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Estate of Lillie Macmunn Stewart v. Commissioner of Internal Revenue

decided: January 5, 1971.


Hastie, Chief Judge, and McLaughlin and Adams, Circuit Judges.

Author: Adams


ADAMS, Circuit Judge.

Because private philanthropy is so deeply rooted in our society, Congress has been persistently confronted with the problem of resolving what types of incentives are appropriate in the Federal tax system for charitable contributions. A traditional incentive has been the allowance of a deduction in the computation of income, estate, and gift taxes for amounts given to charities.*fn1

The form in which gifts may be made so as to qualify under the estate tax deduction provision is quite broad.*fn2 Often such bequests are made in the form of charitable remainder trusts, allowing the decedent to provide for non-charitable beneficiaries, perhaps for their lives, before the charitable remainderman receives anything. To determine the proper deduction in such cases, the Estate Tax Regulations ("the Regulations") provide for a deduction if (1) the charitable interest is "presently ascertainable, and hence severable from the non-charitable interest," and (2) viewing the circumstances as of the date of decedent's death, "the possibility that the charitable transfer will not become effective is so remote as to be negligible."*fn3

The question presented on this appeal is whether the broad administrative powers here granted to the trustee by the trust instruments precluded the value of the charitable remainders of the trusts from being "presently ascertainable" at the decedent's death. Only if it is decided that the value was presently ascertainable need the further question regarding the likelihood of exercise of the power be considered.*fn4

The relevant facts in this case are not in dispute. On May 24, 1960, Lillie MacMunn Stewart created two trusts, naming what is now the Manufacturers Hanover Trust Company as sole trustee. For purposes here pertinent, the two trust instruments were identical providing that the income of the trusts be paid to decedent for life, then to her sister for life, and then to her brother-in-law for life. Upon the death of the last surviving life tenant, the corpus was to be distributed to named charities which meet the requirements of § 2055(a)(2) of the Code (see footnote 2). The trust agreements provided in part as follows:

"4. The trustee shall have the following powers, authority, and discretion, which it may exercise in its sole and absolute discretion whenever and as often as it may deem advisable without application to or approval by any Court, namely:

To retain any property herewith or hereafter placed in trust, and to receive, invest in and retain stocks (whether common or preferred), bonds, securities, undivided interests in any real and personal property, shares or interests in investment companies or investment trusts, any Common Trust Fund maintained by the corporate trustee, and any property, real or personal, foreign or domestic, whether or not wasting assets, without any duty to diversify and without any restriction placed upon fiduciaries by any present or future applicable law, rule of court or court decision, and from time to time to hold property uninvested without liability for interest or loss of income. * * *

To apportion to principal or to income or in part to both any rents, dividends, interest or other income accrued or declared, but unpaid, in respect of any property at the time of the receipt of such property by the trustee, any dividend of whatever kind or nature, any property received upon any exchange, reorganization, recapitalization, consolidation, merger or dissolution, any rents, royalty or payment received in respect of any so-called 'Wasting asset' or so-called 'unproductive property' or any other receipt whatsoever, to determine whether or not to amortize in whole or in part the premium at which any property may be received or held or any depreciation on or any expense in connection with any property, real or personal, to discontinue any sinking fund or depreciation or depletion reserve and to treat the same as income in whole or in part and to pay from principal or income or in part from both any deficit from the operation of any improved or unimproved property or any charge against the trust estate, to distribute property determined to be income and to hold property determined to be principal without liability to any person then or thereafter interested in the trust estate, upon the termination of any trust to pay any accrued rents, dividends, interest or other income, to the next estate without apportionment and in connection with the foregoing to follow or depart in whole or in part from any rule of law; provided that nothing herein shall authorize an illegal accumulation of income.

In all matters to administer and invest the trust estate as fully and freely as an individual owner might do, without any restrictions to which fiduciaries are ordinarily subject, except the duty to act in good faith and with reasonable care.

12. This indenture shall be construed, regulated, and administered in all respects in accordance with the laws of the State of New York, except as otherwise herein expressly provided."

Because the decedent retained a life estate in the two inter vivos trusts, the trusts were included in her gross estate under § 2036 of the Code when she died on May 6, 1964. The estate claimed a charitable deduction for the present value of the trust remainders under § 2055 of the Code. The Commissioner, however, asserted that the broad administrative powers quoted above rendered the deduction unavailable because the charitable interests were not "presently ascertainable" and there was no assurance that the charities would receive the bequest. The Tax Court upheld the charitable deduction in an opinion reported at 52 T.C. 830 (1969), and the Government appealed.

This case presents the first instance in which a Court of Appeals has decided whether broad administrative powers in a charitable remainder trust may allow a trustee such authority to deplete corpus in favor of non-charitable life beneficiaries so as to make the value of the gift not "presently ascertainable."*fn5 Such problem will not arise for estates subject to the Tax Reform Act of 1969 because §§ 201(d), (e) and (g) of that Act require that a trust pay either a fixed dollar amount or a fixed percentage of net ...

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