St. Louis Union Trust Company v. United States

• Decision Date: 09 March 1967
• Docket Number: No. 18263.,18263.
• Citation: 374 F.2d 427
• Parties: ST. LOUIS UNION TRUST COMPANY, Executor of the Estate of Frank Landwehr, Deceased, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

374 F.2d 427 (1967)

ST. LOUIS UNION TRUST COMPANY, Executor of the Estate of Frank Landwehr, Deceased, Appellant, v. UNITED STATES of America, Appellee.

No. 18263.

United States Court of Appeals Eighth Circuit.

March 9, 1967.

Forrest M. Hemker, of Greensfelder, Hemker, Wiese, Gale & Chappelow, St. Louis, Mo., for appellant. Davis Haskin, of Thompson, Mitchell, Douglas & Neill, St. Louis, Mo., with him on the brief.

John M. Bray, Atty., Dept. of Justice, Washington, D. C., for appellee. Mitchell Rogovin, Asst. Atty. Gen., and Lee A. Jackson and Melva M. Graney, Attys., Dept. of Justice, Washington, D. C., and Richard D. FitzGibbon, Jr., U. S. Atty., St. Louis, Mo., with him on the brief.

Before VAN OOSTERHOUT, BLACKMUN, and GIBSON, Circuit Judges.

BLACKMUN, Circuit Judge.

We are concerned here with the subjectability to federal estate tax of a bequest and devise to The Bar Association of St. Louis.

Judge Frank Landwehr, who had been a judge of the Circuit Court of the City of Saint Louis from 1918 to 1936, died testate a resident of that city on May 10, 1959. He was a bachelor. His sister Clara, then age 80, survived him.¹ By his will and codicil the judge bequeathed his law books to the Bar Association of St. Louis and his personal effects and an automobile of her selection to Clara, and gave his residuary estate to the St. Louis Union Trust Company, as trustee. He directed that the trustee

"* * * shall hold the trust estate for the benefit of my sister, Clara Landwehr, and shall pay over and distribute so much of the net income derived therefrom as the said Trustee shall determine is needed for her comfortable support and maintenance so long as she shall live. Any income not so paid over in each calendar year shall be added to principal."

The trustee was to "continue to hold" the testator's home and its contents

"* * * so long as my sister, Clara Landwehr, wishes to use it as a home, and said Trustee shall maintain said home and keep it in repair as long as my said sister makes it her home."

There was an invasion-of-principal clause for Clara's benefit.

At Clara's death, or upon her non-occupancy of the home at any time, all the testator's books in the residence were bequeathed to the Bar Association. Also at her death the trustee was to pay Clara's funeral and grave marker expenses and a number of monetary bequests for named relatives and employees. These bequests were conditioned upon survivorship and continuing employment. At the testator's death their possibly effective total was $18,000.

The will then provided,

"After the death of my said sister, Clara Landwehr, the Trustee shall continue to hold the assets in trust * * * to provide a suitable building and facilities to serve as a headquarters, office and meeting place for the Bar Association of St. Louis and under its control as a meeting place for all lawyers and associations of lawyers in the St. Louis area.

* * * * * *

"The word `building\' as used herein is used to mean a single building or two or more buildings and shall include such furnishings, equipment and facilities as are necessary or appropriate to the use to be served.

"In carrying out the purposes of the trust, it is my intention that the Trustee shall have the widest possible latitude and freedom of action to accomplish the purpose, with the funds provided. * * *

"At such time as the Trustee has completed the carrying out of the purpose of the trust and the building is ready for use and occupancy, the said Trustee shall convey said building to the Bar Association of St. Louis by appropriate deed and conveyance which shall thereafter hold said property for the uses and purposes herein stated, and the Trustee shall be discharged and this trust shall end, except in the case of a surplus of funds as hereinafter provided.

* * * * * *

"Should there be a balance of funds remaining after the carrying out of the purpose of said trust, such balance, or should, at the time this trust becomes effective, the Bar Association of St. Louis have an adequate and suitable building, then all of the trust shall continue to be held by the Trustee * * * as a perpetual fund to provide for the upkeep and maintenance of said building. The income only or so much thereof as shall be needed in the opinion of the Trustee shall be paid over to the St. Louis Bar Association yearly or at more frequent intervals for such maintenance, upkeep or repair. Should there be income in excess of that needed for maintenance, upkeep and repair of the building, the balance shall be used by the Association for general association activities."

The Trust Company was also named as the executor of Judge Landwehr's will and codicil. It so qualified. In the federal estate tax return filed for the decedent's estate, the executor, in determining the taxable estate, asserted as deductions, under § 2055(a) (2)² of the Internal Revenue Code of 1954, the returned values, aggregating $415,288.60, of the book bequests and of the residuary gift to the Association. This residuary gift was valued net after allocable death taxes, Clara's interim interest, and the presumably effective legacies payable at her death.

On audit, deductions for these Bar Association gifts were disallowed on the ground that the Association was not an entity of the kind described in § 2055(a).

The estate paid the resulting deficiency. Claims for refund were filed and this suit followed in due course. Approximately $135,000, plus interest, is involved.

Upon the government's demand the case was tried to a jury. The Association called 13 witnesses to testify as to the purpose and nature of the Association and as to its activities. Each was a present or former officer or employee. The government called no witness, but extensively cross-examined the plaintiff's witnesses and offered in evidence a number of documents and publications of the Association. At the close of the evidence each side moved for a directed verdict. The court reserved ruling on these motions and submitted the case to the jury under instructions which made its verdict depend on whether the Association was organized and operated exclusively for charitable, scientific, or educational purposes, thus employing the language of § 2055(a) (2). The jury returned a verdict for the government. The executor's subsequent motion for judgment notwithstanding the verdict or, in the alternative, for a new trial, was denied. It appeals.

At issue are the adequacy of the evidence to support the verdict that the Association did not qualify under the statute; the propriety of the charge; and the effect of the invasion clause.

1. From the language of § 2055(a) (2) it is readily apparent that for a bequest or devise to be deductible four conditions are to be satisfied: (1) the donee corporation must be organized exclusively for religious, charitable, scientific, literary, or educational purposes; (2) the donee corporation must be operated exclusively for those purposes; (3) no part of its net earnings may inure to the benefit of any private individual; and (4) no substantial part of its activities may be the carrying on of propaganda or otherwise attempting to influence legislation.

We note:

1. The government concedes that no part of the net earnings or income of the Association inures to the benefit of any individual. Neither does it argue that deduction is to be disallowed here because any substantial part of the Association's activities consist of carrying on propaganda or otherwise attempting to influence legislation. And the government does not seem seriously to assert that there is any aspect of the Association's formal organization which is disqualifying.

2. The first, third and fourth conditions of § 2055(a) (2) thus are not in issue. The case comes down to the question whether the Association is, within the words of the statute, "operated exclusively for * * * charitable, scientific * * * or educational purposes". Its activities are the decisive factor.

3. Despite the will's provision that the gift to the Bar Association was one in trust for the acquisition and maintenance of a building (with directions for the use of excess income, if any, for "general association activities"), the parties appear to agree that the gift is to be treated as one to the Association for its general purposes. Consequently, § 2055(a) (3), which allows a deduction for a gift to a trustee to be used exclusively for qualifying purposes, although urged in one of the refund claims and in the complaint, is not now of particular significance in the case.

4. Government counsel, in his argument to the jury, stated that the word "exclusively" in the controlling statute did not mean that an organization "can't engage in anything at all that is not charitable", and that "Many of the Association's activities are truly charitable". The trial court's instructions reflected this concept.

Certain established legal principles are applicable:

1. The word "exclusively", as it appears in § 2055(a) (2), is pivotal. Thus, the statute's requirement that the donee corporation be "organized and operated exclusively" for the qualifying purposes demands that all its primary activity be so devoted. Hammerstein v. Kelley, 349 F.2d 928, 930 (8 Cir. 1965). The same is true with respect to exemption from federal income tax, Stevens Bros. Foundation, Inc. v. Commissioner of Internal Revenue, 324 F.2d 633, 638 (8 Cir. 1963), cert. denied 376 U.S. 969, 84 S.Ct. 1135, 12 L.Ed.2d 84; Duffy v. Birmingham, 190 F.2d 738 (8 Cir. 1951), and with respect to exemption from federal social security taxes. Better Business Bureau of Washington v. United States, 326 U.S. 279, 66 S.Ct. 112, 90 L.Ed. 67 (1945). Like statutory language is used in the income tax deduction and gift tax deduction sections. § 170(c) (2) (B), § 642(c), and § 2522(a) (2) and (b) (2) of the 1954 Code.

The standard is exemplified by the Supreme Court's comment in Better Business Bureau, p. 283...