Mercantile-Safe Deposit and Trust Co. v. United States

• Citation: 252 F. Supp. 191
• Decision Date: 07 March 1966
• Docket Number: Civ. No. 15254.
• Parties: MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, Executor under the Last Will and Testament of George F. Sargent v. UNITED STATES of America.
• Court: U.S. District Court — District of Maryland

252 F. Supp. 191

MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, Executor under the Last Will and Testament of George F. Sargent v. UNITED STATES of America.

Civ. No. 15254.

United States District Court D. Maryland.

March 7, 1966.

COPYRIGHT MATERIAL OMITTED

Gordon G. Power and Power & Mosner, Towson, Md., for plaintiff.

Moshe Schuldinger, Atty., Dept. of Justice, Washington, D. C. (Richard M. Roberts, Acting Asst. Atty. Gen., and David A. Wilson, Jr., Atty., Dept. of Justice, Washington, D. C., and Thomas J. Kenney, U. S. Atty., and Robert W. Kernan, First Asst. U. S. Atty., Baltimore, Md., on brief), for defendant.

THOMSEN, Chief Judge.

In this action to recover estate taxes alleged to have been erroneously and illegally collected, the issue is whether the value of the remainder interest to charity in the residuary trust created by the will of Dr. George F. Sargent was deductible under sec. 2055 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 2055. More specifically, the questions presented are: (1) whether the will provides a sufficiently definite standard limiting the extent of possible invasion for the benefit of non-charitable interests so that the value of the charitable remainder was "presently ascertainable" at the time of the testator's death; and if so, (2) whether the possibility that the charity would not take was so remote as to be negligible. These questions must be considered both with respect (A) to the powers given the trustee during the life of the widow, and (B) to the powers given the trustee after her death in connection with annuities of $1,000 each provided for two servants, William F. Wiggins and Eva Wiggins. Plaintiff cannot recover unless both questions are answered "yes".¹

The material portions of Dr. Sargent's will are set out in the margin.² A summary of the provisions material to each of the questions presented is included in the discussion of the particular question.

Dr. Sargent died in June 1959, survived by his wife, who was eighty-one years old, and by Mr. and Mrs. Wiggins. Mrs. Sargent died in March 1963, William F. Wiggins died in August 1959; Eva Wiggins is still living. At no time after Dr. Sargent's death were any payments made either to Mrs. Sargent or to Mr. or Mrs. Wiggins out of the principal of the trust.

The estate tax return was filed in August 1960. It showed a gross estate of $951,521.96, a taxable estate of $224,405.87, after deductions which included the charitable remainder valued at $634,575.35, and an estate tax liability of $54,796.02. Upon audit, a deficiency of $192,842.82 was assessed and paid in January 1963, together with interest of $26,997.99. The basis for the assessment was the disallowance of the charitable deduction. A claim for refund in the amount of $215,609.10 was timely filed in February 1963, notice of disallowance was sent to plaintiff in August 1963, and the instant suit was filed in January 1964.

Each side has filed a motion for summary judgment.

The Statute and Regulations

The case is governed by sec. 2055 of the Internal Revenue Code of 1954, 26 U.S. C.A. § 2055, which provides, in substance, that for purposes of the estate tax, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies and devises to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, and all bequests, legacies and devises to trustees for such purpose, with certain provisos and other provisions not important in this case. Sec. 2055 of the 1954 Code is essentially similar to sec. 812(d) of the 1939 Code, which was involved in most of the cases cited herein.

Treasury Regulations on Estate Tax (1954 Code), sec. 20.2055-2, entitled "Transfers not Exclusively for Charitable Purposes", which has the effect of law,³ outlines the requirements for such a deduction. The provisions material to this case read as follows:

"(a) Remainders and Similar Interests. If a trust is created or property is transferred for both a charitable and a private purpose, deduction may be taken of the value of the charitable beneficial interest only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. * * *

"(b) Transfers Subject to a Condition or a Power. If, as of the date of a decedent's death, a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. If an estate or interest has passed to or is vested in charity at the time of a decedent's death and the estate would be defeated by the performance of some act or the happening of some event, the occurrence of which appeared to have been highly improbable at the time of the decedent's death, the deduction is allowable. If the legatee, devisee, donee, or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, devised, or given by the decedent, the deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of the power. * * *"⁴

These provisions are essentially similar to secs. 81.44 and 81.46 of Treasury Regulation 105, which dealt with the 1939 Code and were involved in most of the cases cited.

A The Provisions with Respect to the Widow

1. Does the will provide a sufficiently definite standard limiting the extent of possible invasion for the benefit of noncharitable interests, so that the value of the charitable remainder was "presently ascertainable" at the time of the testator's death? This question must be decided from the will itself, without the use of extraneous evidence.⁵

The provisions of the will with respect to Mrs. Sargent, the widow, may be summarized as follows: Paragraph (a) of Item Third provides that the net income be applied for the maintenance, support, comfort and welfare of the widow, with a customary "spendthrift" provision. Paragraph (b) provides that the "spendthrift" provision shall not prevent the trustee from applying the "income or principal which would otherwise be payable to or for her benefit" under the will directly to her support and maintenance, and that if the widow becomes incapacitated, or if in the judgment and discretion of the trustee the welfare of the widow would be better served, the trustee may apply the income or other benefits to her support and maintenance, rather than paying them to her. Paragraph (c) directs that if the widow's income from all sources is insufficient to provide her with the best medical, hospital or nursing care or treatment in case of sickness, the trustee shall apply to her support, maintenance, comfort and general well being such part of the principal of the trust estate as, in the absolute discretion of the trustee, shall be necessary to supply such deficiency.

The leading case is Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647, 649 (1929), where the will gave the residue of the estate to the wife for life, with authority to use from the principal any sum "that may be necessary to suitably maintain her in as much comfort as she now enjoys". The Court sustained the right to the deduction, saying: "The principal that could be used was only so much as might be necessary to continue the comfort then enjoyed. The standard was fixed in fact and capable of being stated in definite terms of money. It was not left to the widow's discretion." 279 U.S. at 154, 49 S.Ct. at 291.

Following the Ithaca Trust decision, the courts have held that the standard is sufficiently definite where the will permits invasion for the beneficiary's "comfort and welfare". Blodget v. Delaney, 1 Cir., 201 F.2d 589 (1953), "proper care, support and maintenance", Lincoln Rochester Trust Co. v. Commissioner, 2 Cir., 181 F.2d 424 (1950), "support and maintenance", Berry v. Kuhl, 7 Cir., 174 F.2d 565 (1949), "to meet any unusual demands, emergencies, requirements or expenses for her personal needs that may arise from time to time", Lincoln Rochester Trust Co. v. McGowan, 217 F.2d 287, 289 (1957), or for "the upkeep of the homeplace and all necessary medical and hospital expenses in the case of the illness" of either or both of the testator's sisters, Bowers v. South Carolina National Bank of Greenville, 4 Cir., 228 F.2d 4 (1955). Granting the trustee discretion with respect to the amount to be used for the specified purpose is not fatal. Neither is omission from the will of specific reference to the support or comfort "then enjoyed". See the cases cited above, and Internal Revenue Bulletin 54-285 (IRB 1954-29; P. H.Fed.Tax Serv., sec. 120,555.1), which stated:

"Where the power of invasion is limited by such words as `comfort and support' with no express standard or limitation in the will or instrument, such words should be interpreted as meaning the comfort and support according to the standard of living enjoyed by the beneficiary power to the decedent's death, if such interpretation is consistent with applicable local law, and other terminology in the will or instrument does not require some different interpretation. * * *

"The trust instrument in the instant case impliedly fixes a definite standard, as the trustee is not authorized to use principal except for the proper comfort and support of the widow. * * *"

The cases relied on by the government are not in conflict with those rulings. In Merchants National Bank of Boston v. Commissioner, 320 U.S. 256, 64 S.Ct. 108, 88 L.Ed. 35 (1943), invasion was permitted for "the comfort, support, maintenance and/or happiness of my said wife", and the trustee was...