Estate of Schildkraut v. CIR

• Decision Date: 27 October 1966
• Docket Number: Docket 30223.,No. 354,354
• Citation: 368 F.2d 40
• Parties: ESTATE of Sol SCHILDKRAUT, Deceased, Eugene Schildkraut and Lester Schildkraut, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

368 F.2d 40 (1966) ESTATE of Sol SCHILDKRAUT, Deceased, Eugene Schildkraut and Lester Schildkraut, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 354, Docket 30223.

United States Court of Appeals Second Circuit.

Argued May 24, 1966.

Decided October 27, 1966.

Charles M. McCarty, Brooklyn, N. Y. (George C. Wildermuth, Brooklyn, N. Y., on the brief), for petitioners.

Solomon L. Warhaftig, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, Washington, D. C., Attorneys, on the brief), for respondent.

Before FRIENDLY, HAYS and FEINBERG, Circuit Judges.

FEINBERG, Circuit Judge:

The issue in this case is whether a decedent's estate should be denied both a marital and charitable estate tax deduction for the corpus of a trust even though the entire corpus must ultimately go either to decedent's widow or to a bona fide charity. For reasons set forth below, we conclude that the decision of the Tax Court to deny both deductions was unjustified; we hold that at least a charitable deduction is warranted.

The facts before us are not complex. Sol Schildkraut, a New York resident, died testate on September 24, 1959; the value of his estate was slightly under one million dollars.¹ He was survived by his widow, Golda Perl Dickerson Schildkraut, who was forty-seven years old at his death. Article Seventh of his will created a trust with the principal amount of $300,000; his executors were directed to pay to Mrs. Schildkraut during her lifetime $1,000 a month out of income of the trust and if the income was insufficient, out of principal. The executors were also directed to pay out of the trust corpus federal and state income taxes on any sums paid to the widow from the trust and the real estate taxes on certain property in Florida so long as she continued to own it. Any trust income in excess of $12,000 a year was to be paid to The Schildkraut Foundation, Inc. ("the Foundation"), a New York charitable corporation. Upon the death of Mrs. Schildkraut, the remaining principal of the trust and accumulated income vested in the Foundation.² The Foundation has the attributes necessary to entitle the estate to a charitable deduction.

After some preliminary changes of position, petitioners Eugene Schildkraut and Lester Schildkraut, executors of the estate, sought in the Tax Court a charitable deduction of $55,431.55, or a marital deduction for all or part of the $300,000 principal of the trust.³ The Tax Court denied any deduction with respect to any part of the $300,000 corpus of the trust. 24 CCH Tax Ct.Mem. 1215 (1965). In their petition for review in this court, the executors claim a marital deduction of $107,766.98 for the commuted value of property interests which passed to decedent's surviving spouse and a charitable deduction of $55,431.55 for the commuted value of the charitable remainder.

I Marital Deduction

Petitioners' claim to an estate tax marital deduction is based upon sections 2056(a) and (b) of the Internal Revenue Code of 1954. The former allows as a marital deduction from the value of decedent's gross estate "an amount equal to the value of any interest in property which passes or has psed from the decedent to his surviving spouse." However, interests that are terminable do not qualify for the deduction, presumably because they are not the equivalent of interests owned outright by a surviving spouse in a community-property state.⁴ The terminable interest rule is, therefore, an exception to the marital deduction; it requires disallowance where the interest passing to a surviving spouse terminates or fails "on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur." Int. Rev. Code § 2056(b) (1). Since Mrs. Schildkraut's interest in the $300,000 trust fund clearly terminated upon her death, petitioners rely upon an exception to the exception. This is contained in Int. Rev. Code § 2056(b) (5), which qualifies a terminable interest for the marital deduction if it is a life estate with a power of appointment in the surviving spouse. This section provides:

In the case of an interest in property passing from the decedent, if his surviving spouse is entitled for life to all the income from the entire interest, or all the income from a specific portion thereof, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire interest, or such specific portion (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the interest, or such specific portion, to any person other than the surviving spouse —

(A) the interest or such portion thereof so passing shall, for purposes of subsection (a), be considered as passing to the surviving spouse, and

(B) no part of the interest so passing shall, for purposes of paragraph (1) (A), be considered as passing to any person other than the surviving spouse.

This paragraph shall apply only if such power in the surviving spouse to appoint the entire interest, or such specific portion thereof, whether exercisable by will or during life, is exercisable by such spouse alone and in all events.

Thus, an interest in property that is terminable on the death of a surviving spouse will nevertheless qualify for the deduction if the spouse "is entitled for life to all the income from the entire interest, or all the income from a specific portion thereof," and has the power to appoint the entire interest or such specific portion. It is the "specific portion" concept that concerns us here.

Petitioners argue that with respect to a "specific portion" of the trust, a life estate with power of appointment did indeed pass to the widow. The claimed "specific portion" is composed of three elements: a sum equal to the difference between the $12,000 reqÅuired to be paid annually to the widow and the assumed lesser annual income of the trust ("item 1"); a sum sufficient to pay federal and state income taxes on payments from the trust to the widow ("item 2"); and a sum sufficient to pay the annual real estate taxes on the Florida property ("item 3"). Petitioners claim that these sums can be accurately computed by making various reasonable assumptions as of decedent's death; e. g., the trust will earn interest at 3½ per cent per year; income taxes are based on 1959 rates for a single person having one exemption and taking the standard deduction; the widow's life expectancy is 26.11 years. On this basis, petitioners have made detailed calculations showing the sums for the three items to be, respectively, $107,861.46, $38,639.48, and $29,112.65, for a total of $175,613.59. The commuted value of this total using the federal estate tax regulations, according to petitioners,⁵ is $107,766.98; this is the marital deduction claimed.

These basic assumptions are attacked by respondent. Thus, he rejects the 3½ per cent intest estimate, arguing that it cannot be said that the trust will not earn 11+ per cent per year. If the trust did earn that sum, there would be no need for invasion for the widow's benefit, and item 1 above would disappear. Similarly, he argues that it is faulty to assume that federal income tax rates in effect in 1959 will remain the same. This affects the computation of item 2. Also, respondent characterizes as without basis the assumptions that the widow will retain the Florida real estate for 26.11 years and that taxes on that property will remain the same; this affects item 3.

A Treasury regulation requires the "specific portion," referred to in section 2056(b) (5), to "constitute a fractional or percentile share of a property interest."⁶ In Gelb v. Commissioner of Internal Revenue, 298 F.2d 544, 549 (2d Cir. 1962), we pointed out that prior to the 1954 Code, unless all of a trust qualified for a marital deduction, no part of it would, and that the 1954 Code introduced a new concept — the qualifying "specific portion." Construing the provision as a liberalization of prior law, we disapproved the regulation and held that the "specific portion" may be a dollar amount and even one determined by actuarial calculation of life expectancy. Yet, reliance on Gelb is not sufficient for petitioners here. In that case, in sharp contrast to this, Gelb's widow had a general power of appointment over the corpus of the trust. Petitioners argue that this deficiency is met here by the widow's power to consume the corpus of the trust in items 1, 2 and 3, and it is true that, depending upon the accuracy of the assumptions already referred to, a substantial portion of the corpus may be paid out to the widow from the trust. However, those whose power is only to stand and wait for a monthly stipend do not thereby have a power of appointment. Moreover, if Mrs. Schildkraut were to die tomorrow, none of the amounts predicted as future invasions would be taxable in her estate, see Int. Rev. Code § 2041(b) (1) (A), a consideration which may not be decisive but is highly significant. "Thus the marital deduction is generally restricted to the transfer of property interests that will be includible in the surviving spouse's gross estate." United States v. Stapf, 375 U.S. 118, 128, 84 S.Ct. 248, 255, 11 L.Ed.2d 195 (1963) (footnote omitted). But cf. Note, Powers to Consume and the Marital Deduction, 39 N.Y. U.L.Rev. 504 (1964). Moreover, we agree with the Tax Court that even if power to direct invasion of the corpus were considered to be in the widow — a most questionable assumption — the power would still not be a qualifying power of appointment. Estate of May v. Commissioner of Internal Revenue, 283 F.2d 853 (2d Cir. 1960), cert. denied, 366 U.S. 903, 81 S.Ct. 1045, 6 L.Ed.2d 202 (1961); United States v. LincolnÊ Rochester Trust Co., 297 F.2d 891 (2d Cir.), ...