Opinion
Docket No. 15462.
1948-11-29
ESTATE OF ANNA FINLEY KENNY, FRANKLIN A. KENNY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Andrew Koerner, Esq., and Frank H. Spears, Esq., for the petitioner. Robert G. Harless, Esq., for the respondent.
Decedent bequeathed the residue of her estate to a corporate trustee, directing that the income be paid to her husband for life and the corpus thereafter be distributed to 10 charities. She authorized the trustee to make payments to her husband out of corpus if required for his comfort and support. At the time of decedent's death the husband was over 83 years of age. His habitual living expenses exceeded the income of the testamentary trust, but were substantially less than his combined income from this source, an inter vivos trust, also created by decedent for his support, and his separate means. On the evidence, held, that the amounts of the remainder bequests to charity can be computed with reasonable accuracy as of the time of decedent's death, and they are hence deductible under section 812(d), Internal Revenue Code, since the possibility of corpus invasion was remote. Ithaca Trust Co. v. United States, 279 U.S. 157, followed. Andrew Koerner, Esq., and Frank H. Spears, Esq., for the petitioner. Robert G. Harless, Esq., for the respondent.
The Commissioner determined a deficiency of $16,196.33 in estate tax, in part by disallowing a deduction of $58,095.81 claimed on account of bequests of remainder interests in a testamentary trust to 10 charities, on the ground that trust corpus could be invaded if necessary for the support of a life beneficiary and hence the amount which the charities might ultimately receive was uncertain and contingent. Petitioner assails the disallowance, contending that under the circumstances shown the invasion of corpus was too improbable to defeat a reasonably accurate computation of the value of the charitable bequests.
FINDINGS OF FACT.
This case was submitted upon a stipulation and exhibits, which we incorporate herein by reference as findings of fact, and upon testimony elucidating the stipulation. From this record it appears that: Franklin A. Kenny is the surviving husband of Anna Finley Kenny, who died testate on March 7, 1945, a resident of Portland, Oregon. Kenny, who also resides at Portland, was duly appointed executor of her estate, petitioner herein, and filed an estate tax return with the collector of internal revenue for the district of Oregon on May 24, 1946. The decedent was 75 years of age when she died; her husband's age was 83 years, 7 months, and his life expectancy was 3 years, 7 months.
By her will made several specific bequests to individuals and by the twelfth paragraph devised and bequeathed the residue of her estate to the United States National Bank of Portland, Oregon, in trust, granting the trustee full powers of management, maintenance, sale, investment, and reinvestment, subject, however, to her husband's approval of investments during his lifetime. The trustee was directed to pay the income to the husband for life, and:
(b) * * * to expend and consume so much of principal of the trust estate, up to and including the whole thereof, as, in a liberally exercised judgment, shall be required from time to time for the comfort and support of my said husband for his lifetime.
(c) Upon the death of the last to survive of my said husband and myself, any residue of the trust estate, if any then remains, shall be applied by my trustee * * * :
to the payment of four legacies aggregating $25,000 and the balance divided among the ‘following named corporations or institutions, for use in Oregon for charitable purposes, in these proportions, to-wit:‘
+-----------------------------------------------------------------------------+ ¦1. Board of Trustees of the First Presbyterian Church and Society of ¦1/ ¦ ¦Portland, Oregon ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦2. Young Women's Christian Association, Portland, Oregon ¦2/ ¦ ¦ ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦3. Young Men's Christian Association, Portland, Oregon ¦2/ ¦ ¦ ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦4. Fruit and Flower Mission, Portland, Oregon ¦1/ ¦ ¦ ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦5. Patton Home, Portland, Oregon ¦2/ ¦ ¦ ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦6. Waverly Baby Home, Portland, Oregon ¦2/ ¦ ¦ ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦7. Board of National Missions, Presbyterian ¦1/ ¦ ¦ ¦32 ¦ +-------------------------------------------------------------------------+---¦ ¦8. Board of Foreign Missions, Presbyterian ¦1/ ¦ ¦ ¦32 ¦ +-------------------------------------------------------------------------+---¦ ¦9. Doernbecher Hospital, Portland, Oregon ¦3/ ¦ ¦ ¦16 ¦ +-------------------------------------------------------------------------+---¦ ¦10. The Portland Community Chest ¦2/ ¦ ¦ ¦16 ¦ +-----------------------------------------------------------------------------+
The 10 enumerated beneficiaries are all charitable organizations within the meaning of section 812(d), Internal Revenue Code.
By the twelfth paragraph of her will decedent directed further that:
(g) During any operative period of the testamentary trust in which my said husband shall be living, he shall have and is hereby given the right to substitute for the trustee named by me any other and different trustee of his selection, provided only that such substitute trustee be a strong and well established corporate bank or trust company, experienced in the successful operation of trust properties. The filing by my said husband with the then trustee of his formal notice of substitution in writing, by him signed and acknowledged, shall be sufficient to effect such substitution and to transfer to and vest in the new trustee therein named all of the rights, titles, powers and duties hereby given the original trustee of my selection. It is my purpose and desire, over all others, by this and the foregoing provisions of my Will, to assure to my said husband a generous administration of my trust estate as concerns his comfort and well-being, and that only when this purpose shall be fully served, by consumption of the entire estate left by me if that be required, shall any remainder go to other uses and purposes.
When decedent died, the husband had no dependents and was in good health. He owned securities, cash, and miscellaneous assets which had a value of $131,422.60 at the end of 1945, of $101,580.58 at the end of 1946, and of $98,504.17 at the end of 1947, exclusive of any interest in his wife's estate or trusts created by her, and his gross income during the years 1939-1944 ranged between about $7,000 and $8,500. It was $13,593.50 in 1945, $21,826.18 in 1946, and $20,929.44 in 1947. By his wife's death on March 7, 1945, the husband became entitled for life to the income of an inter vivos trust which she had created on August 8, 1944, transferring certain shares of stock to a corporate trustee under an instrument whereby she reserved to herself the income for life and directed that after her death the trustee pay the income for life to her husband ‘for his comfort, maintenance and support.‘ For several years prior to this transfer she had annually received from the shares transferred an income ranging between $6,600 and $7,600. From this trust the husband received $1,600 (less fees) in 1944; $5,753.05 in 1945, $10,408.36 in 1946, and $11,608.36 in 1947. From his wife's estate or the testamentary trust he received $4,225.99 in 1945, $4,628.88 in 1946, and $5,098.07 in 1947. During the years 1939-1944 the husband's expenditures, including personal gifts and taxes, ranged from $4,767.92 in 1940 to $8,343.20 in 1943. The living expenses for himself and his wife never exceeded $6,000. Exclusive of gifts and taxes, his expenditures were $6,659.97 in 1945, $6,552.02 in 1946, and $8,564.01 in 1947. Inclusive of gifts and taxes they were $13,462.18 in 1945, $25,715.96 in 1946, and $15,836 in 1947. Petitioner's trustee has never been requested to pay the husband anything out of trust corpus and has never done so.
The corpus of the trust created by decedent in 1944 is to be distributed to her husband's two children in 1964 if they be then living; otherwise to their descendants. Since a portion of the Oregon inheritance tax on this transfer will fall due in 1964, the husband sought to insure that means would be available for its payment in case the children should not be living in 1964, and on advice of counsel he purchased two insurance policies on the life of each of the children, paying single premiums aggregating $9,521.85 in 1946 and making a gift of the policies to the children. He also gave each of them $2,500 in 1945.
In connection with this proceeding attorney's fees of $2,500 have been charged and paid.
On the estate tax return petitioner reported $67,921.31 as the value of the residuary estate subject to the bequests to the 10 charities. This value was reduced by that of the husband's life interest in the trust, and the remainder, or $58,095.81, was deducted as the present value of charitable bequests at decedent's death. The Commissioner determined that no deduction was allowable on account of these bequests because the trustee was empowered to use the residue of the estate in any amount required for the comfort and support of the husband during his lifetime.
OPINION.
JOHNSON, Judge:
For the computation of estate tax, section 812(d) of the Internal Revenue Code permits the deduction from gross estate of the amount of all bequests to charities, as therein defined, and the parties are agreed that the 10 designated remainder beneficiaries are charities within the statutory definition. But respondent disallowed the deduction claimed on account of the bequests to these charities, and he defends that determination on the ground that no reasonably accurate computation of the value or amount could be made at the time of decedent's death, since the trustee was authorized to use part or all of the trust principal, from which they were to be paid, in providing for the ‘comfort and support‘ of decedent's husband in case he should require it.
It is well settled that no deduction may be taken on account of a remainder bequest to charity unless at the testator's death it is possible to make:
* * * a highly reliable appraisal of the amount the charity will require * * * . Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. * * * (Merchants Nat. Bank of Boston v. Commissioner, 320 U.S. 256.)
And in many cases the absence of reliably predictable facts has led to judicial approval of the Commissioner's disallowance of a claimed deduction. De Castro's Estate v. Commissioner (C.C.A., 2d Cir.), 155 Fed.(2d) 254; Industrial Trust Co. v. Commissioner (C.C.A., 1st Cir.), 151 Fed.(2d) 592; certiorari denied, 327 U.S. 788; Estate of Eunice M. Greene, 11 T.C. 205; Estate of Bayard H. Christy, 8 T.C. 862; Estate of John W. Holmes, 5 T.C. 1289.
But petitioner contends that the cited cases are not here applicable because the trustee's power to invade corpus could be exercised only if the trust income, together with the life beneficiary's income from other sources, should be inadequate for the beneficiary's ‘comfort and support,‘ and since the husband's customary expenditures for years preceding decedent's death were considerably less than this aggregate income from all sources, the probability of an invasion of corpus was so remote as to be negligible. It has been held that remote possibilities of corpus invasion do not render the amount of a remainder bequest to a charity impossible of calculation, and petitioner relies strongly on Ithaca Trust Co. v. United States, 279 U.S. 151, wherein the Supreme Court considered the excess of a trust's income over the support requirements of the life beneficiary and, in holding the possibility of corpus invasion too unlikely to defeat a reasonable uncertainty appreciably greater than the general uncertainty that attends human affairs.‘
The will here provides that the trust income be paid to the beneficiary husband during life and that so much of principal be paid him ‘ * * * as, in a liberally exercised judgment, shall be required from time to time for the comfort and support of my said husband for his lifetime.‘ We are of opinion that this language restricts the trustee from making payments out of corpus to the life beneficiary unless the latter's income should be inadequate for his habitual comfort and support. Similar words were so construed in Union Planters Nat. Bank v. Henslee (C.C.A., 6th Cir.), 166 Fed.(2d) 933; Hartford-Connecticut Trust Co. v. Eaton (C.C.A., 2d Cir.), 36 Fed.(2d) 710; Estate of Nellie H. Jennings, 10 T.C. 323; Estate of Lucius H. Elmer, 6 T.C. 944; Estate of James M. Schoonmaker, Jr., 6 T.C. 404; and Estate of Edwin E. Jack, 6 T.C. 241, and even the trustee's power to invade corpus if necessary to cover expenses of a life beneficiary's illness or accident has been held not to make valuation of the remainderman's interest too uncertain for calculation where the life beneficiary's income greatly exceeded the requirements for his support. Commissioner v. Wells Fargo Bank & Union Trust Co. (C.C.A., 9th Cir.), 145 Fed.(2d) 130; Commissioner v. Bank of America Nat. Trust & Savings Assn. (C.C.A., 9th Cir.), 133 Fed.(2d) 753.
A contrary conclusion has been reached, however, where the trustee was authorized to invade corpus not only for support but also for the life beneficiary's happiness, Merchants Nat. Bank of Boston v. Commissioner, supra; pleasure, Industrial Trust Co. v. Commissioner, supra; use and benefit, Estate of Nathan P. Cutler, Jr., 5 T.C. 1304; unforseen emergency needs, De Castro's Estate v. Commissioner, supra, or as the beneficiary should desire, Gammons v. Hassett (C.C.A., 1st Cir.), 121 Fed.(2d) 229. See discussion in Estate of Horace G. Wetherill, 4 T.C. 678. And respondent contends that under decedent's will the husband here could in fact have forced the trustee to pay him indefinite amounts out of corpus. He argues, first, that the husband could remove and replace the trustee and could disapprove the trustee's investments. The contention, if we understand it, is that the husband was in a position to misuse his powers by exerting undue pressure on the trustee for his own benefit. In deciding tax incidence, we shall not assume irregularities either by him or by a trustee. The second argument is that the trustee was under a duty to pay the husband an amount sufficient for comfort and support, regardless of the husband's income from other sources; that, as the trust income of between $4,000 and $5,000 annually was not equal to the husband's habitual living expenses, which reached about $6,000, the trustee could be required to provide the deficit from corpus; and, furthermore, that the husband's gifts in 1945 and 1946 illustrate a means whereby he could render himself entirely dependent on the trust for comfort and support.
The husband has not in fact rendered himself wholly dependent on the testamentary trust, and no trust corpus has ever been paid to him or requested by him. But we should be impressed by respondent's argument if the husband were in a position to exact indeterminate amounts of corpus either by express provisions of the will, cf. De Castro's Estate v. Commissioner, supra, or, failing these, under the interpretation given by Oregon courts to trust instruments in which the grantor's intention on this point is not clear. Cf. Estate of Bayard H. Christy, supra. The parties admit inability to cite a pertinent Oregon decision, nor have we found any, but each contends that his view represents the weight of authority in other states. It is of some support to petitioner, we note in passing, that the Court of Appeals for the Ninth Circuit has twice adverted to the life beneficiary's independent income in holding an invasion of trust too improbable to defeat a reasonable appraisal of the remainderman's bequest. Commissioner v. Wells Fargo Bank & Union Trust Co., supra; Commissioner v. Bank of America Nat. Trust & Savings Assn., supra.
We perceive no occasion, however, to speculate on the abstract question of whether or not an Oregon court would hold it proper for a trustee to ignore the individual income of a life beneficiary entitled to trust corpus for support if trust income should be inadequate therefor. Such a question arises only when there is no evidence from which the grantor's intent can be inferred. The decedent's intent here seems obvious. By the provisions of the inter vivos trust which she created in August 1944, she likewise directed that trust income be paid to her husband ‘for his comfort, maintenance and support.‘ She could not have intended that each trust provide his sole support. And we conclude, therefore, that she did not intend for the trustee of the testamentary trust to ignore his income from other sources.
As for respondent's suggestion that the husband could deliberately impoverish himself by gifts and thus become solely dependent on the testamentary trust, it is sufficient to point out that he could not give away the corpus of the inter vivos trust, and, since the combined income of the two trusts substantially exceeded his habitual expenses, it is reasonable to assume that the corpus of the testamentary trust would not be invaded even if his earnings and separate property are left out of account. This is a fortiori true because of the husband's advanced age of 83 years, 7 months. We hold, therefore, that at the time of decedent's death a reasonably accurate computation of the value of remainder bequests to charity could be made, and, in accordance with the parties' stipulation, applicable in the event of such a decision, we find and hold that $64,519.75 is a proper deduction to be allowed in the computation of net estate.
Reviewed by the Court.
Decision will be entered under Rule 50.