Opinion
Docket No. 5444-67.
1970-06-25
ESTATE OF JOHN EDGAR McALLISTER, SAMUEL LEWIS McALLISTER AND MERRILL DES BRISAY, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
George Rowe, Jr., and Daniel J. O'Connell, for the petitioners. Stanley J. Goldberg, for the respondent.
George Rowe, Jr., and Daniel J. O'Connell, for the petitioners. Stanley J. Goldberg, for the respondent.
The decedent, a nonresident alien, provided in his will that 25 percent of the income of his residuary estate be paid to a Canadian foundation; said income to be used for the benefit of Canadian students attending the Michigan College of Mining and Technology. The bequest was predicated upon the condition that the college establish a foundation which was tax exempt under Canadian law. Said tax-exempt foundation was, in fact, established and the specified income was paid to Canadian students in the form of checks which were mailed directly to Michigan College where, upon arrival, the students would endorse the checks over to the college in payment of tuition, receiving any excess in cash which was used to pay out-of-pocket expenses. Held, the possibility that the bequest would not become effective was so remote as to be negligible. Held, further, the bequest was ‘to a trustee or trustees * * * to be used within the United States,‘ since the funds were expended here. Hence, the decedent's estate is entitled to the claimed deduction for a charitable contribution. Sec. 2106(a) (2)(A)(iii), I.R.C. 1954. /1/
STERRETT, Judge:
Respondent determined a deficiency in the estate tax of the Estate of John Edgar McAllister in the amount of $32,549.96. Due to a concession by the petitioners the sole issue remaining for decision is whether petitioners are entitled to a charitable deduction by reason of the bequest of a portion of decedent's residuary estate to a certain Canadian foundation.
FINDING OF FACT
Some of the facts have been stipulated. The stipulation and the exhibits attached thereto are incorporated herein by this reference.
John Edgar McAllister (hereinafter the decedent) died testate on May 27, 1959, in Charlottesville, Va.; a citizen and resident of Ontario, Canada. After the decedent's death his last will and testament, dated April 24, 1958, together with a codicil dated April 1, 1959, was admitted to probate on July 16, 1959, in the Surrogate's Court on the County of York, Toronto, Ontario, Canada. Samuel Lewis McAllister and Merrill Des Brisay, the executors under the will, are the petitioners herein.
The decedent left property in both the United States and Canada. The existence of property within the United States necessitated the filing of a U.S. Nonresident Alien Estate Tax Return which was filed by the petitioners on or about August 16, 1965, with the Internal Revenue Service, Office of International Operations, at Washington, D.C.
The decedent's will provides in substance that after the payment of cash legacies to specified individuals and charities, totaling $242,500, and the establishment of a trust of $100,000 for the decedent's great-grandchildren, the residuary estate shall be held in trust in perpetuity for two purposes. Firstly, to pay 75 percent of the income to the University of Toronto, such income to be used to support deserving engineering students at that university for study purposes. Secondly, to pay the balance of the income, i.e., 25 percent, to a Canadian foundation which ,as the will provides, shall be used for the benefit of deserving engineering students who attend the Michigan College of Mining and Technology (hereinafter referred to as Michigan), provided Michigan shall cause such a foundation to be formed and such foundation shall enjoy a certain tax-free status in Canada. It is the tax consequences flowing from the second of these purposes that is in issue here.
In spelling out the second purpose the decedent's will provides as follows:
If and when the Michigan College of Mining and Technology, Houghton, Michigan, U.S.A., establishes in Canada to the satisfaction of my Trustee, a charitable foundation corporation or a charitable trust so that monies may be received by it in Canada from my estate and others and the said money spent in Canada without income tax or succession duty levies of any kind, then on that happening, and only then, my Trustees are to pay the remaining twenty-five percent of the net annual income to the said charitable foundation corporation or charitable trust when established as aforementioned and the income so received is to be used for the following purposes:
Assistance to worthwhile students who wish to continue studies at the said College and who would be described as ‘Plodders' and who might not without such financial assistance be able to enter or complete graduate or post-graduate studies in the said College. The assistance to be given to applicants who are not necessarily scholarship material. The selection of such students and the distribution of the income is to be determined by the said corporation or trust under a committee consisting of the President from time to time of said College, his nominee and my Trustees and their successors.
In the event that conventions between the United States and Canada are ever revised so as to permit tax and successions duty free gifts across the international border between the two countries to educational institutions, then in the discretion of my Trustees some of the income aforementioned can be used to make payments direct to the said College or to the foundation thereof in the United States or otherwise for the more direct use and benefit of the said College.
Until such time as the said College has established in Canada the necessary charitable foundation corporation or trust as aforementioned, then the entire annual income from my residuary estate is to be paid to the Board of Governors of the University of Toronto for the purposes set out in the prior paragraph 5(b).
The value of the decedent's gross estate amounted to $1,707,389.98; his residuary estate amounted to $1,300,638.31 and the 25-percent interest of Michigan amounted to $325,159.58. The value of the decedent's property situated in the United States for Federal estate tax purposes amounted to $150,667.65; the expenses, claims, and other deductions attributable thereto, other than the charitable deduction here in issue, amounted to $9,167.76.
In due course, Michigan in accordance with its practice in such circumstances requested counsel for the executors of the decedent's estate to establish the necessary foundation and obtain the required rulings from the appropriate Canadian taxing authorities and to take such other steps as were necessary or advisable to meet the requirements imposed by the decedent's will.
Subsequent to this request a corporation entitled Michigan Tech Canadian Foundation (hereinafter referred to as foundation) was established on or about November 3, 1961.
Pertinent parts of the foundation's letters patent issued by the Secretary of State of Canada state the purposes of the foundation as follows:
1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.The stipulation refers to the corporation as a foundation; however, the letters patent make clear that it is, nonetheless, a corporation.
(1) (T)o receive, establish and maintain a fund or funds and to apply from time to time all or part thereof and/or the income therefrom for educational purposes within Canada as follows:
(a) to grant to students residing in Canada scholarships, bursaries, grants, payments or interest-free loans for the purpose of assisting such students to study at the Michigan College of Mining & Technology (hereinafter referred to as ‘Michigan Tech’);
(b) to grant sums to professors and teachers residing in Canada and to Canadian universities, colleges and other educational institutions for the purpose of assisting in the interchange of professors and teachers between such Canadian universities, colleges and educational institutions and Michigan Tech;
(c) to pay in Canada the expenses and salary of professors and teachers of Michigan Tech attending Canadian universities, colleges or other educational institutions as lecturers or teachers;
(d) to grant in Canada to students of Michigan Tech scholarships, bursaries, grants, payments or loans for the purpose of assisting such students to carry out special postgraduate studies at Canadian universities, colleges and other educational institutions;
The letters patent also provide that, ‘The operations of the Corporation may be carried on throughout Canada and elsewhere.’ And that, ‘The head office of the Corporation will be suitable at the City of Toronto, in the province of Ontario.’
Pertinent parts of the foundation's bylaws provide as follows:
14. The five Trustees shall be divided into two classes to be known as Class A and Class B Trustees. The Class A Trustees shall be three in number of whom two shall be Canadian citizens and these Trustees shall be elected from amongst a group comprising only the persons holding the following offices: the President of the Michigan College of Mining & Technology, the President of the Michigan Tech Alumni Association, a Vice-President of the Michigan Tech Alumni Association and Secretary-Treasurer of the Michigan Tech Alumni Association if the last two officers are held by one person. The Class B. Trustees shall be two in number both of whom shall be Canadian citizens.
and:
31. There shall be a standing committee to be known as ‘The McAllister Committee’, the purpose of which is to select and recommend worthwhile students who are residents of Canada and who would qualify for financial assistance under the provisions of the Will of the late John Edgar McAllister, deceased, and to determine in accordance with the provisions of that said Will the distribution of any monies paid to the Foundation by the Executors of the Estate of the said John Edgar McAllister, deceased. The members of this Committee is to meet with the Executors of the said Estate and with the President of Michigan Tech and no student is to be selected or recommended for such assistance and no distribution of income is to be made except with the written approval of those said Executors and the said President of Michigan Tech.
By letter dated May 23, 1961, and action thereafter taken in accordance therewith by the Department of National Revenue, Taxation Division, Ottawa, Ontario, Canada, the department ruled that the foundation was a charitable corporation and therefore exempt from both dominion and provincial income taxes under section 62(a)(f) of the Income Tax Act of the Dominion of Canada.
By letter dated December 19, 1961, the aforementioned taxing authority ruled that the decedent's entire residuary estate was exempt from the estate tax of the Dominion of Canada.
Further, by letters dated January 25 and August 9, 1961, the Succession Duty Office, Treasure Department, Province of Ontario, Canada, ruled that the bequest to the foundation was exempt from succession duty under section 5 of The Succession Duty Act of the Province.
Under Canadian law taxing authorities do not have discretion to determine whether or not a particular foundation has tax-exempt status. The appropriate authority is bound to apply statutory law. Securing rulings is a matter of applying to the proper administrative body. Once such a ruling is secured, as in the instant case, it relates back to the date of death (if such date is relevant). In the case at bar, under the law of Canada, a normal period of time within which to set up a foundation and procure the rulings would be 1 year.
In actual practice the McAllister Committee as set forth in the above-quoted bylaws would meet in order to determine the student who would become the recipient of a grant. The names of these prospective recipients were then submitted to the trustees for their approval.
After the recipients of the scholarships have been selected, checks drawn by the foundation on its Toronto bank account are made out. Such checks are usually drawn three times a year, one check per term, and are payable to the student but are mailed directly to Michigan. When the student arrives at Michigan he endorses the check and said amount is applied to his tuition fees with any excess thereof being available for expenses while at college.
Since the establishment of the foundation's tax-exempt status, the income has been annually paid out in the above-described fashion.
On the U.S. Nonresident Alien Estate Tax Return filed on behalf of the decedent's estate the petitioners deducted $325,159.58 as a charitable contribution, stating:
Since 25% of the residuary estate is given to the MICHIGAN COLLEGE OF MINING & TECHNOLOGY, Houghton, Michigan, the estate is entitled to a deduction in the amount of this bequest, * * *
By his statutory notice respondent disallowed the deduction in full, stating:
It has been determined that the charitable deduction claimed on your return in the amount of $325,159.58 is not an allowable deduction within the purview of Section 2106(a) of the Internal Revenue Code of 1954.
OPINION
Section 2106(a)(2) provides a deduction from the gross estate, situated in the United States at the time of death, of a nonresident alien if the following conditions are met:
SEC. 2106. TAXABLE ESTATE.
(2) TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES.
(A) IN GENERAL.— The amount of all bequests, legacies, devises, or transfers * * * (iii) to a trustee or trustees, * * * , but only if such contributions or gifts are to be used within the United States by such trustee or trustees * * * exclusively for religious, charitable, scientific, literary, or educational purposes, * * *
In the case at bar it is the respondent's contention that the decedent's devise, of 25 percent of his residuary estate to a Canadian foundation for the benefit of engineering students who attend Michigan (sometimes hereinafter referred to as the Michigan bequest), fails to meet section 2106(a)(2) on two grounds. First, the Michigan bequest was dependent upon the performance of a precedent event and the possibility that the bequest would not become effective was not ‘so remote as to be negligible.’ Sec. 20.2106-1(a)(2), Estate Tax Regs.; sec. 20.2055-2(b), Estate Tax Regs. Second, assuming the possibility that the bequest would not become effective was so remote as to be negligible, it, nonetheless, fails to meet the terms of section 2106(a)(2)(A)(iii) because the bequest was not to trustees for use within the United States. We will consider the respondent's contentions each in turn.
The decedent's will provides, in pertinent part:
If and when the Michigan College of Mining and Technology, Houghton, Michigan, U.S.A., establishes in Canada to the satisfaction of my Trustees, a charitable foundation corporation or a charitable trust so that monies may be received by it in Canada from my estate and others and the said monies spent in Canada without income tax or succession duty levies of any kind, then on that happening, and only then, my Trustees are to pay the remaining twenty-five percent of the net annual income to the said charitable foundation * * *
It is the respondent's position that the above-quoted disposition paragraph contains three conditions which according to the terms of the decedent's will had to be satisfied before the Michigan bequest could become effective:
1. That Michigan establish a foundation in Canada;
2. that the foundation qualify for Canadian tax exemption; and
3. that the trustees of the decedent's estate be satisfied with the foundation as completed.
We hold that despite these conditions, considered individually and in toto, the possibility that the Michigan bequest would not become effective was so remote as to be negligible.
The question of remoteness is purely factual. Estate of Russell Harrison Varian, 47 T.C. 34, 48 (1966), affd. 396 F.2d 753 (C.A. 9, 1968); Estate of Abraham L. Buckwalter, 46 T.C. 805, 818 (1966). As noted, our careful consideration of all of the facts and circumstances convinces us that there was a mere negligible possibility that the bequest would fail. Estate of Russell Harrison Varian, supra at 50.
As to the first condition, one can safely presume that Michigan would take all steps necessary to avail itself of the benefits of the $325,159.58 bequest. This is particularly true since, as we have indicated in our findings of fact, all that was required of Michigan was that it request the decedent's executors to proceed.
On brief respondent makes mention of the fact that the decedent's will directed that financial assistance be extended to ‘plodders' who otherwise might not be able to attend Michigan. It is the respondent's contention that Michigan might not find these ‘plodders' desirable as students. We do not feel that this fact would tend to influence as students. We do not feel that this fact would tend to influence Michigan's decision against acceptance of the bequest. The decedent's will provided that assistance be rendered ‘worthwhile students.’ And we believe that it is generally recognized that not all worthwhile students are possessed of mercurial intelligence. A plodder is ‘a person who proceeds or works slowly, steadily, and unimaginatively.’ Webster's Third New International Dictionary (1969 unabridged). While not scholarship material in one sense it is our view that these slow but diligent students would be a welcome addition to the college campuses of the day.
Respondent's other arguments on this point are concerned with whether the bequest would be of financial benefit to Michigan rather than merely creating additional burdens by reason of an influx of students. However, it is the function of a college to benefit students and while it may be argued that colleges would be less burdened with fewer students we find this method of reasoning sophistic.
As to the matter of obtaining Canadian tax exemptions, we find the possibility of failure so remote as to be negligible. As it appears from our findings of fact securing rulings from appropriate authorities was merely a matter of proceeding through administrative channels. The Canadian taxing authorities were charged with interpreting existing law in much the same fashion that our Internal Revenue Service is so charged. Since the petitioners ultimately obtained the exemptions and since the determinations of the Canadian taxing authorities relate back to the date of decedent's death, it seems that there were never any obstacles to the requisite exemptions. It was almost a certainty from the outset that this condition of the Michigan bequest would be satisfied. The relative ease with which the exemptions were procured certainly supports this conclusion.
The respondent contends that there was a ‘strong possibility’ that the exemptions would not be forthcoming because section 62(1)(f) of the Income Tax Act of the Dominion of Canada requires that funds be used in Canada before exemption is permitted. Without delving into the mysteries of Canadian tax law it suffices to say that we are blessed with the opinions of opinions of Canada's Department of National Revenue, Taxation Division, and Ontario's Treasury Department, Succession Duty Office, which, in fact, granted exemption.
The question of whether the funds were to be used within the United States for purposes of sec. 2106(a)(2)(A)(iii) will be discussed infra.
As to the third condition, i.e., the satisfaction of the decedent's trustees, we also hold that the possibility of failure was so remote as to be negligible. Once the foundation had been established and the tax exemption assured the trustees were powerless to withhold approval. Under the terms of the decedent's will the trustees were merely given the duty of seeing to it that a tax-exempt foundation was established. The respondent contends that the trustees were given no standards and that their discretion was unbounded. However, the intention of the decedent is manifest from the face of his will and the discretion of the trustees was clearly circumscribed by this manifestation.
Further, respondent argues that there were circumstances present as of the date of decedent's death which would tend to discourage the trustees from expressing their satisfaction; i.e., the difficulty of obtaining tax exemption and difficulties concerning construction of the decedent's will. As to the first of these circumstances, we have dealt at length herein with the lack of obstacles to tax exemption. As to the second we find the decedent's will clearly drawn.
Respondent also argues that no benefit would arise from the Michigan bequest since if the bequest had failed the 25-percent interest would have reverted to the University of Toronto where it would have been utilized for the same purposes. This argument ignores the fact that the decedent's intention was clearly expressed and, perhaps equally important, the decedent's estate stood to gain a substantial tax benefit with the effectuation of that intention.
We have heretofore considered each condition individually; taken in the aggregate their weight is no greater. The very fact that the foundation seems to have commenced its operation with such relative ease disposes of the respondent's contention. The obvious purpose of section 20.2055-2(b), Estate Tax Regs., is to prevent the allowance of a charitable deduction when more than a remote possibility exists that the charitable organization will not receive the benefit of a given devise or bequest. Based on all the facts and circumstances of the instant case we do not find that such a possibility existed here.
We turn now to a consideration of the respondent's second contention; i.e., that the Michigan bequest fails to meet section 2106(a)(2)(A). Admittedly this contention is more difficult to resolve. However, we hold that the bequest meets the terms of section 2106(a)(2)(A)(iii), thus rendering consideration of clauses (i) and (ii) unnecessary.
Clause (iii) of section 2106(a)(2)(A) provides, in effect, that the bequest must be to trustees for use within the United States. The respondent simply argues that ‘neither the trustees of the estate nor the Foundation itself uses the funds in the United States.’
The facts as to this question are largely uncontested. The decedent's trustees would accumulate the income generated by the residuary estate and deposit 25 percent of the net income in a Toronto bank. The Canadian foundation would draw checks on this bank, making them payable to the students who were to receive assistance. The checks were then sent to Michigan where upon arrival the student recipient would endorse the check to Michigan. The proceeds were then credited against the cost of tuition and any excess made available to the particular student for use while at the college.
These facts indicate to us that the funds in question were used by the trustees in the United States for educational purposes. The Canadian foundation merely acted as a conduit.
Estate of Harley J. Davis, 26 T.C. 549 (1956); accord, Morey v. Riddell, 205 F.Supp. 918, 921 (S.D. Cal. 1962). The funds were clearly destined for use by Canadian students within the United States. It is true, as the respondent contends, that Canada would benefit from the Michigan bequest by having its citizens educated as engineers. However, it is also true that the actual expenditure of money occurred in the United States and Michigan and its community were the ultimate recipients and beneficiaries of this portion of the foundation's income.
Respondent in its own revenue ruling has approved the ‘conduit’ concept. See, e.g., Rev. Rul. 63-252,1963-2 C.B. 101.
Section 303(b)(3) of the Revenue Act of 1926, the predecessor of section 2106, was enacted by Congress without comment in the committee reports on the meaning of the phrase ‘within the United States.’ However, H. Rept. No. 1860, 75th Cong., 3d Sess., p. 19 (1938), 1939-1 C.B. (Part 2) 742, states, with reference to the predecessors of section 170(c)(2)(A) which limited contributions to domestic organizations, that the reason therefor is that the deduction is allowed because by the contribution ‘the Government is compensated for the loss of revenue by its relief from financial burden.’ It seems reasonable to assume that Congress had the same intent when it enacted section 303(b)(e) of the 1926 Act. Therefore, it is our view that the United States is being compensated by the assistance that the Michigan bequest lends Michigan. We find that allowance of the deduction herein is in accord with the implicit legislative intent.
On brief the respondent devotes a considerable portion of his argument to the fact that the letters patent of the foundation stated that the purpose of the foundation is ‘to receive, establish and maintain a fund or funds and to apply from time to time all or part thereof and/or the income therefrom for educational purposes within Canada,‘ and that the foundation has proceeded in accordance with its letters patent thus maintaining its exempt status under Canadian taxing statutes. Without passing on the rectitude of the determinations of the Secretary of State or of the Canadian taxing authorities we would simply reiterate that we have reached an independent conclusion that the Michigan bequest is being used within the United States. We have concerned ourselves with the objective fact that Michigan and its environs ‘wound up with the money,‘ to put it in the vernacular. In addition, we are not bound by the executive or administrative determinations of Canadian authorities in matters germane to United States taxation. See Commissioner v. Estate of Bosch, 387 U.S. 456 (1967); Estate of Florence H. Lawler, 52 T.C. 268, 276 (1969).
In accordance with the foregoing,
Decision will be entered under Rule 50.