Buder v. U.S.
| Decision Date | 29 October 1993 |
| Docket Number | No. 92-3723,92-3723 |
| Citation | 7 F.3d 1382 |
| Parties | -6758, 93-2 USTC P 60,149 G.A. BUDER, III, Personal representative of the Estates of G.A. Buder, Jr., Deceased; Theodore A. Buder, Personal representative of the Estates of G.A. Buder, Jr., Deceased; Marshall O. Buder, Personal representative of the Estates of G.A. Buder, Jr., Deceased; Boatmen's National Bank, of St. Louis, Personal representative of the Estates of G.A. Buder, Jr., Deceased, Appellees, v. UNITED STATES of America, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Bridget M. Rowan, Dept. of Justice, Washington, DC, argued (Gary R. Allen and David E. Carmack, on the brief), for appellant.
Richard D. Lageson, St. Louis, MO, argued, for appellees.
Before BOWMAN and MAGILL, Circuit Judges, and HENDREN, * District Judge.
The United States appeals the judgment of the District Court 1 awarding the estate of G.A. Buder, Jr. a federal estate tax refund. We affirm.
Buder, a St. Louis business and tax attorney, died in 1984, leaving a will he personally drafted and a substantial estate. Article I of his will provides for the payment of his debts and the expenses associated with his death. Article II explains that he did not make a provision for his daughter because her status as a member of a religious order had changed her "needs and requirements." Article III and Article IV provide bequests for his wife.
The pivotal issue in this case concerns Article V of the will, which states that "twenty-five percent (25%) of my remaining net estate ... shall be divided among and paid to the following charitable, benevolent or educational organizations or entities, or their respective successors[,] in the following proportions." Article V then lists thirteen charitable organizations that were to receive bequests. Pursuant to 26 U.S.C. § 2055(a)(3) (1988), the estate deducted these bequests in determining its federal estate tax liability. The only deduction challenged by the Government is that of the bequest of Paragraph D (the "Paragraph D Trust"), which provides that
D. Ten per cent (10%) [of the assets disposed of by this Article shall be given to five listed persons], IN TRUST, however, to be used solely and exclusively in fostering and promoting the cause of patriotism, loyalty and fundamental constitutional government in the United States of America, and in combating subversive activities, socialism and communism, including, if deemed advisable, assistance in the teaching of the principles of conservatism in public affairs among college and high school students. The said Trustees and their successors in office are authorized and empowered to use the principal and income of such fund as they may agree to be most advisable and effective for the accomplishment of the objectives mentioned in this paragraph; and may, in their discretion, make contributions to other organizations or specific programs constituted and operated to achieve the purposes herein mentioned....
....
Article VI places the remainder of Buder's estate in trust for his wife and children. Article VI(e) provides that "[d]uring the life of my beloved wife Kathryn M. Buder, my trustees shall pay over and deliver to her monthly any portion or all of the net income of the trust estate as they may in their discretion deem advisable." On its federal estate tax return, the estate treated this residual trust as "qualified terminable interest property" (QTIP) under 26 U.S.C. § 2056(b)(7)(B) (1988) and claimed the marital deduction.
The remaining articles of Buder's will deal with administrative matters. Buder subsequently executed a codicil to his will in which he bequeathed fifty thousand dollars to each of his grandchildren, made several minor changes not relevant here, and otherwise ratified the contents of his will.
Buder's estate timely filed its federal estate tax return in 1986, showing a tax due of $156,648. As the result of an audit, however, the Internal Revenue Service determined in 1988 that the estate had a tax deficiency of $374,180 plus interest. This deficiency was based primarily on the IRS's disallowance of the estate's deduction of the bequest made to the Paragraph D Trust. The IRS did not challenge the estate's QTIP deduction of the portion of the estate passing under Article VI.
Later in 1988, after the IRS's audit but before its assessment of additional taxes against the estate, the trustees of the Paragraph D Trust executed an ancillary Indenture of Trust, by which they agreed that the Trust would make contributions only "to such charitable, scientific, literary or educational organizations whose policies are consistent with the purposes set out under the will of G.A. Buder, Jr. and are qualified as organizations described in Section 501(c)(3) and Section 170(c)(2) of the Internal Revenue Code of 1986." Subsequently, in 1989, the IRS determined that the G.A. Buder, Jr. Charitable Trust (the Paragraph D Trust and its ancillary Indenture of Trust) qualified under 26 U.S.C. § 501(c)(3) (1988) as a tax-exempt organization. Furthermore, the parties have stipulated that substantially all of the donations made from the Paragraph D Trust prior to the execution of this ancillary Indenture of Trust were to tax-exempt organizations.
After paying the deficiency assessed in the 1988 audit, the estate filed an administrative claim for a refund, which the IRS denied. The estate then brought this action in the District Court for a refund, claiming that the IRS had erroneously disallowed the estate's charitable deduction of the sums passing to the Paragraph D Trust.
During its trial preparations, the Government determined that the estate's deduction of Article VI's residual bequest as QTIP should have been disallowed. The Government made this determination at such a late date, however, that by the time it raised the QTIP issue only ten days remained before the trial's scheduled date. The Government did not earlier inform the estate of its objections to the QTIP deduction. It did, however, issue about a month before the trial's scheduled date a notice of deposition (which it never took) to the trustees of the Article VI trust, telling them it intended to ask about the distribution of the trust's income. The estate objected to the Government's raising the QTIP setoff defense, claiming it was untimely and not pleaded.
The District Court concluded that the Paragraph D Trust qualified as a charitable deduction. The court refused to consider the Government's setoff defense because it was not timely raised, and it ordered the federal estate tax refund. The Government appeals, and we affirm.
We turn first to the issue of whether the estate properly deducted from its return Buder's bequest to the Paragraph D Trust. The Government, renewing the argument it made to the District Court, contends that the bequest does not qualify for a charitable deduction because the trustees have the discretion to dispense funds to organizations that engage in such noncharitable activities as lobbying and campaigning. Hence, the Government concludes, the Paragraph D Trust does not comply with the requirements established by the Internal Revenue Code, and the estate's deduction of the bequest was erroneous.
An estate may deduct bequests in trust that are to be used "exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals"; the deduction is improper, however, if the trust "would ... be disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation" or if the trustees "participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." 26 U.S.C. § 2055(a)(3) (1988).
Wills are construed in accordance with state law. Teller v. Kaufman, 426 F.2d 128, 131 (8th Cir.1970). Under Missouri law, the settlor's intent controls the interpretation of the bequest, and we must ascertain this intent "from the whole will and not from single words, passages or sentences." Mercantile Trust Co. v. Mercantile Trust Co., 677 S.W.2d 343, 346 (Mo.Ct.App.1984). Because Missouri courts use the same rules for construing both trusts and wills, Central Trust Bank v. Stout, 579 S.W.2d 825, 827 (Mo.Ct.App.1979), we construe Buder's Paragraph D Trust by examining the will in its entirety. Buder organized his will into several sections. After providing for his debts and the natural objects of his bounty, Buder turned in Article V to his charitable interests. At the beginning of the Article, he provided that his assets were to be distributed "to the following charitable, benevolent or educational organizations or entities." Buder then listed thirteen different charitable organizations, twelve of which were already established, the other being the ...
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