Ives v. Comm'r of Internal Revenue (In re Estate of O'Connor)
| Decision Date | 03 November 1977 |
| Docket Number | Docket No. 7156-74. |
| Citation | 69 T.C. 165 |
| Parties | ESTATE of A. LINDSAY O'CONNOR, DECEASED, DERMOD IVES and UNITED STATES TRUST COMPANY of NEW YORK, EXECUTORS, TRUST UNDER ARTICLE FOURTH, SUBDIVISION I, of THE WILL of A. LINDSAY O'CONNOR, DECEASED (MARITAL TRUST), DERMOD IVES and UNITED STATES TRUST COMPANY of NEW YORK, TRUSTEES, and OLIVE B. PRICE, ROBERT L. and LUCILLE S. BISHOP, and DONALD F. and EDNA G. BISHOP, INDIVIDUALLY, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Decedent left one-half of his net estate in trust (marital trust) for his wife, who was given the income therefrom, a general testamentary power of appointment, and a power to withdraw any or all of corpus at any time by filing a written election with the trustees. Shortly after decedent's death, the wife filed a written election with the executors-trustees to withdraw all of the corpus of said trust and, that same day, executed an assignment of all of her rights therein to a charitable foundation. The foundation received cash and securities which constituted principal and income of the estate. Held, the marital trust is not recognized for Federal tax purposes and the estate is deemed to have made distributions to the foundation with said trust acting as a mere conduit. Held, further, the estate is not entitled to distributions deductions under sec. 661, I.R.C. 1954, for amounts received by the charitable foundation; the validity of sec. 1.663(a)-2, Income Tax Regs., prescribing sec. 642(c), I.R.C. 1954, as the exclusive means by which an estate or trust may deduct amounts paid for charitable purposes upheld. Held, further, the amounts received by the foundation do not qualify for deduction by the estate under sec. 642(c), I.R.C. 1954.
The remaining half of decedent's net estate was divided into three trusts, each trust having one current income beneficiary. The estate made distributions to the trusts and to the income beneficiaries thereof directly. Held, on the facts before the Court, tax consequences of such distributions to the trusts' income beneficiaries determined. Kenneth W. Greenawalt and John F. Williamson, for the petitioners Estate of A. Lindsay O'Connor, deceased, Dermod Ives and United States Trust Co. of New York, executors, and Trust under Article Fourth, subdivision I, of the will of A. Lindsay O'Connor, deceased (marital trust), Dermod Ives and United States Trust Co. of New York, trustees.
Morris Gitlitz and Eugene E. Peckham, for the petitioners Olive B. Price, Robert L. and Lucille S. Bishop, and Donald F. and Edna G. Bishop.
Rudolph J. Korbel and David A. Schmudde, for the respondent.
Respondent determined the following deficiencies in the petitioners' Federal income taxes:
The issues before us are:
(1) Whether the decedent's estate properly claimed distributions deductions in respect of amounts received by a charitable foundation on the grounds either (a) that such amounts constituted distributions to a marital trust created under decedent's last will and testament or (b) that, since the foundation succeeded to the interests in the marital trust, such amounts should be treated as distributions to a beneficiary under said last will and testament;
(2) If the estate is entitled to such distributions deductions on the ground that they were made to the marital trust, whether the marital trust is entitled to distributions deductions in respect of the amounts received by such charitable foundation;
(3) Whether certain distributions by the estate to the beneficiaries of residuary trusts under the decedent's last will and testament were required distributions of current income and, in any event, the amount of such distributions includable in gross income by such beneficiaries; and
(4) Whether a portion of the executors' commissions paid by the decedent's estate are allocable to tax-exempt income and, therefore, nondeductible.
Respondent concedes that any assessment against the marital trust for the taxable year ended December 31, 1969, is barred by the statute of limitations.
This case was submitted to the Court upon a full stipulation of facts, which, together with the exhibits, is incorporated herein by this reference.
A. Lindsay O'Connor (decedent) died on May 9, 1968, a resident of Delaware County, N. Y. His last will and testament, dated December 11, 1957, was admitted to probate by decree of the Surrogate's Court, County of Delaware, N. Y., dated May 20, 1968, and letters testamentary and letters of trusteeship were issued to Dermod Ives and United States Trust Co. of New York authorizing them to act as executors and trustees under the will. A joint petition was filed herein by Dermod Ives and United States Trust Co. of New York as executors and trustees and by Olive B. Price, Robert L. and Lucille S. Bishop, and Donald F. and Edna G. Bishop, individually. The United States Trust Co., a corporation organized under the banking laws of the State of New York, maintained its principal office in New York, N. Y., at the time of filing said petition.1
The executors filed an estate tax return on June 24, 1969. They elected a fiscal year ending October 31 for income tax reporting purposes. A short-period income tax return was filed by the estate for the period from the date of decedent's death to October 31, 1968. Thereafter, income tax returns for the estate were duly filed for the taxable years ending October 31, 1969, October 31, 1970, and October 31, 1971. The trustees elected the calendar year for income tax purposes and duly filed forms 1041 for the marital trust and for each of the other trusts for 1969, 1970, and 1971.
The dispositive provisions of the decedent's will basically provided for the division of his estate into two shares.2 The first share, consisting of one-half of the entire net estate, was bequeathed in trust (marital trust) for his widow, Olive B. O'Connor, who was given the income therefrom, coupled with a general testamentary power of appointment over corpus in favor of “such persons and/or corporations as she may appoint” and a power to withdraw at any time (including the year of death) any or all of the corpus by a written election to be filed with the trustees. As to the second share, the decedent made some specific pecuniary bequests and directed that the balance be divided into three equal parts, to be held in trust, with income from each part to be paid or applied for the benefit of Olive B. Price, Donald F. Bishop, and Robert L. Bishop (niece and nephews of the widow), respectively.
On May 23, 1968, the decedent's widow, Olive B. O'Connor (Mrs. O'Connor), notified the executors and trustees in writing that she elected to have all of the principal of the marital trust paid to her. By instrument, executed the same day and entitled “Gift Assignment of Interest in Estate of A. Lindsay O'Connor,” Mrs. O'Connor assigned all of her right, title, and interest to the marital trust, together with any income from such property, to the A. Lindsay and Olive B. O'Connor Foundation (hereinafter the foundation). The foundation had been created by Mrs. O'Connor in 1965 and was, at all times material herein, recognized by the Internal Revenue Service as a charitable foundation within the meaning of section 501(c)(3).3 For the year 1968, Mrs. O'Connor filed a gift tax return in which she reported the assignment of her interest in the marital trust to the foundation; the value of such interest in both income and corpus was estimated to be $25 million.
With respect to its 3 taxable years involved herein, the parties have stipulated that “the estate made the following distributions to the beneficiaries thereof”:
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