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Lincoln Rochester Trust Co. v. McGowan

decided: November 15, 1954.


Author: Medina

Before SWAN, MEDINA and HARLAN, Circuit Judges.

MEDINA, Circuit Judge.

Frank M. Harroun, the decedent, died on September 29, 1946, leaving a last will and testament which was duly admitted to probate in the Surrogate's Court, Monroe County, New York. Plaintiff, the Lincoln Rochester Trust Company, was named as executor and trustee of the will on October 10, 1946.

After making certain specific bequests, the decedent, in paragraph Seventh of his will, left the residue of his estate in trust, to pay the net income to his wife, Daisy L. Harroun, for life, and upon her death, to distribute the principal and accumulated income, after payment of two small bequests to individuals, to certain named institutions which qualified as charitable organizations within the provisions of Section 812(d) of the Internal Revenue Code, 26 U.S.C.A.

Paragraph Seventh of the will also provided:

"My trustee is hereby authorized to take, from the principal of the trust herein provided for my wife, such sum or sums as in its sole discretion may be necessary to meet any unusual demands, emergencies, requirements or expenses for her personal needs that may arise from time to time. A letter addressed to the trustee, requesting the payment of such sum or sums and signed by my said wife, shall be good and sufficient authority for the payment of such sum or sums, but said letter shall not bind or obligate my said trustee to pay any sum or sums, but the said trustee shall use its discretion solely, and its judgment shall be final and shall be binding and conclusive on all the parties interested herein. This clause is intended to provide for emergencies arising from sickness, accident or failure of investments. Need caused by support by my said wife of, notes signed by her with or endorsed for, or any obligation assumed for another, should not considered sufficient reason."

In decedent's federal estate tax return, duly filed with the Collector of Internal Revenue for the Twenty-eighth District of New York, the executor claimed as a deduction the sum of $80,687.74, which sum, according to the return, represented the value at the date of decedent's death of the charitable bequests called for by paragraph Seventh of the will.

The Commissioner of Internal Revenue disallowed the claimed deduction upon the ground that the beneficial interest in favor of the charities was not presently ascertainable and thereupon assessed a deficiency in the estate tax in the amount of $17,338.66. On December 24, 1948, the executor paid the deficiency together with interest thereon in the sum of $1,025.87. A claim for refund of such payments with interest was filed on December 15, 1950 and, on March 26, 1951, the Commissioner disallowed this claim. This action was accordingly commenced on February 18, 1952.

All of the foregoing facts are admitted in the pleadings. Defendant denied only those allegations of the complaint in which it is claimed in general that the extent of permissible invasion of principal is limited by a standard fixed in fact and capable of being stated in definite terms of money, that the possibility of invasion of principal for the purposes specified by the decedent is so remote that the value of the charitable bequests is presently ascertainable, that the claimed charitable deduction should have been allowed and that the plaintiff should have judgment in the amount of $18,364.53 with interest from December 24, 1948. Defendant asserted that it was without knowledge or information sufficient to form a belief as to the truth of those allegations of the complaint in which it is claimed that the income from the decedent's estate since the date of his death had been greater than the sum actually required for the support and maintenance of the decedent's wife and that no part of the principal had been paid over to or expended for her benefit.

Following the denial of a motion for summary judgment filed by the defendant, the case was tried before a judge and jury in the United States District Court for the Western District of New York. 109 F.Supp. 437.

During the course of the trial, plaintiff introduced into evidence certain documentary exhibits together with the testimony of several witnesses which tended to establish facts relative to financial conditions, investments, mode of living and health of the widow after the date of decedent's death. Defendant objected to the admission of this evidence upon the ground that the estate tax is applied on facts existing at the date of the decedent's death and that evidence of facts occurring after that date is immaterial.Included in the evidence admitted over defendant's objection was: Plaintiff's Exhibit 4, a schedule showing the income from the trust and the estate and the payments of income to Mrs. Harroun for the six years, 1947 through 1952; Plaintiff's Exhibit 6, a list of property owned by Mrs. Harroun as of December 31, 1952, together with figures purporting to state the fair market value of these properties as of that date; Plaintiff's Exhibit 7, a statement of Mrs. Harroun's income and cash expenditures for the years 1947 to 1952 and Plaintiff's Exhibit 9, a summary of the information contained in Exhibit 7; Mrs. Harroun's testimony describing the arrangements she had with her son concerning living expenses and duties on the farm from the time he came to live with her in July, 1947 to the date of the trial; Mrs. Harroun's testimony relating to her mode of living and health during the period subsequent to her husband's death; Dr. Lenhard's testimony relating to Mrs. Harroun's mode of living and health during the period subsequent to her husband's death; the testimony of Thomas E. Hargrave, an investment broker, comprising an analysis of the soundness and the conservative and balanced nature of the securities contained in the Harroun Estate as of December 31, 1952.

At the conclusion of the plaintiff's case, defendant moved for a directed verdict upon the grounds: (1) that there were no contested issues of fact which were material to the question presented and (2) that under the terms of the will, the right to invade the corpus is left so open that it could be said, as a matter of law, that the possibility of invasion was great enough that no deduction should be allowed for charitable bequests. This motion was denied; the jury was instructed that the will set up a definite and fixed standard for the exercise of the trustee's discretion in the allowance of payments out of principal and was asked to decide (1) whether it could be predicted with reasonable accuracy whether the right to make payments out of principal would be exercised by the trustee and (2) if it could, to what extent would it be exercised. The jury decided that it could be predicted that there would be no exercise of the right to invade.

Prior to entry of judgment on this verdict, defendant moved for judgment non obstante veredicto or in the alternative for a new trial, asserting: (1) that the will contained no standard fixed in fact and capable of being stated in definite terms of money, sufficient to support a finding as to the possibilities of invasion; (2) that the plaintiff's evidence, viewed in a light most favorable to the plaintiff, did not show that the possibility of invasion could be reasonably predicted, and (3) that the court erred in admitting immaterial, irrelevant and prejudicial evidence offered by plaintiff over defendant's objection, to wit, evidence of facts occurring and circumstances existing subsequent to the death of the decedent. This motion was denied and judgment was entered for the taxpayer. It is from this judgment that the Collector now appeals alleging that the lower court erred in denying his several motions and in admitting, over objection, evidence of facts and circumstances existing subsequent to the date of decedent's death.

The primary question in this type of case is the ascertainment of the intention of the testator as expressed in the will. In the event that the will as thus construed makes the invasion of the corpus depend upon conditions "fixed by reference to some readily ascertainable and reliably predictable facts", so that "the amount which will be diverted from the charity and the present value of the bequest become adequately measurable", Merchants Nat. Bank of Boston v. Commissioner, 1943, 320 U.S. 256, 261, 64 S. Ct. 108, 111, 88 L. Ed. 35, then in that event, and only then, may the trier or triers of the facts proceed to inquire as to the value, at the death of the testator, of the interest of the charities, which thus would constitute a deduction for purposes of computing the ...

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