Commissioner of Internal Revenue v. State Sternberger

• Decision Date: 10 January 1955
• Docket Number: No. 24,24
• Citation: 99 L.Ed. 246,75 S.Ct. 229,348 U.S. 187
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. STATE of Louis STERNBERGER, The Chase National Bank of the City of New York, Executor
• Court: U.S. Supreme Court

348 U.S. 187

75 S.Ct. 229

99 L.Ed. 246

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

v STATE of Louis STERNBERGER, The Chase National Bank of the City of New York, Executor.

No. 24.

Argued Oct. 19 and 20, 1954.

Decided Jan. 10, 1955.

Miss

Melva M. Graney, Washington, D.C., for petitioner.

Mr. Edward S. Greinbaum, New York City, for respondent.

Mr. Justice BURTON delivered the opinion of the Court.

The issue here is whether, in determining a net estate for federal estate tax purposes, a deduction may be made on account of a charitable bequest that is to take effect only if decedent's childless 27-year-old daughter dies without descendants surviving her and her mother. For the reasons hereafter stated, we hold that it may not.

Louis Sternberger died testate June 25, 1947. His federal estate tax return discloses a gross estate of $2,406,541.71 and, for the additional estate tax, a net estate of $2,064.346.55. It includes assets owned by him at his death and others held by the Chase National Bank, respondent herein, under a revocable trust created by him. As the revocable trust makes provisions for charity that are for our purposes identical with those in the will, this opinion applies to both dispositions.

The will places the residuary estate in trust during the joint lives of decedent's wife and daughter and for the life of the survivor of them. Upon the death of such survivor, the principal of the trust fund is payable to the then living descendants of the daughter. However, if there are no such descendants, one-half of the residue goes to certain collateral relatives of decedent and the other half to certain charitable corporations. If none of the designated relatives are living, the entire residue goes to the charitable corporations.¹

At decedent's death, his wife and daughter survived him. His wife was then 62 and his daughter 27. The latter married in 1942, was divorced in 1944, had not remarried and had not had a child.

In the estate tax return, decedent's executor, respondent herein, deducted $179,154.19 from the gross estate as the present value of the conditional bequest to charity of one-half of the residue. Respondent claimed no deduction for the more remote charitable bequest of the other half of the residue. The Commissioner of Internal Revenue disallowed the deduction and determined a tax deficiency on that ground. The Tax Court reversed the Commissioner. 18 T.C. 836. The Court of Appeals for the Second Circuit affirmed the Tax Court, 207 F.2d 600, on the authority of Meierhof v. Higgins, 2 Cir., 129 F.2d 1002. To resolve the resulting conflict with the Court of Appeals for the First Circuit in Newton Trust Co. v. Commissioner, 160 F.2d 175, we granted certiorari, 347 U.S. 932, 74 S.Ct. 629.

The controlling provisions of the Revenue Code are in substantially the same terms as when they were first enacted in 1919² and are as follows:

'Sec. 812. Net Estate

'For the purpose of the tax value of the net estate shall be determined, * * * by deducting from the value of the gross estate—

'(d) TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES. The amount of all bequests, legacies, devises, or transfers * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *.' I.R.C., 26 U.S.C.A. § 812(d).

The Commissioner concedes that the corporations named in the will qualify as charitable corporations under the statute. There is no doubt, therefore, that if the bequest to them had been immediate and unconditional, its value would be deductible. The question before us is what, if any, charitable deduction may be made despite (1) the deferment of the effective date of the charitable bequest until the deaths of both decedent's wife and daughter and (2) the conditioning of the bequest upon a lack of descendants of decedent's daughter surviv- ing at that time. We find the answer in the Treasury Regulations, which are of long standing and strengthened by reenactments of I.R.C., § 812(d), since their promulgation.³

In their earliest form, the predecessors of these regulations, in 1919, recognized, in plain language, the propriety of the deduction of the present value of a deferred, but assured, bequest to charity.⁴ Section 81.44(d) of Treasury Regulations 105 does so with inescapable specificity:

's 81.44 Transfers for public, charitable, religious, etc., uses. * * *

'(d) If a trust is created for both a charitable and a private purpose, deduction may be taken of the value of the beneficial interest in favor of the former only insofar as such interest is presently ascertainable, and hence severable from the interest in favor of the private use. § 81.10 indicates the principles to be applied in the computation of the present worth of federred uses, but such computation will not be made by the Commissioner on behalf of the executor. Thus, if money or property is placed in trust to pay the income to an individual during his life, or for a term of years, and then to pay or deliver the principal to the charitable corporation, or to apply it to a charitable purpose, the present value of the remainder is deductible. To determine the present value of such remainder, use the appropriate factor in column 3 of Table A or B of § 81.10. If the present worth of a remainder bequeathed for a charitable use is dependent upon the termination of more than one life, or in any other manner rendering inapplicable Table A or B of § 81.10, the claim for the deduction must be supported by a full statement, in duplicate, of the computation of the present worth made, in accordance with the principle set forth in § 81.10, by one skilled in actuarial computations.' (Emphasis supplied.) 26 C.F.R.

The very explicitness of the above provisions emphasizes their restriction to 'the computation of the present worth' of assured bequests such as are the subject of each of the illustrations and cross references in the section. The statute restricts charitable deductions to bequests to corporations 'organized and operated exclusively for * * * charitable * * * purposes'.⁵ (Emphasis supplied.) Likewise, the above section of the regulations requires that the deductible value of 'the beneficial interest in favor of' the designated charitable purpose be 'severable from the interest in favor of the private use.' There is no suggestion in the statute or in § 81.44 of a deduction of funds other than those later to be used exclusively for charitable purposes.

Here, also, the regulations in their earliest form, in 1919, were unequivocally restrictive.⁶ It was only after court decisions had demonstrated the need for doing so⁷ that the restrictions were restated so as expressly to permit deductions of bequests assured in fact but conditional in form.

Section 81.46 now provides expressly that no deduction is allowable for a conditional bequest to charity 'unless the possibility that charity will not take is so remote as to be negligible.' The whole section is significant:

's 81.46 Conditional bequests. (a) If as of the date of decedent's death the transfer to charity is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that charity will not take is so remote as to be negligible. If an estate or interest has passed to or is vested in charity at the time of decedent's death and such right or interest would be defeated by the performance of some act or the happening of some event which appeared to have been highly improbable at the time of decedent's death, the deduction is allowable.

'(b) If the legatee, devisee, donee, or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, devised, or given by the decedent, deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of such power.' (Emphasis supplied.) 26 C.F.R.

Sections 81.44 and 81.46 fully implement § 812(d) of the code. In their early forms they were obviously mu- tually exclusive and easily reconcilable. The predecessor of § 81.46 confined charitable deductions to outright, unconditional bequests to charity. It expressly excluded deductions for charitable bequests that were subject to conditions, either precedent or subsequent. While it encouraged assured bequests to charity, it offered no deductions for bequests that might never reach charity. Subsequent amendments have clarified and not changed that principle. Section 81.46(a) today yields to no condition unless the possibility that charity will not take is 'negligible' or 'highly improbable.' Section 81.46(b) is equally strict. It relates to provisions whereby funds may be diverted in whole or in part to noncharitable uses, and it limits the tax deduction to that portion of each fund that cannot be so diverted. Where the principal of a bequest to charity thus may be invaded for private purposes, it is only the ascertainable and assured balance of the bequest to charity that is recognized for a tax deduction.

Respondent concedes that the chance that charity will not take is much more than negligible. Therefore, if § 81.46(a) applies to the instant case, no charitable deduction is permissible.

Respondent claims, however, that § 81.44 covers this case. In doing so, it reads §§ 81.44 and 81.46 together and, instead of confining them to their mutually exclusive subjects, makes them overlap. It applies § 81.44 to some deferred conditional bequests. It does so in any case where it can compute, on approved actuarial standards, the degree of possibility that charity will receive the conditional bequest. Respondent then computes the present value of a corresponding percentage of the entire deferred bequest. In...