Estate K. Starkey v. United States ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-2357
Estate of Kenneth E. Starkey,
Plaintiff-Appellant,
v.
United States of America,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 98 C 343--Larry J. McKinney, Judge.
Argued February 25, 2000--Decided August 17, 2000
Before Bauer, Ripple, and Manion, Circuit Judges.
Manion, Circuit Judge. Kenneth Starkey was
apparently both financially successful and
generous. As he neared death, he made out his
last will and testament and set up a charitable
trust. These documents were drafted by his
attorney son, who had little or no experience
drafting such instruments, and the inartful
language caused problems. The Internal Revenue
Service concluded that the charitable trust Mr.
Starkey created did not qualify for a charitable
deduction. As a result, it denied the Estate a
charitable deduction worth well over one million
dollars. This resulted in an estate tax
deficiency of over one half million dollars. The
district court entered summary judgment in favor
of the IRS in the Estate’s suit to recover a tax
refund. We hold that the documents, while
inartfully drafted, adequately demonstrate that
Mr. Starkey intended to create a charitable trust
that qualifies for the charitable deduction. We
therefore reverse the district court entry of
summary judgment in favor of the IRS./1
I. Background
Kenneth Starkey’s will created an educational
trust for his grandchildren and a charitable
trust. Section 5.02 of the will, the provision at
issue, instructed the trustees of the charitable
trust to distribute the income as follows:
Half of the income from the trust is to go to
Lawndale Community Church in Chicago, Illinois
provided that Wayne Gordon is still the pastor of
it at the time of my death and that church will
receive this until the time that he is no longer
pastor. The Trustees are to manage the property
of the Trust for the benefit of this beneficiary,
missionaries preaching the Gospel of Christ, and
Milligan College.
(Emphasis added.) Section 5.03 authorized the
trustees to distribute the net income or corpus
of the trust to or for the benefit of a
beneficiary "at any time and from time to time as
the Trustees deem advisable." One week later, Mr.
Starkey executed the following codicil to his
will:
My Last Will and Testament in Items IV and V,
created two trusts, the former an educational
trust and the latter a charitable trust. My Last
Will and Testament further provided that the
trusts would eventually end even though they were
educational and charitable in nature and
therefore not subject to the Rule against
Perpetuities twenty-one years after the death of
my last descendant alive at the time of my own
demise. My last Will and Testament did not
dispose of the residue of the trusts upon the
occurrence of the terminating events. I
specifically leave the residues of both trusts to
Milligan College.
Mr. Starkey died about three weeks later. The
Estate claimed a charitable deduction of about
$1.3 million on its federal estate tax return for
the amount Mr. Starkey had left to the charitable
trust and asked the IRS to determine that the
trust was exempt from taxation. The IRS declined
to do so. It noted various defects in the trust
instrument and issued a directive on how the
Estate might remedy them. See Estate of Starkey
v. United States, 58 F. Supp.2d 939, 944 (S.D.
Ind. 1999).
In response, the Estate petitioned the state
probate court to amend Section 5.02 of the will
to allow the trustees, in their discretion, to
distribute trust income to eight specific
beneficiary groups (in effect replacing the
"missionaries" phrase in Section 5.02 with the
eight specific groups). The motion stated that
the groups "all fit the description of those
intended by the testator to benefit from this
trust, "[Lawndale Community Church], missionaries
preaching the Gospel of Christ, and Milligan
College." The Estate then filed an amended
petition stating that the part of Section 5.02
referring to "missionaries preaching the Gospel
of Christ" had "created confusion as to whether
the phrase . . . defines the beneficiary Lawndale
Community Church or whether missionaries
preaching the Gospel of Christ creates a
[separate] class of beneficiaries." The amended
petition no longer sought to substitute
specifically named groups for the "missionaries"
phrase; it retained the phrase and argued that it
was meant simply to describe the Lawndale
Community Church. The Estate requested the state
court to construe the phrase accordingly.
In the verified petition, Mr. Starkey’s son
stated that the Lawndale Community Church was
well known for its missionary program and that,
in fact, its missionary program was the only such
program his father supported. The Estate also
offered the testimony of Dr. Lynn Franken, a
former associate dean of the College of Arts and
Sciences at Butler University, who received her
doctorate in English language and literature. Dr.
Franken is trained as a grammarian, someone who
studies the relationship between words and
meaning. She opined that the "missionaries"
phrase did not create a separate class of
beneficiaries, but merely described the Lawndale
Community Church. The probate court agreed and
construed the phrase "missionaries preaching the
Gospel of Christ" in Section 5.02 "as merely
descriptive of Lawndale Community Church" and "as
not creating a separate class of beneficiaries to
which the trustees could distribute income or
corpus."
The next day the IRS issued the Estate an estate
tax deficiency in the amount of $520,178 (plus
penalties). Despite the probate court’s
construction of the will, the IRS maintained that
the will created three trust beneficiaries: the
Lawndale Community Church, a group of
missionaries, and Milligan College. The IRS thus
disallowed the Estate a charitable deduction
because the trust assets were split between
charitable and noncharitable beneficiaries
(concluding that while the Lawndale Community
Church and Milligan College were both qualified
charities, a group of unknown missionaries was
not) and the amount of the charitable bequest was
unascertainable.
Shortly thereafter, the Estate petitioned the
probate court to appoint a guardian ad litem to
represent the interests of the unknown
"missionaries preaching the Gospel of Christ" so
they could appeal the probate court’s ruling that
they--whoever they might be--are not
beneficiaries. The Indiana Court of Appeals, in
an unpublished opinion, affirmed the ruling of
the probate court. It held that the
"missionaries" phrase "is most logically
interpreted in the context of the will as
standing in apposition to, and describing, the
Lawndale Community Church." The guardian sought
transfer to the Indiana Supreme Court, but it
declined to hear the case.
After the state court proceedings concluded, the
Estate paid the assessment and filed a refund
claim with the IRS. The Estate claimed that the
trust qualified for a charitable deduction
because in his will, as interpreted by the state
courts, Mr. Starkey had intended to create only
two beneficiaries (the Lawndale Community Church
and Milligan College), both of which are
charities. The IRS disallowed the refund claim,
and the Estate filed this action against the
United States under 28 U.S.C. sec. 1346(a)(1)
(allowing taxpayers to sue for relief from
erroneously assessed taxes).
Both sides moved for summary judgment. The
district court framed the issue as whether Mr.
Starkey had "intended that the portion of his
estate transferred to the [charitable] trust
would be used by the trustees exclusively for
charitable purposes, and whether the language he
used in the grant to the trust restricted the
trustees to such use . . . ." Estate of Starkey,
58 F. Supp.2d at 955. The district court held
that the probate and appellate courts’ decisions
did not bind it, and it was only required to give
them "proper" weight. The court determined that
"proper" was not much because the probate court
proceedings were not adversarial due to the
absence of the IRS. Id. at 951. Yet, although the
United States received notice of both the probate
and appellate proceedings, it did not contest
them or even appear. The district court disagreed
with the state courts’ interpretation of the
"missionary" phrase and concluded that Mr.
Starkey more likely intended to benefit a group
of missionaries in addition to the church and the
college. Id. at 956-57. Because the trustees had
the discretion to distribute an undesignated
amount of trust corpus or income to a group of
"missionaries" potentially for personal purposes,
the court held that Mr. Starkey had failed to
create a charitable trust. Id. at 957-58. The
district court ruled that the Estate was not
entitled to a charitable deduction and entered
judgment for the Government. The Estate appeals
this ruling.
II. Discussion
We review a grant of summary judgment de novo.
Miller v. American Family Mut. Ins. Co., 203 F.3d
997, 1003 (7th Cir. 2000). The IRS’s calculation
of tax assessments is presumed to be correct, and
the taxpayer bears the burden of rebutting this
presumption and proving he is entitled to a
refund. United States v. Janis, 428 U.S. 433, 440
(1976).
A. Relevant Tax Principles
The Internal Revenue Code imposes a tax "on the
transfer of the taxable estate of every decedent
who is a citizen or resident of the United
States." 26 U.S.C. sec. 2001(a). A decedent’s
gross estate includes "the value at the time of
his death of all property, real or personal,
tangible or intangible, wherever situated", id.at sec. 2031(a), and the value of any property
interests the decedent has transferred (including
by trust) within three years of his death (with
some exceptions). Id. at sec. 2035. A decedent’s
taxable estate is determined by deducting from
the gross estate transfers for public, charitable
or religious uses (among other things). Id. at
sec. 2055(a). The entire amount transferred to a
trust for the benefit of a qualified charity is
deductible. Id. at sec. 2055(a)(3)./2
To qualify for the charitable deduction, the
charitable bequest must be ascertainable at the
time of the transfer. Estate of Marine v.
Commissioner of Internal Revenue, 990 F.2d 136,
138 (4th Cir. 1993) ("Ascertainability at the
date of death of the amount going to charity is
the test."). If a will provides a trustee with
discretion to distribute trust assets to
charities and to individuals for their personal
use, the amount bequeathed to the charities might
not be ascertainable at the time of the transfer.
See Merchants Nat. Bank of Boston v. Commissioner
of Internal Revenue, 320 U.S. 256, 257-58, 263
(1943); see also Estate of Marine, 990 F.2d at
138-39. Such a trust, where the assets are
"split" between charitable and noncharitable
beneficiaries, is known as a "split-interest"
trust. See 26 U.S.C. sec. 2055(e)(2). With such a
trust, the estate can only take a charitable
deduction if the charitable interest of the trust
is presently ascertainable. See id. at sec.sec.
2055(e)(2)(A) & (B), 2055(e)(3); see also Treas.
Reg. sec. 20.2055-2(a) ("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.").
The will’s codicil clearly states that Mr.
Starkey intended to set up a charitable trust,
and the IRS acknowledges that this was indeed his
intent. Its dispute with the Estate is over the
type of charitable trust he intended to create
and, more specifically, whom he intended to
benefit. The IRS acknowledges that if Mr. Starkey
intended the "missionaries" phrase to create two
beneficiaries (Lawndale Community Church and
Milligan College, both of which are qualified
charities), then the value of the charitable
interest would be ascertainable and hence
deductible. In that case, the trust would not be
a split-interest trust because both the trust
beneficiaries would be qualified charities and
the trust assets could only be used for their
benefit. As a result, the charitable portion of
the trust would be ascertainable (it would be the
entire value of the trust)./3 If, however, Mr.
Starkey intended to benefit a group of
missionaries in addition to the church and the
college, the IRS argues that then Mr. Starkey
will have created a split-interest trust with
both charitable and noncharitable beneficiaries.
In that case the trust assets would not have been
specifically divided among the charitable and
noncharitable beneficiaries. Because the
charitable portion of the trust would thus not be
ascertainable, the Estate would not qualify for a
charitable deduction. See Treas. Reg. sec.
20.2055-2(a). We agree with the IRS that this is
the "ultimate issue" and thus must now determine
whom Mr. Starkey intended to assist financially
in preaching the Gospel of Christ, and if the
will sufficiently expresses his intent.
B. Kenneth Starkey’s Probable Intent
Both parties agree that Indiana law governs our
analysis of Mr. Starkey’s will. Estate of Bowgren
v. Commissioner of Internal Revenue, 105 F.3d
1156, 1161 (7th Cir. 1997). In Indiana, the
primary goal in interpreting a will is to
determine and give effect to the testator’s
intent as expressed in the will, and determining
this intent is a question of law. Gladden v.
Jolly, 655 N.E.2d 590, 592 (Ind. Ct. App. 1995);
Hershberger v. Luzader, 654 N.E.2d 841, 842 (Ind.
Ct. App. 1995). The Estate notes that the probate
court determined that Mr. Starkey intended the
charitable trust to have only two beneficiaries,
and it argues that the district court should have
adopted this determination of Mr. Starkey’s
intent because it was affirmed by the Indiana
Court of Appeals, "the highest Indiana Court
which has addressed the issue."
The Supreme Court has made clear that we are not
bound by the probate court’s decision: "where the
federal estate tax liability turns upon the
character of a property interest held and
transferred by the decedent under state law,
federal authorities are not bound by the
determination made of such property interests by
a state trial court." Commissioner of Internal
Revenue v. Estate of Bosch, 387 U.S. 456, 457
(1967). Intermediate state appellate decisions,
however, are presumed to be a correct indicator
(or "datum") of state law which we may not
disregard unless other decisions convince us
"that the highest court of the state would decide
otherwise." Id. at 465 (emphasis omitted). But
Bosch also tells us that if a state’s supreme
court has not resolved an issue, we have to apply
what we "find to be the state law after giving
’proper regard’ to relevant rulings of other
courts of the State." Id.While the Supreme Court did not expand upon what
it meant by "proper regard," we note that the
Indiana Court of Appeals did not publish its
decision. As a result, it is questionable whether
we may simply presume that it correctly indicates
Indiana law--whether we may "properly regard" it
as precedent--even though it is, of course,
directly on point. See Ind. R. App. P. 15(A)(3)
(unpublished decisions shall not "be regarded as
precedent nor cited before any court except for
the purpose of establishing the defense of res
judicata, collateral estoppel or the law of the
case."); Horn v. A.O. Smith Corp., 50 F.3d 1365,
1370 n.10 (7th Cir. 1995) (quoting Ind. R. App.
P. 15(A)(3)) ("Although admittedly on point,
Colglazier is an unpublished memorandum opinion,
and Indiana’s rules make plain that such opinions
shall not ’be regarded as precedent . . . .’").
But while an unpublished opinion is normally not
presumed to be an indicator or "datum" of state
law as a published (precedential) decision would
be, Bosch, 387 U.S. at 465, we note that arguably
(although no one seems to have made the argument)
it is the law of the case, which is one of the
exceptions under Ind. R. App. P. 15(A)(3) for
when unpublished decisions "may be regarded as
precedent." Supra. Anyway, regardless of the
extent to which it may be viewed as a "datum" of
state law, we are persuaded by the Indiana Court
of Appeals’ analysis in this matter.
The Court of Appeals concluded that the
"missionaries" phrase was ambiguous and then
construed this ambiguity. A will is ambiguous if
it is reasonably susceptible to different
interpretations. Hauck v. Second Nat’l Bank of
Richmond, 286 N.E.2d 852, 863 (Ind. Ct. App.
1972). In this case, the Estate contends that the
"missionaries" phrase is unambiguous and modifies
"this beneficiary" (which everyone agrees refers
to the Lawndale Community Church). This is an
entirely reasonable grammatical construction. See
In re City of Fort Wayne’s Petition to Establish
a Conservancy Dist., 484 N.E.2d 584, 589 (Ind.
Ct. App. 1985) ("in the phrase ’freeholder . . .
, who owns land,’ the clause ’who owns land’ is a
descriptive clause. Note the clause is set off
from the antecedent noun by a comma indicating a
rather loose relationship to ’freeholder.’")./4
The IRS, though, seems to contend that this
phrase is ambiguous and that it should be
construed to denote a second beneficiary in a
series of three beneficiaries. On its face, this
construction is also plausible. Cf. Pleasureland
Museum, Inc. v. Dailey, 422 N.E.2d 754, 756 (Ind.
Ct. App. 1981) (In "the phrase ’stores and
shops’. . . the words are connected with the
conjunctive ’and,’ and are set apart from the
other items in the [series] by a comma.").
Because the "missionaries" phrase is reasonably
susceptible to different meanings, we agree that
it is ambiguous. As a result, and like the
Indiana Court of Appeals, we must use rules of
construction to determine Mr. Starkey’s intent.
See id. (ambiguity must exist before a court may
construe a will)./5
Rules of grammar may be used to construe a will.
See Donahue v. Watson, 411 N.E. 741, 750 (Ind.
Ct. App. 1980); Nichols v. Alexander, 152 N.E.
863, 864 (Ind. Ct. App. 1926) (en banc); cf.
Faris Mailing, Inc. v. Indiana Dept. of State
Revenue, 557 N.E.2d 713, 716 (Ind. Tax 1990)
("rules of grammar can be used to construe an
ambiguous statute"). We are reluctant, however,
to hang our hat on the cases the parties have
cited to support their competing interpretations
of the "missionaries" phrase (modifier versus an
item in a series). In the case the Estate cites,
the court was determining what a phrase modified;
it was not passing upon the question presented in
this case: whether a phrase is a modifying phrase
or a separate item in a series. See Donahue (and
other cases), note 4, supra. And the case the IRS
cites, Cape v. State, 400 N.E.2d 161, 164 (Ind.
Ct. App. 1980), also did not address this
specific issue. See also Pleasureland Museum,
Inc., supra.
However, Dr. Franken (the English professor whom
the Indiana courts relied upon as a grammatical
aid) did address this precise question. She
concluded that the "missionaries" phrase most
likely modified "this beneficiary" because for
the phrase to denote an item in a series would be
"inconsistent . . . with the parity of value
generally intended by such a seriatim listing. It
is not a reasonable interpretation that the
decedent could have intended an elaborate item in
the middle surrounded by two very specific and
short items." She also rejected the notion of a
seriatim listing because "[r]ead as three items
in a series, the phrase fails to produce three
distinct categories." Dr. Franken’s expert
opinion provides a sound grammatical reason for
the Indiana Court of Appeals to conclude "that
the phrase ’missionaries preaching the Gospel of
Christ’ is most logically interpreted in the
context of the will as standing in apposition to,
and describing, the Lawndale Community Church."
Furthermore, all the evidence indicates that
Kenneth Starkey intended to benefit the
missionary program of the Lawndale Community
Church, not any and all Christian
missionaries./6 Specifically, his son stated in
the Estate’s verified petition in state court
that the Lawndale Community Church is well known
for its missionary programs that preach the
Gospel of Christ, and its missionary program was
the only such program his father was known to
support.
This case is thus similar to Chappell v.
Missionary Society of Churches of Christ in
Indiana, 29 N.E. 924 (Ind. Ct. App. 1892). Ms.
Chappell bequeathed $500 to the "Christian
Missionary Society of this state." The Missionary
Society of the Churches of Christ in Indiana
filed a petition claiming to be the missionary
society listed in the will. The Society averred
that Ms. Chappell was a member of the Church of
Christ in Indiana. Id. The Society also asserted
that it was the only missionary society in
Indiana affiliated with Ms. Chappell’s church,
and that it was commonly known as the "Christian
Missionary Society" of this state. Id. at 924-25.
Relying on the Indiana Supreme Court’s decision
in Skinner v. Harrison Tp., 18 N.E. 529 (Ind.
1888), the Chappell court held that because the
ambiguity concerned the "object of the testator’s
bounty," the ambiguity was latent, and therefore
it was proper for the trial court to rely on
extrinsic evidence in determining that Ms.
Chappell intended to benefit the Society. 29 N.E.
at 925./7
The Indiana Court of Appeals in this case
applied Chappell and observed that "there would
appear to be . . . no persons or corporations in
existence who precisely answer to the description
’missionaries preaching the Gospel of Christ.’"
(Emphasis in original.) "Therefore," it
concluded, "the trial court did not err in
admitting extrinsic evidence in determining the
testator’s intention regarding the object of his
bounty." The Court of Appeals’ analysis was
consistent with Indiana law. See Chappell and
note 6, supra. The evidence about the missionary
program Mr. Starkey supported was not introduced
to create a new instrument or vary the will’s
terms. See Hauck, 286 N.E.2d at 862. Rather, the
ambiguity in Section 5.02 "was easily explained
by resort to extrinsic evidence." Superbird
Farms, Inc. v. Perdue Farms, Inc., 970 F.2d 238,
244 (7th Cir. 1992) (emphasis added) (applying
Indiana law), overruled on other grounds by
Medcom Holding Co. v. Baxter Travenol Lab., Inc.,
106 F.3d 1388, 1397 n.3 (7th Cir. 1997). This
evidence compels us, as it did the Indiana
probate court and Court of Appeals, to conclude
that because Mr. Starkey intended to benefit the
missionary program of the Lawndale Community
Church, the "missionaries" phrase modifies or
describes "this beneficiary" (the Lawndale
Church), as opposed to listing another class of
beneficiaries.
The IRS offers three reasons why the
"missionaries" phrase should be interpreted as
referring to a distinct class of beneficiaries.
It first argues that it does not make sense to
interpret the "missionaries" phrase as modifying
the Lawndale Church ("this beneficiary") because:
a) Mr. Starkey already described the church in
the first part of Section 5.02 by specifying its
pastor (Wayne Gordon) and its location (Chicago,
Illinois); and b) the church is a singular noun
while "missionaries preaching the Gospel of
Christ" is plural. Dr. Franken, however,
explained away both of these asserted
difficulties with the state courts’
interpretation of Section 5.02: "Read as an
appositive renaming the noun ’beneficiary,’ the
phrase ’missionaries preaching the Gospel of
Christ’ characterizes the Lawndale Community
Church in a way that explains and justifies the
nature of the bequest."
The IRS next argues that the "spendthrift
clause" in Section 5.05 "serves no purpose if the
only beneficiaries of the will were Lawndale
Community Church and Milligan College, since
those entities do not have a ’life’ and are not
subject to claims for alimony or spousal support.
By contrast, the clause serves a purpose if the
trustees are authorized to distribute trust
assets to individual missionaries . . . ."/8
According to the IRS, the state courts’
interpretation of the "missionaries" phrase would
thus violate the principle that "in construing a
will effect should if possible be given to every
provision thereof and the will must not be
interpreted to render any part meaningless". See
Diaz v. Duncan, 406 N.E.2d 991, 1000 (Ind. Ct.
App. 1980).
We disagree with the IRS that the state courts’
interpretation of the phrase would render the
spendthrift clause meaningless. The church is a
(not-for-profit) corporation. Thus, under the
Estate’s interpretation of the phrase, the
"spendthrift clause" would still protect the
trust from claims of the Church’s creditors. The
clause would also protect the trust from claims
for alimony from a former spouse of Wayne Gordon.
Rev. Gordon is specifically referred to in the
will and, as pastor, he is either the perceived
or actual leader of Lawndale Community Church. It
is of course unusual for a testator to worry that
a pastor might have his assets (or those over
which he had some influence) subject to claims
for alimony. But it is just as unusual for a
testator to worry that Christian missionaries
might have their assets subject to claims for
alimony. See id. (Courts should not reject any
provision "to which a reasonable effect can be
given.") (emphasis added). These equally bizarre
scenarios lead us to agree with the Estate that
the "spendthrift clause" was most probably
included because the will’s drafter, Mr.
Starkey’s son, admittedly had little or no
experience drafting wills and inserted the clause
as boilerplate language from a form book.
In this situation, we will not reject the state
courts’ interpretation of the "missionaries"
phrase even if it renders part of the
"spendthrift clause" meaningless. Significantly,
the often-quoted rule the IRS cites states that
"if possible" a will should be interpreted to
give effect to every provision. Id. Indiana
courts have declined to apply this rule when
doing so would thwart the testator’s intent. See
Matter of Estate of Walters, 519 N.E.2d 1270,
1272-73 (Ind. Ct. App. 1988) (citing principle
from Diaz but then declining to give effect to
the "mischievous words per stirpes" to thwart an
intent which was otherwise clear: "We are of the
opinion that its use was merely a legalistic
flourish, devoid of any expression of intent.").
Here, under either the Estate’s or the IRS’s
interpretation, the phrase has little, if any,
applicable meaning. The extrinsic evidence,
however, is persuasive that the "missionaries"
phrase means the Church. Using the "spendthrift
clause" to create a separate class of
beneficiaries, then, would thwart the testator’s
intent. We do not believe that the Indiana
Supreme Court would agree with this use of Diaz.
See Keplinger v. Keplinger, 113 N.E. 292, 293
(Ind. 1916) (after testator’s intent has been
ascertained, "ambiguous terms not reconcilable
therewith may be disregarded.")./9
Lastly, the IRS argues that the state courts’
construction of the "missionaries" phrase should
be rejected because "the state court proceedings
. . . were instituted for the sole purpose of
decreasing the estate’s tax liability." We have
no doubt that they were; it is not unusual not to
want assets, which have already been taxed, to be
taxed again. This desire is not impermissible.
The only inquiry here is whether Mr. Starkey
intended to draft his will so as to permissibly
reduce, or even avoid, his estate’s tax
liability. In this regard, the IRS candidly
acknowledged at oral argument that Mr. Starkey
did not have an illegal intent. The charitable
trust was not a "tax dodge." Mr. Starkey was not,
for example, trying to shuffle money between
family members to "shelter it" from tax while
really keeping it within the family./10 His
charitable intent, and his estate’s attempt to
implement it, were both perfectly
permissible./11
III. Conclusion
Dr. Franken’s analysis of Section 5.02 of the
will and the extrinsic evidence of Mr. Starkey’s
intent show that he intended his charitable trust
to have only two beneficiaries (the church and
the college). Because our objective in construing
Mr. Starkey’s will is to determine and give
effect to his true intent, "rather than have that
intent frustrated," Gladden, 655 N.E.2d at 592,
we hold that "missionaries preaching the Gospel
of Christ" in Section 5.02 of Kenneth Starkey’s
will modifies "this beneficiary" ("the Lawndale
Community Church"). As so construed, the bequest
to the trust qualifies for a charitable deduction
under 26 U.S.C. sec. 2055(a)(3).
The judgment of the district court in favor of
the defendant is REVERSED and the case is remanded
for judgment to be entered in favor of the
plaintiff.
/1 The IRS also denied the Estate a marital
deduction it had claimed on its estate tax
return. The Estate does not challenge this denial
on appeal.
/2 "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 to a trustee or
trustees . . . but only if such contributions or
gifts are to be used by such trustee or trustees
. . . exclusively for religious, charitable,
scientific, literary, or educational purposes, or
for the prevention of cruelty to children or
animals, such trust . . . would not be
disqualified for tax exemption under section
501(c)(3) by reason of attempting to influence
legislation, and such trustee or trustees . . .
does not participate in, or intervene in . . . ,
any political campaign on behalf of (or in
opposition to) any candidate for public office.
Id./3 The IRS notes that the church and the college are
qualified charities, and since trust assets could
only be used for their benefit under this
interpretation of Mr. Starkey’s will, the IRS
agrees that the will would sufficiently limit the
trustees’ discretion. The IRS thus disagrees with
the district court, which held that even if the
"missionaries" phrase were interpreted simply to
refer to the church, the bequest still would not
qualify for a deduction because the will did not
sufficiently restrict the trustees’ discretion.
See Estate of Starkey, 58 F. Supp.2d at 952, 955-
57. We agree with the IRS that if the trust is
interpreted to have only the two beneficiaries,
then the trustees’ discretion is sufficiently
limited for the bequest to qualify for the
charitable deduction.
/4 Cf. Spears v. State, 412 N.E.2d 81, 82 (Ind. Ct.
App. 1980) ("Commas set off the modifying phrase
’by visible or audible means’ . . . ."); Donahue
v. Watson, 411 N.E.2d 741 (Ind. Ct. App. 1980)
("As an extension of the previous phrase the
provision for surviving issue can only be read as
a modification of the surviving child’s
interest."); Freigy v. Gargaro Co., 60 N.E.2d
288, 293 (Ind. 1945) ("The last phrase, set off
by commas, modifies all of the preceding phrase .
. . .").
/5 Before attempting to construe an ambiguity, a
court must determine whether Mr. Starkey’s
"intent is clearly articulated in other
provisions of the will." In re Estate of Grimm,
705 N.E.2d 483, 498 (Ind. Ct. App. 1999) (citing
Pleska v. Zakutansky, 459 N.E.2d 745, 748-49
(Ind. Ct. App. 1984)). Other provisions of Mr.
Starkey’s will do not clearly indicate his intent
with respect to the "missionaries" phrase.
/6 In Indiana, extrinsic evidence may be used to
resolve a "latent" ambiguity but not a "patent"
ambiguity. See McConnell v. Robbins, 140 N.E. 59,
61 (Ind. 1923); see also First Federal Sav. Bank
of Ind. v. Key Markets, Inc., 559 N.E.2d 600, 607
(Ind. 1990). Unlike a "patent" ambiguity, a
"latent ambiguity arises not upon the face of the
instrument by virtue of the words used, but
emerges in attempting to apply those words in the
manner directed in the instrument." Hauck, 286
N.E.2d at 862. Thus, with a latent ambiguity,
"introduction of extrinsic evidence merely
completes the instrument by identifying its
object or subject matter." Id. But with a patent
ambiguity, where "the writing is too uncertain
for a settled construction, admission of
extrinsic evidence would, in effect, create a new
instrument." Id. The ambiguity in this case is
latent. It arose when the IRS attempted to apply
the "missionaries" phrase to determine whom, if
anyone, besides the church and the college could
receive proceeds from the trust. Id.; see also
Eckart v. Davis, 631 N.E.2d 494, 497 (Ind. Ct.
App. 1994). Moreover, an ambiguity concerning
whom the testator intended to benefit is
typically latent. See Hauck, 286 N.E.2d at 862;
see also Huyler’s v. Gas Appliance Supply Corp.,
257 N.E.2d 831, 836 (Ind. Ct. App. 1970) (latent
ambiguity exists when description "is shown to
fit different pieces of property").
/7 The court stated that "[n]o principle is better
settled than that parol evidence is admissible to
remove latent ambiguities, and, when there is no
person or corporation in existence precisely
answering to the name or description in the will,
parol evidence may be given to ascertain who were
[the beneficiaries] intended by the testator."
Id. (emphasis added).
/8 Section 5.05 provides that "[n]o interest under
this instrument shall be transferable or
assignable by any beneficiary or be subject
during his life to the claims of his creditors or
to any claims for alimony or for the support of
his spouse."
/9 It is also difficult to believe that Mr. Starkey,
who was very specific about which church was to
benefit from his trust (the "Lawndale Community
Church in Chicago, Illinois"), and about the
conditions under which the church would be
allowed to do so ("provided that Wayne Gordon is
still the pastor of it at the time of my death"),
would then turn around and give his money to
unknown missionaries of whatever stripe--Baptist,
Catholic, Mormon--without any real conditions
(just that they preach "the Gospel of Christ").
/10 Indeed, because the money for the charitable
deduction was (and is) clearly going outside the
family one way or another, Mr. Starkey’s
relatives have nothing to gain or lose from the
outcome of this case. The only people who stand
to lose under the IRS’s proposed construction are
the charities themselves if half the trust corpus
goes to the United States. We believe an Indiana
court would not find this to be Mr. Starkey’s
intent. See Pleska, 459 N.E.2d at 749 ("The
specificity of Peter’s bequests supports a
determination that he did not intend for his
probate estate to be exhausted by the payment of
[estate] taxes on the non-probate assets.").
/11 The IRS points out that the Estate initially
petitioned the probate court to amend the will to
substitute eight specific groups for
"missionaries preaching the Gospel of Christ,"
stating that the groups "all fit the description
of those intended by the testator to benefit from
this trust, "[Lawndale Community Church],
missionaries preaching the Gospel of Christ, and
Milligan College." In light of this petition, the
IRS argues that the Estate cannot now maintain
that Mr. Starkey intended the "missionaries"
phrase merely to modify "this beneficiary." The
Estate’s course of action in this regard, though,
is understandable. At this time, the Estate was
still represented by Mr. Starkey’s son, who did
not have expertise in this area. He had been
corresponding with the IRS about how the trust
could qualify for a charitable deduction, and it
was in response to a directive from the IRS that
he filed the petition in question. The petition
was effectively withdrawn when the Estate filed
an amended petition in which the Estate
represented that the "missionaries" phrase was
descriptive. Under these circumstances, we do not
deem the Estate’s actions with the initial
(superceded) petition as indicative of Mr.
Starkey’s true intent.