Court Opinion

ID: 4481970
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:13.677004+00
Date Added: 2024-06-11T13:25:12.055432
License: Public Domain

Raum:, /., dissenting: I agree that this case is distinguishable from Stewart in certain important respects. But the majority opinion is not content to let the matter rest there. Instead there is an obvious effort to rehabilitate our former decision Stewart, repeating some of the same arguments which in my judgment were properly rejected by the Third Circuit in its reversal. I think that the opinion of the Court of Appeals was sound, and I dissent from the majority here to the extent that it attempts to resuscitate our opinion in that case. Hoyt, Qtjealy, and Goefe, JJ., agree with this dissent. Qtjealy, J., dissenting: Insofar as the opinion of the majority reaffirms the opinion of this Court in Estate of Lillie MacMunn Stewart, 52 T.C. 830 (1969), revd. 436 F. 2d 1281 (C.A. 3, 1971), I am unable to agree. I believe that the U.S. Court of Appeals for the Third Circuit correctly interpreted the law of the State of Hew York and the application of section 2055 in its opinion in Stewart. In determining the deductibility of charitable remainders, the Supreme Court has clearly established the basic principle to be that there must be some assurance that the charity to which the bequest has been made will receive the bequest or a determinable part of it and that the possibility of an invasion of the corpus, not subject to a readily ascertainable standard, will result in the disqualification of a given charitable deduction. Commissioner v. Sternberger’s Estate, 348 U.S. 187 (1955); Henslee v. Union Planters Bank, 335 U.S. 595 (1949); Merchants Bank v. Commissioner, 320 U.S. 256 (1943); and Ithaca Trust Co. v. United States, 279 U.S. 151 (1929). The most explicit statement of the principle is found in Merchants Bank v. Commissioner supra at 261, where the Court stated: Por a deduction under § 303(a) (3) to be allowed, Congress and the Treasury require that a highly reliable appraisal of the amount the charity will receive be available, and made, ait the death of the testator. Rough guesses, approximations, or even the relatively accurate valuations on which the market place might be willing to act are not sufficient. Cf. Humes v. United States, 276 U.S. 487, 494. Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. * * * For the most part, the courts seem to agree that broad administrative powers granted to a trustee, while not so intended, may give rise to such uncertainty as to make it impossible to presently ascertain the value of the charitable remainder within the meaning of section 2055 (a) of the Internal Revenue Code as interpreted by section 20.2055-2, Estate Tax Regs.1 In any given case, the result depends upon the trust law of the particular jurisdiction involved and the language of the particular trust instrument. Thus, in Greer v. United States, 448 F. 2d 987 (C.A. 4, 1971), after enumerating the more recent cases2 involving the effect of administrative powers in the determination of deductibility of a charitable remainder, the court said: None of the authorities sustaining the government’s position holds that broad administrative powers always or never prevent the deduction; rather, the cases rely heavily on the trust law doctrines and practices of the particular states involved, as well as the language of the trust instrument under consideration, to determine if there is any real likelihood that the interests of the charitable remainderman can be invaded for the benefit of the life tenant. * * * The eases rejecting the government’s position have also rested on the trust law doctrines and practices of the particular states involved as well as the language of the trust instrument under consideration although they have evidenced greater liberality in substaining some flexibility in the administration of the trust without disallowance of the charitable deduction. * * * Similarly, in Peoples Trust Co. of Bergen County v. United States, 444 F. 2d 193 (C.A. 3, 1971), the U.S. Court of Appeals for the Third Circuit, in distinguishing its prior decision in the Stewart case, said: Both the provisions of the trust instrument and the law of New Jersey present quite a different situation with respect to the trustee’s powers than was presented in Estate of Stewart v. Commissioner of Internal Revenue, supra. Because there is not in this trust, as it would be construed in New Jersey, a power to divert the ascertainable corpus from its charitable purporse, Section 20.2055-2 (b), the deduction should have been allowed. The judgment of the district court will be affirmed. In Estate of Lillie MacMunn Stewart, supra, the Tax Court recognized that “in theory the trustee herein might use its discretionary powers to allocate to income amounts that might, as an a priori matter, be technically allocable to corpus, and thereby impair the charitable remainers.” While we regarded the laws of New York with respect to administration of trusts as imposing some obligation on the trustee irrespective of the terms of the instrument itself, we found that such laws did not preclude the diversion to the life beneficiary of what otherwise might be regarded as corpus. However, under the facts in that case, we determined that “there was no more likelihood that the corporate trustee would or could, in light of New York law, utilize its discretionary powers as a substitute power of invasion for the benefit of the income beneficiaries than there would be in a situation where such provisions were not included in the governing instruments.” On this basis, we concluded that “To hold otherwise would be to turn what are commonplace trust powers intended simply to provide administrative flexibility into a substantive grant of disposi-tive flexibility.” On appeal, the U.S. Court of Appeals for the Third Circuit disagreed. See Estate of Stewart v. Commissioner, supra. The court concluded that “the central issue with respect to powers of invasion,” direct or indirect, “is ‘not what the trustees [are] likely to d'o, but what they [have] the power to do,’ and whether that power is limited by an ascertainable standard.” I agree with the Third Circuit’s formulation of the problem with respect to powers of invasion in the context of section 2055, and I cannot accept the attempt by the majority in this case to revive the “likelihood of use” standard promulgated by this Court in Stewart and rejected by the Third Circuit. It is not for the courts to engage in speculation as to whether and how a trustee might exercise the administrative powers vested in him by the trust instrument. The fact that the trustee has such powers, standing alone, may present an element of uncertainty which renders a given charitable remainder not susceptible of ascertainment within the meaning of the law. Thus, in Rand v. United States, 445 F. 2d 1166 (C.A. 2, 1971), the U.S. Court of Appeals for the Second Circuit said: The crucial issue here is not whether the trustee would do something so severe as the above example; rather the question is simply whether the trustee has a number of powers so broad that at the time of the decedent’s death we cannot ascertain with any reasonable degree of probability the value of the remainder. In view of these considerations, the question presented for decision in any given case of the type presently before us is whether the law of the particular jurisdiction involved in the case establishes an overriding standard which effectively limits the discretion granted to the trustees under the so-called administrative clauses of the trust instrument under consideration in the particular case and thereby cures the uncertainty inherent in such powers which would otherwise prevent the given charitable remainder from being presently ascertained as required 'by the law. lb. reversing our decision in Estate of Stewart, the U.S. Court of Appeals for the Third Circuit held that Hew York law does not establish such a standard stating that: state law will not provide any fixed and ascertainable standard of investment and management conduct for the trustee. Here the decedent’s dispositive intent does not reveal any desire to favor the life tenants over the remaindermen, but decedent’s administrative intent was to rely solely upon the trustee’s judgment and discretion rather than upon the normal rules of state law governing the administration of trusts. * * * The doctrine of In re Talbot’s Will, supra, and In re Estate of Lecompte, supra * * * does not provide the requisite ascertainable standard for amounts left to charity where the powers are so broad as here. In a related context, the U.S. District Court for the Southern District of New York in the case of Jacobs v. United States, 334 F. Supp. 388 (S.D.N.Y. 1971), also held that Hew York law does not provide the “requisite standard” of “investment and management conduct for the trustee.” In that case, the District Court was concerned with the possibility of an indirect invasion of an inter vivos trust corpus as opposed to the possibility of an indirect invasion of a testamentary trust corpus of the type we have before us in the instant case. The taxpayers in Jacobs v. United States, supra, contributed stock in a regulated investment trust to a trust. The remainder of the later trust was to pass to a charitable foundation, and the taxpayers claimed part of their contribution to that trust as a charitable deduction under section 170(a). The respondent denied the deduction on the basis that the powers granted the trustee in the trust instrument were so broad that the remainder interest which was to go to the charity was not presently ascertainable. The court in Jacobs v. United States, supra, concluded that there was no material difference between a charitable remainder of an inter vivos trust and that of a testamentary trust; and, in deciding the issue before it, the court went on to apply the analysis of the Supreme Court decisions and the decisions of other courts involving charitable remainders of testamentary trusts. With respect to New York law, the court in Jacobs v. United States, supra, concluded: In my view, plaintiffs are incorrect in urging that New York law provides the requisite standard to ascertain tbe extent to which corpus will be depleted in this case. * * * While a court of equity may have power to stop a trustee from acting in such a way as to deplete or consume a corpus, thus providing a fixed standard at one end of the spectrum, such power does not provide a reliably predictable standard to solve the problem presented in this case — i.e. where along the continuum leading to depletion equitable action can and should occur. In the present case, the trust instrument grants the trustee broad administrative powers. Article 11(c), for example, allows the trustee to invest in wasting assets and gives him wide latitude as to assets in which he can reinvest. Article 111(g) allows the trustee to charge trust expenses against principal. More important, Article IA requires the trustee to pay the net income quarterly to the life tenant, and Article IV allocates cash dividends, including capital gains dividends, to income. * * * With these and other broad powers given to him to deal with the trust res * * * the trustee here could in good faith carry out recognized fiduciary duties under New York law, yet still invade corpus * * * to an immeasurable extent, thus rendering impossible present valuation of the remainder interest. While plaintiffs have cited many cases holding that a court of equity will prevent a trustee from effecting a substantial diminution or depletion of the remainderman’s interest, such cases do not provide a fixed standard, accurately calculable, by which we can ascertain the value of charitable remainder in this case. See, e.g., In re Gould’s Will, 17 A.D. 2d 401, 234 N.Y.S. 2d 825, 828 (3d Dept., 1962) (“The yardstick for determining the duties of trustees is governed by the rule of the ‘prudent man’.”) ; In re Dickson’s Estate, 38 Misc. 2d 678, 237 N.V.S. 2d 572, 576 (1963) (“ * * * for the best interests of all persons interested in the estate.”). The standards imposed upon the trustee in the present case by New York law do not conform to the rules laid down by the Supreme Court for determining whether or not a remainderman’s interest is presently ascertainable. * * * I believe that the interpretation of New York law promulgated by the Court of Appeals in Estate of Stewart, and the District Court in Jacobs v. United States, supra, is correct. I also cannot find anything in the law of Delaware which in the instant case would lead me to a conclusion different from that reached by the Court of Appeals in Stewart and the District Court in Jacobs under New York law. Therefore, I cannot accept the attempt by the majority in the case now before us to reaffirm what I consider to be the clearly erroneous view of New York law established by this Court in its opinion in Stewart, and I must disagree with the interpretation of Delaware law herein accepted by the majority.   This problem will not arise under the Tax Reform Act of 1969 because subsees. (d), (e), and (g) of sec. 201 of that Act reguire that a trust pay a fixed percentage of the net fair market value of the trust assets or a fixed-dollar amount to the life beneficiaries before the charitable remainder can qualify for the deduction. Pub. L. 91-172, S3 Stat. 487, 560-565, codified in secs. 642(c) (5), 664, and 2055(e) of the Internal Revenue Code of 1954.    In the recent past, a relatively large number of cases involving the problem of the effect of a trustee’s administrative powers in the determination of the deductibility of a charitable remainder have been decided. These cases have been summarized by the majority, and it is therefore unnecessary to do so here.