Ann Jackson Family Found. v. Comm'r of Internal Revenue
| Decision Date | 12 November 1991 |
| Docket Number | Docket No. 28883-89. |
| Citation | 97 T.C. 534,97 T.C. No. 35 |
| Parties | THE ANN JACKSON FAMILY FOUNDATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P, a private nonoperating foundation, received distributions totaling $350,000 per year from a split-interest trust as defined by sec. 4947(a)(2), I.R.C. Held, the distributions from the split-interest trust are not included in distributable amount as defined in sec. 4942(d), I.R.C.; sec. 53.4942(a)-2(b)(2), Foundation Excise Tax Regs., invalidated. Held, further, P is not liable for additions to tax pursuant to sec. 6651(a)(1), I.R.C. Robert L. Miller and George R. Dirkes, for the petitioner. Gordon L. Gidlund, Ann M. Murphy, and Cynthia K. Hustad, for the respondent.
Respondent determined deficiencies in and additions to petitioner's Federal excise tax as follows:
+-------------------------------------------------------------------+
¦ ¦First tier tax ¦Second tier tax ¦Additions to tax ¦
+-------------+----------------+-----------------+------------------¦
¦Year ending ¦sec. 4942(a) 1 ¦sec. 4942(b) ¦sec. 6651(a)(1) ¦
+-------------+----------------+-----------------+------------------¦
¦ ¦ ¦ ¦ ¦
+-------------+----------------+-----------------+------------------¦
¦5/31/84 ¦$36,627 ¦--- ¦$9,157 ¦
+-------------+----------------+-----------------+------------------¦
¦5/31/85 ¦77,976 ¦--- ¦19,494 ¦
+-------------+----------------+-----------------+------------------¦
¦5/31/86 ¦122,262 ¦--- ¦30,565 ¦
+-------------+----------------+-----------------+------------------¦
¦5/31/87 ¦122,262 ¦--- ¦30,565 ¦
+-------------+----------------+-----------------+------------------¦
¦5/31/88 ¦122,262 ¦--- ¦30,565 ¦
+-------------+----------------+-----------------+------------------¦
¦5/31/89 ¦122,262 ¦--- ¦30,565 ¦
+-------------+----------------+-----------------+------------------¦
¦9/25/89 ¦--- ¦$815,079 ¦--- ¦
+-------------------------------------------------------------------+
After concessions by respondent the issues remaining for decision are: (1) Whether petitioner is liable for excise taxes under section 4942(a) for failure to distribute income for taxable years ending May 31, 1984, through May 31, 1987; and (2) whether petitioner is liable for additions to tax for failure to file a tax return under section 6651(a)(1) for the same taxable years.
This case was submitted fully stipulated pursuant to Rule 122(a). All the facts are stipulated and are so found. The Stipulation of Facts and attached exhibit are incorporated by reference.
Petitioner was located in Santa Barbara, California, at the time the petition in this case was filed. Petitioner filed Forms 990-PF, Return of Private Foundation, for taxable years ending May 31, 1984, through May 31, 1989, with the Internal Revenue Service at Fresno, California. Petitioner did not file Form 4720 for any of the years at issue.
Petitioner is a private, nonoperating foundation incorporated in California on December 1, 1978. It is exempt from tax under section 501(a).
Ann Gavit Jackson (Jackson) created The Ann Jackson Family Charitable Trust (Trust) on February 28, 1979. On April 2, 1979, Jackson transferred $5,000,000 to the Trust. The terms of the Trust require the trustees to distribute to petitioner, “in quarterly or more frequent installments, an annual amount equal to seven percent (7%) of the initial net fair market value of the trust estate.” 2 These distributions are to continue for 20 years at which point the remainder is to be distributed for the benefit of specified descendants of Jackson.
The Trust is a split-interest trust as defined by section 4947(a)(2). The Trust made distributions of $350,000 to petitioner in each of the taxable years ending May 31, 1983, May 31, 1984, and May 31, 1985.
Section 4942(a) imposes a 15 percent excise tax on the undistributed income of private foundations. 3 The remainder of section 4942 provides in pertinent part:
SEC. 4942(c) Undistributed Income. -- For purposes of this section, the term “undistributed income” means, with respect to any private foundation for any taxable year as of any time, the amount by which --
(1) the DISTRIBUTABLE AMOUNT for such tax year, exceeds
(2) the qualifying distributions made out of such distributable amount.
(d) Distributable Amount. -- FOR PURPOSES OF THIS SECTION, THE TERM “DISTRIBUTABLE AMOUNT” MEANS, WITH RESPECT TO ANY FOUNDATION FOR ANY TAXABLE YEAR, AN AMOUNT EQUAL TO --
(1) THE SUM OF THE MINIMUM INVESTMENT RETURN PLUS THE AMOUNTS DESCRIBED IN SUBSECTION (f)(2)(C), 4 reduced by
(2) the sum of the taxes imposed on such private foundation for the taxable year under subtitle A and section 4940.
(e) Minimum Investment Return. --
(1) In general. -- For purposes of subsection (d), the minimum investment return for any private foundation for any taxable year is 5 percent of the excess of --
(A) the aggregate fair market value of all assets of the foundation other than those which are used (or held for use) directly in carrying out the foundation's exempt purpose, over
(B) the acquisition indebtedness with respect to such assets (determined under section 514(c)(1) without regard to the taxable year in which the indebtedness was incurred). [Emphasis added.]
Section 53.4942(a)-2, Foundation Excise Tax Regs. (the regulation), provides in pertinent part:
(a) Undistributed income. For purposes of section 4942, the term “undistributed income” means, with respect to any private foundation for any taxable year as of any time, the amount by which --
(1) The distributable amount (as defined in paragraph (b) of this section) for such taxable year, exceeds
(2) The qualifying distributions (as defined in sec. 53.4942(a)-3) made before such time out of such distributable amount.
(b) Distributable amount -- (1) In general. For purposes of paragraph (a) of this section, the term “distributable amount” means --
(i) For taxable years beginning before January 1, 1982, an amount equal to the greater of the minimum investment return (as defined in paragraph (c) of this section) or the adjusted net income (as defined in paragraph (d) of this section); and
(ii) For taxable years beginning after December 31, 1981, an amount equal to the minimum investment return (as defined in paragraph (c) of this section), reduced by the sum of the taxes imposed on such private foundation for such taxable year under subtitle A of the Code and section 4940, and increased by the amounts received from trusts described in subparagraph (2) of this paragraph. 5
(2) Certain trust amounts -- (i) In general. THE DISTRIBUTABLE AMOUNT SHALL BE INCREASED BY THE INCOME PORTION (AS DEFINED IN SUBDIVISION (II) OF THIS SUBPARAGRAPH) OF DISTRIBUTIONS FROM TRUSTS DESCRIBED IN SECTION 4947(a)(2) WITH RESPECT TO AMOUNTS PLACED IN TRUST AFTER MAY 26, 1969. * * *
(ii) Income portion of distributions to private foundations. For purposes of subdivision (i) of this subparagraph, the income portion of a distribution from a section 4947(a)(2) trust to a private foundation in a particular taxable year of such foundation shall be the greater of:
(a) The amount of such distribution which is treated as income (within the meaning of section 643(b)) of the trust, or
(b) The guaranteed annuity, or fixed percentage of the fair market value of the trust property (determined annually), which the private foundation is entitled to receive for such year, regardless of whether such amount is actually received in such year or in any prior or subsequent year.
(iii) Limitation. Notwithstanding subdivisions (i) and (ii) of this subparagraph, a private foundation shall not be required to distribute a greater amount for any taxable year than would have been required (without regard to this subparagraph) for such year had the corpus of the section 4947(a)(2) trust to which the distribution described in subdivision (ii) of this subparagraph is attributable been taken into account by such foundation as an asset described in paragraph (c)(1)(i) of this section. [Emphasis added.]
The issue before us is straightforward: does the increase in the distributable amount set forth in the regulation constitute an unwarranted extension of the statutory provision which defines “distributable amount” in terms of “minimum investment return,” as petitioner contends, or is it a reasonable interpretation of that provision which carries out the intent of Congress, as respondent contends. For the reasons hereinafter set forth, we agree with petitioner.
Initially, we note that the regulation in question herein was promulgated pursuant to the general authority granted to the Secretary of the Treasury by section 7805(a) and not pursuant to specific legislative authority related to section 4942. It is therefore interpretative and, although it is entitled to respect, it is not entitled to the high degree of deference accorded to a legislative regulation. Phillips Petroleum v. Commissioner, 97 T.C. 30, 34 (1991).
The guidelines applicable to the issue before us have been set forth in Edward L. Stephenson Trust v. Commissioner, 81 T.C. 283, 288 (1983):
Although regulations are entitled to considerable weight, “respondent may not usurp the authority of Congress by adding restrictions to a statute which are not there.” Estate of Boeshore v. Commissioner, 78 T.C. 523, 527 (1982). See State of Washington v. Commissioner, 77 T.C. 656 (1981), affd. 692 F.2d 128 (D.C. Cir. 1982). A regulation is not a reasonable statutory interpretation unless it harmonizes with the plain language, origin, and purpose of the statute. United States v....
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