Cole v. Comm'r of Internal Revenue (In re Estate of Gillespie)

• Decision Date: 10 December 1980
• Docket Number: Docket No. 12424-77.
• Citation: 75 T.C. 374
• Parties: ESTATE of MARY E. GILLESPIE, DECEASED, BARTLETT F. COLE, TESTAMENTARY TRUSTEE, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

75 T.C. 374

ESTATE of MARY E. GILLESPIE, DECEASED, BARTLETT F. COLE, TESTAMENTARY TRUSTEE, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 12424-77.

United States Tax Court

Filed December 10, 1980.

D bequeathed her residual estate to a trust of which a church was a contingent remainderman. Such remainder does not constitute an interest in a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund, referred to in sec. 2055(e)(2)(A), I.R.C. 1954. Held, sec. 2055(e)(2) is constitutional, and therefore, the estate is not entitled to an estate tax charitable deduction for such contingent remainder interest. Held, further, certain “dividends” omitted from the estate tax return are includable in the decedent's gross estate. Bartlett F. Cole (testamentary trustee), for the petitioner.

Jan R. Pierce, for the respondent.

SIMPSON,, Judge:

Judge: The Commissioner determined a deficiency of $33,874 in the petitioner's estate tax. The parties have settled certain issues, and the issues remaining for decision are: (1) Whether section 2055(e)(2) of the Internal Revenue Code of 1954¹ is constitutional and disallows a deduction for a contingent remainder interest bequeathed to a church; and (2) whether the estate improperly omitted certain dividends on the estate tax return.

FINDINGS OF FACT

Some of the facts were stipulated, and those facts are so found.

The decedent, Mary E. Gillespie, died on December 4, 1974, and was a resident of Portland, Ore., at the time of her death. The executor of her estate, Bartlett F. Cole, filed a Federal estate tax return for the decedent's estate with the Internal Revenue Service. Mr. Cole maintained a business address in Portland, Ore., at the time he filed the petition in this case.

On March 1, 1968, Mary E. Gillespie executed a last will and testament which provided that all jointly owned property pass upon her death to her husband, Miln D. Gillespie, if he survived her. The decedent also left the remainder of her estate in trust for the use and benefit of her son, Hugh William Gillespie (Hugh). The will named the Bank of California in Portland and Bartlett F. Cole as cotrustees of such trust. The will provided that the trustees shall, at their discretion, make payments for her son's support, education, health, and welfare, and that upon her son's 21st birthday, the trustees shall pay to him one-fifth of the principal balance and continue to pay him one-fifth of the principal balance on each of his birthdays thereafter. The trustees were instructed to distribute any remaining balance on his 26th birthday.

The decedent's will also provided that if her son were to die before the trust estate was distributed to him and if he had a child or children, then the undistributed balance shall be held in trust for the use and benefit of such grandchild or grandchildren and distributed to them in equal amounts when the youngest reaches the age of 21. The will further stated that if there were no surviving child or grandchild at the time of distribution, the undistributed trust estate shall go to the decedent's husband, and if he did not survive, then to the First Unitarian Church of Portland, Ore. (the church).

Miln Gillespie died on April 4, 1968, and, therefore, did not survive the decedent.

On July 9, 1973, the decedent executed a codicil to her will. The codicil provided that in the event the trustees were of the opinion that Hugh was unable to hold and manage his property, then the trustees should hold the estate in trust during his lifetime or until such time as, in their sole discretion, he was capable of handling his own financial affairs. In administering the trust, Hugh's general welfare was to be the trustees' paramount consideration.

Hugh suffers from chronic schizophrenia. Since adolescence, he has generally lived in various institutions and schools for the emotionally disturbed. It is unlikely that he will ever recover from such illness or that he will ever be self-supporting.

When Mary Gillespie died on December 4, 1974, Bartlett F. Cole was appointed personal representative to administer the estate in Oregon. After the decedent's death, the Bank of California declined to serve as trustee, and Mr. Cole became the sole trustee. The decedent's estate is now closed.

On the Federal estate tax return, $145,988 was claimed as a charitable deduction by reason of the gift of the remainder interest to the church. In his notice of deficiency, the Commissioner determined that such deduction was not allowable under section 2055 since the trust was neither a charitable remainder annuity trust nor a charitable remainder unitrust. The Commissioner also determined that dividends in the amount of $2,082 were improperly omitted from the estate tax return.

OPINION

The first issue to be considered is whether the estate is entitled to a charitable deduction for the contingent remainder interest bequeathed to the church. The Commissioner contends that such remainder interest is subject to the provisions of section 2055(e)(2) and that since the trust established under the decedent's will is not a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund, the estate is not entitled to an estate tax charitable deduction. The petitioner, in effect, concedes that the trust does not meet the requirements of section 2055(e)(2). However, it points to the fact that the trust was established to provide support for Hugh, that he will be dependent upon such trust throughout his lifetime, and that throughout history, trusts have been used in similar situations. Also, the estate contends that since Hugh is not likely to have children, it is probable that at least a portion of the trust will be transferred to the church upon Hugh's death. Thus, it argues that section 2055(e)(2) “is so arbitrary, capricious, so devoid of reason, and so impossible of attainment, that * * * [it] must be declared unconstitutional and void, as a senseless restriction on testamentary giving.”

Prior to the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, an estate tax deduction was allowed for transfers of property in trust with a remainder interest to charity if the value of the charitable interest was presently ascertainable, and if the possibility that the charitable transfer will become effective was not so remote as to be negligible. Sec. 20.2055-2(a), and (b), Estate Tax Regs. Thus, if a decedent who died before January 1, 1970, transferred property to a trust to pay income to an individual for life and then to pay the principal to charity, the present value of the remainder interest qualified for an estate tax charitable deduction. However, Congress concluded that such rule resulted in certain abuses. For example, the assets of such a trust might be invested in a manner so as to maximize the income interest with the result that there would be little relationship between the interest assumptions used in calculating the present value of the charitable remainder and the present value of the amount actually received by the charity. H. Rept. 91-413 (1969), 1969-3 C.B. 200, 237. Also, a deduction was often allowed for a conditional bequest to charity even though it was not probable that the full amount of the bequest would ultimately be received by the charity. H. Rept. 91-413, supra, 1969-3 C.B. at 237-238. For example, a deduction was allowable for a charitable bequest even though the charity's interest was contingent upon the failure of issue or even though the trust's terms permitted invasion of the charitable share for the benefit of the income beneficiary. See, e.g., Estate of DeFoucaucourt v. Commissioner, 62 T.C. 485 (1974); Estate of Jack v. Commissioner, 6 T.C. 241 (1946).

In order to correct these perceived abuses, and to insure a closer correlation between the amount of the estate tax charitable deduction and the present value of the amount ultimately passing to charity, the Tax Reform Act of 1969 added section 2055(e)(2) to the Internal Revenue Code of 1954. Pub. L. 91-172, sec. 201(d)(1), 83 Stat. 560. Such section is effective, with certain exceptions not here relevant, with respect of decedents dying after December 31, 1969. It provides that an estate tax charitable deduction is not allowed for transfers of property to a trust which has both charitable and noncharitable interests unless, in the case of a remainder interest, the trust is in one of three qualifying forms: a charitable remainder annuity trust, ² a charitable remainder unitrust,³ or a pooled income fund.⁴ Sec. 2055(e)(2)(A). It is clear from the legislative history that Congress intended to disallow a charitable deduction in situations similar to the one presented in this case. See H. Rept. 91-413, supra, 1969-3 C.B. at 237-238; S. Rept. 91-552 (1969), 1969-3 C.B. 423, 479-480.

The petitioner views section 2055(e)(2) as abrogating a decedent's right to provide for the needs of an income beneficiary and to pass property upon the beneficiary's death to charity. We do not view the statute as having such an effect. The creation and validity of testamentary trusts is governed by State law, not the Internal Revenue Code. However, whether a particular transfer does qualify for an estate tax charitable deduction is a matter of Federal concern. Section 2055(e)(2) merely prescribes the requirements for a trust if the decedent wishes to obtain the benefit of a tax deduction. Thus, while section 2055(e)(2) affects the choice as to the form which a transfer may take, it does not mandate the form which a transfer must take. In this respect, its affect is no different from that of many tax statutes.

Traditionally, to invalidate a taxing statute on the basis that the statute offends due process, it must be shown that Congress did a “wholly arbitrary thing,” or “found equivalence where there was none” or that they “laid a burden unrelated to privilege.” United...