Eagan v. Commissioner

SUSAN YOUNG EAGAN AND MARION M. JACKSON, EXECUTORS, ESTATE OF JOHN JOSEPH EAGAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Eagan v. Commissioner

Docket No. 26077.

United States Board of Tax Appeals

17 B.T.A. 694; 1929 BTA LEXIS 2267;

September 28, 1929, Promulgated

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The owner of a controlling part of the stock of a corporation bequeathed the stock in trust to persons who were representatives of the board of directors of the corporation and of its employees, and to their successors, to receive the dividends and in their discretion so to use them as to provide a living wage to employees of the corporation or, in the event the plant should be shut down or the employee should be disabled, to provide an income for him or his dependents; the trustees were directed, in the control of the corporation, through the control of the stock bequeathed, to manage the corporation in such a manner as to enable it to sell its goods to the public at the lowest possible price consistent with maintenance of the plant and business and payment of reasonable wages; the trustees were expressly designated as trustees for the benefit of the employees and of the purchasing public; the corporation was a business corporation organized for pecuniary gain to its stockholders. Held:

1. That in determining whether the trust is charitable in its nature and the amount of the bequest is deductible under section 403(a)(3), Revenue Act of 1921, local laws and decisions as to the nature of the trust will not be considered.

2. That a decree of the court of the State of decedent's domicile, in an uncontested proceeding, holding the trust to be charitable, should not be given any weight.

3. That the objects of the trust were so inseparable from the business welfare of the corporation that the trust can not be said to be charitable.

4. That, in view of the benefits inuring to the corporation through sale of goods at the lowest price consistent with maintenance of its plant and reasonable wages to employees, and through the intermingling of the actual management of the trust with the management of the business of the corporation, the trust was not exclusively charitable.

Robert C. Alston, Esq., for the petitioners.

Frank T. Horner Esq., for the respondent.

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STERNHAGEN

This proceeding involves a deficiency of $113,171.61 in estate tax. The question is whether the amount of a bequest by decedent to certain trustees is deductible from the value of the gross estate under section 403(a)(3) of the Revenue Act of 1921 as a bequest to trustees exclusively for charitable purposes.

FINDINGS OF FACT.

John Joseph Eagan died March 30, 1924, a resident of De Kalb County, Georgia. He was survived by his wife, Susan Young Eagan, and two minor children. The value of his gross estate was $1,990,547.43. This included $1,112,125 which was the undisputed value determined by respondent of 1,085 shares of common stock of the American Cast Iron Pipe Co., hereinafter called the Company. Decedent left a will dated April 22, 1922, and a codicil dated April 3, 1923. By the original will, he made certain specific bequests and bequeathed his residuary estate to his wife. No specific mention was made of the aforementioned 1,085 shares. The codicil follows:

Whereas I Jno. J. Eagan, did on the twenty second day of April 1922, sign, seal, declare and publish my last will and testament in the presence of A. E. Nettie Catoe and H. A. Etheridge who signed said will and testament as witnesses:

And whereas, I desire to add an additional bequest and devise in said will and testament, I, therefore make, declare and publish this codicil to said will and testament, to wit

I hereby give, bequeath and devise ten hundred and eighty-five (1,085) shares of the common stock of the American Cast Iron Pipe Company, being all of my holdings of said common stock of said Company, to the members of the Board of Management and the members of the Board of Operatives of said American Cast Iron Pipe Company jointly, and their successors in office in said Boards, as trustees, in trust for the following purposes, and subject to the directions hereinafter set forth, to wit:

First: To receive all dividends paid upon said stock and use so much of the dividends thus received, as said trustees in their discretion may deem advisable in supplementing the salaries and wages of the employees of said American Cast Iron Pipe Company in amounts sufficient in the judgment of the said trustees to insure to each of said employees an income equivalent to a living wage, said trustees to be the sole judges of what constitutes a living wage, and of the amounts, if any, to be paid to each one or any of said employees of said Company.

Second: To use such sums from the dividends received upon said stock, as said trustees in their discretion may deem advisable, in paying an income to any employee, or to the wife and minor children of any employee of said American Cast Iron Pipe Company, at such times as the plant of said Company may shut down for any cause, or at such times as said employee through no fault of his or her own, but through accident, sickness, or other unavoidable causes, shall be unable to work and said trustees are hereby made the sole judges of the amounts, if any, which shall be paid by said trustees to any employee, or to the members of any employee's family under the provisions of this paragraph -

Third: To vote said certificates of stock in said American Cast Iron Pipe Company at all meetings of stockholders of said Company -

It is my will and desire, and I direct, that in determining all questions as to voting said stock, and as to carrying out the provisions of the trust created by this codicil, the members of the Board of Management, as Trustees, shall vote as a unit, and the members of the Board of Operatives, as trustees, shall vote as a unit, the vote of each group to be determined by the majority vote of the members of the respective boards; and that in the event of the failure of the respective groups of trustees to agree upon any question said question in dispute shall be referred to the Board of Trustees, whose decision shall be final -

Any member of either of said boards, who shall cease to be a member of either Board for any cause whatsoever shall thereupon cease to be a trustee under this codicil of my will, his or her successor upon either of said Boards, becoming, by virtue of his or her office, a trustee under this codicil, immediately upon his or her acceptance of said trust -

Any employee of said American Cast Iron Pipe Company who shall die, or who shall voluntarily or involuntarily for any cause whatsoever, other than the temporary shutting down of the plant or plants of said Company, leave the employment of said Company, shall immediately thereupon cease to have any interest of any kind whatsoever in any income from, or in any part of the trust estate created by this codicil of my will. Any person, who may hereafter at any time enter the employment of said Company, shall immediately thereupon become a beneficiary of said trust estate with all of the rights and privileges enjoyed by the employees of said Company at the time of my death, and subject to the same conditions -

The provisions of the two paragraphs immediately preceding this paragraph shall apply to the wife, or child, or the wife and children, or children of said employee of said Company, if there be wife, or child, or children or both, provision having been made for them, in the event of the death of said employee leaving such, under the rules for the management of said Company of its Pension Fund -

By this codicil to my will and testament, it is my purpose, will and desire to create a trust estate both for the benefit of the persons actually in the employ of said American Cast Iron Pipe Company, and for such persons as may require the product of said Company.

The trustees, appointed by this codicil, in accepting the trust and acting hereunder, will be trustees both for said employees and said persons requiring the product of said Company.

It is my will and desire that said trustees in the control of said Company, through the control of said common stock, shall be guided by the sole purpose of so managing said Company as to enable said American Cast Iron Pipe Company to deliver the Company's product to persons, requiring it, at actual cost, which shall be considered the lowest possible price consistent with the maintenance and extension of the Company's plant or plants and business and the payment of reasonable salaries and wages to all of the employees of said Company, my object being to insure "Service" both to the purchasing public and to labor on the basis of the Golden Rule given by our Lord and Saviour Jesus Christ.

This third day of April 1923

(Signed) JOHN J. EAGAN.

The will and codicil were, on May 5, 1924, admitted to probate. Petitioners are the executors.

Thereafter, in August 1924, the executors as plaintiffs instituted a proceeding in the Superior Court of Fulton County, Georgia, against W. D. Moore and others, as trustees for the employees of the Company for the wives and children of said employees and for the general public, and as employees and representatives of all employees of the Company. The petition prayed for an order (1) construing the bequest of 1,085 shares "to be a charitable bequest within the meaning of the law of Georgia, thereby creating a perpetual trust for charitable purposes," (2) construing the words "Boards of Trustees" in the codicil to mean the board of directors of the Company, and (3) directing petitioners to deliver the shares to defendant members of the "Board of Management" and "Board of Operatives" of the Company as trustees. Answer was filed substantially admitting the facts and acceding to the prayer of the petitioners. The jury, on December 15, 1924, found for petitioners as requested, and decree in accordance therewith was on the same day entered.

In January, 1925, Susan Young Eagan, as executrix, delivered the 1,085 shares to the trustees.

The American Cast Iron Pipe Co. is a Georgia corporation organized in 1905, and its powers, as shown by its original charter and subsequent amendments thereto, are those of a business corporation with the object of "pecuniary gain to the stockholders," with the right to issue common and preferred shares. The original capital stock was fixed at $150,000 divided into shares of $100 each, either common or preferred, or both, with the right to increase the capital to $1,000,000 or to reduce it to $50,000.

Decedent was one of the original organizers of the Company. In December, 1921, he became president. In a letter to the stockholders dated January 20, 1922, he stated that he had "accepted [the position] with the understanding that the teachings of Jesus Christ should be the controlling principles in the business."

In December, 1921, decedent announced the creation of an executive committee, authorized by article IV, section 11, of the Company's by-laws, as follows:

The Board of Directors may appoint an executive committee consisting of not less than three (3) of its members, to whom it may delegate such of its duties as may seem proper.

The name of this committee was changed to the "Board of Management" on March 15, 1922. At the time of its creation decedent announced:

It is the hope of our Directors to make our organization thoroughly democratic and cooperative. We have begun by a distribution of our responsibilities. This has been divided under four heads: Sales, Manufacturing, Purchases and Employees, and Finance.

The "Board of Operatives" was created with the consent of the stockholders. The first steps were taken about the Christmas season of 1921. On March 1, 1922, a report on "Employee Representation" was submitted as follows:

The Board of Management of the American Cast Iron Pipe Company asks that the employees of the Company elect representation from their number to constitute and to be known as the Board of Operatives.

This Board of Operatives is expected to provide a channel to secure and insure close relations and intelligent cooperation on the part of all connected with our organization.

The Board of Operatives will have access to the books of the Company and will be made familiar with its monthly, quarterly and yearly statement of earnings. It will be consulted by the Board of Management on questions affecting the employees, including any important changes in wages, hours of work or working conditions.

It will be expected to make recommendations to the Board of Management on such matters affecting the employees as it may desire, and may report these recommendations to the Board of Management either in writing or in person through its chairman, or arrange a conference when all its members may meet with the Board of Management at a time mutually convenient.

It will be expected to nominate to the stockholders of the Company two of its members as directors in the Company.

In order to facilitate its work it shall appoint three sub-committees, with names and duties as follows:

LIVING CONDITIONS COMMITTEE: This sub-committee will make recommendations with a view to helping the management of the Company in its aim to see that every employee working regularly and faithfully for the Company shall be offered constant employment and shall receive such a wage as will enable him to live in reasonable comfort.

COMMITTEE ON WORKING CONDITIONS: This sub-committee will make recommendations on matters of wages, working hours, and the comfort and safety of working conditions.

COMMITTEE ON RECREATION AND EDUCATION: This sub-committee will make recommendations on matters in connection with the recreation and education of employees and their families.

The above named sub-committees will report to the Board of Operatives, which will, after due consideration, make such recommendations to the Board of Management as it may deem wise.

DIRECTORS OF COLORED Y.M.C.A.

The members of the Colored Y.M.C.A. are asked to elect twelve directors who shall have the same relationship and perform the same duties with regard to the Colored Y.M.C.A. as the present directors of the Acipco White Y.M.C.A. entertain to that organization.

In addition to this, these directors shall constitute a Board which the Board of Management or the Board of Operatives may call into conference on any matters affecting the interests of the colored employees.

Pursuant to this plan an election was held, at which ten members of the "Board of Operatives" were elected, representing various departments of the Company. The membership of this board is chosen once a year.

In June, 1922, an increase of the capital stock to $3,000,000 was authorized by charter amendment, and thereafter preferred stock was issued to replace at book value all outstanding common stock except the 1,085 shares held by decedent. The outstanding preferred stock aggregating $1,337,800 face value is entitled to priority both as to face value and to dividends up to 6 per cent annually.

During 1922 decedent requested the "Living Conditions Committee" of the "Board of Operatives" to determine if the Company's workers were receiving a living wage. Pending their report he declined to receive dividends from his 1,085 shares of common stock directing that the monies derived therefrom be administered jointly by the "Board of Operatives" and the "Board of Management" as an "Employees' Fund" for the care of employees or their families in distress due to unemployment, sickness or otherwise, who were not reached by any other welfare agency. During 1922 and 1923 all the dividends from said stock were turned into the "Employees' Fund" and administered by the trustees. In the first quarter of 1924 the committee determined that the Company's employees were receiving a living wage and the 2 per cent quarterly dividend for the first quarter was not paid into the fund.

After decedent's death, the two administering boards directed by joint resolution that the undistributed remainder of the dividends in their hands, amounting to $13,718.65, be "set aside as a separate and distinct fund to be known as the John J. Eagan Fund." As trustees of the 1,085 shares of common stock of the company under the codicil of decedent's will, they jointly resolved that the "principal and accretions to the said fund" be used "for the relief of any person in the employ of the American Cast Iron Pipe Company, or for the relief of the dependent or dependents of any such employee, including the relief of the families of deceased or disabled employees in such way, on such terms and to such extent as the said Board may in each individual instance deem to be wise and proper." When entering upon their duties, the trustees expressed their understanding of the principles of the trust as follows:

The said Eagan was an earnest believer in the teachings of Jesus Christ, and lived in accordance with his understanding of those teachings, and it was his purpose and intent that "the teachings of Jesus Christ are to be made the controlling principles of the American Cast Iron Pipe Company." The said Eagan believed that industry should be based on Christianity, and he understood this to mean:

(1) A reasonable living wage to the lowest paid workman;

(2) Constant employment to every member of the organization; and

(3) Actual application of the Golden Rule to relations between employee and employer.

Mr. Egan also declared that:

"The aim of this Company should be Service"; and be classified this "Service" to be as follows:

(1) Service to the public by manufacturing an honest and meritorious product;

(2) Service to employees by applying the Golden Rule;

(3) Service to the stockholders by making for them a fair return on the investment.

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The Board of Management and the Board of Operatives do now declare, for themselves and for their successors in office, the irrevocable purpose to manage the said trust and the said property in the spirit of the said John J. Eagan, as herein expressed, that is, to conduct said property in accordance with the teachings of Jesus Christ.

All dividends, 8 per cent per annum, on the 1,085 shares of common stock, aggregating $41,230 from decedent's death to December 31, 1928, have been paid to the trustees. The fund derives income solely from these dividends and interest on their accumulation. Its assets totaled $37,485.76 on January 1, 1929; the sum of $23,842.14 has been distributed from it for the relief of employees disabled or in distress. In addition to the Eagan Fund, the employees are benefited by a pension fund established by the Company in 1917. As of December 31, 1928, its assets totaled $635,883, as compared with $289,604 near date of decedent's death; it has made payments aggregating $66,866. On the recommendation of the "Pension Board" the Company's directors voted $15,000 for unemployment insurance on March 24, 1925, and took similar action in succeeding years in an effort to meet what they regarded as the spirit of the trust, and $23,208.91 has been distributed by the Company in this manner.

For the relief of employees unable to work because of sickness or accident and to assist in the burial of an employee or his family, the Acipco Mutual Benefit Association was established by the Company, deriving its funds partly from the employees and partly from the Company until June 30, 1922, when the scope of its activities was broadened and the Company undertook to finance it altogether. Since 1917 the Company has paid into it $148,216, of which $104,184 was paid since decedent's death. To the Y.M.C.A. the Company has paid $328,864, of which $163,638 was paid since Eagan's death. In connection with the Y.M.C.A., schools for white and colored boys are maintained. For free medical attention to employees the Company has expended $362,873, of which $290,315 was paid since decedent's death. Group insurance has recently been inaugurated for the employees' benefit, for which the Company has appropriated $500. As additional compensation to officers, salesmen and other employees, it has paid since 1916 in bonuses $2,898,367, of which $1,713,201 was paid since decedent's death.

The foregoing appropriations have been made since decedent's death by vote of the trustees, the trustees, controllers of the Company, conceiving that the compensation being paid employees did not constitute a living wage. In October, 1928, the Company employed about 1,400 people and some 6,000 were dependent upon it for support. Its regular weekly pay roll totaled $29,815. With the exception of the dividends declared and paid into the Eagan Fund for disbursement by the trustees, all the other expenditures for the benefit of employees have been made directly by the Company under instructions of the trustees to avoid separate organizations and to escape Federal taxes payable if such sums were included in income, then declared as dividends, and then expended for the same purposes by the trustees.

Altogether the amounts which have been spent by the Company to benefit its employees during the period of the trust total $2,391,577. Dividends paid the John J. Eagan Fund during the same period and not included in the foregoing total amounted to $41,231.

OPINION.

STERNHAGEN: The sole issue is one of law, namely, whether the bequest of the 1,085 shares as set forth in the codicil is within section 403(a)(3), Revenue Act of 1921. The respondent has included the undisputed value of the bequest ($1,112,125) within the net estate subject to estate tax and has accordingly determined a deficiency of $113,171.61.

SEC. 403. The for the purpose of the tax the value of the net estate shall be determined -

(a) In the case of a resident, by deducting from the value of the gross estate -

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(3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money's worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent's death, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. This deduction shall be made in case of the estates of all decedents who have died since December 31, 1917.

Since the issue arises under the Federal revenue act, it must, so far as practicable, be swept clear of confusions in various jurisdictions as to charities, charitable uses and charitable trusts. The historical development, since the Statute of Elizabeth, of the law relating to charitable trusts both in England and the United States has taken place independently of the law relating to taxation. The definitions and implications have arisen out of social and political circumstances having little or no relation to government revenue. In their setting, apart from taxation, they are various and conflicting in different jurisdictions, that which is firmly fixed as a charity in one State being unrecognized in another. Even as to local taxes, the exemptions of each State differ from those of others. See Zollman on Charities; Perry on Trusts, vol. 2; and 11 Corpus Juris, Charities. While it must be recognized that the deduction of charitable bequests provided in the revenue act was conceived by a purpose to encourage public charity, Trinidad v. Sagrada,263 U.S. 578">263 U.S. 578; Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47, it is not necessary for the fulfillment of this purpose to import all of the judicial dicta which have been used to safeguard the chancery power.

The administration of this Act must, in matters such as this, transcend any local law of statute or decision. Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110">269 U.S. 110; United States v. Robbins,269 U.S. 315">269 U.S. 315; Weiss v. Wiener,279 U.S. 333">279 U.S. 333; Calhoun Co. v. Ajax Co.,182 U.S. 499">182 U.S. 499, 505. There would be hopeless confusion if deduction were allowed of a bequest because the State of decedent's domicile recognized it as charitable in consonance with the Statute of Elizabeth, and denied a similar bequest of a decedent residing in a State holding a different view. In the present case, the Superior Court of Georgia has decreed this trust to be charitable "within the meaning of the law of Georgia." This decree was entered in an uncontested proceeding, and counsel will concede that it is not binding here. But they ask that it be given weight. This must be denied. Georgia may, of course, adjudicate those trusts as are within her jurisdiction to suit her own policies and purposes, and to that extent the decrees of her courts must be respected. But "the act of Congress has its own criteria, irrespective of local law," Weiss v. Wiener, supra, and impinges upon the trust at an entirely different point. The States themselves have the right to deny recognition of the charitable exemptions of a sister State. Zollman on Charities, § 781, and cases cited. It matters not, therefore, whether this trust violates the Georgia Code, § 3851, and is utterly void or only voidable at the instance of the protected kin, cf. Jones v. Habersham,107 U.S. 174">107 U.S. 174, and tax free in Georgia until attacked, cf. In re DeLamar's Estate,197 N.Y.S. 301">197 N.Y.S. 301.

Section 403(a)(3) is not one providing an exemption from tax. It sets forth a deduction to be used in determining the net estate by which the estate tax is measured. Since the tax is an excise tax, Knowlton v. Moore,178 U.S. 41">178 U.S. 41; Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47, and not a property tax, and all decedents' estates are taxable by the same general measure, the issue is not subject to the strict rule of construction applied by States to exemptions of charitable property from ad valorem property taxes. The taxpayer here is not claiming special exemption from tax imposed upon all others, but the benefit of a factor of measurement allowed to all. And the only question is whether the circumstances are within the fair intendment of the language used to describe the deduction.

The petitioner in a vigorous argument urges that the trust is charitable and relies upon extracts from many decisions. But no case has been cited and we have found none which considers a trust similar to that here in question. This trust is in its nature farther from those which are well recognized as charitable than any which have been so adjudicated. We have no inclination to doubt its fine purpose or to belittle the spirit of magnanimity which actuated the decedent. But it is clear that the business welfare of the American Cast Iron Pipe Co. was inseparable from the purposes of the trust. It was not a mere incident to the relief of the poor and the suffering. It was not primarily to inure to the public benefit. The living wage, the cost price to customers, the reasonable dividends to stockholders and service to such of the public as were affected were all factors of a generous plan which revolved around the profitable operation of the private business of the Company for the benefit primarily of the capital and labor devoted to it. The trustees were such only by virtue of their connection with the business, and their differences were to be arbitrated by the directors of the corporation, whose duty presumably was to protect the interests of the preferred shareholders as well as of the common. The fact that the plan brought about a mutuality of interest between the employer and the employee, however sound in economic policy, does not indicate a charity. And in the eyes of the law it is not made charitable or religious because conducted "on the principles of the teachings of Jesus Christ."

But we think there is a more conclusive reason against the petitioners' claim. The language of the statute contains the word "exclusively, " and this may not be ignored, cf. Curtis v. Androscoggin,99 Me. 356">99 Me. 356; 59 Atl. 518; Grand Lodge v. Taylor,146 Ark. 316">146 Ark. 316; 226 S.W. 129">226 S.W. 129. The last paragraph of the codicil sets forth a purpose to control the Company so that goods may be sold at the lowest price consistent with maintenance and extension of the plant and reasonable salaries to employees. To say that such a purpose is "exclusively charitable" as a basis for the tax deduction is to ignore the distinction between charity and legitimate business ideals and goes beyond any reasonable intendment of the statute.

Furthermore, the actual management of the trust has been so mingled with the management of the business of the corporation that its benefits have inured to the corporation. The benefit funds have been made up largely by corporate appropriation as a means to save Federal income taxes. Where the line can be drawn between the activities of the two boards as corporate managers and as Eagan trustees is difficult to say, and surely to the extent the trust is a means to promote the interest of the business corporation it is not "exclusively charitable." The direction to use the fund to bring about living wages to employees has not been followed except as the corporation has voted funds for such purposes, including bonuses to officers. The trustees have used the trust income (8 per cent dividends) for relief of distressed employees and dependents. But this is not the sole purpose, function or effect of the trust.

We are of opinion that the bequest is not deductible under section 403(a)(3).

Reviewed by the Board.

Judgment will be entered for the respondent.