Trust Can't Deduct Charitable Contributions Where Will Did Not Explicitly Allow Them

(Parker Tax Publishing October 2016)

The Tax Court held that charitable contributions made by a trust were not deductible because they were not made pursuant to the will that established the trust. The court stated that if the decedent had intended to give his trustees authority in his will to make charitable contributions, he could have added language to that effect, and disagreed that the will contained a "latent ambiguity" allowing the contributions. Harvey C. Hubbell Trust v. Comm'r, T.C. Summary 2016-67.

Background

The Harvey C. Hubbell Trust is a testamentary trust created under the last will and testament of Harvey C. Hubbell. Hubbell died in 1957 and, following the final distribution of his estate in 1960, the trust came into existence. The trust provides for fixed payments to certain individuals for their life and directs the trustees to make the payments out of net income if available, otherwise out of principal. The trust document also provides that the trust "shall terminate upon the death of the last person receiving benefits therefrom, except that if in the judgment of the then Trustees it is advisable to continue the trust, it may be continued for not longer than ten (10) years after such death. All unused income and the remainder of the principal shall be used and distributed, in such proportion as the Trustees deem best, for such purpose or purposes, to be selected by them as the time of each distribution, as will make such uses and distributions exempt from Ohio inheritance and Federal estate taxes and for no other purpose."

Mr. Hubbell's will appointed three individuals to be the executors and trustees. They were given broad powers to manage Mr. Hubbell's estate and the trust. From 1960 to 2009, the trustees managed the assets of the trust, paid fees and expenses, and from the net income of the trust they made the required beneficiary distributions. From time to time, the trustees also caused the trust to make charitable contributions as defined by Code Sec. 170(c). Between 1985 and 2008, more than $1 million in charitable contributions were made by the trust. On its 2009 Form 1041, the trust took a charitable contribution deduction of $64,279. The IRS disallowed the deduction.

IRS's Position

While conceding that the contributions were made for a purpose specified in Code Sec. 170(c), the IRS nonetheless disallowed the trust's charitable contribution deduction because it was not made "pursuant to the terms of the governing instrument" as required by Code Sec. 642(c)(1). The IRS noted that no provision of the will authorized the trustees to make charitable contributions for 2009 or for any other year. Thus, the IRS argued, the charitable contributions made during 2009 were not deductible under Code Sec. 642(c)(1).

Trust's Position

The trust asserted that the Tax Court could go beyond the provisions of the will to determine Mr. Hubbell's intent because there was a latent ambiguity in the will. Case law defines a "latent ambiguity" as a defect which does not appear on the face of language used or an instrument being considered. It arises when language is clear and intelligible and suggests only a single meaning, but some intrinsic fact or some extraneous evidence creates a necessity for interpretation or a choice between two or more possible meanings (for example, where the words apply equally well to two or more different subjects or things).

The trust argued that, to the extent the language of the will was not clear in explicitly authorizing charitable gifts, it contained a latent ambiguity. The trust further argued that the latent ambiguity was revealed by the fact that the trustees of the trust, including his attorney, had consistently exercised their duties with the understanding that the will authorized them to make charitable gifts. As a result, the trust said, the Tax Court could use extrinsic evidence to resolve the latent ambiguity in the will and to find that Mr. Hubbell intended his trustees to make the charitable contributions that were made during 2009.

Tax Court's Analysis

The Tax Court noted that, in order for the trust to be entitled to the charitable contribution deduction, it had to do three things: (1) identify the "governing instrument"; (2) show that the charitable contributions were paid "pursuant to" the terms of that instrument as required by Code Sec. 642(c)(1); and (3) demonstrate that each contribution was paid for a charitable purpose under Code Sec. 170(c). Because the parties agreed that the will was the governing instrument and that the contributions were paid for a charitable purpose under Code Sec. 170(c), the trust only had to show that the charitable contributions were made "pursuant to" the terms of the will, as required by Code Sec. 642(c)(1).

The Tax Court held that the charitable contributions made by the trust in 2009 were not deductible because they were not made pursuant to the will. The court rejected the trust's argument that there was ambiguity in the will. In essence, the court said, the trust was arguing that the terms of the will, which stated in effect that charitable gifts could not be made before the death of the last annuitant, were ambiguous because they did not explicitly state the opposite - that charitable gifts could be made before the death of the last annuitant. The court observed that, after the death of all annuitants, the will authorized the unused income and the remainder of principal to be used and distributed for a purpose "exempt from Ohio inheritance and Federal estate taxes and for no other purpose." The court concluded that, if Hubbell had intended to give his trustees authority in his will to make charitable contributions, he could easily have done so. The court said it was hard to believe that his failure to grant authority to his trustees to make charitable contributions before the death of the last annuitant was not intentional.

In reaching its conclusion, the court also cited the Supreme Court's decision in Old Colony Trust Co. v. Comm'r, 301 U.S. 379 (1937), in which the Court held that a trust is not entitled to a charitable contribution deduction when the fiduciary, acting without any authority under the trust instrument, distributes trust assets to charity. The trust instrument must authorize the fiduciary to make charitable contributions, in order for a court to find that the charitable contributions were made "pursuant to" the terms of the trust instrument.

For a discussion of the requirements a trust must meet to deduct a charitable contribution, see Parker Tax ¶53,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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