Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.
These cases present extraordinary circumstances. McGillick was the president of the petitioner, F. E. McGillick Company. McGillick and his first wife, Margaret, owned all or approximately all of the stock of the Company. The petitioner, the Francis Edward McGillick Foundation, is a trust created under the laws of Pennsylvania by an indenture executed on January 6, 1937. The indenture provided that the trustees of the Foundation should accept the trust subject to McGillick's "Last Will and Testament". The Will is written into the indenture as an integral part thereof. At the time of the hearing before the Tax Court in 1956 McGillick was still alive and was over ninety years old. The Will therefore on this record is still ambulatory. The Will contains the usual provisions for the payment of funeral expenses and next sets up five specific bequests to members of McGillick's family. It then provides that all the rest, residue and remainder of McGillick's estate is bequeathed to his Executors, in trust, who are designated as Managers of the Foundation and who are to pay annuities of $1,500 to each of McGillick's four children and to his first wife, Margaret, and also to pay an annuity of $400 to his sister and an annuity of $100 to his brother.*fn1 Then comes the following declaration: "Whereas it is my desire to devote a substantial portion of my estate to charitable and educational uses and purposes now, therefore, to these ends, I do hereby create and establish the Francis Edward McGillick Foundation".*fn2 The Will then provides that the executors shall set up a "charitable and educational corporation" to "carry on the objects, uses and purposes" of the trust and that the trust property shall be conveyed to this corporation.
The Will then states, "upon the creation and organization of such corporation, I empower my Executors to convey, transfer and deliver to said Corporation, monies, property or assets to provide for the two special funds created in paragraphs 16, 17, and 18*fn3 of this my Will, and to convey, transfer and deliver to said Corporation, at such other times as in their discretion they may deem advisable, property and assets belonging to me and to which the said Francis Edward McGillick Foundation may be or become entitled. In case any of my bequests should fall leaving any funds not herein provided for, the same shall go to the Foundation, for such charitable, educational and public uses and objects and purposes as the said Managers of the Francis Edward McGillick Foundation from time to time shall appoint, order and direct in conformity with my wishes hereinafter set forth."
In the indenture there are no words other than those set out in the last sentence of the quotation which state a general religious, charitable or educational purpose for the Foundation. Unless a general religious, charitable or educational purpose can be spelled out from the last sentence quoted above there was no general dedication of McGillick's estate by him to religious, charitable or educational purposes. The inartistic way in which the indenture and the Will are drawn would suggest that the omission of an explicit general dedication was perhaps inadvertent.
After the Foundation was created, property valued at at least $1,133,000 was conveyed to it by McGillick or his agents. On March 15, 1951, the Foundation applied for a ruling exempting it from federal taxation under the provisions of Section 101(6), Internal Revenue Code of 1939, 26 U.S.C.A. § 101(6). On October 3, 1952, the Commissioner of Internal Revenue ruled that the Foundation was neither organized nor operated exclusively for purposes within the meaning and intent of Section 101(6). After receiving this ruling the Foundation requested reconsideration of the application. On June 12, 1953, the Treasury Department affirmed the original ruling.
The only tax returns filed by the Foundation from 1937 through 1952 were those filed in 1950 on Form 990, and those filed in 1951 and 1952 on Form 990-A, Return of Organization Exempt from Tax, under Section 101(6), Internal Revenue Code of 1939. On these returns the Foundation stated that the nature of its activities was the "Rental and sales of real estate". The McGillick Company, prior to 1950, filed corporate income tax returns with the Collector of Internal Revenue but for the years 1950 up to and including 1952, it filed no such returns and paid no income taxes. However, the Company was designated as a "feeder" corporation on the 990 Form filed by the Foundation in 1950 and the 990-A Forms filed by the Foundation in 1951 and 1952, and the Company's asset position, gross income, deductions and net income were separately listed on those Forms. Both the Foundation and the Company had income in the years for which the Commissioner assessed income taxes, with penalties for willful failure to file returns, against both the Company and the Foundation. Both the Company and the Foundation sought relief from the Tax Court which decided the issues with which we are presently concerned against the taxpayers. After making certain adjustments the Tax Court upheld deficiencies and penalties against the McGillick Company for the calendar years 1950, 1951, and 1952 in the amounts of $2,125.80, $9,121.38, and $25,592.49, respectively, and against the Foundation for the calendar years 1949, 1951, and 1952 in the amounts of $101,469.14, $22,836.65, and $5,057.30. 30 T.C. 1130. The petitions for review followed.
The Will of McGillick, an integral part of the indenture, was, as we have stated, ambulatory at the time the indenture creating the Foundation was executed by McGillick on January 6, 1937, and insofar as the present record shows the Will is still ambulatory though McGillick may have executed another Will or other Wills. Faced with this anomaly we construe the provisions of the Will as if they were specific gifts given by McGillick inter vivos to the trustees for designated beneficiaries.
The indenture with the Will included as an integral part of it was construed by the Orphans' Court of Allegheny County. That court held: "The entire estate embraced by the deed of trust of January 6, 1937, is committed irrevocably by the settlor to the charitable uses therein provided, subject only to the payment of expenses, charges, legacies and annuities which he has directed. The proper distribution of the income and principal of this trust to the charitable beneficiaries named in the trust instrument may only be made after the settlor's death and after the other charges against the fund have been paid or provided for."*fn4
We are bound by this determination of the Orphans' Court of Allegheny County as to the existence and extent of the trust. Blair v. Commissioner, 1937, 300 U.S. 5, 57 S. Ct. 330, 81 L. Ed. 465; Spiva v. Commissioner, 1941, 43 B.T.A. 1174.
The Foundation asserts that its income is not taxable because it is a charitable corporation within the purview of Section 101(6),*fn5 Internal Revenue Code of 1939, and if it cannot attain the harbor of non-taxability under the provisions of that section that it is entitled to deduct all or substantially all of its income under Section 162(a) of the 1939 Code, 26 U.S.C.A. § 162(a).
We will discuss now the Foundation's contention based on Section 101(6). Judicial interpretation has put a gloss on the provisions of the statute and it has been held in substance, despite the express provisions of Section 101(6) to the contrary, that where the predominant purpose for which a foundation is organized is "in its broadest sense" religious, charitable or educational, the foundation is entitled to income-tax exemption under the section cited even though some of its funds are to be used for non-charitable purposes. This is the substance of the ruling of the Supreme Court in Lederer v. Stockton, 1922, 260 U.S. 3, 8, 43 S. Ct. 5, 67 L. Ed. 99.*fn6 See also William L. Powell Foundation v. Commissioner, 7 Cir., 1955, 222 F.2d 68, 73-74; Commissioner of Internal Revenue v. Orton, 6 Cir., 1949, 173 F.2d 483, affirming Edward Orton, Jr. Ceramic Foundation, 1947, 9 T.C. 533, and Emerit E. Baker, Inc. v. Commissioner, 1939, 40 B.T.A. 555.
In respect to the application to the Foundation's case of the "predominant purpose" or "prior charge" doctrine, as it is sometimes termed, we are troubled by the fact that the Foundation stated the nature of its activities as those of a rental or sales agent for real estate on the 990 and 990-A Forms filed with the Internal Revenue Service, but this naive declaration seems belied by the terms of the indenture and the determination by the Orphans' Court of Allegheny County that the estate embraced by the indenture was committed irrevocably to charitable purposes. We are also troubled by the fact that McGillick also stated that a "substantial portion" of his estate should be devoted to religious, charitable and educational purposes for the term "substantial" does not mean the greatest part or even a very great portion of an estate.*fn7 But this fact is more than offset by the unequivocal declaration of the Orphans' Court of Allegheny County that the fund of over $1,300,000 is irrevocably committed to religious, charitable and educational purposes.
We would have little hesitancy in applying "the predominant purpose" doctrine if it could be said with a certainty absolute that a very great portion of the corpus of the trust would be available for religious, charitable and educational purposes. While certainty is not present the amount of the specific bequests required to be paid under the indenture on McGillick's death is very small compared to the $1,300,000 which was irrevocably committed to the trust prior to the time the cases were tried and if nothing more be received from McGillick's estate on his death there would seem to be a very high degree of probability that a very great portion of the corpus of the trust will be available for religious, charitable and educational purposes. This is a fact of which we think both the court below and this court may take cognizance. The use of probabilities in ascertaining the existence and value of present interest is well known to the tax law. It is conceivable that the $1,300,000 could so shrink, by reason of the viscissitudes of market or bad management, that the small specific bequests might engulf the sum presently available, leaving little or nothing for religious, charitable or educational purposes. The Tax Court did not inquire into this possibility or make any ruling respecting it but such diminution of the trust res is grossly improbable. Moreover, in cases where organizations alleged to be tax-exempt under Section 101(6) have both charitable and non-charitable beneficiaries, the resolution of the issue of taxability does not seem to depend on the specific amount available for religious, charitable or educational purposes, but rather on the intent of the grantor that substantial funds be held in trust for such purposes plus the fact that all tax benefits accrue to the organization's charitable beneficiaries. If we rule that the Foundation is to be accorded tax-free status, ...