COMMISSIONER OF INT. REV. v. CITIZENS & SO. NAT. BANK

HUTCHESON, Circuit Judge.

The taxpayer, executor under a will leaving all of testator's property, subject to special bequests1 payable out of income, to a charitable foundation,2 to use the income for "charity purposes", claimed deductions in 1936, 1937, 1938 and 1939 for payment of the bequests as allowable under Sections 162(b) or (c), amounts distributable currently to beneficiaries, and the balance as paid or permanently set aside for charitable uses pursuant to the will, and, therefore, allowable under Section 162(a), Rev. Acts of 1936 and 1938, 26 U.S.C.A. Int.Rev.Code, § 162(a-c).3 The commissioner disallowed the deduction claims on the grounds: (1) that part of the income from the property, being by the will dedicated to the payment of bequests to persons not the subject of charity, the Foundation was not a charitable corporation under Section 23(c) (3) and (o) (2), Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, pages 828, 829; (2) that if it was such a corporation, the amounts paid out of the income and claimed as deductible under 162(a) were not so deductible because having been paid to discharge debts and obligations of the Estate, they had not, within the meaning of the statute, been paid or permanently set aside during the taxable year exclusively for charitable purposes; and (3) that the sums which had been paid out of income to satisfy the bequests were not deductible because they had not been paid by the Foundation as directed in the will but by the executors, who had no authority under the will to pay them.

As a result of these disallowances, taxpayer and commissioner, like the lion and the unicorn fighting for the crown, have, since March, 1941, when the deficiency letter, disallowing the claimed deductions, was mailed, been contending over quite sizeable sums, $290,028.13, $286,319.77, $246,698.07, $253,083.49, claimed as income taxes for 1936, 1937, 1938 and 1939. In the Tax Court, the taxpayer beating the commissioner, as the lion had "beat the unicorn, all around the town", came off fully victor. In an opinion4 setting the facts5 out with great fullness, the Tax Court carefully and fully canvassed the contentions of, and the authorities cited by, the parties. Pointing out that tax provisions granting exemptions in respect of charities spring from profound concern for human welfare and are, therefore, liberally construed,6 and that the test of the propriety of the claimed deductions is furnished by the terms of the will and not by what was done under it by the executor,7 it determined all of the issues in taxpayer's favor, rejected the disallowances, and found no deficiencies.

The commissioner, here with a long brief and much argument, insists that: claimed deductions, being matter of grace, must be precisely and clearly brought within the statutes allowing them; that those claimed here, if brought within the statute at all, were so brought only by a strained and unnatural construction; and that the Tax Court was, therefore, wrong.

The taxpayer sees the matter more simply and, we think, more as it is. He insists that it would be difficult to imagine a charitable corporation more clearly within Section 23(o). He urges upon us that the fact that the will charged a very small part of the very large income with the payment of bequests can not deprive it of that character, and particularly of the exemption extended by Sec. 162(a).8 As to the claim that the use of the income by the executor to defray corpus charges has subjected the charity to taxes on income which the statute expressly exempts from tax, taxpayer, citing cases the Tax Court cites, urges that it is the terms of the will and not what the executor does with the income which determines the exemption, and that the use by the executor of income for purposes not authorized by the will9 cannot make taxable, income which will and statute have made exempt. But taxpayer doesn't stop here. He argues further that in fact and in law the funds were paid or permanently set over to charitable uses in that, by mere temporary transfer from the income account to the corpus account, they discharged claims against the corpus and saved property itself devised to charity.10 As to the payments out of income directly to the legatees, taxpayer points out that these payments were all charged by the will on the income, and by it directed to be paid annually out of income turned over by the executor to the Foundation. It insists that the fact that the income went directly from executor to legatees instead of by a double play, as provided in the will, from executor to Foundation to legatees is, if a departure from the will, a purely technical one, which cannot in any manner change the fact that these payments directly charged by the will against the income and to be paid out of it annually were in fact so paid, and were, therefore, proper deductions.

We agree with the taxpayer. The Tax Court in its opinion has fully set the facts out, and has elaborately treated the questions of law here raised, and that opinion has our approval. We will not, therefore, further labor the points there discussed. We find it sufficient to say that the terms of the will, the facts surrounding its execution and administration, and the condition of the estate at testator's death, leave us in no doubt that his purpose to create a charitable trust, to devise to it, subject only to the payment of his known debts for which he had ample cash on hand, all of his property, and, subject to the payment out of it of certain small bequests, to dedicate and devote the entire income therefrom to charitable uses, has been sufficiently indicated and must be given effect. Neither are we in any doubt that in creating the foundation and in protecting the corpus against the unforeseen contingencies which arose after death, the executor, by defraying corpus charges out of income, has not deprived the charity of the exemption the will and statute conferred whether the view is taken that the use of the income to pay corpus charges was a charitable use or the view that it was not, but, being unauthorized by the will, it was a diversionary act of the executor without effect. The fact that the very large income was charged with the payment of very small bequests does not in any way alter the controlling fact that the will devised the whole corpus and, except for the bequests, the whole income to charity, and that the Foundation was therefore such a corporation as is described in Sec. 23(o). Neither does the fact that part of the income was temporarily diverted to defray corpus charges affect the dedication to charity provided by the will, or subject the exempt income to tax. Finally, as to the payments of the bequest by the executor, we think it clear that the fact that they were paid by the executor instead of by the Foundation is wholly immaterial. The Tax Court's judgment was right. It is

Affirmed.