Opinion
Docket No. 8020.
1946-04-30
ESTATE OF LUCIUS H. ELMER, PHOENIX STATE BANK AND TRUST COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harold E. Mitchell, Esq., for the petitioner. Carl A. Stutsman, Esq., for the respondent.
Decedent left his residuary estate in trust, one-half the income therefrom to be paid to his widow for her life and one-half to his sister for her life, with the survivor of the two taking all the income for life. Each was 69 years old and in good health at decedent's death. In the event the trust income should be insufficient, together with the widow's income from other sources, to provide the widow with ‘comfortable support and maintenance‘ the trustee was given the discretionary power to pay or apply so much of the corpus of the trust as might be necessary ‘to properly provide for her support and maintenance.‘ After the death of both the widow and the sister, the corpus of the trust was payable to certain charitable organizations. Decedent and his wife always lived a modes, frugal existence. Since his death, she has continued to live in the same manner and has steadily increased her personal estate through savings. The income received by her from the trust has far exceeded her living expenses. Held, at decedent's death there was no likelihood that the corpus would ever have to be invaded for the widow's support and maintenance, the value of the charitable remainder was definitely ascertainable, and the estate is entitled to a deduction under section 812(d), I.R.C. Estate of Edwin E. Jack, 6 T.C. 241, followed. Harold E. Mitchell, Esq., for the petitioner. Carl A. Stutsman, Esq., for the respondent.
An estate tax deficiency of $78,108.20, resulting principally from the disallowance of a claimed deduction for charitable bequests in the amount of $263,032.29, has been determined by respondent. Petitioner does not contest the other adjustments, which are of a minor character. The question for decision is whether any deduction is allowable in view of the fact that the trustee of the residuary estate of Lucius H. Elmer, deceased, has a conditional power to invade the corpus of the trust to provide for the support and maintenance of decedent's widow.
The parties have agreed upon the amount to be used in the Rule 50 recomputation in the event this Court determines that a deduction is allowable.
FINDINGS OF FACT.
The Phoenix State Bank & Trust Co., hereinafter sometimes called the bank, is the executor of the estate of Lucius H. Elmer, deceased, and also the trustee of a residuary trust provided for in the will of the decedent. Lucius H. Elmer died March 26, 1942, a resident of Hartford, Connecticut, and the estate tax return was timely filed with the collector for the district of Connecticut.
In his will decedent provided for certain outright bequests, including $10,000 and certain personal property such as household furnishings, to his widow, Ada Elmer, and directed that she should have the right to the life use of the family home in Hartford. In paragraph eleventh of the will he provided that his residuary estate, real and personal, should be held in trust. From the annual net income of the trust $50 a year for five years was to be paid to a newspaper editor for the benefit of a summer camp for children, $100 a year for five years to the Salvation Army for its Christmas fund, and $50 a year for the care and maintenance of the testator's cemetery lot and monument. The trustee was then directed to divide the remainder of the annual net income into two equal parts and pay one part to the testator's widow for life and the other part to his sister for life. Upon the death of either widow or the sister, the share of the deceased was to be paid to the survivor. Subparagraph five of paragraph eleventh of the will reads:
5. In the event that said net income payable to my said wife hereunder shall be insufficient, together with such other income as my wife shall then have, to provide my wife with comfortable support and maintenance, then the Trustees shall, in their sole and uncontrolled discretion, pay to my said wife, or apply for her benefit, so much of the principal of this Trust Fund as shall be necessary in the sole and uncontrolled discretion of the Trustees from time to time to properly provide for her support and maintenance.
At the death of the survivor of the testator's widow and sister the trust was to terminate and the trustee was directed to distribute the corpus in stated proportions to seven institutions which are charitable organizations within the provisions of section 812(d) of the Internal Revenue Code.
The inventory of the estate filed with the probate court at Hartford on or about May 25, 1942, showed that the gross estate amounted to $585,895.19, and that sum was reported in the estate tax return. The executor's final administration account, dated October 7, 1943, showed assets on hand for distribution in the amount of $400,556.67. There after, in the period between November 1943 and February 1944, the testamentary trust provided for in paragraph eleventh of the will was set up, and assets totaling approximately $400,000 were turned over to it by the estate. The assets consisted primarily of stocks, bonds, and other securities, savings deposits, and real estate valued at approximately $70,000. By April 1945 all the real estate except the family home had been sold by the trustee.
In 1942, and the greater part of 1943, Mrs. Elmer received from the estate a widow's allowance of $300 per month, approved by the probate court. After the trust began to operate in the latter part of 1943, monthly sums of $350 were paid to her from the income, and undistributed balances were paid to her semiannually. In July of 1945 the monthly payments were increased to $450.
At the time of the testator's death the average return on investments in the bank's trust department was about 4 percent, and the bank, as executor, was then able to estimate the approximate amount of assets which would remain after payment of taxes, administration expenses, etc., to be transferred to the trust.
The gross income of the trust for the calendar year 1944 was $15,418.50, and of that amount $5,927.92 was actually distributed to Mrs. Elmer during the year. An undistributed cash balance of $694.67 was held in the trust account as of December 31, 1944. Her total share of income from the trust, as reported in her income tax return for that year, was $6,272.43. In 1945, to and including October 5, she had actually received distributions of $4,192.23 from the trust, and as of November 1, 1945, she was entitled to receive one-half the cash balance of $5,489.19 income then in the hands of the trustee.
Decedent and Mrs. Elmer were married in 1914. They always lived a very modest and frugal life. They had one child, a daughter, who died about 26 years ago. While the daughter live, Mrs. Elmer had a maid. They entertained very little socially in their home and went out socially very little at that time. After the daughter's death they had practically no social life at all.
In 1919, the testator purchased the house in which he and Mrs. Elmer lived until his death and in which she is still living. The house is a frame structure, located in a middle-class neighborhood. It has three rooms on the first floor, three bedrooms and a den on the second floor, and three rooms are finished off in the attic. It was appraised at $6,000 for purposes of inventory of the estate.
After the daughter's death Mrs. Elmer had no maid, but did her own household work. During his lifetime the testator gave her an allowance of $25 per week on which to operate the house. From this allowance she bought groceries, paid laundry bills, and paid a woman to help her with the cleaning once a week. She also paid a man to clean the sidewalks and care for the lawn. Some of the money she was able to save for herself, and occasionally she bought some of her clothes from the savings. The bills for taxes on the house, gas, electricity, telephone, fuel, and charge purchases at department stores were paid by the testator by check.
The total living expenses for the testator and Mrs. Elmer from 1936 to 1941, inclusive, averaged about $2,500 a year, ranging from $2,272.32 in 1938 to $2,915.74 in 1941. Since the testator's death, Mrs. Elmer has continued to live in the same general manner. She still does her own housework, sends out her laundry, has a woman come in occasionally to help with the cleaning, and pays a man to care for the lawn and sidewalks. Her living expenses since 1942, exclusive of income taxes, have averaged no more than $2,000 a year.
At the time of the testator's death Mrs. Elmer's separate estate, consisting principally of savings account deposits in various banks, amounted to a little more than $16,000. She deposited in the Phoenix State Bank & Trust Co. the $10,000 bequest received from her husband's estate, bringing her separate estate to approximately $26,000. By October 1945, through savings and the purchase of war bonds, her personal estate had increased to almost $36,000. Her only source of income other than from the trust is interest she receives on her savings deposits, amounting to between $400 and $500 a year.
Mrs. Elmer is now, and at the time of testator's death was, in good health. She was then 69 years of age. She has had no serious illness for several years. She has no children living and no dependents. The testator's sister, the other life beneficiary of the trust income, is of approximately the same age as Mrs. Elmer, and she also is in good health. The trustee has no power to invade the corpus for her benefit.
Mrs. Elmer has never asked that the corpus of the trust be invaded. The bank's trust department administers a number of trusts containing powers of invasion similar to that provided for in the decedent's will. It is the bank's consistent practice, when a request for invasion is made by a beneficiary of any such trust, to submit the question to a committee or committees of its trust officers and general officers. If no member of the committee is familiar with the circumstances of the beneficiary, an inquiry or investigation is made. Consideration is given to the applicant's separate estate, his needs, and his obligations. The trust department is always cautious in its treatment of such requests to invade corpus because of its liability to be surcharged by remaindermen.
The possibility of filing a waiver of the power to invade corpus in the instant case was once suggested to the bank by the Internal Revenue authorities upon the occasion of examining the estate tax return, and the question was considered by its officers. It was never discussed with Mrs. Elmer, and no waiver or disclaimer was ever filed, either by the trustee or by or on behalf of Mrs. Elmer.
Since the testator's death Mrs. Elmer has had more than sufficient means for her comfortable support and maintenance. There was no likelihood that it would be necessary for the trustee to invade the corpus to provide for her support and maintenance.
OPINION.
ARUNDELL, Judge:
Respondent has disallowed the deduction claimed for charitable bequests under section 812(d) of the Internal Revenue Code on the ground that no standard or limitation is fixed by which the extent of invasion of the trust corpus can be measured, and that therefore the amount which will eventually pass to the charitable institutions can not be determined.
Under the decedent's will the trustee's power to invade the corpus is contingent upon insufficiency of the net income of the trust, together with the other income of the widow, to provide her with ‘comfortable support and maintenance.‘ In the event of such insufficiency the trustee then has the discretionary power to pay or apply so much of the principal as may be necessary ‘to properly provide for her support and maintenance.‘ Petitioner contends that these provisions fix a definite standard capable of being stated in terms of money.
We have recently had occasion, in Estate of Edwin E. Jack, 6 T.C. 241, a case quite similar factually to this one, and also in Estate of James M. Schoonmaker, Jr., 6 T.C. 404, to review a number of leading decisions which are directly in point on the question here at issue, including Ithaca Trust Co. v. United States, 279 U.S. 151; Merchants Nat. Bank of Boston v. Commissioner, 320 U.S. 256; Hartford-Connecticut Trust Co. v. Eaton, 36 Fed. (2d) 710, and many others on both sides of the question. As we said in Estate of Edwin E. Jack, the decisions establish the proposition that deductibility of such bequests depends upon both the language of the power and the likelihood of its exercise in view of the facts and circumstances of each case.
In the Jack case the trustees had a discretionary power to use the principal for the ‘comfort and support‘ of the testator's widow, if they thought the income insufficient. We cited numerous cases holding that the terms ‘comfort,‘ ‘support,‘ and ‘maintenance,‘ in varying combinations, supplied the necessary objective standard limiting invasion of the corpus, and we concluded that the power there under rather than the Merchants National Bank case and others holding that the use of such subjective terms as ‘happiness,‘ ‘pleasure,‘ ‘use and benefit,‘ and ‘desire‘ introduces elements too speculative to permit present ascertainment of the value of the charitable bequests. With respect to the power in the instant case, our conclusion is the same. By the standard here fixed the trustee's discretion is limited to the support and maintenance of the widow according to her customary mode of life.
As to the likelihood that the power would ever have to be exercised, we think the facts set out in our findings speak for themselves. When the decedent was alive, he and Mrs. Elmer habitually led a modest, frugal existence. Since his death, she has continued to live in the same manner. She was 69 years of age and enjoying good health when he died. At that time it was possible to estimate that her share of income produced by the trust assets would far exceed the expenditures required to support and maintain her according to her station in life. The facts since have borne out the estimate. Her personal estate has steadily increased through savings of the excess of the amounts received from the trust over the amounts required for living expenses. Considering all the facts, we conclude that the possibility of the trustee's ever having to exercise the power to invade corpus was so remote as to be negligible; consequently, the value of the charitable bequests was capable of definite ascertainment.
It follows that petitioner is entitled to a deduction on account of the charitable bequests.
Reviewed by the Court.
Decision will be entered under Rule 50.