Continental Illinois National Bank and Trust Company of Chicago v. The United States

COWEN, Chief Judge.

Richard Wasserman, the testator, an American citizen at the time of his death, bequeathed the residue of his estate to “the Mayor & Magistratsraete of Fuerth, Bayern, Germany 13a, to be used and expended for the benefit of said city of Fuerth.” Fuerth’s City Council 1 has used the money thus far for construction of an old peoples’ home for the city’s inhabitants, and has earmarked any additional funds for operating and maintaining the home.

The Internal Revenue Service included the amount of the bequest, about $341,-000, in the testator’s gross estate. Plaintiff, as executor, paid the tax and filed a claim for refund. This was disallowed. Now the executor sues for a refund of about $86,000 plus interest, arguing that the residuary bequest is deductible from the testator’s gross estate as a charitable contribution within the provisions of § 2055(a) of the Internal Revenue Code of 1954, 2 or is exempt from estate taxation under Article XI 3 of the 1954 German-American Treaty of Friendship, Commerce, and Navigation of October 29, 1954, 7 U.S. Treaties 1839. On the undisputed facts, we hold that plaintiff’s contentions fail, and hence that its claim for refund was correctly disallowed.

I

Plaintiff’s first contention is that this bequest was charitable, and thus entitled to be deducted from the gross estate under the provisions of § 2055(a) (2) or (3). For the reasons which follow, we reject this contention. 4

(a)

Section 2055(a) (1) permits an estate to deduct the amount of a bequest to or for the use of the United States, any state, or any political subdivision thereof for exclusively public purposes. Since the bequest before us was to a foreign municipality, the taxpayer admits that the gift is excluded from the coverage of § 2055(a) (1) unless the Treaty makes it applicable (see infra, Part II of this opinion for a discussion of this point). Nevertheless, an examina *724 tion of the entire structure of § 2055(a) is essential to a resolution of this issue. Paragraph 1, with some modifications not here pertinent, has been continuously included in the estate tax law since the Revenue Act of 1918. Although legislative history of the paragraph is almost totally lacking, we should not attribute to Congress a futile act, but should endeavor to ascertain the purpose for the broad exemption permitted only for bequests to governmental bodies within the United States. If Congress thought that governmental units were charitable organizations, there surely would have been no need to give domestic governmental bodies special treatment, for bequests to charitable organizations or for exclusively charitable purposes are covered in other paragraphs of § 2055(a).

The Supreme Court in United States v. Perkins, 163 U.S. 625 , 16 S.Ct. 1073 , 41 L.Ed. 287 (1896), said that the United States was not a charitable institution within the meaning of the New York inheritance tax statute. The Court went on to say that the United States was “a purely political or governmental corporation” and thus was not a “religious, educational, charitable, or reformatory” institution. Although the statement was dicta, the Court was observing the fairly obvious fact that a governmental unit, be it local or national, is basically a political organization and not a charitable one, although it may engage in some “charitable” functions. It is reasonable to suppose that Congress in enacting the predecessor of § 2055(a) (1) meant to provide a special deduction for bequests to domestic governmental bodies, although such deductions would not be permitted under the rubric of bequests for charitable purposes.

It should also be noted that § 2055(a) (1) allows the deduction to bequests made for “public purposes.” Surely Congress chose the word “public” to encompass something more than “charitable,” which is used in the rest of the section. It seems to us that the word “public” embodies a broader concept, and envisions gifts to domestic governmental bodies for purposes other than the ordinary philanthropic purposes most people associate with “charity.” Consequently, it is our opinion that the use of the word “public” shows a congressional intention to bring within the statutory exemption gifts which could be used for such standard governmental functions as the payment of salaries to policemen and firemen. We think there is a clear indication that Congress considered that many contributions which wouM benefit domestic municipalities are not charitable, because the exemption permits different and broader uses of a bequest than those which are exclusively for charitable purposes.

Many activities of cities are in no sense charitable, and in fact are generally available only to paying customers. These are proprietary activities and include the operation of golf courses, wharves, market places, transportation facilities, and such public utilities as gas, water, and electric systems. It is a meaningful distinction to say that while these activities are not “charitable,” they nevertheless are for public purposes, as the local government conceives the needs of its public.

Plaintiff’s motion is supported by the affidavit of Professor Max Rheinstein, who provided translations of various Bavarian laws relating to municipal functions. 5 Even a cursory reading of *725 these laws indicates that Fuerth is empowered to perform proprietary functions, functions which are strictly governmental, such as police and fire protection, and other functions which are more traditionally charitable in nature, such as health care. It is clear, therefore, that the beneficiary of this gift is not a “corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes” within the meaning of § 2055(a) (2). This is especially true in light of the recognition by Congress that gifts to American governmental units to be used for any public purpose are deductible only by reason of the provisions of § 2055(a) (1).

(b)

We turn now to consider whether a bequest — not clearly restricted to a charitable use — to a foreign municipality can qualify under § 2055(a) (3) as a gift or contribution to be used exclusively for charitable purposes. We first note that a tax deduction is allowable only if specifically authorized by the Internal Revenue Code (see, e. g., New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435, 440 , 54 S.Ct. 788 , 78 L.Ed. 1348 (1934)). In this case, the Code is specific: to be deductible, the gift must be “to a trustee or trustees, * * * but only if such contributions or gifts are to be used * * * exclusively for religious, charitable, scientific, literary, or educational purposes * * * ” [emphasis added]. We have no doubts that this gift was in fact in trust. While it is true the form of the gift was “to the Mayor & Magistratsraete of Fuerth, Bayern, Germany 13a,” we accept Professor Rheinstein’s uncontradicted affidavit that German courts would consider this a gift to the city of Fuerth. We think the language which follows the gift shows that the testator had no intention of making a gift to the persons of the Mayor and Magistratsraete, because the gift is qualified: it is “to be used and expended for the benefit of said city of Fuerth.” Thus, we encounter no problem in finding that an outright gift on its face to the Mayor and Magistratsraete was a gift in trust because of the qualifying language which follows. We do not doubt that a city administration can serve’ as trustee for a gift in trust for the benefit of the city. See, e. g., In re Sage’s Estate, 122 F.2d 480 , 137 A.L.R. 658 (3rd Cir. 1941).

The fact that the gift involved here was used for a charitable purpose presents plaintiff’s most appealing argument. But this is not sufficient to meet the requirements of § 2055(a) (3). If the right to make the deduction could be met by showing only a charitable use of the contribution, the applicability of the estate tax in all similar situations would *726 depend upon the vagaries of post-estate planning. The testator, and he alone, must order the recipient to hold or use the contribution exclusively for charitable purposes. Further, the statute does not permit the deduction unless it is shown that the testator intended that the gift be used exclusively for a charitable project. Estate of Lamson v. United States, 338 F.2d 376 , 168 Ct.Cl. 33 (1964) and cases cited therein. Entitlement to the deduction must rest on more than a doubt or ambiguity. Commissioner of Internal Revenue v. Sternberger’s Estate, 348 U.S. 187, 190, n. 3 , 75 5. Ct. 229, 99 L.Ed. 246 (1955). Plaintiff’s proof simply fails to lift the taxpayer over this hurdle.

The only restriction imposed by the will was that the bequest “be used and expended for the benefit of said city of Fuerth.” We find nothing in this language to establish that the testator intended that the contribution be used solely for charitable purposes. Rather, as we noted above, it seems quite likely that the purpose of this language was to make it clear that the gift, which was outright in form to the Mayor and Magistratsraete, was not intended for their own personal use, but was for the benefit of the city. But it takes a great deal of imagination to impute more to these words of the will.

Since no extraneous evidence was introduced to show the testator’s intent that the gift be used exclusively for charitable purposes, we are left with the words of the will alone. We cannot agree that the will limits the use of the contribution to charitable activities, because the city of Fuerth is not legally empowered to spend money or government funds for nonpublic purposes. 6 Almost any use of the bequest for a public purpose, including some of the purely proprietary and clearly non-eharitable activities mentioned above, would benefit the city of Fuerth. Thus, for all practical purposes, the contribution was unrestricted as to use. If the mayor and city council had decided to use the gift for enlarging the city’s water distribution system, for street paving, for the payment of salaries to policemen or for any of the other broad categories of activities authorized by the municipal law of the Free State of Bavaria, 7 we find nothing in the will that would have prevented the city officials from using the gift for such purposes.

We acknowledge that some of the authorities relied upon by plaintiff have broadly held that a gift to a city or other governmental body is charitable. See, e. g., Estate of Boyles, 4 T.C. 1092 (1945); Koehler v. Lewellyn, 44 F.2d 654 (W.D.Pa.1930), and Dickenson v. City of Anna, 310 Ill. 222 , 141 N.E. 754 , 30 A.L.R. 587 (1923). For several reasons we do not base our decision on these cases and other authorities which enunciate the same general rule. Boyles and Koehler involved gifts to domestic municipalities. Dickenson is illustrative of common law cases which have held such gifts to be charitable in order to avoid a decision that the bequest violates the Rule against Perpetuities. None of the authorities in this group considered the applicability of § 2055(a) (3) to a bequest to a foreign governmental body. Therefore, we do not feel bound under the facts of this case to follow blindly the common law concept that all gifts to a municipality for a public use are charitable. To do so would, in our opinion, render § 2055(a) (1) superfluous and defeat the purpose for which Congress enacted the predecessor of that section of the Internal Revenue Code.

As we read them, none of the federal tax cases, which have considered the deductibility of gifts to foreign govern *727 mental bodies, supports plaintiff’s position. In addition to Edwards v. Phillips, note 4, supra, the pertinent cases are Beggs v. United States, 27 F.Supp. 599 , 89 Ct.Cl. 39 (1939); In re Sage’s Estate, supra, and Schoellkopf v. United States, 124 F.2d 982 (2d Cir. 1942).

In Beggs , this court considered whether donations made under a bequest to “such charities and worthy objects as they my executor and my sister shall determine, remembering, however, the City of Fort Worth, in Texas, the City of Vancouver in British Columbia, Parker County, in Texas, and England, places to which I have become attached” were deductible under the estate tax provisions as bequests to charitable institutions. In his will, the testator recited that he would write a letter to his sister to set forth his suggestions as to appropriate donees under provisions of the will and, in fact, he did write such a letter. After consulting with the sister, the executor made several charitable gifts, including one to the University of Texas. The court determined the intention of the testator from the language of the will and the surrounding facts and circumstances, and held that it was his intention to leave his residuary estate to charity, although he did not name the specific charitable institutions to which the bequests should be paid. The case does not disclose any contributions to the city of Vancouver, or to England, and the point was not considered whether a gift to either, if required to be made under the will, would be charitable.

In Sage’s Estate , the bequest was to the Lord Provost of Glasgow, with the request that he “distribute same among such institutions in Scotland, as are devoted to the care and maintenance of the blind, maimed, and disabled soldiers and sailors of the British Army and Navy according to his best judgment and discretion.” The government conceded that this was a trust for specific charitable purposes.

In Sehoellkopf, the court considered a charitable trust which was required to make annual payments to two German cities “for charitable, educational and/or benevolent purposes.” In passing on the taxpayer’s claim that the bequest was deductible under Section 23 (n) of the Revenue Act of 1928, which is substantially identical to § 2055(a) of the 1954 Code, the court through L. Hand, J., said:

This the [government] challenges, because § 23 (n) (1) exempts gifts made to municipalities within the United States, and by implication does not exempt any others. That would indeed preclude unrestricted gifts to foreign cities, and is a good answer so far as concerns § 23(n) (1); but § 23 (n) (2) creates an exemption without local limitations when the purposes are charitable as there defined. 124 F.2d at 985 [emphasis added].

We think Judge Hand’s opinion clearly indicates what we now hold — unrestricted bequests to foreign cities are not deductible under the applicable statute and regulations, whereas contributions and gifts to foreign cities for exclusively charitable purposes are deductible.

In summary, the beneficiary of the bequest involved here is a foreign municipality which engages in activities and functions that are not charitable, although they are public functions authorized by local law. Under such circumstances, it is incumbent on the taxpayer to show the testator’s intent that the contribution was to be used exclusively for charitable purposes, rather than for any public purpose. Plaintiff has failed to discharge that burden in this case. See Levey v. Smith, 103 F.2d 643 (7th Cir. 1939).

II

Plaintiff argues that, whether or not the bequest qualifies for treatment as a charitable bequest under § 2055(a) (2) or (3), the estate is entitled to the claimed deduction by reason of Paragraphs 1, 2, and 3 of Article XI, Treaty of Friendship, Commerce and Navigation between the United States and the Federal Republic of Germany of October 29, *728 1954. 8 Plaintiff argues that since the gift would undoubtedly qualify under § 2055(a) (1) for a deduction were it made to an American municipality, the Treaty obligates this court to give similar tax treatment to a gift to a German municipality. Otherwise, plaintiff contends that contrary to the terms of the Treaty, a German city would be “subject to the payment of taxes * * * imposed upon or applied to income, capital, transactions, activities or any other object, or to requirements with respect to the levy and collection thereof * * * more burdensome than those borne in like situations by nationals and companies of such other Party.”

With this argument we cannot agree. Plaintiff’s position rests entirely on the fact that the city of Fuerth will receive less under the testator’s will if the tax is imposed than if it is not. Thus, plaintiff reasons, Fuerth bears the burden of the tax. We do not doubt that the collection of the tax may reduce the amount of the bequest received by the city. It is equally clear, however, that within the contemplation of the law, the city does not bear the tax. Rather, the tax is borne by the estate of an American citizen, and his estate is a creature of Illinois law.

In United States v. Perkins, 163 U.S. 625 , 16 S.Ct. 1073 , 41 L.Ed. 287 (1896), the Supreme Court considered whether a New York inheritance tax was inapplicable because it taxed a bequest to the United States. The Court held that the tax there was “not upon the property in the ordinary sense of that term, but upon the right to dispose of it, and it is not until it has yielded its contribution to the state that it becomes the property of the legatee.” 163 U.S. at 628 , 16 S.Ct. at 1075 . The same concept has been applied by the Court in federal tax cases. Thus, in Y.M.C.A. v. Davis, 264 U.S. 47 , 44 S.Ct. 291 , 68 L.Ed. 558 (1924), Mr. Chief Justice Taft, in speaking for the Court, noted that the federal estate tax is not a tax on the property of the beneficiary, but on the transfer of the estate; it is a tax not on the interest to which the legatees and devisees succeed on death, but upon the interest which ceases by reason of death. Again, in Ithaca Trust Co. v. United States, 279 U.S. 151 , 49 S.Ct. 291 , 73 L.Ed. 647 (1929), the Supreme Court declared that the estate tax was a tax on the act of the testator, not on the receipt of the property by the legatees.

When that concept is applied here, it is clear that the Treaty provides no relief for the taxpayer estate. It is the property of the estate, still in the hands of the administrator, to which the estate tax law applies. The city of Fuerth is in no way involved in the legal process of taxation. It merely awaits the out *729 come. Thus, this is not a situation which calls into effect the Treaty provisions, because no German national is subject to the payment of any taxes.

Plaintiff maintains that Brewster v. Gage, 280 U.S. 327 , 50 S.Ct. 115 , 74 L.Ed. 457 (1930), supports its position that, in reality, the tax is on the German city’s property, because the German city is the equitable owner of the bequest as soon as the testator dies. But plaintiff ignores a qualification the Court in Brewster attached to the statement relied upon: the right to the legatee’s distributive share vests in so much as shall remain after proper administration of the estate. See 280 U.S. at 334 , 50 S.Ct. 115 . For federal tax purposes, proper administration of the estate certainly includes the payment of estate taxes. That portion of the estate that is needed to pay the estate tax belongs to the United States by operation of law. Consequently, the city of Fuerth has no “equitable” title to the whole amount of the bequest but only to so much of it as remains after the tax law operates.

In another context, the Supreme Court has rejected the view that whoever bears the economic burden of a tax necessarily bears the legal burden for tax purposes. In Maximov v. United States, 373 U.S. 49 , 83 S.Ct. 1054 , 10 L.Ed.2d 184 (1963), the Court considered an American trust, the beneficiaries of which were British citizens. The trust realized capital gains income in this country. The gains were not distributed and were taxed under the provisions of the Internal Revenue Code. The taxpayer there claimed that because the Income Tax Convention between the United States and the United Kingdom, April 16, 1945, 60 Stat. 1377 , 1384, exempted capital gains of a resident of the United Kingdom, the trust could not be taxed, because the real burden fell on the beneficiaries, who were British citizens. The Court disagreed, holding that the Convention applied to “residents” of the United Kingdom, whereas the trust, which was taxed, was a resident of the United States. We have such a case here. The tax is imposed, as we have said, on the estate and its passing, not on the legatee and its reception of the gift. The Treaty is therefore inapplicable.

Finally, plaintiff urges that the “most favored nation” tax clause of the Treaty (Article XI, paragraph 3) requires a deduction, because of Article IX of the Treaty of Friendship, Commerce and Navigation between the United States and Italy, February 2, 1948, United Nations Treaty Series 172. However, as we have already concluded, no taxation of a German national entity is involved in this case. Since the Treaty with the Federal Republic has no application for any purpose in this case, the “most favored nation” provision of the Treaty with Italy is a fortiori inapplicable.

For the reasons stated above, plaintiff’s motion for summary judgment is denied; defendant’s cross-motion for summary judgment is granted, and plaintiff’s petition is dismissed.

. The Magistratraete are now equivalent to the City Council. See note 6, infra.

. Section 2055 provides, in pertinent part:

“ (a) In general.

“For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers * * *

“(1) 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;

“(2) to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *

“(3) to a trustee or trustees, * * * but only if such contributions or gifts are to be used by such trustee or trustees * * * exclusively for religious, charitable, scientific, literary, or educational purposes * *

. See note 8, infra.

. In Edwards v. Phillips, 373 F.2d 616 (10th Cir.), cert. denied, 389 U.S. 834 , 88 S.Ct. 38 , 19 L.Ed.2d 94 (1967), the court, on somewhat different facts, reached the same conclusion. However, we do not adopt the rationale of the Tenth Circuit’s decision as the basis for our holding in this case.

. The following are excerpts from plaintiff’s exhibits, translations by Professor Max Rheinstein of the University of Chicago Law School, of various pertinent statutes and ordinances.

“Constitution of the Free State of Bavaria

“Art. 83(1). The intrinsic functions of municipalities (Art. 11, para. 2) include the administration of municipal properties and enterprises; local traffic including building of roads and highways; provision of water, light, gas and electricity; institutions for the safeguard of food; local planning, construction of dwellings and supervision of buildings; local police, fire protection; local culture; primary and vocational schools and instruction of adults; guardianships and public assistance; local health; marriage coun *725 seling and aid to mothers and infants; school hygiene and physical education of youth; public baths; burial of the dead; preservation of historical monuments and buildings.

“Municipal Laxo of the Free State of Bavaria

“Art, 1 Definition. Municipalities are original territorial corporations with the right to organize and administer the local affairs within the scope of the laws. They constitute the basis of Government and democratic life.

“Ax-t. 57 Scope of Intx-insic Fxonctions. (1) Within the scope of their intrinsic functions and within the limits of their ability, municipalities shall create the public institutions required by local conditions for the economic, social and cultural well-being of their residents. (2) Regardless of the responsibility of others, municipalities are required, in conformity with applicable law, to create and maintain the institutions necessary for the maintenance of public safety and order, fire protection, public hygiene, traffic, health, public aid and welfare, including juvenile assistance, public education and instruction of adults, physical education of youth, fostering of culture and preservation of public records. This provision shall not affect other statutory duties of municipalities.

“Art. 61 Maintenaxice and Additions of Property. (3) The giving away of municipal property is prohibited (Article 12, paragraph 2, sentence 2 of the Constitution).

“Art. 62 Acquisition and Disposition of Municipal Px-operty. (1) Property may be acquired or disposed of only as the discharge of municipal functions requires or permits.”

. Professor Rheinstein, in his affidavit, states inter alia, that the Mayor and Magistratsraete are legally the corporate municipal body, and that the municipality of Fuerth may expend its funds only for municipal purposes. But this does no more than restate the general rule applicable to municipal corporations. See Municipal Law of the Free State of Bavaria, Articles 61 and 62, supra, n. 5.

. See note 5, supra.

. Article XI of the Treaty reads in pertinent part as follows:

“1. Nationals of either Party residing within the territories of the other Party, and nationals and companies of either Party engaged in trade or other gainful pursuit or in scientific, educational, religious or philanthropic activities within the territories of the other Party, shall not be subject to the payment of taxes, fees or charges imposed upon or applied to income, capital, transactions, activities or any other object, or to requirements with respect to the levy and collection thereof, within the territories of such other Party, more burdensome than those borne in like situations by nationals and companies of such other Party.

“2. With respect to nationals of either Party who are neither resident nor engaged in trade or other gainful pursuit within the territories of the other Party, and with respect to companies of either Party which are not engaged in trade or other gainful pursuit within the territories of the other Party, it shall be the aim of such other Party to apply in general the principle set forth in paragraph 1 of the present Article.

“3. Nationals and companies of either Party shall in no case be subject, within the territories of the other Farty, to the payment of taxes, fees or charges imposed upon or applied to income, capital, transactions, activities or any other object, or to requirements with respect to the levy and collection thereof, more burdensome than those borne in like situations by nationals, residents and companies of any third country.”