Lincoln Rochester Tr. Co. v. Commissioner of Int. R.

• Decision Date: 19 April 1950
• Docket Number: No. 193,Docket 21577.,193
• Citation: 181 F.2d 424
• Parties: LINCOLN ROCHESTER TRUST CO v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

181 F.2d 424 (1950)

LINCOLN ROCHESTER TRUST CO v. COMMISSIONER OF INTERNAL REVENUE.

No. 193, Docket 21577.

United States Court of Appeals Second Circuit.

Argued April 5, 1950.

Decided April 19, 1950.

Scott Stewart, Jr., of Rochester, N. Y. (Nixon, Hargrave, Middleton & Devans, of Rochester, N. Y., on the brief), for petitioner-appellant.

L. W. Post, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., and Ellis N. Slack, Sp. Asst. to Atty. Gen., on the brief), for respondent-appellee.

Before AUGUSTUS N. HAND, CLARK, and FRANK, Circuit Judges.

CLARK, Circuit Judge.

Mary P. Morse of Rochester, N. Y., died on March 15, 1944, leaving a will wherein she bequeathed her residuary estate to a trustee to pay the income therefrom to one Lillian MacDonald for the latter's life, and to pay "the remaining principal" at her death to three named charities. The trust also contained this provision: "My said Trustee is authorized, empowered and directed also to advance from said residuary estate to the said Lillian MacDonald such sums of principal as may be necessary for her proper care, support and maintenance." The executor, in computing the estate tax due, deducted the present worth of the remainder interest, which was to go to charity, in accordance with § 812(d) of the Internal Revenue Code, 26 U.S.C.A. § 812(d), and § 81.44 of Treasury Regulation 105. The Commissioner, however, levied a deficiency assessment of $38,929.37 on the theory that the value of the charitable remainder could not be ascertained with sufficient accuracy to permit the deduction, and he was upheld in so doing by the Tax Court. This petition for review followed.

The life beneficiary, Miss MacDonald, had lived with the decedent as nurse, companion, and friend for approximately twenty years prior to the latter's death. At that date Miss MacDonald was 72 years of age and had a life expectancy of between seven and eight years. She had received from decedent a salary of $1,300 a year and had an additional income of $360 annually from rent of the upper story of a house which she owned. Since the decedent's death Miss MacDonald has lived in the lower story of that house. The expenses of maintenance of the house averaged $1,700.46 per year during the years 1945 through 1948. Other identified expenses paid by her during the same years averaged $2,441.65 per year; and in addition to these expenses, withdrawals from her bank account averaged $2,070.61, making a total average yearly expenditure of $6,212.73. Her net income from the trust after taxes rose from $5,406.15 in 1945 to $6,578.13 in 1948. In addition she had received a cash bequest from decedent of $10,000, and an inheritance from a sister in 1946 of $2,181.28.

Miss MacDonald worked all her life as a professional nurse, and her background was characterized by a witness as "plain and simple." She has never owned an automobile, nor has she taken any trips of consequence save those she made with the decedent in the course of her employ. She has no servants. In May, 1947, she was operated on for the removal of cataracts from her eyes at a cost of $600, and she may require another eye operation. At no time has she required or requested an advance from the principal of the trust. The principal totals $153,983.37.

The governing legal principles have been rather clearly defined. Under the statute and regulations and present worth of a charitable remainder such as this is deductible if its value is ascertainable with sufficient definiteness. Hence the deduction should be made here unless the existence of the power in the trustee to invade the principal for the "proper care, support and maintenance" of the life beneficiary makes the value of the remainder interest too indefinite to be ascertained. But even where there is a power to invade principal, the remainder may still be deductible provided the will sets up a definite and fixed standard for the exercise of the trustee's discretion, and thus makes it possible to predict with reasonable accuracy whether the right of invasion will or will not be exercised. We have before us therefore the legal issue as to the correct interpretation of this provision of the will and specifically whether or not it does provide such a definite and fixed standard. If it does, it is for the Tax Court, as finder of the facts, to scrutinize the evidence and ascertain whether exercise of the power of invasion, in accordance with the standard set out, is likely to deplete the remainder for which a deduction is sought. As usual, the burden of proof is on the taxpayer. See generally Paul, Federal Estate and Gift Taxation § 12.26, Supp. 1946; Montgomery, Federal Taxes — Estates, Trusts and Gifts 1948-49, 802-809.

In deciding whether the language of the will provides a fixed and definite standard for invasion, we enter a field where fine verbal distinctions appear to hold full sway. A power to take from principal for the life tenant sums "necessary to suitably maintain her in as much comfort as she now enjoys" allows deductions of remainders to charities, Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647, while a mandate to the trustee to "be liberal" or to concern itself with the beneficiary's "happiness" or "pleasure" does not. Merchants Nat. Bank of Boston v. C. I. R., 320 U.S. 256, 64 S.Ct. 108, 88 L.Ed. 35; Henslee v. Union Planters Nat. Bank & Trust Co., 335 U.S. 595, 69 S.Ct. 290. Our problem is to decide whether the language used here, "proper care, support and maintenance," authorizes invasion of corpus only so far as is necessary to maintain the objective measure of the standard of living enjoyed by the life tenant at the decedent's death, under the authority of the first case, or whether it is so subjective a standard as to allow invasion to...