Amicus Curiae Brief — Henderson v. Commissioner

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In THE

Yourt, U.S

JUN 7% 1971 |

E. ROBERT SEAVER, CLERK

| Supreme Court of the United States

Octoser Term, 1970

No.=l380 lig -3236.

Estate or Linus Mac Munn Stew ART, Deceased,

W. ALAN HENDERSON, Executor,.

Petitioner,

v.

a

Commission ER OF INTERNAL REVENU E,

Respondent

ON PETITION FOR A WRIT OF CERTIORARI TO. THE

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF F OR

THE NEW YORK STATE BANKERS ASSOCIATION,

TRUST DIVISION, AND THE CORPORATE FIDU-

CIARIES ASSOCIATION OF NEW YORK CITY, AS

AMICI CURIAE, IN SUPPORT OF THE PETITION

- FOR A WRIT OF CERTIORARI .

Hewirr A. Conway

KeLiey Dryr Warren CLARK

Carr & Exuis

' 350 Park Avenue y

New York, New York 10022

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TABLE OF CONTENTS

PAGE

Statement of Interest of Amici en eR MADR ies? 1

Question in Issue... iis see RSAC 2

Summary of Argument ee ataaunild ERP

Argument ....... jE ee reek aE a ; ! 4

Background ot

(1) “A changed interpretation of the law by the In-

_, ternal Revenue Service in 1960 Memarelideniescasn ne. 4

Reasons Why the Petition Should Be Granted ...._ 8°

(1) Intervention by this Court is necessary to re-

solve conflicts in already decided cages and pro-

vide a rule of law for the proper disposition: of

other cases now being disputed in administrative |

proceedings within the Internal Revenue Ser-

vice and. in court ial 9

(2) Intervention by this Court is necessary to pre-

vent difficult and extensive future litigation in

the federal courts 22a 11

The Merits of Petitioner’s nine ee 13

(1) The additional discretions conferred do not ma-

terially increase the power of the trustee to shift

economic interests between the beneficiaries .... 14

(2)

PAGE

The Service’s valuation tables are not specially

designed for valuing trust interests. They are

validly ‘used for that purpose only because it is

assuined that trustees’ discretions will be im-

; partially and fairly exercised. Only on this

assumption is the value of any charitable re: °

(3)’

(4)

mainder interest “presently ascertainable” ’........

The additional discretions conferred are not in-

tended to favor the income beneficiaries over the

charitable remaindermen. There is no reason to

believe they will not be impartially and fairly

CRIN 2 Foi rest serreeccorssnacderscongasss deuanaauetiaaaccne

The chance that the charitable remainder here

in question will not beqome effective is so remote

as to be negligible. Its value is deductible ........

Conta ~ 0 cumineanatel masa: anaes

Cases:

Avuruoririrs Crrep

>

18

24

"95

' Bankers Trust Co. v. United States, 308 F. Supp. 545, .

70-1 U.S. Tax Cas. Para. 12,653, 25 Am. Fed. Tax

R. 2d 70-1509 (S.D.N.Y. 1970), affirmed on another

issue, —— F.2d ——, 71-1 U.S. Tax Cas. Para.

12,748, 1971 27 Am. Fed. Tax R. 2d Para. 148,460

(2d 8S Se © Caen dt aan eay ; 9,

‘adie: of Clark, 275 N.Y. 1, 9 N.E. 2d 753 (1937) ..

Connor v. Hart, 157 Conn. 265, 253 A.2d 9 (1968) ........

Matter of Curley, 245 App. Div. 255, 280 N.Y.S. 80

(2d Dept. 1935), aff’d without opinion, 269 N.Y. 548,

199 N.E. 665° (1985) ..............

23n

S

24n

' PAGE

Doss v. United States, Civil Action 5-693 (N.D. ‘Tex.

1971) mesial

First National Bank in ‘Palm. Beach v. United States,

— F.2d —,- 71-1 US. Tax Cas. Para. 12,777.

(5th Cir. 1971) ssrttaseeseesshnnsseessesegeeeray 10, 120, 18, 20, 21n

Florida National Bank at. Lakeland v. United States, »

F.2d » (1-1 U.S. Tax Cas. Para: 12,771,

27 Ant. Fed. Tax R. 2d Para. 147,568 (5th Cir.

1971)

Estate of Frank, N.Y.L.J. Feb. 24, 1971 at 20, col. 3

coneusabteuntsnscaisnastoagsnsasehintsansasssnssanessecianay 23n

Gardiner v. United States, 69-2 U.S. Tax Cas. Para.

12,628, 24 Am. Fed. Tax R. 2d 69-6108 (D. Ariz.

TOD) navsncctecnccces cniteiecbOoreslebuensteniekasine cot iS 6n, 11

25 Am. Fed. Tax R. 2d 70-1629 (M.D.N.C: 1970) .. 10.

e

i

Matter of Heinrich, 195 Mise. 803, 90. N.Y.S. 24 805

(Sur. Ct. Monroe Co. 1949) oo. ccccccceccceeee 23n

Henslee vy. Union Planters Bank, 335 U.S. 595 (1949) 20

Ithaca Trust Company v. United States, 279 U.S. 151

(1929) a :

Marold vy. United States, 322 F.“Supp, 664, 27 Am. Fed.

Tax R. 2d Para. 148,397 (D.N.J. 1970) debbiniseieialitcansets 10

Lstate of Phyltis W. McGillicuddy, 54 T.C. 315 (1970) 9:

Merchants National Bank v. Commissioner, 320 US.

256 (1943) | | 9, 20

es,

-——, 71-1 U‘S. Tax Cas. Para. 12,744, 27 Am. Fed.

Tax R. 2d Para. 147,565 (5th Cir. | 7n, 10,20 |

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SIE TT OPER. LTE IE EST, NY SR ASU ae NNT Segre Ti

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iv

PAGE

Matter of Muller, 24 ‘N.Y. 2a 336, 248 N.E. 2d 164

(1969)... ‘ } veeeeeee 10, 23n

Old Colony Trust Company v. Silliman, 352 Mass. 6,

Pe es ce akc ecctanees 22

Old Colony Trust Company v. United States, 423 F.2d

601, 70-1 U.S. Tax Cas. Para. 12,667, 25 Am. Fed.

' Tax R. 2d 70-1549 (1st Cir. 1970). ..... ssatiatinecnenianss Oy D

Peoples Trust Co. of Bergen County v. United States,

311 F. Supp. 1197, 70-1 U.S. Tax Cas. Para. 12,658, |

25 Am. Fed. Tax R. 2d 70-1531 (D.N.J. 1970). 2... 9

Sternberger’s natate, Commissioner v., 348 US. 187

AEs SORT Fa Se 25

Estate of Lillie MacMunn Stewart, 52 T.C. 830 (1969) 6n

- Matter of Talbot, 170 Mise. 138, 9 N.Y.S. 2d 806 (Sur.

Ct. Orange Co. 1939) .. ipciceade 23n

Estate of Toulmin v. United States, —— F., Supp. - -——,

71-1 U.S. Tax Cas. Para. 12,775, 27 Am. Fed. Tax

_R. 2d Para. 147,560 (S.D. Qhio 1971) . 10

United States. v. Provident Trust Co., 291: US. 272

(1934) i Ear OW Oa aaaa e < a

Statutes: | * }

Florida Statutes Annotated

Section I at xf . 12n

Section 690.07 0.....-:.ccccec0--- Vena ‘eeee 12

Internal Revenue Code of 1954 .

ection 170(£)(3)(A)* —..22.-- 2 Posies 5n

a ne . 13

Vv

| PAGE

sca se bee en Ne . 6n

- Section 2055(e) SS Sea ea rcmaei as Re 5n

- Section 2522(e)(2)(A) Sanita, . Sn

Laws of New York, L. 1936, ¢. 234 Ne RROAN SOR AMAR Seah 23n

New York Estates, Powers & Trusts Law

| Boden 6-44 oo ee (sicieoiciat

regener ips ict EE ON ED 23n

Cee TERI) i 15

Public Law No. 91- i72, 83 Stat. 549

-saispeiac Spier A ENE ET BE “es

Section 201(g) ideas (BE) .. uhsantpstdcacheeontiancdsebeccieniscd i 6n

Beviuea Uniform Principal and Income Act ©

Section 2 saecnnaiinstenniiinnnsanicnslimnadjungenatannanshiapeanedennsast cece’ 23n

Section rs ioceeninetiiage aidistaa cn aacae 12n,15 :

Uniform Prineipal and Income Act E

_ Section 6 sateen attentions trsiatecinsaishilieen 12n

| Virginia Gide.

; Section 64.1-57 (Supp. 1970) ieiliotccilsoten ah saaeontnatigiacns nace 24n

Miscellaneous: ;

Rey, Rul. 55-620, 1955-2 Cum. Bull Se

Rev. Rul. 60-385, 1960- 2 Cum. Bull. 77-20: »---4, 5n, 17

Bogert, The Law of Trusts and Trustee, Section

612 (2d Ed. 1960, Supp. 1970) ....\...... ......-16n, 21n

IIT Scott on Trusts (3d Ed. 1967) )

Section 232 et a 14, 14n

Section 236.3 Liana

Bocemer eto verseeemetee peepee oe Piney

ai PAGE

Section 236.6 ...... | : ww 18n

Section 236.10 2 : gohan 13n

or

‘Taggart, Charitable Deductions for Transfers of Re- )

mainder Interests Subject to Invasion, 21 Tax L. Rev.

535 (1966) Aen RUA Saat 20

‘Wall Street Journal, May 21, 1971 ........... islet 15n

sont . \

ratte os |

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ae : '. Iw tHe | sie j

. Supreme Court of the United States a

| Ocroser Term, 1970 F

No. 1780 .

Estate 6r Liu Mac Muyn Stewart, Deceased, E

_W. Azan Henperson, Executor, | gE

Petitioner, E

: “y,. F

CoMMISSIONER OF INTERNAL REVENUE, : is ;

_- Respondent. ~_ |

_ ON PETITION FOR A WRIT QF CERTIORARI TO THE .

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ q

: anak BRIEF FOR | i

THE NEW YORK STATE BANKERS ASSOCIATION, E

TRUST DIVISION, AND THE CORPORATE FIDU. ©

- CIARIES ASSOCIATION OF NEW YORK CITY, AS — a

AMICI CURIAE, IN SUPPORT OF THE’ PETITION 3

.

BOR A WRIT OF CERTIORARI

Statement of Interest of Amici Curiae t [

The New York State Bankers Association, Trust Divi- : :

sion,’ and The Corporate Fiduciaries Association of New B~.

ag

1 The-New York State Bankers Association consists of 281 state

* and national banks and trust companies engaged in commercial

banking activities in New York. Its Trust Division has 126 mem- :

* bers; being virtually all of the hanks and trust companies actively ~

exercising personal trust powers in the state.

2

York City? appear herein as Amici Curiae, with the consent

of the parties, in representation of the beneficiaries of the

_™many trusts their members are now and hereafter will be

administering that are adversely affected: by the decision

of the Court of. Appeals for the Third Circuit in this ‘case.

Question in Issue

Whether charitable remainder gifts in trust after income

interests are allowable charitable deductions under the

various federal tax laws when the governing instrument.

‘gives the trustee more administrative discretion than state

law alone would provide. | : .

‘Summary of Argument

- As a result of a change’ in its interpretation of the law

in 1960, the Internal Reverse Service has since then been

denying deductions for- remainder interests following in-

come interests in trusts when the governing instrument

gives the trustee more administrative discretions than state |

law alone would provide. — ;

The ‘Service's attack on the deductibility of charitable

remainders following income interests succeeded in Con-.

gress in 1969. In the Tax Reform Act of 1969, Congress:

_? The Corporate Fiduciaries Association of New York City is

comprised of:trust companies, state and national banks maintaining

‘trust departments or engaging in fiduciary transactions which have

their principal offices in the City of New York: These are Bankers .

Trust Company, The Chase Manhattan Bank, N.A., Chemical Bank,

Fiduciary Trust Company of New York, First National City Bank,

Irving Trust Company, Kings Lafayette Bank, Manufacturers

Hanover Trust Company, Marine Midland Grace Trust Company

of New York, Morgan. Guaranty Trust Company of New York,

National Bank of North America, Schroder Trust Company, The

Bank of New York, Underwriters Bank and Trust Company and °

. United States Trust Company of New York. . ee

%

Dr ! z : . 3

permitted no estate, gift or income tax charitable deduction

for a charitable remainder interest following ‘an income

interest in trust. Only remainders in “charitable remainder

annuity trusts” and “charitable remainder unitrusts” are

deductible wnder the new law. However, because of ‘the

equities: involved, Congress made the new rules entirely.

prospective in operation. The case at bar and similar cases

involve a retroactive application of the Service’s changed

interpretation. 7 j

This court should grant the petition for certiorari to re-

solve conflicts in already decided cases, to provide a rule of

law for the proper disposition of numerous other cases

jow being disputed within the Internal Revenue Service

* and in the couris, and to prevent difficult and extensive

future litigation in the federal courts. peak

Extensive future litigation will be avoided if the de-

- cision below is corrected. The additional discretions eon-

ferred in the governing instrument: do not materially -in-

crease the power of the trustee to shift economic interest

between the beneficiaries; the settlor evidenced no intent

that these additional discretions should .be exercised par-

tially; and there is no reason to believe that the trustee:

will use them any less fairly and impartially than its other

discretions. The Service's estate tax valuation tables, which

assume that all the discretigns of a trustee will be impar-

tially and fairly exercised, are therefore applicable to

value the charitable remainder in question, and it is “pres-

ently ascertainable” thereunder, As the ‘chance that this

charitable remainder will not become effective is so 'remote

as. to be negligible, its value is deductible. |

yes 3 PERE

Weyer TS teen cnet st.

Argument

Background

(1) A changed interpretation of the law by the Internal

Revenue Service in 1960.

This case is a product of a changed interpretation of

the, tax law by the Internal Revenue Service announced °

only by the issuance of Revente Ruling~ 60-385, 1960-2

Cum. Bull. 77, which held that a .charitable’ remainder .

‘interest in trust was not presently ascertainable and

severable from the noncharitablé’ income interest when

capital gains dividends of: regulated investment companies

- were allocable to income or could in the trustee’s disere-

_- tion be so allocated. Prior to that time, the Service had

never intimated the slightest concern’ that the breadth

of a trustee’s administrative discretion or special alloca-

tion provisions in the governing instrument might affect

deductibility. In fact, in Revenue Ruling 55-620, 1955-2

Cum, Bull. 56, which. Revenue Ruling 60-385. overruled,

the:Service had specifically held that the remainder interest

was deductible whether the capital — dividends were

alloeable. to principal or income. :

. Most ef the cases that. have been litigated up to now

involve discretionary powers ‘to allocate receipts and dis-

~ bursements betw een principal’ ay.d -income. ‘Sometimes

these powers accompany Broad investment. powers, as in

the case at bar. However, in Doss v. United States, Civil

Action 5-693 (N.D. Tex. May 20, 1971), the deduction was

disallowed by the Internal Rev enue Service‘ solely on the

ground that the trustee’s ‘broad discretionary investment

powers would enable her to intest in assets whose returns

under: the Texas Tfust Act would be required to be appor-

tioned in whole or in part to the income beneficiary.

~

5

~- Tt is only now apparent that the Service’s policy since °

1960, when it changed its interpretation of the law, has

been to attack the deductibility of all charitable remainder

interests preceded by income interests in trust, whenever

the trustee has been given any more administrative discre-

tion in the governing instrument than state law alone

would confer? . -

(2): Congressional response to the Service's changed inter-

pretation—The Tax Reform Act of 1969

The Service’s attack succeeded in Congress in 1969.

The Tax Reform Act of 1969 allows no’ estate, gift or

income tax charitable deduction for a remainder interest ©

following an income interest in trust. Such trusts will

hereafter sometimes be referred to as “charitable remainder

income trusts” in accommodation to the terminology used

in the Tax Reform Act to refer to other kinds of charitable

remainder trusts. For the ‘remainder to be deductible

* Revenue Ruling 60-385, supra, was issued in December 1960,

seven months after the irrevocable trust agreements in the case at

bar were executed. The Ruling was in terms applicable only to

trusts made after 1960, so its precise holding with respect to capital

gains treated as income is not applicable to Mrs. Stewart’s trusts.

_ A serious tax policy question exists whether the Service’s changed

interpretation of the law was go extreme that the Commissioner ~

abused his discretion in failing.to announce and explain it; also,

in his failure to make it entirely prospective in operation. Many

wills and trust agreements prepared in all good faith that became

effective, or will become effective, between January 1, 1961 and.

October 9, 1972 and are now or will be in litigation would have

been rewritten to conform to the changed rules if the draftsmen

had only known new rules were in effect ang what they were. .

* Pub. L. No. 91-172, §201 (Dee. 30, 1969), 83 Stat. 549, enacting

the following provisions of the Internal Revenue. Code: Estate ne

Int. Rev. Code §2055(e)(2)(A). Gift taz—Int. Rev. Code §2522

(c)(2)(A). Income tar—Int. Rev. Code §170(f) (2) (A). Remain-

der interests in so-called pooled income funds, which are entirely

different from the private trust arrangements here involved, are.

also deductible. ° -

6

under the new law, the precedent interest must be in the

form of an annuity (“charitable remainder annuity trust”) -

or in the form of a specified percentage of the value of .

the trust principal determined at least annually (“char-

itable remainder unitrust”).5 Use of a definite amount or

a definite mathematical formula to dete-mine the non-

‘exempt beneficiary’s interest was apparently designed to

eliminate the -trustee’s discretion and, therefore, insure

that charity would actually receive the full benefit of the

deduction meee

Uilikesthe Servidé, Congress made the new rules apply

only prospectively for estate tax purposes—to trusts and

wills of decedents dying after December 31, 1969, with

a grace period for irrevocable trusts established on ‘or °

before October 9, 1969 and revocable trusts and wills

written on or before October 9, 1969 of settlors and testa-.

tors who die before October 9, 1972 without changing or

repiblishing them.’ In adopting these effective dates,

Congress unmistakably endorsed the continued deductibility

of charitable interests in charitable remainder income

trusts that became effective prior to January 1, 1970 or

before the end of the grace period, if elma

—___—_— ~*~

* Charitable remainder annuity trusts and unitrusts are defined

in new Int. Rev. Code §664. .

® One cannot help commenting, however, that in the ease of the

charitable remainder annuity trust, the taxable annuitant seems to

receive all the protection, the charity being more than ever depen-

dent on the trustee to act for its benefit and make other than the

most conservative kinds of investments.

7 Pub. L. No. 91-172, §201 ¢g) (4) (A)-(B).

* It is important in thjs connection that the Tax Court’s decision _

‘below in favor of the taxpayer, 52 T.C. 830, which the entire Tax

-Court reviewed without dissent, was: handed down on August 14,

1969. Gardiner v. United States (not officially reported), 69-2 U. s.

Tax Cas. Para. 12,628, 24 Am.Fed. Tax R.2d 69-6108 (D. Ariz.)

had previously been decided i in taxpayer’s favor, on May 21, 1969:

7

>,

The Present Chaotic State of the Law

It is apparent from the Service’s zealous litigation of

this and related cases, and its continuing administrative

policy of denying the charitable deduction whenever the

governing instrument grants the trustee any additional

discretion over that provided by state law, that the Service —

is not satisfied with Congress’ prospective application of

its new interpretation of the law, but wishes it to be applied

retroactively to as many charitable remainder income

trusts as possible. .

The government’s success in the Court below has effec-

tively frustrated the purpose of the grace period provided

by Congress—to give affected taxpayers. and their counsel

reasonable time to familiarize themselves with the new

law before requiring substitution of charitable remainder

annuity trusts and unitrusts for existing arrangements.

So strange and awkward are the new trust entities, and

so technical and complex are the tax and administrative

problems they create, ‘that at this writing (June 2, 1971),

. final regulations have yet to be issued respecting them.

Thus, no estate planner at the present moment knows

- what either the old law or the new law is; and he cannot

accommodate to the decision of the Court below by amend-

ing a pre-October 10, 1969 revocable -trust or making a

_ Thereafter, on September 2, 1969, Miami Beach First National

' Bank v. United States (not officially reported), 69-2 U.S. Tax Cas.

Para. 12,627, 25 Am.Fed. Tax R.2d 70-1502 (S.D. Fla.), reversed,

¥r F.2d ——, 71-1 U.S. Tax Cas. Para. 12,744, 27 Am.Fed. Tax .

-2d Para. 147,565 (5th Cir. 1971) was also decided for the tax-

payer. No decision in any court favoring the Service's ‘position

was-handed down until 1970. Hence, the law was wholly favorable

to taxpayers when the grace period provisions were first added to

‘the Tax Reform Act by the Senate Finance Committee in its. bill

introduced on November 21, 1969, and when the. Tax Reform Act

became law. ae

Vi Peete eae etaamon,

- 8

“eodicil to a pre-October 10, 1969 will, for that would take

him out of the. grace period. Only this Court’s prompt

‘review of the decision below will resolve tke old-law part

of his dilemma,’ ,

Reasons Why the Petition Should Be Granted

In its Petition, taxpayer cites several valid legal reasons,

particularly a direct conflict between the decision of the

Third Circuit in this case and the First’ Cireuit’s holding

in Old Colony Trust Company v. United States, 423 F.2d

601, 70-1 U.S. Tax Cas. Para. 12,667, 25 Am.Fed. Tax R.2d

70-1549 (1st Cir. 1970). Our membérs fully subscribe to

Petitioner’s reasoning and conclusion. However, they have

two particular duties to their beneficiaries that are ‘here

directly. involved: first, their duty to keep trust administra-

tion expenses—specifically, litigation expenses—to a mini- .

mum; and second, their duty to resist illegal tax claims by

litigation, if necessary. This brief accordingly stresses the

need for prompt settlement of existing widespread contro-

versy and avoidance of a large number of needless disputes’

in the future as the primary reasons why this Court should © ~

A

review the decision below.

° If the decision of the Court below and the more recent decision

of the Court of Appeals for the Fifth Cireuit in First National

Bank in Palm Beach v. United States, 71-1 U.S. Tax Cas. Para.

12,777 ,(5th Cir; May 7, 1971), are correct, the grace period was

nothing but a trap for anyone who relied on it and died after

October 9, 1969 and before January 5, 1971, the date of the decision

below, leaving a will giving any extra discretion to the trustee.

=

(1) Intervention by this Court is necessary to resolve con-

flicts in already decided cases and provide a rule of

law for the proper disposition of other cases now being

_ disputed in administrative proceedings within the In-

ternal Revenue Service and in court

As a result of the Service’s general attack on charitable

remainder income trusts, the decided cases involving .the -

issue herein are already numerous :\

First Circuit: The Tax Court decided against the govern-

ment in a case involving broad discretionary allocation

‘ powers, applying Massachusetts law, in Estate of Phyllis

W. McGillicuddy, 54 T.C. 315 (1970). The government. did

not appeal to the, Court of Appeals which, however, cited

the case with approval in Old Colony Trust Company ‘v.

United States, 423 F.2d 601, 70-1 U.S. Tax Cas. Para,

12,667, 25 Am.Fed. Tax R.2d 70-1549 (1st Cir. 1970). As

petitioner states in the petition herein, the decision below

conflicts directly with the Old Colony Trust Com case,

the only possible distinction being a formal ot that the

cases arose under different sections of the estate tax law.

Second Circuit: J udge Lloyd F: McMahon ruled adversely

.

‘to the government in a’ case that cannot: successfully be

distinguished from -the case at bar, Bankers Trust Co. v.

United States, 308 F.Supp. 545, 70-1 U.S. Tax Cas. Para.

12,653, 25 Am.Fed. Tax R.2d 70-1509 (S.D.N.Y. 1970—gen-

eral discretionary powers under New York law), affirmed

on, another issue, 71-1'U.S. Tax Cas. Para, 12,748, 27 Am.

Fed. Tax R.2d Para. 148,460 (2d Cir. 1971). The govern-

ment: not having chosen to appeal this issue in Bankers

Trust case, Judge McMahon’s ruling is the law in the

- Second Circuit.

Third Circuit: The case at bar. In addition, the Court of

Appeals has before it an appeal Peoples Trust -Co. of

Bergen County v. United States, 311 F.Supp. 1197, 70-1

U.S. Tax Cas. Para. 12,658, 25 Am.Fed. Tax R.2d°70-1531

PENRYN POG I A

ea dh ae ial

CRP ZI

AAD RAGES IS Mer arr anne Lae STI EIS

10

(D.N.J. 1970) (capital gains dividends. from mutual funds’

—New Jersey law—held for taxpayer). Also arising under

New, Jersey law was Marold v. United States, 322 F.Supp.

664, 27 Am.Fed. Tax R.2d Para. 148,397 (D.N.J. 1970)

involving’ broad discretionary allocation powers. The gov-

ernment did not = me court’s decision in favor of the |

. taxpayer.

Fourth Circuit: The government lost in Greer v. United

‘States, 70-1 U.S. Tax Cas. Para. 12,690, 25 Am.Fed. Tax

R.2d 70-1629 (M.D-N.C. 1970) (broad discretionary invest-

ment and allocation powers under North Carolina law).

It did not appeal.

Fifth Circuit: In addition to First National Bank in em

Beach, supra, the Court of Appeals has decided two other

cases adversely to taxpayers, Florida National Bank at

Lakeland v. United States, F.2d , 71-1 US. Tax

Cas. Para. 12,771, 27 Am.Fed. Tax R.2d Para. 147,568

(Sth Cir. April 26, 1971) (Florida law, capital gains .to

be included in distributions to income beneficiaries) and

+ Miami Beach First National Bank v. United States, ——

F.2d’ , 71-1 U.S. Tax Cas. Para. 12,774, 27 Am. Fed. Tax

~R2d Pars. 147,565 (5th Cir. April 30, 1971) (Florida law,

- eapital gains dividends from mutual funds and broad dis-

cretionary apportionment powers.) Still another case has.

just been decided in this circuit in the taxpayer’s favor,

Doss v. United States, Civil Action 5-693 (N.D. Fee. May

"20, 1971) (broad investment powers).

Sixth Circuit: The taxpayer won in Estate of Toulnin v.

United States, —— F.Supp. —<; 71-1 U.S. Tax Cas.

Para. 12,775, 27 Am.Fed. Tax R.2d Para. 147,560 (S.D.

Ohio, March 19, 1971) (general discretionary allocation

powers under Ohio law). Whether the government will -

appeal has not been announced.

il

> Ninth Circuit: On appeal to the Court of Appeals is |

Gardiner v. United States (not officially reported), 69-2'

U.S. Tax Cas. Para. 12,628, 24 Am.Fed. Tax R.2d 69-6108

(D. Ariz. May 21, 1969) (Arizona law, general discretionary

allocation powers—held for taxpayer). .

Our members are parties to many Similar: cases and

have heard of numerous others throughout the country

that are pending in the Tax Court and the District Courts

_ or are being considered at some administrative level within

the Internal Revenue Service. There is more than sufficient —

conflict, confusion and volume of decisions to warrant this.

Court’s grant of certiorari.

(2) Intervention by this Court is necessary jo prevent diffi-

- cult and extensive future litigation in the federal courts

‘This Court should also consider the future effects of

the decision below upon the administration of justice by

the District and Circuit courts, for unlike this Court, they

may not decline to hear cases properly brought. If the

decisions of the-Courts of Appeals for the Third and Fifth

Circuits stand, and if the Internal Revenue Service con-

tinues to disallow charitable deductions wherever -eon- °

ceivable, the federal courts will be inundated by a flood -

of these charitable deduction cases. It will be ‘necessary

for them to try to develop, case by case, rules for deter-

-Inining what, if any, deviations from state laws, discre-

tionary or otherwise, are permissible. The fact that the

' grant of discretion to trustees is common, that few lawyers

draft identical trust agreements, that the possible devia-

‘ tions and combinations of ‘deviations from 51 different

bodies of local law are innumerable, and that millions

of dollars of taxes and correlative losses to charity will

be at stake to give impetus to litigation, makes the prospect

alarming. 3 ¥

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The charitable deduction provisions in the federal

statutes demand uniformity of application throughout the

-country.. Because of this, it does not ‘seem possible simply

‘to hold that any deviation from local law is automatically

fatal to deductibility. Why, if. the quantum of the gift

to charity is the same, should a resident of one state have

the benefit of the charitable deduction, and a resident of

another state be denied it? Accommodating to. all the

state law differences on a case by case basis is a difficult

and time-consuming prospect. Adoption of federal stan-

dards would be no easier ‘in view of the wide and irrecon-

cilable differences of opinion of informed: lawyers, judges -

and legislators as to what constitutes principal and what

constitutes income. Such intellectual exercises would in a

sense be wasted, for. they would have no value for the

_future, all the governing instruments that could be involved

having already been written. “

10 The Fifth Cireuit’s opinion in the First National Bank in Palm

Beach case, supra, provides three perfect illustrations of the prob-

lems mentioned. First, non-amortization of premiums paid on the

purchase of bonds, as directed. by the will, which the government

in its brief and Judge Tuttle in his opinion cited as impermissible .

invasions of the charitable remainder interest, is the law in Florida,

Fla. Statutes Ann., §690.07. In common with many other states,

Florida adopted this rule in enacting the Uniform Principal and-

‘Income Act. See §6 of that Act and §7 of the Revised Uniform

Principal and Income Act. Either’ both the government and Judge

Tuttle were mistaken as to Florida law in this respect, or some sort

of federal standard was being used,'Judging from the tone of the

Court’s opinion, the latter explanation seems at least partially

correct. Next, the executors had full authority, wrote the court,

“to treat stock dividends ... . as income rather than as accretions to

corpus, which. they really are. It is*recognized in the Florida law

and the Uniform Principal and Income Act, Florida, Statutes Anno-

tated $690. 06, that ‘stock dividends should inure to the benefit’ of

the corpus’. Stock dividends, of course, are merely a redistribution

of the number of shares. representing ‘the assets of a corporation.

‘Certainly, to the extent that stock dividends represent appreciation

in the value of the underlying assets of the corporation, rather than

income to it they represent accretions to principal.” —— F.2d. ——,

71:1 U.S. Tax Cas.. Para. 12,777 at 9047-75. — is he so-called

13 -;

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_ Finally, the issue in this case is not restricted to\a

relatively small group of estate and gift tax cases. No -

4

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measurable portion of capital gains realized during th

administration of a trust and allocated to principal can be

said to be “permanently set aside for” charitable purposes,

as the income tax statute, §642(c) of the Code requires, i

if the trustee may invest the gains in wasting assets and

allocate the receipts to income, as the court below found

_ to be a “possibility.” it

The issue_in this case, ‘then, affeets the taxation of at

least a_ substantial fraction, and perhaps even a. majority

of thousands of existing split-interest. trusts to which the

Tax Reform Act of 1969. does not apply. This case is of

enormous practical importance not only to the public fise ~

- but also to the charitable community on which the ultimate

burden is going to fall. It involves a conflict of basic trust

principles ‘and: basic tax policies of such importancé and

complexity that only this Court can resolve them and it

should undertake to resolve them.

The Merits of Petitioner’s Case

‘The probability of petitioner's success upon a full hear-

ing may possibly be considered A relevant factor in deter-

mining whether to grant Ks petition for. certiorari.

Accordingly, a brief discussion of the merits of the case —

is now submitted.

Massachusetts rule. Yet many states follow the Pennsylvania rule,

under which stock dividends are treated as income insofar as they

do not impair the “intact value” of the shares when acquired by

the trust. See III Scott on Trusts §§236.3, 236.6 (3d Ed. 1967).

Finally, the Court stated with respect to liquidating dividends,

“Obviously, the distribution of a dividend by distributing the assets

of a corporation on its dissolution is a distribution of principal.”

(1d.) Yet the states following the Pennsylvania rule also hold

liquidation proceeds apportionable in the same way as extraordinary

cash and stock dividends. III Seott on Trusts, §236.10.

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Two unstated and erroneous assumptions underlie the

decisiofis of the Courts of Appeals-for the Third and Fifth

Cireuits: First, that the discretionary powers granted

im the governing instruments increase to a material or

significant degree the trustee’s ‘ability to shift economic

benefits from principal to income. Second, that the tables

prescribed by the Service for valuing trust interests are -

based on some known, definite formula for valuing such

interests.

(1) The additional diseretions conferred do not materially

increase the power of the trustee to shift. economic in-

terests between the beneficiaries

The extent to which economic interests can be shifted .

under discretionary apportionment powers such as those

considered by the two Courts of Appeals is, insignificant,

compared to the power of every trustee to shift by invest-

ment choices. Professor Scott cites investment powers to

support his statement that “The trustee . . ordinarily has

considerable discretion in preserving the elapse between

the beneficiaries.” ITI Scott on Trusts §232 (3d Ed., 1967).

6

' ™ Professor Scott’s complete statement is as follows:

“The trustee, however, ordinarily has considerable discretion

in preserving the balance between the beneficiaries. The bene-

ficiary entitled to the income cannot insist that the trustee

should invest in securities yielding the highest rate obtainable

from proper trust investments, nor on the other hand ean the

_ beneficiary entitled to the principal insist that the trustee

should invest only in the very safest and most conservative of

trust investments, as for example in government bonds. Indeed,

_ if the trustee invests the whole of the trust funds in govern-

ment bonds at a time when the income thereon is very small,

he may conceivably be held liable to the beneficiary entitled to.

the income on the ground that he has unduly favored the re- .

mainderman. There is, however, no absolute rule on this matter

and under some circumstances such conduct of the trustee

might be justified.” III Seott on Trusts, §232, p. 1896 (3d

_Ed., esa

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15

A jatneets exnmale will demonstrate this point better than .

general language.. On a recent date, American Telephone |

‘and Telegraph Company 7.75s of 1977 closed at 1045,

and that Company’s 2%48 of 1975 closed at 8514. These

two issues. are obviously equal in quality and mature in the -

relatively ™ near term within two years of each other.

Although their yields to maturity are approximately the —

same, an investment of $89,200"* inthe one or the other °

will, if tlie bonds-are“held to maturity, have the following

widely different consequences for principal and income

under the Revised Uniform Principal and Income Act §7,

. which has been adopted by New York i in EPTL §11-2.1(f)

and by most other states:

Annual I ntorest we Gain 1 Loss)

Issue.-{. * Allocable to to Principal at .

Purchased . Income _ Maturity

7.75s of 1977 _ $6,587 ($ 3,981)

234s of 1975 $2,860 _ . _ $15, sess

Which issue should be bought? - Perhaps one, ee the

other, perhaps. neither, perhaps some of both (to effset

‘any loss to principal). or perhaps some of the 7. 75s, and

‘some I.B.M. stock. The trustee’s decision will depend on a

_ variety ‘of factors, including the makeup ‘of the investment

portfolio as.a whole, the trustee’s evaluation of general

economic conditions, and his duty. to be impartial as be-

tween principal and income beneficiaries. But whatever

a

- Quotations 2 are for hey 20, » ATE as reported in ' the Wail Street

Journal of May 21, 1971:

. 3 For. purposes of the cine. it has been ignored that bonds

‘ are not traded in units of less than $1,000 face amount.

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investment decision the trustee does make, he necessarily

favors one class of beneficiaries over the other."

Obviously, if trustees can be relied on-to be impartial in

investing, as’they must be, trustees can also be relied upon

to be impartial in making far. less sophisticated and rela-

tively inconsequential apportionment decisions, when any

actual bias ld be far more evident. It is also apparent -

that investment decisions and apportionment. discretions

are

interrelated. In the A T & T obligations example, the

' , trustee would feel freer to buy the 7.75s if he had the dis-

cretion to amortize the -premipm that the trustee has in the

° case at bar: SF

+

‘* Professor Bogert uses the following language to make the same

point: . . :

eo

“The duty to deal impartially between income and principal

beneficiaries cannot be measured precisely as to each investment:

transaction, for each transaction, considered by itself, will at

least slightly favor one or the other beneficiary. This does

_ not mean that a breach of trust is involved. Neither the pru-

’ dent man rule nor the duty of impartiality requires that each

investmént transaction be, considered independently of. other

investment transactions during the current year, or of irtvest-

" ment results in prior years, or, for that matter, apart from

investment planning for the future. For these reasons a

trustee’s investment actions necessarily must be judged over a

period of-time, upon the basis of other -factors discussed in

this section, and by considering related investment transactions

already made and those proposed to be made. The prudence

of a sale of a particular trust asset should be judged both as

an independent action and as part of a larger investment

transaction involving the reinvestment of the sale proceeds,

under current market conditions. i

- _ “Kach proposed investment transaction should be weighed

‘ with a view to the overall relative positions of the income

beneficiary and remaindermen and the effect of the proposed

‘transaction on those positions.” em aged The Law of Trusts

and Trustees, §612 at 47 (2d Ed., 1960, Supp. 1970).

ve

17

: (2) The Service's valuation tables are not specially designed

for valuing*trust interests. They are validly used for

that purpose only because it is assumed that trustees’

é diseretions will be impartially and: fairly . exercised. |

‘Only on this assumption is the value of any charitable

remainder interest “presently ascertainable”

The second unstated and erroneous assumption of the

Courts of Appeals*is that the term “presently ascertain-

able”, as used in the regulations, means “accurately cal-

culable” or “measurable” when applied to interests in trust. -

The denial by Revenue Ruling 60-385, 1960-2 Cum. Bull.

77, supra, of a deduction when capital gaips dividends of

_. investment trusts may be allocated to income “since no

known formula has been. advanced for ascertaining the

value of the charitable interest” implies that there is some

sueh formula that the Internal Revenue Service uses to

value ordinary trust income and remainder interests. Noth-

ing could be further from the truth. The valuation formula

used is nothing more special than compound interest tables

»combined with actuarial factors. These tables accurately

value at 6% interest compounded’ annually (formerly at

342% interest, compounded annually), fixed returns on

money, annuities in fixed amounts, fixed sums of.money pay-

able at the end of a life and other definite payments, but they

have nothing whatever to do with valuing trust interests

that are dependent on the discretion of trustees. They make |

no adjustment for factors peculiar to’ trusts that have an

effect on the value of interests therein. The Internal Reve-

nue Service has informally declined’ on the basis of ad-

ministrative convenience to consider making any sort of

adjustment to reflect the fact that 6% is from 40% to -

50% higher :than trustees are usually able to realize for

income beneficiaries. Their duties ‘to remaindermen re-

quire them to accept a low yield on some investments: And,

of course, the government’s tables are completely oblivious

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* to the substantial differences in value of ineome interests

in different jurisdictions ‘adhering to the widely dissimilar

Pennsylvania and Massachusetts stock dividend allocation

rules.

Thus, valuation of trust ‘interests for federal tax pur-

poses is of a most approximate kind, completely ignoring.

the broad discretionary powers all trustees have. The pre-

scribed tables apply to trusts only because the Internal

Revenue Service says they do. Their application to trust -

- interests is valid only on the assumption that the trustees’

- discretions will in fact be exercised fairly, sometimes in

favor of the income beneficiary, no doubt, and sometimes

m favor of the remaindermen, but even-handedly over-all.

Only on this assumption is the value of any charitable re-

mainder interest “presently. ascertainable.”

(3) The additional discretions conferred are not intended

to favor the income beneficiaries over the charitable

remaindermen. There is no reason to believe they will

not be impartially and frirly exercised

The Court of Appeals for the Fifth Cireuit also based

its Finst National Bank in Palm Beach decision in part

on the following false legal conclusion:

“We have stated in the case of The Miami Bedch

First National Bank vy. United States of America,

[7-1 U.S. Tax Cas. Para. 12,776, 27 Am.Fed. Tax_R.

2d Para. 147,565], it is clear that when extraordinary

powers of this kind are given to the fiduciary they are >

intended to modify the general rule with respect to

the obligations to a fiduciary to deal with an.gv@n hand

with respect to the life tenant as against the remainder-

man when no such extraordinary powers are ex- |

pressed.” —— F.2d ——, 71-1 U.S. Tax Cas. Para. .

12,777 at 9047-76.

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19

The Court assumed the wrong answer to the very: point

to be decided. Whether the grant of extraordinary discre-

tionary powers is made with such intent is not determinable -

@ priori, but is a question of interpretation of the govern-

ing instrument. ° 7 |

If -there is such intent, then the even-handed and bal-

anced exercise* of discretion assumed in the valuation

tables would be upset; otherwise, it would not, and use

of the tables would still. be valid. In the case at bar, : |

there is manifestly no intent to upset the balance. The

discretionary powers were not written specially by the *

settlor but were the 1960 version of “model powers” pre- .

pared for -the convenience of attorneys by one of our

members, Manufacturers Hanover Trust Company, to give

it sufficient discretion to handle the allocation questions

_ that always arise in the administration of trusts in a prac

tical as well as a fair way without having: to go’ to‘court

for instructions or approval. These “model powers” are

in the governing instruments of numerous other trusts

now being. administered by that: Company, some having

charitable benefigaries as in the. case at bar.’ Many other.

members of our organizations have developed their own. .

“model powers” that differ in detail but not in substance

or purpose from Manufacturers Hanover’s. These powers

are not designed to and do not favor either principal .or’ :

income,. giving discretions the “exercise of. which would..

sometimes -benefit the one and sometimes the other.

. “ad

af

**The discretion to invest in investment‘ trusts and wasting

assets, which would normally benefit income, is balanced by the

discretion to hold trust property uninvested without liability. or

loss to income. Also,:the power to allocate payments in respect of

wasting assets.to income ‘is offset by the discretion to allocate pay-

ments in respect of unproductive property to principal. Similarly, —

the determination of whether to discontinue any sinking fund is

balanced by the authority to amortize bond premiums and the im-

plied power to establish’ depreciation and depletion reserves. The

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To be contrasted are discretionary powers that are in

fact designed to favor one class of beneficiaries over the

other.. The governing instrument may expressly authorize

invasions as in Henslee v. Union Planters Bank, 335. U.S.

995 (1949), Merchants National Bank v. Commissioner, 320 ae

U.S. 256 (1943) and Ithaca Trust Company v. United States,

279 U.S. 151 (1929). Or the governing instrument may

. direct the trustee to exercise the discretions i in such a way

as to favor the income beneficiaries or direct or permit such

. extreme deviations from established concepts of what con-

stitutes principal and income as to upset the balance di-

rectly or to manifest an intention that the trustee need not

act impartially.* The governing instrument in. Florida

National Bank at Lakeland v. United States, —— F.2d: ey

71-1 U.S. Tax Cas.-Para. 12,771, 27 Am.Fed. Tax R.2d Porn,

447,968 (5th Cir. 1971), in which the trustee was directed

to distribute income and capital gains to the income bene-

ficiaries, appears to fall within this classification. Such

provisions are really dispositive ‘provisions and not mere

broadenings of administrative discretions.

The instruments in the other two recent cases of the

Court of Appeals for the Fifth Circuit, Miami Beach First

National Bank v. United States, —— F.2d , 71-1 US.

Tax Cas. Para. 12,774, 27 Am.Fed. Tax R.2d Para. 147,565

(5th Cir. 1971), and First National Bank in Palm Beach v.

United States, —— F.2d , 71-1 U.S. Tax Cas. Para.

12,777 (5th Cir. 1971) evidence no intent to and do not up- .

rule authorizing the trustee to apportion acerued income at termi-

nation to the remaindermen could benefit — the charity-remain-

dermen.

"16 OF. Taggart, Charitable Deductions for iakieiie of Remainder

* Interests Subject to Invasion, 21 Tax L. Rev. 535, 572 (1966).

c

21

set the traditional balance.” The broad administrative dis-

cretions provided in them and in the case at bar have many

times been held intended to benefit both principal and in-

come, and not to be exercisable in a partial way. Two ex-—

cellent and well-known recent formulations of the rule are

_ those of the highest courts of Massachusetts and Connecti-

cut: [ee

“We think the grant of power to ‘decide whether

accretions’ are to be treated as principal or inconté and

how expenses. are to be charged, apart from its possible

exculpatory effect, is primarily an administrative

power authorizing the trustee in°instances of doubt to

use its best informed judgment in good faith in the

light of what the established rules suggest to the trus-

tee is consistent therewith. This is a means of avoiding

the expense of litigation. This power may not be used

to shift beneficial interests. It does not authorize favor-

ing either the charitable or the private beneficiaries.

It is of equal advantage to each in conserving the as-

17 Allocating capital gains dividends of regulated investment

companies to.incomie, an issue in the Palm Beach case. would not.

necessarily cause an imbalance. It is the Internal Revenue Service’s

opposite. and arbitrary rule requiring’ allocation to corpus that is

- more likely to upset the balance by unduly favoring the charitable

remaindermen. See Bogert, The Law of Trusts and Trustees, §612

at 52-53 (2d Ed. 1960, Supp. 1970) :

“A clear case of partiality .in connection with investments

would seem to exist where the trustee buys shares in ani invest-

ment trust and under the applicable law capital gains distri- ©

butions by the investment trust are required to be treated as

trust capital. Heré the trustee is taking subnormal income

yield and securing additions to trust capital and not merely

the maintenance of it. Instead of buying an ordinary - legal .

and getting perhaps 414% income and the mere maintenance

of the corpus of the trust, he is getting something like 2.8%

income from the investment trust and 2.3% capital. gains

distributions which go to increase the value of the trtst capital.

The percentages used are taken’ from the report for 1960 made

by the national association of investment trusts.”

‘

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sets of the trust. In our view such a power imports

no more uncertainty in the ascertainment and caleula-

tions of the value of the charitable remainders than .

-dges the contingency. that the precise amount of ad-

ministrative charges and of accretions over the years

cannot be known in advance.”. Old Colony Trust Com-

pany v. Silliman, 352 Mass. 6, 11- 12 , 223 N.E. 2d 504,

507-08 (1967). tie 7

. there eaii = no doubt that the trustees are given

no b didpenitive. as distinguished’ from administrative,

powers and that they cannot, under settled law pre-

vailing not only in Connecticut but elsewhere, exercise

any of their powers for the purpose (even if well-

intended): of. materially altering the value of the ben-

- eficial interests under the Oakwood trust to the detri-

ment of Oakwood as an income beneficiary. To hold

othertvise would permit the trustees to give Oakwood’s

income in whole or in part to the beneficiaries of the

Connor trust under the motivation of a purpose and

desire to enrich the Connor trust at the expense of

the Oakwood trust. |

; 8 s y

“The administrative powers to determine what is

principal and what is gross and net income and to

allocate charges to either income or pr incipal or both:

are powers often conferred in wills and here were in-

cluded in a number of other administrative powers.

grouped together generally in Article Sixteenth, of

the will. It certainly would constitute a violent and

wholly unwarranted repudiation and reversal of here- —

tofore settled Connecticut trust law to construe. any —

or all of these administrative powers conferred'on the

trustees as powers which, separately or ‘collectively,

c/,

23 -

authorized the trustees to destroy or cripple a char-

itable bequest and turn Oakwood’s income over, in

whole or in part, to the Connor trust, thus in effect

nullifying the whole charitable purpose of the second

codicil and leaving the original will as though that

e codicil had never.existed. For the trustees so to do

~ would be an impermissible and illegal abuse of dis-

cretion and would obviously be in violation of the

settled rule that ‘[w]hen there are two or more bene-

_ ficiaries of a trust, the trustee is under a duty to deal’

impartially with -them.” Restatement (Second),. 1

" Trusts §183. The Oakwood trust is a clear. gift of

‘the. net income’ of the trust carpus to an admitted -

charity: Equity would interfere to protect this char-

itable gift from impairment or destruction by the trus- -

tees or anyone else.” Connor y. Hart, 157 Conn. 265,

273-76, 253 A.2d 9, 13-15 (1968).

- New York law is clearly the same."

18 See Bankers Trust. Co. v.: United States, 308 F.Supp. 545 —

(S.D.N.Y. 1970), supra;.Matter of Heinrich, 195 Mise. 803, 90

N.Y.S.2d 805 (Sur. Ct. Monroe Co. 1949), cited with approval by

the Court of Appeals in Matter of Muller, 24 N.Y.2d 336, 341, 248 -

N.E.2d 164, 166 (1969). That the adoption by New York of the

evised Uniform Principal and Income Act §2, now N.Y. EPTL

§11-2.1 did not change the rule of Matter of Talbot, 170 Mise. 138,

-9 N.Y.S.2d 806 (Sur. Ct. Orange Co. 1939), as the Court below

seems to have thought, see Estate of Frank, N.Y.L.J. ‘Feb, 24, 1971 -

at 20; col. 3 (Sur. Ct..N.Y. Co:) which involved a provision giving

the executors power to “determine -what is income and what—is

principal hereunder; and their decision in respect thereto shall be

. conelusive upon all parties”. The Surrogate stated: “The authori-

zation to the fiduciaries to determine what is. income and what is

principal is a grant of discretion to resolve matter of doubt arising

from the reeeipt of money, stocks or securities which may either.

be capital or income.” EPTL §5-1.1 was not enacted to prevent

interference with the income of a surviving spouse by reason of the

breadth of the fiduciary powers in §11-2.1, as the Court below seems -

to have thought, but was simply a re-enactment of a provision first

added to the New York statutes in 1936, L. 1936, e. 234—long before

the enactment of the EPTL—to overrule a specific decision, Matter

s

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Granting discretionary powers in the governing instru-

ment-in addition-to those conferred by state law as a means

of facilitating the administration of trusts for the benefit

of all beneficiaries thereof isin line with a now long-estab- .

lished trend throughout the country, clearly apparent in

the steady: liberalization of trust investment rules, of giv-

ing trustees ever more digcretion.!® This trend reflects a —

uniform judgment :by ‘the states, founded on experience,

that trustees do faithfully and fairly execute the discre-

tionary powers entrusted to them, and that the interests

of all trust beneficiaries, charitable and. non-charitable

alike, are better served by reposing more\ rather - than

less, confidence in them. There is no reason to believe

the trustee will not exercise the discretionary powers here

conferred on it other than impartially and fairly.

(4) The chance that the charitable remainder here in ques-

tion will not become effective is so remote as: to be

negligible. Its value is deductible | |

Neither the government: nor the court below ever as-

serted that there was any real likelihood that the charitable

aan

of Curley, 245 App. Div. 255, 280 N.Y.S. 80 (2d-Dept., 1935),

. aff'd without opinion, 269 N.Y. 548, 199 N.E. 665 (1935), which the

_ Court of Appeals itself disavowed a year later in Matter of Clark,

_ +279 N.Y. 1,9 N.E.2d 753 (1937). ,

19 In fact, Virginia now provides broad discretionary powers in

statutory provisions that can ‘be incorporated by ‘reference in the

governing instrument. The allocation power in Va. Code §64.1-57 -

(Supp. 1970) is as. follows :

“(1) The following powers in addition to ‘all .other powers

granted by law may be incorporated, in whole or in part in

any will or trust, instrument by reference to this section:

cd * - . ; z

“(il) To determine. whether any part of the trust estate

or any addition or increment hereto be income or principal, °

or whether any cost, charge, expenses, tax or assessment shall

be charged against income or principal, or partially against

income and partially against. principal.” . when

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25

remaindermen in this case will not in fact receive the gift

‘ Mrs, Stewart intended to give. The complaint of the Ser-

vice is that it has no way of computing the value of the

“possibility” the charities will receive less; but it is equally

impossible for it to compute the value of the at least equal

“possibility” that the charity will receive more. United

States v. Provident Trust Co., 291. U.S. 272 (1934) stands”

for the principle that the tax law must be ‘applied in a

realistic and not a theoretical way where, as here, a legis-

lative policy to encourage charitable gifts is involved. The

chance that the charitable remainder interest here in ques-

tion will not become effective is so remote as to be negligible

and its value is therefore deductible. Commissioner v.

Sternberger’s Estate, 348 U.S. 187, 193 (1955).

CONCLUSION |

For the foregoing reasons, the petition for a writ of | :

- certiorari should be granted.

ay

/ - Respectfully submitted,

Hewrrr A. Conway

| Keniry Drye Warren CLARK

Carr & EL.is

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7: New York, New York 10022

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