Estate of O'Connor

[Editor’s Note: This case can also be found under the title Estate of O’Connor v. Commissioner.] Lindsay O’Connor died in 1968 and left half of his entire net estate to his widow, Olive O’Connor, in trust. Olive was given the annual income from that marital trust and full testamentary power of appointment over the corpus, as well as the right to withdraw any or all of the corpus at any time with written notice to the trustees and executors. Two weeks after Lindsay died, Olive executed a document giving all of her interest in the marital trust to the A. Lindsay and Olive B. O’Connor Foundation. The foundation had been created in 1965 and was a valid charitable foundation under section 501(c)(3). Olive filed a gift tax return indicating the value of income and corpus to be about $25 million. The other half of Lindsay’s estate, after bequests, was divided into three trusts for his niece and nephews. For the taxable years of 1969, 1970, and 1971, distributions to beneficiaries exceeded the distributable net income of the estate. For those years, the estate claimed distribution deductions, and, similarly, returns were filed on the marital trust for amounts distributed from the estate and passed on to the foundation, amounts that were similarly deducted. However, the government found that the marital trust was not a recognizable tax entity because it was a passive trust, and the estate or trust could not deduct charitable contributions that did not qualify under Internal Revenue Code Section 642(c). Ultimately, the issue in this case became a question of taxability. Lindsay’s estate claimed distribution deductions because the distributions to the marital trust ultimately went to the charitable foundation, which the estate posited should be considered a beneficiary. The secondary question was whether the marital trust could claim distribution deductions for those payments to the charitable foundation.