Delaney v. Gardner

• Decision Date: 05 June 1953
• Docket Number: No. 4696.,4696.
• Citation: 204 F.2d 855
• Parties: DELANEY v. GARDNER et al.
• Court: U.S. Court of Appeals — First Circuit

204 F.2d 855 (1953)

DELANEY v. GARDNER et al.

No. 4696.

United States Court of Appeals First Circuit.

June 5, 1953.

Harry Marselli, Sp. Asst. to Atty. Gen. (Charles S. Lyon, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott and Maryhelen Wigle, Sp. Assts. to Atty. Gen., George F. Garrity, U. S. Atty., and Philip T. Jones, Asst. U. S. Atty., both of Boston, Mass., on brief), for appellant.

Earle W. Carr, Boston, Mass. (Joseph P. Rooney and Gaston, Snow, Rice & Boyd, Boston, Mass., on brief), for appellees.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

HARTIGAN, Circuit Judge.

This is an appeal from a judgment entered in the United States District Court for the District of Massachusetts on June 19, 1952 for the taxpayers in an action brought for a refund of estate taxes.

The taxpayers are the two executors under the will of Olga E. Monks, a Massachusetts resident who died on April 22, 1944. The will was dated March 18, 1939 and was allowed by the Probate Court for Suffolk County, Massachusetts, on May 18, 1944. An estate tax return was duly filed and the tax paid about July 20, 1945.

On audit of the return, the Collector asserted a deficiency of $64,216.71, based on the disallowance of a deduction claimed, and the inclusion in Mrs. Monks' estate of an inter vivos transfer. The deficiencies were paid by the taxpayers on September 24 and December 30, 1946, and a claim for refund was filed on September 13, 1949. After the claim was disallowed on February 16, 1950, the plaintiffs commenced this action.

The two questions which we need to consider on this appeal concern (1) the deductibility of a claimed testamentary disposition to charity, and (2) the includability in the gross estate of the value of securities transferred by the testator in her lifetime to a family corporation.

Article Second of the will of Olga E. Monks provides:

"I give to my executors or administrators with the will annexed One Hundred Thousand ($100,000) Dollars, not subject to any trust, but in the hope that they will dispose of it at their absolute discretion and according to their own judgment, but giving due weight to any memoranda I may leave or any oral expressions by me to them made during my life."

A memorandum and accompanying identifying letter addressed to the executors, dated the same day as the will, were allowed by the Probate Court as a part of the will. The memorandum consisted of a list of individuals and institutions with amounts opposite their names and the letter read in part: "I have purposely not bound you to carry out any wishes I may express for I can not foresee the future and have confidence that you will act wisely and will do as seems best, and possible when the time comes. I am, however, enclosing a list, of of persons and institutions, who I should like to remember and the amounts I have assigned would at this time, seem to me suitable but as I have already said you are free to disregard my suggestions."

One of the executors, George Peabody Gardner, a nephew of the decedent Mrs. Monks, testified that this method of disposition was undertaken upon his advice, with his assurance to her that he and her sons, who were named as the other executors, would endeavor to carry out her desires. There was evidence that the executors distributed the gifts listed in the memorandum, with a few exceptions due to changed circumstances of particular individuals. Thirty-five thousand dollars of the amount so distributed was paid, prior to the filing of the Federal Estate Tax Return, to charitable or religious institutions within the meaning of § 812(d) of the Internal Revenue Code.

The Commissioner ruled that these payments to religious or charitable institutions could not be deducted on the ground that they were not disclosed in the will and there was no legal obligation on the executors to pay them. The lower court overruled the Commissioner and allowed a refund on these items. It found that under the applicable law, the executors held the money for charities as constructive trustees and because the charities could compel compliance with Mrs. Monks' desires, then she had made charitable gifts deductible under § 812(d).

On August 24, 1940, the Roque Island Gardner Homestead Corporation, a non-stock, membership corporation, was organized under Chapter 50 of the Revised Statutes of Maine, which provided for corporations without capital stock for a variety of purposes, including "for the purpose of preserving and maintaining a family homestead and the rights of descendants and of members of the family therein". The incorporators and original members of this corporation were Mrs. Monks, her two sons, her daughter, George Peabody Gardner, his wife and son, and an attorney related to Mrs. Monks by marriage. On October 31, 1940, Mrs. Monks and George Peabody Gardner sold the Gardner Homestead and its contents, which they owned as tenants in common, to the homestead corporation. According to testimony this property, which had been owned by members of the family almost continuously since 1805, consisted of a number of small islands off the coast of Maine, where modest farming operations were conducted and three buildings were maintained to accommodate the Gardners and their guests, who vacationed there.

Mr. Gardner and Mrs. Monks also transferred to the corporation, at about the same time, a sufficient amount of securities to avoid the operating deficits which the corporation might otherwise suffer if it were forced to maintain the islands solely by the rentals charged to members of the family. The Commissioner ruled that the securities transferred to the corporation by Mrs. Monks, valued at the date of her death at $125,640.06, were includible in her gross estate under §§ 81.18 and 81.20 of Regulations 105 as transfers with possession or enjoyment or power to change the enjoyment retained. This ruling is based on two Articles in the by-laws of the Gardner Homestead Corporation. Article I provides that the corporation shall consist of not more than eight members, selected from the family and serving for life, provided only that no member shall fail on two successive years to pay the annual rental charged by the directors. Article VII sets forth the power to amend the by-laws upon appropriate notice.

The lower court overruled the Commissioner on this point also. On ample evidence it was found that the corporation was intended to be a distinct entity and that it functioned as such. It was found that the corporation had taken over the control and management of the islands completely. It was found that this was not a scheme for tax evasion but a measure motivated by decedent's desire to preserve the homestead for members of the family. The gift of securities was admittedly complete. Thus, the court held that decedent Mrs. Monks' membership in the corporation which she endowed did not give her the benefit of such power over the corporate property that her executors should pay estate taxes on her inter vivos donations to the corporation.

The first point urged on this appeal presents a nice issue of statutory interpretation. Internal Revenue Code § 812(d), 26 U.S.C. § 812(d), provides that there shall be deducted from the value of the gross estate the "amount of all bequests, legacies, devises, or transfers * * * to or for the use of * * *" charities. In this case the decedent has specifically detailed her wishes concerning the charities to be benefited upon her death by a memorandum and letter written on the same day as the execution of her will. Her executors accorded with her wishes exactly, and the charities have received precisely the amounts indicated by decedent. It is insisted, as the lower court has said, that if any one of the named charities had not received the exact amount intended, then it could compel the executors to pay over such amount, on the theory of a constructive trust. The Commissioner disputes this and says furthermore that even if the executors did have a legal obligation to pay over the money to the charities, it is still not deductible because any such payments would not be made under the terms of the will.

The argument for allowing this charitable deduction was well expressed in the following language in the opinion below: "While it did not pass by a bequest in express terms under the will of Mrs. Monks, it did pass to them from her estate by a transaction which in substance was the same. It was the expressed desire of Mrs. Monks that they should receive it. As a result of her will and of the promise which she had obtained from her executors, the charities had a legally enforceable right to receive the money. Regardless of the legal formulas employed, what Mrs. Monks wanted to do, and what she actually succeeded in doing, was to make a gift at her death of $35,000 from her estate to recognized charities. Her executors should be allowed to deduct that $35,000 as a charitable gift for tax purposes."

The language of § 812(d) is not of very great assistance on this question. A word like "bequest" indicates that deductions should be limited to gifts which pass under the terms of the will, which is the strict construction urged upon us by the Commissioner. However, the section also says "* * * or transfers * * *" and this indicates a very broad applicability.

Turning to the legislative intent, it seems that the general purpose of § 812(d) adds nothing to the indefinite content of its language. A Congressional intention to encourage gifts to charity, see 1 Paul Federal Estate and Gift Tax, § 12.04 (1942 ed.), does not offer much assistance. The theory of a constructive trust in this type of case rests on the testator's omission of a charitable gift in his will, relying on the promise of the constructive trustee. The asserted Congressional intention is not effectuated by putting unjust enrichment cases within the language Congress has employed to benefit charities. Therefore, ...