#### CENTRAL UNION TRUST CO. OF NEW YORK, GUARANTY TRUST CO. OF NEW YORK, FREDERIC A. JUILLIARD, CHESTER A. BRAMAN, AND ROBERT WESTAWAY, AS EXECUTORS OF THE LAST WILL AND TESTAMENT OF AUGUSTUS D. JUILLIARD, DECEASED, v. THE UNITED STATES

[No. E-161.

Decided March 8, 1926]

*On the Proofs*

*Federal estate tax; bequest and devise for charitable purposes? income dming formation of trust.*— Where a testator devises and bequeaths his residuary estate to trustees to form a corporation for charitable purposes, the income therefroin 'for the period of the formation of said corporation to be paid to a nephew of said testator by the trustees, the income received by the nephew during the year in which the trust was being formed was subject to the Federal estate transfer tax.

*The Reporters*statement of the case:

*Mr. John M. Perry*for the plaintiff. *Mr. Richard M. Hamilton*and Larkin, *Rathbone c& Perry*were on the briefs-

*829
      *Mr. Fred K.*Dyar, with whom was *Mr. Assistant Attorney General Merman J.*Galloway, for the defendant.

The court made special findings of fact, as follows:

I. On or about the 25th day of April, 1919, Augustus D. Juilliard died a resident of the county of Orange, State of New York, leaving a last will and testament which was, on the 25th day of September, 1919, duly admitted to probate by the surrogate of the said county of Orange, and on the 25th day of September, 1919, letters testamentary were issued to plaintiffs as executors, who ever since have been, and still are, duly qualified and acting executors of said estate.

II. A certificate of the clerk of said surrogate’s court showing such appointment has been filed in this court.

III. On the 22d day of April, 1920, plaintiffs, as executors of said estate, in conformance with an act of Congress entitled “ The revenue act of 1918 ” prepared and filed in the office of the collector of internal revenue, 14th district of New York, a return of the Federal estate tax on the transfer of the above estate, which return showed a net •estate subject to tax of $5,430,127.15, and the sum of $888,-614.14 was paid thereon to the collector of internal revenue, 14th district of New York, on the 22d day of October, 1920, which sum represented the amount of tax shown to be due on said return plus 20 per cent of the amount of the value of three annuities as set forth in said return, which sum was, as nearly as it was possible at that time to determine, the total amount due from the above estate :as computed according to the revenue act of 1918.

IY. The said return was not false or fraudulent and did mot contain any understatement or undervaluations.

Y. The will of said Augustus D. Juilliard contained .among other provisions the following:

“ Forty-fifth: I give, devise, and bequeath all of the rest, residue, and remainder of my estate of whatever kind or nature, including therein all legacies which shall lapse, and .all legacies, bequests, or other testamentary dispositions which for any reason shall be or become ineffectual or be •declared invalid, as follows:

*830“(a) Unto my executors and trustees hereinafter named, or such of them as shall qualify and undertake the execution of this my will and to the survivors or survivor of them and their successors in trust, giving and granting to my said executors and trustees the same rights and powers in connection with the management and investment of said trust fund as are conferred upon them by the section of this my will marked ‘Forty-second.’

“(5) I do hereby direct and instruct my said executors and trustees, or such of them as shall qualify and undertake the execution of this my will, and the survivors or survivor of them and their successors, as soon after my death as may be practicable, and within the lifetime of my nephew Frederic A. Juilliard and my partner Eobert Westaway, and the survivor of them, to incorporate or cause to be incorporated under the general laws of the State of New York or by special act of the Legislature of the State of New York, a corporation to be known as the ‘Juilliard Musical Foundation,’ which shall have authority, among other powers as may be conferred upon it, to take and hold property and administer, invest, and reinvest the same, and to devote the income therefrom to the objects of said organization, which shall be in general scope as follows:

“(a) To aid worthy students of music in securing a complete and adequate musical education, either at appropriate institutions now in existence or hereafter created, or from appropriate instructors in this country or abroad; (b) to arrange for and to give without profit to it musical entertainments, concerts, and recitals of a character appropriate for the education and instruction of the general public in the musical arts; and (c) (to such extent as it may be lawfully entitled so to do without affecting the validity of the trust by this section of my will created) to aid by gift of part of such income at such times and to such extent in such amounts as the trustees of said Foundation may in their discretion deem proper, the Metropolitan Opera Company in the city of New York, for the purpose of assisting such organization in the production of operas, provided that suitable arrangements can be made with such company so that such gifts shall in no wise inure to its monetary profit.

“ In thus stating the objects of and the powers to be given to said corporation, I do not intend to limit my said executors and trustees hereinafter named, or such of them as shall qualify and undertake the execution of this my will, the survivors or survivor of them and their successors, or the incorporators of said corporation, to the language thus employed by me, nor that the charter to be procured by *831them shall be limited only to the objects aboye set forth, but that such charter shall provide in some form of language for the power to carry out some or all of the objects thus specified by me, and may contain such other enumeration of powers as by my said executors and trustees hereinafter named, or such of them as shall qualify and undertake the execution of this my will, the survivors or survivor of them and their successors, or the incorporators of said corporation, may be deemed necessary or convenient to the proper fulfillment of the purposes I have in view as herein expressed, and as may be sanctioned by the laws of the State of New York. The details of the organization and the maintenance of, and the rules and regulations concerning the conduct of the business of the said corporation, I leave to the good judgment of the Trustees of the said corporation, hereby authorizing them to perfect and carry out such details in such manner as to them shall seem best.

“(o) I do hereby direct my executors and trustees hereinafter named, or such of them as shall qualify and undertake the execution of this my will, the survivors or survivor of them, and their successors, upon the organization of said corporation, the Juilliard Musical Foundation, and within the lifetime of said Frederic A. Juilliard and Robert West-away and the survivor of them, to transfer and pay over unto the said corporation the entire capital of the said trust fund created by this section of my will, marked ‘ Forty-fifth,’ in order that said corporation may devote the same, under the laws of the State of New York, to the uses and purposes that may be provided in the charter as aforesaid.

*“*The failure for any reason of my trustees to carry out or of the proposed corporation to be organized to carry out any one of the methods I have indicated for the purpose of accomplishing my main purpose shall in no wise prevent the effecting of any or all other methods and this bequest shall be and be deemed to be of the same effect as though such method has not been enumerated.

It is my request that the president of the Central Trust Company of New York, the president of the Guaranty Trust Company of New York, and my nephew, Frederic -A. Juil-liard, shall act as trustees of said corporation for at least the first year of its existence, and for as long thereafter as they shall be elected and may be willing to serve, and it is my request that these three persons select to act with them on said board of trustees at least two other persons, whom they deem best qualified to assist them in carrying out the objects and purposes of said corporation, and that such persons shall act as trustees of said corporation for at least the first year of its existence and for so long thereafter as they *832shall continue to be selected by the said three persons first above named, and continue to be elected and willing to serve. It is my desire that in naming future trustees, the names of those proposed to be selected shall first be submitted to the members for the time being of the executive committees of the Central Trust Company of New York and the Guaranty Trust Company of New York, and that only such persons as such bodies respectively shall approve shall be named as such trustees. It is my desire that it shall be provided in the charter or by-laws of said corporation that the Trustees shall have power to increase their number and to fill any vacancies occurring in the board.

*“(d)*Until the organization of the corporation Juilliard Musical Foundation as hereinabove provided (which I trust may be accomplished without any appreciable delay after my death) and within the lifetime of said Frederic A. Juilliard and Eobert Westaway, and the survivor of them, I direct my said executors and trustees under this will to pay over unto said Frederic A. Juilliard all income that may be actually received from the fund provided to be transferred to said corporation upon its organization, but that upon the organization of said corporation all distribution of income from said fund unto said Frederic A. Juilliard shall cease, and there shall be no apportionment to him of income partially or wholly earned, but not yet due and payable at the time above stated.

“ If for any reason the said corporation shall not be organized within the time specified, to wit, within the lives of said Frederic A. Juilliard and Eobert Westaway, and the survivor of them, or if for any other reason the provisions of this clause shall be ineffectual, then I give, devise, and bequeath the entire fund and estate referred to in this section of my will marked £ Forty-fifth ’ unto the American Museum of Natural History and St. John’s Guild in the City of New York in equal amounts.”

A copy of the will of the said Augustus D. Juilliard is hereto annexed marked “ B ” and is made an appendix to these findings.

VI. During the lives of Frederic A. Juilliard and Eobert Westaway (referred to in the extract of the will set out in the last above section hereof) the executors caused such action to be taken that on the 30th day of March, 1920, the Legislature of the State of New York passed and the governor approved, a special act incorporating “ Juilliard Musical Foundation.” The said act is as follows:

*833Chap. 89

AN ACT

To incorporate Juilliard Musical Foundation. Became a law March 30, 1920, with the approval of the governor. Passed, three-fifths being present.

The people of the State of New York, represented in senate and assembly, do enact as follows:

Section 1. In order to effectuate the testamentary purposes of Augustus D. Juilliard, late of Tuxedo, New York, to create and maintain a musical foundation to aid worthy students of music in securing a complete and adequate musical education and to foster and advance the musical arts, Frederic A. Juilliard, George W. Davison, and Charles H. Sabin, together with such persons as they may associate with themselves, and their successors, are hereby constituted a body corporate, in perpetuity, under the name of Juilliard Musical Foundation, and by that name shall possess all of the powers which by the general corporation law are conferred upon corporations, and in addition thereto shall have all the powers and be subject to all the restrictions which now or may hereafter pertain by law to membership corporations so far as the same are applicable thereto and are not inconsistent with the provisions of this act, and shall be capable to take and hold by bequest, devise, gift, purchase, exchange, lease or by judicial order or decree, either absolutely or in trust, for any of its purposes, any property, real or personal, and especially the real and personal property devoted by the said Augustus D. Juilliard in his last will and testament, which was admitted to probate by the surrogate’s court of Orange County, on the twenty-fifth day of September, nineteen hundred and nineteen, to the objects herein referred to without limitation, as to the amount or value thereof, except such limitations, if any, as the legislature shall hereafter specifically impose; to sell, to mortgage, exchange, lease or otherwise convey, transfer or dispose of such property, and to invest and reinvest the principal thereof and the surplus income therefrom, not only in such subjects as are or may be permissible for trust investments by law, but likewise in the purchase of, exchange of, or loan upon security or any securities or items of personal property whatsoever and wheresoever located as the board of trustees may see fit, and to deal with and use, expend and apply any property belonging to the corporation, and the income derived therefrom, in such manner as in the judgment of the board of trustees will best promote its objects.

*834Sec. 2. The objects of said corporation shall be to defray the expenses of and otherwise aid worthy students of music in securing a complete and adequate musical education, either at appropriate institutions now in existence or hereafter created by this foundation or by others, or from instructors in this country or abroad; to arrange for and give, directly or through others, without profit to it, musical entertainments, concerts, and recitals, and to do such other things as in the judgment of the board of trustees are-appropriate for the education and instruction of the general public in the musical arts; to aid, to such extent and in such-manner as it may be lawfully entitled to do under this act without affecting the validity of the trust created by section forty-five of the last will and testament of the said Augustus D. Juilliard by gifts of part of its income, at such times and to such extent and in such amounts as its board of' trustees may in its discretion deem proper, the Metropolitan Opera Company in the city of New York, or its successor or successors, for the purpose of assisting such company in the production of operas, provided that suitable arrangements can be made with such company that such gifts shall in no way inure to its monetary profit; to afford facilities-by use of appropriate means and.instrumentalities to foster and encourage in the general public a deeper interest in and appreciation of the musical arts; to acquire, by gifts, devise, or otherwise, property of every kind and nature whatsoever; to hold, invest, and reinvest the same, and to devote the income therefrom or so much thereof as in the discretion of the board of trustees may seem proper, to the-above-mentioned purposes or any of them, and particularly for such purposes to acquire the residuary estate of the late Augustus D. Juilliard as the same is disposed of by his last will and testament dated March twenty-ninth, nineteen hundred and seventeen. And it is hereby granted all power-necessary to accomplish all of such objects.

Sec. 3. The persons named in the first section of this; act shall constitute the first board of trustees and members of the corporation. They, or a majority of them, shall hold a meeting and organize the corporation and adopt by-laws, which shall prescribe the qualifications of members; the manner of their selection; the number of trustees, not less than, five, by whom the business and affairs of tbe corporation shall be managed; the qualifications, powers, and manner of selection of the trustees and officers of the corporation,': the manner in which vacancies among the trustees and officers, occurring by death, resignation, increase in number, or any other way, shall be filled; the method of amending its; by-laws, and any other provisions for the management and. *835government of the corporation, the disposition of its property and the regulation of its affairs which may be deemed expedient.

Sec. 4. This corporation is not established and shall not be maintained for pecuniary profit, but shall be and remain a charitable educational corporation. No officer, member, or employee of this corporation shall receive, or be lawfully entitled to receive, any pecuniary profit from the operations thereof except reasonable compensation for services in effecting any one or more of its objects, or as a proper beneficiary of its strictly benevolent and charitable purposes.

Sec. o. This act shall take effect immediately.

The corporation so' formed is a charitable corporation of such character that the amount of gifts, bequests, legacies, devises to or for the use of said corporation is an allowable deduction from the gross estate of a decedent making such gift, bequest, legacy, or devise under the Federal estate tax law, and was so treated by the Commissioner of Internal Revenue in fixing the tax herein referred to.

The American Museum of Natural History and St. John’s Guild in the city of New York, the substitutionary legatees named in the section of the will of said Augustus D. Juilliard above set out, are charitable corporations organized and existing under the laws of the State of New York and are of such character that the amount of gifts, bequests, legacies, and devises to or for the use of said corporations or any of them is an allowable deduction from the gross estate of a decedent making such gift, bequest, legacy, or devise under the Federal estate tax law.

VII. During the years 1919 and 1920 the law of the State of New York, contained in section 2688 of the Code of Civil Procedure then in force, provided:

“ No legacy shall be paid by an executor, or administrator with the will annexed, before the completion of the publication of notice to creditors * * * or if none be published before the expiration of one year from the time of granting-letters testamentary or of administration, unless directed by the will or by a decree on an accounting to be sooner paid.”

The will of Augustus D. Juilliard did not provide for earlier payment, there was no decree of accounting within the year, and the publication of notice to creditors was not *836completed until after the organization of the Juilliard Musical Foundation, as aforesaid.

VIII. On April 16, 1924, plaintiffs were notified by the Commissioner of Internal Eevenue of an additional estate tax assessed against the said estate in the amount of $101,012.18 alleged to have been found due from the above estate, and the said sum of $101,012.18 was paid under protest to the collector of internal revenue, 14th district of New York on the 9th day of May, 1924.

IX. The said additional assessment of $101,012.18 was levied and assessed because the Commissioner of Internal Eevenue disallowed the deduction from the value of the gross estate, of the entire amount of the residue, which residue went to a charitable corporation, and allowed only as a deduction from the value of the gross estate an amount equal only to the so-called present worth of this charitable bequest, as determined by standard actuarial tables and methods. That is, he found the value of the residue at the date of the death of the testator, and deducted therefrom interest at the rate of 4% per annum for the period from the date of the death of the testator, April 25, 1919, to the date of the formation of the foundation, March 30, 1920, and allowed as a deduction from the gross estate of the decedent the present worth so determined. This basis of calculation resulted in said additional tax of $101,012.18.

The will provided that the income actually received from said residue from testator’s death until the organization of. the corporation was to be paid to Frederic A. Juilliard. The income amounted to the sum of $220,520.17, which amount was paid to Frederic A. Juilliard. The Commissioner of Internal Eevenue deducted from the value of the residue at the date of testator’s death the sum of $567,055.36 in determining the present worth.

X. On the 12th day of May, 1924, plaintiffs, as executors of said estate, filed in the office of the collector of internal revenue, 14th district of New York, a claim for refund in the sum of $101,012.18; a hearing on said claim for refund was granted the plaintiffs’ representative on the 12th day of June, 1924, and thereafter and on or about July 2, 1924, the *837Commissioner of Internal Revenue rejected the said claim for refund in its entirety.

The court decided that plaintiffs were entitled to recover.

Campbell, *Chief*Justice,

delivered the opinion of the court:

Recovery is sought by this suit of an additional tax assessed by the Commissioner of Internal Revenue and paid under protest by the executors of the last will and testament of Augustus D. Juilliard, deceased. The testator left an estate which the executors returned for taxation at a net valuation of over five millions of dollars after deducting from the gross valuation the amount of the residuary estate bequeathed to a charitable purpose with which we have to deal and the taxes due upon this net value were paid. The commissioner made an additional assessment amounting to approximately $101,000, which the executors were required to pay.

The testator, after making certain specific bequests not material here, bequeathed to the executors and trustees named in the will the residue of the estate “ in trust ” for certain charitable purposes, directing them to cause to be formed a corporation under the general laws or a special act of the Legislature of New York, with authority to administer the trust for the charitable purposes set forth in the will. It contemplated the formation of the corporation “ without any appreciable delay,” but directed that during the interim between the death of the testator and the organization of the corporation the income received from the trust fund should be paid to the testator’s nephew, and that upon its organization the corporation should receive the estate, and all interest of the nephew in any of the income should cease.

The testator died on the 25th day of April, 1919, and the Juilliard Musical Foundation was incorporated by special act of the Legislature of New York March 30, 1920, less than a year after the testator’s death. The additional assessment was not made until April, 1924, or four years after the special act incorporating the foundation. The statute *838under which the executors made their return and which the commissioner relied upon to sustain his additional assessment is the revenue act of 1918, 40 Stat. 1057, 1096, which, in section 401, imposes a tax equal to the sum of stated percentages of the value of the net estate (determined as provided in section 403) “ upon the transfer of the net estate ” of every decedent dying after the passage of the act. Section 402 prescribes the method for determining the gross estate. Section 403 provides that for the purpose of the tax the value of the net estate shall be determined by deducting from the value of the gross estate the amounts of certain expenses and other items stated and (3) the amount of all bequests “ to or for the use of any corporation organized and operated exclusively for charitable * * * purposes * * * or to a trustee or trustees exclusively for such * * * purposes,” and (4) a further exemption of $50,000.

The tax so imposed is not upon the several legacies or the residue of the estate but, in terms, is a tax “ upon the transfer of the net estate.” It is imposed upon the interest which ceases by reason of the death. See *Edwards*v. *Slocum,*264 U. S. 61. *“*What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death.” (Mr. Chief Justice Taft in *Y. M. C. A.*v. Davis, 264 U. S. 47, 50.) And this' interest, being the taxable net estate, is to be determined by the prescribed statutory method. *Edwards*v. Slocum, *supra.*In making their return the executors deducted from the gross estate the amount of the corpus of the residuary estate as being a bequest to a charitable purpose, and in doing this they apparently followed literally the language of the act, whatever significance attaches to the word “ value ” in connection with the taxable interest or the word “ amount ” in connection with authorized deductions. This corpus was bequeathed to the executors and trustees “ in trust ” for the foundation they were directed to organize to administer it, and it Avas a bequest *in frmsenti,*which no doubt Avould have been enforceable by the beneficiary when it came into being, or at the end of the *839.year allowed by the State statute for the payment of legacies. But the fact remains that the bequest of the corpus carried with it a bequest to the nephew of the income arising from it between the date of the death and the formation of the proposed corporation; and while the corpus was held in trust, as stated, the nephew acquired an interest which was not deductible from the gross estate, but did add something to the taxable value of the net estate. The commissioner, making an additional assessment, ■some four years after the executors had paid the tax on their return, decided that too great a deduction had been taken by them, and in arriving at his conclusion it is stated on the Government’s brief he “ determined that the amount of the gift to charity was less than the value of the residuary property, because the charity was deprived of the income from this property during the period prior to the formation of the corporation, and, consequently, he calculated that the value of the interest not devised to the charity was '$567,055.36, and allowed as a deduction only the difference between this sum and the value of the residue.” To reach this conclusion “ he found the value of the residue at the .date of the death of the testator and deducted therefrom interest at the rate of 4% per annum for the period from the ■date of the death of the testator, April 25, 1919, to the date nf the formation of the foundation, March 30, 1920, and ■allowed as a deduction from the gross estate of the decedent the present worth, so determined.” (See Finding IX.) When this action was taken the income that had accrued .and been paid to the nephew amounted to the sum of $220,520.17. The method used had the effect, therefore, of .reducing the value of the charitable bequest by over $550,-.000, because of its deprivation of an income, which, in itself,, .amounted to about $220,000. The additional tax amounted to $101,012.18. The difference between the $550,000 and the $220,000 did not go into the estate for any purposes of distribution. We think that what the commissioner should have done was to take either the actual income paid to the nephew and add it to the net estate or to have found a pres*840ent value of this income as of the date of the death, thus increasing the taxable net estate by this amount.

The contemplated foundation was formed within a year from the testator’s death. The tax upon the value of the net estate was “ due one year after the decedent’s death.” The State statute allowed the executors a year within which to pay legacies. When the year ended the executors were in a position to make their return so as to include the deductible items allowed by section 403 to arrive at the net estate, which alone was taxable. It is proper, therefore, to limit the nephew’s interest by reason of the income to be paid him to the one year within which all the facts became known, and the right to possession of the corpus of the residuary estate became absolute. The plaintiffs are entitled to recover a part of the additional assessment imposed by the commissioner, but the facts stated in the stipulation are not sufficient to enable the court to determine the amount of the judgment. The case is remanded that the parties may stipulate the amount of the tax if $220,520.17 had been used by the commissioner instead of the figures he did use in making the additional assessment.

GRAi-iam, *Judge;*Hat, *Judge;*DowNey, *Judge;*and Booth, Judge, concur.