Opinion

Galloway v. United States

Court: Court of Appeals for the Third Circuit
Filed: Jun 21, 2007
Status: Published
Cited by: 0 cases
Authority: More cited than 40.4%

The opinion

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

6-21-2007

Galloway v. USA

Precedential or Non-Precedential: Precedential

Docket No. 06-3007

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 06-3007

EDMOND C. GALLOWAY, Successor Trustee

Appellant

UNITED STATES OF AMERICA

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D.C. No. 05-cv-00050E)

District Judge: Honorable Sean J. McLaughlin

Argued May 15, 2007

Before: FISHER, NYGAARD and ROTH, Circuit Judges.

(Filed: June 21, 2007)

Arthur D. Martinucci (Argued)

The Quinn Law Firm

2222 West Grandview Boulevard

Erie, PA 16506-4508

Attorney for Appellant

John A. Dudeck, Jr. (Argued)

Kenneth L. Greene

U.S. Department of Justice

Tax Division

P.O. Box 502

Washington, DC 20044

Attorneys for Appellee

OPINION OF THE COURT

FISHER, Circuit Judge.

This case comes to us on appeal from the decision of the

District Court affirming the Internal Revenue Service’s (“IRS”)

decision to disallow a nearly $400,000 charitable deduction

claimed by the James D. Galloway Revocable Living Trust (“the

Trust”). We are asked to determine whether Internal Revenue

Code (“IRC”) § 2055(e) prevents an estate from claiming a

charitable deduction when distributing the proceeds of a single

trust to both charitable and non-charitable beneficiaries. We

hold that it does, and, for the reasons set forth below, we will

affirm the judgment of the District Court.

On March 5, 1991, James D. Galloway (“the Decedent”)

created the Trust, which was amended on three separate

occasions during his lifetime: May 20, 1994; July 3, 1995; and

September 7, 1996. As amended in 1996, the residue of the

Decedent’s estate is held in trust. The beneficiaries include two

natural persons – Edmond C. Galloway (“Galloway”), the

Decedent’s son, and Karen Minns, the Decedent’s

granddaughter – and two charitable entities – the James D.

Galloway Scholarship Fund of the Federated Church of East

Springfield, Pa., and the WLD Ranch of the Federated Church

of East Springfield, Pa. Each beneficiary is to receive an equal,

one-quarter share in the Trust. The Trust documents instruct

that each beneficiary shall receive one-half of its one-quarter

share on January 1, 2006, and the remainder on January 1, 2016.

The Trust contains the further condition that, with respect to the

natural person beneficiaries, if either is no longer living at the

time of a distribution, his or her share will be distributed to the

remaining beneficiaries in equal parts.

The original Trust document contains the powers of the

trustee, which were not altered by any of the subsequent

amendments to the Trust. The trustee is entitled to sell any and

all real estate and mixed or personal property, invest Trust assets

in appropriate certificates of deposit and government bonds, and

reinvest the proceeds from the sale of any stocks owned by the

Decedent at the time of his death in corporate bonds that have an

“A” or “B” rating with Standard & Poors. The Decedent was

the trustee during his lifetime, with Galloway named as the

trustee after his death.

Following the Decedent’s death, his attorney requested

that the Commonwealth of Pennsylvania Department of

Revenue calculate the value of the residuary interest under the

Trust. The Department of Revenue determined that the entire

value of the residuary interest was $690,475.60, of which

$399,079.33 would be distributed to the charitable entities.1

Therefore, on its federal estate tax return, the Estate claimed a

charitable deduction of $399,079.33. Following the deduction,

the Estate had a taxable income of $1,059,850.53 and had a

calculated estate tax of $168,637.09. The Estate paid the tax in

three installments.

The IRS notified Galloway on April 27, 2000, that the

Estate’s tax return would be audited. In October, 2000, based

on IRC § 2055(e), the IRS disallowed the charitable deduction,

determining that the Decedent’s Trust provided for a split-

interest bequest that was not cast in a qualifying form under

§ 2055(e). Therefore, the Estate’s liability was computed to be

$306,604.57. Thereafter, Galloway paid the additional tax in

two payments. He timely filed a refund claim for $160,394.13

under IRC § 6511(a) on July 22, 2002. The IRS denied the

claim on February 5, 2003.

These numbers are based on the Appellant’s findings of

material facts not in dispute and the undisputed facts in the

parties’ briefs.

Following the IRS’s denial of his refund request,

Galloway filed a complaint in the United States District Court

for the Western District of Pennsylvania. The parties filed

cross-motions for summary judgment. The District Court

granted the United States’ motion for summary judgment and

denied Galloway’s, finding that the plain language of § 2055(e)

required that the charitable deduction be disallowed. This

timely appeal followed.

II.

The District Court had jurisdiction over this taxpayer suit

under 26 U.S.C. §§ 6532(a)(1), 7422(a), and 28 U.S.C.

§ 1346(a)(1). We have jurisdiction pursuant to 28 U.S.C.

§ 1291. We review a district court’s grant of summary judgment

de novo. Gordon v. Lewistown Hosp., 423 F.3d 184, 207 (3d

Cir. 2005). Summary judgment shall be granted “if the

pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any, show that

there is no genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of law.” Fed.

R. Civ. P. 56(c). Interpretation of the IRC is a question of

statutory construction, over which we exercise plenary review.

In re CM Holdings, Inc., 301 F.3d 96, 101 n.3 (3d Cir. 2002).

III.

The sole issue in this appeal is whether the IRS rested its

disallowance of the Estate’s $399,079.33 deduction on a proper

interpretation of IRC § 2055(e). As with all cases involving

statutory interpretation, we begin with the statute itself. IRC

§ 2055(a) allows a deduction from a decedent’s estate for the

amount of “all bequests, legacies, devises or transfers” to a

qualifying charitable organization. 26 U.S.C. § 2055(a).2 Prior

to the Tax Reform Act of 1969, if a document created a split-

interest trust – transferring property to both a charitable and

non-charitable beneficiary – the value of the charitable

beneficial interest could be deducted so long as the amount was

readily ascertainable. See 26 C.F.R. § 20.2055-2(a); Rev. Rul.

89-31, 1989-1 C.B. 277. When the split-interest trust provided

a non-charitable individual with a life interest in an estate with

the remainder passing to the charity, the charitable deduction

was determined using actuarial life-expectancy tables and an

assumed interest rate. Oetting v. United States, 712 F.2d 358,

360 (8th Cir. 1983). However, Congress found that “the rules

for determining the amount of a charitable deduction in the case

of gifts of remainder interests in trusts do not necessarily have

any relation to the value of the benefit which the charity

receives.” Id. (quoting S. Rep. No. 552, 91st Cong., 1st Sess.,

reprinted in 1969 U.S. Code & Cong. Admin. News 2027,

2116). This was so because trustees were investing the corpus

of a trust in high-risk, high-yield investments, which maximized

the amount the life-beneficiary received but substantially

reduced the amount of the corpus left for the charity when the

remainder converted to it. Id.

The parties do not dispute that the James D. Galloway

Scholarship Fund of the Federated Church and the WLD Ranch

of the Federated Church are charitable organizations for

purposes of § 2055(a).

Therefore, Congress enacted IRC § 2055(e), which

disallows a charitable deduction for a split-interest bequest

unless, in the case of a remainder, the charity’s interest is in the

form of a charitable remainder annuity trust,3 a unitrust,4 or a

pooled income fund,5 or, in the case of any other trust, the

charitable beneficiary receives a guaranteed annuity or yearly

fixed percentage. The pertinent portion of IRC § 2055(e)

provides:

(e) Disallowance of deductions in certain cases.–

(1) No deduction shall be allowed under

this section for a transfer to or for the use

of an organization or trust described in

section 508(d) or 4948(c)(4) subject to the

conditions specified in such sections.

(2) Where an interest in property (other

than an interest described in section

170(f)(3)(B)) passes or has passed from

A charitable remainder annuity trust is one which

requires the payment of a sum certain at least once every year.

26 C.F.R. § 1.664-2.

A unitrust is one which requires the annual payment of

a fixed percentage of the trust. 26 C.F.R. § 1.664-3.

A pooled income fund is a trust which grants an

irrevocable interest in property to a charity while the donor

retains a life interest in the property. 26 C.F.R. § 1.642(c)-5.

the decedent to a person, or for a use,

described in subsection (a), and an interest

(other than an interest which is

extinguished upon the decedent's death) in

the same property passes or has passed (for

less than an adequate and full

consideration in money or money's worth)

from the decedent to a person, or for a use,

not described in subsection (a), no

deduction shall be allowed under this

section for the interest which passes or has

passed to the person, or for the use,

described in subsection (a) unless –

(A) in the case of a remainder

interest, such interest is in a trust

which is a charitable remainder

annuity trust or a charitable

remainder unitrust (described in

section 664) or a pooled income

fund (described in section

642(c)(5)), or

(B) in the case of any other interest, such

interest is in the form of a guaranteed

annuity or is a fixed percentage distributed

yearly of the fair market value of the

property (to be determined yearly).

26 U.S.C. § 2055(e).

The parties do not dispute that the Trust does not fall into

one of the excepted categories set forth in subsections (A) and

(B). The charities do not receive a fixed percentage distributed

yearly pursuant to subsection (B), and, as the charities do not

receive a remainder interest, subsection (A) is inapplicable.

Therefore, the only way that a deduction can properly be taken

is if § 2055(e) does not apply to the Trust. The Government

argues that § 2055(e) clearly applies to the bequests at issue

here. It argues that a split-interest trust is clearly defined by the

language of § 2055(e). The Government asks us to determine

that “[t]he trust documents create one trust from one set of

property, and the trust holds the property for both the charitable

and individual beneficiaries.” (Appl’s Br. 19.) “Accordingly,

since charitable and non-charitable interests ‘in the same

property’ passed ‘from the decedent,’ the decedent’s trust

provided for a split-interest within the meaning of Section

2055(e)(2).” (Id. at 20.)

However, Galloway contends that the statute is inherently

ambiguous in that it fails to clearly define what Congress

considered to be a “split-interest” trust and what is meant by the

“in the same property” requirement. Therefore, he asks that we

turn to the legislative history of the section to determine what

Congress intended when it passed § 2055(e) into law.

Our first task, then, is to determine whether there is any

ambiguity in § 2055(e) such that we may look outside the statute

to determine its meaning. We find that there is not. It is a well-

established precept of tax law that, in interpreting statutes, the

literal meaning of the statute is most important, and we are

always to read the statute in its “ordinary and natural sense.”

Estate of Cassidy v. Comm’r, T.C. Mem. 1985-37 (Jan. 22,

1985) (citing United States v. Merriam, 263 U.S. 179, 187-88

(1923); DeGanny v. Lederer, 250 U.S. 376, 381-82 (1919)). In

particular, courts are admonished to strictly construe deductions

and to allow such deductions “only ‘as there is a clear provision

therefor.’” INDOPCO, Inc. v. C.I.R., 503 U.S. 79, 84 (1992)

(quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); Deputy v. Du Pont, 308 U.S. 488, 493 (1940)).

Section 2055(e) presents clear, unambiguous language.

It states:

Where an interest in property (other than an

interest described in section 170(f)(3)(B)) passes

or has passed from the decedent to a person, or for

a use, described in subsection (a) [a charitable

beneficiary], and an interest (other than an interest

which is extinguished upon the decedent's death)

in the same property passes or has passed (for less

than an adequate and full consideration in money

or money's worth) from the decedent to a person,

or for a use, not described in subsection (a) [a

non-charitable beneficiary], no deduction shall be

allowed under this section for the interest which

passes or has passed to the person, or for the use,

described in subsection (a) [the charitable

beneficiary] . . . .

26 U.S.C. § 2055(e). Under the plain language of § 2055(e),

where an interest in the same property passes to both charitable

and non-charitable beneficiaries, no deduction is allowed.

The Trust divides a single property between charitable

and non-charitable beneficiaries, falling directly within the

language of § 2055(e). The Trust documents create a single

trust, the James D. Galloway Revocable Living Trust. Article

III, which delineates the powers of the trustee, refers to the Trust

in the singular, as does each of the three amendments to the

Trust. The Trust property remains single and undivided until the

two distributions in 2006 and 2016. In short, two charitable and

two non-charitable beneficiaries have interests in the same

property – the Trust – bringing the Trust within the meaning of

§ 2055(e). Therefore, the IRS properly disallowed the

deduction.

In order to avoid this result, Galloway argues that the

legislative history of § 2055(e) makes the statutory language

ambiguous and that it precludes a finding that the Trust falls

under the provisions of § 2055(e). He argues that the only kind

of split-interest trusts Congress intended § 2055(e) to cover are

split-interest trusts in which a non-charitable beneficiary has a

life interest and the charitable beneficiary has a remainder

interest. The legislative history of § 2055(e) does suggest this

type of split-interest trust was at the forefront of the

congressional consciousness when enacting § 2055(e). See S.

Rep. No. 552, 91st Cong., 1st Sess., reprinted in 1969 U.S.

Code & Cong. Admin. News 2027, 2116. However, both the

Supreme Court and this Court have made clear that we may not

turn to legislative history in order to muddy the waters of an

otherwise clear statute. Exxon Mobil Corp. v. Allapattah Servs.,

Inc., 545 U.S. 546, 568 (2005); Morgan v. Gay, 471 F.3d 469,

473 (3d Cir. 2006). “[T]he authoritative statement is the

statutory text, not the legislative history or any other extrinsic

material.” Exxon Mobil, 545 U.S. at 568. Therefore, where, as

here, the language of the statute is clear and unambiguous, we

will not create an ambiguity through the use of legislative

history. The language of § 2055(e) does not refer only to trusts

creating a remainder interest. It also refers to “any other

interest.” 26 U.S.C. § 2055(e)(2)(B). We will not use

legislative history that focuses on a particular type of trust to

narrow the broad language Congress chose to use when enacting

the statute.

In so saying, we recognize the unfortunate result in this

case. Section 2055(e) was passed to protect against abuses that

resulted most frequently from non-charitable beneficiaries

exploiting their life interest in an estate and leaving a charitable

beneficiary with a shadow of what was bequeathed to it. In this

instance, there is little chance that the same sort of abuse would

take place. Each beneficiary of the Trust, charitable and non-

charitable, shares equally in the risk of loss and the benefit of

good investing as each beneficiary receives an equal share in the

property. However, the fact that the abuses Congress sought to

protect against are not present here does not give us license to

circumvent the clear language presented in the statute. In the

future, should testators seek to bequeath their estates to both

charitable and non-charitable beneficiaries, they must use the

tools provided in §§ 2055(e)(2)(A) and (e)(2)(B).

Our holding comports with the decisions of other courts

that have found § 2055(e) to be clear and unambiguous. See,

e.g., Estate of Johnson v. United States, 941 F.2d 1318, 1321

(5th Cir. 1991); Estate of Edgar v. Comm’r, 74 T.C. 983, 987

(1980); Zabel v. United States, 995 F. Supp. 1036, 1047 (D.

Neb. 1998). Galloway’s attempts to distinguish these cases are

unavailing. In Zabel, in particular, the United States District

Court for the District of Nebraska recognized that the operation

of the trust presented to it protected against the same abuses

prevented by § 2055(e). However, even with that recognition,

it found the language of the statute unambiguous and affirmed

the IRS’s decision to disallow the charitable deduction. Zabel,

995 F. Supp. at 1047. The mere fact that the abuses are not

present will likewise not take this Trust outside § 2055(e).

Furthermore, the line of cases beginning with the United

States Court of Appeals for the Eighth Circuit’s decision in

Oetting v. United States is not to the contrary. In Oetting, the

court held that § 2055(e) did not disallow a charitable deduction

where a charitable beneficiary’s remainder interest in property

passed directly to the charity through a settlement. 712 F.2d at

363. Because the money had passed directly to the charitable

beneficiary, there was no possibility of the non-charitable

beneficiaries benefitting themselves at the expense of the

charitable beneficiary’s interest. Id. Rather, the money passed

directly to the charity, removing any shared interest by the non-

charitable beneficiary. For that reason, the deduction was

allowed. Id. Based on this language, a number of courts have

allowed deductions when a charity receives its interest following

a settlement. See, e.g., First Nat’l Bank of Fayetteville v. United

States, 727 F.2d 741, 746 (8th Cir. 1984); Strock v. United

States, 665 F. Supp. 1334, 1338-40 (W.D. Pa. 1987); Northern

Trust Co. v. United States, 41 A.F.T.R.2d 78-1523 (N.D. Ill.

1977).

These cases are easily distinguishable from the situation

currently before us. In Oetting, and every case to allow the

deduction using its reasoning, the charitable beneficiary had

already received its interest in the trust. Therefore, the non-

charitable beneficiary no longer had any interest in that

property. At that point, the charitable and non-charitable

beneficiaries no longer had an interest in the same property. In

the case before us, at the time the deduction was claimed in

2000, the charitable and non-charitable beneficiaries retained an

interest in the same property. Their interests did not diverge

until the first distribution in 2006, six years after the claimed

deduction. Therefore, at the time of the claimed deduction, the

two charitable and two non-charitable beneficiaries had an

interest in the same property, and § 2055(e) precluded any

deduction for the charitable beneficiaries’ interests in that

property.6

IV.

The language of § 2055(e) clearly disallows any

charitable deduction when an interest in the same property

passes to both charitable and non-charitable beneficiaries.

Because the language is clear, we do not look to the legislative

history. The Decedent created a single Trust that was to be

distributed evenly between charitable and non-charitable

We also reject Galloway’s argument based on Treasury

Regulation § 20.2055-2(e)(i). Section 20.2055-2(e)(i) refers

only to undivided interests in property that are not held in trust,

see 26 C.F.R. § 20-2055-2(e)(i), and is therefore inapplicable to

the question before us.

beneficiaries. His bequest falls clearly within the parameters of

§ 2055(e)’s disallowance and, therefore, the IRS properly

disallowed any charitable deduction. For this reason, and for

those set forth above, we will affirm the judgment of the District

Court.

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