*164 Decision will be entered for the petitioners.
Decedent established a revocable inter vivos trust with the remainder, after intervening life estates, payable to a named charity. His will poured the residuary estate into the trust. A bank was designated as sole trustee and was given discretionary powers of investment and of allocation of dividends and expenses between principal and income. Held, the existence of such discretionary powers did not preclude the deductibility of the charitable remainder under
*804 *166 OPINION
Respondent determined a deficiency in petitioners' estate tax in the amount of $ 510,195.19. The sole issue for our determination is whether the remainder interest in a trust established by the decedent fails to qualify for a charitable deduction pursuant to
*805 All of the facts have been stipulated and are found accordingly.
Petitioners are the executors of the Estate of George I. Speer (referred to herein as decedent), who died on June 21, 1965, a resident of Wilmington, Del. Petitioner Alice M. Speer had her legal residence in Wilmington, Del., at the time the petition herein was filed. Petitioner Bank of Delaware is a corporation organized and existing under the laws of the State of Delaware having its principal office in Wilmington, Del., at the time of filing the petition herein. The*167 estate tax return was filed with the district director of internal revenue, Wilmington, Del.
On July 12, 1963, the decedent created a living trust, with the Bank of Delaware as sole trustee. The trust was fully revocable by the decedent during his lifetime. In addition, the trustee could invade principal for the decedent's benefit in the event of the latter's incapacity.
The trust agreement provided for payment of the income to the settlor, or the accumulation thereof as settlor might direct, during his lifetime. After the settlor's death, the trustee was to pay one-half of the net income of the trust estate to settlor's sister, Alice M. Speer, for life; one-fourth of said net income to settlor's sister, Elizabeth S. Coppage, for life; and one-fourth to settlor's brother, Robert A. Speer, for life. The trustee was not given any power to invade principal for the benefit of the income beneficiaries. Upon the death of all the life tenants, or upon the settlor's death if he should survive them all, the trust provided:
* * * Trustee shall create a fund with whatever remains of the trust estate to be known as the George I. Speer and Lizzie F. Speer Memorial Fund, the net income*168 from which shall be paid annually to the New Castle Presbytery, by whatever name known, to be used by the said Presbytery for general purposes in memory of Settlor's parents. * * * 2
Additionally, upon the death of any of the life tenants, his or her share of the net income of the trust estate was to be accumulated and added to principal for ultimate disposition in accordance with the above-quoted provision.
The trust agreement contained the following provision dealing with the investment powers of the trustee:
Settlor desires that Trustee be permitted to invest a larger proportion of the trust estate in common stocks than might otherwise be considered proper, and also for a larger proportion thereof to be invested in the stock or other securities of Bank of Delaware and International Business Machines Corporation, or their corporate successors, than might otherwise*169 be considered proper. It is therefore agreed that Trustee shall be under no duty to diversify the investments held hereunder, and that in acquiring new investments by purchase or exchange, as *806 well as in retaining investments that were a part of the trust estate at the time of the creation or that were thereafter delivered by Settlor's Executor to Trustee in kind (and also in acquiring additional stocks, bonds, notes or other securities of Bank of Delaware and International Business Machines Corporation, or their corporate successors, through the exercise of options, rights, and conversion privileges) Trustee, in its discretion, may disregard the rules of diversification of investments usually considered applicable to fiduciaries, and that Trustee shall not be liable for any depreciation of or loss to the trust estate resulting from disregarding such rules of diversification.
The trust agreement also authorized the trustee, in its absolute discretion:
To apply stock dividends, other non-cash dividends and other extraordinary dividends or distributions received by it to principal or income or to apportion such dividends or distributions between principal and income, to charge*170 the premiums of securities purchased at a premium either against principal or income or partly against principal and partly against income, and to determine what expenses, costs, taxes and charges of all kinds shall be charged against principal and what against income. In each case its decision with respect thereto shall be conclusive and binding upon all parties in interest;
The trust agreement further provided that all questions pertaining to the validity, construction, and administration of the trust were to be determined in accordance with the laws of Delaware.
Decedent's last will and testament poured his residuary estate into the aforementioned trust.
The trust assets at all pertinent times consisted almost entirely of publicly traded securities. The following table shows the holdings of International Business Machines shares by the trust at various dates indicated.
| Market value | Total market | Percent of | ||
| Shares | Date | of IBM | value of | IBM |
| stock held | trust assets | |||
| 3063 | 7/15/63 | $ 1,323,216 | $ 1,572,015.00 | 84.17 |
| 3063 | 4/13/64 | 1,807,170 | 2,106,730.00 | 85.78 |
| 3829 | 4/12/65 | 1,795,801 | 2,139,148.00 | 83.95 |
| 3500 | 4/25/66 | 1,893,500 | 2,458,786.70 | 77.01 |
| 4500 | 4/24/67 | 2,128,500 | 2,723,640.99 | 78.15 |
| 4055 | 4/19/68 | 2,578,980 | 3,380,010.17 | 76.30 |
*171 We are again confronted with the question of the extent to which management powers conferred upon a trustee with respect to allocation of income and expenses operate to preclude the deductibility under
*808 By way of summary, the Government has been successful in the Second and Fifth Circuits; unsuccessful in the Fourth Circuit, in the District Courts (with the exception of Florida Bank at Lakeland, Jacobs, and Detroit Bank & Trust Co.), and in this Court; and has won one and lost one in the Third Circuit. Obviously, this melange of cases furnishes no divining rod for decision herein. Moreover, the confusion is compounded by the fact that each of the decided cases turns on its own facts and the vagaries of local probate and trust law as seen through the eyes of the Federal courts.
The essence of our decision in Stewart was that, even taking into account a modicum of uncertainty as to the*175 extent of a trustee's discretionary power under the New York law involved in that case, we were not disposed "to turn what are commonplace trust powers intended simply to provide administrative flexibility into a substantive grant of dispositive flexibility." See
As the Third Circuit pointed out in Stewart (see
(1) In Stewart, the trustee had the specific power to invest in wasting assets and shares of investment companies. No such specificity is contained in the investment powers involved herein.
(2) In Stewart, the trustee had power to apportion a variety of specific items including rents, interests, dividends, property received in exchanges and reorganizations, payments in respect of wasting assets or unproductive property, and any other receipt whatsoever. In the case before us, the clause granting power to allocate receipts to principal or income is far narrower, being limited to "stock dividends, other non-cash dividends and other extraordinary dividends or distributions." We shall have more to say about this clause at a later point in this opinion.
(3) In Stewart, there was discretion in the trustee to determine whether to amortize the premium "at which any property may be *809 received or held" and to depreciate any expense on or any expense in connection with property of*177 any kind. In the instant case, there was only a power to amortize and that was limited to "securities purchased at a premium."
(4) In Stewart, there was a specific power to discontinue any sinking fund or depreciation account and treat the same as income. No such power is specified in the instant instrument.
(5) In Stewart, the trustee had the power to pay from principal or income any deficit from the operation of property or any charge against the trust estate. In the instant case, the trustee was given only the power to determine "what expenses, costs, taxes and charges of all kinds shall be charged against principal and what against income." It is at least arguable that such language is limited to items involving cash outlay and does not cover such items as depreciation or depletion reserves or the broad category of "operating deficits."
We have already noted that, in the instant case, the power to allocate on the intake side is limited to "stock dividends, other non-cash dividends and other extraordinary dividends or distributions." We think that the narrow focus of this clause provides a crucial distinction. Compare
(1) In
(2) In
(3) In
(4) In
In determining the effect of broad discretionary administrative powers on the deductibility of charitable remainders, it is in order for us to look for indications, at least insofar as they are contained in the instrument itself, of the settlor's intention as to whether such powers should be exercised so as to favor the income beneficiary over the remainderman. See
An examination of local law is also essential to a determination of the effect of discretionary administrative powers on the duties of a trustee. The main Delaware authority is 8
In our opinion, the statutory provision prescribed a sufficiently objective standard so that, if there were no discretionary powers granted in the instrument itself, the charitable deduction herein would be available under
Finally, we must dispose of respondent's contention that in light of
*813 The claimed deduction should be allowed. 9
*188 Decision will be entered for the petitioners.
Raum, J., dissenting: I agree that this case is distinguishable from Stewart in certain important respects. But the majority opinion is not content to let the matter rest there. Instead there is an obvious effort to rehabilitate our former decision Stewart, repeating some of the same arguments which in my judgment were properly rejected by the Third Circuit in its reversal. I think that the opinion of the Court of Appeals was sound, and I dissent from the majority here to the extent that it attempts to resuscitate our opinion in that case.
Quealy, J., dissenting: Insofar as the opinion of the majority reaffirms the opinion of this Court in
In determining the deductibility of charitable remainders, the Supreme Court has clearly established the basic principle*189 to be that there must be some assurance that the charity to which the bequest has been made will receive the bequest or a determinable part of it and that the possibility of an invasion of the corpus, not subject to a readily ascertainable standard, will result in the disqualification of a given charitable deduction.
For a deduction under § 303(a) (3) to be allowed, Congress and the Treasury require that a highly reliable appraisal of the amount the charity will receive be available, and made, at the death of the testator. Rough guesses, approximations, or even the relatively accurate valuations on which the market place might be willing to act are not sufficient. *190 Cf.
For the most part, the courts seem to agree that broad administrative powers granted to a trustee, while not so intended, may give rise to such uncertainty as to make it impossible to presently ascertain the value of the charitable remainder within the meaning of
None of the authorities sustaining*191 the government's position holds that broad administrative powers always or never prevent the deduction; rather, the cases rely heavily on the trust law doctrines and practices of the particular states involved, as well as the language of the trust instrument under consideration, to determine if there is any real likelihood that the interests of the charitable remainderman can be invaded for the benefit of the life tenant. * * * The cases rejecting the government's position have also rested on the trust law doctrines and practices of the particular states involved as well as the language of the trust instrument under consideration although they have evidenced greater liberality in substaining some flexibility in the administration of the trust without disallowance of the charitable deduction. * * *
Similarly, in
Both the provisions of the trust instrument and the law of New Jersey present quite a different situation with respect to the trustee's powers than was presented in
In
On appeal, the U.S. Court of Appeals for the Third Circuit disagreed. *194 See
I agree with the Third Circuit's formulation of the problem with respect to powers of invasion in the context of
The crucial issue here is not whether*195 the trustee would do something so severe as the above example; rather the question is simply whether the trustee has a number of powers so broad that at the time of the decedent's death we cannot ascertain with any reasonable degree of probability the value of the remainder.
In view of these considerations, the question presented for decision in any given case of the type presently before us is whether the law of the particular jurisdiction involved in the case establishes an overriding standard which effectively limits the discretion granted to the *816 trustees under the so-called administrative clauses of the trust instrument under consideration in the particular case and thereby cures the uncertainty inherent in such powers which would otherwise prevent the given charitable remainder from being presently ascertained as required by the law.
In reversing our decision in Estate of Stewart, the U.S. Court of Appeals for the Third Circuit held that New York law does not establish such a standard stating that:
state law will not provide any fixed and ascertainable standard of investment and management conduct for the trustee. Here the decedent's dispositive intent does not*196 reveal any desire to favor the life tenants over the remaindermen, but decedent's administrative intent was to rely solely upon the trustee's judgment and discretion rather than upon the normal rules of state law governing the administration of trusts. * * * The doctrine of In re Talbot's Will, supra, and In re Estate of Lecompte, supra * * * does not provide the requisite ascertainable standard for amounts left to charity where the powers are so broad as here.
In a related context, the U.S. District Court for the Southern District of New York in the case of
The court in
In my view, plaintiffs are incorrect in urging that New York law provides the requisite standard to ascertain the extent to which corpus will be depleted in this case. * * * While a court of equity may have power to stop a trustee from acting in such a way*198 as to deplete or consume a corpus, thus providing a fixed standard at one end of the spectrum, such power does not provide a reliably *817 predictable standard to solve the problem presented in this case -- i.e. where along the continuum leading to depletion equitable action can and should occur. In the present case, the trust instrument grants the trustee broad administrative powers. Article II(c), for example, allows the trustee to invest in wasting assets and gives him wide latitude as to assets in which he can reinvest. Article III(g) allows the trustee to charge trust expenses against principal. More important, Article IA requires the trustee to pay the net income quarterly to the life tenant, and Article IV allocates cash dividends, including capital gains dividends, to income. * * * With these and other broad powers given to him to deal with the trust res * * * the trustee here could in good faith carry out recognized fiduciary duties under New York law, yet still invade corpus * * * to an immeasurable extent, thus rendering impossible present valuation of the remainder interest. While plaintiffs have cited many cases holding that a court of equity will prevent*199 a trustee from effecting a substantial diminution or depletion of the remainderman's interest, such cases do not provide a fixed standard, accurately calculable, by which we can ascertain the value of charitable remainder in this case. See, e.g.,
I believe that the interpretation of New York law promulgated by the Court of Appeals in
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as in effect at the date of decedent's death, unless otherwise noted.↩
2. Respondent makes no argument that the New Castle Presbytery fails to meet the requirements of a charitable organization as specified in
sec. 2055(a) (2)↩ .3.
SEC. 2055 . TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES.(a) In General. -- 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 the amount of all bequests, legacies, devises, or transfers * * *
* * * *
(2) to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *
Respondent's Estate Tax Regulations contain the following provisions:
Sec. 20.2055-2. Transfers not exclusively for charitable purposes. --
(a) Remainders and similar interests. If a trust is created or property is transferred for both a charitable and a private purpose, deduction may be taken of the value of the charitable beneficial interest only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. * * *
(b) Transfers subject to a condition or a power↩. If, as of the date of a decedent's death, a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. If an estate or interest has passed to or is vested in charity at the time of a decedent's death and the estate or interest would be defeated by the performance of some act or the happening of some event, the occurrence of which appeared to have been highly improbable at the time of the decedent's death, the deduction is allowable. If the legatee, devisee, donee, or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, devised, or given by the decedent, the deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of the power. * * *
4. At the time of our opinion in Stewart, apparently only one court had passed upon the question. See Gardiner v.United States, an unreported case (
D. Ariz. 1969, 24 A.F.T.R. 2d 69↩-6108, 69-2 U.S.T.C. par. 12,628).5. Compare also
Worcester County National Bank v. King, 268 N.E. 2d 838↩ (Mass. 1971) .6. See Scott, "Principal or Income?", 100 Trusts and Estates 180, 182 (1961), where the author suggests that a trust estate consisting largely of growth stocks such as IBM is more advantageous to the remainderman than to the income beneficiary.↩
7.
Sec. 3526 . Corporate distributions received by trustee; allocation between principal and income.(a) Unless expressly or by necessary implication provided otherwise in the instrument creating or defining the duties and powers of a trustee, a trustee shall treat all property, tangible or intangible, received as a corporate distribution upon or with respect to shares of stock held in trust, including shares of the same class:
(1) As trust income to the extent that, in the judgment of the Trustee, such distribution would be regarded as income from an investment rather than a diminution of an income producing property, by men of prudence, discretion, and intelligence in the management of their own affairs; and in making this determination, the trustee may consider whether such distribution would be likely, of itself, to have the effect of reducing materially the future earning capacity and the future earnings of the corporation, whether such distribution would be likely, of itself, to have the effect of reducing materially the future income of the trust from the shares of stock upon or with respect to which such distribution shall be made (assuming that the trustee should continue to hold such shares of stock for an indefinite period), and any other circumstances and factors which the trustee may deem relevant and significant.
(2) As trust principal to the extent that, in the judgment of the trustee, such distribution is not determined to be trust income under provisions of paragraph (1) of this subsection.
(b) The provisions of this section shall apply to any corporate distributions received after July 1, 1959 on trust property in any trust existing on or created after July 1, 1959.↩
8. Cf. Note,
50 Yale L.J. 1467">50 Yale L.J. 1467 , 1473↩ (1941).9. We note that the problem presented in the instant case will not arise for estates subject to the Tax Reform Act of 1969, because secs. 201(d) and 201(e) of that Act require that the remainder interest be in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust or a pooled income fund in order to be eligible for a deduction under
sec. 2055↩ . See Pub. L. 91-172, 83 Stat. 487. See also sec. 201(g)(4) of the Tax Reform Act of 1969 for the general effective date rule and the exceptions thereto for purposes of applying the aforementioned changes.1. This problem will not arise under the Tax Reform Act of 1969 because subsecs. (d), (e), and (g) of sec. 201 of that Act require that a trust pay a fixed percentage of the net fair market value of the trust assets or a fixed-dollar amount to the life beneficiaries before the charitable remainder can qualify for the deduction. Pub. L. 91-172, 83 Stat. 487, 560-565, codified in
secs. 642(c)(5) ,664 , and2055(e) of the Internal Revenue Code of 1954↩ .2. In the recent past, a relatively large number of cases involving the problem of the effect of a trustee's administrative powers in the determination of the deductibility of a charitable remainder have been decided. These cases have been summarized by the majority, and it is therefore unnecessary to do so here.↩