In the case of Harvey C. Hubbell Trust et al. v. Commissioner; T.C. Summary Opinion 2016-67 the IRS was disallowing all of the charitable contributions claimed by the trust for 2009. The IRS did not deny that the contributions were made. The agency also did not claim the recipients were not qualified charitable organizations. Rather, the IRS claimed the contributions were not made according to the terms of the will that established the trust.
The trust in question had been making charitable contributions for many years (going back to 1985) and in quite substantial amounts. For instance, in 1985 the trust made (and deducted) charitable contributions of $384,976, and had made contributions, often in excess of $100,000, for many years between 1985 and 2008. Apparently the IRS had never raised any issue with regard to these contributions—likely because the IRS had never examined the trust.
But in 2009 the IRS did examine the trust’s tax return. The IRS found no issues on the return except for the trust’s claimed charitable deduction of $64,279. The IRS argued that IRC §642 prohibited such a deduction unless it made “pursuant to the terms” of the governing instrument. The will that had established the trust provided only for payments to be made to specified individuals for their life. Following the death of the last surviving beneficiary, the trust would normally terminate unless the trustees decided there was reason to continue it for a period of no more than 10 years.
After the death of that final beneficiary, the will provided:
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.
Thus, only after the final beneficiary died could the trustee make distributions to any party other than the named beneficiaries—none of whom were charitable organizations.
The trust admitted that the will did not explicitly provide for charitable contributions to be made by the trusts created by the will, rather arguing there was a “latent ambiguity” in the terms of the will that allowed considering other information beyond the terms of the will. As the Court notes:
The trust argues that the latent ambiguity is revealed by the fact that the trustees of the trust (including Alton E. Purcell, who was Mr. Hubbell's attorney and "presumably" knew his intent, and who probably drafted the will) "have consistently exercised their duties with the understanding that the Will authorized them to make charitable gifts". As a result, the trust argues, the Court can 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 taxable year 2009.
In fact, following the IRS’s challenge on the issue the trust went back to state court and had the following judgment entered:
The language of the Will, as written, providing for the administration of the Trust, authorizes, and has from the inception of the Trust authorized, the Trustees of the Trust to make distributions of income and principal for charitable purposes specified in Internal Revenue Code section 170(c), or the corresponding provision of any subsequent federal tax law, both currently and upon termination of the Trust.
Unfortunately for the trust, the Court did not find any of this persuasive. The Court pointed out that the terms of the will specifically provided only for payments to the beneficiaries while any of them were alive, presumably to assure there would be sufficient assets to insure they would receive their payments specified from the trust. The Court found no phrasing in the will that was subject to multiple interpretations.
As the Court found:
The trust argues that the ambiguity in the will is found in the fact that "the language of the Hubbell Will is not clear in explicitly authorizing charitable gifts". Thus, the trust argues that items IV and V, which state in effect that charitable gifts cannot be made before the death of the last annuitant, are ambiguous because they do not explicitly state the opposite, that charitable gifts can be made before the death of the last annuitant. This is not an ambiguity in the will. It does not involve an interpretation or a choice between the different meanings of words of the will that have two or more meanings, or words that can be understood in more than one way, or words that refer to two or more things at the same time. See Boulger, 377 N.E.2d at 757. The trust is not asking the Court to resolve a latent ambiguity. The trust is asking the Court to rewrite the will.
What about that state court order? Unfortunately, those sorts of orders issued by a state court in what will most often be an uncontested request don’t tend to carry a lot of weight in Tax Court. Had that decision been handed down in a case where an heir had been pursuing damages from the trustee for an unauthorized action (that is, a truly adversarial proceeding), the situation would have been different.