decided: November 26, 1973.
Appeal from decree of Court of Common Pleas, Orphans' Court Division, of Allegheny County, No. 12449 of 1942, in re estate of John A. Hermann, Jr.
Gilbert E. Morcroft, for appellants.
Norman R. Schade, with him Campbell, Thomas & Burke, for appellee.
Jones, C. J., Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Opinion by Mr. Justice Pomeroy.
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Pittsburgh National Bank, as corporate trustee of a charitable trust established by John A. Hermann, Jr., now deceased, petitioned the Orphans' Court Division
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of the Court of Common Pleas of Allegheny County for approval of an interim account of the affairs of the trust. Appellants, individual trustees of another charitable trust of the same settlor, filed exceptions which were overruled by the court below in an order which approved the bank's second and partial account. Hence this appeal.
There are involved here two separate trusts, although only one is presently before the Court in this proceeding. The first is an intervivos trust created in 1939 by a conveyance of the settlor, John A. Hermann, Jr., to five individual trustees, including himself. By this deed of trust Mr. Hermann established the John A. Hermann, Jr. Memorial Art Museum, intended to be a free "public art museum", conveying to the trustees thereof his personal collection of paintings, ivories, bronzes and other objects d'art, together with a plot of land and a residence thereon situated in the Borough of Bellevue, Pennsylvania.*fn1 We will refer to this trust as the "museum trust".
The second trust is a testamentary trust created by Mr. Hermann in his will, executed in 1940 (the testator died in 1942). Under the terms of this trust, $75,000 was transferred to Peoples-Pittsburgh Trust Co., predecessor of the present accountant, as trustee to hold, invest and reinvest, and to pay the net income to the museum trustees "for the maintenance, repair and improvement of the museum and real property connected therewith."*fn2 The trustee of this testamentary trust,
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appellee here, is not, it should be noted, a trustee of the museum trust.
The intervivos trust which created the museum was in perpetuity. The testamentary trust, however, provided that "[i]f ever the Art Museum shall cease to exist the principal and any unused income shall be held thereafter by Peoples-Pittsburgh Trust Company, as Trustee, for the same uses and purposes as are herein set forth for my residuary estate."
In 1954 the trustees of the museum trust instituted proceedings in the Court of Common Pleas of Allegheny County to have the trust terminated. The residence in which the art collection was housed had become dilapidated and expensive to maintain, and income was insufficient to build a new building or to undertake a major renovation of the old one. The petition sought, in terminating the trust, to have the trustee of the testamentary trust take over all the objets d'art of the museum. The trust company opposed the petition, arguing that it was a trustee only of funds totaling $100,000 and that it was not responsible for what might become of the settlor's art collection. The court refused to declare a termination, but by its order, entered August 16, 1955, authorized the individual trustees of the museum to sell the land and building (this was done, producing $91,300), to transfer the art to a floor of the public library building in Bellevue, Pennsylvania, and to conduct
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the activities of the museum at that site. The museum has remained at this location until the present time. The income of the invested assets since 1955 has consistently far exceeded maintenance expenses.
Following enactment of the Federal Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, the corporate fiduciary, as trustee of principal funds of $100,000,*fn3 refused to pay over to the individual trustees of the art museum the income received by the bank for the last quarter of 1970 and all subsequent quarters to date. Its reason for refusing was not that the purpose of the trust of which it was trustee had failed or that the purpose of the museum trust had failed; its refusal to pay over income was based, rather, on its opinion that income so distributed to the museum trustees would be considered as made to an entity which was not an "operating foundation", with the result that its income payments would not qualify as tax exempt "qualifying distributions" and so would be subject to a severe federal tax under section 4942 of the Internal Revenue Code of 1954, as amended by the Tax Reform Act of 1969, Pub. L. 91-172.*fn4
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The reason that the appellee thought the museum not to be an "operating foundation" was that since the sale of the original building with court approval in 1955 and transfer of the settlor's collection to a floor of the library building in Bellevue, income of the bank trust had far exceeded expenses associated with maintaining the museum in such reduced surroundings. It would follow that the excess would not be expended "directly for the active conduct of the activities constituting the purpose [of the museum]." 26 U.S.C. § 4942 (j)(3)(A) (1970).
The individual trustees of the museum sought to allay the bank's fears that the museum was not an entity to which "qualifying distributions" might be made by requesting, on May 24, 1971, a federal tax ruling on the matter. Under § 4942(g)(2) of the I.R.C. of 1954, as amended, the Secretary of the Treasury (or his designate) is empowered to authorize a "set-aside" of undistributed income (otherwise taxable under § 4942) if the "set-aside" is to be expended on a specific project within 5 years, the project is one associated with the purposes of the foundation, and the project is one better accomplished through accumulation. The project proposed by the individual trustees was the acquisition of suitable land and the construction of a museum building within the next five years. Proposed expenditure for land was $50,000 and for the building was $250,000. On March 16, 1972 -- after the first hearing
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before the auditing judge in this matter, but before the second -- the Secretary's designate responded and approved a "set-aside" of $8,400 for 1972 and indicated that upon submission of evidence of further planning (option to purchase real estate, architect's drawings, cost estimates, etc.), he would extend the authorization to set-aside income for four additional years.
The account of the appellee-trustee indicated the fact of withholding the accumulated income, and its petition for distribution, after reciting most of the foregoing history, sought approval of the account and the proposed "deviation" from the terms of the trust.*fn5 The auditing judge considered, as stated in his opinion, that the petition "raises the question as to whether or not the Museum is still in existence", and concluded that "the purposes of the Museum trust have failed. There is no question about this." In a later portion of his opinion the court stated the conclusion that "the Museum [has] ceased to exist."
It was the premise of the appellee-corporate trustee in filing its account here in audit that should trust income distributed to the museum trustees be taxable under section 4942 of the Internal Revenue Code (see Note 4, supra), then it would be justified in refusing
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to make distributions commanded by the trust instrument. We do not think that the conclusion necessarily follows. Should such distributions precipitate the first step, or 15% income tax, we doubt that the corporate trustee would thereby be justified in refusing further distributions. The mere fact of imposition of a tax is insufficient reason to conclude that the settlor would want his trustee to cease making all distributions.*fn6 Should such distributions further result in a 100% taxation of the income, a considerably more difficult question would arise. It is, however, not necessary for us here to grapple with new legal issues caused by the impact of section 4942 of the I.R.C. on the law of charitable trusts in Pennsylvania, and particularly whether that impact could be said to render the purpose of the trust "indefinite or impossible or impractical of fulfillment."*fn7 It is enough to observe that the ruling obtained from the Internal Revenue Service by the museum trustees, approving a "set-aside" and thus staying the imposition of section 4942 tax, has caused any such issues to disappear from this proceeding. The income which the appellee-corporate trustee has withheld is, for our purposes today, as immune to taxation as it was before the enactment of section 4942.
As to the learned auditing judge's conclusion that "the Museum [has] ceased to exist", with all respect, we do not agree that failure of the testamentary trust is even raised by the petition for distribution. The penultimate paragraph of the petition, reproduced in the margin,*fn8 while perhaps not as lucid as one might wish,
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is not an allegation of failure of purpose or of cessation of the museum or the museum trust to exist. It is rather a suggestion to the auditing judge that there was no present need for the court to examine, by appointment of a master or otherwise, whether the purpose of the trust had failed, in view of the fact that the Secretary of the Treasury, in undertaking to act upon the "Request for Approval of Set-Aside" filed by the museum trustees, would necessarily examine the manner of operation of the museum.*fn9
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Not only was the question of continued existence of the museum trust not presented by the petition for distribution, but there was no attempt by the corporate trustee to offer any proof for such a proposition; it adduced no evidence whatever beyond the averments of the petition for distribution. The only witness called at the audit was an individual trustee of the museum trust. His testimony dealt solely with his efforts to
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obtain a favorable tax ruling from the Internal Revenue Service. The only evidence, if it can be called that, relied upon by the appellee to support the finding of failure is a statement in the petition of the museum trustees in 1955 for leave to terminate the trust. It was there alleged that the museum and its objets d'art "have been almost totally ignored by the public during the past five years, the current rate of visitation thereto by the general public being one person per month."*fn10 But this petition was refused, as noted above, and the court directed that, with modification, "the Trust known as the John A. Hermann, Jr. Memorial Art Museum shall continue in being." (Emphasis added.) Appellee also points to a statement at audit by appellant's counsel that, "I would not kid the court, the art is miserable." Counsel, of course, is no more qualified than is the court to make such a judgment, and this offhand, perhaps jocular remark cannot be considered evidence against the client, the museum trust.*fn11 The lower court
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terminated this trust for the sole reason that the art it is designated to support "does not warrant the maintenance of a building" and that the public continues to ignore the display. It is difficult to conceive of a subject less appropriate for judicial review than the quality of an artistic work; certainly judicial condemnation is nowise justified by this record.*fn12 If Mr. Hermann's collection is as poor as the appellee contends, it well may be that he entertained a certain insensitivity toward prevailing tastes in "art". There is no indication in his trust instruments nor precedent in the law for judicial review of the question whether Mr. Hermann's museum "does [or does] not warrant the maintenance of a building."*fn13
In sum, our review of the record is that there was no evidence that the purpose of the trust had been made impossible of fulfillment or that the trust res, the museum, had ceased to exist.*fn14 To the contrary, the record
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evidence does establish that the museum trust has principal and assets of approximately $250,000, of which $180,000 represents undistributed income.*fn15 It is apparent that the objets d'art exist, that adequate funds are now on hand to acquire land and to construct a building, and that the individual museum trustees intend so to act within the next five years.
The balance for distribution should be decreed back to the appellee Pittsburgh National Bank as trustee, as the court below did by its decree here appealed from, but not for administration pursuant to the court's opinion of June 27, 1972; rather, the accountant should be directed to hold and administer the trust funds in accordance with the terms of the testamentary trust of the decedent, viz., to invest and reinvest the same and pay over all income to the trustees of the museum trust.
Decree reversed and case remanded for entry of a decree in accordance with this opinion. Costs on appellee as trustee.
Decree reversed and case remanded.