Opinion
Docket No. 39615.
Promulgated November 24, 1953.
ESTATE TAX — DEDUCTION — CHARITABLE BEQUEST — EXCLUSIVELY — SEC. 812 (d), I. R. C. — A residuary bequest, after a life estate of measurable value, gives rise to a deduction under section 812 (d) where left to trustees as a "Retirement and/or Welfare Fund" for employees of a corporation.
Enoch C. Filer, Esq., for the petitioner.
Edward L. Cobb, Esq., for the respondent.
The Commissioner determined a deficiency of $20,495.56 in estate tax. The only issue for decision is whether the Commissioner erred in disallowing a deduction for an alleged charitable bequest.
FINDINGS OF FACT.
The decedent, Leonard O. Carlson, died on November 10, 1947, while residing in Erie, Pennsylvania. His wife, Esther, survived him. They had no children. The decedent's mother survived him.
The Federal estate tax return was filed with the collector of internal revenue for the twenty-third district of Pennsylvania.
The decedent was the founder, the president, and, at the time of his death, the owner of one-half of the stock of Erie Meter Systems, Inc. The corporation engaged in the manufacture of gasoline meter pumps. That corporation, at the time of his death, employed about 300 persons, most of whom were members of Erie Meter Systems Employees Association, an unincorporated association of the employees which rendered aid where it was needed by any member. The corporation had a pension and retirement plan in operation for its employees at the date of the decedent's death.
The last will and testament of the decedent dated January 17, 1939, was duly probated. The petitioner, after bequeathing a few shares of Erie Meter Systems, Inc., stock to various employees of that corporation, provided in paragraph Fifth of his will as follows:
I give and bequeath to the Security Peoples Trust Co. of Erie, Pa. the remaining shares of stock in Erie Meter Systems, Inc., owned by me, in trust nevertheless, any income, profits and revenue therefrom to be paid to my wife, Esther, so long as she may live and that my Trust company shall issue a proxy to my wife, Esther, to permit her to vote all shares in this trust any time a stockholders meeting requires a vote for any purpose. I further direct my said Trustee accept retirement of any or all of these shares of Erie Meter Systems, Inc. stock by the said corporation on receipt of not less than 80% (eighty percent) of the current book value of any or all said shares. I further direct my said Trustee to dispose by sale of any or all of these shares; giving the corporation a 30 day option to purchase any shares sold; if necessary to pay any indebtedness of my estate, or/and to provide funds for the maintaiance [ sic] of my wife, Esther, in the manner to which she is accustomed, provided the other sources of income and bequests become insufficient to so provide.
Upon the death of my wife, Esther, I direct the Trust herein created shall terminate and all the remaining shares of Erie Meter Systems, Inc. stock shall be sold, giving the corporation a 30 day option to purchase any or all of said shares. I give and bequeath the proceeds of this sale to the duly elected Directors of Erie Meter Systems, Inc. to be used as a Retirement and/or Welfare Fund, the income and/or principal of said Fund to be distributed to employees of Erie Meter Systems, Inc. in any such manner as aforesaid Directors may promulgate after due counsel with a committee representing said employees.
Paragraph Eighth of the will was as follows:
I direct my wife, Esther to provide funds, or its equivalent in equivalent in care and maintainance [ sic], equal to that provided by my brother N. A. Carlson for the maintainance [ sic] and support of my mother, Mrs. E. N. Vandewark.
The petitioner left all of the remainder of his estate to his wife, Esther, and the alternative provisions contained in paragraphs Ninth, Tenth, Eleventh, and Twelfth made on condition that she predeceased him or that both died in a common accident or disaster became inoperative due to her survival of him.
A claim for refund was filed by the estate on May 19, 1950, on the ground that the bequest of the remainder under paragraph Fifth of the will was deductible under section 812 (d) of the Internal Revenue Code as a gift for charitable purposes. The Commissioner explained in the notice of deficiency:
Careful consideration has also been given to your claim for refund filed May 19, 1950 and to claim of the estate for a deduction on account of an alleged Charitable Bequest. It is determined that the claim for refund should not be allowed and that no deduction on account of said bequest is deductible.
1,220 shares of stock of Erie Meter Systems, Inc., owned by the decedent at the time of his death, were distributed to Security-Peoples Trust Company as trustee under paragraph Fifth of the will. Esther never made any demand for any part of the principal of that fund and there has not been any encroachment upon that principal.
Esther was 55 years and 9 months of age and in good health at the time of the decedent's death. She then had a separate estate worth $125,750. His death increased her estate by $140,393.15, representing proceeds of insurance and property owned with her husband as tenants by the entirety which passed to her at his death.
The average of the combined living expenses of the decedent and his wife for the 2 years prior to his death was $10,220.70 and the average of Esther's living expenses for the 3 years after his death was $6,873. The average of her annual income for the latter period was $11,047 and in addition thereto the average annual income from the trust under paragraph Fifth of the will for the 3-year period was $2,916. The average of her annual taxes for the 5 years after the death of the decedent was $1,568. Her income after the death of the decedent was ample to defray all of her expenditures which might have been reasonably anticipated.
The board of directors of the Erie Meter Systems, Inc., constituted themselves trustees to administer the trust in remainder under paragraph Fifth of the will at an organization meeting held December 19, 1951, and directed one of their number to counsel with a committee representing the employees and have prepared a trust agreement establishing a retirement and welfare fund or both, the income and principal or both to be distributed to employees as outlined in paragraph Fifth of the will. A declaration of trust dated January 2, 1952, was prepared and signed by the three directors of the corporation. The trust funds were to be used only to give aid and assistance to beneficiaries retired because of age, physical disability, or other cause, to give medical care and attention to employees suffering from sickness or physical disability, to give financial aid in case of misfortune or mishap to any beneficiary, to render financial aid to dependents where death of a beneficiary has worked extraordinary financial hardship, and to give financial aid to employees temporarily unemployed for causes beyond their control. The trust was irrevocable and was to continue as long as funds were available or if sooner terminated remaining funds were to be given to a nonprofit charitable corporation. No funds have been transferred to the trust.
The first and second accounts of the executor were filed with and confirmed by the Orphans' Court of Erie County.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
The Commissioner devotes a large part of his brief to arguments based upon provisions of the will which were to take effect only in case the decedent's wife, Esther, failed to survive him. However, she survived him and those provisions of the will and the arguments of the Commissioner based thereon are irrelevant hereto and require no further comment.
Esther took a life estate in the property bequeathed in the Fifth paragraph of the will and the value of her life estate at the date of the decedent's death can be computed. The value of the stock has been stipulated. Corpus can be invaded only to maintain Esther "in the manner to which she is accustomed" if her income proves insufficient. Cf. Ithaca Trust Co. v. United States, 279 U.S. 151. The evidence shows that the standard of living to which she was accustomed can easily be maintained by her without invading the principal of this trust, and our interpretation of this provision of the will is that trust principal was not to be used unless her income from all sources should prove insufficient. Cf. Seacrist's Estate, 362 Pa. 190, 66 A.2d 836; Estate of Bayard H. Christy, 8 T.C. 862. Her net worth increased $6,281.13 during the 3 years following the death of the decedent and the record as a whole indicates that the requirement that she furnish support for her mother-in-law equal to that furnished by her brother-in-law did not endanger the principal of the trust. The direction that the trustee accept retirement of shares "on receipt of not less than 80%" of current book value was not intended to give the corporation a continuous election to retire these trust shares as it might choose in non-prorata partial liquidations. The provision means that the trustee may accept 80 per cent of book value but not less, if any circumstance occurs under which it is required by the terms of the trust or otherwise to transfer shares to the corporation for retirement. The remaining question is whether the recipient of the remainder in the trust property after the life estate was to receive it exclusively for charitable purposes within the meaning of section 812 (d), under which the deduction in question is claimed.
The entire fund remaining after the life estate is intended in all events to go to the directors of Erie Meter Systems, Inc., "to be used as a Retirement and/or Welfare Fund, the income and/or principal of said Fund to be distributed to employees of Erie Meter Systems, Inc. in any such manner as aforesaid Directors may promulgate after due counsel with a committee representing said employees." It may be concluded fairly that the directors are to be trustees of the fund, In re Westinghouse's Estate, 281 N.Y. S. 603, and the will has been so interpreted. The statute allows a deduction for the amount of all bequests to trustees only if the gift is to be used exclusively for named purposes of which the one material hereto is "charitable." The decedent was free from the personal, private, or selfish motives which would prevent a gift of the remainder from being charitable. A "Welfare Fund" for employees would qualify as exclusively for charitable purposes. John R. Sibley et al., Executors, 16 B. T. A. 915; Proctor Patterson et al., Executors, 34 B. T. A. 689; T. J. Moss Tie Co., 18 T.C. 188, affd. 201 F.2d 512. But the directors could choose to use this fund solely as a retirement fund for employees of the corporation without regard to need. This possibility raises the question whether the will limits the uses to those exclusively charitable. Earlier this tribunal would probably have held that it did not. Mutual Aid Benefit Ass'n of Forstmann and Huffmann Employees, 17 B. T. A. 967; Susan Young Eagan et al., Executors, 17 B. T. A. 694. However, each of those cases was reversed. Mutual Aid Benefit Ass'n of Forstmann and Huffmann Employees v. Commissioner, 42 F.2d 619; Eagan v. Commissioner, 43 F.2d 881. See also Gimbel v. Commissioner, 54 F.2d 780, reversing 20 B. T. A. 213; Bok v. McCaughn, 42 F.2d 616; Harrison v. Barker Annuity Fund, 90 F.2d 286. The foregoing cases have all been cited with approval in later decisions of this tribunal. Proctor Patterson et al., Executors, supra; T. J. Moss Tie Co., supra. The present case cannot be satisfactorily distinguished from all of the foregoing cases and upon authority of those cases is decided for the petitioner.
Decision will be entered under Rule 50.