2nd Circuit Limits Estate’s Charitable Deduction Pursuant to IRC § 642(c)(1)

The 2nd Circuit, affirming an order granting summary judgment to the United States, held that payments by an estate to charities pursuant to a testamentary power of attorney exercised by the surviving spouse over the principal of a marital trust, did not qualify for a charitable deduction under IRC § 642(c)(1), since the bequest was not made “pursuant to the terms of the governing instrument.” The court held that Lucien Brownstein’s earlier will — and not the power of attorney exercised by Ethyl Brownstein, the surviving spouse — was the “governing instrument.” Estate of Ethyl Brownstein v. U.S., No. 04-4061 (9/27/06).

[Lucien Brownstein died testate in 1971. His will left his wife Ethyl an interest in a marital trust with a general testamentary power of appointment. The bequest qualified for the marital deduction under IRC § 2056(b)(5). Upon her death in 1996, Ethyl directed that her residuary estate be distributed among various charities. Pursuant thereto, the Trustee of the Trust distributed $1 million to the Executor of Ethyl’s estate, which claimed a $1 million charitable deduction on an amended return seeking a refund for tax already paid. Following an IRS denial of the refund claim, an action was commenced in the Southern District. This appeal followed summary judgment granted to the United States.]

Since Lucien’s will expressed no charitable intent, Ethyl Brownstein’s Estate had to establish that Lucien’s will was not the “governing instrument.” This obstacle proved insurmountable. Lucien’s estate had claimed a marital deduction. As the court noted, this deduction was wholly dependent on a qualifying income interest with general power of appointment having been given to Ethyl under Lucien’s will. Unless Ethyl were free to exercise her general power of appointment at her own death, Lucien’s estate would not have been allowed the marital deduction.

Ethyl’s Estate attempted to circumvent this problem by arguing that Lucien’s will and Ethyl’s power of appointment together represented the “governing instrument,” and that Ethyl’s will did express charitable intent. However, the court found this argument unconvincing, since the term “governing instrument” does not comprehend reference to more than one instrument. Combining Ethyl’s power of appointment with Lucien’s will would “strain the statutory language.”

The Court then discussed another requirement of section 642(c), i.e., that the distribution have been made made “pursuant to” the governing instrument. If Lucien’s will were the governing instrument, and Ethyl’s will merely carried out its intent, Lucien’s will did not express “sufficient charitable intent” with respect to the eventual disposition of the Trust principal. The court noted that Ethyl “could have distributed the Trust principal entirely to private individuals.” Since Ethyl was not required to give “one penny” to charity, the statutory language was not satisfied. Therefore, Ethyl’s will did not make the charitable distribution “pursuant to” the terms of Lucien’s will.

The Court’s decision was expressly informed by the doctrine enunciated by the Supreme Court in New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934), that “whether and to what extent deductions shall be allowed depends upon legislative grace.” The court observed that were a Trustee permitted to “agglomerate” the separately manifested intents of various testamentary instruments to create a single, “chimerical” governing instrument, income tax deductions to trusts would be greatly enhanced, a proposition for which Congress had made “no provision.”

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