Dorsey v. Commissioner

Estate of Puilip Dorsey, Deceased, Eleanor G. Bruff, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent

Dorsey v. Commissioner

Docket No. 24271

United States Tax Court

19 T.C. 493; 1952 U.S. Tax Ct. LEXIS 14;

December 22, 1952, Promulgated

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Decision will be entered under Rule 50.

The residue of decedent's estate was placed in trust. The income from the trust, together with so much of the corpus as necessary, was to be used to provide scholarships for the decedent's grandnieces and grandnephews, for the term of the trust. The will also directed payment, out of the residue of the estate, of certain expenses for the benefit of individuals therein designated for so long as they live. Upon the termination of the trust, 20 years after the last to die of the decedent's six nieces and nephews, the trust estate then remaining was bequeathed to Western Maryland College, in perpetuity, the income to be used to provide scholarships, with a preference accorded relatives of the decedent in the awarding of scholarships. Held, the trust providing for the education of decedent's grandnieces and grandnephews is a private trust and the value of the residue of the estate transferred to the trustees is not deductible under section 812(d). Held, further, that the bequest of the residue of the trust to Western Maryland College had no ascertainable value as of the date of decedent's death.

James Thomas, Esq., for the petitioner.

J. Nelson Anderson, Esq., for the respondent.

Harron, Judge.

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HARRON

The respondent has determined a deficiency in estate tax in the amount of $ 54,923.15. The deficiency is due principally to the disallowance of a charitable deduction claimed under section 812 (d) of the Code in the amount of $ 178,731.64.

The only issue for decision is whether the estate of the decedent is entitled to any deduction under section 812 (d) for a charitable bequest.

The estate tax return was filed with the collector for the district of Maryland.

FINDINGS OF FACT.

The facts which have been stipulated are found as facts, and the stipulation is incorporated by reference.

The decedent, Philip H. Dorsey, died testate, a resident of Baltimore, Maryland, on February 6, 1945.

Eleanor G. Bruff is the sole, surviving, duly appointed executrix of the last will of the decedent which was admitted to probate in the Orphan's Court of Baltimore.

The decedent was a bachelor. He was survived by two sisters, six nieces and nephews, and eleven grandnieces and grandnephews. The names, relationship, and approximate ages, in so far as the record discloses, of the next of kin who survived decedent are as follows:

		Approximate age
		on February 6,
	Relationship to the decedent	1945
1. Nellie D. Gibson	Sister	73
2. Amy R. Dorsey	do	66
3. Annie B. Beall	Niece	45
4. Philip H. Dorsey, Jr	Nephew	43
5. T. Jordan Dorsey	do	37
6. Elizabeth D. Combs	Niece	34
7. L. Dorsey Stone	Nephew	44
8. Eleanor G. Bruff	Niece	38
9. Barbara Beall	Grandniece	7
10. Betty Beall	do	5
11. Walter B. Dorsey	Grandnephew	16
12. John R. Dorsey	do	11
13. T. Jordan Dorsey, Jr	do	14
14. Frank D. Combs	do	8
15. Joseph J. Combs	do	6
16. William Combs	do	2
17. Anna D. Stone	Grandniece	10
18. James D. Stone	Grandnephew	5
19. Frank T. Grice	do	15

The decedent, for many years prior to his death, was an equal partner with Robert Jamison in Edelen Brothers, a partnership engaged in the business of commission merchants in Baltimore.

Prior to his death, the decedent provided the support of his two sisters, Nellie Gibson and Amy Dorsey, spending $ 250 a month for this purpose. In addition he paid Eleanor Bruff, the petitioner, $ 100 a month to care for them. In 1940 he purchased a house at 1109 Norwood Drive, Takoma Park, Maryland, for their residence, which they occupied at the time of his death. The decedent also paid the taxes, insurance, and repairs on the property.

The decedent's gross estate is comprised, inter alia, of real estates, securities, cash, and his interest in the above-named partnership.

After making specific bequests, ^{*18 and are to devote the net income "together with such portion of the corpus as may be necessary from time to time" to provide scholarships at Western Maryland College, located at Westminster, Maryland, for any grandniece or grandnephew of the decedent who may desire a scholarship, under certain specified conditions which are set forth in subparagraphs (a) through (g). *19 Upon the termination of the trust, the trustees shall pay $ 500 to All Saints Church in St. Mary's County, Maryland, for the upkeep of the graveyard located there, and the trustees shall then turn over the entire rest and residue of the trust estate, whether of corpus or accumulated income,}

to Western Maryland College, to be held, invested and administered by them, and the net income to be used in providing scholarships for deserving young men and women, * * * and that in awarding scholarships, descendants of my brothers and sisters, having the necessary qualifications, shall receive a preference over others.

In the event that Western Maryland College should decline to accept the fund on the above terms, or should have passed out of existence, then I desire my Trustees to turn over the fund comprising the balance of the corpus of the trust estate and any accumulated income thereof, as aforesaid, to some other comparable institution of learning, which, in their discretion, they would consider acceptable to me, upon like terms and if no such institution be found willing to accept the same then to establish a charitable trust or foundation which may be administered, if my Trustees so elect, by a corporation formed for the purpose, to hold, manage, invest, and administer said fund for the purpose of establishing educational scholarships upon like general terms as are hereinabove expressed in this paragraph in respect of Western Maryland College.

In other items of the will decedent directed the payment out of the residue of the estate of certain expenses for the benefit and during the lifetime of the individuals therein designated. The pertinent provisions above referred to are as follows:

6. I give and devise unto my niece, Eleanor Gibson Bruff, * * * for the duration of her natural life, my farm called "Across the Bay" * * *. During the life of my said niece I direct my Executors, or the Trustees hereinafter named, to pay from the rest and residue of my estate all taxes assessed to said farm and the improvements thereon, * * * together with premiums for an adequate fire insurance coverage on any such improvements. * * *

7. I direct my Executors and Trustees to maintain the house located at 1109 Norwood Drive, Tacoma Park, Prince Georges County, Maryland, which I bought for the benefit of my two sisters, Nellie D. Gibson and Amy R. Dorsey, in the same manner as it is now being maintained by me for the benefit of my said sisters, so long as they or either of them shall live, and to pay all taxes, fire insurance premiums and other expenses, of every reasonable kind, in connection therewith, including compensation of $ 100.00 per month to be paid to my niece, Eleanor G. Bruff, for so long as either of my sisters shall live. * * * In no event and under no consideration do I wish my sister, Amy R. Dorsey, to return to "The Silver Cross Home," and I direct that the expense of maintaining said home for my said sister, including the compensation to my niece, together with the compensation of any other person employed as aforesaid to wait on and attend my said sister shall be a first and paramount charge upon all the rest and residue of my estate.

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8. I direct my Executors and Trustees to retain the house at No. 1813 Eutaw Place, in the City of Baltimore, paying all taxes, insurance premiums and general repairs to the same, and to permit Carl Dotterer and Sadie Houck to live therein for their lives and the lifetime of the survivor, or for so long as they or the survivor can live agreeably in it, my wishes being that this house remain a home for them, as long as either may live and wish to use it as such.

The Executrix submitted the following figures regarding the costs of taxes, insurance and repairs on real estate, the payment of which during the existence of the life estates is a charge against the residue under Items 6, 7, and 8 of the will: Taxes and insurance on the farm called "Across the Bay" $ 145.97 a year. Taxes, insurance and repairs (estimated) on the property at 1109 Norwood Drive, Takoma Park, Maryland, $ 282.36 a year. Taxes, insurance and repairs (estimated) on the property at 1813 Eutaw Place, Baltimore, $ 342.59 a year.

The support and maintenance of the decedent's two sisters, provided for by decedent in Item 7 of the will, exclusive of expenses incident to the real estate, has cost his estate a minimum of $ 4,200 a year including the payment of $ 100 a month to Eleanor Bruff. In 1950, the Executors or Trustees expended an additional $ 1,500 due to the illness and hospitalization of one of the sisters (Nellie Gibson) who died on September 11, 1950.

If Eleanor Bruff should become physically unable to care for and properly attend Amy Dorsey, the cost of providing adequate care would be substantially more than $ 100 a month.

At the time of decedent's death one grandnephew was eligible to receive a scholarship under the trust fund. Since then two others have become eligible. Of the three, one has held a scholarship for three years, receiving $ 3,000 from the trust estate. A second has attended a college other than Western Maryland, and the third has applied for a scholarship under the trust fund.

Since the date of decedent's death another grandniece has been born and it is impossible to determine how many more grandnephews and grandnieces may be born during the term of the trust.

The Executrix claimed a charitable deduction of $ 178,731.64 in the estate tax return, as the value of the residuary estate bequeathed for educational purposes.

The Western Maryland College, located at Westminster, Maryland, is a corporation organized and operated exclusively for educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation.

The decedent's gross estate, after adjustments by the respondent not here in question, was valued at $ 334,297.36.

The residuary estate immediately available to the trustees for the production of income does not exceed $ 174,064.61, *25 to charity does not exceed $ 16,225.36.

The probability that the trust corpus will be invaded for the purposes enumerated in the will, is real and proximate. No fixed standard for measuring in dollars and cents the extent of probable invasion can be ascertained either by reference to the will or to the applicable provisions of the law of the jurisdiction governing the trust.

The bequest of the residue of the trust estate to the Western Maryland College had no ascertainable value as of the date of decedent's death.

OPINION.

The only question to be decided is whether the petitioner is entitled to deduct from the value of the gross estate under section 812 (d) *498 uses. The principal issues are whether the value of the residue of decedent's estate placed in trust under Item 20 of his will, with the income therefrom and so much of the corpus as may be necessary to be used to provide scholarships at Western Maryland College for the relatives of the decedent, is deductible as a charitable bequest. Further, whether the residue of the trust fund bequeathed to Western Maryland College in perpetuity, upon termination of the trust, for educational purposes, had any ascertainable value as of the date of decedent's death. The Western Maryland College is an organization admittedly charitable in nature within the scope of section 812 (d) of the Code.

Under Item 20 of the decedent's will the residue of his estate was placed in trust with the net income from the trust together with such portion of the corpus as may be necessary, to be used to provide scholarships at Western Maryland College for the decedent's grandnieces and grandnephews for the term of the trust. Upon termination of the trust the residue of the trust estate whether of corpus or accumulated income is to be turned over to the Western Maryland College, to be held, invested and administered by them, and the net income to be used for the purpose of providing scholarships for deserving, young men and women, with a preference to be accorded relatives of the decedent. In addition to the power vested in the trustees under Item 20 of the will, to invade the corpus of the trust estate, they are directed in Items 6, 7, and 8 to provide funds out of the corpus for the payment of certain expenses incident to the maintenance of parcels of real estate, and for the support and care of decedent's sisters.

The petitioner contends, in the first instance, that the trust created under Item 20 of the will, to provide scholarships for decedent's grandnieces and grandnephews, is for educational purposes and public in nature, so that the residuary estate conveyed to the trustees aggregating $ 178,731.64 as computed by petitioner, is deductible under section 812 (d) of the Code. Petitioner also argues, that the will fixes a standard for determining the extent of permissible invasion of the trust corpus for private uses; that the possibility of invasion of the trust corpus for private uses is too remote to defeat the residual bequest, upon the termination of the trust, to Western Maryland College for educational purposes; and that the residual bequest is for a charitable use notwithstanding the preference to be accorded the descendants of decedent's brothers and sisters in the granting of scholarships by Western Maryland College.

The respondent contends that the trust is for private rather than for charitable uses, and therefore the value thereof is not deductible under section 812 (d). He contends, also, that because of the permissible and intended invasion of the corpus, for the various purposes enumerated in the will, the value, if any, of the residual bequest, to Western Maryland College for educational purposes is not ascertainable.

The petitioner's first contention is without merit. The trust cannot be construed as one in which a general class of beneficiaries is designated, with a preference accorded to relatives of the decedent, who are members of the general class, as were the provisions of the will in Commonwealth Trust Co. of Pittsburgh v. Granger, 57 F. Supp. 502">57 F. Supp. 502, relied on by petitioner. The primary purpose of the trust in the instant case, is to provide scholarships exclusively for the grandnieces and grandnephews of the decedent. In addition, Items 6, 7, and 8 of the will direct the payment, out of the trust corpus, of other sums for the benefit of individuals therein designated for so long as they shall live. A trust created for the above purposes is not charitable in nature within the intent and scope of section 812 (d). It lacks an essential characteristic of a charitable trust, namely, the uncertainty and indefiniteness of beneficiaries. Russell v. Allen, 107 U.S. 163">107 U.S. 163, 167; Scott on Trusts, Vol. 3, secs. 364, 370, 375. Accordingly, the value of the residue conveyed to the trustees is not deductible as a transfer for public, charitable and religious uses. Commonwealth Trust Co. of Pittsburgh v. Granger, supra;S. E. Thomason, 2 T. C. 441; Amy Hutchison Crellin, 46 B. T. A. 1152.

The next issue is whether under Item 20 of the will the residual bequest of the trust corpus to Western Maryland College in perpetuity for educational purposes had any definitely ascertainable value as of the date of the decedent's death. Western Maryland College will not receive the trust residue, if any, until the termination of the private trust, the corpus of which is subject to being invaded and consumed. For present purposes the private trust must be considered as terminating 20 years after the last to die of six persons, whose ages at decedent's death were from 34 to 45 years, provided that two persons, age 73 and 66, at decedent's death, are then dead. ^{*31 Where a bequest is made of the residue of a trust corpus for charitable uses, and the trustee is empowered during the term of the trust to invade the corpus for private uses, the residual bequest to charity, to be deductible under section 812 (d), must have an ascertainable value as of the date of a decedent's death, and must be severable from the interest in favor of the private use. Merchants Nat. Bank of Boston v. Commissioner, 320 U.S. 256">320 U.S. 256, 261; Henslee v. Union Planters Nat. Bank & Trust Co., et al., 335 U.S. 595">335 U.S. 595; Regulations 105, sections 81.44 to 81.47. "And in these cases the taxpayer has the burden of establishing that the amounts which will either be spent by the private beneficiary or reach the charity are thus accurately calculable." Merchants Nat. Bank, supra, p. 261.}

In this case the petitioner has not sustained that burden. No fixed standard for measuring in terms of money the extent of the directed and permissible invasion of the corpus for private uses can be determined either by reference to the will itself or to the applicable provisions of the law of the jurisdiction governing the trust. The extent of directed invasion, under Items 6, 7, and 8 of the will, for the payment of certain expenses incident to the maintenance of parcels of real estate, could probably be stated in terms of money with reasonable accuracy, although petitioner has made no effort to establish such facts. But the extent of permissible invasion under Item 7 for the compensation of any person engaged to attend decedent's sister, Amy Dorsey, which expense decedent made "a first and paramount charge" upon the residue of his estate, cannot be readily stated or measured. Amy Dorsey was 66 years of age at decedent's death. The record does not disclose the condition of her health then, or whether she had any independent income, or any separate estate. The possibility is ever present that her care may require the expenditure by the trustees of substantial sums from the corpus for medical and nursing expenses.

Furthermore, the extent of permissible invasion of corpus under Item 20 for the purpose of providing scholarships for the grandnieces and grandnephews of decedent cannot be ascertained. The decedent was survived by eleven grandnieces and grandnephews whose ages at his death were from 2 to 16 years. It is impossible to determine how many more grandnieces and grandnephews may be born during the term of the trust. The number of possible recipients of scholarship awards, even as of the date of decedent's death, was considerable. In view of the size of the trust fund and the other burdens placed on it by the will, the possibility, if not probability, that some part of corpus will be used for providing scholarships is apparent.

It is significant, also, that the anticipated trust income appears to be insufficient to satisfy all the demands that may be made upon it, even before any invasion of corpus and before the satisfaction of postponed bequests which will decrease the property available to the trustees for the production of income. The probability that the corpus will be invaded is real and proximate, but the extent of the likely invasion cannot be measured. The petitioner's evidence does not establish either the amount of anticipated income from the trust, or the amount of total anticipated disbursements. Respondent's witness, an actuary, testified that the amount of the residue immediately available to the trustees for the production of income does not exceed $ 174,064.41, which sum, invested at 4 per cent would yield an annual income of only $ 6,962.58.

Assuming that there will be annual income in the amount of $ 6,962.58, it would be charged with the payment of income taxes and trustees' commissions before becoming available for trust purposes. Petitioner concedes that the support and care of decedent's two sisters would cost a minimum of $ 4,200 a year, before making any provision for additional and unusual expenses. In 1950, the trustees expended $ 1,500 for medical and nursing care in addition to ordinary expenses. Recipients of scholarships are to receive one thousand dollars, each, per year. The number of scholarship awards that will be made under the trust cannot be anticipated, but it is possible, that the cost of scholarships alone could exceed a reasonable estimate of the amount of annual trust income.

Petitioner relies on Ithaca Trust Co. v. United States, 279 U.S. 151">279 U.S. 151. But that case is readily distinguishable from this proceeding. In Ithaca Trust, the will provided a standard fixing the extent of possible invasion, and the income of the trust was more than sufficient to meet the standard provided. In our opinion the instant case is controlled by Merchants Nat. Bank, supra.

It is held that the petitioner is not entitled to any deduction under section 812 (d).

As the deficiency in the amount of $ 54,923.15, determined in the statutory notice of deficiency, must be adjusted by the amount of the credit allowable under section 813 (b) of the Internal Revenue Code,

Decision will be entered under Rule 50.

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Footnotes

• 1. Two bequests under Items 3 and 9 of the will, valued at $ 13,500, are to vest three years after date of death; and one bequest of $ 5,000 is to be paid in the discretion of one of the executors, fifteen years after date of death.↩

• 2. The recipient must meet the college entrance requirements; the amount of the scholarship is limited to $ 1,000 yearly; a recipient must satisfactorily complete the selected courses for the preceding year to be entitled to a renewal; and no scholarship shall be held by the same recipient for more than four years.↩

• 3. Gross estate less debts, administration expenses, Federal estate tax, specific bequests and provision for the payment of real estate expenses directed by the will to be paid out of the residue.↩

• 4. See Footnote 1, above.↩

• 5. SEC. 812. NET ESTATE.

  For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --

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  (d) Transfers for Public, Charitable, and Religious Uses. -- The amount of all bequests, legacies, devises, or transfers, * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, * * *. If the tax imposed by section 810, or any estate, succession, legacy, or inheritance taxes, are, either by the terms of the will, by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax, payable in whole or in part out of the bequests, legacies, or devises otherwise deductible under this paragraph, then the amount deductible under this paragraph shall be the amount of such bequests, legacies, or devises reduced by the amount of such taxes. * * *.

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• 6. We cannot assume that the purposes of the trust will be fulfilled at an earlier date, and that the discretion of the trustees with respect to terminating the trust, will be exercised as provided for in the will.↩