Commissioner of Internal Rev. v. FG Bonfils Trust

• Decision Date: 06 November 1940
• Docket Number: No. 2135,2136.,2135
• Citation: 115 F.2d 788
• Parties: COMMISSIONER OF INTERNAL REVENUE v. F. G. BONFILS TRUST et al. F. G. BONFILS TRUST et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

115 F.2d 788 (1940)

COMMISSIONER OF INTERNAL REVENUE v. F. G. BONFILS TRUST et al. F. G. BONFILS TRUST et al. v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 2135, 2136.

Circuit Court of Appeals, Tenth Circuit.

November 6, 1940.

Warren F. Wattles, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the briefs), for Commissioner of Internal Revenue.

John H. McEvers, of Kansas City, Mo. (James B. Grant and Stephen H. Hart, both

of Denver, Colo., and Reece A. Gardner, of Kansas City, Mo., on the briefs), for respondents and cross-petitioners.

Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges.

PHILLIPS, Circuit Judge.

These are petitions to review a decision of the Board of Tax Appeals.

The Facts.

F. G. Bonfils, a resident of Denver, Colorado, died testate, February 2, 1933, leaving surviving him Belle Bonfils, his widow. By his will he made specific bequests and left the remainder of his estate to The Denver National Bank and The First National Bank of Kansas City, Missouri, as trustees. The trustees were directed to collect the income from the trust estate and out of the net income to pay, in their absolute discretion, for the education of two minor children, up to $10,000, and beginning March 1, 1933, certain specified annuities.¹ The will directed that in the event the income should be insufficient to pay the annuities in full, the balance thereof should be paid out of the corpus of the trust estate. It further directed that, beginning April 1, 1934, the trustees should pay over to The Frederick G. Bonfils Foundation all of the remainder of the net income of the trust estate in at least semiannual installments; that capital gains should be added to and retained as a part of the corpus of the trust estate; and that, within ten years after the death of the last survivor of the annuitants, the corpus of the trust estate should be paid over to and expended by the Foundation, which is a charitable corporation within the meaning of § 23(o) (2) of the Revenue Act of 1934, 48 Stat. 690, 26 U.S.C.A. Int.Rev. Acts, page 674.

Belle Bonfils, the widow, rejected the will and elected to take one-half of her husband's estate. It consisted of assets having a fair market value as of February 2, 1933, of $14,300,326.01, against which there were debts and charges, including the costs of administration, aggregating $822,517.81, leaving a net estate of $13,477,808.20.

During 1934, the executors of the Bonfils estate distributed to the trustees 2,500 shares of stock of the Boma Investment Company, which was immediately surrendered to the Investment Company in exchange for assets having a fair market value of $5,333,534.59. On November 6, 1937, the trustees received from the executors a further distribution of 727 shares of stock of the Investment Company, and on December 20, 1937, the trustees received, as one of a series of distributions in complete liquidation of the Investment Company, assets having a fair market value of approximately $447,000. On December 23, 1938, the trustees received in final liquidation of the Investment Company, assets of the fair market value of $519,389.53. It is anticipated that the trustees will receive additional assets from the estate having a fair market value of not less than $679,000. The average annual income for the five years 1934 to 1938, inclusive, received by the trustees from the trust estate was $529,414.85.²

The amounts of the annuities payable and paid during the years 1934 to 1937, inclusive, were $62,035.48, $90,150, $110,600, and $110,200 respectively. The amount of such annuities payable in 1938 was $110,200, unless one or more of the annuitants died before December 31, 1938. The trustees have kept their books and filed their income tax returns on the calendar year and cash receipts and disbursements basis.

During the years 1934 and 1935 the trustees derived capital gains of $793,284.59 and $70,995.23, respectively, and paid annuities, pursuant to the terms of the will, of $62,035.48 and $90,150, respectively. In auditing the income tax returns of the trustees for the years 1934 and 1935, the Commissioner determined that the capital gains and annuity payments were not deductible and determined deficiencies accordingly.

On the primary facts as stipulated the Board found as a fact "that the probability of the invasion of corpus" to pay annuities "is so remote as to be negligible." The Board decided that the capital gains were deductible and that the annuity payments were not deductible.

No. 2135.

This is a petition by the Commissioner to review that part of the decision holding the capital gains deductible.

Sec. 162 of the Revenue Act of 1934, 48 Stat. 728, 26 U.S.C.A. Int.Rev.Code § 162, provides that there shall be allowed as a deduction from the income of a trust any part of the gross income, which pursuant to the terms of the will creating the trust, is during the taxable year permanently set aside for charitable purposes, or is to be used exclusively for charitable purposes.

It will be observed that the test laid down by the statute is whether, pursuant to the terms of the will, the income is, in fact, permanently set aside for charitable purposes in the taxable year. In other words, the question is whether an application of the terms of the will to the existing facts does, in fact, permanently set aside the capital gains for charitable purposes. The determination of this question turns on whether we should blindly adhere to the terms of the will which provide for recourse to corpus in the event income is insufficient to pay annuities, or whether we should be realistic and determine the effect of the terms of the will in the light of the amount of the corpus, the income therefrom, and the amount of the annuities. In other words, whether we should give regard to mere theory or to actuality.

The purpose of Congress in enacting § 162 of the Revenue Act of 1934 was to encourage charitable gifts. Like provisions have been judicially construed so as to further and not hinder their beneficent purpose. Lederer v. Stockton, 260 U.S. 3, 8, 43 S.Ct. 5, 67 L.Ed. 99; Old Colony Co. v. Commissioner, 301 U.S. 379, 384, 57 S.Ct. 813, 81 L.Ed. 1169; United States v. Provident Trust Co., 291 U.S. 272, 285, 54 S.Ct. 389, 78 L.Ed. 793. In Lederer v. Stockton, supra, the Supreme Court, in passing on whether income was received by a corporation operated exclusively for religious, charitable, scientific, or educational purposes, refused to adhere to the technical and formal provisions of a trust, saying, "To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income, would be to defeat the beneficent purpose of Congress." In Old Colony Co. v. Commissioner, supra, the Supreme Court refused to narrowly construe § 162 of the Revenue Act of 1928, 45 Stat. 838, 26 U.S. C.A. Int.Rev.Acts, page 405, which is substantially like § 162 of the Revenue Act of 1934, and held that income paid for charitable purposes was deductible, although it was not paid technically pursuant to the terms of the will, giving heed to actualities rather than the strict letter of the will. In United States v. Provident Trust Co., 291 U.S. 272, 54 S.Ct. 389, 392, 78 L.Ed. 793, the court held that in determining the value of a devise to charities, actualities rather than an arbitrary presumption should prevail.³

In Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647, the will gave the residue of the testator's estate to his wife for life, with authority to use from the principal any sum "that may be necessary to suitably maintain her in as much comfort as she now enjoys." Sec. 403(a) of the Revenue Act of 1918, 40 Stat. 1098, provides that the value of the net estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or gifts, to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. The question presented was whether the provision for maintenance of the wife made the gifts to charity so uncertain as to render them nondeductible. The court concluded that since the amount payable to the wife was conditioned by a fixed standard laid down in the will which was capable of definite ascertainment, and since the income was sufficient to maintain her under that standard, "There was no uncertainty appreciably greater than the general uncertainty that attends human affairs," and that the gifts were deductible.

In Hartford-Connecticut Trust Co. v. Eaton, 2 Cir., 36 F.2d 710, the testator left a will by which he bequeathed all his estate of over one million dollars to a trustee to pay the income to his wife during her life, and the remainder to certain charities. The will authorized the trustee to pay over to or for the benefit of the wife any part of the principal of the trust fund which it might deem necessary or advisable for her comfortable maintenance and support. The question presented was whether the trustee, in computing the income from the trust estate for the year 1926, was entitled to deduct gains realized on the sale of securities, which gains constituted a part of the corpus of the residuary trust estate, under § 219(b) of the Revenue Act of 1926, 44 Stat. 32, 26 U.S.C.A. Int.Rev.Acts, page 174, the provisions of which are substantially the same as § 162 of the Revenue Act of 1934. The court applied the principle of Ithaca Trust Co. v. United States, supra, and held that if the income was sufficient to support the widow in accordance with her station in life and that it was reasonably certain no resort would be had to the corpus, the income derived from the sale of securities was permanently set aside for charitable purposes.⁴

Hartford-Connecticut Trust Co. v. Eaton, supra, was decided December 16, 1929. Since that...