Norris v. Commissioner

ESTATE OF FANNIE W. NORRIS, DECEASED, DANIEL W. NORRIS, EMMET L. RICHARDSON AND PERRY J. STEARNS, AS EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Norris v. Commissioner Docket No. 104902. United States Board of Tax Appeals 46 B.T.A. 705; 1942 BTA LEXIS 832; March 18, 1942, Promulgated *832 Decedent's will, after making a number of specific bequests, left all the residue of the estate to trustees who were directed to pay certain annuities out of the income therefrom and, if they were satisfied they had in their possession property more than sufficient to meet in full all previous requirements of the will, to pay out of the principal "not to exceed $5,000 to Columbia Hospital", and thereafter they were authorized and empowered "whenever and as often as they are satisfied that they have in their hands ample funds to fulfill all the requirements of my said will, at their discretion and option, to pay to any worthy charitable, religious or educational corporation, association or enterprise, operating in the City of Milwaukee, Wisconsin, such sums of money out of the principal in their hands as they may deem best." The trustees were given uncontrolled discretionary power to change or increase specific bequests and annuities to named beneficiaries. They paid $5,000 to the Columbia Hospital and transferred property of the value at the time of decedent's death of $284,341.10 to the Norris Foundation. Held, such bequests were contingent, indefinite, and uncertain, and money*833 and property transferred thereunder within the sole discretion of the trustees to the Columbia Hospital and the Norris Foundation are not deductible from the value of the gross estate as charitable bequests under section 303(a)(3), Revenue Act of 1926, as amended. Perry J. Stearns, Esq., for the petitioner. S. U. Hiken, Esq., for the respondent. ARNOLD *706 The Commissioner determined a deficiency in estate tax in the amount of $68,294.82. The questions involved are whether payments and transfers of money and property to the Columbia Hospital and Norris Foundation were bequests, legacies, devises, or transfers within the meaning of section 303(a)(3) of the Revenue Act of 1926, as amended, and as such deductible from the value of the gross estate of decedent for estate tax purposes. FINDINGS OF FACT. The petitioners are the named and duly appointed executors and trustees under the will of Fannie W. Norris, who died testate in Milwaukee, Wisconsin, on April 26, 1937, a resident of that city. On May 3, 1937, the will and codicils of decedent were duly proved and admitted to probate by the County Court of Milwaukee County, Wisconsin. *834 The will of decedent provided, inter alia, as follows: ITEM EIGHTEEN: All the rest, residue and remainder of my estate, real, personal and mixed, of whatsoever the same may consist, and wherever the same may be, I give, devise and bequeath unto my trustees hereinafter named, the survivor of them and their successors, in trust, to have and to hold the same during the continuance of the lives of - my son, DANIEL WELLS NORRIS, FRANCIS D. WEEKS, MABEL F. LA CROIX, HELEN BRADLEY and ELIZABETH DURHAM, all of whom are named and identified in this will, and the survivors and survivor of them, and thirty (30) years after the death of such survivor. I direct that my said trustees shall have entire control and management of the trust property committed to their care, invest and re-invest the same, change investments and sell, pledge and dispose of all such trust property as they, from time to time shall deem best, and collect all moneys, principal and income, that may be owing, and dispose of said principal and income as herein directed. After deducting all taxes and expenses in the management of the trust funds services of agents, attorneys and reasonable compensations*835 to the trustees from the gross income of the trust property, I direct the trustees to use the net annual income thereof as follows, to-wit: I direct my said trustees to use annually for the comfort, support, welfare and happiness of each of the following named persons during the periods described, the annual sums designated in each case. I direct that my said Trustees and their successors shall have the power, from time to time, in their uncontrolled discretion, to reapportion such income among such beneficiaries as they deem best, increasing the amounts paid to some beneficiaries and decreasing the amounts paid to others to the extent of entirely excluding any beneficiary from the receipt of income for such time as said Trustees deem best, and the decision of my said Trustees adding to or subtracting from the amounts designated, shall be final and conclusive. [Subparagraphs lettered "(A)" to "(Q)", both inclusive, in which decedent named various annuitants, are omitted.] *707 (R) If and when said Trustees are satisfied that they shall have in their possession trust property more than sufficient to meet in full all the previous requirements of my will, then I direct*836 said trustees to pay out of the principal of the trust property in their possession to COLUMBIA HOSPITAL of Milwaukee, Wisconsin, meaning the corporation by that name conducting a hospital near Milwaukee-Downer College, a sum not exceeding Five Thousand (5,000) Dollars. (S) After my trustees have paid to COLUMBIA HOSPITAL the sum of not exceeding Five Thousand (5,000) Dollars as set forth in Subdivision (R) of this ITEM, I authorize and empower them, whenever and as often as they are satisfied that they have in their hands ample funds to fulfill all the previous requirements of my said will, to appropriate and pay over such sums of money as they, in their discretion, may deem best, as additional bequests to such of the beneficiaries named in ITEMS FOURTEEN, FIFTEEN and EIGHTEEN, as they may from time to time determine. (T) After my trustees have paid to COLUMBIA HOSPITAL the sum of not exceeding Five Thousand (5,000) Dollars as set forth above, I authorize and empower them whenever and as often as they are satisfied that they have in their hands ample funds to fulfill all the requirements of my said will, at their discretion and option, to pay to any worthy charitable, religious*837 or educational corporation, association or enterprise, operating in the city of Milwaukee, Wisconsin, such sums of money out of the principal in their hands as they may deem best, with the suggestion which is not mandatory, that the enterprises which I have been interested in be given the preference. (U) The trustees shall have absolute discretion as to the best manner of expending and using the several sums of money I have hereinbefore authorized them to use for the comfort, support, welfare, and happiness of the several beneficiaries above named; and said trustees may, if they deem it best, pay directly to any one or more of said beneficiaries parts or all of said sums, provided however that none of said beneficiaries shall be entitled, as a matter of right, to receive his or her portion in cash, and shall have no right to assign or sell the same; and said trustees shall never be under any obligation to honor any such assignment or sale. (V) The trustees may, if they deem it best, use enough of the principal of the trust property in their possession, in purchasing an annuity or annuities in any one or more first class life insurance companies doing business in the United States*838 of America, for the benefit of any or more of the beneficiaries named in this ITEM EIGHTEEN, whereby each such beneficiary for whom any annuity shall be purchased shall receive during the continuance of his or her life an annual sum equal to that which I have herein directed said trustees to use for his or her comfort, support, welfare and happiness. After the commencement of the payment to any such beneficiaries of such annuity, said trustees shall cease all further expenditures for the benefit of such beneficiary. (W) If the net annual income of the trust property in the hands of my trustees shall in any year exceed the amount required to be paid out for the comfort, support, welfare and happiness of the several annuitants named in this will, then I direct said trustees to pay the excess to my son, DANIEL WELLS NORRIS, or in their discretion, use *708 such excess for the comfort, support, welfare and happiness of such of said annuitants as the trustees shall think most in need thereof. It the net annual income shall in any year be insufficient to meet the requirements set forth in the said will, then I authorize said trustees to use so much of the principal of said*839 trust property as they shall deem wise and best in order to privide for the comfort, support, welfare and happiness of such anuitants. (X) Notwithstanding the fact that the annuites herein created are in terms expressed as continuing during the lives of the several annuitants respectively, it is my intention that they shall cease upon the expiration of the term of the trust as hereinbefore limited and I so direct. If any of the annuitants named in this ITEM be living at the expiration of the trust herein created by lapse of time, I direct my said trustees to expend so much of the principal as may be necessary to purchase an annuity or annuities in any one or more reputable life insurance companies doing business in the United States of America so that the annuity then being paid to such annuitant may be continued during the balance of his or her life, and the remainder of such trust funds then in their hands shall be disposed of as provided in and by the next following Subdivision (Y) of this ITEM EIGHTEEN. ,(Y) In case there shall still be in the possession of said trustees any of said trust property, after said trustees shall have provided for the satisfaction in full of all*840 the foregoing provisions of this ITEM EIGHTEEN, I direct said trustees to pay and transfer the same to my son DANIEL WELLS NORRIS, if he be then living; and if he be dead, then to his surviving issue, to take per stirpes and not per capita; and if there shall then be no such surviving issue, then to the heirs of MARCIA WELLS, my mother, to have and to hold unto the heirs of Marcia Wells, their heirs and assigns forever, which heirs I direct shall take per stirpes and not per capita. On July 25, 1938, the decedent's trustees paid $5,000 from the principal of the trust property in their possession to the Columbia Hospital of Milwaukee, Wisconsin, a corporation conducting a hospital, and also transferred to the Norris Foundation property which had a fair market value of $284,341.10 on the date of decedent's death. The Columbia Hospital of Milwaukee and the Norris Foundation are corporations organized and operated exclusively for religious and charitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual. No substantial part of the activities of either corporation is devoted to carrying on propaganda or otherwise*841 attempting to influence legislation. Prior to making the above mentioned payment of $5,000 the trustees determined, and were satisfied, that they had in their possession trust property more than sufficient to meet in full all the requirements of decedent's will which preceded item eighteen (R) thereof. After such payment was made, the trustees determined, and were satisfied, that there were in their possession ample funds to fulfill all requirements of the decedent's will, and, in the exercise of the option and discretion referred to in item eighteen (T), the trustees transferred the *709 above mentioned properties to the Norris Foundation after determining that the foundation was a worthy charitable, religious, or educational corporation, association or enterprise, operating in Milwaukee, and an enterprise in which the decedent had been interested in her lifetime. The foundation was engaged in the care and education of boys and its activities had been carried on for about twenty years prior to decedent's death by her son. The decedent had been interested in the work of the foundation not only because it was carried on by her son, but because she was interested in the*842 boys. She took part in all proceedings, made frequent visits to the farm, and her interest in the foundation was greater than her interest in her other charitable interests, which were widespread. The Federal estate tax return for decedent's estate was filed with the collector of internal revenue at Milwaukee, Wisconsin, on July 26, 1938. Deductions from gross estate for charitable, public, and similar gifts and bequests were claimed in such return, inter alia, as follows: (2) Columbia Hospital, $5,000; (3) Norris Foundation, $262,511.12. The respondent disallowed these deductions. OPINION. ARNOLD: The petitioners, as executors and trustees of the will of Fannie W. Norris, who died on April 26, 1937, on July 25, 1938, paid $5,000 and transferred property of the value at date of decedent's death of $284,341.10 to the Columbia Hospital and the Norris Foundation, respectively, both of Milwaukee, Wisconsin. The hospital and foundation are corporations organized and operated exclusively for religious and charitable purposes within the purview of section 303(a)(3) of the Revenue Act of 1926, as amended. 1 The petitioners contend that such amounts are deductible as bequests, *843 legacies, devises, or transfers to religious or charitable corporations under section 303(a)(3). The respondent contends that the amounts paid were not bequests to the charities, but to testamentary trustees in whom was vested discretion to pay or to divert the trust property to other uses, and that even if the payment and transfer are considered as bequests to charitable corporations or uses, they were so contingent, conditional *710 and uncertain at the date of decedent's death as to make them nondeductible. *844 Transfers of a testamentary character only are deductible under section 303(a)(3). Taft v. Commissioner,304 U.S. 351. Its purpose is to encourage testators to make charitable gifts. Y.M.C.A. v. Davis,264 U.S. 47. The estate tax is not a succession tax. It taxes not the interest to which the legatees and devisees succeed on death but the interest which ceased by reason of the death. It is a tax upon the transfer of the net estate by a decedent. "It comes into existence before and is independent of the receipt of the property by the legatees." Edwards v. Slocum,264 U.S. 61. In Mississippi Valley Trust Co. et al., Executors,28 B.T.A. 387; affd., 72 Fed.(2d) 197; certiorari denied, 293 U.S. 604; rehearing denied, 293 U.S. 631, the Board stated: * * * The rights of the parties hereto are determined entirely by the will of decedent. They accrued finally when the will became effective, the date the decedent died, December 18, 1929. The gifts made by decedent in his will are valued as of the date of death to determine the amount of the deduction. *845 Ithaca Trust Co. v. United States,279 U.S. 151. The value must be determined from data known or reasonably ascertainable at date of death. United States v. Provident Trust Co.,291 U.S. 272; Humes v. United States,276 U.S. 487. Under the will of the decedent the trustees were directed, if they were satisfied that they "shall have in their possession trust property more than sufficient to meet in full all the previous requirements" of the will, to pay out of the principal of the residuary estate to the Columbia Hospital "a sum not exceeding" $5,000. In Robbins v. Commissioner, 111 Fed.(2d) 828, in which the daughter of decedent was given the power under the will to appoint by her last will to Amherst College up to but not in excess of $250,000 from the principal of the trust fund of which she was beneficiary for life, the court held that at the time of decedent's death, the definiteness and certainty required were lacking, since the daughter could have fulfilled the requirements of her father's will be exercising the power of appointment to the extent of one cent or one dollar. It is immaterial*846 that in that case the daughter failed to exercise the power, whereas the trustees herein exercised their discretionary power as to amount and paid $5,000 to the hospital. Receipt of the property by the legatee merely evidences the exercise of the power residing in the trustee. In their discretion they did that which the testatrix should have done by direction of the estate is to get the benefit of the deduction. A testamentary gift deductible under the statute must be absolute in its terms in so far as the testator can make it and effective as of the date of death. Burdick v. Commissioner, 117 Fed.(2d) 972; certiorari *711 denied, 314 U.S. 631; Knoernschild v. Commissioner, 97 Fed.(2d) 213. There was no mandatory requirement or direction in the will of decedent that $5,000 should be paid to the Columbia Hospital. The will of decedent in subparagraph (S) of paragraph eighteen further empowered and authorized the trustees, after payment of not exceeding $5,000 to the Columbia Hospital, "to appropriate and pay over such sums of money as they, in their discretion, may deem best, as additional bequests to beneficiaries*847 named in "paragraphs fourteen, fifteen and eighteen." Paragraphs fourteen and fifteen contain numerous specific bequests to various relatives, friends, employees, and the First Unitarian Society of Milwaukee. Paragraph eighteen contains the provisions with respect to the disposition of the residue by the petitioners as trustees thereof and, among other things, provides for many annuities payable by the trustees to various persons. In subparagraph (T) of paragraph eighteen the trustees were further empowered "at their discretion and option, to pay to any worthly charitable, religious or educational corporation, association or enterprise, operating in the city of Milwaukee, Wisconsin, such sums of money out of the principal in their hands as they may deem best." Thus it was within the discretion of the trustees to apply all or any part of the principal of the residuary estate to increase specific legacies and bequests made by decedent to the extent of leaving nothing for the Norris Foundation and possibly one dollar or one cent to the Columbia Hospital, or to transfer to such charities an amount determined in their sole discretion. At the time of death of decedent there was, under*848 the provisions of the will, uncertainty and indefiniteness as to the organization or organizations, except perhaps the Columbia Hospital, which were to benefit thereunder and as to the amount or amounts payable. It was wholly uncertain whether such organizations would ever receive anything. That the testatrix intended her trustees to make the final determination as to whether the legatees and annuitants mentioned in paragraphs fourteen, fifteen, and eighteen should receive additional bequests or whether charitable, religious, or educational organizations should be given any of the excess not needed to fulfill the specific bequests made by her is indicated by the fact that she made a specific charitable bequest to the First Unitarian Society of Milwaukee. In her original will she bequeathed $1,000 to that organization and later increased the amount to $5,000 in one of the codicils to her will. From the language of the will, it may reasonably be inferred that it was the primary intention of the testatrix to charge the trustees with the duty to provide for the beneficiaries of her bounty whom she had expressly named. If she had intended to make mandatory bequests effective at the*849 time of her death she could have done so as she did in the case of the First Unitarian Society. It is reasonable *712 to assume that if she had had an intention to make certain a gift to either the Columbia Hospital or the Norris Foundation she would have made such gifts definite and mandatory upon her trustees. Although the hospital and the foundation received money and property out of the residuary estate, they did not receive them "through any act of the testator." Robbins v. Commissioner, supra. It is true the trustees exercised a power given them by the will of decedent, but no absolute gift, reasonably certain and definite, so as to permit a valuation thereof at date of death, was made by decedent. Whether gifts were to be made at all, designation of beneficiaries, except the Columbia Hospital, and amounts to be given, were left to the discretion of the trustees. Acts of the trustees were required to make such determinations and to make the bequests effective. A bequest must be certain and definite in its terms so that the beneficiary and property passing thereby, and his right thereto, may be readily ascertained at the time of the death of*850 the testator. This clearly appears from the statement in Y.M.C.A. v. Davis, supra, as follows: Congress was thus looking at the subject from the standpoint of the testator and not from the immediate point of view of the beneficiaries. * * * Congress was in reality dealing with the testator before his death. It said to him: "if you will make such gifts, we will reduce your death duties and measure them, not by your whole estate, but by that amount, less what you give." Commenting on this language, the court in Mississippi Valley Trust Co. v. Commissioner, supra, said: The meaning of this language is that the testator and he alone must provide for the charitable bequest. It means that the provision by the testator must be one that is definite in ascertainment and that is legally enforceable; it must possess the qualities of a definite command which will define the legal rights of all the parties to the property intended to be affected. Neither the Norris Foundation nor the Columbia Hospital could successfully maintain a suit at law or equity to compel the trustees to make the payments for which deduction is claimed. *851 It is argued by petitioners that under the laws of Wisconsin the acts of the trustees in exercising their discretion in favor of the hospital and foundation relate back to the effective date of the will, and the payment and transfer of money and property become thereby specific bequests from the trust fund to such charitable corporations. However that may be, the deductibility of these amounts is a question of Federal law and not state law. Lyeth v. Hoey,305 U.S. 188. Smith v. Commissioner, 78 Fed.(2d) 897, which reversed 31 B.T.A. 480, and wherein the law of Rhode Island, providing that a compromise agreement be given the same effect as though originally a part of the will, was applied in determining that amounts paid to charities pursuant to the compromise agreement were deductible, was expressly overruled in Robbins v. Commissioner, supra. *713 Since the bequests involved were too uncertain and indefinite to permit valuation of them at the time of the death of decedent, the amounts of $5,000 and $284,341.10 paid and transferred by the petitioners as trustees under the will of decedent to the Columbia*852 Hospital and the Norris Foundation, respectively, ate not deductible from the value of the gross estate under section 303(a)(3), supra. Decision will be entered for the respondent. Footnotes 1. SEC. 303. For the purpose of the [estate] tax the value of the net estate shall be determined - (a) In the case of a citizen or resident of the United States, by deducting from the value of the gross estate - * * * (3) The amount of all bequests, legacies, devices, or transfers * ** to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * 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, or to trustee or trustees, * * * but only if such contributions or gifts are to be used by such trustee or trustees * * * exclusively for religious, charitable * * * or educational purposes * * *. ↩