Court Opinion

ID: 4336104
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:38:56.347872+00
Date Added: 2024-06-11T14:47:57.682855
License: Public Domain

T.C. Memo. 2006-183

                      UNITED STATES TAX COURT

ESTATE OF ANTHONY J. TAMULIS, DECEASED, WANDA RODGERSON, EXECUTOR
                    AND TRUSTEE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 20721-03.                Filed August 29, 2006.

     Hugh J. Graham III, for petitioner.

     Thomas C. Pliske, for respondent.

              MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge:   Respondent determined a deficiency in Federal

estate tax of $745,177 for the Estate of Anthony J. Tamulis (the

estate).   The sole issue for decision is whether the estate is
                               - 2 -

entitled to a deduction under section 20551 for the remainder

interest of the Anthony J. Tamulis Trust (the trust).    We hold

that the estate is not.

                          FINDINGS OF FACT

     Most of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated by this reference.

     Anthony J. Tamulis (decedent), a Roman Catholic priest, died

testate on November 23, 2000, in Sandwich, Massachusetts.2

Dennis Carlile was named executor of the estate and trustee of

the trust.   The estate was administered in Illinois, where Mr.

Carlile resided at the time the petition was filed.3

     Decedent executed a will on February 18, 2000, that was in

effect at the time of his death.   On the same day, decedent also

executed a Third Restatement and Revision of Living Trust

Instrument, governing the terms of the trust.   The parties have

     1
       All section references, unless otherwise noted, are to the
Internal Revenue Code of 1986, as in effect for the time of
decedent's death.
     2
       Decedent was a resident of Mt. Olive, Ill., for most of
his life, but following a stroke several years before his death
had been living in Massachusetts so that he could be cared for by
his niece, Wanda Rodgerson.
     3
       Mr. Carlile died on Apr. 7, 2005, and Wanda Rodgerson was
substituted as executor for the estate and successor trustee for
the trust.
                                - 3 -

stipulated that decedent amended the trust by means of a letter

dated February 26, 2000 (discussed infra).    This Third

Restatement and Revision of Living Trust Instrument, as amended

by the letter, was in effect at the time of decedent's death.     As

settlor, decedent directed that the trust be governed by Illinois

law.

       The will directed that all of decedent's property, after the

payment of debts, expenses, and taxes, pass to the trust.   The

trust's governing instrument provided for specific bequests to

various charitable and noncharitable recipients.   Following the

satisfaction of these specific bequests, the trust's governing

instrument provided for annual payments during the term of the

trust of specific amounts to several of decedent's relatives,

provided certain conditions were met, as well as the transfer of

certain real property and payment of the real estate taxes on

that property during the lives of its life tenants, with the

remainder of the trust's "net income" each year to be divided

equally between two of decedent's grandnieces.   More

specifically, paragraphs 7(B) and (C) of the trust provided that

            B. The trustee is to convey my property at No. 2
       Surrey Lane, Sandwich, Massachusetts 02563 with a life
       estate therein to be held by my brother, John Tamulis and
       his wife, Mary or the survivor of them, with the remainder
       therein to my grandniece[s], Erica Rodgerson and Melissa
       Rodgerson share and share alike.
                                 - 4 -

          During the period of the lives of John and Mary
     Tamulis, the trust shall pay all real estate taxes on said
     real estate; however, utilities and all other costs shall be
     borne by the life tenants, yet as supplemented with the
     contribution from the trust as provided in 7(C)i below.

          C. During the term of the trust, the trustee is to pay
     the following amounts to the following individuals:

                i. $5,000 per year to John Tamulis and if he
                should predecease his wife Mary Tamulis, then
                $5,000 per year to her, said money is for the
                purposes of defraying the utilities and cost of
                repair and maintenance of the house in Sandwich,
                Massachusetts;

                ii. $5,000 per year to Wanda Rodgerson so long as
                she is making reasonable progress in pursuit of a
                Ph.D. in education;

                iii. $1,000 per year to Erica Rodgerson;

                iv. $1,000 per year to Melissa Rodgerson;

                v. The trustee is to pay the balance of the trust
                net income as that is determined in accordance
                with normal accounting principles to Melissa
                Rodgerson and Erica Rodgerson, my grandnieces,
                share and share alike.

The amendment to the trust by letter of February 26, 2000,

provided that the trust would pay $10,000 per year to Migle

Francaite, another of decedent's grandnieces, "until she

graduates from medical school.    I gave same to Melissa and

Erica."   Decedent, as settlor, gave the trustee

     authority to act with regard to the trust and the assets
     making up the trust in all manners consistent with the laws
     of the States of Illinois and Massachusetts provided,
     however, the trustee is authorized to sell or exchange
     shares of stock making up the trust account only upon first
                               - 5 -

     having received the prior written approval of the intended
     sale from my niece, WANDA RODGERSON.

The trust was to operate for the longer of 10 years or the joint

lives of John and Mary Tamulis,4 and upon termination, the

remainder of the trust's assets was to pass to the Roman Catholic

Diocese of Fall River, Massachusetts (diocese).

     After obtaining an extension for filing, the estate timely

filed its Federal estate tax return on November 30, 2001.    The

estate claimed a charitable contribution deduction of $1,495,526

representing the claimed value of a charitable remainder interest

given to the diocese.   On Schedule O of the estate's Form 706,

United States Estate (and Generation-Skipping Transfer) Tax

Return, the following statement (return statement) was made:

     Charitable Remainder
     Roman Catholic Diocese of Fall River, Mass.
     Balance that is residue following 10 year term certain
     charitable remainder unitrust at 5% quarterly payments to
     two grand nieces Erica and Melissa Rodgerson, where during
     the term, the Trustee holds and operates pursuant to the
     terms and conditions of I.R.C. Sec. 664 and related
     provisions with balance at end of 10 year term to the Roman
     Catholic Diocese of Fall River, Mass. a 501(c)3 organization
     See attached calculations of Charitable Remainder
     Deductible.

     4
       The estate states on brief that John and Mary Tamulis were
in their eighties when the trust was created, although there is
no direct evidence of their age in the record.
                                - 6 -

In each of the years 2001 through 2004, the trust distributed 5

percent of the fair market value of the trust assets, valued as

of January 2 of each year, to the trust's beneficiaries.

     An examination of the estate's return commenced sometime

before February 25, 2002, the date of a letter from respondent to

Mr. Carlile seeking additional information in connection with the

examination.   A notice of deficiency was issued on September 18,

2003, in which respondent determined that the charitable

contribution deduction claimed by the estate for the remainder

interest should be disallowed because the trust did not satisfy

the requirements of section 2055.

     During August 2002, certain of the interested parties made

various efforts to reform the trust.    Mr. Carlile and the diocese

each prepared revised versions of the trust's governing

instrument, but neither version was ever executed by the trustee

or any of the beneficiaries.   Mr. Carlile also prepared a draft

of a "Complaint for Restatement of Trust" for filing in State

court, which was circulated to the beneficiaries but never filed

with any court.

     In August 2003, Mr. Carlile executed a document, also titled

"Third Restatement and Revision of Living Trust Instrument",

which by its terms revised the trust's governing instrument (2003

amendment).    All of the beneficiaries of the trust, except Migle
                                 - 7 -

Francaite, provided written consent to the 2003 amendment.     Under

the 2003 amendment, the trustee was required to pay, in the

aggregate, 5 percent of the net fair market value of the trust

assets each year to the same noncharitable beneficiaries

designated in the original instrument, with payment to be

allocated among them so as generally to equal the annual payments

specified for each in the original instrument, with any remaining

balance paid in equal shares to Erica and Melissa Rodgerson.5

                                OPINION

     In general, for purposes of determining the estate tax

imposed by section 2001, a deduction is allowed from a decedent's

gross estate for transfers for public, charitable, or religious

uses.    Sec. 2055(a).   However, this general rule is restricted

for so-called split-interest transfers, wherein an interest in

property passes from the decedent to a charitable beneficiary

while an interest in the same property passes to a noncharitable

beneficiary (for less than adequate and full consideration).     See

sec. 2055(e)(2).    Where the interest passing to the charitable

beneficiary is a remainder interest, no deduction is allowed

unless the interest is in a trust which is a charitable remainder

     5
       The 2003 amendment's terms further provided that, in the
event 5 percent of the annual fair market value was insufficient
to satisfy all of the allocations, the allocated payments would
be satisfied according to a designated order until the 5 percent
was exhausted.
                                - 8 -

unitrust (CRUT) or charitable remainder annuity trust (CRAT)

(described in section 664), or a pooled income fund (PIF)

(described in section 642(c)(5)).   Sec. 2055(e)(2)(A);6 Estate of

Edgar v. Commissioner, 74 T.C. 983, 986 (1980), affd. without

published opinion 676 F.2d 685 (3d Cir. 1982).

     Congress imposed the section 2055(e)(2)(A) requirement that

a CRAT, CRUT, or PIF be used where there is a bequest of a

charitable remainder interest to remove the "incentive to favor

the income beneficiary over the remainder beneficiary by means of

manipulating the trust's investments."   H. Rept. 91-413 (Part 1),

at 59 (1969), 1969-3 C.B. 200, 238; S. Rept. 91-552, at 88

(1969), 1969-3 C.B. 423, 480.   It had come to Congress's

attention that taxpayers were claiming charitable deductions for

bequests of remainder interests in trusts based upon valuation

assumptions for the remainder interests that were inconsistent

with the manner in which the trusts assets were in fact managed.

Where trust assets were invested so as to maximize the income

interest, the value eventually passing to charity through the

remainder interest might bear little relationship to the

deduction previously taken.   Therefore, Congress mandated a trust

     6
       Sec. 2055(e)(2) was enacted as part of the Tax Reform Act
of 1969 (the 1969 Act), Pub. L. 91-172, sec. 201(d)(1), 83 Stat.
560, and its requirements for split interests are often referred
to as the "1969 Act rules."
                               - 9 -

mechanism that set the annual payout to the noncharitable income

beneficiaries as a fixed dollar amount (a CRAT) or fixed

percentage of the value of the trust assets (a CRUT), thereby

minimizing the incentive to skew investment strategy to favor the

noncharitable income beneficiaries.7   Estate of Gillespie v.

Commissioner, 75 T.C. 374, 376-378 (1980); H. Rept. 91-413 (Part

1), supra at 58-60, 1969-3 C.B. at 237-238; S. Rept. 91-552,

supra at 86-87, 1969-3 C.B. at 479.

     To mitigate the reduction in amounts going to charity that

the imposition of this stringent framework could engender,

Congress provided a statutory mechanism in 1984 by which a trust

that failed to satisfy the CRAT, CRUT, or PIF regime of section

2055(e)(2)(A) might nonetheless be modified by means of a

"qualified reformation" so that a deduction under section 2055(a)

would be allowed.   Sec. 2055(e)(3)(A).8   A "qualified

     7
       The third option Congress provided, a PIF, is an
irrevocable trust in which the property of the trust is managed
by the charitable organization to which the remainder interest is
contributed and for which the donor retains an income interest
for the life of one or more beneficiaries. Sec. 642(c)(5).
Since the assets in a PIF are managed by a charitable
organization, the incentive to favor the noncharitable income
beneficiaries is presumed eliminated.
     8
       Sec. 2055(e)(3), enacted by the Deficit Reduction Act of
1984, Pub. L. 98-369, sec. 1022(a), 98 Stat. 1026, was a
permanent rule to replace various temporary reformation
provisions that preceded it and is effective for reformations
made after Dec. 31, 1978.
                              - 10 -

reformation" for this purpose "means a change of a governing

instrument by reformation, amendment, construction, or otherwise

which changes a reformable interest into a qualified interest",

subject to certain conditions.   Sec. 2055(e)(3)(B).

     A "reformable interest" for this purpose is defined as an

interest that would qualify for a deduction under section 2055(a)

but for the CRAT, CRUT, or PIF requirement of section 2055(e)(2),

sec. 2055(e)(3)(C)(i),9 but only if all payments to be made to

noncharitable beneficiaries before the remainder interest vests

are expressed either in "specified dollar amounts" or as a "fixed

percentage of the fair market value of the [trust] property",

sec. 2055(e)(3)(C)(ii).   The requirement that all such payments

be expressed as specified dollar amounts or a fixed percentage of

the fair market value of the trust property does not apply,

however, "if a judicial proceeding is commenced to change such

interest into a qualified interest not later than the 90th day

after the last date (including extensions) for filing the estate

tax return."   Sec. 2055(e)(3)(C)(iii)(I).

     9
       The sec. 2055(e)(3)(C)(i) prong is intended to incorporate
the requirements of prior law, such as that the charitable
remainder interest in a split-interest trust be "ascertainable";
i.e., severable from the noncharitable interest. H. Rept. 98-432
(Part 2), at 1518 (1984); see also Ithaca Trust Co. v. United
States, 279 U.S. 151, 154 (1929); sec. 20.2055-2(a), Estate Tax
Regs.
                             - 11 -

     The legislative history of section 2055(e)(3) indicates that

Congress intended a more liberal reformation rule for trusts

where the creator had made a bona fide attempt to comply with the

provisions of the 1969 Act (i.e., the requirements of section

2055(e)(2)), and a more exacting rule (namely, commencement of a

judicial proceeding within 90 days after the due date of the

estate tax return) for trusts where the creator had not evidenced

any intent to comply with the 1969 Act.

     The committee believes that these [reformation] rules will
     permit the correction of major, obvious defects (such as
     where the "income" interest is not expressed as an annuity
     interest or a unitrust interest) so long as the taxpayer
     initiates reformation proceedings before audit, while
     allowing the correction of minor defects (such as defects in
     determining the correct payout in short taxable years, in
     years of additional contributions, etc.) upon audit so long
     as there was a good faith attempt to comply with the 1969
     Act rules (i.e., the payout is basically expressed as an
     annuity interest or a unitrust interest). * * * [H. Rept.
     98-432 (Part 2), at 1517 (1984); S. Rept. 98-169 (Vol. 1),
     at 732 (1984).]

Thus, where the payout to the noncharitable beneficiaries has

been "basically expressed as an annuity interest or a unitrust

interest"–-that is, as specified dollar amounts or as a fixed

percentage of the fair market value of the trust property, in

accordance with section 2055(e)(3)(C)(ii)–-then a reformation may

be effected even after an audit has commenced.   H. Rept. 98-432

(Part 2), supra at 1517; S. Rept. 98-169 (Vol. 1), supra at 732;

see also Estate of Hall v. Commissioner, 93 T.C. 745, 753-754

(1989), affd. without published opinion 941 F.2d 1209 (6th Cir.
                               - 12 -

1991).    But where the payouts have not been expressed in the

trust's governing instrument in conformity with section

2055(e)(3)(C)(ii), reformation is permitted only if a judicial

proceeding to make the appropriate changes to the trust is

commenced within 90 days after the due date of the estate tax

return.

     The estate has stipulated that the trust, as in effect at

the time of decedent's death, did not qualify as either a CRAT or

a CRUT.10   Consequently, the bequest of the remainder interest to

the diocese will qualify as a deduction under section 2055(a)

only if the remainder interest was a "reformable interest" that

underwent a "qualified reformation".    Sec. 2055(e)(3).

     The remainder interest to the diocese cannot qualify as a

"reformable interest" because certain payments to be made to the

noncharitable beneficiaries before the remainder vests are not

expressed as either a specified dollar amount or a fixed

percentage of the fair market value of the trust property, as

required by section 2055(e)(3)(C)(ii).11   The provision for the

     10
       Similarly, because the trust at issue was not maintained
by the diocese, it cannot qualify as a PIF. See sec.
642(c)(5)(E).
     11
       Respondent also argues that, because the trust instrument
provides for payments to Wanda Rodgerson for "so long as she is
making reasonable progress in pursuit of a Ph.D. in education"
and to Migle Francaite "until she graduates from medical school",
the remainder interest also does not satisfy sec.
                                                   (continued...)
                              - 13 -

payment of the real estate taxes on decedent's Sandwich,

Massachusetts, residence is not expressed as a specified dollar

amount (or calculable as such) or as a fixed percentage of fair

market value; thus, the payment for taxes is not fixed as

required under section 2055(e)(3)(C)(ii).   More significantly,

the provision for payment to Melissa and Erica Rodgerson of the

balance of the trust's "net income" (after satisfaction of the

payments directed for other noncharitable beneficiaries) is

neither a specified dollar amount nor a fixed percentage of fair

market value.   Indeed, by providing for a payout of net income to

a noncharitable beneficiary, the trust's terms would enable the

specific abuse to which the 1969 Act rules (i.e., the provisions

of section 2055(e)(2)) were addressed; namely, the reduction of

the value of the remainder interest actually passing to charity

below the amount of the deduction claimed, because of the

     11
      (...continued)
2055(e)(3)(C)(i); i.e., the remainder interest would not be an
allowable deduction under pre-1969-Act law because the payments
are not "ascertainable". We note that the trust instrument
provides, immediately after directing the foregoing payments,
that "the balance of the trust net income" is to be paid to two
other beneficiaries. This juxtaposition gives rise to a possible
interpretation that the payments to Wanda Rodgerson and Migle
Francaite are limited to the trust's net income, and the estate
makes an argument on similar grounds that the remainder interest
was ascertainable. However, we find it unnecessary to decide
whether the remainder interest satisfies sec. 2055(e)(3)(C)(i),
as the remainder interest's failure to satisfy sec.
2055(e)(3)(C)(ii) precludes a finding that it is a "reformable
interest" in any event.
                                - 14 -

trustee's ability to favor a noncharitable "income" beneficiary

through his management of the trust assets during the period

before the remainder vests.12   See Estate of Gillespie v.

Commissioner, 75 T.C. 376-378; H. Rept. 91-413 (Part 1), supra

at 58-60, 1969-3 C.B. at 237-238; S. Rept. 91-552, supra at 86-

87, 1969-3 C.B. at 479.

     Because the noncharitable beneficiaries' interests were not

fixed as required in section 2055(e)(3)(C)(ii), the only

remaining option for reformation was commencement of a judicial

proceeding to reform the trust within 90 days after the estate's

tax return was due.   See sec. 2055(e)(3)(C)(iii).   Since no such

proceeding was ever commenced, the estate has failed to satisfy

the requirements of section 2055(e)(3)(C)(iii).   As a result, the

remainder interest at issue is not a "reformable interest", which

precludes any reformation whereby it could meet the requirements

for a deduction under section 2055(e)(2).

     While this result may seem harsh, the legislative history

makes clear that Congress intended a tightly circumscribed

reformation rule.   Congress was concerned that an overly liberal

rule would permit abuse; namely, that taxpayers would not reform

     12
       In this regard, we note that although the governing
instrument gave the trustee authority to act with respect to the
trust assets "in all manners consistent with the laws of the
States of Illinois and Massachusetts", the trustee could sell
stock held by the trust only upon the approval of Wanda
Rodgerson, one of the noncharitable beneficiaries.
                             - 15 -

trusts to comply with the 1969 Act rules unless and until defects

were discovered by the Commissioner upon audit.   The committee

reports accompanying Congress's enactment of the reformation

provisions of section 2055(e)(3) state as follows:

          Congress first permitted reformation of charitable
     remainder trusts in 1974 and since that time, the
     Congress has extended the period for reformations
     several times * * * . Even so, it has come to the
     attention of the committee that there are still many
     instruments providing for split-interest charitable
     contributions which do not meet the requirements for
     qualification under the rules of the Tax Reform Act of
     1969. * * * In light of the repeated need to extend
     the period to reform such governing instruments and the
     fact that failure to meet the 1969 Act rules often
     results in reduced amounts passing to charity, the
     committee believes that a permanent rule permitting
     reformation of split-interest charitable contributions
     should be permitted as long as there are adequate
     safeguards to avoid abuse.
          Specifically, the committee is concerned that
     governing instruments of charitable split-interest
     trusts which evidenced no attempt to comply with the
     1969 Act rules would be reformed only if the defects
     are found upon audit by the Internal Revenue Service.
     In order to prevent this from occurring, the committee
     believes that, in order for a governing instrument of a
     charitable split-interest contribution to be
     reformable, either (1) the creator had to make a bona
     fide attempt to comply with the 1969 Act rules or (2)
     the taxpayer must initiate reformation proceedings
     before the Internal Revenue Service could reasonably be
     expected to begin an audit. * * * [H. Rept. 98-432
     (Part 2), supra at 1516-1517; S. Rept. 98-169 (Vol. 1),
     supra at 731-732.]

The committee reports go on to clarify what constitutes the

creator's "bona fide attempt to comply with the 1969 Act rules"

(as codified in section 2055(e)(3)(C)(ii)):   "The governing

instrument evidences an intent to comply with the 1969 Act rules
                               - 16 -

if all current payouts from the trust are expressed solely[13] as

a fixed dollar amount or a fixed percentage of the value of the

trust's assets." Id. at 1518; S. Rept. 98-169 (Vol. 1), supra at

733.

       Congress thus intended reformation to be available only if

the "creator" of the trust had made a bona fide attempt to comply

with the 1969 Act rules (i.e., the governing instrument as

established by the trust's settlor expressed noncharitable

payouts solely as fixed dollar amounts or a fixed percentage of

the value of the trust's assets) or a judicial proceeding to

reform the trust was commenced within 90 days after the return's

filing.

       The estate cobbles together several arguments in an effort

to show that a "qualified reformation" occurred.   The estate

argues that the return statement served either to amend the trust

into a CRUT or to signify the trustee's intent to operate the

trust as a CRUT.    Furthermore, the estate contends, the trust was

in fact managed in accordance with the requirements for a CRUT,

as the total annual distributions to the noncharitable

beneficiaries were equal to 5 percent of the fair market value of

the trust's assets in each of the years 2001 through 2004.

       13
       The excerpts from the House and Senate committee reports
are identical, except that the word "solely" does not appear in
the House version.
                              - 17 -

     We reject the estate's contention that the return statement

amended the trust into a CRUT.   Even if we accept the dubious

proposition that a statement on a Federal estate tax return could

operate to amend a trust created under State law, the return

statement nowhere contains the words "amend" or "amendment" or

otherwise suggests this purpose in any way.   Moreover, there is

no evidence that, as of the return's filing, either the

charitable or the noncharitable beneficiaries consented to the

amendment purportedly manifested on the estate's return, as

required by Illinois law.14

     The estate also contends in the alternative that the return

statement was equivalent to the commencement of a judicial

     14
       Decedent as settlor directed that the trust be governed
by Illinois law, and the estate on brief takes the position that
Illinois law governs. Illinois law requires the consent of all
charitable and noncharitable beneficiaries (whose interests have
not expired) before a trustee may amend a charitable trust
instrument to bring it into conformity with the CRUT requirements
of sec. 664. See 760 Ill. Comp. Stat. Ann. 60/1(2) (West 1992).
     Notwithstanding the foregoing provision of Illinois law, the
estate argues that the trustee was authorized, acting alone, to
amend the trust instrument, citing as authority Rev. Proc. 89-20,
1989-1 C.B. 841. Rev. Proc. 89-20, supra, provides a sample form
of a declaration of trust that, if followed by a taxpayer, the
Commissioner agrees to treat as satisfying the requirements for a
CRUT. The sample form contains a provision authorizing the
trustee, acting alone, to amend the trust in any manner required
for the sole purpose of ensuring that the trust qualifies as a
CRUT. Rev. Proc. 89-20, supra, is conditioned, however, upon a
taxpayer's trust's being "a valid trust under applicable local
law." We conclude that Rev. Proc. 89-20, supra, is neither
intended to, nor does it, abrogate the requirements of Illinois
law for amending a charitable trust.
                               - 18 -

proceeding within the meaning of section 2055(e)(3)(C)(iii),

which ultimately culminated in the 2003 amendment that amended

the payment terms for the noncharitable beneficiaries so that a

qualified interest was created.15   We disagree.   Filing a Federal

estate tax return in no way commences a judicial proceeding.      The

commencement date for a judicial proceeding for purposes of

section 2055(e)(3)(C)(iii) has been strictly construed.    See

Estate of Hall v. Commissioner, 93 T.C. 745 (1989) (State court's

nunc pro tunc effective date for trust reformation disregarded in

determining date of commencement of judicial proceeding under

section 2055(e)(3)(C)(iii)).   In sum, the claim that the trust

was amended by virtue of the return statement does not withstand

scrutiny.

     The estate's argument that the section 2055(e)(3)

reformation provisions were satisfied because the trust was

managed by the trustee in conformance with the requirements of a

CRUT, since the payments to noncharitable beneficiaries were in

fact equal to 5 percent of the fair market value of the trust's

assets, is similarly unavailing.    The claim that it should be

     15
       The 2003 amendment fixed the annual payments to the
noncharitable beneficiaries (in the aggregate) at 5 percent of
the net fair market value of the trust's assets (allocated among
those beneficiaries generally according to the payments specified
in the original trust instrument). However, the 2003 amendment
was not executed, or consented to by any beneficiaries, until
August 2003.
                              - 19 -

sufficient if a trustee chooses to manage a trust so that the

payouts to noncharitable beneficiaries conform to the

requirements of a CRUT, even where the governing instrument does

not require this result, conflicts with the explicit terms of

both the 1969 Act rules, sec. 2055(e)(2), and the reformation

provisions of section 2055(e)(3).   Section 2055(e)(2) provides

that "no deduction shall be allowed" for the charitable remainder

interest in a split-interest trust "unless * * * such interest is

in a trust which is a charitable remainder annuity trust or a

charitable remainder unitrust (described in section 664) or a

pooled income fund (described in section 642(c)(5))".

Reformation under section 2055(e)(3) is not available unless the

governing instrument contains specified terms, sec.

2055(e)(3)(C)(ii), or is promptly amended, sec.

2055(e)(3)(C)(iii).   Thus, in both the "substantive" deduction

requirements of section 2055(e)(2) and the reformation provisions

of section 2055(e)(3), the terms of the governing instrument are

paramount.   As the legislative history explains, the requirement

in section 2055(e)(2) that certain trust forms be used was

designed in large part to eliminate a trustee's discretion, which

might be used to favor noncharitable income beneficiaries.   See

Estate of Gillespie v. Commissioner, supra at 376-377; H. Rept.

91-413 (Part 1), supra at 58-60, 1969-3 C.B. at 237-238; S. Rept.

91-552, supra at 86-87, 1969-3 C.B. at 479.   The fact that the
                              - 20 -

trustee here was not required by the governing instrument to make

payouts conforming to those of a CRUT--at least not until the

untimely 2003 amendment--is fatal to the estate's position.

     The estate also appears at times to suggest that we should

treat the 2003 amendment as a qualified reformation under section

2055(e)(3), since it limited payments to the noncharitable

beneficiaries to amounts that could be satisfied annually by 5

percent of the fair market value of the trust property.   We

disagree.   Since the payments to noncharitable beneficiaries in

the original governing instrument were not expressed as specified

dollar amounts or a fixed percentage of the fair market value of

the trust's assets as required by section 2055(e)(3)(C)(ii), the

only remaining option for reforming the trust was a judicial

proceeding commenced within 90 days after the return's filing,

pursuant to section 2055(e)(3)(C)(iii).   The 2003 amendment was

executed beyond that deadline--indeed, well after respondent had

contacted the estate for purposes of an examination.16

     Finally, the estate argues that the actions of the trustee

should satisfy section 2055(e)(3) under the doctrine of

     16
       We also note that the 2003 amendment appears ineffective
under Illinois law, insofar as the record discloses. As
discussed supra note 14, under Illinois law, amendment of the
trust required the consent of all noncharitable beneficiaries
with unexpired interests. There is no evidence that Migle
Francaite consented to the 2003 amendment or that her interest in
the trust had expired at the time the amendment was purportedly
made.
                               - 21 -

substantial compliance.   According to the estate, the trustee

disclosed in the return statement his intention to follow and be

bound by the requirements of a CRUT in operating the trust, the

payments to the noncharitable beneficiaries in fact conformed

with CRUT requirements, and the 2003 amendment modified the trust

so that it complied with CRUT requirements.   Thus, the estate

argues, the essential purpose of the 90-day rule in section

2055(e)(3)(C)(iii)--which is to require taxpayers to initiate

reformation before being contacted by the Commissioner--has been

satisfied by the return statement, and the eventual amendment of

the trust in 2003 should be treated as timely, especially given

the fact that the trustee in fact adhered to CRUT payout

requirements in the interim.   The foregoing should therefore be

treated as satisfying section 2055(e)(3) under the doctrine of

substantial compliance, in the estate's view.

     We disagree.   This Court's application of the substantial

compliance doctrine has been summarized as follows:

          The test for determining the applicability of the
     substantial compliance doctrine has been the subject of
     a myriad of cases. The critical question to be
     answered is whether the requirements relate "to the
     substance or essence of the statute." If so, strict
     adherence to all statutory and regulatory requirements
     is a precondition to an effective election. On the
     other hand, if the requirements are procedural or
     directory in that they are not of the essence of the
     thing to be done but are given with a view to the
     orderly conduct of business, they may be fulfilled by
                              - 22 -

     substantial, if not strict compliance. * * * [Taylor v.
     Commissioner, 67 T.C. 1071, 1077-1078 (1977); citations
     omitted.]

    Given the antiabuse rationale behind section 2055(e)(3) (as

explained in the legislative history previously discussed), we

conclude that Congress intended compliance with either section

2055(e)(3)(c)(ii) or (iii) as a precondition to effecting a

reformation of a trust to satisfy section 2055(e)(2).    Thus, the

foregoing requirements relate to the substance or essence of the

statute.   We accordingly conclude that section 2055(e)(3)

requires strict, not merely substantial, compliance.

     There was no strict compliance here.    Moreover, we are not

persuaded that even substantial compliance occurred.    The

estate's contention that the return statement should

substantially satisfy the requirement for prompt initiation of

reformation proceedings is unpersuasive.    While the

executor/trustee may have acted in good faith, the return

statement did not put respondent on notice of the trust's defects

before audit.   The return statement is fairly read as asserting

that the trust at issue was a CRUT, as it described the

charitable remainder as the "Balance that is residue following 10

year term certain charitable remainder unitrust * * * where * * *

the Trustee holds * * * pursuant to the terms and conditions of

I.R.C. Sec. 664 and related provisions".    (Emphasis added.)   None

of the efforts to amend the trust, either the unexecuted attempts
                             - 23 -

in August 2002 or the 2003 amendment in August 2003, was

commenced before respondent contacted the estate for an audit--

precisely the circumstances where Congress intended that

reformation could not be initiated.    If the estate's position

regarding substantial compliance were accepted, then the

reformation requirements of section 2055(e)(3) could be

circumvented by means of a simple disclosure on the return that a

CRUT (or CRAT) was intended, without regard to the actual terms

of the trust's governing instrument.

     We have considered the estate's remaining arguments and

conclude they are without merit or relevance.

     For the foregoing reasons,

                                      Decision will be entered

                              for respondent.