Comm'r of Internal Revenue

Tax Court of the United States.Apr 11, 1946
6 T.C. 702 (U.S.T.C. 1946)
6 T.C. 702T.C.

Docket No. 4754.



Raymond T. King, Esq., for the petitioner. Carl A. Stutsman, Esq., for the respondent.

Held, that petitioner is not entitled to deduct, under section 27(o)(2) of the Internal Revenue Code, sums of money contributed by him in 1940 to the trust estate of Percival Lowell for use in carrying on scientific work at the Lowell Observatory, because the observatory is not a separate entity, but rather a part of the trust estate, and the trust estate is not operated exclusively for scientific purposes, the widow of Percival Lowell receiving substantial benefits therefrom. Raymond T. King, Esq., for the petitioner. Carl A. Stutsman, Esq., for the respondent.

Respondent determined an income tax deficiency of $3,420.25 against petitioner for the year 1940. Petitioner claimed an overpayment. The only adjustment now contested is repsondent's disallowance of a deduction for a contribution of $7,260 to the Lowell Observatory at Flagstaff, Arizona, claimed under section 23(o)(2) of the Internal Revenue Code. A second issue raised in the pleadings, relating to certain dividend income, has been disposed of by agreement of the parties, and effect will be given thereto in the recomputation under Rule 50.


Petitioner, an individual, resident at Springfield, Massachusetts, is the present trustee under the will of the late Percival Lowell. His income tax return for 1940 was filed with the collector of internal revenue at Boston.

In 1893 Percival Lowell established the Lowell Observatory at Flagstaff, Arizona. He thereafter devoted his life and his fortune to the development of the observatory until his death, testate, in 1916. His will, executed February 21, 1913, reads in part as follows:

Third, I give to said Constance S. Lowell the sum of One Hundred and Fifty Thousand ($150,000) dollars and all my personal and household effects and my automobile.

Fourth, all the rest and residue of my property I give to my brother-in-law, William Lowell Putnam, to be held subject to the provisions hereinafter made for my wife, in trust for the Lowell Observatory. The property shall be invested. Ten (10) per cent of the net income shall be added yearly to the principal, and the balance of the net income shall be used for carrying on the study of Astronomy, and especially the study of our Solar System and its evolution, at my Observatory, at Flagstaff, Arizona, and at such other places as may from time to time be convenient.

In addition to my Observatory at Flagstaff, and except as hereinafter provided for the benefit of my wife, not exceeding three (3) per cent of the capital of the original trust fund and its accretions and the accumulations resulting from the addition of ten (10) per cent of the annual income as aforesaid shall be kept invested in real estate, but nothing herein shall prevent the trustee from investing income in real estate to any amount, nor from receiving additional sums of money from other sources to be invested in real estate, or otherwise.

The trustee shall also have full control of the management of the trust and shall have power to appoint, select and discharge the director and all other employees and agents of the Observatory, but I hope that Dr. V. M. Slipher will be appointed the first director after my decease, and that Mr. C. O. Lampland will succeed him.

Each trustee shall appoint his own successor within a week, or as soon as possible after his accession to his office, in order that no failure of a regular nomination may take place. This appointment of his successor shall be made by means of a written instrument to be delivered to the American Academy of Arts and Sciences, which they shall open after the decease or resignation of the trustee who delivered it to them. The trustee may at any time and as often as he sees fit, revoke his former appointment and take back the aforesaid instrument, substituting another in its place. He may also nominate his successor in his will if he pleases so to do; and in case of a difference in the person nominated in the will and him who is nominated in the above mentioned instrument, the individual nominated by the instrument last executed shall be his successor. In selecting a successor, I hope that preference will be given to a male descendant of my immediate family if a suitable one exists. A trustee may resign by written instrument delivered to said American Academy of Arts and Sciences.

In case of a vacancy occurring in the office of trustee which has not been filled as aforesaid, a trustee shall be appointed in a written instrument delivered to said Academy by the oldest male descendant of my father, Augustus Lowell, then living, who may appoint himself or any other qualified person.

The trustee for the time being shall have all the rights titles and powers and be subject to all the duties herein given to or imposed upon the original trustee.

Fifth, The Lowell Observatory shall at no time be merged or joined with any other institution.

Sixth, Provided, however, that during the life of my said wife she shall have the right to occupy my house numbered 11 West Cedar Street and 102 and 104 Mount Vernon Street, Boston, Massachusetts, rent free during her life, and shall receive from the above trust an annuity of Sixty Thousand ($60,000) Dollars per year, and in case said house is sold shall be entitled to a corresponding increase in her annuity, or to have an appropriate amount invested in a suitable dwelling house elsewhere, which she may occupy rent free during her life. All taxes on such houses shall be paid out of the residue of the income of the trust.

The following codicils to the will were executed on the dates indicated:

March 1st 1913.

Instead of one hundred and fifty thousand dollars, I give one hundred and seventy-five thousand to my wife Constance. I direct that she shall receive one-half of the income net after deduction of the 10% from the trust fund instead of sixty thousand dollars a year. I also direct that she shall be consulted about the conduct of the Observatory.


Instead of William L. Putnam, I appoint Harcourt Amory my executor and first trustee.

Nov. 22, 1914.

I hereby appoint as trustee of the Lowell Observatory George Putnam in place of W. L. Putnam and Harcourt Amory heretofore mentioned and I enjoin him to appoint as director of the Observatory first, Dr. V. M. Slipher and Mr. C. O. Lampland, unless some important reason arises to the contrary.

December 15, 1915.

I hereby direct that my wife, Constance, shall have the right to live in and enjoy the B. M. house at the Lowell Observatory during her life.

The Lowell Observatory is a scientific organization, engaged in astronomical observation and research and related fields of work. It is not incorporated.

Petitioner, the nephew of Percival Lowell, has been the sole trustee under the will of the latter since 1927 and is the second person to occupy that position. The property of the trust from which the trust income is derived consists primarily of securities.

When petitioner became trustee, he received from his predecessor sets of books that had been kept for the estate and for the observatory. Separate and complete sets of books were kept for each. Two bank accounts were maintained in Boston in the name of the ‘Estate of Percival Lowell.‘ One of these accounts, with the Old Colony Trust Co. at Boston, was used exclusively by the observatory. The other account was used for the general administration of the trust estate. The income produced by the trust properties when received was deposited in the latter account. From it payments were made to Percival Lowell's widow of her share of the trust income, taxes were paid on the residence in which she lived and on other property held by the trust, etc. Also, at quarterly intervals the observatory's share of the trust net income was checked out of the general trust account and deposited in the observatory account. The observatory account in Boston was used primarily to transfer funds direct to Arizona bank account of the observatory and occasionally to make payments for purchases of scientific instruments and the like in the East.

Some time in 1940 petitioner, for convenience, transferred the Boston Observatory account to Springfield. The account with the Springfield National Bank was in the name of the ‘Lowell Observatory,‘ and checks on that account were signed ‘Lowell Observatory, by Roger L. Putnam, Trustee.‘

At various times the observatory has had Arizona bank accounts with the Phoenix National Bank, the Bank of Arizona, and the First National Bank of Arizona. In 1940, only the First National Bank of Arizona account was used in Arizona for the operation and maintenance of the observatory. Checks on the Arizona bank accounts were signed ‘Lowell Observatory, by V. M. Slipher, Director.‘

In a number of years since he became trustee, petitioner, in order to keep the scientific work of the observatory going, to pay salaries, and to buy photographic supplies, has supplemented from his own personal funds the income which the observatory received from the trust estate. In 1940 his contributions to the observatory for such purposes totaled $7,260. These contributions were made by him directly into either the Massachusetts or the Arizona bank account of the observatory, and not into the trust bank account. No part thereof inured to the benefit of Percival Lowell's widow or affected in any way what she received or was entitled to receive from the trust estate under the terms of the will.

The gross income of the trust estate in 1940 was $33,249.12, and the net income was $26,661.30. The sum of $13,330.68 was paid to Mrs. Lowell, and a like amount was paid into the bank account of the observatory.

In his return for 1940 petitioner claimed a deduction on account of the $7,260 he had contributed for operation and maintenance of the observatory, subject to the 15 percent limit of section 23(o) of the code. Respondent refused to allow any part of that sum as a deduction.

During 1940 petitioner received certain distributions from the Boston Real Estate Trust in the amount of $1,437. By agreement of the parties, 52.13 percent of that amount is a nontaxable return of capital, and the remainder of $687.69 is includible as taxable income to petitioner for the year 1940.



Respondent does not contend that the character of the work carried on at the Lowell Observatory is not of a scientific nature, but his objections to allowing the deduction claimed are that the observatory has no separate or independent existence apart from the trust estate, and that the trust estate fails to meet the requirements of section 23(o)(2) of the Internal Revenue Code. He points out that the property which is designated as Lowell Observatory consists of the buildings, the land on which they are erected, and the equipment in and adjacent to the buildings, and that the title to all this property is in the trustee. He then, contends that the trust estate was not organized and operated exclusively for scientific purposes, because one-half the annual net income of the trust, after deducting the 10 percent which is added to corpus, is paid to the testator's widow, a private individual.

SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(o) CHARITABLE AND OTHER CONTRIBUTIONS.— In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:(2) A corporation, trust, or community chest, fund, or foundation, created or organized in the United States or in any possession thereof or under the law of the United States or any State or Territory or of any possession of the United States, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation;to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary.

Petitioner, on the other hand, urges upon us the contention that the observatory itself, as distinct from the Lowell trust, should be characterized as a fund or foundation, no part of the net earnings of which inures to the benefit of any private shareholder or individual. He relies on Faulkner v. Commissioner, 112 Fed.(2d) 987, in support of his contention but we think a careful reading of that case will disclose that the court's opinion does not help this argument. It is true that the court stated:

We are not prepared to assent to the proposition that a gift to a charitable agency, otherwise deductible, loses its deductibility merely because that agency may have been established, or indeed controlled, by a non-exempt organization. That a gift to the parent organization would not be deductible does not imply that the parent organization is an outlaw whose sponsorship of any charitable agency ‘taints‘ the latter with non-deductibility; * * *

Earlier in its opinion, however, the court said:

* * * Apparently a non-exempt organization cannot obtain deductibility for contributions to an admittedly charitable object by setting up a separate trust fund to be applied to that object only, and soliciting contributions thereto. * * * That the ‘fund‘ must be a distinct organization is implied in the corresponding provisions of section 101(6) of the Revenue Act of 1934 * * * where the same word is used. (Italics supplied.)

Actually, the decision in that case turned upon another ground, namely, that the parent organization itself was exempt under the statute. We conclude, therefore, that the case is of no aid to petitioner here.

The difficulty with petitioner's contention is that the observatory is not a separate or distinct entity, but is an inseparable part of the trust estate. We are here concerned, not with a situation in which a parent organization sponsors, establishes, or controls a separate subsidiary organization, or agency, but only with a single and indivisible entity— the trust estate of Percival Lowell. Any contribution made to carry on the work of the observatory is necessarily made to the trust estate. We think it is immaterial that, for convenience, the trustee maintained separate bank accounts, because all the accounts, regardless of how they were designated, necessarily belonged to the trust estate and were under the control and management of the trustee.

On this point we think the respondent must be sustained.

Petitioner makes the further argument that even if the observatory is not a separate entity, the trust itself is such an organization as qualifies under section 23(o)(2). It does not seem to us that it can be seriously argued that the trust estate considered as a single entity is operated exclusively for scientific purposes. The benefits derived by the testator's widow are too material to be ignored, for she receives approximately one-half of the income of the trust and has the right to live in residences owned by the trust. Taxes on the residences are paid by the trust.

We have carefully considered other contentions advanced by petitioner, but think they are without merit. We conclude that respondent did not err in disallowing the claimed deductions.

Decision will be entered under Rule 50.