Court Opinion

ID: 8925230
Source: CourtListenerOpinion
Date Created: 2022-11-27 06:37:43.654512+00
Date Added: 2024-06-11T17:09:23.265567
License: Public Domain

POLITZ, Circuit Judge,
dissenting:
Believing that the tax court was correct in its analysis and result, I respectfully dissent. I am mindful that judicial interpretation and application of the Internal Revenue Code must be based on the language of the Code and, where appropriate, indications of legislative intent. Notions of equity, right reason and fair play must occasionally be shunted aside. But I am not persuaded that either the language of the Code, taken in historical perspective, or the discernible congressional intent and purpose dictate today’s result.
We have before us taxpayers who have inherited what is effectively a residual estate. Under Louisiana law, as applied by the Louisiana courts, these taxpayers were declared owners of the remainder of property which had been placed in a testamentary charitable trust by an ancestor. The trust was established by the last will and testament of Lelia Bonner Dwyer who died on June 22, 1905. The trustees were directed to take the proceeds from the sale of certain property and “found and maintain in New Orleans a home for aged and infirm men to be called the John M. Bonner Memorial Home.”
In 1905 there were no federal estate, gift, or income taxes. No taxes were evaded or avoided by the creation of the trust. Over the years the trustees determined that a non-profit corporation would be a better vehicle for administration of the trust. As reflected by the stipulation of the parties, at no time did the existence or operation of the trust result in an avoidance or evasion of income tax. All income was used for unchallenged trust expenses. A half-century or so after its creation it became apparent that the purpose of the trust could no longer be achieved. The occupancy of the home had dwindled almost to naught. The heirs of Lelia Bonner Dwyer sought and secured a judgment declaring the trust at an end, and recognizing them as the persons entitled to ownership of the remaining trust assets. Those assets were accordingly distributed.
The facts to me are simple and clear. Property was placed in a charitable trust for a stated purpose. At that point in time no estate or gift tax was imposed, thus none was avoided. At no time during the life of the trust was there any taxable income, thus no income tax was avoided. But when the court terminated the trust and recognized the heirs as owners, the tax consequences exploded like a dreaded landmine. According to the majority opinion, which accepts the commissioner’s position, because the trustees failed to notify the Secretary timely of their intent to dissolve the corporation and distribute the residual assets as per the judgment of the Louisiana court, the heirs/taxpayers must pay to the government 110% of the amount received. The tax court disagreed with the commissioner. So do I.
The trust at issue was bona fide from its inception. When the tax code came on the scene, with its provisions for tax exempt entities, the trust qualified under § 501(c)(3). Insofar as this record reflects, at all times the trust was operated in a manner consistent with the creating testament and all applicable state and federal laws and regulations. When the law was changed in the late 1960’s the trustees dutifully applied for the required tax status. Before that status was ever granted, however, the trust was terminated and the assets were distributed. After completing this distribution the trustees notified the government. Because this notification came after the fact, the commissioner maintains that the trust made nonexempt expenditures thus subjecting the recipients to the harsh § 4945 taxes and surtaxes.
Under § 507 if a private foundation, which includes the trust before us, is terminated in a manner inconsistent with the Code provisions, a tax is imposed on all transfers. That tax is to be the lesser of the value of the net assets of the founda*966tion or the “aggregate tax benefit” realized by the foundation. The aggregate tax benefit is the combined total of the taxes the donors would have paid if the donations were not treated as tax exempt, plus all income taxes the organization would have paid over the years. The trust before us had an aggregate tax benefit of zero dollars. There was never any estate, gift or income tax due. It necessarily follows that there was never any meaningful exemption granted nor any de jure or de facto excusal from tax accountability or responsibility. However, because of a failure of timely notice by the trustees, notice which would have resulted in nothing, the majority sanctions the imposition of a penalty of 110% of the amount of inheritance received by these heirs. To this I cannot subscribe.
The provision of the code is specific; for a proper § 507 termination, the exempt organization must give notice:
The status of any organization as a private foundation shall be terminated only if—
such organization notifies the Secretary (at such time and in such manner as the Secretary may by regulations prescribe) of its intent to accomplish such termination____
The record is clear. The trustees did not give notice until after the assets were distributed. That was error. I view this error as neither heinous nor culpable; it appears to be simple inadvertence. Right reason demands that this failing or oversight be put in perspective. The tax law was new. All involved were struggling, including the tax experts and the Internal Revenue Service. As of the time of the termination and asset distribution the Secretary had not yet promulgated regulations prescribing the time and manner for the notice of termination, despite the clear legislative directive that he do so. This delay, to me, reflects the apparent difficulty being generally experienced with the new provisions effecting such entities as the Bonner trust. Notwithstanding, the taxpayers are held to knowledge of the law — the trustees should have given notice. Quite obviously, the taxpayers should have insisted that such be done before they accepted their inheritance. But is that failure a sufficient basis to cause the forfeiture of their entire inheritance plus the payment of an additional 10% penalty? I am persuaded beyond peradventure that Congress intended no such harsh result.
The commissioner assessed the taxpayers for a taxable expenditure under subsection (d)(5) of § 4945 — the catch-all phrase: “for any purpose other than one specified in section 170(c)(2)(B).” This phraseology in a vacuum is meaningless; meaning flows from the preceding four sections. The taxable expenditures articulated in § 4945(d) reflect the mind of the lawmakers. The following expenditures are abrogated:
(1) to carry on propaganda, or otherwise to attempt, to influence legislation, within the meaning of subsection (e),
(2) except as provided in subsection (f), to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive,
(3) as a grant to an individual for travel, study, or other similar purposes by such individual, unless such grant satisfies the requirements of subsection (g),
(4) as a grant to an organization (other than an organization described in paragraph (1), (2), or (3) of section 509(a)), unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with subsection (h), or
(5) for any purpose other than one specified in section 170(c)(2)(B).
I do not glean from this language any congressional desire to protect the public fisc from intrusions occasioned by the distribution of trust assets to heirs of the testamentary settlor. Nor is such reflected in the available fount of legislative history.
Among the activities which under the ... bill give rise to taxable expenditure are those to influence the outcome of any public election____
... where the private foundations spend money on activities generally referred to *967as lobbying expenditures ... attempts to affect the opinion of the general public. ... influence legislation by attempting to cause members of the general public to propose, support, or oppose legislation.
Conference Report No. 91-782, for the Tax Reform Act of 1969, reprinted in 1969 U.S. Code Cong, and Ad.News 2392, 2398.
The obvious intent of Congress in adopting § 4945 was to reduce, if not eliminate, the opportunity for individuals to create tax-free organizations for the pursuit of their private purposes. Private' after-tax dollars ought to be used for those pursuits, not tax dollars. But that is not the case here presented. Lelia Bonner Dwyer did not provide for the creation of the John M. Bonner Memorial Home as part of a grand design or scheme to avoid estate, gift or income taxes; in 1905 no such taxes existed. There has been no manipulation by the taxpayers for their own gain or advantage. When it became apparent that the trust purpose had expired, the taxpayers exercised their rights under Louisiana law and sought a declaration of termination of the trust and a distribution of residual assets. The commissioner concedes that if the trustees had simply given prior notice of this intention there would be no basis for any tax payment or penalty. Notice after the distribution came too late, says the commissioner. So says today’s majority. In this particular case, in this particular setting, I would not say so. Under these peculiar facts, I would find the belated preregulation notice adequate.
I respectfully dissent.