Sells v. Commissioner

Estate of Annie Sells, Deceased, G. M. Sells and T. D. Sells, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent Sells v. Commissioner Docket No. 12641 United States Tax Court 10 T.C. 692; 1948 U.S. Tax Ct. LEXIS 210; April 27, 1948, Promulgated *210 Decision will be entered under Rule 50. The decedent at the age of 78, without legal advice, wrote out in longhand her will, consisting of four paragraphs. In the third paragraph she said "I would like to set aside as an educational loan fund my Bank Stock in The Orange Nat. Bank, the dividend to be used to provide scholarship first to relatives or other Boys or girls" and "I wish that $ 200.00 hundred dollars per year be given for Missions, or where most needed to The First Methodist Church in Orange, Tex. The Pastor & Stewards as trustees." The decedent died in the following year on February 9, 1945. As a result of proceedings in the probate court the bank stock, having a value of $ 22,125, was turned over to a trustee by the executors to administer as a trust in perpetuity. The decedent was survived by 11 relatives of scholastic age. During the first 2 years the trustee collected $ 3,300 as dividends and paid out $ 400 to the church, $ 112.50 as trust fees, and 5 scholarships of $ 500 each to grandnephews and grandnieces of the decedent. Held, the value of the bank stock is deductible from the gross estate of the decedent under section 812 (d), I. R. C., as a bequest*211 to a trustee to be used by such trustee exclusively for religious or educational purposes. Irl F. Kennerly, Esq., for the petitioner. D. Louis Bergeron, Esq., for the respondent. Black, Judge. BLACK *692 This proceeding is for a redetermination of a deficiency of $ 5,777.44 in estate tax. As shown in the statement attached to the deficiency notice, the deficiency is the result of three adjustments to the net estate, as follows: Addition to value of real estate $ 12,000.00 Addition to value of stocks and bonds 16,368.75 Decrease in deduction for charitable bequests 22,125.00 50,493.75 *693 Petitioner, by appropriate assignments of error, contests the first and third adjustments. The first adjustment has been settled by stipulation (paragraph 9 of*212 the stipulation of facts) and effect will be given thereto in the recomputation to be made under Rule 50. The third adjustment was explained in the statement attached to the deficiency notice as follows: Schedule N Determined Returned Item 1 $ 22,125.00 It is held that this item is not a deductible one under the provisions of Section 812 (d) of the Internal Revenue Code, or any other provision of the Estate tax laws and regulations effective at date of decedent's death. FINDINGS OF FACT. The facts as stipulated are so found. Petitioner is the estate of Annie Sells, who died on February 9, 1945, in Orange, Orange County, Texas. The estate acts herein by and through its executors, G. M. Sells and T. D. Sells, who have authority to so act. The executors reside in Orange, Texas. The estate tax return was duly filed by petitioner with the collector for the first district of Texas at Austin. Annie Sells, a feme sole throughout her lifetime, wrote and signed in her own handwriting on January 6, 1944, when she was 78 years of age, a document which is as follows: To my loved ones -- [EDITORS NOTE: TEXT WITHIN THESE SYMBOLS [O> <O] IS OVERSTRUCK IN THE SOURCE.] This *213 is my desire that so long as Genie Call, George Sells or myself may live the Brick Home & contents to remain intact. The last one of us left may dispose of the Home & contents as they please, unless previously sold or disposed by common consent. To Daisy & Traylor D. Sells the Havaland China [O> Set <O]. The other pieces of china & cut glass to be divided among those who love me -- in my heirs. To Charlotte Traylor Bell, my diamond ring. To Olive Sells Wren my Cameio [sic] Pin. To Mildred Sells Haines my pearl necklace & pin. My diamond Pin to Daisy Gee Sells, other little trinkets & personal effects to be divided or given away. (none to be sold) I would like to set aside as an educational loan fund my Bank Stock in The Orange Nat. Bank, the dividend to be used to provide scholarship first to relatives or other Boys or girls. I wish that $ 200.00 hundred dollars per year be given for Missions, or where most needed in The First Methodist Church in Orange Tex. The Pastor & Stewards as trustees. My share in the Brown Paper Mill & other personal property I desire to give equally to my brothers & sisters or the interest thereof to perpetuate, a regular income to my brothers*214 & sisters & to the present & [O> in <O] coming generations of nieces and Nephews leaving this in trust to G. M. Sells & Traylor D. Sells, Sr. Signed by Annie Sells, Jan. 6, 1944. To Traylor D. Sells 10 ft. of ground for his drive way. *694 The sole surviving heirs at law of decedent are her 2 brothers, G. M. Sells and W. R. Sells, and 2 sisters, Eugenia Call, wife of George Call, and Katherine Traylor, wife of W. D. Traylor. She was also survived by several nephews and nieces, including Traylor D. Sells, his brother and 2 sisters, none of whom was of scholastic age, as well as 11 grandnephews and grandnieces of scholastic age, as follows: William Traylor Bell, who has 2 1/2 more years in college; Patricia Lynn Traylor, who is in her first year in college; Frank S. Haines, Jr., who finishes college this year; George Monroe Sells II, who has 3 more years, now being a freshman; Traylor Dixon Sells, Jr., a freshman, who also has 3 more years; as well as the following 6 who are not as yet ready for college: Betsy Ann Bell, age 14; Charlotte Traylor Bell, Jr., age 2; Carolyn Traylor, age 14; Dixon Lee Traylor, Jr., age 11; William Burt Traylor, age 16, and John Potts Traylor, age *215 6. George Monroe Sells II and Traylor Dixon Sells, Jr., are children of Traylor D. Sells, one of the joint executors, as well as the trust officer of the Orange National Bank, hereinafter sometimes referred to as the bank. All of the grandnephews and grandnieces of college age are now attending Southwestern University. The above mentioned document signed by Annie Sells on January 6, 1944, was filed with the County Court of Orange County, Texas, acting as a probate court of competent jurisdiction. On June 11, 1945, the document was duly admitted to probate as the last will and testament of Annie Sells; and G. M. Sells and Traylor D. Sells (son of W. R. Sells) were appointed joint executors of her estate. Thereafter, said appointees duly qualified as such executors by taking the required oath and by giving bond as required by the order of the court. On June 29, 1945, the executors filed in the probate court an inventory and appraisement of the estate which disclosed the following assets subject to liabilities: Real estate: Old Sells home $ 5,500.00 Stocks: 1,687 1/2 shares of stock in Brown Paper Mill Co 37,631.25 150 shares of stock in the Orange National Bank 22,125.00 4 shares of stock in the Orange Casket Co 180.00 Miscellaneous: Cash in bank 11,224.67 Jewelry, etc 89.00 Total assets 76,749.92 Less liabilities: Miscellaneous 675.75 Net estate 76,074.17 *216 On July 17, 1945, the court entered an order approving the inventory and appraisement of the estate as set forth above. *695 Within the time provided by law, the executors of the estate filed an estate tax return wherein they reported as a part of the gross estate the old Sells home at a value of $ 5,500, the shares of stock in the Brown Paper Mill Co. at a value of $ 37,631.25, and the 150 shares of stock in the Orange National Bank at a value of $ 22,125. The executors claimed, as a deduction under "Charitable, Public and Similar Gifts and Bequests," schedule N of the return, the amount of $ 22,125 representing the value of the 150 shares of stock in the Orange National Bank. The return as thus filed showed no tax liability. The respondent determined that at the time of the decedent's death, the value of the old Sells home was $ 17,500, that the value of the Brown Paper Mill Co. stock was $ 54,000, and that petitioner was not entitled to a deduction under section 812 (d) of the Internal Revenue Code of the claimed amount of $ 22,125 or any other amount. For the purpose of this proceeding, the parties now agree that the value of the old Sells home was $ 12,500 instead of *217 $ 5,500 reported by the executors and instead of $ 17,500 determined by the respondent. The increase in the valuation of the Brown Paper Mill Co. stock is not contested. On December 17, 1945, the probate court entered an order which, so far as it is here material, is as follows: This the 17th day of December, 1945, it being brought to the attention of the Court that Annie Sells, deceased, was the owner of 150 shares of stock in the Orange National Bank in Orange, Texas, and also that she was the owner of certain real estate designated as the Home Place and more particularly described as follows, to-wit: * * * * And it further appearing to the Court that according to the terms of the will of the said Annie Sells, deceased, heretofore admitted to Probate in this Court, that the said Orange National Bank Stock was left in trust with the Orange National Bank as Trustee. * * * * And it also being shown to the Court that there is ample cash on hand to pay all of the debts of the deceased, and to pay the expenses of this administration and that therefore the stock and dividends hereinabove mentioned, and the real estate above described should -- distributed to those entitled to the same. *218 It is therefore ordered by the Court that the administrators herein transfer and deliver the 150 shares of Orange National Bank Stock owned by the said Annie Sells, to the Orange National Bank as trustee. In accordance with the above order of December 17, 1945, the executors of the estate of Annie Sells turned over to the bank the 150 shares of stock of the bank. On or prior to January 2, 1946, an account was opened at the bank in the name of "Orange National Bank, Trustee, Miss Annie Sells Estate." The trustee's receipts and disbursements with reference to this account from the beginning to August 15, 1947, inclusive, are as follows: *696 Date Item Receipts Disbursements [1946] Jan. 3 Deposit dividend #136 $ 1,500.00 Jan. 3 First Methodist Church $ 200.00 Dec. 3 Deposit dividend #137 1,800.00 [1947] Jan. 4 First Methodist Church 200.00 July 21 Orange Nat. Bank, trust fees 112.50 Aug. 15 William Traylor Bell 500.00 Aug. 15 Frank S. Haines, Jr 500.00 Aug. 15 Patricia Lynn Traylor 500.00 Aug. 15 George Monroe Sells, II 500.00 Aug. 15 Traylor Dixon Sells, Jr 500.00 The balance in the above account after the above disbursements on August 15, *219 1947, was $ 287.50. On May 8, 1947, the probate court entered the following order: On this the 8th day of May, 1947, came on to be heard, in the above styled and numbered cause, the oral application of G. M. Sells and Traylor Sells in their capacity as joint executors of the will and estate of Annie Sells, deceased, for clarification of a certain Order of this Court entered herein December 17, 1945, on the point of whether or not this Court did thereby appoint The Orange National Bank as Trustee of the Trust for religious and educational purposes created by the will of said decedent. Thereupon it appeared to the Court: that an Order was entered herein on December 17, 1945, whereby this Court adjudicated (among other things) that said decedent's one hundred fifty (150) shares of stock in The Orange National Bank were left in trust with The Orange National Bank as Trustee, and whereby this Court ordered said executors to transfer and deliver said stock to The Orange National Bank as such Trustee; and that said Order, as entered, does not fully and accurately set forth what this Court decided, and requires clarification. It further appeared to the Court that the provisions of said decedent's*220 will clearly indicate her intention to create a trust for specified religious and educational purposes, and to set aside her stock in The Orange National Bank as the fund or property to be utilized for the purposes of said trust, but do not clearly designate a trustee who shall administer said trust. The Court being of the opinion, then and now, that the said trust should not be permitted to fail for want of a trustee, and that this Court should appoint a trustee to administer said trust: It Is, Therefore, Ordered, Adjudged and Decreed by the Court: that said The Orange National Bank be, and it is hereby, appointed Trustee of said trust and vested with full power and responsibility to act as such Trustee in accordance with the provisions of said will and the laws of Texas; and that the said previous Order of December 17, 1945, insofar as applicable, be, and the same is hereby, confirmed and carried forward; and that the action of said executors in heretofore complying with said previous Order by transferring and delivering said one hundred fifty (150) shares of stock to said The Orange National Bank as Trustee, be, and the same is hereby, approved and confirmed. On or about May 19, *221 1947, the bank accepted the appointment as trustee of the above mentioned 150 shares of bank stock. On July 23, 1947, the bank addressed a letter to each of the nephews and nieces of decedent who had children of scholastic age and who *697 were about to attend college or had been attending college. The body of these letters was the same except for the names of the children mentioned therein. The one addressed to "Mr. and Mrs. John Y. Bell" was as follows: As you probably already know, your aunt, Miss Annie Sells, left an educational trust with the Orange National Bank. The income from this trust is to be used for educational and religious purposes. It is our understanding that your son William Traylor Bell plans to re-enter college this fall and, if so, he would be entitled to his prorata part of this trust. We will appreciate hearing from you by letter stating positively that Billy is going to college and that the money received from this trust by him will be used for his education only. Disbursement will probably be made by us early in August, but not until our file is complete with the proper request. We sincerely hope that we will hear from you in the near future so *222 that we can clear this matter in plenty of time before school starts. After all the nephews and nieces who had children of scholastic age had replied to the letter of July 23, 1947, the bank, on August 15, 1947, made the five distributions of $ 500 each to the grandnephews and grandnieces mentioned in the above schedule of receipts and disbursements of the trustee. With respect to the educational feature of the trust here in question, the policy of the trustee is to use only the income of the trust remaining after the payment of expenses and the annual payment of $ 200 to the First Methodist Church to give the educational benefit to the now living grandnephews and grandnieces of the decedent (11 in number) and that after that time the beneficiaries will be selected with the assistance and advice of whoever is the pastor of the First Methodist Church in Orange, Texas. The trust was a trust in perpetuity. There has been no contest of the decedent's will affecting the trust for religious and educational purposes. There is complete accord between the heirs of the decedent and the trustee as to the interpretation of the will. Evidence of that accord is in the form of an affidavit executed*223 by each of the heirs and filed with the trustee. These affidavits are kept by the trustee as a part of its administration of the trust and are in the main identical. The status of the "relatives" of the decedent as prospective recipients of the educational benefits of the trust is set forth in full in the affidavits, and a summary of the common interpretation by the heirs, the executors, and the trustee is found in the following portion of each affidavit: (3) All agree that, subject to the above-mentioned annual payments to the First Methodist Church, the dividends or other income from said stock are to be disbursed from time to time by the trustee of said trust exclusively to provide scholarships or other educational advantages for boys and girls selected by such trustee with the advice and assistance of the person who may then be the pastor of said Church. All agree that the will, in providing for the distribution of such educational benefits, indicates at least a slight preference of relatives of *698 the testatrix, but not a limitation to that class. In other words, all agree that the testatrix in her will expressed a desire that boys and girls related to her have some*224 preference in the selection of those who are to be extended the opportunity to benefit from the distribution of scholarships or other educational advantages from the funds she provided, but that she did not confine her charity to such relatives. All agree, therefore, that in the distribution of such educational benefits, the only relatives who are entitled to any character of preference are those of her nephews and nieces who are now in existence: namely, the following: [Here follows a list of the 11 grandnephews and grandnieces heretofore mentioned in these findings. The affiants, in using the terms "nephews and nieces," unquestionably meant grandnephews and grandnieces, since these were the ones that were specifically named in paragraph 3 of the affidavits.] No part of the activities of the trustee of the trust here in question consisted of carrying on propaganda or otherwise attempting to influence legislation. OPINION. The one issue remaining in this proceeding is whether petitioner is entitled to deduct from the value of the gross estate under section 812 (d) of the Internal Revenue Code the amount of $ 22,125 as representing a bequest to a trustee to be used by such trustee*225 exclusively for religious or educational purposes. The material provisions of this section, as amended, are in the margin. 1 Since the parties *226 agree that no part of the activities of the trustee was carrying on propaganda or otherwise attempting to influence legislation and petitioner is not claiming a deduction in excess of the value of the 150 shares of bank stock required to be included in the gross estate, it follows that petitioner is entitled to the deduction it claims if the remaining facts relative to the claimed deduction fall within the following provisions of the statute: The amount of all bequests * * * to a trustee * * * but only if such contributions or gifts are to be used by such trustee * * * exclusively for religious * * * or educational purposes * * *. The respondent contends that the decedent's will was too vague to warrant a holding that it was the decedent's intention that her 150 shares of bank stock be set aside in a trust for the purpose of using the income exclusively for religious and educational purposes, and, if wrong in that contention, then the educational feature of the trust must *699 be regarded as bestowing a private as contrasted with a public benefit, thus rendering the bequest nondeductible for that reason. That part of the will under which petitioner contends a deductible bequest*227 was made is as follows: I would like to set aside as an educational loan fund my Bank Stock in The Orange Nat. Bank, the dividend to be used to provide scholarship first to relatives or other Boys or girls. I wish that $ 200.00 hundred dollars per year be given for Missions, or where most needed to The First Methodist Church in OrangeTex. The Pastor & Stewards as trustees. It is a cardinal principle in the interpretation of wills that they be construed to effectuate the intention of the testator and that if a general charitable purpose is manifest, within the limits of the testator's language, a broad and liberal construction should be applied to that language and the gift upheld. John Markle et al., Executors, 28 B. T. A. 201. See also Beggs v. United States, 27 Fed. Supp. 599. The probate court recited in its order dated May 8, 1947, that the above provisions of the decedent's will "clearly indicate her intention to create a trust for specified religious and educational purposes, and to set aside her stock in The Orange National Bank as the fund or property to be utilized for the purposes of said trust * * *." *228 The court further recited that the said provisions of the will "do not clearly designate a trustee who shall administer said trust" and that, being of the opinion "that the said trust shall not be permitted to fail for want of a trustee," it thereupon ordered, adjudged, and decreed "that said The Orange National Bank be, and it is hereby, appointed Trustee of said trust and vested with full power and responsibility to act as such Trustee in accordance with the provisions of said will and the laws of Texas * * *." The heirs, executors, and trustee are all in accord with the probate court's construction of what the decedent's intention was with respect to her 150 shares of bank stock. We also agree with that construction and hold that it was the decedent's intention that her 150 shares of bank stock be set aside in a trust, the income from which was to be used exclusively for religious and educational purposes. Cf. Colton v. Colton, 127 U.S. 300; Busby v. Lynn, 37 Tex. 146. Was the bequest rendered nondeductible because of the provision in the decedent's will that part of the income was to be used to provide scholarships*229 "first to relatives or other boys or girls"? It should be noted that the decedent did not limit the educational purposes of her trust to the use of her relatives. She merely indicated that a preference should be given to them and did not confine her charity to such persons. Such a mere preference for relatives will not defeat the deduction provided for under section 812 (d), supra. Commonwealth Trust Co. of Pittsburgh v. Granger, 57 Fed. Supp. 502; Restatement *700 of Trusts, sec. 375, comment c; Estate of Agnes C. Robinson, 1 T. C. 19; Annotation, 131 A. L. R. 1277, 1289. The heading of paragraph IV of the annotation reads as follows: IV. Trust giving preference to relatives. There is virtually complete agreement among the authorities that an otherwise charitable trust, looking to the benefit of the public generally, is not rendered private merely because the donor directs that relatives or descendants shall be preferred in the selection of beneficiaries. Scott, in Law of Trusts at page 2031, states: * * * In the United States as well as in England, it is held that a trust *230 for the relief of poverty or the promotion of education is charitable, although by the terms of the trust it is provided that in selecting the beneficiaries preference should be given to relatives or descendants of the settlor or of other designated persons. The respondent, in contending that the bequest here involved does not qualify for a deduction under the applicable statute, relies principally upon Amy Hutchison Crellin, 46 B. T. A. 1152. In that case the taxpayer set up a fund of $ 35,157.50 in trust primarily to educate 14 of her grandnephews and grandnieces named in the trust instrument, with the provision "That the maximum amount which any one of the before-named persons is entitled to receive under the terms of this trust agreement shall be Four Thousand Dollars ($ 4,000)." The agreement then provided that any part of the fund not required for the 14 named relatives "shall be used for educational aid to young members of the First Methodist Church of Pasadena, Pasadena, California." The taxpayer claimed the $ 35,187.50 as a deduction for gift tax purposes under section 1004 of the code as representing gifts made to a "trust * * * organized and*231 operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *." In denying the deduction claimed we (then the United States Board of Tax Appeals) said: * * * The fourteen relatives named in subdivision A are not within a general class of beneficiaries, and do not present an instance within the doctrine that a trust for a general class is none the less a charitable trust if it provides for a preference to certain members of the class. Cf. Schoellkopf v. United States, 124 Fed. (2d) 982. Instead of being favored beneficiaries of a more general class, the nominees in group A are the particular persons for whom the trust was primarily created. In the instrument itself they are the first named, and, if their educational demands are sufficient, they may exhaust the fund. * * * [Emphasis supplied.] The facts in the Crellin case are materially different from the facts in the instant case. In the Crellin case the trustee could use the corpus as well as the income to educate the 14 persons specifically named in the trust instrument, and could thus very easily at $ 4,000 per person exhaust the fund and leave*232 nothing for the young people of the church. In the instant proceeding the trust was a trust in perpetuity and only *701 the income of the trust could be used for the purposes specified in the will. It is apparent as time goes on that an increasing number of the general class will thus receive the educational benefits specified in the decedent's will. We hold that this difference brings the instant proceeding within the previously mentioned doctrine that a mere preference for relatives will not defeat the deduction provided for under section 812 (d) of the Internal Revenue Code and that the respondent erred in disallowing the deduction claimed in the amount of $ 22,125. Estate of Agnes C. Robinson, supra;Commonwealth Trust Co. of Pittsburgh v. Granger, supra. Decision will be entered under Rule 50. Footnotes 1. SEC. 812. NET ESTATE. For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate -- * * * * (d) Transfers for Public, Charitable, and Religious Uses. -- The amount of all bequests, legacies, devises, or transfers * * * to a trustee or trustees * * * but only if such contributions or gifts are to be used by such trustee or trustees * * * exclusively for religious, charitable, scientific, literary, or educational purposes * * * and no substantial part of the activities of such trustee or trustees * * * is carrying on propaganda, or otherwise attempting, to influence legislation. * * * The amount of the deduction under this subsection for any transfer shall not exceed the value of the transferred property required to be included in the gross estate.↩