Bank of Delaware v. Comm'r of Internal Revenue (In re Estate of Speer)
| Decision Date | 15 March 1972 |
| Docket Number | Docket No. 3346-69. |
| Citation | 57 T.C. 804 |
| Parties | ESTATE OF GEORGE I. SPEER, DECEASED, BANK OF DELAWARE AND ALICE M. SPEER, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Howard L. Williams and Daniel L. Twer, for the petitioners.
Albert J. O'Connor, for the respondent.
Decedent established a revocable inter vivos trust with the remainder, after intervening life estates, payable to a named charity. His will poured the residuary estate into the trust. A bank was designated as sole trustee and was given discretionary powers of investment and of allocation of dividends and expenses between principal and income. Held, the existence of such discretionary powers did not preclude the deductibility of the charitable remainder under sec. 2055, I.R.C. 1954.
Respondent determined a deficiency in petitioners' estate tax in the amount of $510,195.19. The sole issue for our determination is whether the remainder interest in a trust established by the decedent fails to qualify for a charitable deduction pursuant to section 20551 because of the management discretion vested in the trustee.
All of the facts have been stipulated and are found accordingly.
Petitioners are the executors of the Estate of George I. Speer (referred to herein as decedent), who died on June 21, 1965, a resident of Wilmington, Del. Petitioner Alice M. Speer had her legal residence in Wilmington, Del., at the time the petition herein was filed. Petitioner Bank of Delaware is a corporation organized and existing under the laws of the State of Delaware having its principal office in Wilmington, Del., at the time of filing the petition herein. The estate tax return was filed with the district director of internal revenue, Wilmington, Del.
On July 12, 1963, the decedent created a living trust, with the Bank of Delaware as sole trustee. The trust was fully revocable by the decedent during his lifetime. In addition, the trustee could invade principal for the decedent's benefit in the event of the latter's incapacity.
The trust agreement provided for payment of the income to the settlor, or the accumulation thereof as settlor might direct, during his lifetime. After the settlor's death, the trustee was to pay one-half of the net income of the trust estate to settlor's sister, Alice M. Speer, for life; one-fourth of said net income to settlor's brother, Robert A. Speer, for life. The trustee was not given any power to invade principal for the benefit of the income beneficiaries. Upon the death of all the life tenants, or upon the settlor's death if he should survive them all, the trust provided:
* * * Trustee shall create a fund with whatever remains of the trust estate to be known as the George I. Speer and Lizzie F. Speer Memorial Fund, the net income from which shall be paid annually to the New Castle Presbytery, by whatever name known, to be used by the said Presbytery for general purposes in memory of Settlor's parents. * * *2
Additionally, upon the death of any of the life tenants, his or her share of the net income of the trust estate was to be accumulated and added to principal for ultimate disposition in accordance with the above-quoted provision.
The trust agreement contained the following provision dealing with the investment powers of the trustee:
Settlor desires that Trustee be permitted to invest a larger proportion of the trust estate in common stocks than might otherwise be considered proper, and also for a larger proportion thereof to be invested in the stock or other securities of Bank of Delaware and International Business Machines Corporation, or their corporate successors, that might otherwise be considered proper. It is therefore agreed that Trustee shall be under no duty to diversify the investments held hereunder, and that in acquiring new investments by purchase or exchange, as well as in retaining investments that were a part of the trust estate at the time of the creation or that were thereafter delivered by Settlor's Executor to Trustee in kind (and also in acquiring additional stocks, bonds, notes or other securities of Bank of Delaware and International Business Machines Corporation, or their corporate successors, through the exercise of options, rights, and conversion privileges) Trustee, in its discretion, may disregard the rules of diversification of investments usually considered applicable to fiduciaries, and that Trustee shall not be liable for any depreciation of or loss to the trust estate resulting from disregarding such rules of diversification.
The trust agreement also authorized the trustee, in its absolute discretion:
To apply stock dividends, only non-cash dividends and other extraordinary dividends or distributions received by it to principal or income or to apportion such dividends or distributions between principal and income, to charge the premiums of securities purchased at a premium either against principal or income or partly against principal and partly against income, and to determine what expenses, costs, taxes and charges of all kinds shall be charged against principal and what against income. In each case its decision with respect thereto shall be conclusive and binding upon all parties in interest;
The trust agreement further provided that all questions pertaining to the validity, construction, and administration of the trust were to be determined in accordance with the laws of Delaware.
Decedent's last will and testament poured his residuary estate into the aforementioned trust.
The trust assets at all pertinent times consisted almost entirely of publicly traded securities. The following table shows the holdings of International Business Machines shares by the trust at various dates indicated.
+----------------------------------------------------+
¦ ¦ ¦Market value¦Total market ¦Percent of¦
+------+-------+------------+-------------+----------¦
¦Shares¦Date ¦of IBM ¦value of ¦IBM ¦
+------+-------+------------+-------------+----------¦
¦ ¦ ¦stock held ¦trust assets ¦ ¦
+------+-------+------------+-------------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+------+-------+------------+-------------+----------¦
¦3063 ¦7/15/63¦$1,323,216 ¦$1,572,015.00¦84.17 ¦
+------+-------+------------+-------------+----------¦
¦3063 ¦4/13/64¦1,807,170 ¦2,106,730.00 ¦85.78 ¦
+------+-------+------------+-------------+----------¦
¦3829 ¦4/12/65¦1,795,801 ¦2,139,148.00 ¦83.95 ¦
+------+-------+------------+-------------+----------¦
¦3500 ¦4/25/66¦1,893,500 ¦2,458,786.70 ¦77.01 ¦
+------+-------+------------+-------------+----------¦
¦4500 ¦4/24/67¦2,128,500 ¦2,723,640.99 ¦78.15 ¦
+------+-------+------------+-------------+----------¦
¦4055 ¦4/19/68¦2,578,980 ¦3,380,010.17 ¦76.30 ¦
+------+-------+------------+-------------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+----------------------------------------------------+
We are again confronted with the question of the extent to which management powers conferred upon a trustee with respect to allocation of income and expenses operate to preclude the deductibility under section 2055(a)(2) 3 of the otherwise undisputed value of a remainder interest in favor of a qualified charitable organization. We dealt with this question for the first time in Estate of Lillie MacMunn Stewart, 52 T.C. 830 (1969), 4 but our decision in favor of the taxpayer was reversed on appeal, 436 F.2d 1281 (C.A. 3, 1971), certiorari denied 404 U.S. 828 (1971). In the brief period of time since our opinion in Stewart, there has developed a substantial body of case law dealing with the effect of a trustee's administrative powers on the deductibility of charitable remainders. The Government has prevailed in Rand v. United States, 445 F.2d 1166 (C.A. 2, 1971); First National Bank in Palm Beach v. United States, 443 F.2d 480 (C.A. 5, 1971), certiorari denied 404 U.S. 983 (1971); Miami Beach First National Bank v. United States, 443 F.2d 475 (C.A. 5, 1971), certiorari denied 404 U.S. 984 (1971); Florida Bank at Lakeland v. United States, 443 F.2d 467 (C.A. 5, 1971); Estate of Stewart v. Commissioner, 436 F.2d 1281 (C.A. 3, 1971); Detroit Bank & Trust Co. v. United States, 338 F.Supp. 971 (E.D. Mich. 1971); Jacobs v. United States, 334 F.Supp. 388 (S.D.N.Y. 1971). The taxpayer has prevailed in Greer v. United States, 448 F.2d 937 (C.A. 4, 1971); Peoples Trust Co. of Bergen County v. United States, 444 F.2d 193 (C.A. 3, 1971); Doss v. United States, 326 F.Supp. 1320 (N.D. Tex. 1971); Estate of Toulmin v. United States. 326 F.Supp. 1028 (S.D. Ohio 1971); Old Colony Trust Co. v. United States, 317 F.Supp. 618 (D. Mass. 1970); Marold v. United States, 322 F.Supp. 664 (D.N.J. 1970); Bankers Trust Co. v. United States, 308 F.Supp. 545 (S.D.N.Y. 1970), affirmed on another issue 438 F.2d 1046 (C.A. 2, 1971); Estate of Phyllis W. McGillicuddy, 54 T.C. 315 (1970). 5
By way of summary, the Government has been successful in the Second and Fifth Circuits; unsuccessful in the Fourth Circuit, in the District Courts (with the exception of Florida Bank at Lakeland, Jacobs, and Detroit Bank & Trust Co.), and in this Court; and has won one and lost one in the Third Circuit. Obviously, this melange of cases furnishes no divining rode for decision herein. Moreover, the confusion is compounded by the fact that each of the decided cases turns on its own facts and the vagaries of local probate and trust law as seen through the eyes of the Federal courts.
The essence of our decision in Stewart was that, even taking into account a modicum of uncertainty as to the extent of a trustee's discretionary power under the New York law involved in that case, we were not disposed ‘to turn what are commonplace trust powers intended simply to provide administrative flexibility into a substantive grant of...
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