326 F. Supp. 1028 | S.D. Ohio | 1971
This is a tax refund action brought by plaintiff, estate of Harry A. Toulmin, Jr., against the defendant, United States of America, seeking a refund of $202,745.45 plus interest for estate tax allegedly wrongfully assessed and collected by the Internal Revenue Service. This amount arose from the disallowance of a charitable deduction for the present value of a testamentary trust remainder interest passing to Georgetown University Medical School of Washington, D. C, This court has jurisdiction by virtue of 28 U. S. Code, Section 1346(a) (1).
This cause is before this court upon the motions of both plaintiff and defendant for summary judgment.
The facts are not in dispute. The decedent, Harry A. Toulmin, Jr., died on March 8, 1965.. The decedent left a will modified by five codicils which was admitted to probate. Under said will the decedent established two testamentary trusts designated a “Marital Deduction Trust” and a “Trust Estate.”
Under Item VI of said will modified by codicils, the decedent in substance directed that his trustees pay the income from the “Trust Estate” to his widow, Virginia Toulmin, for life with the exception of $3,000.00 payable annually to decedent’s chauffeur for life. Upon the death of the last surviving income beneficiary the remainder interest of the “Trust Estate” was to pass to Georgetown Medical School of Washington, D. C.
Under Item VII of said will the decedent so far as is relevant, granted the trustees the following administrative powers in connection with the “Trust Estate”:
“(c) To enforce, defend against or have adjudicated, by legal proceedings or arbitration, or abandon, compound,*178 adjust, settle, or compromise, any claim or demand whatsoever in favor of or against the Trust Estate; * * ’*
“(e) To invest or reinvest in bonds of the United States of America, or of any state, municipality or subdivision thereof; or in first mortgages and first mortgage bonds on or secured by improved real estate located in any state; or in bonds, notes, debentures, mortgages or stock (including voting trust certificates and shares of all classes) of any corporation within the United States of America, or in certificates of beneficial interest and participation in or promises to pay issued against or secured in whole or in part by groups of securities similar to or embracing those securities above specified; or in real or other property, although any of the investments herein set forth are not of the character permitted for investments by Trustees under any statute or rule of law governing investments of trust funds by fiduciaries, or otherwise, now or from time to time hereafter in force; * * *
“ (m) To determine how all receipts and disbursements shall be credited or charged against, or apportioned between income and principal and against or between the separate trusts; * * *
“(r) To make all payments or distributions without liability for erroneous payments or distributions made in good faith and without actual notice or knowledge of the changed condition or status of any beneficiary receiving payments or distribution upon a condition. * * *
‘ ‘ (t) To determine the expedience, propriety, necessity or advisability of exercising, partially exercising, or not exercising any discretionary powers. * * *
“ (v) To do all other things the Trustee may deem best for the conservation, protection and betterment of the Trust Estate, and to the best interest and advantage of each of the beneficiaries and his or her dependents, as fully and completely as if the trustees were the unqualified owners thereof.”
Plaintiff filed a federal estate tax return for decedent’s estate on June 28, 1966. In said return plaintiff took a charitable deduction for $509,166.00. This amount repre
Upon audit of the federal estate tax return, the Internal Revenue Service disallowed the claimed deduction for the value of the remainder interest passing to Georgetown University Medical School on the grounds that the administrative powers granted the trustees under Item VII of the will, modified by codicils created an unrestricted power to divert the principal of the charitable remainder trust and thus the value of the charitable remainder was not presently ascertainable as of the date of decedent’s death. A deficiency of $206,598.02 in net federal estate tax was assessed. Plaintiff paid this deficiency and filed a timely claim for refund. On May 7, 1969, the District Director of Internal Revenue of Cincinnati, Ohio rejected plaintiff’s claim for refund by certified mail. Plaintiff then commenced this action to recover the deficiency she paid plus interest.
Section 2055(a), Title 26 U. S. Code, which controls the present case, provides that for federal estate tax purposes an estate may deduct from the value of the gross estate the amount of all bequests to certain designated political, charitable or religious organizations. It is admitted by the government that the Georgetown University Medical School is a charitable institution described in Section 2055 (a)(2), Title 26 ü, S. Code.
“Where as in the present case, a trust is created for both a charitable and a private purpose, the Estate Tax Regulations Section 20.2055-2 (a) and (b) allow a deduction for the value of the charitable remainder if (1) the charitable interest is “presently ascertainable and hence severable from the non-charitable interest,” and (2) viewing the circumstances as of the time of the decedent’s death, “the possibility that the charitable transfer will not become effective is so remote as to be negligible.” The regulation further provides that if the trustee is empowered to divert the property or fund, in whole or in part for a non-
It is established law that where a trustee has unlimited power to divert the principal of a charitable remainder trust from the benefit of the income beneficiary, the value of the charitable remainder is not presently ascertainable. A deduction for the value of the charitable remainder is only allowed where the power to invade or divert principal is restricted by a standard “fixed in fact and capable of being stated in definite terms of money” so that the amount that the charity will actually receive is accurately calculable at the time of the decedent’s death. Merchants National Bank of Boston, Executor, v. Commissioner of Internal Revenue (1943), 320 U. S. 256, 64 S. Ct. 108, 88 L. Ed. 35; Ithaca Trust Co. v. United States (1929), 279 U. S. 151, 49 S. Ct. 291, 73 L. Ed. 647.
The issue raised in this action is whether the administrative powers granted the trustee to invest corpus in all forms of property without regard to restrictions imposed by Ohio law on investments by fiduciaries and to allocate all receipts and disbursements between corpus and income constitute a power, unlimited by a measurable standard, to divert corpus from the charitable remainder trust so that the value of the charitable remainder is not presently ascertainable and thus non-deductible.
Under the terms of Item YII of decedent’s will the trustees were granted discretionary powers (1) to invest and to hold any type of property, although any of the investments are not of the character permitted by trustees under any statute or rule of law governing investments of trust funds and (2) to determine how all receipts and disbursements shall be credited or charged against or apportioned between income and principal and against or between the separate trusts.
It is the position of the government that these discretionary administrative powers enable the trustees to divert the corpus of the charitable remainder trust to an unascertainable degree. For example the government argues that the trustees could purchase wasting assets such as mineral
The plaintiff contends that the trustees have no power to divert items of principal to the income beneficiaries because the law of Ohio respecting the decedent’s intent and the particular Toulmin facts preclude principal distortion.
The express terms of the decedent’s will do not set forth a measurable standard limiting the trustees’ discretion in the exercise of their administrative powers. Thus the dispositive question of this action is whether Ohio law operates to preclude the trustees from diverting items of principal from the charity to the income beneficiary. In other words does Ohio law impose measurable and definite restrictions upon the exercise of discretionary administrative powers by the trustees so that the value of the charitable remainder is ascertainable at the time of the decedent’s death.
The general rules of Ohio law recognize that where there are successive beneficiaries of a trust, the trustee owes a fiduciary duty to both the life beneficiary and the remaindermen. The trustee has the underlying duty to treat all beneficiaries impartially unless the trust instrument establishes a preference.
In the absence of a contrary intent on the part of the testator the general rules of Ohio law relating to the investment of corpus, and the allocation of receipts between
If these rules of law applicable to the administration of trusts govern the trustees of the Toulmin “Trust Estate” trust there is no question that the government’s claim that the trustees have an unlimited power to divert corpus from the charitable remainderman to the income beneficiary would be without merit. However, the crucial consideration in the present case is the extent to which the broad investment and discretionary allocation powers granted the Toulmin trustees exempt the trustees from the requirements of established Ohio law in the administration of the trust.
The leading decision under Ohio law on this issue is Sherman v. Sherman (1966), 5 Ohio St. 2d 27. In the Sherman case the testator set up eight trusts for his wife and children, for his grandchild, for his lineal descendants and for his heirs. Under his will the testator granted the trustees broad discretion in the administration of the trust. The trustees were empowered to make investments in all forms of property without any limitation whatsoever as to the character of investment under any statute or rule of law regarding trust funds or investments by fiduciaries
The income beneficiaries of the Sherman trust who were dissatisfied with the amount of income distributed to them suggested that the trustees use their discretionary allocation powers to distribute capital gains and stock acquired from dividends and stock splits as income. The trustees brought an action in the Probate Court of Montgomery County, Dayton, Ohio requesting a construction of the will and a determination., as to whether the grant of discretionary investment and allocation powers exempted the trustees from the established law of Ohio regarding allocation of receipts between income and principal.
The probate court in an opinion reported at 202 N. E, 2d 443 (1962), held (1) that because of the broad powers granted in the will, the testator had dispensed with the requirement of equal treatment of the beneficiaries, at least to the extent that any unequal treatment did not frustrate the underlying testamentary plan; (2) that the term “receipts” as used in the will’s allocation clause includes realized capital gains and newly issued shares of stock resulting from stock dividends or stock splits; (3) that absent a provision in the will to the contrary Ohio law requires that such proceeds be allocated to principal and (4) that the discretionary allocation clause because it was surrounded by other extremely broad power clauses, permitted the trustees to depart from the established allocation rule subject to the requirement that any allocation pursuant thereto must be with reason and in good faith, not arbitrary.
The Ohio Supreme Court in Sherman v. Sherman, supra, affirmed the decision of the Probate Court of Montgomery County, Ohio, holding in syllabus one and two:
“1. The fundamental rule of construction of a will is that the intent of the testator must govern, unless to giv®*184 effect to that intent would create an estate forbidden by law.
“2. "Where a will which establishes a trust grants to the trustees of the property broad powers of sale, investment, voting of stock and all other powers to act which, in their judgment, are necessary to proper and advantageous management of the trust, and gives the trustees the power to determine the propriety of their own actions by a majority vote of the trustees, and gives the trustees discretion to allocate all receipts and all disbursements between principal and income, with the sole exception that premiums on investments shall be charged against principal, such powers indicate that it was the intention of the testator to permit the trustees, in the exercise of their discretion, to allocate capital gains and stock dividends to income, and in the absence of bad faith, abuse of discretion or action inconsistent with the purposes for which tije trust was created, the court will not interfere with such allocation.”
The case of Sherman v. Sherman, supra, establishes that a discretionary allocation clause such as the clause contained in the Toulmin will permits the trustees to depart from the normal rules of trust administration so long as they act in good faith, without abuse of discretion and consistent with the purposes for which the trust was created.
The government argues that since the Toulmin trustees have the power to depart from normal rules of state law designed to assure a fair apportionment as between the life beneficiaries and the remainderman, any departure from these rules alters the dividing line between the income beneficiary and the remainderman and makes it impossible to guarantee that any predictable portion of the trust corpus will pass to the charity upon the death of the last income beneficiary. The court does not agree.
The Estate Tax Regulations and the courts require that the power to invade or divert principal from a charitable remainder trust be limited by a measurable standard so that a highly reliable appraisal of the amount the charity will receive can be made at the time of the testator’s death.
The present fair market value of a charitable remainder is computed by use of Table I in paragraph (f) of the Estate Tax Regulations Section 20.2031.7. The value is
If the Toulmin trustees have the poAver to divert corpus to the extent that corpus is reduced below its original value at the time of the testator’s death, then the value as computed by use of Table I lacks genuine reliability and the value of the remainder is not presently ascertainable.
As the court sees it, the critical question in this action is whether Ohio law precludes the Toulmin trustee from distributing stock dividends or stock acquired from stock splits or investing in wasting assets where the effect of such allocation and investment would reduce trust corpus below its market value as of the date of the testator’s death.
In the present ease the testator’s will and the subsequent deletions therefrom by codicil clearly show that the testator intended to make a bequest of trust principal to GeorgetoAvn University Medical School and did not desire to prefer the income beneficiaries over the charitable remainderman. The testator in great detail elaborated the fact that his grandfather was the first professor at GeorgetoAvn University Medical School and set up the requirement that the pictures of his grandmother and grandfather be hung on the walls of G-eorgetown Medical School. The testator by codicil deleted provisions of his will that permitted the trustees to invade corpus. The testator further struck from his will provisions indicating that his principal purpose was to provide for the income beneficiary, that the rights and interest of the remainderman shall be subordinate and incidental to the rights of the income beneficiary and that the provisions should be construed liberally for the benefit of the income beneficiary.
Under Ohio law the trustees have a duty to administer
The holding of the Ohio Supreme Court in Sherman v. Sherman, supra, does not require a contrary result. The Sherman case must be understood in light of its particular factual context. In Sherman the testator who died in 1939 set up eight testamentary trusts, each having corpus consisting of growth stock which had an original cost value of $375,000.00. By 1960 the market value of the corpus of each trust had grown in value of $2,397,000.00. The trustees in administering the Sherman trust followed the normal allocation rules that newly acquired stock from stock dividends and stock splits should be allocated to principal. The adherence to the normal allocation rules favored the remaindermen over the income beneficiaries in that the income beneficiaries received the relatively low cash dividends whereas a substantial portion of corporate earnings were not distributed as cash dividends but were reinvested in the corporation with the result that the market value of the stock increased to the benefit of the remaindermen.
As the court held in Sherman the trustees who are vested with discretionary allocation power must act in good faith and in a manner consistent with the purposes of the trust. It is clear in the present case that Mr. Toulmin intended to create a trust under which corpus would pass to the charity upon the death of the last income beneficiary. If the Toulmin trustees were to disregard the interests of the remainderman by exercising their administrative powers to erode principal below its original value, the trustees would frustrate the testator’s underlying testamentary plan. This court is convinced that if this question were before the Ohio Supreme Court, the court would find that depletion of principal below its original value would constitute a breach of the trustees’ fiduciary duty to the charitable remainderman and would constitute prohibited action “inconsistent with the purposes for which the trust was created.”
The tax court and the district courts which have considered this question have rejected the government’s contention that the value of a charitable remainder is unaseertainable by reason of broad administrative powers which create an indirect power to divert corpus. See Miami Beach First National Bank v. United States, 69-2 USTC, Section 12627 (on appeal by government to 5th Circuit); Gardiner v. United States, 69-2 USTC, Section 12628 (on appeal by government to 9th Cir.); Bankers Trust Company v. United States, 308 F. Supp. 545 (S. D. N. Y.) (on appeal by government to 2nd Cir.); Peoples Trust Company of Bergen County v. United States (D. N. J. 1970), 311 F. Supp. 1197 (on appeal by government to 3rd Circuit); Estate of McGillicuddy (1970), 54 T. C. 315; Greer v. United States (1970), 69-2 USTC, Section 12628; Old Colony Trust Company v. United States (D. Mass. 1970), 317 F. Supp. 618.
In the recent decision in Old Colony Trust Company v. United States, supra, the District Court applying Massachusetts law held that the law of that state precludes a trustee under a discretionary allocation clause from distributing stock dividends beyond a de minimis amount. The Old Colony Trust Company case is a clearer case in favor of the taxpayer in that the Massachusetts Supreme Court, unlike the Ohio Supreme Court, has construed a broad allocation clause as only permitting the trustees to decide in cases of doubt. However, the District Court went on to decide that, assuming the discretionary allocation power permitted the distribution of stock dividends, the power was limited by a fixed standard imposed by state law. The court stated at page 622:
“Even if the fourth unnumbered paragraph is read to contain a power to distribute stock dividends, this power is limited by a fixed standard as required by Tt%aca Trust, supra. This standard is supplied by the obvious intention of the testator to create charitable remainder interests and by the principles of the Massachusetts law of fiduciary duties as enunciated in Old Colony Trust Company v. Silliman, supra, 325 Mass. 6, 223 N. E. 2d 504. In the light of that express intention, any distribution of stock dividends to the life beneficiaries which upset the basic relationship of life tenants and remaindermen created by the will, i. e., any distribution of stock dividends beyond a de minimis amount would be a breach of trust under Massachusetts law. The reasoning and language of Bankers Trust Co. v. United States (S. D. N. Y. 1970), 308 F. Supp. 545, is applicable to the case at bar.
“If trustees were to use their power to purchase wasting assets and their power to allocate receipts in a manner that would deplete or consume the trust corpus, they would certainly be violating their equitably imposed fiduciary*189 duty to act in the best interests of the charitable remainder-men and the remaindermen could invoke equity to prevent or void their action or hold them personally liable for the breach of trust.
“The trustees’ powers, therefore, to invest in wasting assets or to allocate cash receipts to principal or income is not an indirect power of invasion because it is limited by the testator’s obvious intention of granting the remainder to charity and by New York law which requires a trustee to act for the benefit of the remaindermen. The charitable remainder is ascertainable and qualifies for a deduction from gross estate under Section 2055 of the Internal Revenue Code. * * 308 F. Supp. at p. 548.
This is the first case of this type arising under Ohio law. The court believes that the Ohio Supreme Court would not construe the allocation clause in the Toulmin will as empowering the trustees to erode principal below its original value where such erosion would completely disregard the rights of the charitable remainderman and frustrate the testator’s desire to make a bequest of principal to the charitable remainderman.
It must be recognized that the government has prevailed in the recent case of Stewart v. Commissioner of Internal Revenue (C. A. 3, 1971), 436 F. 2d 1281. In Stewart the settlor granted her trustee extremely broad allocation and investment powers. The allocation clause of the trust provided that the trustee in its sole and absolute discretion could allocate to principal or income (1) any dividend of whatever kind or nature; (2) any property received upon any exchange, recapitalization or dissolution; (3) any payments received in respect to a wasting asset or unproductive property and to amortize in whole or in part the premium at which the property is received and to discontinue any sinking fund and to treat the same as income in whole or in part. The trust instrument expressly granted the trustee the power to depart from any rule of law.
The third circuit recognized that these broad powers, if literally applied by the trustee could be used to divert principal to an unascertainable degree. New York law as
In contrast the Toulmin will contains a simple allocation clause which in substance grants the trustees discretionary power to allocate all receipts and disbursements between income and principal and between the separate trusts. The Toulmin will does not dispense with the requirement of maintaining a sinking fund for wasting assets. The Toulmin will does not contain an express provision authorizing the trustees to follow or depart in whole or in part from any rule of law. Furthermore, Mr. Toulmin deleted from his will a provision which directed the trustees to prefer the income beneficiaries over the remainderman.
Of greater significance is the fact that Ohio does not have a statute, equivalent to the New York Estates, Powers and Trusts law which grants extremely broad powers to trustees. While the Ohio Supreme Court in Sherman v. Sherman, supra, has held that a discretionary allocation clause permits a trustee to allocate capital gains and stock dividends to income, the court was careful to limit its holdings to situations where the trustees act in good faith, without abuse of discretion and in a manner consistent with the purposes for which the trust was created. Since the corpus of the Sherman trusts had greatly increased in value, the distribution of capital gains and stock dividends could not jeopardize the rights of the remaindermen to
The court concludes that the intent of the testator herein to make a bequest of corpus to charity and the rules of Ohio law requiring a trustee to administer a trust in a manner consistent with the testamentary intent operate to preclude the Toulmin trustees from eroding principal without preserving the original value of corpus intact for the benefit of the Georgetown University Medical School and thus the value of the charitable remainder is presently ascertainable.
Since Ohio law operates to preclude the Toulmin trustees from administering the trust in a manner which would erode principal below its original value, the possibility that the principal will not pass to the charity is so remote as to be negligible.
Having found that the value of the charitable remainder is presently ascertainable, the court must resolve the government’s claim that the present value of the charitable remainder, $509,166.00, must be reduced by $125,014.99, representing the amount paid by the estate to the testator’s daughter in settlement of a will contest.
The facts relating to the settlement of the will contest as shown by plaintiff’s answers to interrogatories are undisputed. The assets of the Toulmin Estate included ten shares of no par common stock in Business Corners, Inc., a holding company, solely owned by the testator. Each share had a fair market value of $81,463.98 as of the testator’s death.
With the exception of $100.00 paid by the attorneys for the estate, the amount paid to the testator’s daughter in settlement of the will contest was taken from the capital assets of Business Corners, Inc. The daughter was paid the sum of $24,914.99 in cash from the accumulated earn
Since the settlement was paid out of the capital assets, not the current income of Business Corners, Inc., the value of the charitable remainder interest was necessarily reduced. However, the court does not agree with the claim of the government that the present value of the remainder interest should be reduced by $124,914.99. If the bequest to charity was to take effect upon the distribution of the estate, the government’s claim would be meritorious. Since the interest passing to charity is a remainder taking effect upon the death of the last income beneficiary, the court finds that the present value of the charitable remainder should be computed by reducing the fair market value of the estate assets as of the testator’s death by $124,914.99 and then recomputing the value of the charitable remainder interest in accordance with the applicable Estate Tax Regulations.
Accordingly, the motion of plaintiff for summary judgment on the issue of deductibility hereby is sustained and defendant’s cross-motion for summary judgment on this issue hereby is denied.
The defendant’s motion for summary judgment on its claim for a set-off is sustained to the extent that the market value of the trust corpus as of the date of the testator’s death must be reduced by $124,914.99 and the present value of the charitable remainder determined in accordance with applicable Estate Tax Regulations on the basis of the reduced value of corpus.
Plaintiff’s motion on issue of deductibility sustained. Defendant’s cross-motion for summary judgment denied.