AUGUSTUS N. HAND, Circuit Judge.
On April 20, 1938, the testatrix, Mrs. Macaulay, made a gift to her husband of 5,000 shares of first preferred stock of Niagara Hudson Power Corporation, and on July 1, 1938, of certain house furnishings and art objects. At the time of her death, which was November 24, 1938, the stock had a fair market value of $428,750. Gift taxes were paid on the foregoing donations. In October 1937 Mrs. Macaulay
made a will in which she bequeathed to her husband a legacy of $1,000,000. At about the same time she told Governor Nathan L. Miller, her legal adviser and one of the executors named in her will, that she was thinking of giving her husband securities in an amount sufficient to yield an income of $25,000 per year so that he could meet the additional expenses he was under because of his official position as Irish Envoy to the Vatican. The stock of the Niagara Hudson Power Corporation was apparently given to fulfil the expectations she had expressed but there was no indication that she intended the gift as an advancement on account of the $1,000,000 bequest to her husband. Nevertheless, at the suggestion of Governor Miller, the gift of stock was treated in the judicial accounting in the Surrogate’s Court as an advance of $400,-000 upon the $1,000,000 legacy and the balance, that is $600,000, was accepted by Mr. Macaulay as a full discharge of the entire bequest on the part of the executors. Under the Seventh or residuary clause of her will the decedent gave 46% of her residuary estate to various charities and in Article V of the Seventh Qause provided as follows:
“V. In the event of the death before my decease, or the incapacity to take, of any legatee hereinbefore mentioned, or of the invalidity or ineffectiveness for any reason of any bequest hereinbefore made, for which eventuality no other or different provision shall have been made, I give, devise and bequeath the share, shares or sum so attempted to be bequeathed, to the survivors and to the corporations having capacity to take at the time of my decease of those mentioned as legatees in this “Seventh” paragraph or residuary clause of my Will in proportion to the number of shares of my residuary estate given and bequeathed to each respectively as aforesaid.”
The executors in setting forth the amount of charitable deductions in their estate tax return included the amount represented by the disclaimed legacy of $400,000 in the residuary estate, 46’% of which, as we have already said, was bequeathed to charity. This was due to the advice of Governor Miller, probably founded on the following provision of decedent’s will:
“ * * * I may * * * make advances to some of the legatees herein named on account of their said legacies, and to the extent that I may make such advances, I direct that all legacies upon which advances shall have been made by me shall to the extent thereof abate.”
The executors filed their estate tax return on February 20, 1940, and the Commissioner assessed the tax upon the theory that the gift of stock which the decedent made to her husband was in contemplation of death and hence was to be treated as part of her estate for tax purposes. The Tax Court rejected the theory that the gift was made in contemplation of death. In spite of the treatment of it as an advancement before the Surrogate, it was held that it was not an advancement and this holding was in accordance with the New York law as established in Bowron v. Kent, 190 N.Y. 422, 83 N.E. 472, and Matter of Farmers’ Loan & Trust Co., 181 App.Div. 642, 168 N.Y.S. 952, affirmed 225 N.Y. 666, 122 N.E. 880. The Tax Court required recomputation of the tax in accordance with the opinion.
Upon disclaimer by the legatee of $400,-000 of his legacy, the $400,000 passed into the residuary estate, 46% of which was devised to charity: The taxpayer’s recomputation of the tax, which was accepted by the Tax Court, treated 46% of the $400,000 disclaimed as exempt from the taxable estate as a charitable bequest. The Tax Court’s final order determined that the executors had made an overpayment of $109,682.89, doubtless upon the theory that the disclaimer related back to the date of death. From this the Commissioner has appealed.
The Commissioner objects to the decision on the ground that the “legacy which the decedent intended to give to her husband should not, by his action after her death, increase a deduction, which is intended to reflect the decedent’s gift to charity.”
The provision of the Revenue Act of 1926, c. 27, 44 Stat. 9, directly applicable to the taxation of Mrs. Macaulay’s estate read as follows:
“Sec. 303. For the purpose of the tax the value of the net estate shall be determined — ■
“(a) [as amended by section 403(a) of the Revenue Act of 1934, c. 277, 48 Stat. 680]. In the case of a citizen or resident of the United States, by deducting from the value of the gross estate—
*****
“(3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Terri
tory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. * * 26 U.S.C.A. Int.Rev.Acts, pages 232, 235.
In 1942 a further amendment to Section 303(a) (3) of the Act of 1926 was made which included in the amount of all charitable bequests, legacies, devises or transfers by a citizen or resident of the United States “the interest which falls into any such bequest, legacy, devise, or transfer as a result of an irrevocable disclaimer of a bequest, legacy, devise, transfer, or power, if the disclaimer is made prior to the date prescribed for the filing of the estate tax return.” Section 408(a) of the Revenue Act of 1942.
Section 408(c) of that Act provides: “The amendments made by this section shall be applicable to estates of decedents dying after February 10, 1939.” Mrs. Macaulay’s death in November, 1938, was before the date upon which the statutory amendment took effect. Counsel have argued at length whether the 1942 amendment was passed to clarify or declare existing law, or whether it was passed to change the existing law. The legislative history of the amendment seems to indicate that the Congressional intent was clarification rather than alteration. This appears from quotation from proceedings before the Congressional Committee set forth below.
It is evident from the proceedings in Congress that the amendment was intended to be applicable to two different
situations: First, to the case of a specific charitable bequest which a decedent by will had empowered another to divert to other purposes, and which under existing law was not allowable as a charitable deduction, and second, to the case of a disclaimed legacy which under the law of wills would fall into a residuary estate bequeathed to charity. In addition to this the amendment in either case set a definite limit (which had not before existed) in the case of the estates of decedents dying after February 10, 1939, to the time within which a disclaimer must be made to render a legacy deductible from the taxable estate.
Free access — add to your briefcase to read the full text and ask questions with AI
AUGUSTUS N. HAND, Circuit Judge.
On April 20, 1938, the testatrix, Mrs. Macaulay, made a gift to her husband of 5,000 shares of first preferred stock of Niagara Hudson Power Corporation, and on July 1, 1938, of certain house furnishings and art objects. At the time of her death, which was November 24, 1938, the stock had a fair market value of $428,750. Gift taxes were paid on the foregoing donations. In October 1937 Mrs. Macaulay
made a will in which she bequeathed to her husband a legacy of $1,000,000. At about the same time she told Governor Nathan L. Miller, her legal adviser and one of the executors named in her will, that she was thinking of giving her husband securities in an amount sufficient to yield an income of $25,000 per year so that he could meet the additional expenses he was under because of his official position as Irish Envoy to the Vatican. The stock of the Niagara Hudson Power Corporation was apparently given to fulfil the expectations she had expressed but there was no indication that she intended the gift as an advancement on account of the $1,000,000 bequest to her husband. Nevertheless, at the suggestion of Governor Miller, the gift of stock was treated in the judicial accounting in the Surrogate’s Court as an advance of $400,-000 upon the $1,000,000 legacy and the balance, that is $600,000, was accepted by Mr. Macaulay as a full discharge of the entire bequest on the part of the executors. Under the Seventh or residuary clause of her will the decedent gave 46% of her residuary estate to various charities and in Article V of the Seventh Qause provided as follows:
“V. In the event of the death before my decease, or the incapacity to take, of any legatee hereinbefore mentioned, or of the invalidity or ineffectiveness for any reason of any bequest hereinbefore made, for which eventuality no other or different provision shall have been made, I give, devise and bequeath the share, shares or sum so attempted to be bequeathed, to the survivors and to the corporations having capacity to take at the time of my decease of those mentioned as legatees in this “Seventh” paragraph or residuary clause of my Will in proportion to the number of shares of my residuary estate given and bequeathed to each respectively as aforesaid.”
The executors in setting forth the amount of charitable deductions in their estate tax return included the amount represented by the disclaimed legacy of $400,000 in the residuary estate, 46’% of which, as we have already said, was bequeathed to charity. This was due to the advice of Governor Miller, probably founded on the following provision of decedent’s will:
“ * * * I may * * * make advances to some of the legatees herein named on account of their said legacies, and to the extent that I may make such advances, I direct that all legacies upon which advances shall have been made by me shall to the extent thereof abate.”
The executors filed their estate tax return on February 20, 1940, and the Commissioner assessed the tax upon the theory that the gift of stock which the decedent made to her husband was in contemplation of death and hence was to be treated as part of her estate for tax purposes. The Tax Court rejected the theory that the gift was made in contemplation of death. In spite of the treatment of it as an advancement before the Surrogate, it was held that it was not an advancement and this holding was in accordance with the New York law as established in Bowron v. Kent, 190 N.Y. 422, 83 N.E. 472, and Matter of Farmers’ Loan & Trust Co., 181 App.Div. 642, 168 N.Y.S. 952, affirmed 225 N.Y. 666, 122 N.E. 880. The Tax Court required recomputation of the tax in accordance with the opinion.
Upon disclaimer by the legatee of $400,-000 of his legacy, the $400,000 passed into the residuary estate, 46% of which was devised to charity: The taxpayer’s recomputation of the tax, which was accepted by the Tax Court, treated 46% of the $400,000 disclaimed as exempt from the taxable estate as a charitable bequest. The Tax Court’s final order determined that the executors had made an overpayment of $109,682.89, doubtless upon the theory that the disclaimer related back to the date of death. From this the Commissioner has appealed.
The Commissioner objects to the decision on the ground that the “legacy which the decedent intended to give to her husband should not, by his action after her death, increase a deduction, which is intended to reflect the decedent’s gift to charity.”
The provision of the Revenue Act of 1926, c. 27, 44 Stat. 9, directly applicable to the taxation of Mrs. Macaulay’s estate read as follows:
“Sec. 303. For the purpose of the tax the value of the net estate shall be determined — ■
“(a) [as amended by section 403(a) of the Revenue Act of 1934, c. 277, 48 Stat. 680]. In the case of a citizen or resident of the United States, by deducting from the value of the gross estate—
*****
“(3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Terri
tory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. * * 26 U.S.C.A. Int.Rev.Acts, pages 232, 235.
In 1942 a further amendment to Section 303(a) (3) of the Act of 1926 was made which included in the amount of all charitable bequests, legacies, devises or transfers by a citizen or resident of the United States “the interest which falls into any such bequest, legacy, devise, or transfer as a result of an irrevocable disclaimer of a bequest, legacy, devise, transfer, or power, if the disclaimer is made prior to the date prescribed for the filing of the estate tax return.” Section 408(a) of the Revenue Act of 1942.
Section 408(c) of that Act provides: “The amendments made by this section shall be applicable to estates of decedents dying after February 10, 1939.” Mrs. Macaulay’s death in November, 1938, was before the date upon which the statutory amendment took effect. Counsel have argued at length whether the 1942 amendment was passed to clarify or declare existing law, or whether it was passed to change the existing law. The legislative history of the amendment seems to indicate that the Congressional intent was clarification rather than alteration. This appears from quotation from proceedings before the Congressional Committee set forth below.
It is evident from the proceedings in Congress that the amendment was intended to be applicable to two different
situations: First, to the case of a specific charitable bequest which a decedent by will had empowered another to divert to other purposes, and which under existing law was not allowable as a charitable deduction, and second, to the case of a disclaimed legacy which under the law of wills would fall into a residuary estate bequeathed to charity. In addition to this the amendment in either case set a definite limit (which had not before existed) in the case of the estates of decedents dying after February 10, 1939, to the time within which a disclaimer must be made to render a legacy deductible from the taxable estate. Beyond setting a time limit the effect of the amendment, so far as it related to disclaimers, was only to clarify the existing statute. In making this clarification Congress was not attempting to exercise a doubtful power to
declare the meaning of its own prior statute irrespective of any existing clarity but was giving a persuasive and weighty interpretation of the scope of a preexisting exemption much as legislative agencies constantly do under authorized regulations. This interpretation was not affected by the time when the amendment was to take effect which related only to the statutory changes in the earlier Act. Under such circumstances we think that there is a strong ground for construing the exemption as covering 46% of the $400,000 which was renounced in this case. The amendment allowed a greater exemption after February 10, 1939, than before in respect to certain powers, but plainly was not intended to alter the status of renounced legacies passing to charity except in setting a definite period within which the renunciation must be made.
Under settled law a disclaimed legacy falls into the residuary estate and is disposed of in accordance with the clause of the will governing the disposal of that estate. Albany Hospital v. Albany Guardian Society, 214 N.Y. 435, 445, 108 N.E. 812, Ann.Cas.1916D, 1195. Indeed in the present case Clause V of Mrs. Macaulay’s will so provided. Accordingly when the legacy was disclaimed to the extent of $400,000, the $400,000 became a part of the residuary estate and hy the terms of the will 46% of it passed to charity and fell within the statutory exemption covering: “The amount of all bequests, legacies, devises or transfers * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * This result accords with the state decisions in connection with similar tax provisions. See Matter of DeLamar’s Estate, 203 App.Div. 638, 197 N.Y.S. 301, affirmed 236 N.Y. 604, 142 N.E. 301; Bouse v. Hull, 168 Md. 1, 176 A. 645; Matter of Stone’s Estate, 132 Iowa 136, 109 N.W. 455, 10 Ann.Cas. 1033; State v. Probate Court, 143 Minn. 77, 172 N.W. 902.
It is true that in Davison v. Commissioner of Internal Revenue, 81 F.2d 16, we held that the renunciation, six years after the testator’s death, of a power of appointment which might have been used to defeat certain charitable bequests did not relate back to the date of the death of the testator. That holding did not conflict with our present decision and amounts to no more than saying that a delay of six years created such an uncertainty in the charitable bequest that the amount of the bequest would not be deductible. In other words we set a limit to the time when a disclaimer is effective for tax purposes which has since been fixed by the Amendment of 1942. The Commissioner has not contended that the disclaimer was not made with reasonable promptness in the case at har nor does the record indicate such a thing.
In Burdick v. Commissioner, 2 Cir., 117 F.2d 972, certiorari denied 314 U.S. 631, 62 S.Ct. 63, 86 L.Ed. 506, a will provided bequests to such charitable institutions as the testator’s nephew and sister should select within one year after the probate of the will. In the event no selection should be made the bequests were to lapse and the amount bequeathed was to pass to nonexempt persons. Thus the sister and nephew were given powers, by omitting to make any selection, to divert the bequests from their charitable objects. In that case we denied any exemption. It is well settled that where a third party has a power to divert gifts from charitable to non-charitable objects the gifts are not deductible even though the power of diversion shall never be exercised. The fact that the powers could be exercised by the nephew and sister by refraining from making any selection would not alter the principle. The decisions in Knoernschild v. Commissioner, 7 Cir., 97 F.2d 213, and First Trust Co. of St. Paul State Bank v. Reynolds, 8 Cir., 137 F.2d 518, proceeded upon the same theory.
Where the devolution of a bequest to charity has been brought about through a voluntary disclaimer of statutory rights to take in derogation of the provisions of a will it has frequently been held that the tax exemptions should be allowed. Dimock v. Corwin, 2 Cir., 99 F.2d 799, affirmed 306 U.S. 363, 59 S.Ct. 551, 83 L.Ed. 763; Humphrey v. Millard, 2 Cir., 79 F.2d 107; Commissioner v. First National Bank of Atlanta, 5 Cir., 102 F.2d 129. We see no difference between a renunciation of a legacy which causes the amount to pass to charity and the waiver of a right to take in derogation of the provisions of a will whch give bequests to charity greater than a statute permits. While it is true that there has been some confusion in the theories adopted among the decisions we have previously referred to, we know of
no decision which has denied tax exemption to a disclaimed bequest which has passed to charity. In view of the legislative history we have given of the 1942 amendment, the decisions of state courts granting exemption to legacies falling through disclaimer into a residuary bequest given to charity, and the federal court decisions which are applicable in principle to the case at bar, we think that the Tax Court was right in allowing an exemption in the present case and that its order should be affirmed.