Newton Trust Co. v. Commissioner of Internal Revenue

• Decision Date: 05 March 1947
• Docket Number: 4184.,No. 4177,4177
• Citation: 160 F.2d 175
• Parties: NEWTON TRUST CO. et al. v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. NEWTON TRUST CO. et al.
• Court: U.S. Court of Appeals — First Circuit

160 F.2d 175 (1947)

NEWTON TRUST CO. et al. v. COMMISSIONER OF INTERNAL REVENUE.

COMMISSIONER OF INTERNAL REVENUE v. NEWTON TRUST CO. et al.

Nos. 4177, 4184.

Circuit Court of Appeals, First Circuit.

March 5, 1947.

COPYRIGHT MATERIAL OMITTED

David Burstein, of Boston, Mass. (John T. Powell, of Boston, Mass., on the brief), for Newton Trust Co., et al.

Carlton Fox, Sp. Asst. to the Atty. Gen. (Sewall Key, Acting Asst. Atty. Gen., and A. F. Prescott and Hilbert P. Zarky, Sp. Assts. to the Atty. Gen., on the brief), for Commissioner.

Before MAGRUDER, MAHONEY and WOODBURY, Circuit Judges.

MAHONEY, Circuit Judge.

This case involves cross appeals from a redetermination by the Tax Court of estate tax deficiencies. Two questions are presented: (1) whether certain bequests to charities in the will of decedent are sufficiently ascertainable to be allowed as deductions under Internal Revenue Code, § 812(d), 26 U.S.C.A. Int.Rev.Code, § 812(d), and (2), the measure of the value of the property includible in the gross estate by reason of the exercise by decedent in his will of two powers of appointment.

Nathan P. Cutler, Sr., decedent's father, created an inter vivos trust in 1926, the income of which was payable to himself for life, and on his death the net income was payable in equal shares to his two children, Nathan P. Cutler, Jr., the decedent, and his brother, William H. Cutler, as long as they should live. Upon the death of one of them, that decedent's portion of the income was to go according to the will of that deceased life tenant. On the death of the survivor of the two brothers, the corpus was to be divided into equal shares payable as each son appointed by will. Provisions were made for disposition in the event of default of appointment but they are not now pertinent.

After the father's death in 1931 the net income of the trust was paid in equal parts to the two sons. Nathan P. Cutler, Jr., whose estate is the subject of the present proceedings, died on September 10, 1940 survived by his brother William. The decedent devised and bequeathed to a trustee "all the rest and residue of my property, real or personal, of which I shall die seized or possessed, or to which at the time of my decease I shall be in any way entitled or over which I may have any power of appointment," in trust to pay the net income thereof "to or for the use and benefit" of his wife for life. The trustee was given a power "to make such payment or payments to or for the use and benefit of my said wife as it may in its sole discretion deem advisable." On the death of the wife the remainder, subject to certain specific bequests, was bequeathed to charity. The will empowered the trustee to mortgage, lease, or sell both real and personal property in the trust fund and provided that all decisions of the trustee made in good faith should be conclusive on all parties in interest.

After the death of decedent, one-half of the income from the father's trust was paid to the trustee under the decedent's will. At the time of decedent's death, his brother William's age was 68 years, 3 months, and the wife's 67 years, 8 months. It has been conceded that the charitable organizations are of the type to which charitable bequests may be made and allowed as deductions under Internal Revenue Code, § 812(d).

The Commissioner disallowed any deduction for the charitable bequests on the ground that the trustee's power of invasion of the principal for the use and benefit of the wife of decedent made it impossible to determine with any degree of certainty what amounts would ultimately go to charity, and hence the value of such bequests was not presently ascertainable. The Commissioner also determined that the value of the one-half interest in the Cutler Sr. trust over which the decedent exercised the powers of appointment was $201,382.99. The Tax Court upheld the Commissioner on the disallowance of the amount of the charitable bequests; but found the value of the property passing under the powers of appointment to be the sum of the separate value of the life estate and the remainder, viz., $195,778.35. The Tax Court also made a finding that the wife did not file a disclaimer under the provisions of § 812(d), as amended.

Section 812(d)¹ of the Internal Revenue Code provides for a deduction from the gross estate of decedent of the amount of all bequests, legacies, devises, or transfers to charitable corporations. Treasury Regulations 105, § 81.44² requires that the charitable gift in trust have a "presently ascertainable" value in order to warrant the deduction; and § 81.46³ provides that where a power of invasion is present the deduction will be limited to that portion of the principal which is exempt from the exercise of the power. The Supreme Court has upheld these regulations, which have since been somewhat amended, as appropriate implementations of the statute. Merchants Nat. Bank of Boston v. Commissioner, 1943, 320 U.S. 256, 260, 64 S.Ct. 108, 88 L.Ed. 35.

It would seem that a proper analysis of these powers of invasion cases in conformity with the statute and the regulations must rest on a consideration of two basic propositions. The first problem would concern the measurability of the possible exercise of the power in terms of a definitely ascertainable standard. When no calculable standard is present, no deduction should be allowed since the value of the charitable remainder cannot then be ascertained. If a fixed standard is ascertainable, then as the second step in any analysis it becomes necessary to examine the remoteness of invasion, or the extent of possible invasion, in terms of the standard, to determine the likelihood that the charity will take and the value of what it will receive. See Paul, Federal Estate and Gift Taxation (1946 Supp.) p. 436.

Where the power of invasion is limited to the maintenance of the widow in her former station of life the standard is "fixed in fact and capable of being stated in definite terms of money." Ithaca Trust Co. v. United States, 1929, 279 U.S. 151, 154, 49 S.Ct. 291, 73 L.Ed. 647. But, on the other hand, where non-measurable sums may be expended from the corpus, the power of invasion is not restricted to a fixed standard and the value of the charitable remainder is not "presently ascertainable." Merchants Nat. Bank v. Commissioner, supra. Whether a particular power of invasion falls into one class or the other depends upon the terms of the power and the proper construction to be placed thereon by the law of the state which would have jurisdiction to construe the will or trust in question. Thus, the Ithaca case allowed invasion "necessary to suitably maintain her in as much comfort as she now enjoys." Similarly, where invasion was permitted "if in the judgment of the said trustee, the best interests of my sister should so require" and the trustee testified that in his judgment the best interests of the beneficiary was to maintain her according to her past standards of living, the deduction was allowed. Commissioner v. Robertson's Estate, 4 Cir., 1944, 141 F.2d 855, 856. The terms "comfort, maintenance and support" have also been held to provide a fixed standard under which the value of the charitable remainder is ascertainable and deductible. Lucas v. Mercantile Trust Co., 8 Cir., 1930, 43 F.2d 39, 40. See also Hartford-Connecticut Trust Co. v. Eaton, 2 Cir., 1929, 36 F.2d 710; First Nat. Bank of Birmingham, Ala. v. Snead, 5 Cir., 1928, 24 F.2d 186.

On the other hand a fixed standard has been found wanting where the terms used are vague and uncertain and do not restrict invasion to maintain a prior mode of living or to definitely ascertainable amounts. Thus, in the Merchants Nat. Bank case 320 U.S. 56, 260, 64 S.Ct. 110 the principal could have been used for the "comfort, support, maintenance, and/or happiness" of the widow, and in Industrial Trust Co. v. Commissioner, 1 Cir., 1945, 151 F.2d 592, 593, certiorari denied, 327 U.S. 788, 66 S.Ct. 807 for her "comfort and pleasure." Likewise "need or desire" of the life tenant has been held not limited to a prior mode of life or any other fixed and ascertainable standard. Gammons v. Hassett, 1 Cir., 1941, 121 F.2d 229, 230, certiorari denied 1941, 314 U.S. 673, 62 S. Ct. 136, 86 L.Ed. 539.

In our present case the Tax Court held that "use and benefit of my said wife" did not refer to the widow's previous standard of living and that no other standard of expenditure was prescribed in terms of which the possibility or extent of invasion could be appraised. We agree with this holding. "Use and benefit" considered conjunctively or disjunctively connote considerably more than the maintenance of a standard of living and to our mind payments for such a purpose or purposes could not lend themselves to predetermined measurement or a measurable standard. We do agree with the taxpayer's contention that the terms "desire", "happiness" and "pleasure" are of much broader import than "use and benefit", but the taxpayer's problem here is not solved by a comparison but rather he must show affirmatively that the words used indicate an objective standard ascertainable in money. Undoubtedly a court of equity would disallow certain expenditures from principal under the terms of this trust which expenditures might readily be allowed where the broader terms were used. But within the area of permissible principal invasions here, it is impossible to predetermine just how much would be expended for "use and benefit" or even to set a dollars and cents maximum. The term "benefit" has been said to mean "whatever promotes welfare; advantage, profit." See Helvering v. Evans, 3 Cir., 1942, 126 F.2d 270, 272, certiorari denied 1942, 317 U.S. 638, 63 S.Ct. 30, 87 L.Ed. 514; Stowell v. Stowell's Executor, 1887, 59 Vt. 494, 8 A. 738, 59 Am.St.Rep. 748. This alone should serve to point out the indefiniteness of the terms here employed. Granting that this power of invasion does not bestow...