Opinion
Docket No. 55269.
1956-11-16
ESTATE OF CHARLES A. BROOKS, DECEASED, PEOPLES FIRST NATIONAL BANK & TRUST CO., ET AL., EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Mahlon E. Lewis, Esq., for the petitioners. George J. Rabil, Esq., for the respondent.
Mahlon E. Lewis, Esq., for the petitioners. George J. Rabil, Esq., for the respondent.
Amount of estate tax charitable deduction computed from value of residue left to charities, held, subject to reduction by amount of Pennsylvania inheritance tax ultimately to be due therefrom on account of possible remainders under prior testamentary trust after death of life tenant with powers of appointment and invasion.
In this proceeding estate taxes in the total amount of.$45,974.14 are in controversy. A deficiency of $30,983 was determined by respondent and, in amended pleadings, he claims an additional liability of $14,991.14. The only issue is whether, in computing the deduction for charitable bequests, the amount of the residuary estate transferred to a testamentary trust is allowable in full or is to be reduced by an amount representing a contingent liability for State inheritance taxes.
FINDINGS OF FACT.
Some of the facts have been stipulated and are hereby found.
Charles A. Brooks, herein called decedent, died testate on December 17, 1950, a resident of Brentwood, Pennsylvania. His wife, Anna Cloyde Brooks, survived him. A timely estate tax return was filed by decedent's executor on January 23, 1952.
Decedent's last will and testament, dated June 17, 1948, was admitted to probate on December 26, 1950. Article IV(a) of the will provides for the establishment of a trust, herein called Trust A, of:
One Million Two Hundred Thousand Dollars ($1,200,000) to be held, managed, invested and reinvested for the benefit of my wife, ANNA CLOYDE BROOKS, and the Trustees shall pay the full net income thereof annually in convenient installments to her for and during the term of her natural life. My said wife during her lifetime shall have full power to withdraw principal from the trust upon reasonable notice to the Trustees of her intention to do so. On the death of my said wife, the trust estate shall go and be distributed in such manner as she by her Last Will and Testament may appoint and in default of such appointment shall go and be distributed in the same manner as the other portion of my residuary estate referred to in sub-paragraph (b) immediately following.
Article IV(b) provides that the remaining portion of the residue, or the entire residuary estate in the event decedent's wife predeceased him, shall be held in trust, herein called Trust B, in perpetuity, the income therefrom to be distributed to certain named charities. None of the 22 charities listed in Trust B of decedent's will is to any extent exempt from Pennsylvania inheritance taxes.
On January 18, 1951, payment of $1,200,000 was made to Trust A and as of the hearing of this case there was still at least $1,200,000 in the trust account. Trust A consists of municipal bonds, stocks, and other conventional securities. A marital deduction of the $1,200,000 was claimed on the tax return and not questioned by respondent in the notice of deficiency.
In purported compliance with Article IV(b) of the will, credits were made by decedent's estate to Trust B in amounts as follows:
+---------------------------+ ¦Feb. 20, 1951¦$600,000.00 ¦ +-------------+-------------¦ ¦June 18, 1951¦200,000.00 ¦ +-------------+-------------¦ ¦Dec. 13, 1951¦200,000.00 ¦ +-------------+-------------¦ ¦June 5, 1952 ¦686,031.55 ¦ +-------------+-------------¦ ¦ ¦$1,686,031.55¦ +---------------------------+
A deduction of the $1,686,031.55 was claimed on the tax return, beside the caption ‘Residue to charities (see statement attached),‘ as a charitable bequest. It is the amount of this deduction, the ‘Residue to charities,‘ that respondent has reduced.
Decedent's estate paid Pennsylvania inheritance taxes on the dates and in the amounts as follows:
+--------------------------+ ¦Feb. 10, 1951 ¦$190,000.00¦ +--------------+-----------¦ ¦Dec. 14, 1951 ¦33,000.00 ¦ +--------------+-----------¦ ¦July 28, 1952 ¦2,493.70 ¦ +--------------+-----------¦ ¦ ¦$225,493.70¦ +--------------------------+
Of the above amounts paid, only $24,000, less 5 per cent credit for early payment, represents the amount of inheritance taxes paid on account of the provision of $1,200,000 for Trust A. Pennsylvania reserves the right to collect an additional inheritance tax in an amount equal to 10 per cent of the amount remaining in Trust A at the death of decedent's wife, less a credit for the 2 per cent amount previously paid on the remainder. On the Pennsylvania inheritance tax appraisement for decedent's estate it is stated:
Upon the death of Anna Clyde (sic) Brooks a tax will be due upon the then appraised value of the Remainder Int. passing under the power of appointment Rate 10% Less 2% tax dollars being paid on Remainder Int. at this time.
In the last article of decedent's will it is provided that:
all estate, legacy, inheritance and succession taxes payable by reason of my death shall be paid out of and deducted from the portion of my residuary estate which under Article IV, paragraph (b) of this my Will I direct to be distributed to PEOPLES FIRST NATIONAL BANK & TRUST COMPANY as Trustee for certain charitable institutions named therein, said taxes to be paid by my Executors at such time or times as my Executors shall deem advisable and no such taxes or any part thereof shall be paid by any other person whomsoever by way of reimbursement, apportionment, proration or otherwise.
The trust officer of the bank, charged with the administration of Trusts A and B, must report to the Commonwealth of Pennsylvania on any part of Trust A remaining at the death of decedent's widow and pay any tax due thereon. That trust officer is obligated to pay inheritance tax to the Commonwealth of Pennsylvania on the value of the corpus of Trust A at the time of the widow's death in the event she fails to exercise her testamentary power of appointment or in the event she appoints to anyone other than the charities exempt from Pennsylvania inheritance tax. The bank has filed a bond with the Orphans' Court of Allegheny County, Pennsylvania, which bond can be pursued by the Orphans' Court if a tax which becomes due is not paid by the bank.
At the time of decedent's death his wife was 70 years old. It is stipulated that:
As of the date of this stipulation, the decedent's widow can only make appointment to decedent's collateral heirs, * * * since there are at present no others to whom the widow can exercise her power of appointment over Trust A.
At the time of decedent's death she had an estate of her own, excluding Trust A, which produced income in excess of her needs. The amount of her own estate as of the hearing of this case exceeded the amount of her estate as of the date of decedent's death. She lives modestly and has not been extravagant either before or since decedent's death and has never found it necessary to go outside of the income of her own separate estate or to invade any part of the principal of her own separate estate or other estates for her support.
The amount of Trust B which will be received by the charities is the amount transferred to Trust B reduced by the amount of State inheritance tax determined in the deficiency notice as ultimately payable therefrom with respect to the devolution of Trust A.
OPINION.
OPPER, Judge:
The problem here arises because Pennsylvania's inheritance tax does not coincide with that imposed under Federal statutes. The Federal estate tax is payable in one sum computed on conditions as they existed at decedent's death, Ithaca Trust Co. v. United States, 279 U.S. 151, while in Pennsylvania a part of the tax may be postponed to await the final outcome of decedent's disposition.
This decedent left one trust for his wife's life with powers of invasion and appointment and certain remainders over in default of their exercise. This trust was determined by respondent to be qualified for the marital deduction, has been so treated in his determination, and creates no issue here. Decedent left a second trust, the proceeds of which were to go to charity. The controversy exists because under the express terms of the will
this second or residuary trust must stand the cost of any Pennsylvania inheritance tax levied on the first trust; and because that result will not be known until the life tenant, decedent's widow, dies and it becomes apparent whether and in what manner she has exercised her powers. Under Pennsylvania law the tax on this future disposition is postponed but, nevertheless, payable when the ultimate facts are available. Pa. Stat. Ann. tit. 72, sec. 2304 (Purdon); see In re Heberton's Estate, 351 Pa. 564, 41 A.2d 654.
Petitioner, presumably because it intends to honor the words employed in the will, makes no contention that if any additional taxes are ultimately payable they will not be governed by the language of the second trust that ‘all estate, legacy, inheritance and succession taxes payable by reason of my death shall be paid out of and deducted from’ the charitable trust and that ‘no such taxes or any part thereof shall be paid by any other person whomsoever by way of reimbursement, apportionment, proration, or otherwise’ and we accordingly do not reach the question of what the obligation of the executors might be under State law were the issue to be litigated. See 37 A.L.R.2D 7.
The question reduces to whether under such cases as Ithaca Trust Co. v. United States, supra, the probabilities of devolution of the entire second trust to charity are so great that no account need be taken of the possibility that the charities will not get the entire fund; or whether, as in Commissioner v. Sternberger's Estate, 348 U.S. 189, and Robinette v. Helvering, 318 U.S. 184, there is no practical method of computing the actuarial chances of ultimate devolution, and, as a consequence, no reliable certainty of complete exemption upon which a charitable deduction for the entire second trust may be justified.
We think the facts bring this proceeding more nearly into the scope of the Sternberger's Estate than of the Ithaca Trust situation. Here the widow's circumstances are similar to those in Ithaca Trust but the likelihood that she will find it unnecessary to exhaust the principal eliminates one of the possibilities under which no tax on the first trust would ultimately be due. If she exercises her power of appointment over that trust in favor of collateral heirs, an additional tax will be payable. She may either consume the corpus in her lifetime and thereby place it out of her power to make any appointment; or she may appoint to a charity which is exempt under Pennsylvania law (of which, in this case, only one is mentioned). That she will in her lifetime withdraw all of the principal can certainly not be taken for granted even if the reverse does not probably follow from the size of the fund and her financial condition. And whether she will appoint the first trust to an exempt charity is the merest guess on this record. Even if there were an equal chance that she would do so, the amount in controversy would be exactly described by the language that ‘it is not certain that the charity will take 50% of the corpus; only that it has a 50-50 chance of getting all or nothing.’ Newton Trust Co. v. Commissioner, 160 F.2d 175, 181. See Commissioner v. Sternberger's Estate, supra.
Petitioners (on brief) submit that the only circumstances under which the contingent Pennsylvania tax can be payable are: (1) that the widow permits the residue of that trust to go in default of appointment; or (2) if she appoints to nonexempt organizations or to collaterals of (the decedent) * * *
If Mrs. Brooks appoints to others than charities, then the tax will be due and she may also appoint the necessary amount to the Commonwealth of Pennsylvania so as to relieve any potential charge against Trust B, however remote it may be. (Emphasis added.)
It is thus apparently conceded that in a situation not really as remote as petitioner insists, some additional State inheritance tax would be payable. The eventuality is not so remote because the decedent has no relatives left in the 2 per cent class. The widow's only appointment to individuals would have to be to ‘collaterals.’ And even the ‘charities' available are under Pennsylvania law not necessarily exempt from its inheritance tax.
As to the suggestion that the widow ‘may’ appoint an amount to pay the tax, there are two difficulties. First, no one can say what she will do. But second, even if she does pay the tax, the charitable trust will be made whole by her, not under decedent's will. See Estate of Herman Hohensee, Sr., 25 T.C. 1258.
There being no reasonable certainty demonstrated by the facts shown here that no Pennsylvania tax will have to be deducted from the charitable trust, we think respondent's determination must be sustained.
What we have said applies to the amount of deficiency as determined. By amendment to his pleadings, respondent has requested an increased deficiency based upon a more technical computation of the tax payable. It must be clear from what we have said that the reason that part of the charitable deduction eliminated in the deficiency notice is now being disallowed is that on this record petitioner has not convinced us that the larger amount will actually be received and retained by the charities.
‘ * * * in these cases, the taxpayer has the burden of establishing that the amounts which will either be spent by the private beneficiary or reach the charity are thus accurately calculable.’ Merchants Bank v. Commissioner, 320 U.S. 256. As to the increased deficiency, not only are the same burdens present but in his calculation of the increased deficiency respondent has concededly ‘recomputed the amount of taxes payable out of Trust B by assuming that Trust A will remain the same until the death of the decedent's widow.’ Of all these facts there is, of course, no more reliable proof than with respect to the first branch of the case. Where, accordingly, the burden is upon respondent, as in the event of his application for an increased deficiency, Rule 32, Tax Court Rules of Practice, the opposite conclusion must be reached, and because of his failure of proof, the additional deficiency must be denied.
So much is, in effect, conceded by respondent when he says on the first branch of the case ‘It is incumbent upon the petitioner to show that the charity will actually receive a fixed and ascertainable amount in order to be entitled to the charitable deduction * * * .’
Decision will be entered for the respondent in accordance with the deficiency notice.