Oxford Orphanage, Inc. v. U.S.

• Decision Date: 21 October 1985
• Docket Number: 84-1693,Nos. 84-1650,s. 84-1650
• Citation: 775 F.2d 570
• Parties: -6588, 85-2 USTC P 13,643 OXFORD ORPHANAGE, INC., Shriners Hospitals for Crippled Children, and W. Eugene Johnston, III, Executor of the Estate of Howard Schwarze Hunt and Co-Trustee of the Testamentary Trust of Howard Schwarze Hunt, Appellants, v. UNITED STATES of America, Appellee. OXFORD ORPHANAGE, INC., Shriners Hospitals for Crippled Children, and W. Eugene Johnston, III, Executor of the Estate of Howard Schwarze Hunt and Co-Trustee of the Testamentary Trust of Howard Schwarze Hunt, Appellees, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 570

775 F.2d 570

56 A.F.T.R.2d 85-6588, 85-2 USTC P 13,643

OXFORD ORPHANAGE, INC., Shriners Hospitals for Crippled

Children, and W. Eugene Johnston, III, Executor of the

Estate of Howard Schwarze Hunt and Co-Trustee of the

Testamentary Trust of Howard Schwarze Hunt, Appellants, v. UNITED STATES of America, Appellee.

OXFORD ORPHANAGE, INC., Shriners Hospitals for Crippled

Children, and W. Eugene Johnston, III, Executor of the

Estate of Howard Schwarze Hunt and Co-Trustee of the

Testamentary Trust of Howard Schwarze Hunt, Appellees, v. UNITED STATES of America, Appellant.

Nos. 84-1650, 84-1693.

United States Court of Appeals, Fourth Circuit.

Argued April 3, 1985.

Decided Oct. 21, 1985.

William J. Lehrfeld, Washington, D.C., (Leonard J. Henzke, Jr., Lehrfeld & Henzke, P.C., Washington, D.C., on brief) for appellants/cross-appellees.

Robert A. Bernstein, Washington, D.C., (Glenn L. Archer, Jr.; Asst. Atty. Gen., Michael L. Paup; Murray S. Horwitz, Washington, D.C., Kenneth W. McAllister, U.S. Atty., Greensboro, N.C., on brief) for appellee/cross-appellant.

Before K.K. HALL and CHAPMAN, Circuit Judges, and BUTZNER, Senior Circuit Judge.

BUTZNER, Senior Circuit Judge:

W. Eugene Johnston, executor of the estate of Howard S. Hunt and cotrustee of Hunt's testamentary trust, and the charitable beneficiaries of the trust, Oxford Orphanage and Shriners Hospitals for Crippled Children, appeal from a judgment awarding the government interest on the amount of estate tax that would have been due but for amendment of Hunt's will after he died. The amendment converted his bequests of charitable remainders into qualifying gifts to charity pursuant to the Internal Revenue Code Sec. 2055(e)(3). On cross appeal the government contends that the district court erred in not allowing interest to run for 180 days after the will was amended. ¹ We hold that because the amendment of the will was retroactive to the date of Hunt's death no estate tax was due and the government is not entitled to any interest.

I

The Internal Revenue Code allows an estate to claim a deduction for a qualifying bequest to charity. I.R.C. Sec. 2055(a). Where a right in the property passes to a noncharitable beneficiary, with the remainder over to charity, no deduction is allowed unless the remainder is in the form of a charitable remainder unitrust, annuity trust, or pooled income fund. I.R.C. Sec. 2055(e)(2). These requirements for a dual beneficiary bequest were enacted in 1969 to assure that the charity did not receive less than the estate's charitable deduction. ² Frequently, however, testators did not write or revise their wills to satisfy the stringent requirements of Sec. 2055(e)(2). In such instances, the deduction was disallowed and the value of the charitable bequest was diminished by the estate tax. ³

To enable charities to receive bequests without diminution by estate taxes, Congress enacted Sec. 2055(e)(3) in 1974. ⁴ This section provided that even though the bequest did not qualify for a charitable deduction, the will could be amended in a state court after the testator's death to satisfy the requirements of the Code, and "a deduction shall nevertheless be allowed." If a will is amended after the date the estate tax return is due, "the deduction shall be allowed upon the filing of a timely claim for credit or refund...." Section 2055(e)(3) also provided: "In the case of a credit or refund as a result of an amendment ... no interest shall be allowed for the period prior to the expiration of the 180th day after the date on which the claim for credit or refund is filed."

II

Howard S. Hunt died on October 6, 1977. His will directed that the residue of his estate be placed in a testamentary trust, the income from which would be paid to an individual for life. The remainder was to be divided equally between two charities, Shriners Hospitals for Crippled Children and Oxford Orphanage, Inc. The will did not comply with the technical requirements of I.R.C. Sec. 2055(e)(2) for charitable trusts.

The executor timely filed the estate tax return on July 7, 1978, and claimed a charitable deduction for the remainder. Because of the charitable deduction, the return showed that no estate tax was due, and none was paid. On December 29, 1978, the executor filed a petition for reformation in state court as provided in N.C.Gen.Stat. Sec. 36A-53(b), which specifically authorizes the court to amend a testamentary charitable trust so that it may qualify for the deduction allowed by I.R.C. Sec. 2055. While the state action was pending, the executor obtained a technical advice memorandum from the Internal Revenue Service stating that the proposed amendment to the will complied with section 2055(e)(2) and that the remainder would be deductible as charitable contributions.

On July 14, 1980, the state court, citing the technical advice memorandum, entered its decree amending the will to create an annuity trust that qualified for the federal tax deduction. The amendment was retroactive, and it became effective on the date of Hunt's death.

The Internal Revenue Service allowed the charitable deduction. It assessed no tax. Nevertheless, it charged the estate interest in the amount of approximately $60,000, calculated from the filing date of the estate tax return until 180 days after the date of the decree amending the will. The executor paid the interest and filed a claim for refund, which the IRS disallowed.

The executor and the charitable beneficiaries sued to recover the interest payment for the benefit of the charities. The district court held that the estate owed interest on the amount of tax that would have been payable from the date the estate tax was due until the date the will was amended. It denied the government's claim for interest for the period of 180 days after the will was amended.

III

If the state court's decree amending Hunt's will had been entered before the date the estate tax return was due, the government would have no claim whatsoever for interest. But because the decree amending the will was entered after the date the tax return was due, the government argues that it is entitled to interest from the date the tax return was due until 180 days after the will was amended. It computed interest on the basis of the tax for which the estate would have been liable had the will not been amended.

The government's argument is quite straightforward. It emphasizes three sections of the Internal Revenue Code. Section 6151 provides that a tax is due and payable when the return is filed. Section 6601(a) requires the taxpayer to pay interest on any unpaid "tax imposed" by the Code. The government also relies on the following provisions of Sec. 2055(e)(3):

If the amendment or conformation of the governing instrument is made after the due date for the filing of the estate tax return (including any extension thereof), the deduction shall be allowed upon the filing of a timely claim for credit or refund (as provided for in section 6511) of an overpayment resulting from the application of this paragraph. In the case of a credit or refund as a result of an amendment or conformation made pursuant to this paragraph, no interest shall be allowed for the period prior to the expiration of the 180th day after the date on which the claim for credit or refund is filed.

The government contends that its exoneration from liability for interest is affirmative proof that Congress intended that it should be entitled to the interest.

The difficulty with the government's position is its failure to give effect to the fact that an amendment to a will made pursuant to Sec. 2055(e)(3) is retroactive to the date of the testator's death. As a consequence, the estate is entitled to a charitable deduction as of the date of death.

Retroactive application of the amendment is a central element of the statutory scheme. Distribution in accordance with the amendment must be retroactive to the date of the testator's death. This requirement assures that assets giving rise to the charitable deduction are not diverted to noncharitable beneficiaries. Any assets distributed to noncharitable beneficiaries pending the amendment must be restored to the trust. ⁵

Congress recognized the importance of considering an amendment to be retroactive. Moreover, the legislative history discloses that Congress intended that the amended charitable bequest be retroactive for all purposes and not merely for the purpose of calculating the deduction. Representative Burke, a sponsor of the bill that was codified as Sec. 2055(e)(3), left no doubt about the retroactive effect of amending a will:

[The bill's] fundamental premise is that an unqualified trust, if amended or conformed ... whether effectuated through judicial proceeding or agreement among all interested parties, is treated for tax purposes as if the amended trust was actually in the will ... as of the date of the decedent's death. The amended trust is to be treated as a qualified charitable remainder trust not merely for deduction purposes but for all purposes....

120 Cong.Rec. 35,460 (1974). Nothing in the text of the statute or in the legislative history indicates that retroactivity is a hybrid, effective for a charitable deduction but ineffective with respect to the government's claim for interest.

The retroactivity of the amendment to a will renders Sec. 6601 inapplicable. That section requires the taxpayer to pay interest on any unpaid "tax imposed" by the Code. Section 2001 imposes a tax on the transfer of the testator's taxable estate. Section 2055 determines the value of the taxable estate by deducting from the gross estate the amount of all qualified charitable bequests. The charitable deduction resulting from the will's amendment pursuant to Sec. 2055(e)(3) relates back to the date of the testator's death. Consequently, the taxable estate at the date of death excludes the qualifying gift to charity. No tax is imposed on the gift and...