1982 Tax Ct. Memo LEXIS 40">*43 section 4945. These cases have been submitted fully stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petition in docket no. 6294-77 was filed, all the petitioners in this docket resided in Louisiana. When the petition in docket no. 6355-77 was filed, both of the petitioners in this docket resided in Maine. (The individual petitioners in both dockets, and Bettina Bonner (the decedent of the estate petitioner in docket no. 6355-77) are hereinafter sometimes collectively referred to as "the Heirs".)
Lelia Bonner Dwyer (hereinafter sometimes referred to as "Dwyer") died testate on June 22, 1905. After directing several specific bequests, her will (dated July 16, 1901) contained the following provisions:
Third. I desire all my real estate, except the residence and lots situated in the square bounded by First, Second, Coliseum and Chestnut Streets in the City of New Orleans, to be sold by my executor to the best advantage, and after the payment of the foregoing special pecuniary legacies, which are expressly charged upon said real estate so to be sold, and are not to bear upon any other portion of my estate, I will and bequeath ">*44 all the rest and residue of the proceeds of said real estate so to be sold, to Alexander J. Dwyer, Alfred LeBlanc, Joseph W. Carroll, William B. Sommerville, Joseph P. Blair, Benjamin Moss all of New Orleans, Louisiana, as trustees in trust to found and maintain in New Orleans a Home for Aged and Infirm Men to be called the John M. Bonner Memorial Home, and I request said trustees to form themselves into a body corporate under the laws of the State of Louisiana, to carry this trust into effect. I desire said corporation to be formed pursuant to the provisions of Act 124 of the acts of the legislature of Louisiana of the year 1882, and I desire that vacancies in the Board of Trustees be filled by election by the remaining trustees.
Fourth. I name and constitute my beloved husband Alexander J. Dwyer as my universal residuary legatee, and give and bequeath to him all property of every nature whatsoever of which I may die possessed other than that hereinbefore specially bequeathed and expressly including in the property so given and bequeathed to my said husband the residence and lots being all the real estate owned by me in the square bounded by First, Second, Coliseum and Chestnut ">*45 Streets, in the City of New Orleans.
Dwyer's husband, Alexander J. Dwyer (referred to in paragraphs Third and Fourth of Dwyer's will, supra) predeceased her.
On or about June 27, 1905, Dwyer's six then-surviving first cousins petitioned the Louisiana Civil District Court in which Dwyer's will was probated to recognize them as Dwyer's sole heirs and put them into possession of all property left by her after payment of the specific bequests in her will. On June 28, 1905, the Louisiana Civil District Court rendered a judgment in open court recognizing those six cousins as Dwyer's sole heirs at law and putting them in possession of such property (each to receive an undivided one-sixth portion of such property after payment of state legacy taxes).
On July 13, 1905, the surviving Trustees1982 Tax Ct. Memo LEXIS 40">*46 under paragraph Third of Dwyer's will formed the Board as a corporation for the purpose of carrying into effect the trust imposed on the Trustees by Dwyer's will (see paragraph Third, supra). mortiscausa or inter">*47 vivos from other donors, and to apply the same as may be prescribed in any subsequent act of donation; to receive, buy, sell, mortgage and pledge property, movable and immovable, in accordance with law, and generally to have and exercise any and all the powers conferred by the laws of this State upon corporations organized for literary, scientific, religious and charitable purposes, including the power to make and use a corporate seal and the same to break or alter at pleasure, and, under its said corporate name, to contract, sue and be sued; and to make and establish, as well as to alter and amend from time to time, such rules, by-laws and ordinances for the proper conduct, management and regulation of its affairs as may be necessary and proper.
In 1906, the Board received real property, and undivided interests in real property, that had belonged to Dwyer.
From 1907 through 1914, the Board sold some real estate and acquired property in New Orleans, Louisiana, on which it intended to construct a building as a home for aged and infirm men, in accordance with paragraph Third of Dwyer's will. Construction of the building was completed in 1915. The building, named the "John M. Bonner ">*48 Memorial Home" (hereinafter referred to as "the Home"), was dedicated and opened on June 9, 1915.
In conformance with Dwyer's stated purpose, the Home operated at a capacity of about 20 men until the early 1950's. During the 1950's the number of residents of the Home began to decrease, and its annual operating expenses began to exceed yearly income, causing it to begin using part of its capital to pay operating expenses.
An exemption affidavit (Treasury Dept. Form 1023), dated Juen 22, 1950, was filed with the Internal Revenue Service on behalf of the Board requesting an exemption from Federal income taxes under section 101(6) of the Internal Revenue Code of 1939 (predecessor of sec. 501(c)(3) of the Internal Revenue Code of 1954). Question 16 on the Form 1023 asked: "In the event of the dissolution of the organization, what disposition would be made of its property?" This question was answered as follows:
16. The members of the Board of Trustees have no right or power to dissolve this corporation. If they fail to perform their functions the court would appoint new Trustees in their places. If the corporation were dissolved it is uncertain, under the laws of Louisiana, what ">*49 disposition would be made of this property, but it is clear that no part thereof would accrue to any of the then or previous trustees.
By letter, dated July 26, 1950, the Internal Revenue Service notified the Board as follows:
It is the opinion of this office, based upon the evidence presented, that you are exempt from Federal income tax under the provisions of section 101(6) of the Internal Revenue Code and corresponding provisions of prior revenue acts, as it is shown that you are organized and operated exclusively for charitable purposes.
At a special meeting of the Trustees on February 29, 1956, the following business transpired:
Mr. McIlhenny read to the [Trustees] the requirements of the State Fire Marshal and the State Board of Health, requiring various changes and additions to the present building. After which the President suggested that we hold a meeting at the Home with the State and City Authorities and discuss the situation with them.
Discussion was had as to whether it would not be preferable to close the Home and find another place for the present inmates than to expend large sums of money to make the major additions required by the governing authorities. No formal ">*50 action was taken at this meeting on this matter.
In 1963 Dwyer's surviving collateral heirs sued the Trustees in the Louisiana Civil District Court, asserting that the trust should be dissolved and the remaining assets delivered to them, on the grounds that Dwyer's testamentary trust had been completely fulfilled and could not be further performed. The District Court entered judgment in favor of the Trustees and against the heirs, from which the heirs appealed. The Fourth Circuit Court of Appeal of Louisiana affirmed the District Court. Bonner v. Board of Trustees,181 So. 2d 255 (La. App. 1965), writ refused 248 La. 915">248 La. 915, 182 So. 2d 664 (1966). The Court of Appeal concluded its opinion as follows (181 So.2d at 258):
(1) Even though only five men are being maintained by the Home at the present time, and substantial repairs should be made to the Home, the heirs have a right only to submit an alternate plan as to how the general purpose of the Trust can be better accomplished.
(2) Plaintiffs contend that LSA-R.S. 9:2331-37, Part IV verbo "Cy Pres" under the subject "Charitable, Etc., Trusts," is unconstitutional because it is an ex post facto statute destroying their vested rights ">*51 as heirs of the deceased. This contention is untenable because:
(1) The statute is not ex post facto because it merely establishes a procedure to follow in pursuit of the existing cy pres or approximation doctrine already existing in Louisiana as clearly stated in In re Milne's Succession, cited supra.
(2) Plaintiffs have no vested rights because they are not forced heirs and they were completely ignored in the decedent's testament.
The Cy Pres statute was interpreted in In re Succession of Abraham, 136 So. 2d 417 (La.App. 1962) to the effect that, where the circumstances have so changed since the creation of a Trust as to render it impractical or impossible to comply literally with the terms thereof, the court may decree that the donation be administered in such a manner as to accomplish, as nearly as possible under the then existing circumstances, the general purposes of the bequest or donation.
We fully agree with the district court that the Trustees are reasonably carrying out the purpose of the Trust, as the Home is still in existence, in reasonable condition as shown by the photographs, and funds are available to take care of elderly men at this time, even though the number ">*52 now cared for is only five. On the other hand, if the heirs should prevail, the Home would no longer exist to care for aged men however few, nor as a memorial to John M. Bonner, but would be promptly and permanently closed, and the remaining assets of the Trust, through only sufficient to maintain it for a few more years, would escheat to the collateral heirs which the testatrix never intended.
The judgment of the district court is correct and is affirmed; Plaintiffs to pay costs in both courts.
Judgment affirmed.
In 1970 the Internal Revenue Service sent the Board a form letter transmitting a Form 4653 (Notification Concerning Foundation Status) and Instructions regarding status and classification as a private foundation because of provisions of the Tax Reform Act of 1969. By letter dated August 21, 1970, the Trustees forwarded the completed Form 4653 to the Internal Revenue Service, stating that the Board was a private foundation within the meaning of section 509(a) and claiming that it was an operating foundation within the meaning of section 4942(j)(3).
On July 1, 1971, the Trustees closed the Home, which at that time had only two residents, because its cost of operations ">*53 had significantly exceeded the revenues of the trust fund. As operating costs increased, the revenues available for maintenance of the Home were being substantially depleted.
A form letter dated July 9, 1971, sent to the Board by the Internal Revenue Service, stated that the Internal Revenue Service was waiting for the promulgation of Treasury Regulations pertaining to section 509 before it would respond to the Form 4653 submitted by the Trustees. A form letter dated October 5, 1971, sent to the Board by the Chief of the Rulings Section of the Exempt Organizations Branch, stated that the Board had been classified as a private foundation as defined in section 509(a) and as an operating foundation as defined in section 4942(j)(3).
On November 5, 1971, the Heirs filed a petition in a declaratory judgment proceeding in the Louisiana Civil District Court, asking that "the donation of [Dwyer] made for the purpose of establishing and maintaining the [Home] be dissolved on account of the non-performance of the conditions imposed by the donor on the donee", that they be declared Dwyer's heirs at law, and that they be declared to be entitled to the remaining assets donated by Dwyer. The ">*54 defendant Trustees answered, asserting that the Home had been closed, that "it is impractical to continue the trust and that, in fact, the trust established by Mrs. Dwyer in 1905 has been satisfactorily fulfilled." The Trustees' answer stated that, of the 16 other homes for aged people in the community, 10 accepted both men and women, 6 accepted women only, and none precisely fit the pattern of the Home. They stated that "the Trustees leave to the judgment of this Honorable Court the decision as to whether or not the remaining trust assets should be delivered to the heirs of Mrs. Dwyer or diverted to another cause."
The Trustees' sole argument at the 1971 trial, presented orally by their attorney, was that the cy pres doctrine should be applied to the facts of the case. This position was opposed by the Heirs. The litigation was an adversary proceeding. 1982 Tax Ct. Memo LEXIS 40">*55 The District Court Judge orally assigned reasons for his decision and on December 23, 1971, entered the following judgment:
JUDGMENT
IT IS ORDERED, ADJUDGED AND DECREED that there be judgment herein in favor of plaintiffs' declaring:
That the donation of Lelia Bonner Dwyer made for the purpose of establishing and maintaining the John M. Bonner Memorial Home be dissolved since the trust has been completely fulfilled and cannot be further performed; and that William F. Bonner, Jr., Bettina Bonner, Mrs. Evelyn Gladney, widow of Jackson Thornwell Witherspoon, Jr., Mrs. Celeste Gladney, divorced wife of William A. Shell, now widow of George Peers, William Kelly Gladney, Julian M. Gladney and Edward Lee Gladney, to be the heirs at law of Lelia Bonner Dwyer, and as such entitled in equal portions to the remaining assets of said donations including all property of every description, real, personal [sic] and mixed.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that defendant make a prompt and full accounting as provided by law and that delivery of the properties to plaintiffs' [sic] be made with the formalities provided by law. * * *
One of the Trustees (the one who made the statement described in n. 5, supra) concluded and recommended to the Trustees that the ">*56 December 23, 1971, judgment of the District Court was based on a factual determination and, accordingly, that there was no basis for an appeal. Consequently, on January 18, 1972, and on March 13, 1972, the Trustees delivered to the Heirs the remaining assets of the Board. These assets were divided equally among the Heirs.
After the delivery of all of the Board's remaining assets to the Heirs, the Board was without other assets and carried on only minimum ministerial functions.
A Form 966-E (Liquidation, Dissolution, Termination or Substantial Contraction of Organizations Exempt or Formerly Exempt under Section 501(a)), dated October 24, 1973, was filed on behalf of the Board with the Internal Revenue Service, stating that the Board had been dissolved and that final distribution of assets had been made on January 18, 1972.A Form 990 (Return of Organization Exempt From Income Tax), dated October 24, 1973, and labelled "Final Return," was filed for 1972 on behalf of the Board with the Internal Revenue Service. A Form 990-AR (Annual Report of Private Foundation), dated February 7, 1974, was filed for 1972 on behalf of the Board with the Internal Revenue Service, stating that the assets ">*57 of the Board had been delivered to the Heirs by order of the Louisiana Civil District Court as of January 18, 1972.
There were no contributions by substantial contributors (as defined in sec. 507(d)(2)) made to the Board after February 28, 1913, and no contributions by anyone made to the Board after May 26, 1969. If the Board had taxable income in any year ending after February 28, 1913, then any such taxable income was completely offset by net operating losses which could properly be carried over to that taxable year. The amount of the aggregate tax benefit as defined in section 507(d)1982 Tax Ct. Memo LEXIS 40">*58 ">*59 ">*60 resulting from the Board's section 501(c)(3) status is zero.
Respondent maintains that the Board's distributions of its assets to the Heirs are "taxable expenditures" under section 49451982 Tax Ct. Memo LEXIS 40">*61 because the distributions were made "for purposes other than expressed in section 170(c)(2)(B)", section 4945, and that petitioners are liable for these taxes as transferees of the assets of the Board.
Petitioners argue 1982 Tax Ct. Memo LEXIS 40">*62 precludes classification of the Board as a private foundation and makes it a split-interest trust under section 4947(a)(2), the assets of which were placed in trust before May 27, 1969. From this, they argue that the transfer of assets to the Heirs is not subject to section 4945. Alternatively, they contend that respondent has failed to bear his burden of proving that petitioners are transferees of assets within the meaning of section 6901. Also in the alternative, petitioners maintain that application of section 4945 in the instant case is beyond the purpose of Congress in enacting this section or would result in denial of their rights to property without due process of law, in violation of the Fifth Amendment to the United States Constitution (as constituting retroactive application of section 4945 to their vested property rights).
As another alternative, petitioners contend that the 1971 order of the Louisiana Civil District ">*63 Court acted to terminate the Board as a private foundation for purposes of sections 507 and 509, the transfer of trust assets occurred on termination and was not subject to the section 4945 tax and there is no tax under section 507(c) because the amount of the aggregate tax benefit under section 507(d) is zero.
Respondent replies that there was no right of reversion under Louisiana law, the 1971 judgment of the Louisiana Civil District Court was erroneous and should not be given any effect, and the Board was a private foundation, the transfer of assets from which was subject to section 4945. He also contends that the amount of tax imposed by sections 4945(a)(1) or 4945(b)(1) is not limited to the amount of the aggregate tax benefit as defined in section 507(d).
We agree with petitioners' contention that the Board has no tax liability and that, therefore, petitioners have no transferee liability.
Section 4945 was enacted by section 101 of the Tax Reform Act of 1969 (hereinafter sometimes referred to as "TRA 69"), Pub. L. 91-192, 83 Stat. 512. A recurrent theme in the legislative history makes it clear that, in enacting section 101, TRA 69, the Congress was dissatisfied with then-existing ">*64 law in that (1) it appeared to permit many activities that were thought to be abuses of the tax benefits enjoyed by private foundations and their donors, and (2) the only sanction for violation under then-present law was future loss of status as a section 501(c)(3) exempt organization and as an eligible donee for deductible charitable contributions. The Congress believed that these sanctions often were either too harsh or too trivial. 1982 Tax Ct. Memo LEXIS 40">*65 ">*66 ">*67 ">*68
Accordingly, in section 101, TRA 69, the Congress provided an arsenal of provisions intended to reduce the likelihood of misuse of the tax benefits available to private foundations and to those that contribute to these organizations. Section 101, TRA 69, includes a series of detailed standards of conduct, a series of sanctions intended to be more appropriately related to the violations (and more practical to enforce) than prior law, and a series of publicity and disclosure provisions intended to assist in oversight of foundations by the ">*69 public and by State officials, as well as by the Internal Revenue Service. At the head of these provisions (in fact, as the first substantive provision in the entire TRA 69, 83 Stat. 492), the Congress set section 507, 1982 Tax Ct. Memo LEXIS 40">*70 which provides that an organization could escape private foundation status--in particular, the newly-enacted restrictions and sanctions--but only if the organization pays a tax equal to the amount of the tax benefits (plus interest) that it and its substantial contributors had enjoyed because of the organization's section 501(c)(3) status. 1982 Tax Ct. Memo LEXIS 40">*71 ">*72
Thus, the Congress made it clear that the imposition of the standards, sanctions, and procedural rules was a quid pro quo for the tax benefits, including interest, to the private foundation and its substantial contributors.
In the instant cases, the parties have stipulated that ">*73 these aggregate tax benefits were zero.
At the time the District Court judgment was entered and the Board determined not to appeal, (2) the Board's charitable operation had been closed down for about six months, (2) the Board's section 507(c) tax was zero, and (3) respondent had not taken any public position in furtherance of his statutory obligation under section 507(a)(1) to prescribe by regulations the time and manner in which an organization was to notify respondent of an intention to terminate its private foundation status.
Regulations under section 507(a) were not proposed until April 22, 1972 (37 Fed. Reg. 7986), 1982 Tax Ct. Memo LEXIS 40">*74 and not adopted until December 21, 1972 (T.D. 7233, 37 Fed. Reg. 28157, 1973-1, C.B. 235). 1982 Tax Ct. Memo LEXIS 40">*75 ">*76 ">*77 ">*78 In October 1973, the Board filed with the Internal Revenue Service its Form 966-E (Liquidation, Dissolution, Termination or Substantial Contraction of Organizations Exempt or Formerly Exempt under Section 501(a)) and also its Form 990 (Return of Organization Exempt From Income Tax), both of which indicated that the Board had dissolved.
The statute itself does not define the event that constitutes a termination nor does it provide for either the time or manner of notification.
We conclude that, under the circumstances of the instant cases, the Board's private foundation status (if any) was terminated under section 507(a)(1) on the entry of the unappealed judgment of the District Court, on December 23, 1971, and that the subsequent transfers of assets in accordance with this judgment did not give rise to taxes under section 4945.
Since we conclude that the 1972 transfers of assets did not give rise to the section 4945 taxes determined by respondent, petitioners have no liabilities as transferees.
We believe that this conclusion is consistent with the Congress' clear ">*79 policy of imposing regulatory-type burdens in exchange for tax benefits, as described supra. We believe that respondent has been given ample authority under section 507(a)(1) to establish procedures to protect the integrity of the statutory scheme; we see no need to determine precisely what the existing regulations require, especially as to the time of notification of intent to terminate. Gottesman & Co. v. Commissioner,77 T.C. 1149">77 T.C. 1149, 77 T.C. 1149">1157-1158 (1981); Corn Belt Hatcheries of Arkansas, Inc. v. Commissioner,52 T.C. 636">52 T.C. 636, 52 T.C. 636">639-640 (1969).
Under the state ">*80 of the law and the factual situation as of the end of 1971, we conclude that the notification requirement was satisfied by the subsequent filings by the Board, stating that it had been dissolved and that final distributions of assets had been made.
In light of these conclusions, we see no need to determine what constitutes "proper regard" for the unappealed 1971 Louisiana Civil District Court ruling that the Heirs had a right of reversion in the Board's assets ( Commissioner v. Estate of Bosch,387 U.S. 456">387 U.S. 456, 387 U.S. 456">465 (1967)); 1982 Tax Ct. Memo LEXIS 40">*81 what sort of notification might have been required if the Board's aggregate tax benefits had been greater than zero; whether the Board was a private foundation (sec. 509(a)) or a split-interest trust (sec. 4947(a)(2)); and what the nature is of respondent's burden of proving that the transfers here in dispute are the sort that could give rise to transferee liability (sec. 6902(a)).
We hold for petitioners.
Decisions will be entered for petitioners.
Document Info
Docket Number： Docket Nos. 6294-77, 6355-77.
Citation Numbers： 45 T.C.M. 280, 1982 Tax Ct. Memo LEXIS 40, 1982 T.C. Memo. 708
Filed Date： 12/6/1982
Precedential Status： Non-Precedential
Modified Date： 11/20/2020
