Eagan v. Commissioner of Internal Revenue, 5836.

• Decision Date: 14 October 1930
• Docket Number: No. 5836.,5836.
• Citation: 43 F.2d 881
• Parties: EAGAN et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

43 F.2d 881 (1930)

EAGAN et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 5836.

Circuit Court of Appeals, Fifth Circuit.

October 14, 1930.

Robert C. Alston and William H. Sibley, both of Atlanta, Ga., for petitioners.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and F. Edward Mitchell, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Prew Savoy, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before BRYAN and FOSTER, Circuit Judges, and SIBLEY, District Judge.

SIBLEY, District Judge.

John J. Eagan died a resident of Georgia March 30, 1924. A bequest in a codicil to his will was claimed by his executors to be exclusively for charitable purposes and that its value was deductible in fixing the estate tax. The claim was disallowed by the Board of Tax Appeals. 17 B. T. A. 694. The controlling statute is section 403 of the Revenue Act of 1921, 42 Stat. 279, the material portion of which is:

"For the purpose of the tax the value of the net estate shall be determined — (a) In the case of a resident, by deducting from the value of the gross estate * * * (3) The amount of all bequests * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes."

In determining whether the bequest in controversy is within this provision, it is necessary to inquire whether it is to, or for the use of, a corporation, in which case the organization and operation of the corporation become important; or is to trustees, in which case whether the purposes of the trust are exclusively charitable becomes the determining question. The codicil defines the legatees in these provisions:

"I hereby give, bequeath and devise ten hundred and eighty-five (1085) shares of the common stock of the American Cast Iron Pipe Company, being all my holding of the said common stock of said company, to the members of the Board of Management and the members of the Board of Operatives of said American Cast Iron Pipe Company jointly, and their successors in office in said boards, in trust for the following purposes, etc. * * * Any member of either of said boards, who shall cease to be a member of either board for any cause whatsoever shall thereupon cease to be a trustee under this codicil of my will, his or her successor upon either of said boards becoming, by virtue of his or her office, a trustee under this codicil immediately upon his or her acceptance of said trust. * * * It is my will and desire and I direct that in determining all questions as to voting said stock and as to carrying out the provisions of the trust created by this codicil the members of the Board of Management, as trustees, shall vote as a unit, and the members of the Board of Operatives, as trustees, shall vote as a unit, the vote of each group to be determined by the majority vote of the members of the respective boards, and that in the event of failure of the respective groups of trustees to agree upon any question, said question in dispute shall be referred to the Board of Trustees, whose decision shall be final."

The board of trustees last mentioned has been held to mean the board of directors of the company. The board of managers, formerly called the executive committee, was, under the by-laws, appointed by the directors and was composed of four or five of the directors who had active charge of departments, and this board managed the company's business between meetings of the directors. The board of operatives, also established under the by-laws, consisted of an operative elected annually by his fellow operatives in each of the ten or twelve departments of the business. Its function was to present grievances and make suggestions to the board of managers, to obtain information for the operatives, and generally to promote confidence and co-operation between the employer and employees and the welfare of both. The board of operatives also elected three of their number to be directors, thus giving the operatives direct knowledge of the company's business and a part in its control. The stock bequeathed is the entire common stock of the company. The preferred stock, none of which was owned by Mr. Eagan, has no voting power. It thus appears that the ultimate control of the corporation is put in the trustees, and they in turn are chosen by the machinery of the corporation, and their differences are to be reconciled by its Board of Directors. Nevertheless the bequest is not to the corporation or for its use, but specifically to the members of the two named boards and their successors as individuals. These persons are not identical with the board of directors who control the corporation. Not all of the directors are on the board of managers and so made trustees, and not all the board of operatives, who are all made trustees, are on the board of directors. The duties of these trustees who are also directors are entirely distinct in the two capacities. The director's duty in running the business of the corporation remains the same when he becomes also a trustee. His duties as trustee relate to managing the stock and arise from and are controlled by the will creating the trust. The reconcilement of differences between the two groups of trustees by the board of directors, if that is what the testator meant by "Board of Trustees," is a mere umpirage. The ultimate control of the corporation through the stock ownership no more makes the trustees identical with the corporation than it did Mr. Eagan when he was the sole owner of the stock. The bequest is of the stock, not of the plant and business, of which the preferred stockholders are part owners. It is to trustees and not to a corporation or for its use. The organization and operation of the corporation are therefore not material, but the last clause of the quoted statute which relates to bequests to trustees alone applies.

Are the purposes of the trust exclusively charitable? It is urged that they are clearly so under the statutes of Georgia defining charities, Park's Code, § 4605, and have been held to be such by decree in a bill for direction filed by the executors of Eagan's will against the trustees. The Georgia statute and the decree are material to establish the effectiveness of the trust which depends upon state law. The Revenue Act did not intend to except trusts which could not lawfully take...