Detroit Bank & Trust Co. v. United States

• Decision Date: 30 November 1971
• Docket Number: Civ. A. No. 34941.
• Parties: The DETROIT BANK & TRUST CO., and Mark C. Stevens, Co-Executors of the Estate of Mary S. Palmer, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Michigan

338 F. Supp. 971

The DETROIT BANK & TRUST CO., and Mark C. Stevens, Co-Executors of the Estate of Mary S. Palmer, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 34941.

United States District Court, E. D. Michigan, S. D.

November 30, 1971.

Long, Franseth, Goodenough, Smith & May, Detroit, Mich., for plaintiff.

John P. Hines, Dept. of Justice, Washington, D. C., for defendant.

RULING ON MOTIONS FOR SUMMARY JUDGMENT

KEITH, District Judge.

This case is before the Court upon the motions of both parties for summary judgment under Rule 56(e), Federal Rules of Civil Procedure, the parties having submitted a "Stipulation for Agreed Statement of Facts".

Jurisdiction of the Court is based on the provisions of Title 28, United States Code, Section 1346(a) (1) and 2402 as amended (28 U.S.C.A. §§ 1346(a) (1) and 2402).

The Bank was appointed as trustee of a trust established under the Last Will and Testament of one Mary S. Palmer admitted to Probate on October 18, 1965.

After providing for the disbursement of the net income and setting a termination date for the trust of 10 years from the death of a named beneficiary under the trust, Testatrix disposed of the corpus as follows:

"and in equal shares to:

WOMEN'S MEDICAL COLLEGE of Pennsylvania,

MENTAL HEALTH CENTER of Boston, Massachusetts,

TRINITY METHODIST CHURCH of McConnelsville, Ohio,

BLACK BROTHERS FUND of Seattle 4, Washington.

In the event that, at the termination of the trust, any of the institutions named above shall not qualify as a tax exempt recipient under the provisions of Section 2055(a) of the Internal Revenue Code of 1954, (or under the comparable provisions of any future Congressional enactment), then the legacy to such institution shall be paid to such other educational, charitable or philanthropic institution as may be selected by my Trustees, provided only, that it shall be a tax exempt recipient as aforesaid."

The devising instrument proceeded to confer upon the fiduciaries

"In addition to the powers conferred by law the following powers, authorities and discretion which it (or he or they) may exercise, without prior approval of any court or beneficiary:

"3. To make investments of the funds of the estate in securities and to invest in any form of real estate or personal property, including common stock and stocks of issuers known in fact or in law as `Investment Trusts' or `Investment Companies', ... in the uncontrolled discretion of the Fiduciaries and without regard to the rules and provisions of law regulating investments by Fiduciaries. The Fiduciaries are also authorized to leave funds uninvested.

... "5. To allocate all receipts and disbursements between income and principal in such manner as the Fiduciaries shall deem just and equitable, regardless of any rule of law or statute to the contrary."

Plaintiffs, hereinafter referred to as taxpayers, filed a timely estate tax return wherein they took a charitable deduction for $214,653.02. This amount represented the claimed value at the time of decedent's death of the trust remainder interest passing to the four named charitable, educational and religious institutions named in decedent's Last Will and Testament.

The defendant, hereinafter government, disallowed the claimed deduction for the value of the remainder interest passing to the four charities citing Treasury Regulations on Estate Tax (1954 Code) § 20.2055-2. This section states that a "deduction may be taken of the value of the charitable beneficial interest only insofar as the interest is presently ascertainable, and hence severable from the noncharitable interest." The government contends that under the Will, the trustees' power to invest in Mutual Funds and "to allocate all receipts between income and principal in such manner as the Fiduciary shall deem just and equitable, regardless of any rule or law to the contrary" renders the charitable remainder unascertainable.

The particular problem presented in the instant case will not arise for estates subject to the Tax Reform Act of 1969 because Section 201(d) (e) and (g) of that act requires that a trust pay either a fixed dollar amount or a fixed percentage of net fair market value of the trust assets to the life beneficiary before the charitable remainder is eligible for the deduction. These provisions of the Tax Reform Act of 1969 do not apply to the present case due to the fact that the present devising instrument was executed prior to the effective date of the Act. Tax Reform Act, 1969, supra, § 201(g).

The question presented for this court's determination is whether the value of the remainder interest bequeathed to named charitable, religious and educational organizations is "presently ascertainable" and hence, deductible under Section 2055, Internal Revenue Code of 1954, considering the broad discretionary powers granted trustees by the decedent over the management and administration of the trust in the devising instrument.

I

A deduction for the value of all bequests to charitable, religious and educational organizations is permitted under the Internal Revenue Code, 26 U.S.C. § 2055(a) (2). Regulations promulgated thereunder allow the deduction to be taken only insofar as the interest is presently ascertainable and hence severable from the non-charitable interest, Treasury Regulations 20.2055-2(a).

The Supreme Court has elucidated the requirement that a qualifying charitable remainder be "presently ascertainable" in five major cases: Humes v. United States, 276 U.S. 487, 48 S.Ct. 347, 72 L. Ed. 667 (1928); Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647 (1929); Merchants Nat. Bank v. Commissioner of Internal Revenue, 320 U.S. 256, 64 S.Ct. 108; 88 L.Ed. 35 (1943); Henslee v. Union Planters Nat. Bank & Trust Co., 335 U.S. 595, 69 S.Ct. 290, 93 L.Ed. 259 (1949) rehearing denied, 336 U.S. 915, 69 S.Ct. 601, 93 L.Ed. 1078 (1949); Commissioner of Internal Revenue v. Sternberger's Estate, 348 U.S. 187, 75 S.Ct. 229, 99 L.Ed. 246 (1955).

In Merchants Nat. Bank, supra, decedent had established a testamentary trust consisting of the residue of his estate, with a life estate in his wife and remainder to charity. The trustee was empowered to invade corpus

"at such time or times as my said Trustee shall in its sole discretion deem wise and proper for the comfort, support, maintenance, and/or happiness of my said wife, and ... my said Trustee shall exercise its discretion with liberality to my said wife, and consider her welfare, comfort and happiness prior to claims of residuary beneficiaries under this trust."

The court applied the appropriate provisions of the Revenue Act of 1926 and the Treasury Regulations thereunder (which were substantially identical to Section 2055 of the 1954 Code and Section 20.2055-2 of the Treasury Regulations) and held that the power of invasion provided by decedent's will — which included both a power to invade for the "happiness" of the wife and an injunction to the trustee to exercise its discretion "with liberality" in favor of the wife over the charitable remainderman — was too broad to constitute an "ascertainable standard" which was "fixed in fact and capable of being stated in definite terms of money."

In disallowing the charitable deduction the Court in Merchants Nat. Bank, supra, reasoned as follows (320 U.S., p. 261, 64 S.Ct., p. 111):

"For a deduction under § 303(a) (3) to be allowed 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. Cf. Humes v. United States, 276 U.S. 487 494, 48 S.Ct. 347, 72 L.Ed. 667. 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. And, in these cases, the taxpayer has the burden of establishing that the amounts will either be spent by the private beneficiary or reach the charity are thus accurately calculable."

Taxpayers seek to distinguish these five cases as being ones in which there was a direct power of invasion. However, the principle that the same diversion of corpus can be effected through the exercise of discretionary powers over the management and administration of the trust has been recognized in a number of recent appellate decisions. Rand v. United States, 445 F.2d 1166 (2nd Cir. 1971); Estate of Stewart v. Commissioner of Internal Revenue, 436 F.2d 1281 (3rd Cir. 1971), cert. denied Henderson v. Commissioner of Internal Revenue, 404 U.S. 828, 92 S.Ct. 64, 30 L.Ed.2d 57; Florida Bk. at Lakeland v. United States, 443 F.2d 467 (5th Cir. 1971); Miami Beach First Nat. Bk. v. United States, 443 F.2d 475 (5th Cir. 1971); First Nat. Bk. in Palm Beach v. United States, 443 F.2d 480 (5th Cir. 1971); Greer v. United States, 448 F.2d 937 (4th Cir. 1971); Gardiner v. United States, 24 Am.Fed.Tax R.2d par. 69-6108 (___D.___ Ariz., 1969), appeal docketed, No. ____, (9th Cir. 1971); Estate of Toulmin, Jr. v. United States, 326 F.Supp. 1028 (S.D.Ohio, 1971), appeal docketed, No. ____ (6th Cir. 1971).

Most of the authorities sustaining the principle that broad administrative powers can prevent the deduction, as well as those rejecting it, rely heavily on trust law doctrines and practices of the particular state involved as well as the language of the trust instrument under consideration.

In Rand, supra, the trustees were given broad powers of administration and the court stated there was nothing in Vermont law to indicate that effect would not be given to the broad language in the trust instrument. In Stewart, supra, the court denied the deduction partly on the conclusion that...