Tamulis v. C.I.R.

• Decision Date: 29 November 2007
• Docket Number: No. 06-4141.,06-4141.
• Citation: 509 F.3d 343
• Parties: Estate of Anthony J. TAMULIS, Petitioner-Appellant, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

509 F.3d 343

Estate of Anthony J. TAMULIS, Petitioner-Appellant, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.

No. 06-4141.

United States Court of Appeals, Seventh Circuit.

Argued October 26, 2007.

Decided November 29, 2007.

Rehearing Denied December 19, 2007.

Hugh J. Graham (argued), Graham & Graham, Springfield, IL, for Petitioner-Appellant.

Jonathan S. Cohen, John A. Dudeck, Jr. (argued), Department of Justice Tax Division, Appellate Section, Washington, DC, for Respondent-Appellee.

Before POSNER, FLAUM, and ROVNER, Circuit Judges.

POSNER, Circuit Judge.

This appeal involves the tax treatment of a charitable remainder trust—a trust in which the income goes to individuals during their lifetime (or some other period) but what remains after their rights expire goes to charity. Until 1969 the estimated present value of the remainder was what was deductible from the federal estate tax. But that year, concerned that the trustee might invest the trust's assets in a way calculated to maximize current income, with the result that when finally received by the charity the remainder would be worth less than the estimated actuarial value on which the deduction from estate tax had been based, Congress provided (so far as bears on the present case) that to obtain the deduction the settlor would have to create the trust in the form of a "charitable remainder unitrust." This is a trust in which no more than a specified percentage of the fair market value of the trust's assets (as determined each year), for a specified period, can go to the noncharitable beneficiaries; the rest belongs to a charity or charities designated in the trust. 26 U.S.C. § 664(d)(2).

Congress later created a safety valve by providing that a charitable remainder trust that was not in the unitrust form could, if changed to that form, qualify for the deduction. But if the change that would be required to do this would not just be the correction of some merely technical error in the original trust instrument, then "a judicial proceeding [must be] commenced to change [into the unitrust form any interest for which the charitable deduction would be allowable were the trust a unitrust] not later than the 90th day after— (1) if an estate tax return is required to be filed, the last date (including extensions) for filing such return." 26 U.S.C. § 2055(e)(3)(C)(iii).

Father Tamulis, a Catholic priest, died in 2000, leaving an estate of $3.4 million. His will left the bulk of his estate to a living trust that he had created. The trust was to continue for the longer of 10 years or the joint lives of Tamulis's brother and the brother's wife. During that period they would have a life estate in a house owned by the trust and the trust would pay the real estate taxes on the house. The net income of the trust, as "determined in accordance with normal accounting principles," would go to two of the brother's and sister-in-law's grandchildren (that is, Tamulis's grandnieces), minus $10,000 a year, which would go to their third child until she graduated from medical school. Upon the termination of the trust the assets would pass to a Catholic diocese.

The estate tax return, filed in 2001, claimed a charitable deduction of $1.5 million, represented to be the present value of the charitable remainder, which was described on the return as the "residue following 10 year term certain charitable remainder unitrust at 5% quarterly payments to two grand nieces." In each of the years 2001 through 2004, the trust distributed no more than 5 percent of the fair market value of the trust's assets, as valued at the beginning of each year, to the grandnieces and for the payment of the real estate taxes on their parents' home. The Internal Revenue Service refused to allow the charitable deduction. The charitable remainder, as defined in the trust instrument, was not a charitable remainder unitrust as defined in the Internal Revenue Code. In particular, the trust instrument did not specify either a fixed dollar amount, or the percentage of the trust's fair market value, that would go to the income beneficiaries-to the grandnieces in cash and to their parents in the form of a life estate in the house and payment of the real estate taxes on it, which would be paid out of the trust's income. This was a fundamental defect, corrigible only by a judicial proceeding to reform the trust, filed within 90 days after the estate tax return was due.

The trustee (who was also the executor of Father Tamulis's will) and the diocese realized that there was a problem. But more than eight months elapsed before the executor prepared a complaint to file in an Illinois state court (the trust is governed by Illinois law) to reform the trust. And for unexplained reasons the complaint was never filed. Instead, in 2003 the executor circulated to the income beneficiaries a proposed reformation of the trust to bring it into compliance with the Code. But the third grandniece did not sign it, and so the trust has never been reformed, with or without a judicial proceeding, although the trustee continues to administer it in accordance with the requirements of the Code, as her predecessor (the original trustee, who has died) had said in the estate tax return that he was doing. Her argument, rejected by the Tax Court and renewed before us, is that the statement in the return, coupled with the trustee's continued administration of the trust as if it were a qualified unitrust, should be deemed substantial compliance with the Code, although she concedes that it is not literal compliance.

There is a doctrine of substantial compliance with the often intricate and obscure provisions of the Internal Revenue Code. We have criticized the Tax Court's articulation of the doctrine for formlessness, and, noting that the courts of appeals do not defer to the legal rulings of that court any more than they do to the rulings of a district court, have ruled that the "doctrine of substantial compliance should not be allowed to spread beyond cases in which the taxpayer had a good excuse (though not a legal justification) for failing to comply with either an unimportant requirement or one unclearly or confusingly stated in the regulations or the statute." Prussner v. United States, 896 F.2d 218, 224 (7th Cir.1990) (en banc); see also Volvo Trucks of North America, Inc. v. United States, 367 F.3d 204, 209-10 (4th Cir. 2004); Estate...