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BANKERS TRUST CO. v. UNITED STATES

December 29, 1960

BANKERS TRUST COMPANY and Leonard M. Wallstein as Executors of the Will of Charles Newman, deceased, Plaintiffs,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: PALMIERI

In this action brought by the executors of the estate of Charles Newman, a refund of a portion of the estate tax heretofore paid is sought upon the ground that the Commissioner erroneously disallowed a claimed deduction for the present value of a trust remainder to charity. Both sides have moved for summary judgment.

The Undisputed Historic Facts

Charles Newman died on October 26, 1950. During his lifetime he established a trust providing that, upon his death, the income thereof was to be paid to Anne Marie Hughes and, upon her death, the principal thereof was to be distributed 'to and among the issue of said Anne Marie Hughes, her surviving.' In default of such issue the principal was to be paid to a charitable foundation, bequests to which, in accordance with the Commissioner's ruling, are exempt from federal Taxation.

 Anne Marie Hughes had been Charles Newman's devoted private secretary for the thirty years preceding his death. At the date of his death she was 47 years of age, had been married for 17 years and was childless. *fn1" Upon the taking of her deposition, Mrs. Hughes stated that on October 26, 1950 neither she nor her husband was aware of any physical impediment which might have prevented her from bearing children. *fn2"

 Because the trust was revocable, the full principal, aggregating $ 83,114.36, *fn3" was included in Charles Newman's gross estate. The full principal was also included in the net estate subject to taxation since the Commissioner disallowed the deduction for the remainder to charity originally itemized in the estate tax return. Asserting that the charitable remainder was a deductible item and that its present value on the date of Charles Newman's death was $ 37,384.38, the portion of the estate tax allocable to which was $ 15,107.21, plaintiffs duly filed a claim for refund. Following the Commissioner's rejection of the administrative claim, plaintiffs instituted this action. *fn4"

 The Question Presented

 Plaintiffs base their right to the claimed deduction upon section 812(d) of the Internal Revenue Code of 1939 and the regulations thereunder. Section 812(d) permits as a deduction from the value of the gross estate the amount of all transfers to charitable uses. *fn5" As specified in section 81.44(d) of Treasury Regulations 105, 'if a trust is created for both a charitable and a private purpose,' a deduction may be taken only insofar as the interest in favor of the charitable purpose 'is presently ascertainable.' *fn6" Where, as here, the transfer to charity is conditional in form, the Regulations, in section 81.46(a), go on to provide that 'no deduction is allowable unless the possibility that the charity will not take is so remote as to be negligible.' *fn7" Thus, the question presented is whether, at the date of Charles Newman's death, the remainder to charity, conditioned upon the survival of issue of Anne Marie Hughes, then age 47, married 17 years and childless, had a 'presently ascertainable' value and was sufficiently certain to be enjoyed by the charity.

 The affirmative answer of the plaintiffs is supported by affidavits of medical and actuarial experts tending to show the remote 'statistical probability' of a first birth to a white American married female, living with her husband, at age 47. *fn8" The Government's conclusion that the remainder interest was too remote at the time of Charles Newman's death to qualify for the deduction rests on two propositions: first, the presumption that Mrs. Hughes was physically capable of bearing children was not rebutted by medical evidence; *fn9" second, the charity's chance of enjoying the remainder could not be determined with a sufficient degree of reliability since actuarial estimates as to the occurrence of the contingency, birth of issue to the life tenant, failed to account for a peculiarly individual factor -- the exercise of volition on the part of Mrs. Hughes.

 Neither party has argued that the question is one of valuation. Cf. Commissioner of Internal Revenue v. Maresi, 2 Cir., 1946, 156 F.2d 929. In this respect, I agree with the position shared by the parties that in Commissioner of Internal Revenue v. Sternberger's Estate, 1954, 348 U.S. 187, 75 S. Ct. 229, 99 L. Ed. 246, 55 Colum.L.Rev. 924 (1955), the Supreme Court excluded as a possible approach fragmentation of the claimed deduction to reflect the chance that the charity might not enjoy the remainder interest. Stating that it found 'no statutory authority for the deduction from a gross estate of any percentage of a conditional bequest to charity where there is no assurance that charity will receive the bequest or some determinable part of it,' 348 U.S. at page 199, 75 S. Ct. at page 235, the Court indicated that an 'all or nothing' approach must be taken. *fn10" I am, therefore, faced with the necessity of placing this case on one side of the line or the other.

 The Relevant Factors

 In the absence of evidence to the contrary and in view of the testimony given by Mrs. Hughes upon the taking of her deposition, *fn11" I must assume that on October 26, 1950, the contingency which could defeat the charitable remainder was a physical possibility. See United States v. Provident Trust Co., 1934, 291 U.S. 272, 54 S. Ct. 389, 78 L. Ed. 793. However, plaintiffs' failure to rebut the existence of the bare physical possibility of issue is not necessarily fatal to their claim. For, under the applicable Regulations, *fn12" the test is whether the possibility, assuming that it did exist, was 'so remote as to be negligible.' See City Bank Farmers' Trust Co. v. United States, 2 Cir., 1935, 74 F.2d 692; Rev.Rule 59-143, 1959-1 Cum.Bull. 247; cf. note 15, infra, and text thereat.

 Both the Commissioner in Rev.Rule 59-143 and the Court of Appeals for this Circuit in City Bank Farmers' Trust Co. v. United States, supra, relied upon data reported in Bureau of Census publications rather than direct medical evidence in determining whether the contingency of a first birth was 'so remote as to be negligible.' Cf. Commissioner of Internal Revenue v. Sternberger's Estate, supra, 348 U.S. at page 196, note 8, 75 S. Ct. at page 234. The Second Circuit had before it a bequest conditioned upon the failure of issue of a female life tenant who was 59 and had never had a child up to the date of the testator's death. The Revenue Ruling dealt with a bequest in default of issue of decedent's daughters whose ages were 55 and 59 years, respectively, at the time of decedent's death. Significantly, the Department of Commerce statistics showed no recorded births to women of 55 years and over. *fn13"

 It is illuminating to contrast with these cases the situation presented in In re Cardeza's Estate, 3 Cir., 1958, 261 F.2d 423. There, a reversion was contingent upon the failure of issue of decedent's 64 year old son. Under the applicable code section, *fn14" the property was to be included in the decedent's gross estate if the value of the reversion exceeded 5 per cent of the value of the property. Accordingly, the Government attempted to use birth statistics for fathers aged 55 and over to establish that the reversionary interest retained by the decedent was 'at least' 7.976 per cent of the value of the property. No medical evidence was offered as to the 64 year old son's capacity to procreate. Because of the volitional element and the monetary benefit attendant upon the birth of issue, the Third Circuit rejected the statistical analysis as an insufficient basis upon which to rest a conclusion that the reversion exceeded 5 per cent. Ruling in favor of the taxpayer's contention that the volitional element rendered the Government's actuarial computations an unreliable guide, the Court stated:

 'The government (has not) attempted to adjust its figures to indicate what the procreative figures would be for 65-year-old men with the decided inducement to have progeny that was ...


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