COMM'R v. STERNBERGER'S ESTATE

MR. JUSTICE BURTON delivered the opinion of the Court.

The issue here is whether, in determining a net estate for federal estate tax purposes, a deduction may be made on account of a charitable bequest that is to take effect only if decedent's childless 27-year-old daughter dies without descendants surviving her and her mother. For the reasons hereafter stated, we hold that it may not.

Louis Sternberger died testate June 25, 1947. His federal estate tax return discloses a gross estate of $2,406,541.71 and, for the additional estate tax, a net estate of $2,064,346.55. It includes assets owned by him at his death and others held by the Chase National Bank, respondent herein, under a revocable trust created by him. As the revocable trust makes provisions for charity that are, for our purposes, identical with those in the will, this opinion applies to both dispositions.

The will places the residuary estate in trust during the joint lives of decedent's wife and daughter and for the life of the survivor of them. Upon the death of such survivor, the principal of the trust fund is payable to the then living descendants of the daughter. However, if there are no such descendants, one-half of the residue goes to certain collateral relatives of decedent and the other half to certain charitable corporations. If none of the designated relatives are living, the entire residue goes to the charitable corporations.1

At decedent's death, his wife and daughter survived him. His wife was then 62 and his daughter 27. The latter married in 1942, was divorced in 1944, had not remarried and had not had a child.

In the estate tax return, decedent's executor, respondent herein, deducted $179,154.19 from the gross estate as the present value of the conditional bequest to charity of one-half of the residue. Respondent claimed no deduction for the more remote charitable bequest of the other half of the residue. The Commissioner of Internal Revenue disallowed the deduction and determined a tax deficiency on that ground. The Tax Court reversed the Commissioner. 18 T.C. 836. The Court of Appeals for the Second Circuit affirmed the Tax Court, 207 F.2d 600, on the authority of Meierhof v. Higgins, 129 F.2d 1002. To resolve the resulting conflict with the Court of Appeals for the First Circuit in Newton Trust Co. v. Commissioner, 160 F.2d 175, we granted certiorari, 347 U.S. 932.

The controlling provisions of the Revenue Code are in substantially the same terms as when they were first enacted in 19192 and are as follows:

The Commissioner concedes that the corporations named in the will qualify as charitable corporations under the statute. There is no doubt, therefore, that if the bequest to them had been immediate and unconditional, its value would be deductible. The question before us is what, if any, charitable deduction may be made despite (1) the deferment of the effective date of the charitable bequest until the deaths of both decedent's wife and daughter and (2) the conditioning of the bequest upon a lack of descendants of decedent's daughter surviving at that time. We find the answer in the Treasury Regulations, which are of long standing and strengthened by reenactments of I. R. C., § 812 (d), since their promulgation.3

1. Section 81.44 of Treasury Regulations 105 would permit the deduction of the present value of the bequest if it were an outright bequest, merely deferred until the deaths of decedent's wife and daughter.

In their earliest form, the predecessors of these regulations, in 1919, recognized, in plain language, the propriety of the deduction of the present value of a deferred, but assured, bequest to charity.4 Section 81.44 (d) of Treasury Regulations 105 does so with inescapable specificity:

The very explicitness of the above provisions emphasizes their restriction to "the computation of the present worth" of assured bequests such as are the subject of each of the illustrations and cross references in the section. The statute restricts charitable deductions to bequests to corporations "organized and operated exclusively for. . . charitable . . . purposes."5 (Emphasis supplied.) Likewise, the above section of the regulations requires that the deductible value of "the beneficial interest in favor of" the designated charitable purpose be "severable from the interest in favor of the private use." There is no suggestion in the statute or in § 81.44 of a deduction of funds other than those later to be used exclusively for charitable purposes.

2. Section 81.46 of Treasury Regulations 105 permits no deduction for a conditional bequest to charity "unless the possibility that charity will not take is so remote as to be negligible."

Here, also, the regulations in their earliest form, in 1919, were unequivocally restrictive.6 It was only after court decisions had demonstrated the need for doing so7 that the restrictions were restated so as expressly to permit deductions of bequests assured in fact but conditional in form.

Section 81.46 now provides expressly that no deduction is allowable for a conditional bequest to charity "unless the possibility that charity will not take is so remote as to be negligible." The whole section is significant:

Sections 81.44 and 81.46 fully implement § 812 (d) of the code. In their early forms they were obviously mutually exclusive and easily reconcilable. The predecessor of § 81.46 confined charitable deductions to outright, unconditional bequests to charity. It expressly excluded deductions for charitable bequests that were subject to conditions, either precedent or subsequent. While it encouraged assured bequests to charity, it offered no deductions for bequests that might never reach charity. Subsequent amendments have clarified and not changed that principle. Section 81.46 (a) today yields to no condition unless the possibility that charity will not take is "negligible" or "highly improbable." Section 81.46 (b) is equally strict. It relates to provisions whereby funds may be diverted in whole or in part to noncharitable uses, and it limits the tax deduction to that portion of each fund that cannot be so diverted. Where the principal of a bequest to charity thus may be invaded for private purposes, it is only the ascertainable and assured balance of the bequest to charity that is recognized for a tax deduction.

Respondent concedes that the chance that charity will not take is much more than negligible. Therefore, if § 81.46 (a) applies to the instant case, no charitable deduction is permissible.

Respondent claims, however, that § 81.44 covers this case. In doing so, it reads §§ 81.44 and 81.46 together and, instead of confining them to their mutually exclusive subjects, makes them overlap. It applies § 81.44 to some deferred conditional bequests. It does so in any case where it can compute, on approved actuarial standards, the degree of possibility that charity will receive the conditional bequest. Respondent then computes the present value of a corresponding percentage of the entire deferred bequest. In short, respondent claims an immediate tax deduction equal to the present value of whatever fraction of the bequest corresponds, actuarially, to the chance that charity may benefit from it.

This Court considered a somewhat comparable proposal in 1928. In Humes v. United States, 276 U.S. 487, a taxpayer sought a charitable deduction based on a bequest to charity that was conditional upon the death of decedent's 15-year-old niece, without issue, before reaching the age of 40. To sustain the proposal, the taxpayer sought to establish actuarially a measure of the chance that charity would receive the bequest and to find authority in the Revenue Code for the deduction of the present value of a corresponding percentage of the bequest. Speaking through Mr. Justice Brandeis, this Court found the actuarial computation inadequate. It, however, did not drop the matter there. It made the following statement:

Since the above was written, there have been advances in the actuarial art. Today, actuarial estimates are employed more widely than they were then. The computations now before us illustrate that advance. They do not, however, lesson the necessity for statutory authorization for such a tax deduction. The scope of the authority required by respondent can best be appreciated if examined in the revealing light of the specific circumstances of the present case.

The Tax Court and the Court of Appeals have approved respondent's actuarial computations as fairly reflecting the present value of one-half of a two-million-dollar residue, reduced in proportion to the chance that charity will receive it. In making this estimate, respondent has computed the present value of the deferred bequest on the basis of 4% interest compounded annually and has used the following actuarial tables:

1. To determine the joint life expectancy of decedent's wife and daughter, the Combined Experience Mortality Table prescribed in § 81.10 of the estate tax regulations.

2. To estimate the probability of remarriage of the daughter, the American Remarriage Table, published by the Casualty Actuarial Society.

3. To estimate the chance of a first child being born to decedent's daughter a specially devised table which has been found by the Tax Court to have been prepared in accordance with accepted actuarial principles upon data derived from statistics published by the Bureau of the Census.8

On the basis of these tables, the Tax Court finds that the present value of the charitable remainder at the death of decedent is .18384 on the dollar if computed solely on the chances of his daughter's remarriage;.24094 on the dollar if computed on the chance that a legitimate descendant of his daughter will survive her; and .24058 on the dollar if computed on the chance that any legitimate or illegitimate descendant of his daughter will survive her. It is this last estimate that respondent seeks to apply here.

If respondent is successful, it means the allowance of an immediate and irrevocable deduction of over $175,000 from the gross estate of decedent, although respondent admits there is a real possibility that charity will receive nothing. The bequest in fact, offers to the daughter an inducement of about $2,000,000 to remarry and leave a descendant. To the extent that this inducement reduces the actuarially computed average probability that charity will receive this bequest, it further demonstrates the inappropriateness of authorizing charitable tax deductions based upon highly conditional bequests to charity.

An even clearer illustration of the effect of respondent's interpretation of the code readily suggests itself. If decedent had here conditioned his bequest to charity solely on the death of his daughter before remarriage, the Remarriage Table would then fix the present value of the charitable remainder at .18384 on the dollar. The taxpayer would at once receive a substantial charitable deduction on that basis. The daughter, however, would have a $2,000,000 inducement to remarry. If she did so, her action would cancel the possibility that charity would receive anything from the bequest, but it would not cancel the tax seduction already allowed to the estate. To whatever extent any person can defeat the fulfillment of any condition upon which a benefit to charity depends, to that extent the actuarial estimate that such benefit will reach charity is less dependable. The allowance of such a tax reduction as is here sought would open a door to easy abuse. The result might well be not so much to encourage gifts inuring to the benefit of charity as to encourage the writing of conditions into bequests which would assure charitable tax deductions without assuring benefits to charity.

We find no suggestion of authority for such a deduction in § 812 (d). That section remains substantially the same as it was when Humes v. United States, supra, 276 U.S. 487, was decided. We also find no authorization for the deduction wither in § 81.46 or § 81.44 of the regulations, as thus far discussed. This relegates respondent to the following words now in § 81.44 (d):

In view of the statutory emphasis upon outright bequests and the long-standing exclusion of conditional bequests by § 81.46 of the regulations (and its predecessors), we do not regard the above sentence as now invading the domain of § 81.46 by extending the deduction to conditional bequests in a manner readily open to abuse. we regard the sentence as restricted to computations of deferred but assured, bequests. Section 81.10 (i) now deals at length with the valuation of remainders and reversionary interests and gives many examples of such computations. Every example, however, is one of the valuation of an assured bequest. The additional language in § 81.44 (d), quoted above, does not authorize the deduction, and § 81.46 prohibits it. Such specific and established administrative interpretation of the statute is valid and "should not be overruled except for weighty reasons." Commissioner v, South Texas Co., 333 U.S. 496, 501.

This Court has not specifically faced the issue now before us since Humes v. United States, supra, but we see no reason to retreat from the views there stated. This Court finds no statutory authority for the deduction from a gross estate of any percentage of a conditional bequest to charity where there is no assurance that charity will receive the bequest or some determinable part of it. Where the amount of a bequest to charity has not been determinable, the deduction properly has been denied. Henslee v. Union Planters Bank, 335 U.S. 595, 598-600; Merchants Bank v. Commissioner, 320 U.S. 256, 259-263; and see Robinette v. Helvering, 318 U.S. 184, 189. Where the amount has been determinable the deduction has, with equal propriety, been allowed where the designated charity has been sure to benefit from it. United States v. Provident Trust Co., 291 U.S. 272; Ithaca Trust Co. v. United States, 279 U.S. 151.

Some of the lower courts have squarely met the instant problem and denied the deduction. For example, the deduction was denied in the First Circuit where the court found that "it is not certain that the charity will takes 50% of the corpus; only that it has a 50-50 chance of getting all or nothing." Newton Trust Co. v. Commissioner, 160 F.2d 175, 181. See also, Graff v. Smith, 100 F.Supp. 42; Hoagland v. Kavanagh, 36 F.Supp. 875; Wood v. United States, 20 F.Supp. 197. The administrative practice, as evidenced here by the action of the Commissioner, has been to deny the deduction. See further, Paul, Federal Estate and Gift Taxation (1946 Supp.), 426-427.

The judgment of the Court of Appeals, accordingly, is reversed and the cause remanded for action in conformity with this opinion.

Reversed.

MR. JUSTICE REED, with whom MR. JUSTICE DOUGLAS joins, dissenting.

The facts are fully and fairly stated in the Court's opinion. Its statement of the legal issues accords with our understanding of the case, to wit:

The reason for dissenting, at some length, is that the Court's conclusion seems to disregard the words of the statute in question and to subvert the purpose of Congress in its enactment, that purpose admittedly being to encourage testamentary gifts to corporations organized for certain objects considered highly desirable for the good of our people.1 There is a certain hesitation in dissenting from an interpretation of a tax statute remediable by Congress, but as the Court's decision springs, we think, from an overemphasis on regulations, a protest may have usefulness as a counterweight against future extensions of such treatment to statutory language.

First. The statute, 26 U. S. C. § 812 (d), allows as deductions from the gross estate 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 . . . ." There is no legislative history explanatory of its meaning.2 If we read the quoted portion of § 812 alone, could there be any doubt that the Sternberger bequest is deductible? We think not. It says "all bequests"—whatever the charity takes under the will. There is not a word that limits the deduction of bequests to what assuredly goes to the institution. It is the "amount" of the bequest that is deductible—its presently ascertainable value. The statute plainly allows deferred charitable bequests. It does not require assured enjoyment.

Under the Court's interpretation, if a child were bequeathed his father's estate for life with remainder in default of issue to the recognized institutions, the full estate tax would have to be paid. On the other hand, if the estate were left simply to the child for life and then to the same institutions, the estate would be free from the tax on the present value of the remainder. Such a differentiation is not found in the statute. The Congress said that charitable bequests should be deductible. The valuation of the charitable interest in one instance would be greater than in the other; the tax less. But in each case the net estate would be reduced only by the present actuarial value of the charitable bequest. While particular estates would secure tax advantages under our interpretation, in the aggregate the charitable deductions should substantially equal the amount received by the tax-recognized institutions. This would surely fairly carry out the congressional purpose. To view respondent's contention as urging a possible over-all tax windfall for estates is to deny the mathematical law of averages.3

Our interpretation of the statute has support in the language of Treasury Regulation 105, § 81.44. After referring to the valuation of bequests whose value is presently ascertainable, the regulation adds:

The tables refer to a remainder contingent on the termination of one life only. Section 81.44 alone would allow, in the light of the statutory language, a deduction for a contingent bequest, uncertain as to ultimate receipt. See the Court's opinion, ante, pp. 198 and 199. The Court does not follow this language of the Regulations because of § 81.46 and because of "statutory emphasis upon outright bequests." We find no such emphasis. The purpose of the statute leads us to the contrary result.4

The Court agrees, however, with the Government's contention that "it is immaterial whether the charity's contingent possibility of receipt can be valued as of the decedent's death." It holds that it is only when ultimate receipt must follow that § 812 (d) allows a deduction. Although the Government asserts its conclusion is upheld by our decisions, we do not think they so hold. In this Court five cases have touched upon the problem. Three of them were disposed of because of the failure to introduce, or the impossibility of making, a valuation upon sound actuarial principles.5 None of them held that bequests are not deductible although the ultimate taking by the charitable beneficiary was uncertain.

Two—Ithaca Trust Co. v. United States, 279 U.S. 151, and United States v. Provident Trust Co., 291 U.S. 272— allowed a deduction for conditional charitable bequests. The former because a right to invade the corpus was fixed by a standard capable of being stated in money and, as the income of the estate was ample for the needs of the life beneficiary, there was no uncertainty sufficient to justify a refusal of the deduction for the charitable remainder. The latter is, on its face, a decision that would decide the issue, simplicity, of the deducibility of contingent bequests. Neither is here controlling, however, since in both the charity was held to be assured of taking. The Provident Trust case is worth a moment's examination. Property was left by will in trust for the deceased's daughter for life; upon her death the corpus was to pass to her lawful issue; but should she die without issue, the estate was to be distributed among various charitable organizations. Prior to the death of the testator, an operation had rendered the daughter incapable of childbearing, assuring the vesting of the charitable remainder. This Court did not apply the then existing regulations (the predecessor to § 81.46 (d))6 which would have denied a deduction. It ignored the regulation, apparently believing it in conflict with the purpose of the statute, and allows the deduction, thus requiring the amendment of the regulation to its present form. The Court stated the relevant inquiry to be follows:

Our conclusion is that the purpose of § 812 was to allow a deduction for charitable bequests that are capable of valuation at the time of death, although it is not certain that the gift will ultimately fall to the contingent beneficiary. See in accord Meierhof v. Higgins, 129 F.2d 1002, a case in conflict with Newton Trust Co. v. Commissioner, 160 F.2d 175, which ultimately led to the allowance of this certiorari. The purpose of § 812 and its background forbid, we think, a conclusion that Congress intended to exclude a deduction in those cases.

Second. The Government asserts and this Court agrees that although it is clear that § 812 allows a deduction for some contingent bequests, § 81.46 of the regulations limits those contingencies to instances where the "possibility that charity will not take is so remote as to be negligible." Clearly the possibility here is not "remote." The chances are against the charity taking. It is quite true that § 81.46 has survived reenactment of I. R. C., § 812, and that it can be interpreted as a limitation upon the deducibility of contingent remainders. However, we do not think such a ruling would be consistent with the purpose of Congress, manifested by I. R. C., § 812.

Whether the Regulations are written into the Estate Tax law by reenactment or are merely indicative of congressional purpose,7 the deduction section and the regulations are to be interpreted in the light of the congressional purpose. Whether may be the varying views as to the desirability of testamentary gifts of moneys or business to public or private charitable foundations, congress has sanctioned such provisions, vested or with certain degrees of contingency, by the deduction section of the Estate Tax.8 The policy has brought munificent gifts to the chosen institutions.

If it were not for the reenactment of § 812 after the promulgation of § 81.46, we would have no hesitation in declaring it in conflict with the statute. Even in interpreting statutes when isolated provisions would produce results "plainly at variance with the policy of the legislation as a whole," we follow the purpose rather than the literal words. United States v. American Trucking Assns., 310 U.S. 534, 543. That rule is applicable here. Regulations do not have the safeguards of federal statutory enactments. Interested parties outside the Internal Revenue Service perhaps may not be heard. Reports explaining the action are not available. Public discussion, such as happens in Congress, does not take place. In short, we think that reenactment of a statute after the due adoption of a regulation does not make the regulation a part of the statute. It is only an indication of congressional purpose to be weighed in the context and circumstances of the statutory language. In this instance the congressional purpose to encourage gifts to charity should not be frustrated by the issuance of a regulation.

For the foregoing reasons we would affirm the judgment of the Second Circuit.