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FARMERS TRUST CO. v. UNITED STATES

September 26, 1978

FARMERS TRUST COMPANY, Executor under the Last Will and Testament of Glenn E. Todd, Deceased, Plaintiff,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: HERMAN

MEMORANDUM

This action arises under the Internal Revenue Code of 1954 and involves a claim for refund pursuant to 26 U.S.C. § 7422. Jurisdiction to hear this claim is conferred by 28 U.S.C. § 1346(a)(1). The motions now under consideration are cross-motions for partial summary judgment.

 The issue to be decided is whether Section 2055 of the Code requires that a charitable deduction be reduced by the maximum amount of possible Pennsylvania state inheritance taxes that could have been incurred upon the exercise of a power of appointment, when the power was not exercised before the date prescribed for filing the decedent's estate tax return and when no state taxes were in fact incurred. More simply stated, should a federal charitable deduction be reduced by an amount equal to the maximum possible state inheritance taxes for a power of appointment when none were actually incurred?

 The resolution of this issue raises no genuine question as to any material fact and therefore disposition is proper under Rule 56 of the Federal Rules of Civil Procedure. Under the applicable sections of the Internal Revenue Code and the case law interpreting them, the Plaintiffs are entitled to a judgment in their favor. An order will therefore be entered granting partial summary judgment for the Plaintiff and denying the motion on the part of the Defendant.

 The facts of this action are somewhat complex and need to be laid out in order to properly show the context of this decision. The Plaintiff is the executor under the Last Will and Testament of Glenn E. Todd, who died on July 4, 1973. The will, executed on October 9, 1972, provided for the establishment of two trusts. Decedent in item four of his will created a marital trust in favor of his wife, Mary Line Todd, and in item five a charitable remainder trust. The marital trust was to be funded with property of the estate equalling one half the amount of the "adjusted gross estate" as determined for federal estate tax purposes. The income from the marital trust by the terms of the will was payable to the decedent's spouse in quarterly installments for her life. Mrs. Todd was also given a testamentary power of appointment over the marital trust assets.

 The power of appointment entitled Mrs. Todd to appoint the entire principal of the marital trust to her estate, her creditors, or other persons as she should designate in her sole, absolute, and unrestricted discretion. The will also provided that if Mrs. Todd failed to exercise the power of appointment over the marital trust assets, the assets were to pass into the charitable remainder trust.

 The federal estate tax return of Glenn Todd was filed on April 4, 1974 and a charitable deduction was taken for the total amount of the corpus of the charitable remainder unitrust which was $ 916,497.50. This figure was arrived at by deducting administrative expenses, of $ 130,302.77, personal effects of $ 1,200, marital trust assets of $ 942,253, and Pennsylvania Inheritance Taxes of $ 1,693.70 from the probate estate of $ 2,221,071.50. The total of $ 1,145,621.87 was then multiplied by the eighty percent factor to arrive at the deduction claimed. The Plaintiff did not include any diminutions for Pennsylvania inheritance taxes as to the marital trust property over which Mrs. Todd had a testamentary power of appointment. *fn1" The devolution of the property to the charities set forth in the decedent's will did not result in Pennsylvania inheritance tax liability as a charitable bequest is exempted by the applicable state statute, 72 P.S. § 2485-302.

 The return was audited by the Internal Revenue Service and on June 20, 1975, a notice was sent to the Plaintiff by the District Director alleging a deficiency of $ 113,294.30. The charitable deduction was disallowed on the basis that the maximum amount of Pennsylvania inheritance tax, fifteen percent, should have been charged against the power of appointment and subtracted from the probate estate prior to valuation of the charitable trust for deduction purposes. That is, that fifteen percent of the marital trust assets, $ 141,337.97, should have reduced the figure utilized in arriving at the charitable deduction. *fn2" The taxpayers paid the alleged deficiency of $ 113,294.30 and $ 9,029.40 in interest and filed a claim for refund with the District Director on February 23, 1976 which was denied.

 The Defendant moved for partial summary judgment on the issue of Pennsylvania inheritance taxes by motion filed June 8, 1977, and on June 20, 1978 the Plaintiff moved for partial summary judgment on the same issue. The part of the complaint in issue is paragraph 11 which reads in part:

 
"The Commissioner also erroneously and illegally disallowed a deduction with respect to funds which (a) were bequeathed to charity, (b) vested in charity exempt from Pennsylvania taxes about 80 days after the testator's death by virtue of his wife's death, (c) vested in said charity prior to the filing of estate tax returns for either the testator's estate or that of his wife, and (d) were never utilized for payment of Pennsylvania inheritance taxes. . . ."

 As one might anticipate, there is little precedent that specifically concerns the issue that is raised in this action. The statute and the examination of those few cases bearing some resemblance to the instant case do, however, point clearly and properly toward the decision reached here.

 The pertinent section of the Code is 2055 which provides for the deduction from the gross estate of a decedent the amount of all bequests and transfers to charitable entities. Section (a) further provided in part at the time of the testator's death:

 
"For purposes of this subsection, the complete termination before the date prescribed for the filing of the estate tax return of a power to consume, invade, or appropriate property for the benefit of an individual before such power has been exercised by reason of the death of such individual or for any other reason shall be considered and deemed to be an irrevocable ...

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