Petition — First National Bank of Oregon v. United States

—_MICHAE

wae” Atl RODAK. JR, CLER

IN THE

Supreme Court of the United States

OcToBER TERM, 1977

First NATIONAL BANK OF OREGON, Trustee under the

Will of Bertha E. Chambers, for the benefit of Shriners

Hospitals For Crippled Children,

Petitioner,

We

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF CLAIMS

WILLIAM J. LEHRFELD, FsqQ.

Attorney for Petitioner

1747 Pennsylvania Avenue, N.W.

Washington, D.C. 20006

Telephone No.: [202] 785-9500

Paess or Byron S. ADAMS PRINTING, INC., WasHINGcTO” D.C.

TABLE OF CONTENTS

Page

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QuEsTION PRESENTED FOR REVIEW .............0-0000- 2

ConstTITUTIONAL Provisions AND STATUTES ............ 2

I GP GS TD 6 ik kosdcccesesceccevsceséess 2

Reasons ror GRANTING THE WRIT ..............0000- 4

SE icccdacccunweansnnsensinesecacedccecsas 10

BEES. onc anisawnsnneavetesddnncasdvaseeses<s la

Opinion of the United States Court of Claims

GRRE FD. os ccecevesncacadavcseccsccatsuccessces 10a

United States Constitution, Amendment V

MEE Ge cn en hensecnensencncesensésénncecesses lla

Internal Revenue Code of 1954, as amended (26

U.S.C.), Section 2055(e) (3)

PO OO i i i is 13a

Treasury Regulations (26 C.F.R.), § 1.664-1(f) (3)

ia oa a li i ail is ee a ea 15a

Letter of Chief of Staff, Joint Committee on In-

ternal Revenue Taxation, to Hon. James S. Burke,

Member of Congress

il TABLE OF AUTHORITIZS

Page

Cases

Bolling v. Sharpe, 347 U.S. 497 (1954) .............. +

International Business Machines Corp. v. United

States, 343 F. 2d 914 (Ct. Cl. 1955) .............. 7

New Orleans v. Dukes, 427 U.S. 297 (1976) ........... 6

Shriners Hospitals For Crippled Children v. Maryland

National Bank, 312 A. 2d 546 (Md. 1973) ........ 6

United States v. Kaiser, 363 U.S. 299 (1960) ......... 7

United States v. Maryland Savings-Share Insurance

Corporation, 400 U.S. 4 (1970) ............... 6,7,9

WHYY v. Borough of Glassboro, 393 U.S. 117 (1968).. 6,7

CONSTITUTIONAL PROVISIONS

Fifth Amendment, U.S. Constitution ............... 2, 4

STATUTES

Sp OD i ie cages beabeweenus 5

I ee euenacn 3,5

CE Oe eT Te 3,5

ee waeenus 3, 4, 5, 6, 8

NN eee euubsanaade 3, 6

rn 28 od ond Coupee caunkadedeuneuuseds 2

I a a 4

REGULATIONS

DEE (ctv chee uueadaekbeseekersiwed cine 64 5

MISCELLANEOUS

(See All Legislation Cited)

IN THE

Supreme Court of the United States

OcToBER TERM, 1977

No.

First NATIONAL BANK OF OrEGON, Trustee under the

Will of Bertha E. Chambers, for the benefit of Shriners

Hospitals For Crippled Children,

Petitioner,

V.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF CLAIMS

The First National Bank of Oregon, Trustee under

the Will of Bertha E. Chambers, for the benefit of

Shriners Hospitals For Crippled Children, petitions

for a writ of certiorari to review the judgment of the

United States Court of Claims in this case.

OPINION BELOW

The opinion of the United States Court of Claims

(Appendix A, mfra) is reported at 571 F. 2d 21

(1978).

2

JURISDICTION

The judgment of the Court of Claims was entered on

February 22, 1978 (Appendix A, infra).

The jurisdiction of this Court is invoked under 28

U.S.C. 1255.

QUESTION PRESENTED

The final sentence of Section 2055(e)(3) of the In-

ternal Revenue Code of 1954 (26 U.S.C.) denies inter-

est for a period beginning with the filing of a refund

claim and ending 180 days thereafter to taxpayers on

the overpayment of federal estate tax arising out of the

allowance of a charitable deduction under that provi-

sion. Interest arising out of the allowance of the estate

tax charitable deduction for any other reason is paid

from the date of overpayment of estate tax. The ques-

tion presented is whether the interest limitation in

question violates the guarantee of equal protection of

laws embodied within the due process clause of the

Fifth Amendment of the United States Constitution.

CONSTITUTIONAL PROVISIONS, STATUTES

AND REGULATIONS INVOLVED

The Fifth Amendment to the United States Consti-

tution, Section 2055(e)(2) and Section 2055(e) (3) of

the Internal Revenue Code of 1954 (26 U.S.C.), and

Treasury Reulation § 1.664-1(f)(3) are set forth in

Appendix B, C and D, infra.

STATEMENT OF THE CASE

Petitioner is the Trustee under the Will of Bertha

E. Chambers, deceased, for the benefit of the Shriners

Hospitals For Crippled Children. On September 29,

1973, Bertha E. Chambers, a resident of Marion

A EOS

3

County, Oregon, died testate, and provided, under her

will, a charitable remainder trust designating the

Shriners Hospitals For Crippled Children at Port-

land, Oregon, and a church, beneficiaries upon termi-

nation of the life estate.

At the date of decedent’s death, Section 2055(e) (2)

ot the Internal Revenue Code (the ‘‘Code’’) denied

the estate a charitable deduction for the value of the

remainder interest passing to charity. A timely estate

tax return was filed, and Petitioner, as Executor, paid

$583,401.40 in federal estate tax and $34,869.22 in in-

terest. Thereafter, on December 23, 1975, the Circuit

Court of Marion County, Oregon, issued a decree of

reformation amending Paragraph Seventh of the Last

Will and Testament of the decedent to create a 9%

charitable remainder unitrust under the provisions of

Sections 664 and 2055(e)(3) of the Internal Revenue

Code. As a result of the above-described decree of ref-

ormation, a charitable contribution deduction was al-

lowed Petitioner pursuant to Section 2055(e)(3) of

the Code by the Internal Revenue Service. The Inter-

nal Revenue Service subsequently determined that the

net estate tax owed by the decedent’s estate was

$354,322.00, rather than the $583,401.40 previously

paid, and that there had been an overpayment of estate

tax of $229,079.00.

Petitioner filed a timely claim for refund to recover

interest on the overpayment of estate tax pursuant to

Section 6611 of the Code, and claimed the limitation

on interest in the final sentence of Section 2055(e) (3)

unconstitutionally denied it equal protection of law.

The basis of Petitioner’s constitutional claim was that

the interest limitation created an arbitrary and irra-

tional classification between taxpayers (including char-

4

itable beneficiaries), and therefore violated the guar-

antee of equal protection of the laws contained in the

Fifth Amendment Due Process clause. Petitioner’s

claim for refund was disaliowed by the Internal Rev-

enue Service on August 17, 1976.

Petitioner brought a timely action in the United

States Court of Claims under 28 U.S.C. § 1491. The only

issue before the Court of Claims was whether the last

sentence of Section 2055(e)(3) of the Internal Rev-

enue Code denied Petitioner equal protection of the

laws in violation of the United States Constitution.

After hearing oral argument on the parties’ cross-

motions for summary judgment, the Court of Claims

held that the last sentence of Section 2055(e)(3) was

constitutionally valid.

In its opinion, the Court of Claims has decided an

important question of federal law that never has been,

but should be, considered by this Court, on whether

Congress can constitutionally discriminate between tax-

payers on paying or withholding interest on overpay-

ments of federal tax. Furthermore, the Court of Claims’

decision is in conflict with applicable due process deci-

sions of this Court.

There is no question that both the federal govern-

ment and the states are prohibited from denying equal

protection of the laws. Bolling v. Sharpe, 347 U.S. 497

(1954). The governing principle in equal protection

analysis is that any classification of persons (includ-

ing classifications of taxpayers) must be a reasonable

one, and the Court of Claims has correctly stated this

principle in its opinion (Appendix A, infra):

5

**. .. the classification must be reasonable, not arbi-

trary, and must rest upon some ground of differ-

ence having a fair and substantial relation to the

object of the legislation, so that all persons simi-

larly cireumstanced shall be treated alike .. .”’

(Royster Guano Co. v. Virginia, 253 U.S. 412, 415

(1920) ).

It is Petitioner’s position that the last sentence of

Section 2055(e)(3) of the Internal Revenue Code

creates an arbitrary and unreasonable classification of

taxpayers and charitable beneficiaries which has no ra-

tional relationship to Congress’ purpose in enacting

Section 2055(e)(3). That class consists of all estates

and trusts (and all charitable beneficiaries thereof)

whose governing instruments were amended in accord-

ance with the provisions of Section 2055(e)(3) be-

tween the years 1973 and 1977, and which, because of

Section 2055(e) (3), were entitled to recover interest on

overpayment of tax only for the period beginning 180

days after the filing of a claim for refund. Interest on

overpayments of estate tax arise from date of over-

payment where the deduction was allowed pursuant to

Treasury Regulations (which expired December 31,

1972), or where the deduction was allowable for any

reason other than Section 2055(e) (3). Section 2055(e)

(2) of the Code provides that no estate tax deduction

shall be allowed for the transfer of a remainder interest

in property to or for the use of a charitable organiza-

tion unless the interest is in the form of a qualified

charitable remainder unitrust, charitable remainder

annuity trust (described in Section 664), or pooled in-

come fund (described in Section 642(c)(5)). Under

Treasury Regulation § 1.664-1(f) (3), unqualified char-

itable remainders created after July 31, 1969 and

amended on or before December 31, 1972 were treated

6

as qualified ‘‘for all purposes”’ from, for example, the

date of the decedent’s death, if reformed wy all inter-

ested parties on a timely basis. Shriners Hospitals For

Crippled Children v. Maryland National Bank, 312 A.

2d 546 (Md. 1973). The recovery of interest on any

overpayment of income, estate or gift tax which result-

ed from reformation under the regulations was gov-

erned by Section 6611(a), which allows interest from

the date of overpayment. With the enactment of Sec-

tion 2055(e)(3) in 1974, however, and the completely

unexplained addition of the limitation on the recovery

of interest, a new, special class of overpayers was

created which was denied full recovery of interest on

overpayments.

In its opinion, the Court of Claims appears to sug-

gest that federal tax regulation is somehow different

from other legislation, and that the federal govern-

ment should be accorded more leeway in discrimina-

tion against certain taxpayers. The Court even states

that tax regulation ‘‘may indeed be arbitrary and still

withstand an equal protection challenge’’. (Appendix

A, infra.) However, to justify any such classification,

there must be a rational set of facts and circumstances

perceived by the legislature, and in creating the dis-

crimination, the legislature must have explicated its

support of some sound national policy. United States v.

Maryland Savings-Share Insurance Corporation, 400

U.S. 4 (1970). Cf., New Orleans v. Dukes, 427 U.S. 297

(1976). The Court of Claims has also implied that this

Court’s decision in WHYY v. Borough of Glassboro,

393 U.S. 117 (1968) should not be controlling, since it

was based on Commerce Clause principles, rather than

the Equal Protection Clause of the Fourteenth Amend-

ment.

mee

7

Petitioner submits that the Court of Claims has mis-

applied the principles of equal protection to this case.

While it is true that the tax in question in WHY Y was

a state tax, and the tax in the instant case is a federal

tax, the principles of equal protection are the same for

both cases. In WHYY, this Court determined that

there was no rational basis for distinguishing between

domestic and foreign nonprofit corporations insofar as

tax exemption was concerned, and nowhere in its opin-

ion did this Court intimate that the challenged statute

was unconstitutional because it imposed an undue bur-

den on interstate commerce.

The principle of equality of treatment for taxpayers

similarly situated has long been recognized, both by

this Court and by the Court of Claims. As stated by

Mr. Justice Frankfurter, ‘‘the Commissioner cannot

tax one and not tax another without some rational basis

for the difference’’. United States v. Kaiser, 363 U.S.

299, 308 (1960) (Frankfurter, J., concurring) ; Inter-

national Business Machines Uorp. v. United States, 343

F. 2d 914 (1965), cert. denied 382 U.S. 1028 (1966). It

is submitted that this principle of equality should gov-

ern the instant case.

In United States v. Maryland Savings-Share Insur-

ance Corporation, 400 U.S. 4 (1970), in turning back

an equal protection attack on Section 501(c) (14) of the

Code, this Court emphasized that not all classifica-

tions between taxpayers are so invidious as to warrant

being set aside:

‘Normally, a legislative classification will not be

set aside if any state of facts rationally justifying

it is demonstrated to or perceived by the courts.

8

Here the legislative history of H.R. 3297 affirma-

tively discloses that Congress had a rational basis

for declining in 1963 to broaden the exemption by

extending the cutoff date of § 501(c) (14) (B). Just

as a State may provide that after a specified date

newly established common carriers must obtain

state approval before entering into business so as

to prevent proliferation of such carriers and ex-

cessive use of the State’s highways, see Stanley v.

Public Utilities Comm’n., supra, similarly Con-

gress does not exceed its power to tax nor does it

violate the Fifth Amendment when it refuses to

exempt from tax newly formed corporations, the

multiplication of which might burden otherwise

valid federal programs.’’ 400 U.S. at 6-7.

Here, there is no set of facts in any governmental

record justifying or explaining the limitation. Even the

original draft of the bill’s explanation, before its in-

troduction, and the covering letter to the Congressman,

contain no facts or rationale to support what appears

to be a gratuitous action by an unknown staff employee

of the Joint Committee on Internal Revenue Taxation.

See Appendix E, infra.

In similar fashion, the rationale of a legislature,

through the hearing and report process, provided am-

ple support to permit the Court to uphold a ‘“‘grand-

father’’ clause. In this case, the limitation on interest

contained in IRC Seetion 2055(e)(3) has no record

whatever to support its purpose or reach. Since the

bill’s initial introduction in the House of Representa-

tives on April 20, 1972, through and including the

1976 amendment of Section 2055(e), there is not a

single word mentioned by the bill’s sponsors, nor in

hearings or committee reports, nor floor debate, as to

9

why the interest limitation exists.’ We take the Court’s

rationale on classification to mean that where a worthy

and rational purpose for a classification is explicated

by the legislature, in direct response to an apparent

pressing social need, there may be unequal protection of

the laws. But absent a well defined area of concern, and

a carefully articulated Congressional purpose, an eco-

nomic classification like this interest limitation offends

concepts of equal protection and due process. The Court

of Claims speculated upon reasons why the Congress

passed a law which contained a provision invidiously

classifying taxpayers by the payment of interest to

some and not to others. But a lawyer’s speculation is

hardly a rational ‘‘state of facts’’ under Maryland Sav-

ings-Share Insurance Corporation, supra, which serves

as justification for the classification here in question.

* As to original bill, see Cong. Rec. April 20, 1972; Cong. Ree.

July 24, 1972, S. 11516 (relating to S. 3841, a counterpart of H.R.

14513); Cong. Ree. October 16, 1972, S. 14802; Cong. Rec. Janu-

ary 30, 1973, February 22, 1973 (H.R. 3227 and 4606); Cong.

Ree. October 25, 1973, H. 9439; Cong. Rec. December 5, 1973 (H.R.

11785) ; S. Rep. 93-1063 (93rd Cong., 2d Sess., August 1, 1974) ;

Cong. Ree. August 13 ,1974, S 14854; H. Rep. 93-1405 (93rd

Cong. 2d Sess., October 1, 1974); Cong. Rec. October 11, 1974,

H 10509. As to extension, see Cong. Rec. September 29, 1975 (H.R.

9889); H. Rep. 94-1268 (94th Cong., 2d Sess. June 16, 1976);

Cong. Rec. June 22, 1976, H. 6370; S. Rep. 94-938 (94th Cong.,

2d Sess., June 10, 1976); H. Rep. 94-1236 (94th Cong., 2d Sess.,

September 14, 1976. Bill references are to various versions of IRC

Sec. 2055(e) (3). Congressional Record references are to daily edi-

tions of the Record. Because Petitioner’s counsel was so iniimately

involved in the legislative process leading first to enactment of

Sec. 2055(e)(3) in 1974 and thereafter to its extension, in 1976,

a complete legislative history of the provision is available for in-

spection, and can be supplied as an appendix to this Petition.

Counsel for Respondent has a set.

10

CONCLUSION

For the foregoing reasons, the Petition For Writ

Of Certiorari should be granted.

Respectfully submitted,

WILuiaM .J. LEHRFELD, Esq.

Attorney for Petitioner

1747 Pennsylvania Avenue, N.W.

Washington, D.C. 20006

Telephone No.: [202] 785-9500

APPENDIX

la

APPENDIX A

IN THE UNITED STATES COURT OF CLAIMS

No. 135-77

(Decided February 22, 1978)

First Nationa, Bank or Orecon, duly appointed Executor

of the Estate of Bertha E. Chambers and Trustee of the

Bertha E. Chambers Charitable Remainder Unrrrust v.

Tue Unrrep Srates

William J. Lehrfeld, attorney of record for plaintiff.

Webster € Chamberlain, of counsel.

Patricia B. Tucker, with whom was Assistant Attorney

General M. Carr Ferguson, for defendant. Theodore D.

Peyser and Donald H. Olson, of counsel.

Before Cowen, Senior Judge, Nicnots and Bennett,

Judges.

On the Parties’ Cross-Motions for Summary Judgment

Cowen, Senior Judge, delivered the opinion of the court:

This case raises the issue whether the last sentence of 26

U.S.C. § 2055 (e)(3) (Supp. V. 1975) violates the equal

protection clause of the 14th Amendment as included in the

Fifth Amendment’s due process clause.’ The sentence in

question will not permit interest to be paid to a taxpayer

*The inclusion of the equal protection clause in the Fifth

Amendment is now well settled. Bolling v. Sharpe, 347 U.S. 497

(1954) ; Bruinooge v. United States, 213 Ct. Cl. 26, 550 F.2d 624

(1977).

2a

until 180 days after he has filed a claim for refund, if the

refund is made possible by the reformation of a trust pur-

suant to section 2055(e)(3) for the purpose of permitting

a charitable deduction in accordance with section 2055(e)

(2)(A). We hold that the provision in issue withstands

plaintiff’s constitutional attack.

The case comes before us on cross-motions for summary

judgment and the facts are not in dispute. Plaintiff is the

executor of the estate of Bertha Chambers. Mrs. Chambers

died on September 29, 1973, and left a will which was ad-

mitted to probate in Oregon. Under the terms of the will a

charitable trust was to be established with the sister of the

decedent and two charities designated as income benefici-

aries and one of these charities designated as residual bene-

ficiary. Under the will as written, the bequests to the chari-

ties could not be deducted from the gross estate as chari-

table contributions, because the trust was not a qualifying

charitable remainder annuity trust, unitrust, or pooled in-

come fund as required for charitable remainder deductions

by 26 U.S.C. § 2055(e)(2)(A).? Therefore, after receiving

extensions of 12 months within which to pay the estate tax

due, plaintiff paid $583,401.40 in tax and $34,868.22 in 12-

month assessed interest to the Internal Revenue Service

(IRS).

In 1974, however, Congress enacted 26 U.S.C. § 2055(e)

(3) which, in the case of wills executed before September

21, 1974, creating charitable remainder interests unqualified

for deductions under section 2055(e)(2)(A), permitted ref-

ormation of these wills to meet the requirements of that

section. In accordance with section 2055(e)(3), plaintiff

obtained a reformation of the trust provisions in Mrs.

Chambers’ will so that the bequests to the charities would

be deductible in computing the Federal estate tax due.

* For a further discussion of this provision and its background,

see this court’s opinion in Eliis First Nat’l Bank v. United States,

213 Ct. Cl. 44, —, 550 F.2d 9, 11 (1977).

3a

Plaintiff and the IRS agreed that the refund of tax due as

a consequence of the reformation of the trust and resultant

increase in allowable deductions was $229,079.°

What plaintiff contests in this court is the constitution-

ality of the last sentence of section 2055(e) (3) on which the

IRS relied to deny plaintiff interest on its $229,079 over-

payment for the first 180 days after plaintiff filed its claim

for refund. The sentence provides:

* * * In the case of a credit or refund as a result of an

amendment or conformation made pursuant to this

paragraph, no interest shall be allowed for the period

prior to the expiration of the 180th day after the date

on which the claim for credit or refund is filed.

Plaintiff claims that this provision, applicable to wills

executed or trusts created before September 21, 1974, and

amended by December 31, 1977,* is arbitrary and illogical

when contrasted with the prior policy of the Department of

the Treasury. In 1969, when it enacted section 2055(e) (2)

(A), Congress generally allowed a deduction under prior

law in the case of wills executed on or before October 9,

1969, or trusts created before that date, if the donor died

before October 9, 1972, without having changed such will

or trust. Tax Reform Act of 1969, Pub. L. 91-172, § 201(g)

(4), 83 Stat. 487. The Treasury Department subsequently

issued regulations to minimize the adverse tax impact of

*In its petition to this court, plaintiff claimed that the IRS,

when it agreed to refund $229,079 out of the $583,401.40 tax orig-

inally paid, did not agree to refund a correct percentage of the

$34,868.22 in interest paid on account of plaintiff’s 12-month delay

in paying the state tax due. In its brief and at oral argument,

plaintiff has abandoned this claim.

‘The reformation provision originally applied only to instru-

ments amended by December 31, 1975, 26 U.S.C. § 2055(e)/3)

(Supp. V. 1975). This date was extended to December 31, 1977,

by section 1304(a) of the Tax Reform Act of 1976, Pub. L. 94-455,

90 Stat. 1520.

4a

section 2055(e)(2)(A) on improperly drawn instruments

executed after July 31, 1969, and amended to conform with

section 2055(e)(2)(A) on or before December 31, 1972.

These regulations provided that unqualified charitable re-

mainders created and reformed to qualify during this pe-

riod of time would be treated as qualified “for all purposes”

from the date of their original creation. Treas. Reg. § 1.664-

1(f)(3), 26 C.F.R. § 1.664-1(f)(3) (1973). Thus, just as

under present section 2055(e) (3), if estate taxes were over-

paid by an estate in this situation, the overpayment would

be refunded. The salient factor in the case at bar, however,

is that any claims for refund pursuant to these Treasury

regulations affecting instruments drawn and reformed be-

tween 1969 and 1973 were entitled to interest pursuant to

26 U.S.C. § 6611(a) * from the date of overpayment. There-

fore, plaintiff contends that the current provision denying

this interest for 180 days to estates amending instruments

between 1973 and 1977, created a new special class of tax-

payers who were denied full recovery of interest on their

overpayments, contrary to the 1969-73 policy of the Treas-

ury. Since plaintiff can perceive no logical reason for this

change in policy, it contends the new class of taxpayers

has been denied equal protection of the laws.°

The merits of plaintiff’s argument need not detain us un-

duly. We do not sit as a superlegislature to judge the wis-

dom or desirability of the challenged provision. New Or-

leans v. Dukes, 427 U.S. 297, 303 (1976); Ferguson v.

Skrupa, 372 U.S. 726, 731 (1963); Day-Brite Lighting, Inc.

v. Missouri, 342 U.S. 421, 423 (1952). As long as a suspect

° The provision reads: ‘‘Interest shall be allowed and paid upon

any overpayment in respect of any internal revenue tax at an

annual rate established under section 6621.’’ 26 U.S.C. § 6611(a)

(Supp. V 1975).

‘ Plaintiff also claimed in its petition to this court that the in-

terest limitation in section 2055(e)(3) constituted a taking with-

out just compensation in violation of the Fifth Amendment. In its

brief, plaintiff has abandoned this claim.

5a

classification, such as race, or an area of intermediate

scrutiny, such as sex, is not involved, the test to be ap-

plied to the challenged provision is the following:

* * * the classification must be reasonable, not arbi-

trary, and must rest upon some ground of difference

having a fair and substantial relation to the object of

the legislation, so that all persons similarly circum-

stanced shall be treated alike. * * * (Royster Guano Co.

v. Virginia, 253 U.S. 412, 415 (1920)).

Johnson v. Robison, 415 U.S. 361, 374-75 (1974) ; Bruinooge

v. United States, 213 Ct. Cl. 26, ——, 550 F.2d 624, 627

(1977); Fredrick v. United States, 205 Ct. Cl. 791, 797, 507

F.2d 1264, 1266 (1974). This is the so-called ‘‘minimum

rationality’’ or ‘‘conceivable basis’’ standard. The Supreme

Court has variously phrased the test as mandating that a

‘‘statutory discrimination will not be set aside if any state

of facts reasonably may be conceived to justify it.” Me-

Gowen v. Maryland, 366 U.S. 420, 426 (1961); Dandridge

v. Williams, 397 U.S. 471, 485 (1970).

In one case, Morey v. Doud, 354 U.S. 457 (1957) the Court

found an economic regulation to be an arbitrary classifica-

tion violative of equal protection. An Illinois statute did

not permit ‘‘eurrency exchanges’’ to sell money orders at

drug stores or grocery stores, and yet exempted the Ameri-

can Express Company from the restriction, apparently be-

cause the Company was an enterprise of unquestioned sol-

vency and high financial standing. The Supreme Court in-

validated this classification as arbitrary in the Morey de-

cision, but in a recent case, the Court expressly overruled

that decision. In New Orleans v. Dukes, 427 U.S. 297, 306

(1976), the Court stated:

* * * Morey was the only case in the last half century to

invalidate a wholly economic regulation solely on equal

protection grounds, and we are now satisfied that the

decision was erroneous. * * *

6a

We are not aware of any Supreme Court decision in recent

years holding that a Federal tax regulation subject to a

‘‘minimum rationality’’ test is violative of the equal pro-

tection clause.’ Moreover, the Court’s decision in New Or-

leans, supra, seems to clarify that at least with regard to

Federal tax regulations and other economic regulations, a

Federal court has very little room for disapproval of them

if any ‘‘state of facts reasonably’’ justifyies them. Id.

In fact, as we intimated in our decision in Bruinooge,

supra (213 Ct. Cl. at ——, 550 F.2d at 626), when a Federal

tax regulation is involved it is possible that the regulation

’ See, e.g., United States v. Maryland Savings-Share Ins. Corp.,

400 U.S. 4, 6 (1970). Plaintiff, however, in response to a question

at oral argument in the case at bar, proffered WHYY v. Borough

of Glassboro, 393 U.S. 117 (1968), as the strongest support for its

argument that the tax provision in question before this court vio-

lates equal protection. The plaintiff there challenged a New Jersey

statute which exempted New Jersey nonprofit corporations from

state real and personal property taxes while denying the same

benefit to a foreign nonprofit corporation operating in New Jersey.

The Court stated, in finding the statute did violate equal protec-

tion, that it was following a rule which

‘«* * ® has consistently held that while a State may impose

conditions on the entry of foreign corporations to do business

in the State, once it has permitted them to enter, ‘the adopted

corporations are entitled to equal protection with the state ’s

own corporate progeny, at least to the extent that their prop-

erty is entitled to an equally favorable ad valorem tax basis’.

(Id. at 119}.

This long-held rule of the Supreme Court, that state taxes which

discriminate against an out-of-state transactor in favor of some

local interest violate equal protection, is not applicable to the Fed-

eral tax regulation challenged at bar. The policy of disallowing

discriminatory state taxes is consistent with other Supreme Court

rules which prevent burdens on the free flow of interstate com-

merce. On the other hand, the only policy which applies to the

ease at hand is the long-held policy, discussed above in the text,

aguinst invalidating a Federal tax or other economic regulation as

violative of equal protection.

Ta

may indeed be arbitrary and still withstand an equal pro-

tection challenge. Mr. Justice Brennan, in his recent opin-

ion for the Court in Commissioner v. Kowalski, —— U.S.

46 U.S.L.W. 4015, 4020 (Nov. 29, 1977), remarked:

arguments of equity have little force in construing

the boundaries of exclusions and deductions from in-

come many of which, to be administrable, must be arbi-

——-**

However, we need not decide this further question, for the

interest limitation in issue before this court is rationally

justifiable.

We will not explore all of the reasons the Government

advances for justification of the provision in order to reach

our decision. We accept the Government’s argument that

section 2055(e)(3) is a wholly remedial provision, and that

the limitation on interest is an appropriate restriction on a

grace period provided by Congress for reformation of wills

and trust provisions by the estates of those persons who

failed to rewrite their wills after 1969 to comply with

section 2055(e)(2)(A). The fact that the Treasury Depart-

ment did not limit the payment of interest in its regulations

between 1969-73 does not prevent Congress from imposing

an appropriate restriction when it enacts a piece of purely

remedial legislation in order to benefit a taxpayer or, more

particularly, a charitable remainder interest designated by

the taxpayer.

; Plaintiff has attempted by the following arguments to

circumvent the long-standing precedent against invalidat-

ing on equal protection grounds a Federal tax regulation

such as the one in question here. First, plaintiff argues that

the interest limitation is irrational, because the purpose of

section 2055(e) (3) was to protect charitable beneficiaries of

certain unqualified charitable remainder trusts rather than

to penalize them by limiting their right to interest. This

8a

argument has no merit. There is nothing irrational about

a law which provides remedial legislation for charitable

beneficiaries, and at the same time limits the expense the

Government must undergo in effectuating these benefits.

Second, plaintiff contends the classification in question

must further a “legitimate” state purpose, meaning that it

is not enough for a court to find some rational basis to up-

hold the classification. Plaintiff cites McGinnis v. Royster,

410 U.S. 263, 270 (1973), for this proposition. A careful

reading of the McGinnis decision, however, reveals the

Court’s actual ruling that the “appropriate standard” for

decision is that the legislative classification in question

needs “only some rational basis” to be sustained. (emphasis

added) /d.

Third, plaintiff again cites McGinnis for the proposition

that the rational basis on which the classification is upheld

must be “articulated.” Plaintiff intimates that unless the

rational basis is articulated in the legislative history of the

statute itself, the challenged provision cannot meet con-

stitutional muster. This has never been the holding of the

Supreme Court, and it is not the holding of McGinnis. The

McGinnis decision itself appears to rely mainly on rational

bases enunciated by the state in its brief and at oral argu-

ment, not on the legislative history of the classification in

question there. Jd. In the absence of legislative history, the

methodology which this court recently used in determining

whether a challenged provision such as the one here violates

equal protection is set out in Bruinooge, (213 Ct. Cl. at

——., 550 F.2d at 627): “* * * we try to divine what Con-

gress left unstated [and] we resort to our own talents and

those of counsel to discern” the rationality of the classifica-

tion in question.

As we have shown, the law in the challenged area of equal

protection analysis has been well-settled for many years

9a

now-* Therefore, for the reasons set out in our opinion

above, the Government’s motion for summary judgment is

granted, and the plaintiff’s petition is dismissed.

Ina recent action involving this identical issue in the United

States District Court for the District of New Hampshire, Judge

Bownes saw so little merit in the plaintiff’s contentions that he

dismissed them with one sentence :

— © r The provision to the extent that it sets up a separate

class is reasonable and must be considered together with the

special deduction which it created.’’

Merchants Nat’l Bank v. United States, Civil Action No. 76-

(Nov. 29, 1977). cisectaaee

10a

APPENDIX I

United States Constitution, Amendment V

No person shall be held to answer for a capital, or other-

wise infamous crime, unless on a presentment or indictment

of a Grand Jury, except in cases arising in the land or naval

forces, or in the militia, when in actual service in time of

war or public danger; nor shall any person be subject for

the same offence to be twice put in jeopardy of life or limb;

nor shall be compelled in any criminal case to be a witness

against himself, nor be deprived of life, liberty, or property,

without due process of law; nor shall private property be

taken for public use, without just compensation.

lla

APPENDIX C

Internal Revenue Code of 1954, as amended (26 U.S.C.):

Section 2055(e). Disallowance of Deductions in certain

cases—

* . °

(2) 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), 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 ade-

quate 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 inter-

est is in a trust which is a charitable remainder an-

nuity trust or a charitable remainder unitrust (de-

scribed in section 664) or a pooled income fund (de-

scribed 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).

(3) In the ease of a will executed before December 31,

1977, or a trust created before such date, if a deduction is

not allowable at the time of the decedent’s death because of

the faiiure of an interest in property which passes from the

decedent to a person, or for a use, described in subsection

(a), to meet the requirements of subparagraph (A) of para-

graph (2) of this subsection, and if the governing instru-

ment is amended or conformed on or before December 31,

l2a

1977, or, if later, on or before the 30th day after the date

on which judicial proceedings begun on or before December

31, 1977 (which are required to amend or conform the gov-

erning instrument), become final, so that the interest is in a

trust which is a charitable remainder annuity trust, a chari-

table remainder unitrust (described in section 664), or a

pooled income fund (described in section 642(c) ( 5)), a de-

duction shall nevertheless be allowed. The Secretary may,

by regulation, provide for the application of the provisions

of this paragraph to trusts whose governing instruments are

amended or conformed in accordance with this paragraph,

and such regulations may provide for any adjustments in

the application of the provisions of section 508 (relating

to special rules with respect to section 501(c)(3) organiza-

tions), subchapter J (relating to estates, trusts, benefi-

ciaries, and decedents), and chapter 42 (relating to private

foundations), to such trusts made necessary by the applica-

tion of this paragraph. If, by the due date for the filing of

an estate tax return (including any extension thereof), the

interest is in a charitable trust which, upon allowance of a

deduction, would be described in section 4947(a)(1), or the

interest passes directly to a person or for a use described

in subsection (a), a deduction shall be allowed as if the

governing instrument was amended or conformed under this

paragraph. If the amendment or conformation of the gov-

erning instrument is made after the due date for the filing

of the estate tax return (including any extension thereof),

the deduction shall be allowed upon the filing of a timely

claim for credit or refund (as provided for in section

6511) of an overpayment resulting from the application of

this paragraph. In the case of a credit or refund as a result

of an amendment or conformation made pursuant to this

paragraph, no interest shall be allowed for the period prior

to the expiration of the 180th day after the date on which

the claim for credit or refund is filed.

13a

APPENDIX D

Treasury Regulations (26 C.F.R.):

§ 1.664-1(f)(3). Amendment of post-1969 trusts. A trust

created (within the meaning of applicable local law) subse-

quent to July 31, 1969, and prior to December 31, 1972,

which is not a charitable remainder trust at the date of its

creation, may be treated as a charitable remainder trust

from the date it would be deemed created under § 1.€64-1(a)

( 4} and (5)(i) for all purposes provided that all the follow-

ing requirements are met:

(i) At the time of the creation of the trust, the governing

instrument provides that an organization described in sec-

tion 170(c) receives an irrevocable remainder interest in

such trust.

(ii) The governing instrument of the trust is amended

so that the trust will meet the definition of a charitable

remainder trust and, if applicable, will meet the require-

ment of paragraph (a)(5)(i) of this section that obligation

to make payment of the annuity or unitrust amotnt with

respect to property passing at death begin as of the date of

death, before December 31, 1972, or if later, on or before the

30th day after the date on which any judicial proceedings

which are begun before December 31, 1972, and which are

required to amend its governing instrument, become final.

In the case of a trust created (within the ineaning of appli-

cable local law) subsequent to July 31, 1969, and prior to

December 31, 1972, the provisions of section 508(d)(2)(A)

shall not apply if the governing instrument of the trust

is amended so as to comply with the requirements of section

509(e) before December 31, 1972, or if later, on or before

the 30th day after the date on which any judicial proceed-

ings which are begun before December 31, 1972, and which

are required to amend its governing instrument, become

final. Notwithstanding the provisions of paragraphs (a) (3)

and (a)(4) of §§ 1.664-2 and 1.664-3, the governing instru-

l4a

ment may grant to the trustee a power to amend the govern-

ing instrument for the sole purpose of complying with the

requirements of this section and § 1.664-2 or § 1.664-3 pro-

vided that at the creation of the trust, the governing instru-

ment (a) provides for the payment of a unitrust amount

described in § 1-664-3(a)(1)(i) or an annuity which meets

the requirements of paragraph (a)(2) of §§ 1.664-2 or

1.664-3, (b) designates the recipients of the trust and the

period for which the amount described in (a) of this sub-

division (ii) is to be paid, and (c) provides that an organi-

zation described in section 170(¢) receives an irrevocable

remainder interest in such trust. The mere granting of such

a power is not sufficient to meet the requirements of this

subparagraph that the governing instrument be amended in

the manner and within the time limitations of this subpara-

graph.

(iii) (a) Where the amount of the distributions which

would have been by the trust to a recipient if the amended

provisions of such trust had been in effect from the time of

creation of such trust exceeds the an.ount of the distribu-

tions made by the trust prior to its amendment, the trust

pays an amount equal to such excess to the recipient.

(b) Where the amount of distributions made to the recip-

ient prior to the amendment of the trust exceeds the amount

of the distributions which would have been made by such

trust if the amended provisions of such trust had been in

effect from the time of creation of such trust, such excess

is repaid to the trust by the recipient.

See paragraph (d)(4) of this section for rules relating to

the year of inclusion in the case of an underpayment to a

recipient and the allowance of a deduction in the case of an

overpayment to a recipient. A deduction for a transfer to a

charitable remainder trust shall not be allowed until the

requirements of this paragraph are met and then only if

the deduction is claimed on a timely-filed return (including

extensions) or on a claim for refund filed within the period

of limitations prescribed by section 6511(a).

15a

APPENDIX E

March 28, 1972

Honorable James A. Burke

House of Representatives

Washington, D.C. 20515

Dear Mr. Burke:

_This refers to your letter requesting that we prepare

a bill for you extending the period during which it is pos-

sible for interested parties to amend or reform charitable

remainder trusts so that they will comply with isi

provisions of

the 1969 Tax Reform Act. Pursuant to your request, I am

enclosing a draft bill and an explanation of the bill.

We note that the Shriners Hospital for Crippled Children

has suggested that the amendment period be extended until

July 31, 1979. This would mean that the rules applying to

charitable remainder annuity trusts and charitable re-

mainder unitrusts, which were enacted in 1969, would not

become effective until the end of 10 full years after their

enactment. We believe that a 10-year period is probably too

long and results in an unnecessary postponement of the

application of the legislation enacted in 1969.

The reason for approving an extension of the transitional

rules approved in 1969 is to allow a period of time for in-

dividuals drafting instruments of this sort to become fa-

miliar with the new rules in order that they may properly

draft instruments in compliance therewith. It is believed

that this educational process should, and will, be accom-

plished before the expiration of a 10-year period. We have,

therefore, provided in the bill which we have drafted for

you, that the period during which the governing instru-

ment may be reformed is to expire on July 31, 1975. This

will permit, therefore, an aggregate period of 6 years dur-

ing which it will be possible to reform instruments so that

they comply with the legislation enacted in 1969 regarding

charitable remainder trusts.

Sincerely yours,

Laurence N. Woopwortu

16a

Burke of Massachusetts

To amend the Internal Revenue Code of 1954 to provide for

an estate tax charitable trust in the case of certain

charitable remainder trusts.

That (a) section 2055(e) of the Internal Revenue Code

of 1954 (relating to the disallowance of deductions in cer-

tain cases) is amended by adding at the end thereof a new

paragraph to read as follows:

“(3) If a deduction is not allowable at the time of

decedent’s death, because of the failure of an interest

in property which passes from the decedent to a per-

son, or for a use, described in subsection (a), to meet

the requirements of subparagraph (A) of paragraph

(2) of this subsection and if——

“(A) the governing instrument of the trust is

amended on or before the 30th day after the date

on which judicial proceedings begun before July

31, 1975 (which are required to amend the govern-

ing instrument) become final, so that the interest

is in a trust which is a charitable remainder an-

nuity trust or a charitable unitrust (described in

section 664); and

“(B) the amendment to the governing instrument

is valid under the law of the jurisdiction of the

situs of the trust,

a deduction shall nevertheless be allowed upon the

filing, after the amendment to the governing instru-

ment is made, of a timely claim for credit or refund

(as provided for in section 6511) of an overpayment

resulting from the application of this paragraph. In

the case of a credit or refund as a result of an amend-

ment made pursuant to this paragraph, no interest

shall be allowed for the period prior to the expiration

17a

of six months after the date on which the claim for

credit or refund is filed.”

(b) The amcadinent made by this Act shall apply in the

case of decedents dying after December 31, 1969.

Explanation of the Bill

The Tax Reform Act of 1969 provided that an estate tax

charitable deduction is allowed for a charitable gift of a

remainder interest in trust, where there is a non-charitable

income beneficiary, only if the trust is either a charitable

remainder annuity trust or a charitable remainder uni-

trust. These general limitations are provided so that the

amount received by the charity will be consistent with the

charitable deduction allowed to the donor on the creation

of the trust. An annuity trust is one which specifies in

dollar terms the annua! amount of the annuity which is to

be paid to the income beneficiary. The unitrust is one which

specifies that the income beneficiary is to receive annual pay-

ments based on a fixed percentage of the fair market value

of the trust assets, as determined each year.

Under the 1969 legislation, these provisions apply with

respect to transfers in trust made after July 31, 1969. By

regulation and administrative announcement, the deadline

for emending governing instruments of charitable trusts

(created after July 31, 1969), so that they conform with the

new annuity trust or unitrust rules has been extended until

July 31, 1972. If a trust does not qualify under these new

rules a testamentary transfer in trust will not qualify for

an estate tax charitable deduction. Since lawyers drafting

instruments creating charitable remainder trusts are gen-

erally unfamiliar with the new rules, many instruments

creating trusts which provide for remainder interests to

charity will not qualify for a charitable deduction.

18a

This bill, therefore, provides that if the governing instru-

ment of a trust providing for a charitable remainder in-

terest is reformed (pursuant to State law) before July 31,

1975, so that it complies with these new rules, an estate tax

charitable deduction will nevertheless be allowed. The bill

will resuit in an aggregate transitional period of six years,

from the effective date of the 1969 Act rules, during which

time it will be possible for individuals drafting instruments

of this type to become familiar with the new rules and to

draft instruments in compliance with them.