 provides that for the purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests to trustees, but only if such contributions are to be used by such trustees exclusively for charitable (among other) purposes. The determination, for what purposes are the bequests to be used, is to be made from an examination of the terms of the bequests as properly construed under the applicable State law, in this case, the law of Indiana. Whether those purposes, so determined, are exclusively "charitable" within the meaning of section 2055 is a question of Federal law. Watson v. United States, 355 F.2d 269 (C.A. 3, 1965.)
The bequests are to be used by the trustees of the Palladium Fund "primarily as a pension, unemployment, and insurance fund for the employees of the * * * Palladium-Item, and the wives and minor children of said employees." Item VII, clause 2(a), of the will of Rudolph G. Leeds. The purpose of the Palladium Fund is "to secure regular employees of the Palladium-Item and their dependents against the hazards of unemployment, over which they have no control, due principally to sickness, accident, disability, death and old age." Item VII, clause 2(c). In our view the purpose in other words, is an insurance purpose, to benefit all regular employees by securing them against the enumerated hazards. This purpose is to be effectuated in either of two ways: (1) The use of income "for the purchase of life insurance for said employees, individually or as a group, or for such other insurance or annuities as * * * [the trustees] deem proper for the carrying out of the purposes of said trust, or for making contributions to such purchases" (Item VII, clause 2(d)(8)); (2) the payment of benefits to employees "when unemployment is due to sickness, accident, disability, or any other good cause, including lack of work which the employee is capable of performing" (Item VII, clause 2(d)(4)). In purpose and in effect, the decedents' bequests will operate to relieve qualifying employees of the Palladium-Item of the expense of securing themselves, by savings, insurance, health plan contributions or otherwise, against these same hazards. To us this clearly is not exclusively a "charitable" use of the bequests.
A second use of decedents' bequests is the payment of retirement pensions. "Employees, sixty years of age, who have been regularly employed by * * * [the Palladium-Item] for at least twenty years, shall be eligible to retirement pensions" (Item VII, clause 2(d)(5)). All such employees qualify for retirement pensions without qualification. We do not think this constitutes a use of decedents' bequests for charitable purposes.
As we see it, decedents' bequests are to be used by the trustees merely as an additional form of compensation to the employees of the Palladium-Item; "a logical, legitimate and impelling incentive to a person both in seeking employment with the company and after being hired. The quid pro quo to the company was at least as important, in helping to attract desirable personnel and obtaining satisfactory results from them." Watson v. United States, supra at 271. In these circumstances, we cannot allow the deduction.
Petitioner relies upon Estate of Leonard O. Carlson, 21 T.C. 291 (1953), and the cases cited therein, as establishing that the purposes of a welfare or retirement fund for the benefit of employees of a corporation are charitable. Upon reconsideration of Carlson, in the light of Watson v. United States, supra, we conclude that the position we took in Carlson is no longer tenable. We note that Carlson relied on Gimbel v. Commissioner, 54 F.2d 780, which has been subsequently discredited in Watson by the Third Circuit Court of Appeals, the same circuit court that had decided Gimbel in the first instance.
Reviewed by the Court. Decisions will be entered under Rule 50 .