Schoellkopf v. United States

• Court: U.S. District Court — Western District of New York
• Writing for the Court: KNIGHT
• Citation: Schoellkopf v. United States, 36 F.Supp. 617 (W.D. N.Y. 1941)
• Decision Date: 17 January 1941
• Docket Number: No. 1723 A.,1723 A.
• Parties: SCHOELLKOPF v. UNITED STATES.

36 F. Supp. 617

SCHOELLKOPF v. UNITED STATES.

No. 1723 A.

District Court, W. D. New York.

January 17, 1941.

Kenefick, Cooke, Mitchell, Bass & Letchworth, of Buffalo, N. Y., for plaintiff.

Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and Courtnay C. Hamilton, Sp. Assts. to Atty. Gen., and George L. Grobe, U. S. Atty., of Buffalo, N.Y. (R. Norman Kirchgraber, Asst. U. S. Atty., of Buffalo, N.Y., of counsel), for defendant.

KNIGHT, District Judge.

This action is brought for the recovery of income tax and interest thereon allegedly illegally assessed and collected for the calendar year 1929. After payment of the tax, plaintiff filed a claim for refund which was disallowed by the Commissioner of Internal Revenue.

During the year 1929, the taxpayer transferred, without consideration, 500 shares of the capital stock of Drug, Inc., to the Old Colony Trust Co., of Boston, Mass., as trustee under a trust indenture dated November 12, 1928, between the taxpayer, the Old Colony Trust Company, and the Marine Trust Company of Buffalo. The stock had a fair market value of $57,937.50 at the time of the transfer. In his return the taxpayer made a deduction of $20,167.31, this being the difference between other deductions claimed and the 15 per cent statutory limitation on deduction for charitable contribution. A deficiency of $4,037.47 was determined as the result of disallowance of the deduction for the reason that the contribution was not considered by the Commissioner to be within Section 23(n) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 358.

On November 12, 1928, the taxpayer named the Marine Trust Company, trustee of a fund which will be referred to as the "Buffalo Trust", the income of which was to be paid to him for life. Upon his death the trustees were directed to make a payment of principal to descendants of a grandson and provide for certain annuities. It was also provided that the Trustee should pay any bequest, other than the residuary bequest and any inheritance or estate taxes or other debts of grantor which his estate might not be adequate to pay, waiving any claims against his estate by reason of inability to return any securities borrowed from the Trustee.

After paying up to a specific amount of income to trustor's wife, the balance of income was to be distributed as follows: Twenty-five thousand per annum was to be paid to the Buffalo Foundation to be accumulated in a fund known as "The Schoellkopf Library Fund of the University of Buffalo"; $12,500 was to be paid to the Buffalo Foundation for its general purposes, and the rest paid to the Buffalo Foundation for the "Jacob F. Schoellkopf Fund." This trust agreement was revocable by plaintiff during his life-time except as to the provision for the University of Buffalo.

The trust created under the agreement with the Old Colony Trust Company of Boston will be referred to as the Boston Trust. It provided for a charitable trust in perpetuity to be interpreted under the laws of Massachusetts, with income to be added to principal for a period of 100 years at which time one-half of the principal should be transferred to the Marine Trust Company as Trustee for the Buffalo Foundation, under the provisions of the so-called Buffalo Trust, the remainder to be accumulated for further periods of 50 years at the end of each of which a like disposition should be made. The Boston Trust was made irrevocable, grantor reserving only the right to supplement or modify the provisions regarding the method of administration, the method of determining beneficiaries and the period for the accumulation and dates for distributions of the principal.

Certain modifications of these agreements were made subsequent to their execution but the same have no effect upon this action and need not be set forth.

The Buffalo Foundation is a trust operated exclusively for charitable and educational purposes and the University of Buffalo is a corporation organized and operated exclusively for educational purposes, no part of its income accruing to the benefit of any private individual or stockholder.

Section 23 of the Internal Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Acts, page 356, provided that in computing net income there should be allowed as a deduction contribution or gifts made within the taxable year to any corporation trust, fund or foundation organized and operated exclusively for religious, charitable, scientific, no part of the earnings of which inures to the benefit of any private shareholder or individual.

It is the contention of defendant that the gift in question does not fall within the scope of the above-mentioned section for the reason that grantor has not put it beyond his power to recapture the funds or to divert them to noncharitable beneficiaries. Defendant asserts that the trust funds, when transferred from the Boston Trust would be held by the "ultimate trustee" subject to the terms of the Buffalo trust. The argument assumes that such funds would be subject to all of the terms of the Buffalo Trust and not only those terms having reference to the Buffalo Foundation. From this premise it is urged that by shortening the accumulation periods grantor could make the principal of the trust payable over to the Marine Trust Company almost immediately and that it would then become subject to the provisions whereby grantor could borrow trust securities with no obligation to account for them, or could bequeath such sums that trust funds would be required to pay the legacies or could contract such debts as would require the use of trust...