Lincoln Nat'l Bank & Trust Co. v. Comm'r of Internal Revenue (In re Estate of Boeshore)

• Decision Date: 31 March 1982
• Docket Number: Docket No. 6777-80.
• Citation: 78 T.C. 523
• Court: U.S. Tax Court
• Parties: ESTATE of MINNIE L. BOESHORE, DECEASED, LINCOLN NATIONAL BANK & TRUST COMPANY of FORT WAYNE and MELVIN V. EHRMAN, EXECUTORS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT

78 T.C. 523

ESTATE of MINNIE L. BOESHORE, DECEASED, LINCOLN NATIONAL BANK & TRUST COMPANY of FORT WAYNE and MELVIN V. EHRMAN, EXECUTORS, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 6777-80.

United States Tax Court

Filed March 31, 1982.

1. Decedent devised the residue of her estate to a charitable remainder trust. The trust provided for annual payments of a unitrust amount equal to 6 percent of the fair market value of the trust assets to be determined annually. For the life of decedent's surviving spouse, the unitrust amount was to be paid for private purposes. After the death of the surviving spouse and for the remainder of the unitrust term (measured by the last to die of three surviving descendants), the unitrust amount was to be paid for charitable purposes and for private purposes in the respective percentages of 42 percent and 58 percent. After the death of the three surviving descendants, the remainder was to pass to charity. Held : A Federal estate tax deduction is allowed for the present value of the unitrust interest passing to charity. Insofar as sec. 20.2055-2(e)(2)(vi)( e), Estate Tax Regs., disallows the deduction, it is invalid.

2. During their lifetime, decedent and her husband irrevocably transferred property to a separate trust which created a charitable remainder interest. Held, valuation of such remainder interest for Federal estate tax purposes is made at decedent's date of death and the 6-percent tables of sec. 20.2031-10, Estate Tax Regs., apply. Stephen J. Williams, for the petitioners.

Elsie Hall, for the respondent.

OPINION

FAY, Judge:

Respondent determined a deficiency of $101,358.53 in the Federal estate tax of the Estate of Minnie L. Boeshore. After concessions, the issues are (1) whether a deduction is allowable for the present value of a certain charitable unitrust interest created by a testamentary trust, and (2) the correct actuarial computation of the present value of a charitable remainder interest created by a separate inter vivos trust.

All the facts have been stipulated and are found accordingly.

Petitioners Lincoln National Bank & Trust Co. of Fort Wayne and Melvin V. Ehrman are the executors of the Estate of Minnie L. Boeshore. At the time the petition was filed, the principal place of business of Lincoln National Bank & Trust Co. of Fort Wayne and the residence of Melvin V. Ehrman were Fort Wayne, Ind.

Charitable Unitrust Interest

Minnie L. Boeshore (decedent) died May 28, 1976. After certain specific bequests, the residue of her estate was devised to the “Minnie L. Boeshore Charitable Remainder Unitrust.” The pertinent terms of such trust provide that during each taxable year of the trust, the trustee shall distribute a unitrust amount equal to 6 percent of the fair market value of the trust assets valued annually. During the life of decedent's surviving spouse, Jay F. Boeshore, 70 percent of such distribution is to be paid to decedent's spouse, and the remaining 30 percent is to be paid to decedent's daughter, Shirley Ann Streicher, and two grandchildren, Timothy Streicher and Lori Streicher Schaeffer. After the death of decedent's spouse, 58 percent of the unitrust's annual payout is to be paid to decedent's daughter and two grandchildren for their lives, while the remaining 42 percent is to be paid to charity.¹ Upon the death of all four individual beneficiaries, the ultimate remainder passes to charity.

On the date of Minnie L. Boeshore's death, the four named individual beneficiaries were living, and their ages were as follows: Jay F. Boeshore (spouse), 93; Shirley Ann Streicher (daughter), 45; Timothy Streicher (grandchild), 26; and Lori Streicher Schaeffer (grandchild), 23.

Petitioners claimed a charitable deduction of $381,148 as the present value of the unitrust and remainder interests passing to charity. In his notice of deficiency, respondent allowed a deduction of $25,179.86 as the present value of the remainder interest but disallowed a deduction of $355,968.14 as the present value of the unitrust interest payable to charity—-the 42 percent of the annual payout beginning at the date of death of decedent's spouse.

The narrow issue before us is whether petitioners are entitled to a Federal estate tax deduction for the present value of the charitable unitrust interest. Respondent relies on sec. 20.2055-2(e)(2)(vi)( e), Estate Tax Regs. (hereinafter the regulation), to disallow the deduction because the charitable unitrust interest follows a private unitrust interest. Petitioners contend that, insofar as the regulation precludes a deduction for the charitable unitrust interest, it is invalid. We agree with petitioners.

Generally, section 2055(a) allows a Federal estate tax deduction for the value of property in a decedent's gross estate that is transferred by the decedent to a qualifying charity. Decedents often desire to mix private objectives with philanthropy in their testamentary transfers; thus, it is common for interests in the same property to pass for both charitable and noncharitable purposes. For example, it is possible for a decedent to transfer property to a trust and require that either the income be paid to a charity for a period of years with the remainder payable to private persons thereafter, or that the income be paid to private persons, and the remainder to a charity. Section 2055(e)(2) limits the deductibility of the partial interest passing to charity in those so-called split-interest transfers by providing that no charitable deduction is allowed in such a case unless the form requirements specified in section 2055(e)(2)(A) and (B) are satisfied.² With respect to a charitable nonremainder interest, section 2055(e)(2)(B) provides that such interest must take the form of either a guaranteed annuity or a unitrust interest.³ Implementing section 2055(e)(2)(B), the regulation in issue provides rules for those instances when the existence of a private interest precludes a deduction for the value of a charitable unitrust interest. That regulation provides in pertinent part:

Sec. 20.2055-2 Transfers not exclusively for charitable purposes.—-* * *

(e) Limitation applicable to decedents dying after December 31, 1969—-* * * no deduction is allowed under section 2055 for the value of the interest which passes or has passed for charitable purposes unless the interest in property is a deductible interest described in subparagraph (2) of this paragraph. * * *

* * *

(2) Deductible interests. A deductible interest for purposes of subparagraph (1) of this paragraph is a charitable interest in property where—-

* * *

(vi) Unitrust interest. ( a) The charitable interest is a unitrust interest * * *

* * *

( e) Where a charitable interest in the form of a unitrust interest is in trust, the charitable interest will not be considered a unitrust interest if any amount other than an amount in payment of a unitrust interest may be paid by the trust for a private purpose before the expiration of all the income interest for a charitable purpose, unless such amount for a private purpose is paid from a group of assets which, pursuant to the governing instrument of the trust, are devoted exclusively to private purposes and to which section 4947(a)(2) is inapplicable by reason of section 4947(a)(2)(B). The exception in the immediately preceding sentence with respect to any unitrust interest for a private purpose shall apply only if the obligation to pay the unitrust interest for a charitable purpose begins as of the date of death of the decedent and the obligation to pay the unitrust interest for private purpose does not precede in point of time the obligation to pay the unitrust interest for a charitable purpose and only if the governing instrument of the trust does not provide for any preference or priority in respect of any payment of the unitrust interest for a private purpose as opposed to any payment of any unitrust for a charitable purpose. * * *

Thus, as relevant herein, the regulation disallows a deduction for a charitable unitrust interest if such unitrust interest does not begin as of the date of death of the decedent or is preceded in time by a private unitrust interest.⁴

Since the charitable interest in issue is a nonremainder interest and is in the form of a unitrust interest, the charitable interest clearly complies with the form prescribed by section 2055(e)(2)(B). Yet, the regulation purports to disallow the deduction since the obligation to pay the charitable interest does not begin as of decedent's death and is preceded in time by an obligation to pay a private unitrust interest. For the following reasons, we find those restrictions are invalid in this case.

Treasury regulations are entitled to considerable weight; however, respondent may not usurp the authority of Congress by adding restrictions to a statute which are not there. United States v. Marett, 325 F.2d 28 (5th Cir. 1963); Coady v. Commissioner, 33 T.C. 771, 779 (1960), affd. 289 F.2d 490 (6th Cir. 1961); Smith v. Commissioner, 332 F.2d 671 (9th Cir. 1964). Moreover, a regulation is not a reasonable statutory interpretation unless it harmonizes with the statute's “origin and purpose.” United States v. Vogel Fertilizer Co., 455 U.S. (1982); National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472, 477 (1979).⁵

Prior to the Tax Reform Act of 1969, a charitable contribution deduction was generally available for the value of a charitable interest in a split-interest transfer.⁶ Thus, if money or property was placed in trust to pay the income to an individual during his life, or for a term of years, and then to pay the principal to a charitable organization, the present value of the remainder was deductible. Sec. 20.2055-2(a), Estate Tax Regs. Under those prior rules, a problem arose from the manner in which trust assets could be invested. In the case of a charitable remainder, the trust corpus could be invested in a manner so as to...