Opinion
Docket No. 12782.
1948-06-30
ESTATE OF IDA F. DOANE, MARGUERITE T. DOANE, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry J. Rudick, Esq., Allen Evarts Foster, Esq., and Mason G. Kassel, Esq., for the petitioner. Francis X. Gallagher, Esq., for the respondent.
Timely disclaimer of intervening trust estate held to be effective for purposes of Internal Revenue Code, section 812(d), notwithstanding that disclaiming beneficiary was named and served as trustee of what was charitable trust. Harry J. Rudick, Esq., Allen Evarts Foster, Esq., and Mason G. Kassel, Esq., for the petitioner. Francis X. Gallagher, Esq., for the respondent.
Respondent determined a deficiency of $3,253,532.59 in estate tax of the estate of Ida F. Doane, hereinafter referred to as decedent.
Various minor issues having been waived by petitioner or reserved by stipulation for settlement under Rule 50, the sole remaining issue results from respondent's inclusion in the gross estate of the corpus of a trust created by decedent on June 29, 1917, and permitting no offsetting charitable deduction therefor.
Some of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Decedent died on July 14, 1942, a resident of New Jersey. She was then 84 years of age. Her sister, Marguerite, is the duly appointed executrix of her last will. The estate tax return was filed with the collector for the fifth district of New Jersey.
Decedent and her sister were the only children of William Howard Doane, and upon his death in 1915 inherited substantial, equal amounts. During his lifetime, decedent's father was interested in charitable activities and made large gifts to Denison University, of which he was a trustee. Decedent never married; her sister married a cousin, George W. Doane; there were no children of this marriage.
Both decedent and her sister were also charitably inclined, and from time to time made substantial gifts to charitable and educational institutions.
On June 29, 1917, decedent executed in New York a trust agreement whereby she transferred to her sister, her sister's husband, and Francis S. Phraner, as trustees, certain securities of a then value of $2,298,775, in trust to pay the income to decedent during her lifetime, and upon her death to distribute corpus to decedent's residuary legatees as provided in her will dated November 29, 1915. The agreement could ‘be altered, modified or cancelled by the written agreement‘ of decedent and the trustees or trustee acting thereunder.
The 1915 will devised and bequeathed decedent's estate in equal shares to her mother and to her sister absolutely, ‘trusting that they will carry out my wishes and intentions, although not imposing any obligation of any kind on them.‘ Marguerite's husband and Daniel L. Lyon of Watch Hill, Rhode Island, were named executors.
The trust of June 29, 1917, was created by decedent because she wished to be relieved of the burden of managing her investments and financial affairs. The property transferred to the trust represented a substantial part of her wealth.
At the date of the creation of the trust, and at the date of the decedent's death, the wealth of Marguerite was substantially as great as the wealth of decedent.
Prior to the execution of the trust indenture of June 29, 1917, Marguerite had seen the trust indenture and the will of November 29, 1915, referred to in the trust indenture.
At the time of the execution of the will decedent told Marguerite that she (the decedent) wished and intended all of her property to ‘go to charity after she died‘ and her sister at that time stated that she would carry out decedent's wishes and intentions. Marguerite never expected to receive anything from decedent's estate for herself.
Decedent's purpose in including in her will the statement that no obligation was being imposed was to insure that no penalty would be invoked, if her wishes were not fulfilled.
On seven different occasions, between the date of the creation of the trust and January 1918, decedent transferred additional securities to the trust, totaling $1,285,499.
Because of their mother's death in 1923, decedent and her sister, as sole surviving trustee, by writing of May 7, 1930, amended the 1917 trust. Decedent again reserved to herself a life estate in the trust income, and upon her death the corpus was to be distributed to her residuary legatees as provided in her 1915 will and a codicil thereto, bearing the same date as the amendment of May 7, 1930. The amendment also named William Darling and William H. Lyon of Winnetka, Illinois, as additional trustees.
The codicil devised and bequeathed the estate to decedent's sister, ‘trusting that she will carry out my wishes and intentions, although not imposing any obligations of any kind upon her.‘ If Marguerite did not survive decedent, the estate was to be divided into three equal parts, a part to be given to three named charitable organizations— the Society of Foreign Mission Welfare, Inc., Ventnor, New Jersey; Woman's American Baptist Foreign Mission Society, of New York City; and Denison University, of Granville, Ohio.
On July 1, 1930, Marguerite and Darling, as trustees, and decedent entered into an agreement with William Lyon, under which he was released from any responsibility connected with the administration of the trust until such time as he should actively assume his duties as trustee, but no change was made in the terms of the trust. This agreement was entered into because it was anticipated that Lyon, on account of his residence in Illinois, would be unable to keep in touch with the administration of the trust. Darling died on April 24, 1943, and Lyon assumed his trusteeship in July 1943.
Subsequent to the agreement dated July 1, 1930, there were no further formal amendments to the trust or formal agreements affecting the trust, although the decedent executed two additional codicils to her will.
On December 14, 1935, decedent executed the second codicil. In it she expressly revoked paragraph 1 of her will of November 29, 1915, by which the residuary estate had been devised and bequeathed to her mother and her sister, Marguerite, in equal shares.
In the same paragraph of the second codicil, she also specifically revoked the first paragraph of her first codicil, wherein she had bequeathed and devised the residuary estate to her sister, and in lieu thereof gave and bequeathed to her $100,000, ‘trusting that she will carry out my wishes and intentions in her use of the bequest, although not imposing any obligation of any kind upon her.‘
She then affirmed the second paragraph of the first codicil, which had provided for the distribution of the residuary estate to three named charities if her sister failed to survive.
The decedent then provided that if her sister did survive, her residuary estate was to go to her sister, Darling, and William Lyon, as trustees to pay out either income or principal, in their absolute discretion, to such charities as they might select.
The second codicil, dated December 14, 1935, was prepared by an attorney of Newark, New Jersey. At the date of its execution decedent did not request Marguerite or any of the trustees to consent to an amendment of the trust of June 29, 1917, because Darling, who was one of the trustees and also decedent's financial advisor, did not believe it was legally necessary, since the codicil specifically provided that the corpus of the trust of June 29, 1917, would pass to public, charitable, or religious uses after decedent's death.
On January 13, 1938, decedent executed a third codicil, affirming her domicile and legal residence to be the Village of South Orange, State of New Jersey, in place of the Town of Westerly, State of Rhode Island.
Decedent's will, dated November 29, 1915, and the first, second, and third codicils thereto, were admitted to probate by the Surrogate's Court of Essex county, New Jersey, on September 24, 1942.
On July 8, 1943, a New Jersey inheritance tax return was filed, in which the executrix stated that the trust became part of the residue of decedent's estate.
On October 13, 1943, Marguerite, as executrix, executed and filed a Federal estate tax return for the estate of Ida F. Doane, wherein it was stated that the corpus of the trust created by decedent on June 29, 1917, would ‘become a part of the residuary trust created by the will of the decedent, which, under the terms of the second codicil, dated December 14, 1935, passes to charitable organizations.‘
On August 30, 1944, Marguerite, in her individual capacity, executed and verified the following written instrument before a notary public of the State of New Jersey:
Disclaimer.
To the Trustees of The Trust Created and Declared by Ida F. Doane By Indenture Dated June 29, 1917, and Supplemental Indenture Dated May 7, 1930.
Knowing that it was the intention and desire of my sister, Ida F. Doane, as expressed in the Second Codicil dated December 14, 1935 to her Last Will dated November 29, 1915, to have the entire property (both principal and income) of the trust created and declared by her by Indenture of Trust dated June 29, 1917 and Supplemental Indenture dated May 7, 1930, paid out entirely to organizations devoted exclusively to religious, scientific, educational and charitable purposes, and wishing to have such intention and desire carried out, I hereby irrevocably disclaim any interest whatsoever in and to said trust as a beneficiary thereof. This disclaimer is and shall be construed as an irrevocable disclaimer as provided for in Section 812(d) of the Internal Revenue Code.
In WITNESS WHEREOF I have hereunto set my hand and seal this 30th day of August, 1944.
(Signed) Marguerite T. Doane. (LS) MARGUERITE T. DOANE
(Witnessed by WARD J. HERBERT.)
A copy of such instrument was mailed to the cotrustee, at 708 Church Street, Evanston, Illinois, on August 30, 1944.
At the time of decedent's death, the securities in the trust's portfolio were either carried in ‘street names‘ or were bearer bonds in a safe deposit box in New York City to which Marguerite had access.
The original 1942 income tax return for the trust and the original 1942 income tax return for the estate disclosed income tax liability of $9,806.14 and $3,097.64, respectively. These returns were prepared and filed in March 1943, by a certified public accountant who had not seen the trust indenture of June 29, 1917, as amended, or the last will and testament of the decedent as admitted to probate. After these returns were filed by the certified public accountant, copies of the trust indenture of June 29, 1917, as amended, and the last will and testament of the decedent as admitted to probate, were exhibited to him, and thereupon in May of 1943, he filed amended fiduciary returns for the trust and estate which showed no income tax due for the reason that the income of the trust and estate was permanently set aside for charitable purposes and thus not taxable. He also filed refund claims for the income tax paid by the trust and estate in respect to the year 1942. The certified public accountant at the time of filing the original returns had never met Marguerite; and Darling, who took care of Marguerite's financial affairs, was ill and unable to confer with the accountant.
In the income tax returns of the trust for the years 1943 to 1946, inclusive, the trust income has been shown as ‘permanently set aside for charitable purposes,‘ and no income tax has been paid on such income.
Pursuant to the written determinations of the trustees for the years 1944 to 1947, inclusive, the trustees distributed $696,000 of the income of the trust to the religious, educational, and charitable institutions named in the written determinations. The gross income of the trust from the date of decedent's death on July 14, 1942, to December 31, 1947, was $746,261.15, and its expenditures during the same period, including the amounts distributed to charities, were $710,928.55.
OPINION.
OPPER, Judge:
The portion of the deficiency in controversy was determined by inclusion in decedent's estate of a transfer made by her during her lifetime to a trust of which she was the life beneficiary. The remainder interest in the corpus was nominally given to decedent's sister, but ‘trusting that she will carry out my wishes and intentions.‘ There is no dispute that these ‘intentions‘ were confined to charitable purposes; that the sister, whose means were ample in her own right, was advised of decedent's desires in this regard; or that the former in effect undertook to fulfill them. Upon the filing of a formal disclaimer by the sister after decedent's death, petitioner has insisted that, if the transfer is properly includible in the estate, it is forthwith deductible as a gift for exempt purposes.
The same conclusion will result from a determination that the value of the trust property is deductible as a transfer for charitable uses under section 812(d), Internal Revenue Code,
as would follow if the alternative contention of exclusion from the gross estate were sustained. Since we are in no doubt that the deduction is permissible, consideration of the alternative issue will be unnecessary.
(d) TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES.— The amount of all bequests, legacies, devises, or transfers (including the interest which falls into any such bequest, legacy, devise, or transfer as a result of an irrevocable disclaimer of a bequest. legacy, devise, transfer, or power, if the disclaimer is made prior to the date prescribed for the filing of the estate tax return or, in the case of a decedent dying on or before October 21, 1942, if the disclaimer is made prior to September 1, 1944), to or for the use of the United States, any State, Territory. any political subdivision thereof, or the District of Columbia, for exclusively public purposes. or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * * or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, and no substantial part of the activities of such trustee or trustees, or of such fraternal society, order, or association, is carrying on propaganda, or otherwise attempting, to influence legislation. * * *
The sole rejoinder by respondent to petitioner's contention that the disclaimer filed by decedent's sister was fully operative under the 1942 and 1943 amendments
is that she had already accepted benefits under the trust which precluded any effective action by way of renunciation of her interests.
Secs. 403, 408, and 409, Revenue Act of 1942; sec. 511, Revenue Act of 1943.
Respondent does not deny that the disclaimer was in proper form, or within the time limit specified in the statute. For his disallowance respondent relies upon language in Cerf v. Commissioner (C.C.A., 3d Cir.), 141 Fed. (2d) 564, affirming 1 T.C. 1087. There a gift tax was held to be applicable upon the taxpayer-wife's consent to amendments in favor of the husband-grantor of a trust which had originally provided for the income to be paid to the wife to the extent that she accepted it. In disposing of the contention that by her consent to the amendments the wife was merely refusing to accept an uncompleted gift, the court observed:
* * * The gift was obviously one for the taxpayer's benefit. No doubt she could have refused it. But she did not, indeed her acquiescence is shown by becoming a trustee * * * .
Without questioning the authority of these words with reference to the facts to which they refer,
they nevertheless seem to us entirely inapplicable here. When in 1917 decedent's sister undertook the duties of trustee, decedent herself being at that time the sole beneficiary, the trustee's interest was not, as in Cerf v. Commissioner, a beneficial one, nor its pursuit such an acceptance of benefits under the trust as to preclude the subsequent disclaimer. Statement of the principle involved demonstrates the contrary. The object to be achieved is consistency. See First National Bank of Portland, Executor, 39 B.T.A. 828. A donee cannot be heard to accept the gift and also to renounce it.
But see Brown v. Routzahn (C.C.A., 6th Cir.), 63 Fed. (2d) 914, 916; certiorari denied, 290 U.S. 641:‘ * * * The decedent was in possession of the estate from 1912 until it was transferred to the trustees in 1920. It was not, however, in his possession as donee, but as a coexecutor. Nevertheless, at any time within that period he could have taken the one-third or made a renunciation that would have estopped him from claiming it. He did neither. * * * ‘
But there is no inconsistency in undertaking the task of assuring an ultimate charitable disposition of trust property and at the same time— or at any other—renouncing all personal advantage. The reverse would demonstrate the inconsistency.
‘ * * * A disclaimer is a complete refusal to accept the rights to which one is entitled. If the beneficiary uses these rights for his own purposes, as by receiving a consideration for his formal disclaimer, he has not refused the rights to which he was entitled. There can be no disclaimer after an acceptance of such rights, expressly or impliedly. ‘ H.R. 2333, 77th Cong., 2d sess., 167.
It seems difficult indeed to suggest a more apt illustration of the situation at which the estate tax amendments were aimed.
A transfer actually intended for a charitable destination is from an excess of caution or a sense of protection created in ambiguous and inartificial form. When the charitable use is made inescapable, as it was here by the disclaimer, the legislation was designed to treat as certain what had then become certain. We see no reason for refusing to do so now.
‘Under existing law a deduction for a bequest, legacy, devise, or transfer for charitable and related purposes within the meaning of section 812(d) or 861(a)(3) of the Code is not allowable to the extent that the decedent empowers another to divert such bequest, legacy, devise, or transfer to another purpose. * * * a deduction should be allowed in the full amount passing for charitable and related purposes if the disclaimer of the power or of the specific bequest or devise is prompt. ‘ H.R. 2333, op. cit., 166-167.
Granting that the precatory language used by decedent in the trust, and even the sister's explicit commitment to decedent to carry out her wishes, might have left an ambiguous legal situation as to the ultimate charitable use of the trust property, the disclaimer at once eliminated the sister's intervening estate and fulfilled the requirements of the estate tax provisions. See Estate of James M. Schoonmaker, Jr., 6 T.C. 404. In this respect we view the deficiency as erroneously determined.
Reviewed by the Court.
Decision will be entered under Rule 50.