Hammond v. United States
| Decision Date | 23 March 1984 |
| Docket Number | Civil No. H 82-264. |
| Court | U.S. District Court — District of Connecticut |
| Parties | E. Wesley HAMMOND, Charles E. Shain, Deane C. Avery, Evan Hill and Walter Baker, Trustees of the Day Trust v. UNITED STATES of America. |
Mark R. Kravitz, Edwin A. James, Stacey Jackson Perkins, Wiggin & Dana, New Haven, Conn., for plaintiffs.
D. Patrick Mullarkey, Karen B. Brown, U.S. Dept. of Justice, Tax Div., Civ. Trial Section, Northern Region, Washington, D.C., for defendant.
RULING ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
In 1916, Theodore Bodenwein, owner of The Day, a newspaper he had published in New London, Connecticut since 1891, expressed his "earnest hope that The Day, unlike us poor mortals, will be able to go on forever." Stipulation of Facts ("Stip.") ¶ 7 (filed May 9, 1983). By 1930, however, the publishing industry was increasingly inhabited by regional and national publishing chains that expanded by acquiring small local newspapers. Id. In 1938, Bodenwein executed a will (the "Will"), establishing the Day Trust (the "Trust") to hold the stock of the Day Publishing Company. Stip., Appendix, Exhibit A, Article Fourth ("Exhibit A"). The Trust provided a structure of corporate governance for The Day reposing control in a group of five trustees (the "Trustees"), two of whom manage the day-to-day operations of the newspaper. Id. By this arrangement, Bodenwein sought to ensure that The Day would continue to serve future generations of south-eastern Connecticut residents and remain "a leading factor in the growth, development and improvement of the city and vicinity and the happiness and prosperity of the people." Id., Article First.
Bodenwein devoted the better part of his life to establishing The Day as "a recognized institution in the community," Stip. ¶ 5, and under his tutelage circulation of the newspaper increased fivefold. Stip. ¶ 6. Yet Bodenwein was also concerned with fostering relations between The Day and the people of New London. As his newspaper grew, so did its involvement in community affairs. Stip. ¶ 5. In keeping with this tradition of public service, Bodenwein provided in his Will that profits of the Day Publishing Company not utilized by the newspaper should be transferred annually by the Trustees to a separate trust, the Bodenwein Public Benevolent Foundation (the "Foundation"). Exhibit A, Article Fifth. The Foundation was directed to distribute these funds each year to public and charitable entities in the New London vicinity. Id.
The Trustees maintain that in the forty-five years since Bodenwein's death The Day has continued to play the role he envisaged for it—a "champion and protector of the public interest" which is "more than a business enterprise." Plaintiffs' Memorandum in Support of Motion for Summary Judgment ("Plaintiffs' Memorandum") at 1 (filed May 9, 1983); see Exhibit A, Article First. Nevertheless, the endurance of Bodenwein's unique legacy has been cast into doubt in recent years by the Internal Revenue Service (the "IRS"), which has attempted to subject the Trust to provisions of the Internal Revenue Code (the "Code" or "I.R. C.") enacted more than a generation after Bodenwein's death to combat perceived abuses by tax-exempt charitable organizations. Stip. ¶ 28. Among other things, these so-called "private foundation rules,"1 adopted by Congress in 1969, impose a confiscatory 200 percent tax on "exclusively charitable" trusts whose ownership of an incorporated business enterprise exceeds certain percentage limitations. If, as the Government argues, the Trust is subject to these private foundation rules, see Memorandum of Law in Support of Defendant's Cross-Motion for Summary Judgment ("Government's Memorandum") at 15-16 (filed June 9, 1983), the Trustees would be forced to sell The Day, in all likelihood to a national or regional publishing chain, in direct contravention of Bodenwein's stated desire to preserve The Day as an autonomous, locally-controlled newspaper.2
While this action ostensibly is concerned only with $2801 in federal excise tax paid on the net investment income of the Trust for the year ended December 31, 1980, it has ramifications extending well beyond a possible refund of this relatively insignificant sum. It is not disputed that a determination that the Trust is "exclusively charitable" would subject it to the panoply of rules governing private foundations, not simply the excise tax on net investment income, and that compliance with these private foundation rules would result in termination of the Trust and the transfer of effective control over a newspaper with net operating revenues in 1982 of approximately $10 million and assets in excess of $5 million. See Stip., Exhibit G-6. The Trustees contend that the Trust is not "exclusively charitable" and thus that it fits within the exemption provided by the private foundation rules for so-called "split-interest" trusts created prior to May 27, 1969. If the Trustees are correct, the private foundation rules have no application to the Trust and the Trustees must be permitted to continue publishing The Day as they have since Bodenwein's death in 1939.3
Under the provisions of the Will, the Trust assumed control of The Day upon Bodenwein's death on January 12, 1939. Stip. ¶ 1. The Trust holds virtually all of the issued and outstanding shares of stock of the Day Publishing Company,4 which owns and publishes The Day, an independent daily newspaper in New London, Connecticut. Stip. ¶ 8. The Day is a successful and respected newspaper, acclaimed for its contributions to the City of New London and surrounding area. Stip. ¶ 4. The income of the Trust consists solely of dividends paid by the Day Publishing Company. Stip. ¶ 20.
Bodenwein directed that income of the Trust not consumed in the operation of the newspaper or the maintenance of reserves for its benefit should be paid over annually to the Foundation, the second testamentary trust created under the provisions of the Will. Stip. ¶ 8. The Foundation was in turn directed to distribute the funds it received from the Trust each year to members of Bodenwein's immediate family during their lifetimes, as well as to local public and charitable organizations. Specifically, nine-tenths of the net income and principal of the Foundation was to be paid to Bodenwein's wife and two children and to the survivor and survivors of them, with the remaining one-tenth to be expended for public, religious, charitable, scientific, literary or educational purposes in any town or city in Connecticut in which The Day had a substantial circulation. Exhibit A, Article Fifth; Stip. ¶ 23. When Elizabeth B. Miles, the last survivor of the wife and two children of Theodore Bodenwein, died on November 20, 1978, Stip. ¶ 22, all of the net income and principal of the Foundation became payable for public and charitable purposes under the terms of the Will. Stip. ¶ 24. In 1979, the Hartford National Bank (now the Connecticut National Bank), trustee of the Foundation, applied for and received from the IRS a determination that as a consequence of the death of Elizabeth Miles the Foundation had become a tax-exempt charitable organization described in section 501(c)(3) of the Code and a private foundation described in section 509 of the Code. Stip. ¶¶ 25-26. Thus, the Foundation is subject to all of the restrictions imposed on private foundations. Stip. ¶ 26.5
The Will directs the Trustees, two of whom must be employed exclusively in publishing The Day, to manage the newspaper with the attention to quality that characterized Bodenwein's ownership.6 Exhibit A, Articles First and Fourth. To accomplish this aim, the Will authorizes the Trustees to withhold net income of the Day Publishing Company from distribution to the Foundation and to expend those funds on behalf of the newspaper. The Trustees are also empowered to establish reserves out of the income of the Trust or the Day Publishing Company for the benefit of The Day, id., Article Fourth,7 and to dissolve the Day Publishing Company and hold the assets of the newspaper directly if that would be advantageous from a tax standpoint. Id., Article Eighth.
Id., Article Fourth.
The Will recites that expenditures and the maintenance of reserves for the benefit of The Day to achieve Bodenwein's aims are "in every respect at the discretion of said Trustees," although the Trustees were to be mindful of Bodenwein's desire that the Foundation receive sufficient funds to support his wife and children during their lifetimes. Id. The Will contains no instruction to the Trustees to maximize funds available to the Foundation for charitable and public contributions.
In the Will, Bodenwein directed that stock of the Day Publishing Company not be sold on a piecemeal basis. The Trustees are empowered to sell all of the stock, but only in limited circumstances, namely, if The Day ceases to be published in New London, Connecticut or if the Trust fails in any two successive years to distribute $25,000 to the Foundation. Id.8 Upon termination, assets of the Trust are to be liquidated and any proceeds distributed to...
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Hammond v. U.S.
...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 ......