Commissioner of Internal Revenue v. Sternberger's Estate/Opinion of the Court

The issue here is whether, in determining a net estate for federal estate tax purposes, a deduction may be made on account of a charitable bequest that is to take effect only if decedent's childless 27-year-old daughter dies without descendants surviving her and her mother. For the reasons hereafter stated, we hold that it may not.

Louis Sternberger died testate June 25, 1947. His federal estate tax return discloses a gross estate of $2,406,541.71 and, for the additional estate tax, a net estate of $2,064.346.55. It includes assets owned by him at his death and others held by the Chase National Bank, respondent herein, under a revocable trust created by him. As the revocable trust makes provisions for charity that are for our purposes identical with those in the will, this opinion applies to both dispositions.

The will places the residuary estate in trust during the joint lives of decedent's wife and daughter and for the life of the survivor of them. Upon the death of such survivor, the principal of the trust fund is payable to the then living descendants of the daughter. However, if there are no such descendants, one-half of the residue goes to certain collateral relatives of decedent and the other half to certain charitable corporations. If none of the designated relatives are living, the entire residue goes to the charitable corporations.

At decedent's death, his wife and daughter survived him. His wife was then 62 and his daughter 27. The latter married in 1942, was divorced in 1944, had not remarried and had not had a child.

In the estate tax return, decedent's executor, respondent herein, deducted $179,154.19 from the gross estate as the present value of the conditional bequest to charity of one-half of the residue. Respondent claimed no deduction for the more remote charitable bequest of the other half of the residue. The Commissioner of Internal Revenue disallowed the deduction and determined a tax deficiency on that ground. The Tax Court reversed the Commissioner. 18 T.C. 836. The Court of Appeals for the Second Circuit affirmed the Tax Court, 207 F.2d 600, on the authority of Meierhof v. Higgins, 2 Cir., 129 F.2d 1002. To resolve the resulting conflict with the Court of Appeals for the First Circuit in Newton Trust Co. v. Commissioner, 160 F.2d 175, we granted certiorari, 347 U.S. 932, 74 S.Ct. 629.

The controlling provisions of the Revenue Code are in substantially the same terms as when they were first enacted in 1919 and are as follows:

'Sec. 812. Net Estate

'For the purpose of the tax value of the net estate shall be     determined, *  *  * by deducting from the value of the gross      estate-

'(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 *  *  * .' I.R.C., 26 U.S.C.A.      § 812(d).

The Commissioner concedes that the corporations named in the will qualify as charitable corporations under the statute. There is no doubt, therefore, that if the bequest to them had been immediate and unconditional, its value would be deductible. The question before us is what, if any, charitable deduction may be made despite (1) the deferment of the effective date of the charitable bequest until the deaths of both decedent's wife and daughter and (2) the conditioning of the bequest upon a lack of descendants of decedent's daughter surviving at that time. We find the answer in the Treasury Regulations, which are of long standing and strengthened by reenactments of I.R.C., § 812(d), since their promulgation.

In their earliest form, the predecessors of these regulations, in 1919, recognized, in plain language, the propriety of the deduction of the present value of a deferred, but assured, bequest to charity. Section 81.44(d) of Treasury Regulations 105 does so with inescapable specificity:

's 81.44 Transfers for public, charitable, religious, etc.,     uses. * *  *

'(d) If a trust is created for both a charitable and a     private purpose, deduction may be taken of the value of the beneficial interest in favor of the former only      insofar as such interest is presently ascertainable, and      hence severable from the interest in favor of the private      use. § 81.10 indicates the principles to be applied in the     computation of the present worth of federred uses, but such      computation will not be made by the Commissioner on behalf of      the executor. Thus, if money or property is placed in trust     to pay the income to an individual during his life, or for a      term of years, and then to pay or deliver the principal to      the charitable corporation, or to apply it to a charitable      purpose, the present value of the remainder is deductible. To     determine the present value of such remainder, use the      appropriate factor in column 3 of Table A or B of § 81.10. If     the present worth of a remainder bequeathed for a charitable      use is dependent upon the termination of more than one life,      or in any other manner rendering inapplicable Table A or B of      § 81.10, the claim for the deduction must be supported by a      full statement, in duplicate, of the computation of the      present worth made, in accordance with the principle set      forth in § 81.10, by one skilled in actuarial computations.'      (Emphasis supplied.) 26 C.F.R.

The very explicitness of the above provisions emphasizes their restriction to 'the computation of the present worth' of assured bequests such as are the subject of each of the illustrations and cross references in the section. The statute restricts charitable deductions to bequests to corporations 'organized and operated exclusively for * *  * charitable *  *  * purposes'. (Emphasis supplied.) Likewise, the above section of the regulations requires that the deductible value of 'the beneficial interest in favor of' the designated charitable purpose be 'severable from the interest in favor of the private use.' There is no suggestion in the statute or in § 81.44 of a deduction of funds other than those later to be used exclusively for charitable purposes.

Here, also, the regulations in their earliest form, in 1919, were unequivocally restrictive. It was only after court decisions had demonstrated the need for doing so that the restrictions were restated so as expressly to permit deductions of bequests assured in fact but conditional in form.

Section 81.46 now provides expressly that no deduction is allowable for a conditional bequest to charity 'unless the possibility that charity will not take is so remote as to be negligible.' The whole section is significant:

's 81.46 Conditional bequests. (a) If as of the date of     decedent's death the transfer to charity is dependent upon      the performance of some act or the happening of a precedent      event in order that it might become effective, no deduction      is allowable unless the possibility that charity will not      take is so remote as to be negligible. If an estate or     interest has passed to or is vested in charity at the time of      decedent's death and such right or interest would be defeated      by the performance of some act or the happening of some event      which appeared to have been highly improbable at the time of      decedent's death, the deduction is allowable.

'(b) If the legatee, devisee, donee, or trustee is empowered     to divert the property or fund, in whole or in part, to a use      or purpose which would have rendered it, to the extent that      it is subject to such power, not deductible had it been      directly so bequeathed, devised, or given by the decedent,      deduction will be limited to that portion, if any, of the      property or fund which is exempt from an exercise of such      power.' (Emphasis supplied.) 26 C.F.R.

Sections 81.44 and 81.46 fully implement § 812(d) of the code. In their early forms they were obviously mutually exclusive and easily reconcilable. The predecessor of § 81.46 confined charitable deductions to outright, unconditional bequests to charity. It expressly excluded deductions for charitable bequests that were subject to conditions, either precedent or subsequent. While it encouraged assured bequests to charity, it offered no deductions for bequests that might never reach charity. Subsequent amendments have clarified and not changed that principle. Section 81.46(a) today yields to no condition unless the possibility that charity will not take is 'negligible' or 'highly improbable.' Section 81.46(b) is equally strict. It relates to provisions whereby funds may be diverted in whole or in part to noncharitable uses, and it limits the tax deduction to that portion of each fund that cannot be so diverted. Where the principal of a bequest to charity thus may be invaded for private purposes, it is only the ascertainable and assured balance of the bequest to charity that is recognized for a tax deduction.

Respondent concedes that the chance that charity will not take is much more than negligible. Therefore, if § 81.46(a) applies to the instant case, no charitable deduction is permissible.

Respondent claims, however, that § 81.44 covers this case. In doing so, it reads §§ 81.44 and 81.46 together and, instead of confining them to their mutually exclusive subjects, makes them overlap. It applies § 81.44 to some deferred conditional bequests. It does so in any case where it can compute, on approved actuarial standards, the degree of possibility that charity will receive the conditional bequest. Respondent then computes the present value of a corresponding percentage of the entire deferred bequest. In short, respondent claims an immediate tax deduction equal to the present value of whatever fraction of the bequest corresponds, actuarially, to the chance that charity may benefit from it.

This Court considered a somewhat comparable proposal in 1928. In Humes v. United States, 276 U.S. 487, 48 S.Ct. 347, 72 L.Ed. 667, a taxpayer sought a charitable deduction based on a bequest to charity that was conditional upon the death of decedent's 15-year-old niece, without issue, before reaching the age of 40. To sustain the proposal, the taxpayer sought to establish actuarially a measure of the chance that charity would receive the bequest and to find authority in the Revenue Code for the deduction of the present value of a corresponding percentage of the bequest. Speaking through Mr. Justice Brandeis, this Court found the actuarial computation inadequate. It, however, did not drop the matter there. It made the following statement:

'One may guess, or gamble on, or even insure against, any     future event. The Solicitor General tells us that Lloyds of     London will insure against having twins. But the fundamental     question in the case at bar, is not whether this contingent      interest can be insured against or its value guessed at, but      what construction shall be given to a statute. Did Congress,     in providing for the determination of the net estate taxable,      intend that a deduction should be made for a contingency the      actual value of which cannot be determined from any known      data? Neither taxpayer, nor revenue officer-even if equipped     with all the aid which the actuarial art can supply-could do      more than guess at the value of this contingency. It is clear     that Congress did not intend that a deduction should be made      for a contingent gift of that character.' (Emphasis      supplied.) Id., 276 U.S. at page 494, 48 S.Ct. at page 348.

Since the above was written, there have been advances in the actuarial art. Today, actuarial estimates are employed more widely than they were then. The computations now before us illustrate that advance. They do not, however, lessen the necessity for statutory authorization for such a tax deduction. The scope of the authority required by respondent can best be appreciated if examined in the revealing light of the specific circumstances of the present case.

The Tax Court and the Court of Appeals have approved respondent's actuarial computations as fairly reflecting the present value of one-half of a two-million-dollar residue, reduced in proportion to the chance that charity will receive it. In making this estimate, respondent has computed the present value of the deferred bequest on the basis of 4% interest compounded annually and has used the following actuarial tables:

1. To determine the joint life expectancy of decedent's wife and daughter, the Combined Experience Mortality Table prescribed in § 81.10 of the estate tax regulations.

2. To estimate the probability of remarriage of the daughter, the American Remarriage Table, published by the Casualty Actuarial Society.

3. To estimate the chance of a first child being born to decedent's daughter, a specially devised table which has been found by the Tax Court to have been prepared in accordance with accepted actuarial principles upon data derived from statistics published by the Bureau of the Census.

On the basis of these tables, the Tax Court finds that the present value of the charitable remainder at the death of decedent is .18384 on the dollar if computed solely on the chances of his daughter's remarriage; .24094 on the dollar if computed on the chance that a legitimate descendant of his daughter will survive her; and .24058 on the dollar if computed on the chance that any legitimate or illegitimate descendant of his daughter will survive her. It is this last estimate that respondent seeks to apply here.

If respondent is successful, it means the allowance of an immediate and irrevocable deduction of over $175,000 from the gross estate of decedent, although respondent admits there is a real possibility that charity will receive nothing. The bequest, in fact, offers to the daughter an inducement of about $2,000,000 to remarry and leave a descendant. To the extent that this inducement reduces the actuarially computed average probability that charity will receive this bequest, it further demonstrates the inappropriateness of authorizing charitable tax deductions based upon highly conditional bequests to charity.

An even clearer illustration of the effect of respondent's interpretation of the code readily suggests itself. If decedent had here conditioned his bequest to charity solely on the death of his daughter before remarriage, the Remarriage Table would then fix the present value of the charitable remainder at .18384 on the dollar. The taxpayer would at once receive a substantial charitable deduction on that basis. The daughter, however, would have a $2,000,000 inducement to remarry. If she did so, her action would cancel the possibility that charity would receive anything from the bequest, but it would not cancel the tax deduction already allowed to the estate. To whatever extent any person can defeat the fulfillment of any condition upon which a benefit to charity depends, to that extent the actuarial estimate that such benefit will reach charity is less dependable. The allowance of such a tax reduction as is here sought would open a door to easy abuse. The result might well be not so much to encourage gifts inuring to the benefit of charity as to encourage the writing of conditions into bequests which would assure charitable tax deductions without assuring benefits to charity.

We find no suggestion of authority for such a deduction in § 812(d). That section remains substantially the same as it was when Humes v. United States, supra, 276 U.S. 487, 48 S.Ct. 347, 72 L.Ed. 667, was decided. We also find no authorization for the deduction either in § 81.46 or § 81.44 of the regulations, as thus far discussed. This relegates respondent to the following words now in § 81.44(d):

'If the present worth of a remainder bequeathed for a     charitable use is dependent upon the termination of more than      one life, or in any other manner rendering inapplicable Table      A or B of § 81.10, the claim for the deduction must be      supported by a full statement, in duplicate, of the      computation of the present worth made, in accordance with the      principle set forth in § 81.10, by one skilled in actuarial      computations.' (Emphasis supplied.) In view of the statutory emphasis upon outright bequests and the long-standing exclusion of conditional bequests by § 81.46 of the regulations (and its predecessors), we do not regard the above sentence as now invading the domain of § 81.46 by extending the deduction to conditional bequests in a manner readily open to abuse. We regard the sentence as restricted to computations of deferred, but assured, bequests. Section 81.10(i) now deals at length with the valuation of remainders and reversionary interests and gives many examples of such computations. Every example, however, is one of the valuation of an assured bequest. The additional language in § 81.44(d), quoted above, does not authorize the deduction, and § 81.46 prohibits it. Such specific and established administrative interpretation of the statute is valid and 'should not be overruled except for weighty reasons.' Commissioner of Internal Revenue v. South Texas Co., 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831.

This Court has not specifically faced the issue now before us since Humes v. United States, supra, but we see no reason to retreat from the views there stated. This Court finds no statutory authority for the deduction from a gross estate of any percentage of a conditional bequest to charity where there is no assurance that charity will receive the bequest or some determinable part of it. Where the amount of a bequest to charity has not been determinable, the deduction properly has been denied. Henslee v. Union Planters Nat. Bank, 335 U.S. 595, 598-600, 69 S.Ct. 290, 291 292, 93 L.Ed. 259; Merchants Nat. Bank of Boston v. Commissioner, 320 U.S. 256, 259-263, 64 S.Ct. 108, 110-112, 88 L.Ed. 35; and see Robinette v. Helvering, 318 U.S. 184, 189, 63 S.Ct. 540, 542, 87 L.Ed. 700. Where the amount has been determinable, the deduction has, with equal propriety, been allowed where the designated charity has been sure to benefit from it. United States v. Provident Trust Co., 291 U.S. 272, 54 S.Ct. 389, 78 L.Ed. 793; Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647.

Some of the lower courts have squarely met the instant problem and denied the deduction. For example, the deduction was denied in the First Circuit where the court found that 'it is not certain that the charity will take 50% of the corpus; only that it has a 50-50 chance of getting all or nothing.' Newton Trust Co. v. Commissioner, 160 F.2d 175, 181. See also, Graff v. Smith, D.C., 100 F.Supp. 42; Hoagland v. Kavanagh, D.C., 36 F.Supp. 875; Wood v. United States, D.C., 20 F.Supp. 197. The administrative practice, as evidenced here by the action of the Commissioner, has been to deny the deduction. See further, Paul, Federal Estate and Gift Taxation (1946 Supp.), 426-427.

The judgment of the Court of Appeals, accordingly, is reversed and the cause remanded for action in conformity with this opinion.

Reversed.

Mr. Justice REED, with whom Mr. Justice DOUGLAS joins, dissenting.