Merchants National Bank of Boston v. Commissioner of Internal Revenue/Opinion of the Court

Ozro M. Field died in Massachusetts in 1936, leaving a gross estate of some $366,000. In his will he provided, after certain minor bequests, that the residue of his estate be held in trust, the income to go to his wife for life, and on her death all but $100,000 of the principal to go 'free and discharged of this trust' to certain named charities. Under the trust set up by the will, the trustee, petitioner here, was authorized to invade the corpus 'at such time or times as my said Trustee shall in its sole discretion deem wise and proper for the comfort, support, maintenance, and/or happiness of my said wife, and it is my wish and will that in the exercise of its discretion with reference to such payments from the principal of the trust fund to my said wife, May L. Field, my said Trustee shall exercise its discretion with liberality to my said wife, and consider her welfare, comfort and happiness prior to claims of residuary beneficiaries under this trust.'

In 1937 the trust realized gains of $100,900.31 from the sale of securities in its portfolio.

In filing estate and income tax returns petitioner, which was also Mr. Field's executor, sought to deduct $128,276.94 from the gross estate and the $100,900.31 from the 1937 income of the trust, on the theory that those sums constituted portions of a donation to charity and were therefore deductible respectively under § 303(a)(3) of the Revenue Act of 1926, 44 Stat. 72, 26 U.S.C.A.Int.Rev.Acts, page 232 and § 162(a) of the Revenue Act of 1936, 49 Stat. 1706.

The commissioner disallowed the deductions and determined deficiencies of $26,290.93 in estate tax and $42,825.69 in income tax for 1937, but on the taxpayer's petition for review the Board of Tax Appeals (now the Tax Court) upheld the latter's contentions. The Court of Appeals reversed the Board of Tax Appeals, 132 F.2d 483, and we granted certiorari because of an asserted conflict with decisions of other circuit courts and this Court. (319 U.S. 734, 63 S.Ct. 1031, 87 L.Ed. 1695.)

There is no question that the remaindermen here were charities. The case, at least under § 303(a)(3), turns on whether the bequests to the charities have, as of the testator's death, a 'presently ascertainable' value or, put another way, on whether, as of that time, the extent to which the widow would divert the corpus from the charities could be measured accurately.

Although Congress, in permitting estate tax deductions for charitable bequests, used the language of outright transfer, it apparently envisaged deductions in some circumstances where contingencies, not resolved at the testator's death, create the possibility that only a calculable portion of the bequest may reach ultimately its charitable destination. The Treasury has long accommodated the administration of the section to the narrow leeway thus allowed to charitable donors who wished to combine some private benefaction with their charitable gifts. The limit of permissible contingencies has been blocked out in a more convenient administrative form in Treasury Regulations which provide that, where a trust is created for both charitable and private purposes the charitable bequest, to be deductible, must have, at the testator's death, a value 'presently ascertainable, and hence severable from the interest in favor of the private use,' and further, to the extent that there is a power in a private donee or trustee to divert the property from the charity, 'deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of such power.' These Regulations are appropriate implementations of § 303(a)(3), and, having been in effect under successive reenactments of that provision, define the framework of the inquiry in cases of this sort. Cf. Helvering v. Winmill, 305 U.S. 79, 59 S.Ct. 45, 83 L.Ed. 52; Taft v. Commissioner, 304 U.S. 351, 58 S.Ct. 891, 82 L.Ed. 1393, 116 A.L.R. 346.

Whatever may be said with respect to computing the present value of the bequest of the testator who dilutes his charity only to the extent of first affording specific private legatees the usufruct of his property for a fixed period, a different problem is presented by the testator who, preferring to insure the comfort and happiness of his private legatees, hedges his philanthropy, and permits invasion of the corpus for their benefit. At the very least a possibility that part of the principal will be used is then created, and the present value of the remainder which the charity will receive becomes less readily ascertainable. Not infrequently the standards by which the extent of permissible diversion of corpus is to be measured embrace factors which cannot be accounted for accurately by reliable statistical data and techniques. Since therefore, neither the amount which the private beneficiary will use nor the present value of the gift can be computed, deduction is not permitted. Cf. Humes v. United States, 276 U.S. 487, 48 S.Ct. 347, 72 L.Ed. 667.

For a deduction under § 303(a)(3) to be allowed, Congress and the Treasury require that a highly reliable appraisal of the amount the charity will receive be available, and made, at the death of the testator. Rough guesses, approximations, or even the relatively accurate valuations on which the market place might be willing to act are not sufficient. Cf. Humes v. United States, 276 U.S. 487, 494, 48 S.Ct. 347, 348, 72 L.Ed. 667. Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. 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. Cf. Bank of America Nat'l Trust & Savings Ass'n v. Commissioner, 9 Cir., 126 F.2d 48.

In this case the taxpayer could not sustain that burden. Decedent's will permitted invasion of the corpus of the trust for 'the comfort, support, maintenance and/or happiness of my wife.' It enjoined the trustee to be liberal in the matter, and to consider her 'welfare, comfort and happiness prior to the claims of residuary beneficiaries,' i.e., the charities.

Under this will the extent to which the principal might be used was not restricted by a fixed standard based on the widow's prior way of life. Compare Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647. Here, for example, her 'happiness' was among the factors to be considered by the trustee. The sums which her happiness might require to be expended are of course affected by the fact that the trust income was not insubstantial and that she was sixty-seven years old with substantial independent means and no dependent children. And the laws of Massachusetts may restrict the exercise of the trustee's discretion somewhat more narrowly than a liberal reading of the will would suggest, although that is doubtful. Cf. Dana v. Dana, 185 Mass. 156, 70 N.E. 49; and compare Sparhawk v. Goldthwaite, 225 Mass. 414, 114 N.E. 718. Indeed one might well 'guess, or gamble * *  * or even insure against' the principal being expended here. Cf. Humes v. United States, supra (276 U.S. 487, 48 S.Ct. 348, 72 L.Ed. 667). But Congress has required a more reliable measure of possible expenditures and present value than is now available for computing what the charity will receive. The salient fact is that the purposes for which the widow could, and might wish to have the funds spent do not lend themselves to reliable prediction. This is not a 'standard * *  * fixed in fact and capable of being stated in definite terms of money.' Cf. Ithaca Trust Co. v. United States, supra. Introducing the element of the widow's happiness and instructing the trustee to exercise its discretion with liberality to make her wishes prior to the claims of residuary beneficiaries brought into the calculation elements of speculation too large to be overcome, notwithstanding the widow's previous mode of life was modest and her own resources substantial. We conclude that the commissioner properly disallowed the deduction for estate tax purposes.

The deduction for income tax purposes stands on no better footing. Congress permitted a deduction of that part of gross income 'which pursuant to the terms of the will * *  * is during the taxable year *  *  * permanently set aside' for charitable purposes. In view of the explicit requirement that the income be permanently set aside, there is certainly no more occasion here than in the case of the estate tax to permit deduction of sums whose ultimate charitable destination is so uncertain.

Accordingly, the decision of the Court of Appeals is

Affirmed.

Mr. Justice DOUGLAS, with whom Mr. Justice JACKSON concurs, dissenting.