tax return would belie their contentions as an exercise in semantics.
As seen from the estate tax return, the plaintiffs reduce the residuary amount left to charity by the amount of $575,600.90 instead of the $601,304.25 actually paid in Federal death taxes, the difference representing the amount of interest which could be earned on the $601,304.25 over 15 months at the legal rate of 3 1/2%. Since the amount actually deducted for payment of taxes was $25,703.35 less than that necessary to fully pay the tax obligations, the additional funds used for payment of the taxes must, at least in theory, have come from interest earned by the estate.
The plaintiffs argue that all the taxes were indeed paid in full from the principal of the estate residue. If this is so then the additional $33,000.00 claimed as a charitable deduction must have constituted interest. The plaintiffs cannot meet the dictates of the will -- to pay the death taxes from the principal of the residue -- and also take a charitable deduction for more than value of the residue minus the full amount of the taxes, without taking into account at least some post-mortem income. No evidence has been presented as to whether or not the funds for tax payment were actually kept separate from the remainder.
A further point which must be considered is that by denying the additional $33,000.00 as a charitable deduction, this court is certainly not preventing the use of that money by charity. It has been admitted that the plaintiffs obtained at least $33,000.00 of interest from the tax funds which redounded to the benefit of the certainly worthwhile recipient causes. Since this interest was in reality earned post-mortem, it would be reported as income though admittedly excluded from income taxation due to its charitable destination. It would be largesse in the extreme to allow the same amount of money to be reported as tax free post-mortem income and further use it to increase the amount of the federal estate tax charitable deduction.
I recognize the plaintiffs' contention that it was not the actual post-mortem interest which should be included with the charitable residue but the right to that interest, such right presumably arising at death. I must also recognize, however, that a main purpose of the rule against payment of taxes from post-mortem income so as to increase the charitable deduction is the possibility that such income could be included on both the estate and income taxes. Whether one calls it "income" or a "right to income", there is only a single sum of money earned on the amount set aside for tax purposes over 15 months. Assuming arguendo income was not earned, and the plaintiffs were allowed to include the potential interest as a deduction, they would be receiving a charitable deduction for $33,000.00 which, in fact, was not being put to charitable uses. Thus the so-called "right to interest" or "income interest" is really an "interest expectancy" which, viewed from the date of death, is not certain of fulfillment.
Though it is true that the Commissioner has issued tables setting forth interest rates which could be used in evaluating the present value of future interest of charitable funds, Regulation 20.2031.7, the tables were not intended for use in relation to tax funds. Those tables were proposed specifically for valuation of annuities, life estates, terms for years, remainders and reversions. In other words, what the plaintiffs are attempting here is to derive an extra benefit which is not authorized by the Internal Revenue Code on the basis of what they consider equivalent, for example, the present value of a life estate. The situation of future earned interest from death-tax funds during the 15-month period of grace privilege allowed for the Code fits none of these situations.
Accordingly, the plaintiffs' motion for summary judgment will be denied and the defendant's cross motion for summary judgment will be allowed.
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