Court Opinion

ID: 9445016
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:18:30.559734+00
Date Added: 2024-06-11T17:30:06.195986
License: Public Domain

POPE, Circuit Judge
(dissenting).
I have a somewhat different view of the statutes here applicable, — one that has led me to believe that Arthur Jordan Foundation v. C. I. R., 7 Cir., 210 F.2d 885, which reaches the opposite conclusion, is correctly decided.
I do not think Ralph H. Eaton Foundation v. Commissioner of Internal Revenue, 9 Cir., 219 F.2d 527, furnishes any solution for this case. It was decided upon a claim for exemption under Sec. 101 (6) of the Revenue Code which refers to “corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *.” The John Danz Charitable Trust does not come within any of those categories. It is, as the Tax Court pointed out in its opinion, “a genuine valid trust * * * taxable under Supplement E”. The tax is imposed by Sec. 161 and ■ the deduction claimed is that allowed by Sec. 162(a).
A difference in phraseology in Sec. 101 (6) and Sec. 162(a) suggests a different congressional intent with respect to corporations and foundations on the one hand and trusts on the other. Sec. 101 (6) which commanded the decision in the Eaton Foundation case refers to corporations or foundations “organized and operated exclusively for religious, charitable”, etc. purposes. The words which I have italicized appear to me to be key words. Because Eaton Foundation was not operated exclusively for charitable purposes, it was not entitled to the exemption claimed.
As pointed out in the majority opinion, Sec. 162(a) contains two clauses. The first clause:
“There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(0)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (0),”
the second clause:
“Or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit. * * * ”
It seems to me that the first clause is intended to cover the case of a trust which provides for distribution of income both to charitable and non-charitable purposes. Thus if the creator of the trust provides for distribution of income (a) to his grandson, and (b) to the community chest, the deduction relates to that part of the gross income which during the taxable year is paid or permanently set aside for the community chest. However, if the trust instrument makes no provision whatever for the grandson or any other individual and the sole ben*678eficiary under the trust is the community chest, then the second clause applies since the income “is to be used exclusively for * * * charitable * * * purposes.” Thus there is no necessity for any allocation within the taxable year of the income as between an ordinary individual on the one hand and a charity on the other. The second clause begins with the words: “Or is to be used exclusively” etc. These are words which themselves point to future use.1 The construction which I here suggest would lead to the same result reached in Arthur Jordan Foundation v. C. I. R., supra.
It is true that here the Trust purchased and operated for a limited time three small candy shops adjoining the theatres which were owned by a theatre company in which the trust held shares of stock. The findings also show that the trustees purchased the hotel property for the purpose of liquidating the personal property and holding the real property for lease to a hotel operator. It is entirely normal for a trust to acquire and own real property and collect the rents and revenues from leases thereof, and the operation of the hotel during the taxable year here involved, while a suitable arrangement for lease was being sought, was no more than incidental to the proper acquisition of real estate for rental purposes.
In Arthur Jordan Foundation, supra, the court said, 210 F.2d at page 889: “But if the ultimate beneficial application of the income is for approved purposes, the bequests so held for investment are, within the meaning of the statute, being used for those purposes. Accordingly, such bequests are deductible.
“The principle which to us seems controlling in this case is the reasonable certainty that the beneficent purposes of the trust will be greatly served as the investment fund éxpands and reaches the goal fixed by the settlor. It may be expected that as the fund increases the income available for direct application to charitable or related purposes will increase accordingly. There can be no other reason, under the terms of the trust instrument, for adding to the fund. On the other hand, anything which retards the growth of the fund necessarily reduces the amount of the income available for direct charitable purposes. The purpose of investment is solely and exclusively to produce more income for those purposes. To subject to tax that part of the income which is retained as a part of the corpus would thus very materially impair the possibility of achieving those objectives.”
I am impressed by that language and what was said about the policy of Congress to encourage gifts for charitable purposes. As I have indicated above, I think that the word “exclusively” is inserted in this section for the purpose of making the distinction between trusts which may be set up for dual purposes and trusts which are set up exclusively for charitable purposes. That some of the funds here were invested in candy stores is not sufficient to demonstrate that the income of the trust, whatever it is, is not to be used exclusively for charitable purposes. Even a trust which purchases stocks and bonds might suffer loss in its investments but that would not suggest that the income received by such a trust was for that reason not to be used exclusively for charitable purposes.
I am satisfied that the interpretation the majority give to the word “exclusively” is untenable. They say this “must mean that, although the beneficiaries are not yet designated, the funds are to be disbursed ‘within the taxable year’.” Disbursement within a taxable year would necessarily be to named beneficiaries. The effect of the majority’s interpretation is to wipe out this second clause entirely.
It is suggested that the Arthur Jordan Foundation was different in that there the distribution to charitable organizations was to be made when the fund had reached $5,000,000. Says the opinion: *679John Danz, as settlor, was under no compulsion to exercise his power to designate charitable beneficiaries.” This is unimportant for the trust instrument provides that upon the death of John Danz the amounts remaining in trust A “shall then be distributed” to beneficiaries which must meet the designated requirements. Nothing could be more certain than the death of John Danz.
I am of the opinion that the decision of the Tax Court should be reversed.

. There is no comparable language, looking to the future, in § 101(6) which was involved in the Eaton Foundation case.