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Rand v. United States

decided: July 22, 1971.


Smith and Hays, Circuit Judges, and Pollack, District Judge.*fn*

Author: Pollack

POLLACK, District Judge:

This litigation is one of a series brought by the United States to limit the availability of estate tax charitable deductions for estates not governed by the Tax Reform Act of 1969.*fn1 Plaintiff is the executor of the estate of Ormsby MacKnight Mitchel who died in 1964. In his Will the decedent created a trust which provided that the principal should go to various charities after the end of a life estate. The Revenue Service denied a deduction for the present value of the charitable remainder on the ground that the interest is not presently ascertainable and hence is not severable from the noncharitable interest. The estate paid the deficiency and sued for a refund which was awarded to it by the Court below (Clarie, D.J.). For the reasons appearing hereafter, we reverse and dismiss the complaint.

The decedent was a partner in a stock brokerage firm and owned a seat on the New York Stock Exchange used by the firm. He planned to leave the bulk of his estate to several charities. However, he did not wish to cause his partners financial hardship at the time of his death by forcing them to purchase the seat from the estate. As a result, Mitchel left the value of 20% of the seat to two of his partners absolutely. He also bequeathed, in trust, for the life of Henry M. Watts, Jr., his partner, an amount of money equal to 80% of the amount due to the estate in liquidation of the testator's seat capital account in the brokerage firm. Watts was named the trustee of the trust as well as its income beneficiary. The remainder of the trust was given to designated charities.

The trust gave the "entire gross or net income" to the trustee income beneficiary. The trustee was given extremely broad powers to manage and reinvest the principal at his sole discretion in any type of investments, including the power to invest in partnership interests in any brokerage or other firm and in real property, "all without regard to any law concerning the investment of trust funds." The trustee was also given power to charge all operating and maintenance expenses against trust corpus. He was authorized to loan any part or the whole of the trust estate, as trustee, to anyone, including to himself as an individual, for any purpose whatsoever, upon any terms, in his sole discretion. In addition, the Will excused the trustee from the duty to render to any court annual or other periodic accounts whether or not provided by law and directed that any allocation of expenses in relation to the settlement or approval of the accounts made by the trustee was to be binding upon all persons interested.

The District Court found that under the law of Vermont, where the decedent was domiciled at the time of his death, the broad administrative powers did not permit the trustee to deal otherwise than impartially between the life tenant and the remaindermen/charities. Moreover, the District Court pointed to Vermont statutory law which serves in its judgment, to render the value of the remainder interest ascertainable. The statutes referred to are those requiring a bond for faithful performance of trust duties; separation of trust from individual property; annual accountings; probate court examination of trustee under oath; and general equity control over the trustee by the probate court.

On those grounds, the District Judge concluded that any power that the trustee here may have to invade corpus is subject to an ascertainable standard, i. e., that provided by said law. Therefore, the District Court found that the value of the charitable remainder was presently ascertainable and deductible for federal estate tax purposes. The Court below also found that factual evidence reinforced the conclusion that the possibility the charitable remaindermen might not take was so remote as to be negligible. 26 C.F.R. § 20.2055-2(b).

The Internal Revenue Code permits as a deduction from the value of the gross estate the amount of all bequests to charitable and religious organizations. 26 U.S.C. § 2055(a)(2). Regulations promulgated thereunder permit the deduction to be taken only insofar as the interest is presently ascertainable and hence severable from the noncharitable interest. 26 C.F.R. 20.2055-2(a). The Supreme Court has said of these provisions:

Congress and the Treasury require that a highly reliable appraisal of the amount the charity will receive be available, and made, at the death of the testator. Rough guesses, approximations, or even the relatively accurate valuations on which the market place might be willing to act are not sufficient. * * * Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. Merchants Nat'l Bank of Boston v. Commissioner of Internal Revenue, 320 U.S. 256, 261, 64 S. Ct. 108, 111, 88 L. Ed. 35 (1943).

The taxpayer seeks to distinguish prior cases denying estate tax charitable deductions on the ground that those decisions involved provisions permitting an invasion of trust corpus on terms not readily ascertainable and predictable, while here there are no direct powers of invasion of principal to the detriment of the charitable remaindermen. However, any of several powers given the trustee make ascertainment of the remainder too indefinite to allow the requisite deduction.

The trustee (who is also the life beneficiary) has the right to enjoy the "entire gross or net income" of the trust. This in effect permits trust expenses to be charged against principal. The stock exchange seat has definite expenses attached to its use which can be charged to principal. But more importantly, the trustee has the right to sell the seat and invest in something else, including real property. As the Government points out, this permits the trustee to invest in income producing property involving high management expenses. Taking the extreme illustration of an apartment house, for instance, valued at $100,000, as the substituted corpus of the trust, the Government suggests that this might produce gross rental income of $500,000 and involve maintenance expenses of $490,000. The $10,000 net annual profit would represent a good return on the original investment, but if gross income ($500,000) were allocated to the income beneficiary while all expenses ($490,000) were charged against corpus, it would not take long to deplete completely the entire remainder interest.

The taxpayer said in oral argument that in such an instance the remaindermen would not stand idly by while such a gross depletion of the remainder could occur. However, he could point to no Vermont decision so limiting the life tenant. If anything, Vermont Courts would permit the trustee to do what the express language of the instrument permits:

A trust deed takes effect when it is made and the construction that would be given to it at that time holds true throughout the life of the instrument. * * *

The trust instrument must be construed to give effect to the grantor's intent as manifested by the language used. Destitute of Bennington County by Van Santvoord v. Henry W. Putnam Memorial ...

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