United States Trust Co. v. IRS

Citation617 F. Supp. 575
Decision Date28 August 1985
Docket NumberCiv. A. No. J83-0909(B).
PartiesUNITED STATES TRUST COMPANY, Trustee, Jean C. Lindsey, Cynthia C. Saint-Amand, Margaret A. Chisolm, and the Estate of Alexander F. Chisolm, Deceased, Jean C. Lindsey, Successor Executrix, Plaintiffs, v. The INTERNAL REVENUE SERVICE, an Agency of the United States of America and the United States of America, Defendants.
CourtUnited States District Courts. 5th Circuit. Southern District of Mississippi

Kenneth I. Franks, Charles G. Copeland, R. Nash Neyland, Jackson, for plaintiffs.

George Phillips, U.S. Atty., Jackson, William D.M. Holmes, Tax Div., Dept. of Justice, Washington, D.C., for defendants.

MEMORANDUM OPINION AND ORDER

BARBOUR, District Judge.

This matter is before the Court on Cross-Motions for Summary Judgment. The material facts are either stipulated or uncontradicted on the record. The material facts are as follows.

FACTS

Alexander F. Chisholm (the "decedent") died on or about March 12, 1974, a resident of the State of Mississippi, and left a will and testament dated May 17, 1967, which was duly admitted to probate in the Chancery Court of the Second Judicial District of Jones County, Mississippi. The will provided in pertinent part:

I give to the Chisholm Foundation, a New York membership corporation, a sum equal to ten percent (10%) of the value of my gross testamentary estate as finally determined in the Federal estate tax proceeding relating to my Estate, provided that such bequest is deductible from my gross Estate in determining my taxable Estate for Federal Estate tax purposes.

Ten percent of the decedent's gross testamentary estate was determined to be $2,473,719.00.

During the period of March 12, 1974, through December 31, 1974, no part of the specific bequest of $2,473,719.00 was paid by the Executor to the Chisholm Foundation. During calendar year 1975, the Estate distributed $1,505,000.00 in cash and $512,635.00 in stock to the Chisholm Foundation in partial fulfillment of the ten percent bequest. The cash distributions were made in eleven equal monthly installments of $125,000.00 and one monthly installment of $130,000.00. These monthly cash distributions were made from the Estate's bank account at First National Bank of Laurel, Account Number XX-XXX-X styled "Estate of Alexander F. Chisholm." The account contained monies of the Estate derived from 1974 and 1975 income and corpus of the Estate; however, at all times the amount of current 1975 income of the Estate in the account exceeded the amount distributed to the Chisholm Foundation and necessary to pay the Estate's current administrative expenses.1 No income of the Estate was distributed to a beneficiary of the Estate other than to the Chisholm Foundation.

Thereafter, the Estate filed a Federal Estate Tax Return with the Internal Revenue Service which claimed an estate tax deduction pursuant to 26 U.S.C. § 2055(a)(2), for the entire amount of the $2,473,719.00 specific bequest, which was distributed to the Chisholm Foundation during the calendar years 1975 and 1976. The Estate Tax deduction was allowed in full by the Internal Revenue Service pursuant to § 2055(a)(2).

Of the $1,505,000.00 in cash distributed to the Foundation in calendar year 1975, the Estate deducted $1,240,467.00 from its 1975 gross income as a deduction for distributions to beneficiaries under 26 U.S.C. § 661(a)(2). These distributions did not qualify for a deduction for distributions to charitable organization pursuant to 26 U.S.C. § 642(c) because the Will did not specify that the distribution come from income.

In auditing the Estate's 1975 income tax return, the IRS disallowed the Estate's § 661(a)(2) deduction for $1,240,467.00 of the $1,505,000.00 of current income distributed to the Foundation in calendar year 1975. Appropriate protests were made to no avail and on or about December 28, 1981, an additional $1,434,822.42 in taxes and interest was paid on behalf of the Estate to satisfy the claimed deficiency in the Estate's income taxes for calendar year 1975. Of this amount, $1,281,596.72 is attributable to the IRS's disallowance of the § 661(a)(2) distribution deduction.

On May 17, 1982, an amended Estate income tax return was filed for calendar year 1975, claiming a refund of the taxes and interest wrongfully assessed and collected by the IRS. On August 23, 1983, the Estate received a Notice of Disallowance informing the Estate that its claim for refund was denied. This suit was timely filed pursuant to 26 U.S.C. § 6532, seeking a judgment for federal income taxes and interest previously paid by the Estate for the taxable year 1975 in the amount of $1,281,596.72, plus interest as provided by law and attorney's fees as provided by 28 U.S.C. § 2411(a) and 26 U.S.C. § 7430.2

Jurisdiction to determine this issue is conferred upon this Court by 28 U.S.C. § 1346(a)(1).

QUESTION FOR DECISION

The Court having concluded that the distributions at issue did come from distributable net income rather than from corpus, the question for decision is: Is the Estate allowed a § 661(a)(2) distribution deduction for amounts of its current income which it distributed to the Chisholm Foundation, a beneficiary of the Estate and a qualified charitable organization, when the distribution did not otherwise qualify as a § 642(c) deduction for distributions to qualified charities, and the Estate had already claimed and been allowed an Estate tax deduction for the amount of the ten percent bequest, $2,473,719.00, pursuant to 26 U.S.C. § 2055(a)(2)?

I. STATUTES AND REGULATIONS

Although Sections 661 and 6633 are most directly involved in the determination of the present controversy, these sections and the regulations purporting to interpret them must be analyzed in light of surrounding and related Internal Revenue Code sections.

Section 641 provides generally that income received by an estate during the administration or settlement of the estate is taxable income. Section 642(c) provides for an income tax deduction in the following situation:

(c) Deduction for amounts paid or permanently set aside for a charitable purpose. (1) General Rule. In the case of an estate or trust (other than a trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a) relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c)....

Section 643 defines "Distributable Net Income" of the Estate.

The deduction claimed in the instant case is that provided by Section 661(a)(2). Section 661 provides in pertinent part:

(a) Deduction. In any taxable year there shall be allowed as a deduction in computing the taxable income of an estate or trust (other than a trust to which subpart B applies) the sum of—
(1) any amount of income for such taxable year required to be distributed currently (including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable year); and
(2) any other amounts properly paid or credited or required to be distributed for such taxable year;
but such deduction shall not exceed the distributable net income of the estate or trust. (Emphasis ours).

Treasury Reg. § 1.661(a)-2, "Deduction for Distributions to Beneficiaries" provides in pertinent part:

(A) In computing the taxable income of an estate or trust there is allowed under § 661(a) as a deduction for the distributions to beneficiaries the sum of:
(1) the amount of income for the taxable year which is required to be distributed currently and
(2) any other amounts properly paid or credited or required to be distributed for such taxable year.
However, the total amount deductible under § 661(a) cannot exceed the distributable net income as computed under § 643(a) and as modified by § 661(c). (B) The term "income required to be distributed currently" in § 661(a)(1) includes any amount required to be distributed which may be paid out of income or corpus (such as an annuity) to the extent it is paid out of income for the taxable year....
(C) The term "any other amounts properly paid or credited or required to be distributed" in § 661(a)(2) includes all amounts properly paid, credited or required to be distributed by an estate or trust during the taxable year other than income required to be distributed currently. Thus, the term includes the payment of an annuity to the extent it is not paid out of income for the taxable year, and a distribution of property in kind ... where the income of an estate or trust may be accumulated or distributed in the discretion of a fiduciary, or where the fiduciary has a power to distribute corpus to a beneficiary, any such discretionary distribution would qualify under § 661(a)(2).

Section 662, "Inclusion of Amounts in Gross Income of Beneficiaries of Estates and Trusts Accumulating Income or Distributing Corpus" provides generally for inclusion in the taxable income of beneficiaries for the amounts of income passed through to them to the estate.

Section 663, "Special Rules Applicable to Sections 661 and 662" provides in pertinent part:

(a) Exclusions. There shall not be included as amounts falling within Section 661(a) or 662(a)-...
(2) Charitable, etc. Distributions. Any amount paid or permanently set aside or otherwise qualifying for the deduction provided in Section 642(c)...

Treasury Reg. § 1.663(a)-2, "Charitable, etc. Distributions" provides in pertinent part:

Any amount paid, permanently set aside, or to be used for the charitable, etc. purposes specified in § 642(c) and which is allowable as a deduction under that section is not allowable as a deduction to an estate or trust under § 661 or treated as an amount distributed for purposes of determining
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1 cases
  • U.S. Trust Co. v. I.R.S.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • November 7, 1986
    ...for summary judgment, the district court denied the IRS' motion and entered judgment for the taxpayer. United States Trust Co. v. Internal Revenue Service, 617 F.Supp. 575 (S.D.Miss.1985). Based upon our interpretation of the relevant tax statutes and treasury regulation, we reverse and rem......

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