Estate of Lawler v. Commissioner

*269 Respondent has determined a deficiency in Federal estate tax in the amount of $ 1,767,985.79. ¹

On March 27, 1968, we severed issues in this docket on petitioner's unopposed motion, therefore the only issue for decision herein is whether petitioner is entitled to claim a charitable deduction under section 2055 of the Internal Revenue Code of 1954 for the gift of "Fund C" under the terms of the Florence H. Lawler Trust to the bishop of the Roman Catholic Diocese of Richmond.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are *134 incorporated herein by this reference.

Florence Lawler (hereinafter sometimes referred to as the decedent) died testate, a resident of Richmond, Va., on February 23, 1962. Decedent was a widow, her husband having predeceased her by more than 30 years.

J. Edward Lawler, coexecutor (hereinafter sometimes referred to as petitioner), resided at Richmond, Va., at the time of the filing of the petition herein. Petitioner and Leonard Abrams were duly appointed and qualified as coexecutors of the Estate of Florence H. Lawler.

Decedent, owned most or all of the stock of Union Life Insurance Co. (hereinafter sometimes referred to as Union). On December 3, 1959, the decedent, who was at that time 72 years old, created the Florence H. Lawler Trust (hereinafter sometimes referred to as the trust), and on the same date transferred 16,000 shares of the common stock of Union to the trust.

Under the terms of the trust agreement decedent was to be paid during her lifetime all dividends and income of any nature, including *270 rents, from the corpus of the trust. The trust agreement provided that upon the death of decedent, or upon her written renunciation of the benefits of the trust --

the*135 Trustees shall deliver unto Most Rev. John J. Russell, Bishop of Richmond, or his successor in office, the corpus then remaining of the said Trust estate in three equal funds as follows:

FUND A -- For the erection and maintenance of a hospital in and of the Diocese of Richmond, but not restricted thereto, should Most Rev. John J. Russell, Bishop of Richmond, or his successor in office, deem it advisable to apply this Fund to other charitable purposes of the Diocese of Richmond.

FUND B -- For educational purposes of the Diocese of Richmond, including private and parochial schools, high schools, colleges, training schools and seminaries.

FUND C -- For missionary purposes of the Diocese of Richmond, including the establishment, maintenance and improvement of existing missions, the establishment, maintenance and improvement of additional missions, and the maintenance of the group of clergy known as the Diocesan Missionary Band.

The decedent designated as trustees of the trust --

the Most Reverend John J. Russell, Bishop of the Roman Catholic Diocese of Richmond; J. E. Lawler, Vice President and counsel for the Union Life Insurance Company, Inc., of Richmond, Virginia; and I. H. Wainwright, *136 Vice President and Comptroller of the Union Life Insurance Company, Inc., of Richmond, Virginia.

On November 10, 1960, and December 13, 1961, the decedent transferred to the trust 150 shares and 100 shares, respectively, of the common stock of Union.

By her last will dated April 5, 1961, decedent made a testamentary bequest to the trust of all her Union stock -- this amounted to 1,350 shares. This 1,350 shares of Union, together with the 16,250 shares of Union already held by the trust, constituted all of the outstanding stock of Union.

On May 24, 1963, the executors filed a Federal estate tax return for the decedent's estate. The executors in computing decedent's gross estate included the value of both the 16,250 shares of Union already held by the trust at decedent's death, and the 1,350 shares of Union that passed to the trust under decedent's last will and testament. The value of these transfers was then deducted as a charitable gift in arriving at the taxable gross estate.

On May 26, 1966, a complaint was filed in the Hustings Court of the City of Richmond, Part II, ² by the residuary legatees under decedent's last will and testament, alleging that the several funds passing*137 to the Most Reverend John J. Russell, bishop of Richmond (hereinafter referred to as the bishop), or his successor in office, at decedent's death were individually and collectively void because section 57-16 of the Code of Virginia (1950), as in force at decedent's death, was *271 unconstitutional, and in the alternative, that the several funds passing to the bishop at decedent's death were individually and collectively void as to any amount in excess of $ 2 million.

The defendants in the above action (petitioner herein) filed a demurrer, which was sustained by an order of the Hustings Court after a compromise offer was accepted by the complainants. Said order read in part:

Now, Therefore, the Court being of the opinion that the trusts involved herein are good and valid charitable trusts doth so adjudge and decree and the Court deeming it to the best interests of the infant parties to approve said compromise settlement doth accordingly approve and confirm the same *138 and direct that the defendants pay into Court the sum of Thirty-Five Thousand Dollars ($ 35,000.00) in final settlement of all matters in controversy in this case, and the defendants having this day paid the said Thirty-Five Thousand Dollars ($ 35,000.00) -- into Court the defendants are hereby discharged of all further liability to the parties to this controversy and final judgment is hereby entered in favor of the defendants Leonard Abrams and J. Edward Lawler, as Executors under the Last Will and Testament of Florence H. Lawler, deceased; and Most Reverend John J. Russell, Bishop of Richmond and J. E. Lawler and I. H. Wainwright, Trustees under the Florence H. Lawler Trust.

The Roman Catholic Diocese of Richmond encompasses most of the State of Virginia and eight counties in West Virginia; its area is approximately 35,000 square miles. In 1962 there were 109 parishes and 32 missions in the Richmond Diocese. A parish of the Catholic Church is a separate congregation with a resident pastor, whereas a mission is a separate congregation which does not have a resident pastor because it is incapable of supporting one.

In the Roman Catholic Church, the bishop is charged with taking care*139 of the spiritual needs and the material means and properties of a diocese. A bishop is appointed by the Pope, the supreme temporal head of the Roman Catholic Church.

Canon 1495 No. 1, in the Code of Canon Law of such church, claims the authority of the Roman Catholic Church to hold property throughout the world. In the United States it is the policy of the Roman Catholic Church that property should be held by a moral person and, since the Third Council of Baltimore, the bishop as the head of each individual diocese has been authorized to hold and administer the properties of the diocese.

Respondent, by his statutory notice of deficiency, determined deficiencies in estate tax resulting from: (a) An undervaluation of stocks and bonds held by decedent at her death, which included therein the 1,350 shares of Union stock bequeathed to the bishop of the Diocese of Richmond; (b) an undervaluation of the 16,250 shares of Union stock transferred inter vivos to the Florence H. Lawler Trust; (c) an adjustment decreasing the amounts claimed and deducted as administrative *272 expenses; and (d) the disallowance as a charitable deduction of the value of Union stock (as valued by respondent) *140 allocable to Fund C of the Florence H. Lawler Trust.

Petitioner filed a motion endorsed "no objection" by respondent to sever issues in this docket. We granted such motion and consequently the only issue for our present consideration herein is whether the petitioner is entitled to claim a charitable deduction from decedent's adjusted gross estate for the gift of "Fund C" under the terms of the Florence H. Lawler Trust to the bishop of the Roman Catholic Diocese of Richmond. Accordingly, a decision for respondent on this issue will leave for our consideration the valuation of the stocks and bonds, including the 1,350 shares of Union, held by decedent at her death; the value of the 16,250 shares of Union transferred to the Florence H. Lawler Trust; and the amount of deductible administrative expenses. A decision for the petitioner on this issue will leave for our consideration the value of the stocks and bonds (exclusive of the 1,350 shares of Union) held by decedent at her death; and the amount of deductible administrative expenses. This is so because, if the value of Fund C is properly deductible from decedent's adjusted gross estate, there will be no change in the amount of Federal*141 estate tax due. The value of Fund C will have been included in the gross estate, and the same amount will be deducted as a charitable gift from the adjusted gross estate.

OPINION

Respondent disallowed a part of the charitable deduction claimed by petitioner, as executor of the Estate of Florence H. Lawler, on decedent's Federal estate tax return. It is respondent's contention that the gift of "Fund C" under the terms of the Florence H. Lawler Trust, which trust was included in decedent's gross estate, is invalid under Virginia law and, therefore, the Estate of Florence H. Lawler is not entitled to a charitable deduction for the value of "Fund C" in computing its Federal estate tax. Respondent agrees that if the gift is valid under the law of Virginia it is a proper deduction from decedent's adjusted gross estate.

Our decision on this issue rests largely on the law of Virginia; we therefore deem it advisable to touch briefly on the foundations of Virginia jurisprudence regarding charitable bequests.

In Baptist Association v. Hart's Executors, 4 Wheat. 1 (1819), the Supreme Court, speaking through Chief Justice Marshall, held that the charitable*142 bequest of a Virginia testator could not be established by a court of equity, independent of the statute of 43 Eliz., ch. 4 (often referred to as the Statute of Charitable Uses), and since the statute of 43 Elizabeth was repealed in 1792 by Virginia's general repeal of English *273 Statutes, the bequest was void. Twenty-five years later the Supreme Court, in Vidal et al. v. Girard's Executors, 2 How. 126 (1844), distinguished the Hart decision and noted that the English Court of Chancery entertained jurisdiction over charities long before the statute of 43 Elizabeth. ³

*143 In the interim, between the Hart and Vidal decisions, the Supreme Court of Appeals of Virginia decided Gallego's ex'ors v. Attorney General, 3 Leigh 450, 30 Va. 487 (1832). In Gallego it was held that a trust for indefinite beneficiaries was invalid and that indefinite bequests for charitable purposes could only be sustained under the statute of 43 Elizabeth, which was repealed by the State of Virginia in 1792.

Although Gallego was decided before Vidal, the Gallego court did not rely entirely on the opinion of Chief Justice Marshall in Hart. Speaking for the court in Gallego, Judge Tucker stated (30 Va. at 516-517):

a just respect to the policy of the legislature, in relation to religious charities especially; a prudent caution on our part, in assuming doubtful powers; a due sense of the infinite difficulty and embarrassment, which must attend the search after the common law doctrines anteriour to the statute of Elizabeth; and a just view of the danger of reviving these obsolete doctrines; -- must determine us to leave the subject to the wisdom of the legislature*144 itself. * * *

As an aftermath to Judge Tucker's opinion in Gallego, the Virginia legislature in 1839 and in 1841 promulgated statutes validating charitable (literary and educational) and religious gifts respectively. These statutes were the predecessors of what is presently section 55-26 and section 57-7 of the Virginia Code of 1950. The legislature, however, fearful that an accumulation of wealth by religious institutions would result in an intermeddling in the affairs of government, permitted only transfers of realty and restricted the quantity of said transfers. Beginning in 1902, and by subsequent amendments, the Virginia legislature authorized gifts of specific amounts of personalty to religious institutions (presently sec. 57-12). See Maguire v. Loyd, 193 Va. 138, 67 S.E. 2d 885 (1951).

Although the Supreme Court's opinion in Hart, was subsequently reexamined in Vidal and found to be erroneous, the Virginia Court of Appeals' decision in Gallego, that a trust for indefinite beneficiaries *274 could only be validated by an act of the legislature, remains today as a viable doctrine of Virginia jurisprudence. *145 See Moore v. Perkins, 169 Va. 175, 177, 192 S.E. 806, 807 (1937); Maguire v. Loyd, supra; and see Smith v. Moore, 343 F. 2d 594, 599-600 (C.A. 4, 1965).

In line with Virginia's fear of organized religions intermeddling in the affairs of government, the present constitution of Virginia provides in article IV, section 59, that "The General Assembly shall not grant a charter of incorporation to any church or religious denomination, but may secure the title to church property to an extent to be limited by law." Although this provision first appeared 4 in the constitution of 1850, and was subsequently included in each succeeding constitution, 5 its germination may be traced to the Revolution and the Bill of Rights wherein the church and state were disestablished. Thus, the purpose of this constitutional provision was to reaffirm the separation of church and state and not to prevent the holding of property by organized religion. Trustees Gen. Assem. Presbyterian Church U.S. v. Guthrie, 86 Va. 125, 10 S.E. 318, 322 (1889).*146 Accordingly, the incorporation of church agencies essential to the accomplishment of church work has been held not to be the incorporation of a church and, therefore, a bequest to such an organization is not rendered invalid. Trustees Gen. Assem. Presbyterian Church U.S. v. Guthrie, supra.Thus, in Virginia today, title to church property may be secured to an extent limited by law, however, both charitable and religious trusts for the benefit of indefinite beneficiaries must be validated by an act of the legislature.

Accordingly, under the*147 law of Virginia, charitable bequests, exclusive of transfers to religious organizations, are validated by section 55-26 of the Virginia Code of 1950 (hereinafter referred to as section 55-26). Transfers to lay trustees for religious organizations are validated by section 57-7 of the Virginia Code of 1950 (hereinafter referred to as section 57-7) and limitations upon the quantity of realty and personalty that said trustees may hold under section 57-7 are imposed by section 57-12 of the Virginia Code of 1950 (hereinafter referred to as section 57-12). Provision is also made under section 57-16 of the Virginia Code of 1950 (hereinafter referred to as section *275 57-16) for the acquisition of property by an appointed bishop, minister, or other ecclesiastical officer whenever the laws, rules, or ecclesiastical polity of any church commits to said bishop, minister, or ecclesiastical officer authority to administer its affairs. This section was enacted in 1942.

Petitioner contends that Fund C of the trust constitutes a valid charitable bequest under section 55-26. ⁶ To support his contention, petitioner argues that the main purpose of Fund C is "missionary purposes of the Diocese*148 of Richmond" and, therefore by definition, is not a gift to a religious institution which would be governed by section 57-7.

*149 Petitioner's attempt to categorize Fund C as a charitable bequest under section 55-26 through the use of the word "missionary" must fail. The whole tenor of Fund C indicates that the bequest was not intended to be totally nonsecular. To accept petitioner's argument, therefore, would be to circumvent the intent of the Virginia legislature as expressed in sections 57-7, 57-12, and 57-16. Moreover, we find support for this analysis in Moore v. Perkins, supra, where the Supreme Court of Appeals of Virginia held that a bequest of money to be administered by a named pastor, who was to pay the interest earned on said money "to the Methodist Church South for missionary work where he thinks it will do the greatest good," did not fall within section 55-26. In Perkins, the court recognized the dichotomy in Virginia between bequests and devises for religious purposes and bequests and devises for charitable purposes. The court observed that section 55-26 was intended to deal primarily with charitable trusts for literary and educational purposes, while religious donations were to be controlled by the sections of the Virginia Code specifically*150 made applicable to them and, therefore, the bequest in Perkins "for missionary work" *276 could not be validated under section 55-26. A fortiori the bequest herein cannot be validated under section 55-26.

Petitioner makes two additional arguments in a further effort to demonstrate that Fund C was a valid bequest under section 55-26.

Primarily, petitioner refers us to the case of Fitzgerald v. Doggett's Ex'r, 155 Va. 112, 155 S.E. 129 (1930), wherein a gift to the Virginia Conference, Methodist Episcopal Church, South, for the relief of superannuated ministers, was validated under section 55-26. Petitioner attempts to draw a comparison between the objectives of the gift in Fitzgerald v. Doggett's Ex'r and the objectives in Fund C. We find, however, that the objectives of these gifts are not similar. The gift in the instant case is for missionary work and there is no question that some part of this missionary work will be of a sectarian nature. The gift in Doggett, however, although for the relief of superannuated ministers, was primarily to provide financial support for a specific class of people. The *151 fact that these people were ministers does not lead to a conclusion that the objectives of the gift in Doggett are similar to the objectives of Fund C in the instant case.

In further support of his contention that Fund C was a valid bequest under section 55-26, petitioner urges us to adopt the conclusion of the order issued by the Hustings Court of the City of Richmond, Part II, in Carole Lee Handley versus Leonard Abrams, wherein said court approved a compromise settlement and stated: "Now, therefore, the Court being of the opinion that the trusts involved herein are good and valid charitable trusts doth so adjudge and decree."

Although the decision of a State trial court is not binding on this Court, Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), we have in certain circumstances accepted the determination of a State trial court, believing that it is clearly correct. Harold S. Smith, 50 T.C. 273, 282 (1968). We do not believe, however, under the facts of the instant case and the nature of the proceeding in the Hustings Court, that we should adopt that court's "opinion" that Fund C was a charitable trust, *152 and we do not do so. The proceedings therein were composed entirely of a complaint, an answer and preliminary motions; moreover, the order was issued as a result of a court-approved compromise settlement. In short, a trial on the merits was never held.

*277 Petitioner contends, in the alternative, that section 57-16 ⁷ of the Virginia Code validates the gift of "Fund C" and that at the time of decedent's death, there was no limitation in section 57-16 upon the amount of money or securities that the bishop could take or hold for diocesan purposes.

*153 *278 It is respondent's contention, however, that section 57-12⁸ which is directed to lay trustees and which contained at decedent's death a $ 2 million limitation on the amount of personalty said trustees (of a church or religious congregation or society) could hold, is applicable to transfers under section 57-16; that as a result of this limitation, the bishop may not hold more than $ 2 million of personalty for the diocese; and that petitioner's construction of section 57-16 would render the section unconstitutional.

*154 We agree with petitioner.

We note that decedent's gift of "Fund C" is to the bishop for "missionary purposes of the Diocese of Richmond" and not to the bishop for the benefit of a specific church or parish within the diocese. Section 57-7⁹ validates transfers to lawful trustees of a church or religious congregation, subject to the limitations imposed by section 57-12; which section in 1962 imposed a limitation in the sum of $ 2 million *279 on the amount of personalty said trustees of a church could hold. In construing section 57-7, the Virginia Supreme Court of Appeals has held that "church or religious congregation" means only the local congregation and not the church at large in its denominational sense. Moore v. Perkins, supra at 807-809, and cases there cited. Thus, section 57-12, which provides for limitations on the amount of a gift to trustees of a church or religious congregation, is applicable only to the local congregation and not to the church at large in its denominational sense.

*155 Section 57-16, however, which also validates religious transfers, confers authority to hold property not on trustees but upon a "duly elected or appointed bishop, minister or other ecclesiastical officer." Unlike the related sections 57-7 and 57-12, section 57-16 did not at the time of decedent's death impose a limitation on the transfer of personal estate, ¹⁰ and neither now nor then did this section speak only in terms of a "church or religious society" as did section 57-7¹¹ at the time of decedent's death.

*156 Subsection (1) of section 57-16 provides:

Sec. 57-16. Property held, etc. by ecclesiastical officers. -- (1) How property acquired, held, transferred, etc. -- Whenever the laws, rules or ecclesiastic polity of any church or religious sect, society or denomination commits to its duly elected or appointed bishop, minister or other ecclesiastical officer, authority to administer its affairs, such duly elected or appointed bishop, minister or other ecclesiastical officer shall have power to acquire by deed, devise, gift, purchase or otherwise, any real or personal property, for any purpose authorized and permitted by its laws, rules or ecclesiastic polity, and not prohibited by the laws *280 of Virginia, and the power to hold, improve, mortgage, sell and convey the same in accordance with such laws, rules and ecclesiastic polity, and in accordance with the laws of Virginia.

On balance, we believe that section 57-16 was enacted to provide an acceptable alternative for those denominations that found lay trusteeship objectionable. See McGrath, Catholic Institutions in the United States: Canonical and Civil Law Status 2, 23, 24 (1968). Furthermore, we believe that section 57-16*157 was meant to be applicable not only to the acquisition of property for the local church or parish within a diocese but also for the diocese itself. We base this conclusion on the fact that throughout subsections (1) (How property acquired, held, transferred, etc.); (3) (Validation of deeds, etc.); and (4) (Insufficient designation of beneficiaries or objects of trust), reference is made to "any church, or religious sect, society or denomination," whereas section 57-7, at the time of decedent's death, spoke only of "any church, or religious society" -- which in turn was construed to mean the local congregation rather than the denomination. See Moore v. Perkins, supra.

Moreover, subsection (5) of 57-16 imposing limitations on the amount of land to be held refers only to "any parish or congregation." We agree with respondent that the limitation on personalty found in section 57-12 was implied in the operation of section 57-16 at the time of decedent's death, however, we do not agree with respondent that the bishop when holding personalty for the diocese is subject to the limitations of section 57-12.

Subsection (1) of 57-16 provides*158 that property could be acquired for "any purpose * * * not prohibited by the laws of Virginia," and subsection (7) provides: "This section shall not be so construed as to effect an implied repeal of any other provisions of this chapter." As noted above, sections 57-7 and 57-12 at the time of decedent's death referred only to the local congregation and not to a larger religious unit -- such as a diocese or denomination. Accordingly, we conclude, as a result of both subsection (1) and subsection (7) in section 57-16, that when the bishop, as an ecclesiastical officer as provided in section 57-16, holds personalty for a specific congregation or parish he is subject to the limitations of section 57-12.

At the time of decedent's death sections 57-7 and 57-12 did not impose limitations upon the amount of personalty that could be held for a diocese. Respondent, however, urges upon us such a limitation for section 57-16, arguing that to construe section 57-16 otherwise would be to create an advantage in favor of those religions having a centralized ecclesiastical structure as compared to religions having a congregational ecclesiastical structure and that petitioner's construction *281 *159 of section 57-16 would render said section unconstitutional. Respondent's argument is antithetical.

Denominations governed by the provisions of sections 57-7 and 57-12 may still take and hold property above the congregational level, through corporate agencies. Trustees Gen. Assem. Presbyterian Church U.S. v. Guthrie, supra at 322 (86 Va. 125, 10 S.E. 318 (1889)). Those denominations referred to in section 57-16, however, cannot utilize the normal corporate form because of their ecclesiastical polity. Therefore, the only alternative would be for the property to be held by an ecclesiastical officer and, if we were to give credence to respondent's argument, it would mean that the later denomination, at the diocesan level, could take and hold only $ 2 million of personalty, while their brothers of the cloth in other denominations could take and hold more than $ 2 million at the diocesan level, through the use of corporate agencies. Accordingly, we find and hold that the gift to the Diocese of Richmond was a valid gift under the laws of Virginia and therefore petitioner, as an executor of the Estate of Florence H. Lawler, was correct in claiming a charitable deduction from*160 decedent's Federal estate tax.

We thus hold for petitioner on the severed issue. The remaining issues in this docket, which are the value of certain stocks and bonds held by the decedent at her death and the amount of deductible administrative expenses, will be set for trial by further order of this Court.

The parties are directed to move with respect to further proceedings in this case, or otherwise act, on or before August 1, 1969.