Docket No. 87974.
08-16-1938
THE M. D. THATCHER ESTATE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Leon E. Williams, C. P. A., Egbert Robertson, Esq., Henry L. McIntyre, Esq., Montgomery Dorsey, Esq., and W. Clayton Carpenter, Esq., for the petitioner. Lewis S. Pendleton, Esq., for the respondent.
Leon E. Williams, C. P. A., Egbert Robertson, Esq., Henry L. McIntyre, Esq., Montgomery Dorsey, Esq., and W. Clayton Carpenter, Esq., for the petitioner.
Lewis S. Pendleton, Esq., for the respondent.
The Commissioner determined a deficiency of $15,807.16 in the Federal gift tax liability of the petitioner, the M. D. Thatcher Estate Co., for the calendar year 1924.
The petitioner disputes the correctness of said determination and has assigned errors as follows:
(1) The Commissioner of Internal Revenue has erred in failing to allow as a deduction from the total gifts the amount of Three hundred ninety-seven thousand five hundred thirteen and 6/100 (397,513.06) dollars which represents the value, as of December 30, 1924, of the remainder to be used for charitable purposes after a life estate in the securities and cash placed in trust under date of December 30, 1924.
(2) The Commissioner of Internal Revenue has erred in failing to determine the value as at December 30, 1924, of the life interest of the beneficiary subject to the gift tax, which amount is One hundred forty-five thousand nine hundred forty-eight and 71/100 (145,948.71) dollars.
The case is submitted upon a stipulation of facts and briefs of counsel.
We adopt as our findings of fact the facts as stipulated. Only so much thereof as is deemed necessary for an understanding and determination of the issues involved is set forth in our findings of fact.
FINDINGS OF FACT.
The petitioner is a Colorado corporation.
The stipulation provided in part as follows:
In the year 1924 Luna A. Thatcher was sixty-nine years of age, the widow of Mahlon D. Thatcher (Sr.), who had been a resident of Pueblo, Colorado, during substantially all of his business life and had there accumulated a large fortune. She had a son, Mahlon D. Thatcher, and three daughters, each of whom was independently wealthy. The M. D. Thatcher Estate Company was a corporation which was entirely owned by Mrs. Thatcher's son and daughters (excepting that Mrs. Thatcher had a life interest in the income of a portion of the stock of said corporation), and Mrs. Thatcher and each of her children had a large amount of other property, outside the holdings in the Estate Company. After the death of her husband Mrs. Thatcher devoted a large part of her time and means to charitable activities in the City of Pueblo, Colorado.
In 1924 Mrs. Thatcher consulted her personal attorney, Robert S. Gast, of Pueblo, and her son, Mahlon D. Thatcher, with respect to her intention to leave a large portion of her estate to charitable purposes, and it was agreed between Mrs. Thatcher and her said son, with the consent of the other owners of stock in The M. D. Thatcher Estate Company, that the charitable plans which Mrs. Thatcher contemplated should be carried out, and should be augmented by a contribution from the company of which her children were the owners; and it was thereupon determined as a single unified plan: that there should be organized a charitable corporation to effectuate Mrs. Thatcher's plans, that by her will such charitable corporation should be a substantial beneficiary, and that The M. D. Thatcher Estate Company should create a trust, to consist of approximately Five Hundred and fifty Thousand Dollars ($550,000) in value of securities, of which Mrs. Thatcher should receive the income for life and the remainder should be devoted to the same charitable purposes provided for by Mrs. Thatcher's will and the charter of such charitable corporation.
Accordingly, on November 10, 1924, the stockholders of The M. D. Thatcher Estate Company duly adopted a resolution, which provided as follows:
"WHEREAS, Luna A. Thatcher has long planned to devote the major portion of her estate to charitable uses, and particularly on her death to the establishment of some worthy memorial; and
"WHEREAS, we so heartily approve of this purpose that we wish to have a part in its accomplishment and now want to create a fund that will insure a memorial of adequate dignity and strength.
"NOW, THEREFORE, BE IT RESOLVED: That the officers and directors of this corporation be and hereby are directed to authorize and execute a deed of trust in the following form and to deliver the same with the trust property therein described to the trustees therein named: —"
At the same time Mr. Gast proceeded with the organization of the proposed charitable corporation, under the name of "Charities, Inc.," and on December 19, 1924, the organization of such corporation was completed. * * *
Paragraph second of the certificate of incorporation provided as follows:
The objects of this corporation shall be to receive gifts and grants of money and property of every kind and to administer the same for charitable, educational, civic and philanthropic uses and to do anything necessary or proper for the accomplishment of these purposes.
On November 1, 1934, the certificate of incorporation was amended to read as follows:
SECOND: The objects of this corporation shall be to receive gifts and grants of money and property of every kind and to administer the same exclusively for charitable, educational, scientific, and philanthropic uses within the State of Colorado and to do anything necessary or proper for the accomplishment of these purposes.
On November 21, 1935, the certificate of incorporation was further amended to read as follows:
SECOND: The objects of this corporation shall be to receive gifts, legacies and grants of money and property of every kind and to administer the same exclusively for charitable or educational purposes entirely within the State of Colorado and to do everything necessary or proper for the accomplishment of these purposes, and no funds or property of the corporation shall ever in any way inure to be used for the benefit of any member, officer or employee of the corporation and at no time shall the corporation carry on propaganda or otherwise attempt to influence legislation.
The corporation was organized solely for Luna A. Thatcher, and the trustees and incorporators acted in said incorporation solely in her behalf, her name not appearing as an incorporator, in order to avoid public comment.
For the same reason the corporation so formed did not originally use the name "Mahlon D. and Luna A. Thatcher Foundation," which it afterwards adopted, or the name "Mahlon D. and Luna A. Thatcher Memorial Association," by which it was described in the proposed deed of trust; but it was at all times contemplated by all of the persons interested that upon Mrs. Thatcher's death and the transfer to such corporation of the corpus of the trust the name of the corporation should be changed in substantial accordance with the designation used in the trust indenture.
Prior to the organization of Charities, Inc., Luna A. Thatcher's attorney, Gast, prepared for her and she executed a will in which it was provided that her residuary estate was bequeathed to her executors in trust, with instructions to organize a charitable corporation and transfer the trust property to the corporation.
On December 30, 1924, The M. D. Thatcher Estate Company completed the execution and delivery of the deed of trust authorized by the foregoing resolution of the stockholders of said corporation, and the trustees accepted the same. * * *
The pertinent provisions of the trust instrument are as follows:
Four. All of the net income of the trust funds and property shall be paid over at frequent and convenient intervals and not less often than semi-annually to Luna A. Thatcher of Pueblo, Colorado, throughout her life.
Five. As soon as may be after the death of the said Luna A. Thatcher, the Trustees shall devote all trust funds and property to the creation or endowment of a suitable memorial to the memory of Mahlon D. and Luna A. Thatcher and to accomplish this purpose shall transfer and pay over all trust funds and property to any benevolent corporation or one not for profit that may have been formed for this purpose by Luna A. Thatcher during her lifetime, or that may be formed by her executors pursuant to her testamentary direction it being anticipated that she will cause to be formed for this purpose a corporation to be known as The Mahlon D. and Luna A. Thatcher Memorial Association.
Immediately upon the execution, delivery, and acceptance of said deed of trust the M. D. Thatcher Estate Co. transferred and delivered to the trustees named therein the securities therein mentioned. The securities had an aggregate market value of $562,102.21 and produced an annual income of $22,070.
It is further stipulated in part as follows:
The value of the remainder of said trust after the life estate, as of December 30, 1924, was $397,513.06, determined by multiplying the actual value of the securities and cash placed in trust, ($562,102.21), by .70719, the factor applicable to a trust remainder after a life estate of a person sixty-nine years of age.
The value of the life estate in the trust as of December 30, 1924, was $164,589.15.
After the transfer of said securities to the Trustees, Luna A. Thatcher, during her lifetime, executed several wills, by each and all of which she made substantial bequests to Charities, Inc.
Mrs. Thatcher died December 31, 1935, and by her last will and testament (executed December 6, 1935), she provided in paragraph twenty-six thereof as follows:
"In furtherance of my plans to do what I can for the community in which I have lived so happily, but not wishing at this time to publicly disclose my purposes, I have caused to be formed under the laws of the State of Colorado, CHARITIES, INC., a corporation not for pecuniary profit, with powers limited to the furthering of charitable and educational uses, and I now request my children and their associates in control of that corporation to change its name to THE MAHLON D. AND LUNA A. THATCHER FOUNDATION.
"Wishing as I do with all my heart to make Pueblo a better place in which to live and with high hopes that the funds for which I now make provision may be so used as to bring comfort and happiness to some who otherwise would lack it, I give, devise and bequeath one-half (½) of all the rest, residue, and remainder of my property, real, personal and mixed, wherever situate, including all lapsed legacies and bequests, to said Charities, Inc., its successors and assigns forever. As community needs may change and as I can not now forecast how this bequest can best be used when it becomes available, I merely request my children who are in control of Charities, Inc. to exercise their best and most sympathetic judgment in determining the use or uses to which these funds shall be devoted."
Immediately after the death of Mrs. Thatcher, by amendment to the Certificate of Incorporation of Charities, Inc., filed with the Secretary of State of Colorado on June 3, 1936, the name of that corporation was changed to "The Mahlon D. and Luna A. Thatcher Foundation."
Shortly thereafter the trustees of the trust created by the trust indenture hereinbefore described transferred and delivered to said corporation, The Mahlon D. and Luna A. Thatcher Foundation, all the securities and property held by such trustees in trust, and the said corporation has continuously thereafter engaged in the active conduct and operation of the charitable and educational activities provided for by its charter.
At all times herein mentioned it was the intention of Luna A. Thatcher and of petitioner and its officers, directors and stockholders, and of the trustees of said trust and the trustees and officers of Charities, Inc., that the remainder after the life estate in said trust should be used exclusively for charitable and educational purposes, and the same has been and is now being so used, and has not been and is not now being used for any other purpose.
* * * * * * *
It is further stipulated and agreed that if this Board should adjudge that the remainder created after the life estate of Luna A. Thatcher in the property transferred in trust by the petitioner under date of December 30, 1924, constitutes an allowable deduction from the total gifts made by the petitioner in the year 1924, then the deficiency in gift tax to be determined in this proceeding is the sum of $372.81.
OPINION.
DISNEY:
The assignment of errors herein raises issues the determination of which involves the consideration of sections 319 and 321 (a) (2) of the Revenue Act of 1924. Section 319 imposes a tax upon the transfer by a resident by gift, during the calendar year 1924, of any property wherever situated, whether made directly or indirectly. Section 321 provides that, in computing the amount of the gifts subject to the tax imposed by section 319, there shall be allowed as deductions:
(a) In the case of a resident
* * * * * * *
(2) The amount of all gifts or contributions made within the calendar year 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, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees * * * but only if such gifts or contributions are to be used by such trustee or trustees * * * exclusively for religious, charitable, scientific, literary, or educational purposes, * * * and the amount of all gifts or contributions made within the calendar year by such corporation, trustee * * * or association for a religious, charitable, scientific, literary or educational purpose * * *.
In the consideration and determination of the issues in the instant case, we must bear in mind that charitable bequests are favorites of the law, St. Louis Union Trust Co. v. Burnet, 59 Fed. (2d) 922, are expressly encouraged by statute, and should be broadly construed. Edwards v. Slocum, 264 U. S. 61; John Markle et al., Executors, 28 B. T. A. 201, 204; Ould v. Washington Hospital, 95 U. S. 303; and Helvering v. Bliss, 293 U. S. 144, 151.
The deductibility of a gift to charity under section 321 (a) (2), supra, must be determined as of the date the gift was made.
In the instant case, the question is whether on December 30, 1924, the date of the execution and delivery of the trust instrument and the securities described therein to the trustees designated by the M. D. Thatcher Estate Co., the remainder interest in the trust fund here involved was so transferred and vested in the three trustees named in the trust instrument as to render the transfer of the remainder interest subject to tax in 1924, as claimed by the respondent, or whether the petitioner is entitled to a deduction of the amount of said remainder interest from the total amount of gifts, as claimed by petitioner under section 321 (a) (2), supra.
The trust instrument does not use the exact language employed in the statute, section 321 (a) (2), which, in applicable instances, authorizes the allowance of deductions such as claimed by the petitioner. Paragraph five of the trust deed directed that after the death of Luna A. Thatcher the trustees "shall transfer and pay all trust funds and property to any benevolent corporation or one not for profit that may have been formed for this purpose by Luna A. Thatcher during her lifetime, or that may be formed by her executors pursuant to her testamentary direction, it being anticipated that she will cause to be formed for this purpose a corporation to be known as The Mahlon D. and Luna A. Thatcher Memorial Association."
Mrs. Thatcher died December 31, 1935, and by her last will and testament, executed December 6, 1935, provided in paragraph twenty-six, as set forth in our foregoing findings of fact, in effect that she had organized Charities, Inc., a corporation not for pecuniary profit, but for charitable and educational uses, and that in order to bring comfort and happiness to some who otherwise would lack it, she gave one-half of her property to Charities, Inc.
The record shows that the alleged "charitable corporation" which Mrs. Thatcher "caused to be formed" was "Charities, Inc.", the organization of which was completed on December 19, 1924. The second article of its certificate of incorporation states:
The objects of this corporation shall be to receive gifts and grants of money and property of every kind and to administer the same for charitable, educational, civic and philanthropic uses and to do anything necessary or proper for the accomplishment of these purposes. Italics supplied.
There is therein no requirement in exact terms that the gifts and grants of money and property received by it should be administered "exclusively" for the uses enumerated therein nor are the uses for which the gifts and grants therein were to be administered identical with those set out in section 321 (a) (2), supra, which in applicable instances entitles the donor to deductions as indicated therein.
Not until November 1, 1934, approximately ten years after the trust instrument was executed and the securities were transferred and delivered to the trustees, was there an amendment to the second article of the certificate of incorporation of "Charities, Inc." That amendment required that the administration of the gifts and grants of money and property to it should be "exclusively for charitable, educational, scientific, and philanthropic uses." The word "civic" was eliminated from said article as amended.
On November 21, 1935, shortly before the execution (December 6, 1935) by Mrs. Thatcher of her last will and testament, the second article of the certificate of incorporation of Charities, Inc., was again amended as shown in our findings of fact, the word "legacies" being added and also a provision that "no funds or property of the corporation shall ever in any way inure to be used for the benefit of any member, officer or employee of the corporation * * *."
Our question is, therefore, whether the language used in the trust deed and in the original unamended certificate of incorporation of Charities, Inc., authorizes the exemption claimed under section 321 (a) (2) of the Revenue Act of 1924. Considering the conclusions to which we have come, we find it unnecessary to decide whether the trust deed or the certificate of incorporation controls. In our opinion, the language of both instruments satisfies the requirements of the statute. In both instruments it is obvious that the purposes therein set forth are exclusive for the reason that in the trust instrument "all" trust funds and property are to be devoted to the purposes named, and the purposes named in the certificate of incorporation are by law exclusive, the objects of the corporation being named and any other objects or action outside of the named objects being ultra vires. We think the expressions "benevolent corporation or one not for profit" in the trust instrument, and "charitable, educational, civic and philanthropic uses" in the original certificate of incorporation, when construed with the breadth and liberality required of us, fairly and plainly conform to and come within the purview and intendment of the statute. In our opinion, the statute uses the word "charitable" in its broad sense, connoting selflessness as contradistinguished from selfishness, and that it was the intent of the statute to exclude from the provisions of the gift tax those gifts or conveyances made for an unselfish, and not a private and selfish purpose. "Caritas", the etymological origin of "charitable", undoubtedly embraced broadly a meaning of regard or love for mankind. Bok v. McCaughn, 42 Fed. (2d) 616. We think the expression as used today covers and includes "civic and philanthropic", as well as "benevolent" and "not for profit" — the various expressions used in the two instruments being considered here. Each of these expressions is an attribute of charity; each negatives the idea of personal or selfish purposes. This is particularly true of the words "civic and philanthropic" when they are used in the same phrase with the statutory expression "charitable." Saltonstall v. Sanders, 11 Allen (Mass.), 446; In re Cunningham's Will, 136 N. Y. S. 922; and In re Murphy's Estate, 184 Pa. 310; 39 Atl. 70. The word "charitable" does not appear in the trust instrument, the language there being "benevolent" and "not for profit." Inasmuch, however, as the corporation had already been formed at the date of the trust instrument, by the same parties and through the same attorney and as a part of a "single unified plan" with the execution of the trust instrument, we think the two instruments should be read together, and that the purposes of the already formed corporation are inserted into the trust instrument, and that it can not be said that the expression "charitable" is not in effect a part thereof. Independently, however, of that consideration, we consider and hold that charitable covers and includes the expressions used in both instruments. It has been said that charity covers a multitude of sins; we think it may well be considered to cover a few virtues of a character kindred to charity. In Ould v. Washington Hospital, supra , a charitable use is defined as follows:
A charitable use, where neither law nor public policy forbids, may be applied to almost anything that tends to promote the well-doing and well-being of social mean.
See also Rotch v. Emerson, 105 Mass. 431; St. Louis Union Trust Co. v. Burnet, supra; 48 C. J. 1054; Fox v. Gibbs, 86 Me. 87; 29 Atl. 940; Gossett v. Swinney, 53 Fed. (2d) 772, 777; and Union & New Haven Trust Co. v. Eaton, 20 Fed. (2d) 419.
The word "civic" has been included within the meaning of charitable upon consideration of a charitable deduction for income tax purposes, where the expression used was "either civic, charitable or benevolent" purposes. Johnson v. United States, 8 Fed. Supp. 842. The word "public," considered in Michigan Trust Co. v. United States, 21 Fed. Supp. 482, and Jackson v. Phillips, 14 Allen (Mass.), 539, 556. includes among charities the erection or maintenance of public buildings or works or otherwise lessening the burdens of government. Webster v. Wiggins, 19 R. I. 73; 31 Atl. 824, characterizes as charitable funds those from private gift, for any legal or public purpose. In re Estate of Graves, 242 Ill. 23; 89 N. E. 672, considered as charitable a gift to erect a public drinking fountain for horses. Benjamin Franklin's will, providing a fund to be expended in building or procuring public works to promote the convenience and comfort of the people of Boston, was held a valid charitable gift. City of Boston v. Doyle, 68 N. E. 851.
Furthermore, though under the above authorities we do not think it is necessary to this opinion, we believe that the use of the word "civic" comes within that portion of the language of the statute exempting gifts to or for the use of a state or political subdivision thereof. In its origin, the word "civic" means that which has to do with the state (civis, meaning citizen; civitas, meaning state). It seems plain, therefore, that any civic matter has to do with a "state or a * * * subdivision thereof", within the language of the statute, and we do not think this view is inconsistent with the not uncommon use of the word "civic" in connection with matters of a city or town. Although under some jurisdiction cities are not political subdivisions of the state in a technical sense, yet obviously within the broad meaning of the term, as indicated by its origin, they are a part of the state. For this additional reason, therefore, we believe that the word "civic" is to be included within the connotation of "charitable."
In the light of the above conclusions, it is unnecessary to pass upon the question as to whether the intention of the trust instrument may be gathered from circumstances outside of the instrument itself, or to decide whether, if the trust instrument did not provide for charitable use, it was void for indefiniteness and, therefore, as a resulting trust was not subject to gift tax; although under primary principles of interpretation of instruments it would appear that the trust instrument would be subject to explanation by evidence dehors the instrument itself, and although the Colorado statute under which the validity of the trust would be determined apparently provides, by section 5161.1, Compiled Laws of 1932, that indefiniteness or uncertainty of beneficiary does not invalidate a gift for such charitable purposes as herein involved.
In our opinion, the respondent's contention, that to include within the intendment of the statute the expressions involved in the instruments here being considered would be beyond proper bounds of judicial interpretation, is not well founded, nor do the cases cited control. We have here for interpretation words of general import, and we consider it wholly within the bounds of proper principles of interpretation to ascertain whether the general expressions of the statute cover and include those of the instruments here involved.
After full consideration of the record herein and briefs of counsel citing numerous authorities, examined though all not discussed, we are of the opinion and hold that the value of the remainder interest of the aforesaid trust in the securities transferred and delivered by petitioner to, and accepted by, the trustees of Charities, Inc., on December 30, 1924, is allowable as a deduction from the total amount of the gifts involved herein. The action of the respondent in disallowing the claimed deduction of said remainder interest, $397,513.06, is accordingly disapproved.
The parties have stipulated that if the Board should determine that the gift (so far as concerned the remainder of the life estate in the property transferred in trust) constitutes an allowable deduction from the total gifts made by the petitioner in the year 1924, then the deficiency in gift tax is $372.81. We therefore hold and determine that there is a deficiency in gift tax in this proceeding in the sum of $372.81.
Decision will be entered redetermining the deficiency in gift tax to be the amount of $372.81.