1970 U.S. Tax Ct. LEXIS 162 | Tax Ct. | 1970
Lead Opinion
OPINION
Issue 1. The Marital Deduction
Section 2056 provides generally that, for purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes from the decedent to the decedent’s surviving spouse. Section 2056(c) (1) limits the deduction to an amount not exceeding 50 percent of the value of the “adjusted gross estate.”
We must decide whether 50 percent of the value of Budolph’s “adjusted gross estate” passes to Florence, his surviving wife, as provided by Item IV of his will.
Budolph directed his executor to pay all estate taxes from his estate, i.e., out of the property passing under his will. Because that property is not sufficient to pay all Federal estate taxes and also to distribute the bequests provided under Items II, III, IV, V, and VI, some portion of the Federal estate taxes must be paid out of one or more of those bequests. If any amount must be paid out of the bequest under Item IV, then the amount of property passing to Florence — and the allowable marital deduction — will be reduced by such amount.
Our question, then, is simply, what bequests are to be invaded first for the payment of the Federal estate tax. The answer is found, in this case, in the law of Indiana. Riggs v. Del Drago, 317 U.S. 95 (1942).
The applicable statutory provision, sec. 7-1103, Ind. Ann. Stat. (1953), provides:
7-1103. Order in which, assets appropriated — Abatement—General rules— Contrary provisions, plan or purpose. — (a) Except as provided in subsection (b) hereof, shares of the distributees shall abate, for the payment of claims, legacies, the widow’s or family allowance, the shares of pretermitted heirs or the share of the surviving spouse who elects to take against the will, without any preference or priority as between real and personal property, in the following order:
(1) Property not disposed of by the will;
(2) Property devised to the residuary devisee;
(3) Property disposed of by the will but not specifically devised and not devised to the residuary devisee;
(4) Property specifically devised.
A general devise charged on any specific property or fund shall, for purposes of abatement be deemed property specifically devised to the extent of the value of the thing on which it is charged. Upon the failure or insufficiency of the thing on which it is charged, it shall be deemed property not specifically devised to the extent of such failure or insufficiency.
(b) If tbe provisions of tbe will or tbe testamentary plan or tbe express or implied purpose of tbe devise would be defeated by tbe order of abatement stated in subsection (a) hereof, tbe shares of distributees shall abate in such other manner as may be found necessary to give effect to tbe intention of tbe testator.
A careful reading of tbe entire will of Eudolpb G. Leeds persuades us tbat in order to give effect to tbe intention of tbe testator, tbe marital share must abate last. By Item I tbe decedent directed tbat his estate taxes be paid from other property than tbat given and devised to his wife or from life insurance received by her so tbat any property received by her would not be reduced by tbe. payment of such taxes, and for tbe further reason tbat bis estate might get the full benefit of tbe marital deduction. By Item IV tbe decedent gave and devised to bis wife such an amount of bis property, real or personal, which when added to bis life insurance paid to bis wife and tbe bequests made to her in. Item II above, shall total an amount in equal value to 50 percent of bis adjusted gross estate, as such term is used in tbe Federal Tax Reduction Act of 1948.
We think the decedent’s intention to give 50 percent of bis adjusted gross estate to bis wife was predominant over bis intention to make the bequests under Items V and VI. Accordingly, we bold tbe bequests under Items V and VI abate first for tbe payment of Federal estate taxes and tbe amounts given to Ms wife, last.
Issue 2. The Oharitable Deduction
Section 2055 provides tbat for tbe purposes of tbe tax imposed by section 2001, tbe value of tbe taxable estate shall be determined by deducting from tbe value of tbe gross estate tbe amount of all bequests to trustees, but only if such contributions are to be used by such trustees excl/asiml/y for charitable (among other) furposes. Tbe determination, for what purposes are tbe bequests to be used, is to be made from an examination of tbe terms of tbe bequests as properly construed under the applicable State law, in this case, the law of Indiana. Whether those purposes, so determined, are exclusively “charitable” witMn tbe meaning of section 2055 is a question of Federal law. Watson v. United States, 355 F. 2d 269 (C.A. 3, 1965.)
Tbe bequests are to be used by the trustees of the Palladium Fund “primarily as a pension, unemployment, and insurance fund for tbe employees of tbe * * * Palladium-Item, and tbe wives and minor children of said employees.” Item VII, clause 2(a), of tbe will of Rudolph G. Leeds. The purpose of tbe Palladium Fund is “to secure regular employees of the Palladium-Item and their dependents against tbe hazards of unemployment, over which they have no control, due principally to sickness, accident, disability, death and old age.” Item VII, clause 2(c). In our view the purpose in other words, is an insurance purpose, to benefit all regular employees by securing them against the enumerated hazards. This purpose is to be effectuated in either of two ways: (1) The use of income “for the purchase of life insurance for said employees, individually or as a group, or for such other insurance or annuities as * * * [the trustees] deem proper for the carrying out of the purposes of said trust, or for making contributions to such purchases” (Item VII, clause 2(d) (8)); (2) the payment of benefits to employees “when unemployment is due to sickness, accident, disability, or any other good cause, including lack of work which the employee is capable of performing” (Item VII, clause 2 (d) (4)). In purpose and in effect, the decedents’ bequests will operate to relieve qualifying employees of the Palladium-Item of the expense of securing themselves, by savings, insurance, health plan contributions or otherwise, against these same hazards. To us this clearly is not exclusively a “charitable” use of the bequests.
A second use of decedents’ bequests is the payment of retirement pensions. “Employees, sixty years of age, who have been regularly employed by * * * [the Palladium-Item] for at least twenty years, shall be eligible to retirement pensions” (Item VII, clause 2(d) (5)). All such employees qualify for retirement pensions without qualification. We do not think this constitutes a use of decedents’ bequests for charitable purposes.
As we see it, decedents’ bequests are to be used by the trustees merely as an additional form of compensation to the employees of the Palladium-Item; “a logical, legitimate and impelling incentive to a person both in seeking employment with the company and after being hired. The quid pro quo to the company was at least as important, in helping to attract desirable personnel and obtaining satisfactory results from them.” Watson v. United States, supra at 271. In these circumstances, we cannot allow the deduction.
Petitioner relies upon Estate of Leonard O. Carlson, 21 T.C. 291 (1953), and the cases cited therein, as establishing that the purposes of a welfare or retirement fund for the benefit of employees of a corporation are charitable. Upon reconsideration of Carlson, in the light of Watson v. United States, supra, we conclude that the position we took in Garlson is no longer tenable. We note that Garlson relied on Gimbel v. Commissioner, 54 F. 2d 780, which has been subsequently discredited in Watson by the Third Circuit Court of Appeals, the same circuit court that had decided Girnbel in the first instance.
Reviewed by the Court.
Decisions will be entered under Rule 50.