Butler v. Commissioner

Estate of Nicholas Murray Butler, Deceased, T. Ludlow Chrystie and Guaranty Trust Company of New York, Surviving Executors, and T. Ludlow Chrystie and Guaranty Trust Company of New York, Executors of the Estate of Kate Butler, Deceased Executrix, Petitioners, v. Commissioner of Internal Revenue, Respondent Butler v. Commissioner Docket No. 32431 United States Tax Court 18 T.C. 914; 1952 U.S. Tax Ct. LEXIS 114; August 27, 1952, Promulgated *114 Decision will be entered under Rule 50. 1. Where the decedent's widow was suffering from cancer in an inoperable and incurable form at the date of the decedent's death and facts known at that time indicated that her actual life expectancy was less than one year, held, the facts in existence at the time of decedent's death will be taken into account in valuing the widow's life estate rather than actuarial tables. 2. Where a charitable remainder given under the decedent's will violates section 17 of the New York Decedent Estate Law, held, for the purposes of section 812 (d) of the Internal Revenue Code, only that portion of the remainder determined by the decree of the Surrogate's Court of New York to violate section 17 is to be excluded in determining the value of the remainder for purposes of a section 812 (d) deduction. Samuel L. Brookfield, Esq., for the petitioners. Ellyne E. Strickland, Esq., for the respondent. Hill, Judge. HILL *915 The respondent determined a deficiency of $ 650.39 in estate tax of the estate of Nicholas Murray Butler. The entire deficiency is in dispute and petitioners claim an overpayment of approximately $ 14,500. Two minor issues have been stipulated by the parties in favor of the petitioners. The remaining questions presented are as follows: 1. Is the full amount of a specific bequest to a charitable legatee deductible under section 812 (d) of the Internal Revenue Code where the testator by precatory language requests that a monthly allowance for life be paid out of the bequest, or its income, to an individual? 2. Whether actuarial expectations or known facts in *116 existence at the time of the testator's death are to be used for purposes of valuing a life estate preceding a charitable remainder. 3. Whether in valuing a charitable remainder under section 812 (d) of the Internal Revenue Code, the respondent is bound by the decree of the New York Surrogate's Court or entitled to make his own computation where section 17 of the Decedent Estate Law is violated. FINDINGS OF FACT. The facts stipulated by the parties are found accordingly. The petitioners are the executors of the estate of Nicholas Murray Butler, who died on December 7, 1947, a resident of the State of New York. The Federal estate tax return of the estate of Nicholas Murray Butler was filed by the executors with the collector of internal revenue for the third district of New York. The decedent died testate, leaving a last will and testament, which was duly admitted to probate by the Surrogate's Court of New York County, State of New York, on or about January 27, 1948. Letters testamentary were duly issued by the Surrogate's Court to T. Ludlow Chrystie, Kate Butler and Guaranty Trust Company of New York, the named executors, on January 27, 1948. After certain small bequests, clause*117 FIFTH of the decedent's will provided as follows: FIFTH: I give, devise and bequeath all the rest, residue and remainder of my estate, real, personal or mixed, of which I shall die seized or possessed, or to *916 which I shall be entitled at the time of my decease, or over which I shall have power of appointment, or any legacy which I may have made herein in this my last will and testament which may lapse or become void for any reason, to my trustees hereinafter named in trust to hold, manage, invest and reinvest the same, and to pay the income thereof to my wife, KATE LE MONTAGNE BUTLER, for and during her natural life, and upon her decease the trust shall terminate, and I thereupon give, devise and bequeath the principal thereof, or if I shall survive my wife, then upon my death I give, devise and bequeath my said residuary estate, as provided in subdivisions (a), (b) and (c) of this clause FIFTH, as follows: (a) To The Trustees of Columbia University in the City of New York, one hundred thousand (100,000) dollars to constitute a permanent fund to be known as the Kate La Montagne Butler Memorial Fund, in token of my wife's long years of devoted and unselfish service to Columbia*118 University, its staff and its students. The income of this fund is to be used in such ways as The Trustees of Columbia University may from time to time determine, to support and strengthen the work of Columbia University. I ask the Trustees of Columbia University to make from this fund, or its income, a monthly allowance of ninety (90) dollars to KATHERINE V. R. SCHUYLER during her lifetime. Her present address is Box 415, Morganton, North Carolina. She is a cousin of my daughter. This allowance is necessary to enable her to meet her living expenses. (b) To my grandson, MURRAY LAWRENCE, residing with his father in Woking, England, the sum of one hundred thousand (100,000) dollars, to mark my affection for him and my faith in his future. To The Century Association of 7 West 43rd Street, New York, the sum of ten thousand (10,000) dollars to constitute a permanent fund the income of which shall be used in such manner as the Board of Management of the Association may from time to time determine. If Murray Lawrence shall predecease me or my wife the legacy to him bequeathed shall lapse. If my estate shall not be sufficient to pay in full the legacies bequeathed in subdivision (a) *119 and subdivision (b) of this clause FIFTH of my last will and testament, then I direct that the legacy bequeathed in subdivision (a) shall first be paid in full before any payment is made on account of the legacies bequeathed in subdivision (b), and the legacies bequeathed in subdivision (b) which shall not have lapsed, shall abate proportionately to the extent necessary to carry out this provision. (c) To The Trustees of Columbia University in the City of New York all the rest, residue and remainder of my estate to be added to the Kate La Montagne Butler Memorial Fund established under subdivision (a) of this clause FIFTH. It is my intention that all of my estate not disposed of by this will shall pass under this subdivision (c) of this clause FIFTH. The decedent was survived by all of the legatees named in clause FIFTH of his will. The Century Association and the trustees of Columbia University in the City of New York were organizations in existence at the time of the decedent's death and still continue to exist. Kate Butler survived her husband. At the time of her death she was 83 years of age and desperately ill. She had undergone an operation for cancer in 1947, but the advanced*120 stage of the disease had made it impossible to remove all of the cancerous tissue. On December 7, 1947, her life expectancy was not more than one year *917 because of the cancer from which she was suffering, which was in an inoperable and incurable form on that date. Kate Butler was admitted to St. Luke's Hospital in New York City February 2, 1948, and remained in that hospital until May 4, 1948, the date of her death. She survived her husband, the decedent herein, by less than five months, which, in the words of her physician, was "longer than I expected her to live." The petitioners filed their final accounting in the Surrogate's Court in New York County. The account was approved by the Surrogate's decree dated June 24, 1949, and was resettled by decree dated December 11, 1950. The decree approved the payment of various legacies already made by the executors and the other usual payments for administration expenses and provided in addition that Philip J. McCook, special guardian for Murray Lawrence, the decedent's infant grandson, be paid the sum of $ 2,250 for his services as guardian, which sum has been paid, and that a sum of $ 9,483.60 pass as intestate property. The*121 intestate property resulted from a compromise agreement reached at arm's length between the special guardian and the executors of the decedent's estate in settlement of a dispute as to the proper interpretation of section 17 of the Decedent Estate Law of New York State. It was based upon the report of the special guardian verified June 20, 1949, part of which reads as follows: 5. I have examined the will of the testator and the petition of the executors, and have made a thorough examination of their accounts schedule by schedule. I have personally checked the assets with which the executors charge themselves in Schedule H. With my associate, James Harper, Jr., of the New York Bar, I have had numerous conferences with the attorneys for the petitioners. I have given particular attention to the effect of Section 17 of the Decedent Estate Law. In this connection, I have made computations to determine whether Section 17 of the Decedent Estate Law has been violated. As a result of my examination, I have found that upon one interpretation of the statute which was favored by the executors and by the Trustees of Columbia University, there was no violation. On the other hand, on the basis*122 of another interpretation, which is mine, there appeared to be a violation in the amount of approximately $ 14,000. As is more particularly set out in my report dated and filed May 5, 1949, I respectfully referred the matter of the proper interpretation to the Honorable Surrogate. Since that time I have conferred with the attorneys for the executors and they have deemed it expedient in the circumstances to join in submitting the matter on the assumption that there has been a violation of Section 17 of the Decedent Estate Law. * * * * 7. Following the conferences described above in paragraph "5", I conferred with the attorneys for the executors and agreed that there had been a violation of Section 17 of the Decedent Estate Law to the extent of $ 14,621.57 in excess of the permitted charitable devises * * *. We started with the figures of the expenses of the estate, etc., worked out in connection with my original report. On the basis of the Federal Estate Tax return, as filed and corrected, the tax *918 rate is 30%, and an 80% credit is allowed for taxes paid to the State. This comes to 27.6% as the rate of tax. There is imposed a tax on the $ 14,621.57 above mentioned, plus*123 a tax on the amount of the reduction of the charitable bequest. In working out this combination, the attorneys for the executors agreed with me that the net tax should be $ 5,147.97. Subtracted from the original report figure of $ 14,621.57, [sic] the remainder comes to $ 9,483.60. Two-thirds of this amount should therefore be allocated to decedent's infant grandson, Murray Lawrence, who is represented by me as Guardian, and one-third of the Estate of Kate Butler, deceased. The lawyers who participated in the various conferences appreciate, and I am authorized so to state, that these figures are not, and cannot in their nature be, exact. They constitute the result of estimates which we all believe, though only approximate, are substantially correct and essentially fair. We have therefore agreed that there be submitted a decree according to which the above described share of my infant ward, Murray Lawrence, shall be made payable to him or to the Trustees under the will of the decedent, and be held and invested for his benefit under the terms of Article SIXTH of the will. The time for appeal from the Surrogate's decree has expired. OPINION. The petition filed in this proceeding*124 sets forth three assignments of error. The petition alleges, first, an erroneous valuation of the charitable remainder passing to the trustees of Columbia University in the City of New York, an organization admittedly tax exempt under section 812 (d) of the Internal Revenue Code; second, the failure to allow as a deduction the sum of $ 2,250, which was ordered to be paid to the special guardian by decree of the Surrogate's Court upon the executors' final account; and third, the failure to allow as a deduction the expenses of this proceeding. The issues raised by the second and third allegations of error have been stipulated by the parties in favor of the petitioners. We need not concern ourselves with them here. The first assignment of error raises questions which are more complex. Under subsection (a) of clause FIFTH of the decedent's will, Columbia University was given a specific bequest of $ 100,000 to constitute a permanent fund to be known as a memorial to the decedent's wife, Kate La Montagne Butler, and the trustees of Columbia University were requested to make from this fund, or its income, a monthly allowance of $ 90 to Katherine V. R. Schuyler during her lifetime. Counsel*125 for petitioners stated at the hearing that this gift to Katherine V. R. Schuyler was precatory in nature 1 and hence the full $ 100,000 should be deducted under section 812 (d) of the Internal Revenue *919 Code because the terms of the will relating to the allowance do not require Columbia University to make payment thereof. However, it is conceded that Columbia University has been regularly paying this monthly allowance to Katherine V. R. Schuyler. The petitioners' argument that the value of this legacy to Katherine V. R. Schuyler should not be deducted from the specific bequest of $ 100,000 to Columbia University in determining the final deduction allowable for the specific bequest is without substance and was not pressed upon brief. For these reasons we will not further concern ourselves with this argument here. It is sufficient that we hold that the value of this monthly allowance should be deducted from the bequest in computing the deduction allowable therefor under section 812 (d). *126 A further minor issue under the major allegation of error is the proper valuable of the life estate given by Clause FIFTH of the decedent's will to his surviving widow, Kate La Montagne Butler. It is the respondent's contention that this life estate must be valued by reference to the actuarial tables exclusively, while the petitioners maintain that the valuation of the life estate is ruled by our holding in the Estate of Nellie H. Jennings, 10 T. C. 323. There, as here, the decedent left a last will and testament under which the trustee was to hold the estate "For the use and benefit of my husband, James W. Jennings, so long as he may live." After having resolved one point not here material in favor of the taxpayer, this Court states the following at pages 327-328: The United States Supreme Court has said that in making a deduction for a remainder interest bequeathed to charity, such as is here under consideration, "the value thereof must be determined from data available at the time of the death of decedent." United States v. Provident Trust Co., 291 U.S. 272. We held in the Estate of John Halliday Denbigh, 7 T. C. 387,*127 that the use of established mortality tables, which are evidentiary only, must give way to the proven facts which show a less life expectancy. There, the life beneficiary was suffering from cancer in an "inoperable, incurable" form and was doomed to die within a year or two, whereas, according to the mortality table, she had a life expectancy of about sixteen years. Those are much like the facts in the instant case, and we think the same principle governs. The evidence is that at the date of decedent's death the life expectancy of her husband was not more than one year. Actually, he lived only two months. We therefore sustain the petitioner's contention that the valuation of the life estate, which must be deducted from the charitable bequests, should be based upon a life expectancy of not more than one year. The above decision is conclusive in the case at bar. At the time of the decedent's death it was known that his widow could not survive him for more than one year. She was then suffering from cancer in an inoperable and incurable form, so advanced in state as to cause her death less than five months after her husband's. The facts in existence at the time of decedent's*128 death were such as to render it certain that Kate La Montagne Butler would not live more than one year after decedent's *920 death, hence the proper factor to use in computing the proper value of the remainder of the trust passing to Columbia University in this respect is .961538, which is the value of the reversionary interest of $ 1 at the end of one year. The final issue for our decision involves the effect of section 17 of the Decedent Estate Law of the State of New York on the proper valuation of the charitable remainder to Columbia University. 2 *129 The respondent argues that the permissible one-half passing to charity under section 17 of the New York Decedent Estate Law is valued by subtracting from the gross estate of $ 539,358.52 the debts of the decedent and insurance payable to a named beneficiary amounting to $ 14,804.51 and dividing the result by two. Based upon this premise respondent contends that he did not err in thus limiting the deduction for the charitable remainder under the provisions of section 812 (d) to $ 262,277, which is considerably less than the amount which the charitable remainderman will receive under the Surrogate's decree. The issue of a violation of section 17 of the New York Decedent Estate Law was raised by the special guardian for the infant grandson of the decedent, who, filing a report on May 5, 1949, set forth what he deemed to be the proper interpretation of that section. His interpretation of section 17 was opposed by the executors, who relied on an interpretation more favorable to the intent of the decedent-testator. Thereafter, conferences were held between the special guardian and the attorneys for the executors. Both parties were extremely capable and familiar with the law of New York. *130 Finally, in compromise it was agreed by the parties in interest to the accounting proceeding that there had been a violation of section 17 of the Decedent Estate Law to the extent of $ 14,631.57 in excess of the permitted charitable bequests. There being a tax imposed on this sum, *921 plus a tax on the amount of the reduction of the charitable bequest, a computation was made to arrive at the amount which should be considered to be distributable intestate property of the decedent. The figure of $ 9,483.60 was deemed to be distributable intestate property, and as the result of this violation, the original decree of the Surrogate's Court was resettled by decree of the same court dated December 11, 1950, which reads in part as follows: And it appearing that the said executors have fully accounted for all the monies and properties of the estate which have come into their hands as such executors and the account having been adjusted by the said Surrogate and a summary statement of the same having been made and herewith recorded, and the Special Guardian having duly filed his report on behalf of his ward, it is hereby ORDERED, ADJUDGED AND DECREED that the said account be and the*131 same is hereby judicially settled and allowed, AND IT APPEARING that the maximum amount permissible to be given to religious, charitable or educational institutions by Section 17 of the Decedent Estate Law has been exceeded, and the Special Guardian on behalf of the infant, Murray Lawrence, grandson of the deceased, having duly raised the question of such excess under said Section 17 of the Decedent Estate Law as more fully set forth in his report filed herein, * * * it is further ORDERED, ADJUDGED AND DECREED that the sum of Nine thousand four hundred eighty-three and 60/100 dollars ($ 9,483.60) shall pass as intestate property of the testator, and it is directed one-third of said sum shall be paid by the executors to the executors of the Estate of Kate Butler, Deceased, and two-thirds thereof, the amount payable to testator's non-resident infant grandson, Murray Lawrence, shall be paid into or deposited with the Surrogate's Court on behalf of said infant * * *. Thus it is seen that section 17 of the Decedent Estate Law of New York has been violated at most by the sum of only $ 14,631.57, and further that for Federal estate tax purposes the sole effect of this violation is to increase*132 the taxable net estate by exactly that sum. It is fundamental that section 812 (d) of the Code requires a valid bequest, legacy, devise or transfer. 3 The respondent does not contest the validity of the bequest entitling Columbia University to the charitable remainder under discussion here. Indeed, section 17 of the Decedent Estate Law standing alone does not make any part of a charitable bequest void. Its effect has been held to make a bequest which violated its provisions voidable at the instance of one of the specified individuals *922 in the statute, that is, a surviving husband, wife, child, descendant or parent. Millard v. Humphrey, 8 F. Supp. 784, affd. 79 F. 2d 107. See also, In re Donnelly's Estate, 172 Misc. 107, 14 N. Y. S. 2d 700. Testamentary gifts of more than one-half are merely voidable, depending upon whether one of the individuals enumerated above chose to initiate proceedings requisite for the purpose of subverting the indicated testamentary intent of the testator. In re Gaubert's Estate, 164 Misc. 768, 299 N. Y. S. 619.*133 The effect of the respondent's argument is to make the Commissioner of Internal Revenue a proper party-plaintiff to sue for violations under section 17 of the Decedent Estate Law of New York. Of course, this is impossible. *134 The statute fails to include the Commissioner among those enumerated as beneficiaries of its provisions. The plain terms of section 812 (d) permit the deduction of a valid bequest to a charitable, religious, scientific, literary, or educational institution. We therefore hold that all of the requirements of section 812 (d) of the Code have been met to the extent that the value of the deductible charitable remainder herein does not include the sum of $ 14,631.57, which is the amount by which section 17 of the New York Decedent Estate Law was found to be violated. Decision will be entered under Rule 50. Footnotes 1. Clause FIFTH of decedent's will: (a) * * * I ask the Trustees of Columbia University to make from this fund, or its income, a monthly allowance of ninety (90) dollars to KATHERINE V. R. SCHUYLER during her lifetime. Her present address is Box 415, Morganton, North Carolina. She is a cousin of my daughter. This allowance is necessary to enable her to meet her living expenses. * * * *↩ 2. McKinney's Consolidated Laws of New York, Annotated, Decedent Estate Law: § 17. Devise or bequest to certain societies, associations, corporations or purposes. No person having a husband, wife, child, or descendant or parent, shall, by his or her last will and testament, devise or bequeath to any benevolent, charitable, literary, scientific, religious or missionary society, association, corporation or purpose, in trust or otherwise, more than one-half part of his or her estate, after the payment of his or her debts, and such devise or bequest shall be valid to the extent of one-half, and no more. The validity of a devise or bequest for more than such one-half may be contested only by a surviving husband, wife, child, descendant or parent. When payment of a devise or bequest to such society, association, corporation or purpose is postponed, in computing the one-half part of such society, association, corporation or purpose, no allowance may be made for such postponement for any interest or gains or losses which may accrue after the testator's death. The value of an annuity or life estate, legal or equitable, shall not be computed upon the actual duration of the life, but shall be computed upon the actuarial value according to the American Experience Table of Mortality at the rate of four per centum per annum. Such value shall be deducted from the fund or property, which is subject to the annuity or life estate, in order to ascertain the value of a future estate or remainder interest passing to such society, association, corporation or purpose. As amended L. 1923, c. 301; L. 1927, c. 502; L. 1929, c. 229, § 3; L. 1936, c. 288; L. 1947, c. 848, § 2, eff. April 14, 1947.↩ 3. 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 Religous Uses. -- The amount of all bequests, legacies, devises, or transfers * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, * * *.↩