Opinion
Docket No. 107365.
1944-01-17
ESTATE OF J. B. WHITEHEAD, BY THE CITIZENS AND SOUTHERN NATIONAL BANK, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Pope F. Brock, Esq., for the petitioner. Bernard D. Hathcock, Esq., for the respondent.
1. The will of petitioner's decedent, who died in 1935, left his entire estate to a corporation to be formed for the purpose of using the income for charitable and educational purposes, subject, however, to directions for carrying out settlement contracts which the decedent had entered into with a former wife and with his wife; also for the payment of specified annuities to two individuals. His widow claimed the entire estate as sole heir, but the matter was compromised for $500,000, and a decree of court accordingly entered, not specifying whether payment was to be from income or corpus. The corporation was organized in 1937. During the taxable years petitioner received the gross income, carried out the contracts with the wife and former wife, and paid the annuities, in addition to paying the $500,000. Some payments were made from corpus. In 1938 and 1939 petitioner paid income to the corporation. Held, that the entire gross income of the estate during the taxable years, except the amount necessary to pay the specific annuities, is deductible by the petitioner because it was, pursuant to the terms of the will, to be used exclusively for charitable and educational purposes; Held, further, that such gross income was deductible for the reason that it was by the terms of the will permanently set aside for the purposes and in the manner specified in section 23(o)(2) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code, i.e., to a corporation organized and operated exclusively for charitable and educational purposes, no part of the net earnings of which inured to the benefit of any private shareholder or individual. Sec. 162(a), Revenue Acts of 1936 and 1938 and Internal Revenue Code.
2. The will provided that the foundation should pay out of income from the decedent's estate $12,500 per annum for 20 years, or for as long as two beneficiaries should live. Held, that the payments were properly deductible as distributed currently, under section 162(b) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code. Pope F. Brock, Esq., for the petitioner. Bernard D. Hathcock, Esq., for the respondent.
This proceeding involves the redetermination of deficiencies in income taxes for the calendar years 1936, 1937, 1938, and 1939 in the respective amounts of $290,028.13, $286,319.77, $246,698.07, and $253,083.49. The issues raised by the petition are whether any part of the income of petitioner is deductible under the provisions of section 162(a) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code, and whether assessment of the deficiency for 1936 is barred by the statute of limitations. By an amendment to his answer, respondent alleges error in allowing as a deduction each year the amount of $12,500 distributed to certain beneficiaries and has asked for increased deficiencies. The partial stipulation of facts filed by the parties in the proceeding is incorporated herein by reference. Portions thereof necessary for proper consideration of the questions involved will be set forth in our findings of fact.
FINDINGS OF FACT.
Petitioner is the duly appointed executor of the estate of Joseph B. Whitehead, who died testate on November 14, 1935.
In 1928 the decedent made a settlement agreement with his then wife, Marjorie C. Whitehead, in which he agreed to pay her annually the sum of $18,000 for the remainder of her life, or until her remarriage, and she released him of all claims and rights growing out of the marriage relationship. A divorce was subsequently granted to her. In 1932 the decedent and his second wife, Laura G. Whitehead, entered into a settlement agreement in which he agreed to pay her $6,000 per annum for life, or so long as she did not remarry, and $20,000 per annum for four years, and a like sum during the fifth year if she did not remarry in the meantime, and she released her rights arising from the marriage relationship.
The will of the decedent provided that the agreements entered into with his former wife and his widow be carried out by his executor and the Joseph B. Whitehead Foundation, a corporation to be formed as soon as possible after the testator's death, and upon its organization to receive from the executor all of his property for the purposes set forth in the will. The will stated that the object of organizing the corporation was to create a memorial to the decedent's father ‘for the purpose of the income from said estate to be used by the poor and needy of the community in which he lived and died and in which I was reared as a child.‘ The will vested the management of the corporation in a board of directors, or trustees. Item V of the will provided that the directors or trustees of the corporation use the income from the property turned over to them as follows:
One-fourth (1/4th) of said income from such estate as is turned over and delivered to said Foundation, I direct to be used by the Trustees or Directors of said Corporation or Foundation by disbursing the same to the most deserving orphan's home or homes, where fatherless or motherless children are maintained and I leave it to said Trustees or Directors of said Foundation to select the most deserving home or homes to which to make said distribution. I desire that a substantial part of the same be made around Christmas time of each year and that the funds so distributed be used to purchase for the children of said homes such toys, gifts, fruits, candies and clothes as children in ordinary circumstances usually have at such Christmas time which are generally denied children supported and maintained in orphanages. Said Trustees and Directors of said Foundation are authorized to make the purchases necessary to carry out this provision of my will and I am making this provision because of the early impressions made upon my mind by visiting the Georgia Baptist Orphans Home at Hapeville, Georgia, with my father, the late Joseph B. Whitehead.
The balance of the income from my property held by said Foundation, after the payment of the special bequests hereinafter made, I direct to be used for charity purposes and in the relief of pain and suffering and poverty by the Trustees or Directors of the Foundation to be formed as herein provided. It being my purpose in making this provision in my will that the income derived from the property held by the said JOSEPH B. WHITEHEAD FOUNDATION shall be used by the said Foundation for the relief of such institutions as the SCOTTISH RITE HOSPITAL, the GEORGIA BAPTIST HOSPITAL, and like institutions that dispense charity and are worthy and in need of funds, and that said Foundation, in addition to disbursing funds to organizations such as are herein mentioned may, in its discretion, disburse funds to individuals who are deserving and to other deserving institutions such as schools, whether the same be public or private, and in fact, any worthy and deserving individual, association or institution that said Trustees may deem worthy and in need of the funds herein provided for without regard to race, color or creed.
That out of the income from my estate and before the same is disbursed, as herein set forth by said JOSEPH B. WHITEHEAD FOUNDATION, I do hereby make the following special bequests and direct that the same be paid before the payment of the item of One-fourth (1/4th) of the income to the orphans, as herein set forth, and before the remainder, or Three-fourths (3/4ths) is disbursed to charity, as herein set forth, and that such special bequests are to be paid by said FOUNDATION from the income from my estate turned over to it by my executors as follows:
Item VI and VII of the will contain directions for payment of the special bequests consisting of payments of $5,000 and $7,500 per annum to Barbara J. Champion and Dena Marlowe, respectively, for a period of 20 years, the payments to each beneficiary to cease in the event of her death prior to the expiration of the 20-year period.
The petitioner reported the gross estate of the decedent for estate tax purposes at a value of about $5,282,000. The respondent determined that the gross estate had a value of about $6,088,000. The debts of the decedent, exclusive of the amounts payable under the contracts with his former wife, and widow, were about $192,000. The assets of the estate consisted of cash in the amount of $335,000, stock of the Whitehead Holding Co., of a value of about $4,378,000, and of the Whitehead Realty Co., personal holding companies owned equally by the decedent and his mother and brother and other corporations. The assets of the Whitehead Holding Co., consisted of stock of the Coca-Cola Co. and other corporations. Petitioner still holds the stock of the Whitehead Holding Co.
Decedent's widow filed a suit in December 1935 to contest the will of the decedent. Her demands were settled for $500,000, plus the sums payable to her under the separation agreement; and the court entered its final decree accordingly, on January 20, 1937. Neither the settlement nor the decree of court designated whether payment should be from income, or from corpus. The balance of $550,405.48 in the income cash account of petitioner on January 20, 1937, was transferred on that date to the principal cash account kept by it for the estate. Immediately prior to the transfer the principal cash account had an overdraft of $4,436.97. The transfer was made to obtain funds necessary to settle the suit instituted by the decedent's widow. Of the amount payable under the settlement, $400,000 was paid on January 20, 1937, and the remainder in August 1937 and January 1938. The payments to the widow were charged to principal cash and corpus accounts.
The Joseph B. Whitehead Foundation was incorporated under the laws of Georgia on March 26, 1937, without capital stock. The charter provided that the corporation's income was to be used ‘for charitable, educational and eleemosynary purposes‘ set forth in the decedent's will, with power to carry out the terms of decedent's will, and that it was ‘not organized for individual pecuniary gain.‘ The will was, by reference, incorporated in the charter.
In 1936, 1937, 1938, and 1939 petitioner paid to Barbara J. Champion and Dena Marlowe each year, in accordance with provisions of decedent's will, the respective amounts of $5,000 and $7,500. The Payments made in the first three years were charged by petitioner to corpus and principal cash accounts maintained by it for the estate. The payments made in 1939 were charged to an income cash account. On December 31, 1937, petitioner entered as a receipt in its corpus and principal cash accounts and a charge in its income cash account the sum of $12,500, with the following explanation: ‘To transfer payments to E. F. Champion for Barbara J. Champion $5,000, and to Mrs. Dena Marlowe $7,500 from corpus account to income.‘
The amounts payable to the former wife and to the widow of the decedent under his will were paid by the petitioner. The payments made to Marjorie C. Whitehead to April 1, 1939, were charged to corpus account and principal cash, and thereafter to income cash. The payments made to Laura G. Whitehead to May 31, 1939, were charged to corpus account and principal cash, and thereafter to income cash.
Estate tax upon decedent's estate was determined in September 1938.
In returns filed for the taxable years petitioner reported gross income and claimed deductions for income distributable under decedent's will to charity, as follows:
+--------------------------------+ ¦Year¦Gross income¦Deductions for¦ +----+------------+--------------¦ ¦ ¦ ¦charity ¦ +----+------------+--------------¦ ¦1936¦$481,947.97 ¦$431,449.53 ¦ +----+------------+--------------¦ ¦1937¦488,588.46 ¦440,711.04 ¦ +----+------------+--------------¦ ¦1938¦432,577.60 ¦398,075.93 ¦ +----+------------+--------------¦ ¦1939¦445,349.33 ¦384,725.63 ¦ +--------------------------------+
Practically all of the income reported was from dividends.
In his determination of the deficiencies respondent found that petitioner had taxable net income as follows, after allowing deductions for the amounts paid to Barbara J. Champion and Dena Marlowe, and without allowing deductions under section 162(a) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code:
+-----------------+ ¦1936¦$478,816.86 ¦ +----+------------¦ ¦1937¦473,666.36 ¦ +----+------------¦ ¦1938¦418,636.20 ¦ +----+------------¦ ¦1939¦427,504.85 ¦ +-----------------+
He allowed no deductions for amounts paid, set aside, or distributable to the Joseph B. Whitehead Foundation.
On December 31, 1937, the principal cash and corpus accounts were charged and the income cash account was credited with $642,889.63. Immediately prior thereto the principal cash account had a balance of $64,590.37, thus creating an overdraft of $578,299.26 in the account, and in the income cash account a balance of $453,677.60. The net balance of the accounts was $518,267.97. These adjusting entries were made upon the recommendation of a firm of accountants to give effect to the decedent's will, as interpreted by the accountants.
On December 14, 1938, the Superior Court of Fulton County authorized petitioner to borrow not in excess of $1,000,000 upon the security of its assets to pay debts, taxes, and administrative expenses of the estate, to preserve the estate for the purposes of the will.
On June 15, 1939, petitioner and the Joseph B. Whitehead Foundation entered into an agreement in which petitioner agreed to obtain a loan pursuant to the authority granted by the court, in an amount sufficient to restore the income account and to eliminate the overdraft in the corpus account of the estate of the decedent, and in which provision was made for repayment of $200,000 of the loan in 1939, all of which might be, but at least $100,000 should be, paid out of the 1939 income of the estate, and the remainder at the rate of $25,000 quarterly, commencing March 31, 1940. Provision was made in the agreement for the retention by petitioner, out of the cash it had on hand of the estate after the loan had been made, of an amount equal to two-thirds of the amount of the loan, and for the retention thereafter of two-thirds of the amount of the loan outstanding and for the delivery to the Foundation, after the loan had been made, of the property of the estate except the cash to be retained under the terms of the loan agreement and capital stock of the Whitehead Holding Co. Provision was also made for delivery of certain shares of stock of the Whitehead Holding Co. as the loan was repaid, and that petitioner should continue to make payments to all of the legatees under the will until the loan was fully paid.
On June 19, 1939, petitioner, as executor, borrowed $950,600.38 from itself as a banking institution. The amount of the loan was entered as a receipt in the principal cash and corpus accounts of petitioner. The entry in the principal cash account converted an overdraft therein of $840,835.54 into a surplus balance of $109,764.84. The borrowed funds were used to make the following payments:
+-------------------------------------------------+ ¦Overdraft principal cash Jan. 1, 1939¦$450,241.77¦ +-------------------------------------+-----------¦ ¦Marjorie Whitehead ¦9,000.00 ¦ +-------------------------------------+-----------¦ ¦Laura G. Whitehead ¦2,500.00 ¦ +-------------------------------------+-----------¦ ¦Estate tax and interest ¦379,093.77 ¦ +-------------------------------------+-----------¦ ¦Petitioner (commissions) ¦94,764.84 ¦ +-------------------------------------+-----------¦ ¦Attorney fees ¦15,000.00 ¦ +-------------------------------------+-----------¦ ¦Total ¦950,600.38 ¦ +-------------------------------------------------+
In 1939 petitioner paid a total of $200,000 from its income cash account on the note for $950,600.38. The entires for the payments explained that the first payment of $100,000 was made from income during 1938, and that the other payments were paid out of 1939 income.
The corpus account had a balance of $4,378,076 on December 31, 1939. There was no balance in the principal cash account between June 20, 1939, and February 12, 1941, when a small receipt was entered in the account and disbursed to the Joseph B. Whitehead Foundation the next day. The income cash account had the following balances on the dates shown:
+------------------------------+ ¦December 31,1935 ¦$128,639.83¦ +------------------+-----------¦ ¦March 15, 1937 ¦3,434.69 ¦ +------------------+-----------¦ ¦December 31, 1939 ¦500,400.24 ¦ +------------------------------+
On December 16, 1938, petitioner distributed $200,000 to the Joseph B. Whitehead Foundation, and during 1939 a total of $966,238.65. The first distribution was made pursuant to a resolution adopted by the trustees of the Joseph B. Whitehead Foundation on December 15, 1938. All of the distributions were charged to the income cash account of petitioner.
In 1938 the Joseph B. Whitehead Foundation donated a total of $120,000, and in 1939 $460,000, to charitable and educational institutions.
On March 15, 1937, petitioner filed a fiduciary return of income for 1936 on Form 1041 with the collector for the district of Georgia. The return showed income from interest and dividends in the respective amounts of $571.77 and $481,947.97; claimed as deductions amounts including $884.44 for interest paid; $8,890.46 for taxes paid; $431,449.53 for contributions accrued in favor of the Joseph B. Whitehead Foundation, and $27,099.50 for executor's commissions, and reported net income of $12,500. The beneficiaries' shares of the income and credits were shown in the return to be in amounts aggregating $12,500. Attached to the return were schedules itemizing the income and deductions. Returns captioned ‘Fiduciary Income Tax Return‘ bearing the same form number were timely filed with the same collector for 1937, 1938, and 1939.
Petitioner kept its books on the cash basis. The fiduciary returns filed for 1938 and 1939 contain statements by petitioner that they were prepared on the same basis.
The deficiency notice from which the petition herein was filed was mailed on March 11, 1941.
OPINION.
DISNEY, Judge:
The petitioner deducted in returns filed by it for the taxable years amounts accrued to the Joseph B. Whitehead Foundation, a corporation organized under the will solely for charitable purposes. The amount deducted each year was the residue of gross income after making other deductions not herein involved, and after leaving $12,500 for distributions to beneficiaries of two special bequests provided in the decedent's will.
In his determination of the deficiencies the respondent held that the income of petitioner was not paid to, or permanently set aside for the use of, a charitable foundation specified in section 23(o) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code, and accordingly that no deductions were allowable under the provisions of section 162(a) of those acts and the Code.
The will of the decedent provided in general terms, and subject to more particular conditions hereinafter discussed, that certain contractual obligations to his widow and a former wife should be carried out and executed by his executors and by a corporation to be formed; that such corporation should be formed as soon as possible after his death and that his estate should be delivered to it; that such corporation, after paying $12,500 a year from income upon two special bequests should use one-fourth of the income from such estate by disbursing it to deserving orphans' homes; and the balance for charitable purposes and in the relief of pain and suffering and poverty, and for the relief of such institutions as hospitals and like institutions that dispense charity, or are worthy and in need of funds, in addition to which such corporation could in its discretion disburse funds to individuals, associations, and institutions such as schools, whether public or private, if deemed worthy, deserving, and in need of funds. The petitioner, the executor of the estate, duly took charge of the estate, which was valued at approximately six million dollars. The widow filed suit to recover the entire estate as sole heir, and questions arose as to the estate tax. After about a year the widow's claim was settled for $500,000, and shortly thereafter a corporation, known as the Joseph B. Whitehead Foundation, was formed along the lines provided in the decedent's will, the will in effect being by reference made part of the corporate charter. The first distribution, of $200,000, was made by the executor to the corporation about a year and a half later, in 1938, after the amount of the estate tax had been fixed. The executor continued to receive the income of the estate throughout the taxable years, in the meantime making payments to the widow and a former wife, also upon the special bequests. During 1939 the executor paid the corporation $966,238.65. Some of the payments in the meantime had been made from corpus and in particular transfers had been made from income account to corpus account in order to pay the $500,000, the amount of the settlement with the widow.
The questions presented by the parties are in effect whether under sections 162(a) of the Internal Revenue Code the petitioner may deduct from gross income the entire amount thereof, except certain other deductions not here involved, and except the $12,500 a year paid under the two special bequests, which deduction the petitioner claims under section 162(b) or (c) and as distributed currently by a fiduciary to a beneficiary. The petitioner's view is in substance that the gross income (except the amount paid upon the two special bequests) was all deductible because, under the terms of section 162(a) it was, pursuant to the terms of the will and during the taxable years, paid or permanently set aside to a corporation complying with the terms of section 162(a), and further because such gross income was, pursuant to the terms of the will, and the statute, to be used exclusively for charitable or educational purposes. The respondent's position is in effect that none of the deductions are proper on the ground that the will did not provide for such payment or permanent setting aside of the gross income as contemplated by the statute for the reason that the corporation formed was not, as required by section 162(a) by reference to section 23(o), one organized or operated exclusively for charitable or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and further that the will did not provide for the use of the gross income exclusively for charitable or educational purposes. Sections 162(a), (b), and (c) and 23(o)(2)
SEC. 162. NET INCOME.The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—(a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23(o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit;(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * *(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(o) CHARITABLE AND OTHER CONTRIBUTIONS.— In the case of an individual, contributions or gifts payment of which is made within the taxable year to or for the use of:(2) A domestic corporation, or domestic trust, or domestic community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual * * *
Although the petitioner has the burden of showing its right to the deductions claimed, the element of charity requires liberal construction. Helvering v. Bliss, 293 U.S. 144; Old Colony Trust Co. v. Commissioner, 301 U.S. 379; Edwards v. Slocum, 264 U.S. 61. Tax provisions as to charities are begotten from motives of public policy and are not to be narrowly construed. Beggs v. United States, 27 Fed.Supp. 599; Harrison v. Barker Annuity Fund, 90 Fed.(2d) 286, 289.
It is apparent from the whole record that the intent of the testator, as expressed in his will, was that his estate should be devoted to charitable or educational uses after the discharge of his contractual obligations to his widow and former wife, and after the payment of two special bequests. Does the existence of such exceptions and the further fact, urged by the respondent, that under the will amounts could be disbursed to institutions such as schools, public or private, and to deserving individuals, preclude classification of the foundation set up, within the terms of section 162(a), and consequent allowance of the deductions; and what is the effect of the latter part of section 162(a) as to income which under the will is to be used exclusively for charitable or educational purposes?
The test of the propriety of the deductions claimed is furnished by the terms of the will, and not by what was actually done thereunder by the petitioner. Bowers v. Slocum, 20 Fed.(2d) 350. That case construes that part of section 162(a) which appeared in section 219 of the Revenue Act of 1928; i.e., the portion granting deduction of gross income paid or permanently set aside to charitable, etc., organizations. In pertinent part it holds as follows:
Section 219(b) does not make the deduction depend upon the action of the executors in crediting the income upon their books, but upon the permanent setting aside of the income by the will itself for corporations of the character in question. The question, therefore, resolves itself into this: Was the income received by the estate during the year 1919 permanently set aside for the residuary legatees by the will itself?
The government, as I understand it, argues that the income in question might have been allowed as a deduction, if it had been paid by the executors or credited on their books. This would make the imposition of the tax depend upon some act of the executors, which had no result in law upon the rights of the parties, and is not in accordance with what we have found to be the expressed intent of the Congress, which was to tax the income received by the estate, which would pass to any person subject to taxation, but relieve from taxation the income set aside by the terms of the will for corporations of the character described.
In Leubuscher v. Commissioner, 54 Fed.(2d) 998, we read:
* * * The purposes of the bequest are to be ascertained from the will, not the corporation's charter privileges, and the conduct of the trust since, if not in accordance with the will, is merely a perversion or mismanagement of the trust to be corrected by proper authority. Eagan v. Com'r. 43 F.(2d) 881, 71 A.L.R. 863 (C. C. A. 5).
In Hu L. McClung et al., Executors, 13 B.T.A. 335, we said executors could not by their acts change the directions contained in the will. We therefore look to the terms of the will, and apply them to the statute involved.
The latter part of section 162(a), that is, ‘or to be used exclusively for * * * charitable * * * or educational purposes * * * ,‘ was added in section 219(b)(1) of the Revenue Act of 1924, the earlier portion, in substance referring to payment to, or setting aside for use by, certain classes of corporations or organizations, having existed prior thereto. Such language in the Act of 1924 provided an additional deduction. Senate Committee Report No. 398, 68th Cong., 1st sess., referring to a part of the language added. The remainder was added in the House bill. Apparently, and it seems to us with good logic, it was considered that the trust involved in the requirement of exclusively charitable, etc., use would guarantee application to such uses, equally as safely as requiring an organization formed and operated exclusively for such uses. If, therefore, in this case the will provided that any part of the gross income of his estate was to be used exclusively for charitable or educational uses, as to such part the foundation, the agency for such use, provided by the will, need not comply with the requirements of the earlier part of section 162(a), that is there need be no payment to, or permanent setting aside to, an entity organized and operated exclusively for charitable or educational purposes with no benefit inuring to private individuals, as required by the section prior to 1924.
In Estate of Edward T. Bedford, 39 B.T.A. 1039, we construed section 162(a) of the Revenue Act of 1934 and approved deduction by an estate of an amount which the testator's will directed to be paid to his daughter for a charitable or educational purpose— the maintenance of a garden enjoyed by the public. Thus it appears that no corporation or other organization qualifying under the first part of section 162(a) was required to supervise the disbursal of the money, only an individual doing so. Eagan v. Commissioner, 43 Fed.(2d) 881, involved estate tax and section 403(a)(3) of the Revenue Act of 1921. That section inter alia provided for deduction of bequests ‘to or for the use of any corporation‘ organized for charitable, etc., purposes, or to a trustee exclusively for such purposes. The court held that the bequest was to trustees and not to a corporation (though as such trustees they controlled the corporation), and that therefore, under the latter clause of the statute as to trustee ‘the organization and operation of the corporation are therefore not material,‘ and that the deduction of the bequests to the trustees was proper. There is in our opinion no essential difference, so far as here concerned, between the latter part of section 403 construed as above by the court, and the latter part of section 162(a). In the case of each, provision for deduction merely because of exclusively charitable, etc., use of legacies was added to the earlier clause requiring that the recipient be an organization organized and operated exclusively for such charitable, etc., purposes. That the intent was to broaden the deductions beyond those merely to organizations particularly organized and operated is patent. A trust was imposed in the instant case upon the funds to be ‘exclusively used‘ for charity, education, etc. They were received in trust for such use. The respondent, upon reply brief, takes the view that the foundation received the remainder in trust. We conclude and hold that within the ‘to be used exclusively‘ clause in section 162(a) the foundation receiving and disbursing the estate was not required to qualify, under the earlier language, as one organized and operated exclusively for charitable purposes, etc., but that the statutory provision covers the situation if the charitable, etc., use of the estate as directed by the will was to be exclusive. The use required by the will, not the character of the disbursing agency, is sufficient test, under the latter part of section 162(a). We hold, too, that the testamentary provision here involved provided the exclusive use for charity, etc., required by the statute. That the primary purpose and terms of the will was charitable is not and could hardly be denied, for, with the exception of providing for the discharge of contractual obligations to his widow and former wife (required, of course, to be paid, regardless of mention in the will) and payment of two special bequests, testator's entire fortune was devoted to charity; except also that the foundation which he set up might, under the terms of the will, make distributions of funds to institutions, such as schools, public or private, and individuals, if deemed in need, worthy, and deserving. The argument is that these particular provisions prevent a conclusion that the purposes of the will were exclusively charitable in nature. The word ‘exclusive‘ has been liberally construed. Estate of Robert Marshall, 2 T.C. 1048. The mere fact that some provisions are not charitable in nature does not require denial of the deduction. In Lederer v. Stockton, 260 U.S. 3, a devise to a hospital created for charitable purposes was subject to the payment of $800 per year. The Court, speaking of the hospital, said:
* * * It uses the remainder of the income from the fund for its expenses. It is thus actually receiving the full benefit of the income of $15,000 from the residuary fund, reduced only by the annuity of $800.
* * * we see no reason why the exemption should not be given effect under the circumstances. To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income would be to defeat the beneficent purpose of Congress.
In Estate of Edward T. Bedford, supra, we said:
* * * The word ‘exclusively‘ does not serve to defeat a claimed deduction where the primary use is charitable even though some purely incidental use, which is not charitable, may inherently result. * * *
Among the cases cited as authority are Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578; Y. M. C. A. Retirement Fund, Inc., 18 B.T.A. 139; and Proctor Patterson et al., Executors, 34 B.T.A. 689.
Trinidad v. Sagrada Orden de Predicadores, supra, involved the question whether a corporation, otherwise organized and operated for religious, benevolent, etc., purposes failed to be exclusively so because it used its properties to produce income and traded in wine, chocolate, and other articles. It was held that in using its properties to produce income it was adhering to and advancing its religious, charitable and educational purposes and not stepping aside from them or engaging in business, and that transactions in wine and chocolate were incidental.
Y. M. C. A. Retirement Fund, Inc., supra, reads in part on this point:
In determining whether property is exempt as ‘used exclusively‘ for certain purposes, the decisions have uniformly held that such language means the primary and inherent use and does not preclude such incidental uses as are directly connected with, essential to, and in furtherance of, the primary use. * * *
In Proctor Patterson et al., Executors, supra, we pointed out in passing, ‘mere incidental things which are not charitable or educational or religious are not sufficient to deprive the organization (otherwise classified as charitable, etc.) of its charitable or educational or religious classification.‘
Emerit E. Baker, Inc., 40 B.T.A. 555, involved a nonprofit corporation otherwise qualified as tax exempt under section 101(6) of the Revenue Acts of 1934 and 1936. It was held not to lose the exemption because under a will it became trustee to receive an estate, pay the testator's wife $12,000 per year for life (from corpus if necessary), use so much property and estate as she might direct in the education of her nieces and nephews, and upon her death to use the estate for the benefit of a certain city and its inhabitants in establishing and improving parks, aiding crippled children, assisting the young to obtain an education, etc.
The respondent seeks to distinguish the Baker case on the ground that the payments there were merely incidental to and a means of furthering the charitable and educational purposes. We see no distinction between the payments to the wife there and the special bequests and annual payments to the widow and former wife in the instant matter. In both cases the payments were senior to the charitable, etc., benefactions. The education of the wife's nieces and nephews in the Baker case did not come within general charitable purposes, but was a private purpose. The widow in the Baker case, in lieu of asserting her rights to dower, actually received amounts greater than provided by the will, just as in this matter the widow was paid $500,000 additional in settlement of her claim to the entire estate. The payment of her claim is not material. It was made from the principal cash account, but, if considered paid from income, it was made contrary to, and not pursuant to, the terms of the will— a perversion of the trust. Though the settlement was followed by a decree of court in accordance therewith, neither the settlement nor the decree designated that payment should be from income. Leubuscher v. Commissioner, supra. In Potter v. Bowers, 89 Fed(2d) 687, the court held it to be of no consequence that income devoted to charity was reduced by payments made in settlement of a claim against the estate (though in fact deduction was not asked for on the amount of income paid on the settlement). ‘Both the fund and the disputed income were dedicated to a charitable purpose * * * .‘ To hold that discharge of such claims against an estate as those of the widow, and the former wife, based upon law or contract and payable in any event, destroys a broad testamentary provision that the residuum of the estate go to charity would, no doubt, tend to strike down very many testamentary charities, for it can hardly be thought that an estate would have no claims against it at all.
The discharge of decedent's obligations to his widow and former wife and the payments upon the two special bequests, subject to which the residuary estate was devised much as in the Baker case above, were clearly a means to an end, prerequisite to and incidental to the securing of a large fortune for charitable and educational purposes; and in the light of the above cases we conclude and hold that the testamentary provisions for the widow, the former wife, and the special bequests do not constitute ground for refusing classification of the testamentary purposes as exclusively charitable. The same is true of the more general provisions for the benefit of individuals and institutions, such as schools, public or private. Reading the whole clause so providing, we conclude that the purpose is altogether charitable or educational. All beneficiaries were required to be deserving and needy. The word ‘charity‘ is too broadly to be construed, to permit a contrary view. Old Colony Trust Co. v. Commissioner, supra. In Beggs v. United States, supra, the testator provided for distribution ‘to any charity or for any purpose they (executor and sister) may consider worthy,‘ and also used the words ‘worthy objects‘ and ‘special friends‘; yet, considering the entire will and circumstances, the Court of Claims held the objects to be charitable. The same clearly appears here from the will itself.
This leads us to an alternative consideration of the latter clause of section 162(a), providing for deduction in the case of provision for exclusively charitable or educational use of gross income. The section does not require that all gross income be devoted to exclusively charitable, etc., purposes in order for any portion thereof to be deductible, but only that any part of such gross income which the will provides shall be exclusively so used, may be deducted. Since we have just above concluded that the general language as to disbursements to individuals and institutions, such as public or private schools, is charitable or educational, it follows that in any event, of the entire gross income of the estate, all was exclusively devoted to charity, except the $12,500 per year required to pay the two special bequests, the $18,000 annually required for the former wife and the annual amounts payable to the widow ($6,000 per annum for life, or until remarriage, plus $20,000 for four years, and a like sum for a fifth year from 1932, if she did not remarry). Under the latter clause of section 162(a), all of the income, except the above maximum amounts, was by the terms of the will exclusively devoted to charitable or educational purposes, and the deduction in any event proper. However, concluding as above that the will provided exclusively charitable use for the entire gross income, we hold that all (except the incidental special bequests) is deductible under the latter portion of section 162(a).
In addition, we conclude, under the authority of the same cases above cited, that the foundation was in fact an organization organized and operated exclusively for charitable or educational purposes. The payments to the widow, former wife, and special bequests constituting, on this point also, only incidents to the primary benefaction set up in the will, and the reference to disbursing funds to institutions such as schools, public or private, and to worthy and deserving individuals all being subject to the direction that the estate be used for charity purposes, we see in such language no violation of the requirement that no part of the net earnings inure to private benefit. A reading of the entire will negatives the idea of noncharitable participation by any individual. The fact that the will was made by reference a part of the corporate charter of the foundation, therefore, does not indicate that it was organized for other than charitable or educational purposes. The will under the above authority had no other purpose. Such cases as Henry C. Dubois, 31 B.T.A. 239; Amy Hutchison Crellin, 46 B.T.A. 1152; and James Sprunt Benevolent Trust, 20 B.T.A. 19, involve situations where the charitable or educational element was plainly unimportant in comparison with the provisions for private and family benefactions, and do not affect the salutary general rule laid down in the above cases. Scholarship Endowment Foundation v. Nicholas, 106 Fed.(2d) 552, is not to the contrary, for there the taxpayer paid an annuity to a donor in consideration of the transfer of property to it. The donor made gifts of $130,000, up to the taxable year, and had a right to a life annuity of $5,000. In the taxable year he drew only $2,000, but the amount spent for charity was only $1,000.
It is also contended that the deductions claimed are improper for the reason that the will does not direct the income to be used for charity during the period of administration, covering the taxable years, but that only the foundation could, under the will, spend the income upon charity. In Potter v. Bowers, supra, the court followed Bowers v. Slocum, supra, and held that it was not essential that the charitable institution be in existence during the taxable year, it being sufficient if the will mandatorily required its incorporation, and that the income ultimately distributed was deductible even though it had been reduced by an amount paid to settle a suit contesting the will. Here the will directed the organization of the foundation as soon as possible after the testator's death. Petitioner had no discretion in the matter and was bound by the directions set forth in the will. Neither is it essential that the income be earned in the year in which the deduction was made. Old Colony Trust Co. v. Commissioner, supra. In Bowers v. Slocum, supra, it is said: ‘There is no force in the argument that the clause does not apply to estates in process of settlement, but only to trusts, in view of its language, 'pursuant to the will or deed creating the trust.’‘ In this connection we note that in the Estate of Edward T. Bedford case, supra, as here, the taxable year was covered by the administration, further, that the will provided, as in this matter, that the trustee should disburse to the daughter the money which was held to have been directed to be used by the daughter exclusively for purposes of charity or education; yet, the deduction was held allowable to the executor of the estate— even though corpus could be used if income were insufficient. Section 162(a) makes no requirement either that the permanent setting aside of income for the purposes and in the manner specified in section 23(o)(2), or its exclusive use under the latter clause, be by the executors of the estate in order that the executors be allowed the deduction. It is true that the will does not in specific terms provide for use of income by the executor, but we find nothing in the statute, which should on this question of charity be liberally construed, to confine the deduction of income devoted to charity to the actual disburser of such income. The statute here involved allows a deduction under entirely different circumstances than those involved in section 162(b) or (c) and without regard to taxability of the recipient. Estate of Edward T. Bedford, supra.
In Beggs v. United States, supra, the Court of Claims considered a case where the residuary estate was left to charity. The will did not specifically mention income from the residuary estate during administration and distribution, but the court holds that under section 219(b)(1), Revenue Act of 1926, the same as section 162(a), here being considered, such specific mention of income during administration was not necessary to the rights of the executor to deduct such income from income for income tax purposes. The estate was in process of administration throughout the taxable years 1927 to 1931, inclusive. Quoting the statute, the court says:
The income derived by the executor during administration became a part of the corpus of the residuary estate, the net proceeds of which we have held were by the will bequeathed to charity and so distributed. As such income was received it was by the terms of the will permanently set side and destined for charitable uses. Such income was clearly deductible.
Bowers v. Slocum, supra, says on this question:
The intention of the testatrix plainly appears from her will that all of her residuary estate shall go to corporations of the character described in section 219(b), and the residuary estate includes the income in question. * * *
In so far as deductions should be disallowed in this case, the amount going to charity would be curtailed, and in effect the tax be paid by the beneficiaries of charity. In our opinion the object of the statute is to preserve to the use of charity, free from taxes entailed in deductions denied, that which the testator intended exclusively for charitable use; and to deny such deduction to the executor, prior to the formation of the charitable trust would defeat such object. Moreover, in substance, the disbursements by executors were those of the foundation; and the respondent upon brief, in arguing that the foundation was not operated exclusively for charitable purposes, cites the payments by the executors, ratified and agreed to by the foundation under the agreement of June 15, 1939, as those of the foundation by its agent. The testator considered the foundation to be merely a part of the management of his estate, for he provided that the two annuities, payable for 20 years or life, should be paid ‘out of the income of my estate.‘ He can not reasonably be presumed to have expected the administration to be so long continued. The local law provided for payment of debts primarily from corpus, rather than income, leaving the income to charity. Rachels v. Wimbish, 31 Ga. 214. That corpus might, if income were insufficient, be called upon, is immaterial. Estate of Edward T. Bedford, supra. No claim is made that the possibility of using corpus for other purposes rendered the charity nondeductible as being impossible of computation, and in any event, such possibility is so remote as to require that no effect be given. The income necessary to pay the special bequest and annual payments to the widow and former wife was only a very small fraction of the annual income of the estate. It is suggested that a state court had construed the will against the petitioner's contention. The order of the local court was not one establishing a rule of property, but merely authorizing the borrowing of money, reciting that it was necessary for the preservation of the estate and the objects for which it was created by the will. The state court could not decide the question of Federal taxation. We conclude that the will permanently set aside income for, and directed it to be used for, charity during the period of administration.
The respondent urges that he was in error in allowing deduction of the amounts paid by the executor upon the two special bequests, contending that the amounts, being payable by the foundation, were not ‘properly‘ payable under section 162(c) by the executor. However, the amounts were to be paid annually out of income, and were actually paid by the executor. Though the will does recite that the special bequests are to be paid by the foundation, it also recites that the bequests are made ‘out of the income of my estate and before the same is disbursed * * * by the Foundation.‘ In the light of all this language, we think it within the testator's intent that the special bequests be paid annually both before and after the formation of the foundation. We do not think he intended to leave the two special beneficiaries unprovided for during the period of administration. He intended, in our opinion, that the amounts be paid annually, out of his estate, either by the executor or by the foundation. The amounts were income ‘which is to be distributed currently‘ under Section 162(b). We can not say that the amounts were not properly payable by the executor. We find no error shown in the allowance of the deduction of the $12,500 per year for these bequests.
In view of the conclusions above expressed, it is unnecessary to pass upon the question of limitation upon assessment.
Decision will be entered under Rule 50.