Watson v. United States

• Decision Date: 22 December 1965
• Docket Number: No. 14717.,14717.
• Parties: W. W. WATSON, Schuyler E. Tylee and United States Trust Company of New York, as Executors of the Last Will and Testament of Jacques Wolf, Deceased, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

355 F.2d 269 (1965)

W. W. WATSON, Schuyler E. Tylee and United States Trust Company of New York, as Executors of the Last Will and Testament of Jacques Wolf, Deceased, v. UNITED STATES of America, Appellant.

No. 14717.

United States Court of Appeals Third Circuit.

Argued October 8, 1964.

Reargued May 25, 1965.

Decided December 22, 1965.

Norman H. Wolfe, Dept. of Justice, Tax Division, Washington, D. C. (Louis

F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Attys., Dept. of Justice, Washington, D. C., David M. Satz, Jr., U. S. Atty., Vincent J. Commisa, Asst. U. S. Atty., on the brief), for appellant.

Bernard Cedarbaum, New York City (Charles B. Alling, Montclair, N. J., on the brief), for appellees.

Before BIGGS, Chief Judge, McLAUGHLIN, KALODNER, STALEY, HASTIE, GANEY, SMITH and FREEDMAN, Circuit Judges.

McLAUGHLIN, Circuit Judge.

The issue before us arises out of a testamentary trust in the will of Jacques Wolf who died on January 26, 1954, a resident of the State of New Jersey. The Commissioner refused to allow a deduction under Section 812(d) of the 1939 Code, 26 U.S.C. 1952 ed. § 812(d) of the amount of the bequest made by Clause (5) Art. 7 of the will as a bequest to trustees exclusively for charitable purposes. The tax was paid and thereafter the executors brought this suit for refund. The district court upheld their contention and the Government appeals. There is no dispute regarding the facts which have been stipulated.

Clause (5) of Article 7 in pertinent part reads:

"Clause (5) Forty per cent (40%) thereof to my Trustees hereinafter named, in trust, however, for the following purposes: To hold the same until the death of the last survivor of the following described persons, namely, my chauffeur, Fred Brower, my friend Jerome Payet, all persons who at the time of my death are employees of Jacques Wolf & Co., all former employees of Jacques Wolf & Co. who retired prior to my death after having served for twenty-five (25) or more years with Jacques Wolf & Co., and the wives of all such employees and retired employees who had been married to them for at least twenty (20) years at the time of my death; to invest and keep the same invested and to make the following payments therefrom: * * *".

There were certain other detailed instructions regarding specific pension payments, pension reductions by Social Security benefits, etc. If a yearly income from the trust corpus exceeded pensions to be paid that year, the balance was to go to the trustee of the Jacques Wolf & Co. Employees' Trust Fund which had been created in 1946. That trust instrument provided that the trustee should pay the income from the trust to such employees of the company and such personal employees of Jacques Wolf as the board of directors of the company might from time to time designate. After the death of Mr. Wolf, the trustee of the Employees' Trust Fund was directed to disburse the principal and income "in such manner and to such persons and/or corporations as the Board of Directors of Jacques Wolf & Co. may from time to time direct." When the Testamentary Trust was terminated, which event would occur on the death of the last survivor of the beneficiaries named in it, the principal and income then existing of that trust was to be distributed by giving $2,000. to each of the hospitals named in it and the balance to the trust of the Jacques Wolf & Co. Employees' Trust Fund. In 1956, the company and the United Mine Workers Union established a pension plan for certain qualified employees. As a result of this all of the Testamentary Employees' Trust Fund income is now required to be paid into the Employees' Trust Fund except those sums payable to employees who had retired prior to the adoption of the plan, or to their widows or to employees not covered by the union agreement. Between June 1, 1956 and April 29, 1959, the company directors under the Employees' Trust Fund instrument authorized certain payments to various employees in appreciation of their service, the payments being made in both lump sum and pension type disbursements.

On April 29, 1959 in anticipation of the sale of the company and the retirement of its then board of directors, the latter irrevocably directed the trustee of the Employees' Trust Fund to disburse in monthly payments "all of the principal and income constituting said fund at present and any and all amounts which the trustee receives hereafter to the employees or former employees of Jacques Wolf & Co. as listed on schedules designated as A and B and made a part hereof." At the death of the last survivor of the beneficiaries the balance was to be divided among the three hospitals mentioned in the Testamentary Employees' Trust. Aside from the Wolf chauffeur, everyone receiving payments from the Testamentary Employees' Trust was a company employee of twenty-five years or more service. Everyone who has or will receive payments from the Employees' Trust Fund was a company employee. All employees who have so qualified have received payments under the mentioned instruments.

From the above stipulated facts it would seem that the Testamentary Trust involved was manifestly not a charitable bequest within the definition of Section 812(d). We are not here dealing with an impoverished class. In thought and execution this was an ordinary pension trust, explicitly for the benefit of both employee and employer. It was a real part of the compensation to the employee; a logical, legitimate and impelling incentive to a person both in seeking employment with the company and after being hired. The quid pro quo to the company was at least as important, in helping to attract desirable personnel and obtaining satisfactory results from them. See Duffy v. Birmingham, 190 F.2d 738 (8 Cir. 1951); Harvey v. Campbell, 107 F.Supp. 757 (N.D.Tex.1952). Both the 1939 Code (Section 165(a); Section 101(6) and the 1954 Code (Sections 401(a) and 501(a)); Section 501 (c) (3) sharply distinguish between employees' trusts and charitable organizations. The Commissioner of Internal Revenue in 1956, under facts almost identical with those at bar, soundly ruled that such employees' pension trusts are not charitable organizations within the meaning of the Code. He held (Rev.Rul. 56-138, 1956-1 Cum.Bull. 202):

"A trust is organized and operated by an employer for the primary purpose of paying pensions to its retired employees. In addition, the trust also provides certain other benefits to selected employees or their beneficiaries, the selection of the recipients and the amounts paid being based on need and being solely within the discretion of an executive committee. Held, a trust organized and operated for the primary purpose of paying pensions to retired employees is not organized exclusively for charitable purposes within the intendment of section 501(c) (3) of the Internal Revenue Code of 1954 and, therefore, is not entitled to exemption from Federal income tax under section 501(a) of the Code. Contributions to such a trust are not considered to be charitable contributions and therefore, are not deductible by the donors as charitable contributions under section 170 of the Code."

The source of the misconception regarding the nature of the trust at bar was the old decision of this court in Gimbel v. Commissioner, 3 Cir., 54 F.2d 780 (1931). It was there held that the employer employee fund involved qualified as having been "* * * organized and operated exclusively for charitable and educational purposes within the Revenue Act of 1924 (section 231 26 U.S.C.A. § 982 and note)." This in the face of the specific ruling in that opinion that "In its practical working, the main or dominant purpose of the foundation is the grant of pensions, * * *." In reaching the above conclusion that the Gimbel fund was within the Act the court cited Bok v. McCaughn, 42 F.2d 616 (3 Cir. 1930) and Mutual Aid, etc., Ass'n. v. Commissioner, 42 F.2d 619 (3 Cir. 1930), as having discussed the general subject, particularly stressing a quotation in Bok from a statement of an attorney defining charitable trust in another appeal, Vidal v. Girard's Exs. 2 How. 128, 11 L.Ed. 205 (1844). The quotation reads "Whatever is given for the love of God, or the love of your neighbor, in the catholic and universal sense, given from these motives and to these ends, free from the stain or taint of every consideration that is personal, private, or selfish." The Girard will case had nothing to do with pension trusts. It concerned the establishment of a college for the poor. In any event, whatever might be said as to the rightness of said definition, it could not be correctly applied to the trust at bar which contains entirely proper personal, private and legitimately selfish elements. And certainly, as of this day and age, that definition cannot be said to accurately describe the Gimbel employees' foundation. We strongly disagree with the suggestion that the conclusion that the Testamentary Trust was made for exclusively charitable purpose in accordance with § 812(d) was a permissible one under C.I.R. v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 4 L.Ed.2d 1218 (1960). That conclusion was founded on a similar one in Gimbel which had been made by the appellate court in reversing the lawfully designated fact finder, the Board of Tax Appeals. With the lapse of time and changed economic conditions the district court's holding in this appeal is even more clearly wrong than the appellate conclusion in Gimbel upon which it relies. In fairness, we note and emphasize that the district judge had no recourse but to follow the then undisturbed Gimbel opinion. It should be noted also that the other decisions named in support of Gimbel, to the extent that they do, are, to say the least, as outmoded as is Gimbel.

One other fact affecting the instant appeal needs comment. The Wolf will was before the New Jersey state courts on two occasions. In the first, there was an oral opinion by a...