Estate of Flanigan v. C. I. R.
| Decision Date | 11 October 1984 |
| Docket Number | 83-5567,Nos. 83-5566,s. 83-5566 |
| Citation | 743 F.2d 1526 |
| Parties | 84-2 USTC P 13,592 ESTATE OF Aimee Magnus FLANIGAN, Deceased, Peter M. Flanigan, Personal Representative, Petitioner-Appellant, v. COMMISSIONER, INTERNAL REVENUE, Respondent-Appellee. ESTATE OF Horace C. FLANIGAN, Deceased, Peter M. Flanigan, Personal Representative, Petitioner-Appellant, v. COMMISSIONER, INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
John S. Nolan, Miller & Chevalier, Washington, D.C., Peter Matwiczyk, Gunther, Yoakley, Criser & Stewart, P.A., Palm Beach, Fla., for petitioner-appellant.
James J. Keightley, Michael L. Paup, Chief, Appellate Section, Tax Div., Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Robert A. Bernstein, U.S. Dept. of Justice, Tax Div., Kristina E. Harrigan, Asst. Atty. Gen., Washington, D.C., for respondent-appellee.
Appeals from the Decision of the United States Tax Court.
Before HILL and ANDERSON, Circuit Judges, and TUTTLE, Senior Circuit Judge.
The estates of Aimee Magnus Flanigan and Horace C. Flanigan appeal a decision of the Tax Court disallowing certain charitable deductions and determining estate tax deficiencies of $2,770,238.77 and $3,236,233.14. The issue on appeal is the proper application of certain portions of Sec. 2055 of the Internal Revenue Code, 26 U.S.C.A. Sec. 2055 (West 1979), as they existed between the passage of the Tax Reform Act of 1969 and the passage of the Tax Reform Act of 1976. Section 2055 governs charitable deductions from taxable estates.
The parties stipulated the following facts. Horace C. Flanigan and Aimee Magnus Flanigan were husband and wife at the time of Mrs. Flanigan's death on August 19, 1976. On that date, Mr. Flanigan was 86 years old. Mr. Flanigan died on June 15, 1978. Both Mr. and Mrs. Flanigan died testate.
Mrs. Flanigan's will was executed on January 14, 1975. The will made specific bequests of certain property, which are not relevant here, and, from a portion of the residue of the estate, established a marital deduction trust for Mr. Flanigan's benefit. The will specifically provided that no estate, inheritance, or death taxes were to be charged against this portion of the estate. The marital deduction trust gave Mr. Flanigan a right to all the net income of the trust for life, with a power of invasion in the trustee to secure Mr. Flanigan's comfort and welfare. Mr. Flanigan received a general power of appointment over the principal, exercisable only in his will.
The marital trust was designed to take advantage of the estate tax marital deduction provided by Sec. 2056(a) of the Tax Code. Mrs. Flanigan bequeathed to the marital trust an amount of property that would result in the maximum marital deduction.
Within six months of Mrs. Flanigan's death, Mr. Flanigan executed an affidavit specifying his intent to exercise his testamentary power of appointment over the marital deduction trust in favor of organizations recognized as charitable by the IRS for purposes of the estate tax charitable deduction. The affidavit was filed with the IRS as an attachment to the estate tax return of Mrs. Flanigan's estate.
On November 15, 1976, the date of the affidavit, Mr. Flanigan also executed his will, exercising his power of appointment in favor of the charitable beneficiaries listed in his affidavit. The will expressly conditioned the exercise of the power of appointment on the allowance of a charitable deduction to his wife's estate with respect to the remainder of the marital deduction trust and the allowance of an estate charitable deduction to his own estate based on his exercise of the power of appointment.
No part of the corpus of the marital deduction trust was distributed to any beneficiary during Mr. Flanigan's life.
Mrs. Flanigan's estate claimed a marital deduction, $6,580,975.29 of which was attributable to Mr. Flanigan's interest in the marital deduction trust. Her estate also claimed a charitable deduction, $5,267,741.67 of which represented the value of the remainder interest in the marital deduction trust.
Mr. Flanigan's estate claimed a charitable deduction of $6,818,218.29, representing the value at the time of his death of the marital trust remainder passing to charitable beneficiaries under his exercise of the power of appointment.
The IRS denied both charitable deductions. The IRS denied the charitable deduction of Mrs. Flanigan's estate because the remainder interest of the marital trust did not satisfy the requirements of Sec. 2055(e)(2), which by its terms governs the deductibility of split interest gifts to charity. The charitable deduction claimed by Mr. Flanigan's estate was denied because it was conditioned on the allowance of the charitable deduction to his wife's estate. Mrs. Flanigan's taxable estate was therefore increased $5,267,741.67. Mr. Flanigan's estate was increased $6,818,218.29.
The taxpayers filed timely petitions in the United States Tax Court, which sustained the Commissioner's determinations. The taxpayers then filed these appeals.
Sec. 2055 of the Internal Revenue Code governs charitable deductions from taxable estates. 1
Sec. 2055(a) states that bequests, legacies, devises, and transfers to charity are deductible from the value of a taxable estate.
Sec. 2055(b) explains which decedents are to be considered transferors for purposes of the charitable deduction of Sec. 2055 when powers of appointment are used. Sec. 2055(b)(1) states that property which is included in a decedent's gross estate because he has a power of appointment, and which is received by charity, shall be considered a bequest of such decedent. In other words, the holder of the power is deemed a transferor of the property.
Sec. 2055(b)(2), which was repealed by Sec. 1902(a)(4) of the Tax Reform Act of 1976, 2 provides that under certain circumstances, the creator of a power of appointment is also deemed a transferor. It provides that "for purposes of this section" a bequest in trust by a decedent to his spouse (the spouse being entitled to income for life and having a general power of appointment by will over the corpus), shall, to the extent the power is exercised in favor of a charity, be deemed a transfer of the trust principal, less the value of the life estate, to the charity by the decedent, if (1) no part of the trust corpus is distributed to a beneficiary during the life of the surviving spouse, (2) the surviving spouse was over 80 years old at the date of decedent's death, (3) the surviving spouse executes an affidavit within 6 months after the decedent's death specifying the charities in whose favor he plans to exercise the power, and (4) the power of appointment is exercised in favor of the charities specified in the affidavit.
Secs. 2055(c), (d), and (e) limit the deductions allowed under Sec. 2055. Sec. 2055(c) provides that amounts deductible under Sec. 2055 must be reduced by the amount of taxes payable out of the bequest, legacy or transfer. Sec. 2055(d) disallows a deduction for the value of transferred property not included in the gross estate. Sec. 2055(e) disallows deductions in certain cases. Sec. 2055(e)(2), which was added to the Code by the Tax Reform Act of 1969, limits deductions under Sec. 2055 in the case of split interest gifts. Split interest gifts are those under which part of the decedent's interest passes to a noncharitable beneficiary and the remaining part passes to a charitable beneficiary, e.g., life estate to a child, remainder to charity. Sec. 2055(e)(2)(A) disallows a charitable deduction for a split interest gift of a remainder interest to charity unless the transfer is a charitable remainder annuity trust or a charitable remainder unitrust or a pooled income fund.
The issue in this appeal is the relationship between Sec. 2055(b)(2) and Sec. 2055(e)(2)(A). There is no dispute that the conditions of Sec. 2055(b)(2), under which Mrs. Flanigan is deemed to have made a remainder interest transfer to charity, have been met. There is also no dispute that her split interest bequest does not meet the requirements of Sec. 2055(e)(2)(A). Finally, there is no dispute that by the terms of Mr. Flanigan's will, his estate is allowed a charitable deduction only if a charitable deduction is allowable to Mrs. Flanigan's estate. The only disputed question is whether Sec. 2055(e)(2)(A) applies to bequests that satisfy the conditions of Sec. 2055(b)(2), thus disallowing a charitable deduction for Mrs. Flanigan's Sec. 2055(b)(2) deemed remainder interest transfer to charity. The Tax Court held that Sec. 2055(e)(2)(A) does apply to deemed transfers under Sec. 2055(b)(2). Appellants urge that this conclusion is wrong for three reasons.
Appellants argue that Sec. 2055(e)(2)(A) limits only actual split interest transfers to charity. They contend that it does not apply to remainder interest transfers to charity under Sec. 2055(b)(2), which are not actual transfers, but rather are deemed, hypothetical, transfers, i.e., legal fictions. They point out that the only actual transfer made by Mrs. Flanigan was the marital deduction bequest to Mr. Flanigan, under which he had a life interest in the marital deduction trust and a general power of appointment by will. In support of their position, appellants cite Estate of Miller v. Commissioner of Internal Revenue, 400 F.2d 407 (3d Cir.1968), and Estate of Pfeifer v. Commissioner of Internal Revenue, 69 T.C. 294 (1977).
The appellants are essentially arguing that although there was a "transfer" to charity under Sec. 2055(b)(2), there was no "transfer" for purposes of Sec. 2055(e)(2)(A). As noted by the Tax Court, the express language of Sec. 2055(b)(2) refutes this argument. Sec. 2055(b)(2) states that when its conditions are met, a bequest in trust shall be deemed a transfer to charity by the decedent "[f]or...
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