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ESTATE OF STROCK v. UNITED STATES

March 18, 1987

Estate of Joseph Givler Strock, Dent Hazel Palframan and Pittsburgh National Bank, Co-Executors, Plaintiffs,
v.
United States of America, Defendant



The opinion of the court was delivered by: COHILL

 This case is presently before us on cross-motions for summary judgment. Oral arguments related to these motions were heard on January 5, 1987. Plaintiffs, by their underlying complaint, are seeking recovery of certain estate taxes which allegedly were erroneously and illegally assessed and collected. For the reasons set forth below, we will enter judgment in favor of plaintiffs and against defendant.

 Background

 The parties have stipulated to the relevant facts, a copy of this stipulation having been filed with the Court.

 Joseph Givler Strock died testate on November 17, 1978. Mr. Strock's will was executed February 21, 1976. On November 22, 1978, the will was admitted to probate. Article 3 of the will left the residue of his estate in trust. This trust provided for a "split-interest" transfer whereby certain named life beneficiaries were to receive the major portion of the income from the trust for their lives, and upon the death of the survivor of the named life beneficiaries, the remainder was to be paid over to certain charities in designated amounts. Stip. paras. 1, 2 and 4, and Ex. A.

 On August 17, 1979, the Estate of Strock ("the Estate") filed a Form 706, United States Estate Tax Return, together with a remittance of $177,378.32. This Form 706 did not contain a claim for a charitable deduction. Id. at paras. 5-6.

 On December 31, 1981, the Estate filed a petition with the Orphan's Court Division of the Court of Common Pleas of Allegher County, Pennsylvania, seeking permission to reform Strock's will to conform to 28 U.S.C. § 2055(e). The charitable remainder trust created by the will was a "split-interest trust," which the Estate acknowledged did not qualify for a charitable deduction. Id. at para. 10, and Ex. C, at 7.

 Also on December 31, 1981, the Orphan's Court issued a citation to all life beneficiaries and charitable organizations named in Strock's will to show cause why the trust created under Article 3 of the will should not be amended so as to conform with the requirements of Sections 664 and 2055(e) of the Code. Id., Ex. C.

 At a conference before the Orphan's Court, counsel for one life beneficiary and his three children contended that a paragraph had been left out of the will which would have dictated that upon the death of the last life beneficiary, the remaining principal would pass pursuant to the intestate law. Counsel for two of the charitable organizations named in the will contended that the Estate should be distributed in accordance with the will as written so that upon the death of the last life beneficiary, the principal would be distributed to the charities indicated. Id., Ex. F, at 3.

 On August 13, 1982, the Estate filed its Form 833, Claim for Refund and based its Claim for Refund upon its petition to amend the trust. Id., at para. 12. It claimed a charitable deduction of $168,605.55 and sought a refund of $53,955.43.

 On January 7, 1983, all parties in interest submitted to the Orphan's Court a Stipulation of Settlement whereby all parties agreed to the following: the Executor of the Estate would pay the sum of $45,000 to the named charities in the will, and in consideration of the payments, the charitable organizations "shall release any and all claims they have to the Estate of Joseph Givler Strock, arising out of his Will, the trust created thereon, or otherwise." Id. at para. 14, and Ex. F, at 5.

 The parties also agreed that the will would be construed so as to provide that on the death of the survivor of the named life income beneficiaries, the remaining principal of the trust would be distributed to Strock's issue per stirpes. Id., Ex. F, at 6.

 The Orphan's Court entered an Order on January 7, 1983, providing for the amendment of the will as set forth in the Stipulation of Settlement submitted to it. Id., Ex. F.

 As a result of an audit of the decedent's estate tax return, the Internal Revenue Service disallowed the charitable deduction on the ground that the distribution did not meet the statutory prerequisites of § 2055(e). The plaintiffs paid the estate tax deficiency and thereafter sought a refund of the disputed amounts from the Internal Revenue Service. After exhausting all administrative remedies, plaintiffs filed a complaint with this court seeking a tax refund of $14,850 as a result of the purported charitable deduction. Plaintiffs also seek a refund for legal fees they have incurred or will incur in bringing this refund suit.

 Having read the briefs submitted by both sides to this dispute, it is apparent that the primary issue presented for resolution is whether § 2055(e) in fact applies to this case. The government asserts that the modification of Strock's will did not comport with the guidelines set forth in 26 U.S.C. § 2055(e) (3), which permits a deduction for otherwise non-deductible charitable bequests of remainder interests, provided the bequests are modified by amendment to conform with one of three permissible forms specified in § 2055(e) (2) (A).

 Plaintiffs have argued in response to defendant's motion for summary judgment that § 2055(e) does not apply to the charitable bequests resulting from the Stipulation of Settlement with regard to Strock's will because the bequests passed directly to the charities and no longer as part of any form of split-interest trust. As such, ...


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