Hammond v. U.S.
| Decision Date | 05 June 1985 |
| Docket Number | D,No. 475,475 |
| Citation | 764 F.2d 88 |
| Parties | -5256, 85-2 USTC P 9453 E. Wesley HAMMOND, Charles E. Shain, Deane C. Avery, Evan Hill and Walter Baker, Trustees of the Day Trust, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. ocket 84-6222. |
| Court | U.S. Court of Appeals — Second Circuit |
Mark R. Kravitz, New Haven, Conn. (Stacey Jackson Perkins, Wiggin & Dana, New Haven, Conn., on the brief), for plaintiffs-appellees.
Robert S. Pomerance, Tax Div., Dept. of Justice, Washington, D.C. (Glen L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Ann Belanger Durney, Tax Div., Dept. of Justice, Washington, D.C., Alan H. Nevas, U.S. Atty. for Dist. of Conn., New Haven, Conn., on the brief), for defendant-appellant.
Before VAN GRAAFEILAND, KEARSE and PIERCE, Circuit Judges.
Defendant United States of America appeals from a final judgment of the United States District Court for the District of Connecticut, Jose A. Cabranes, Judge, awarding plaintiffs, the trustees ("Trustees" or "Day Trustees") of the Day Trust (the "Trust"), a refund of $2,801 in excise taxes paid by the Trust pursuant to Sec. 4940 of the Internal Revenue Code of 1954, as amended ("IRC"), 26 U.S.C. Sec. 4940 (1982), on its investment income for 1980. The district court, in an opinion reported at 584 F.Supp. 163 (1984), held that, under IRC Sec. 4947(a)(2), 26 U.S.C. Sec. 4947(a)(2) (1982), the Trust was not subject to the tax imposed by Sec. 4940 because two entities having unexpired interests in the Trust were devoted to purposes not described in IRC Sec. 170(c)(2)(B), 26 U.S.C. Sec. 170(c)(2)(B) (1976). On appeal, the government contends that the district court erred because (1) one of the entities in question, the Day Company (the "Company"), had no unexpired interest in the Trust, and (2) the fact that the other entity, the Bodenwein Public Benevolent Foundation (the "Foundation"), which had income and remainder interests in the Trust, had the authority to make distributions to municipalities for public purposes--purposes described in IRC Sec. 170(c)(1), 26 U.S.C. Sec. 170(c)(1) (1976)--does not make its interest in the Trust an interest other than one "devoted to one or more of the purposes described in section 170(c)(2)(B)," IRC Sec. 4947(a)(2). Because we conclude that the Company has an unexpired interest in the Trust, we affirm on that basis.
This appeal presents the question whether, for the tax year 1980, the Trust was a charitable trust under IRC Sec. 4947(a)(1), 26 U.S.C. Sec. 4947(a)(1) (1982), or a split-interest trust under IRC Sec. 4947(a)(2). If it was the former, it is treated as an organization described in IRC Sec. 501(c)(3), 26 U.S.C. Sec. 501(c)(3) (1982), and accordingly, as a private foundation within the meaning of IRC Sec. 509, 26 U.S.C. Sec. 509 (1982), and is therefore subject to virtually the full panoply of rules and taxes imposed by IRC Secs. 507-509 and 4940-4947, 26 U.S.C. Secs. 507-509, 4940-4941, and 4943-4947 (1982) and 26 U.S.C. Sec. 4942 (1976 & Supp. IV 1980) (the "private-foundation rules"). If it was instead a split-interest trust, it is not treated as a Sec. 501(c)(3) organization or a private foundation and was not subject to the excise tax imposed by IRC Sec. 4940. The basic facts are not in dispute.
For nearly fifty years prior to his death in 1939, Theodore Bodenwein was the owner, manager, and primary force behind The New London Day ("The Day"), a successful and highly-acclaimed local newspaper published by the Company in New London, Connecticut. In the stated hope of perpetuating the local control, editorial independence, and high quality of The Day, Bodenwein established the Trust in his will (the "Will"); he bequeathed to the Trust his ownership interest in the Company, comprising virtually all of the Company's outstanding stock, and directed that the Trustees operate The Day. The Will also established the Foundation, which was to receive distributions from the Trust and make distributions to Bodenwein's wife and children Pursuant to Article 4 of the Will, the Trust has been administered by a self-perpetuating board of five Trustees, two of whom must be employed exclusively in publishing The Day. The Will directed the Trustees
and to charitable and public entities in the New London area. The parties have stipulated, in effect, that Bodenwein's estate received a charitable deduction under IRC Sec. 2055, 26 U.S.C. Sec. 2055 (1982), or its predecessor for the bequest to the Trust.
[t]o hold said stock; to manage and operate by means thereof a newspaper to be published in New London, Connecticut, hereinafter referred to as "The Day" ...: to so manage said newspaper ... as to provide liberal compensation and various forms of assistance and rewards, such as insurance, bonuses, and pensions, to its employees; to pay sufficient salaries to assure a high type of executives and skilled writers and workmen; to make provision for providing in the course of time a new building to house the paper and such other tenants as they consider it desirable to provide space for, such building to be distinctive in character, a credit to the City architecturally, and an evidence of a farsighted policy; to constantly improve and maintain the mechanical plant used for publishing the paper; to maintain reasonable reserves for all of the above and for unforeseen contingencies, including taxes; said provisions as to compensation, assistance, and rewards to employees, salaries to executives, the erection of a building, and the maintenance of reserves are to be in every respect at the discretion of said trustees, and said trustees to be mindful always, in making such expenditures or reserves therefor, of my desire that the Foundation receive sufficient funds to pay the sums hereinafter provided for my wife and children: to annually determine the net income from said business over and above all expenditures and reserves: to pay out of said net income all taxes and expenses in connection with the trust, and pay all remaining net income to The National Bank of Commerce, as Trustee, as hereinafter set forth, of The Bodenwein Public Benevolent Foundation.
The Trustees are also authorized, in the event that substantial tax savings would result, to liquidate the Company and hold its assets directly in the Trust. Further, if the Company ceases to publish a newspaper in New London, or if, in each of two successive years, the Trust fails to distribute at least $25,000 to the Foundation, the Trustees are to sell the Company, terminate the Trust, and distribute the proceeds to the Foundation.
Under Article 5 of the Will, the Foundation was to use its distributions from the Trust to pay taxes and administration expenses, and to distribute 90% of the remaining income to Bodenwein's wife and children, so long as any of them survived, and 10% to "uses" selected by the trustee of the Foundation (the "Foundation Trustee"). The Foundation Trustee's choice of uses was limited as follows:
(a) Payments may be made to the Town or City of New London, the Town of Groton, the Town of Waterford, or any town contiguous to any of the same, or any town or city in the State of Connecticut in which any newspaper published by the Day Trustees has a substantial circulation, providing said payment is made for a purpose exclusively public; or said [Foundation] Trustee may expend said sum for any exclusively public purpose in respect to any of said towns or cities:
(b) Payments may be made to any corporation organized under the laws of the State of Connecticut, providing said corporation is engaged solely in religious, charitable, scientific, or educational purposes, and providing that the sums so paid are restricted to the use exclusively for one or more of such purposes within one or more of the towns or cities above described; or said [Foundation] trustees may expend any sum for such purposes. No such trustee or corporation shall be engaged in carrying on propaganda or influencing legislation, nor shall the Since the creation of the Trust in 1939, the Day Trustees have participated actively in managing the affairs of the Company. The Will named as original Trustees the then-directors of the Company, and, with a single exception, all of the subsequent Trustees have been directors of the Company during their terms as Trustees. The Trustees' monthly meetings have been devoted primarily to matters of Company management, such as personnel decisions, capital expenditures, editorial policies, circulation, and competition from other local newspapers. The Trustees have caused the Company to approve liberal compensation for the Company's employees, to expand its plant, to improve its mechanical equipment, and to maintain substantial reserves in the Company.
earnings of any such corporation inure to the benefit of any stockholder or individual....
In 1978, the last survivor among Bodenwein's wife and children died. Thereafter, under Article 5 of the Will, all of the income and principal of the Foundation became payable for public or charitable purposes selected by the Foundation Trustee. Accordingly, in 1979, the Foundation Trustee applied for, and received from the Internal Revenue Service ("IRS"), recognition that the Foundation was a tax-exempt charitable organization described in Sec. 501(c)(3) and a private foundation under Sec. 509.
In 1979, the Day Trustees applied to the IRS for a determination of the Trust's status under IRC Sec. 4947(a). That section provides, in pertinent part, as follows:
(a) Application of tax
... [F]or purposes of this chapter, a trust which is not exempt from taxation under section 501(a), all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and for which...
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