Hartwick College v. United States

Hartwick College (plaintiff) was a beneficiary under the estate of Jessie Smith Dewar. Dewar left an estate worth about $49 million. After expenses, taxes, and bequests, the residue of the estate was to be divided between Hartwick and two other charitable organizations. For the period from May 28, 1976 to April 30, 1977, the co-executors of Dewar’s estate filed a fiduciary federal income-tax return. It reported total income of about $3.5 million, with deductions and exemptions of about $1.1 million, leaving a taxable income of about $2.4 million. The executors claimed no deduction for amounts permanently set aside for charitable purposes and paid income-tax liability of about $1.7 million. In 1978, the executors filed a final accounting and petition for settlement, and Hartwick objected, saying that the executors had erred in failing to claim a charitable income-tax deduction. The executors then filed an amended return, including $330,208 in additional deductions and $35,774 in additional income. The IRS issued a refund of $189,557 to the estate. Meanwhile, Hartwick’s president, Philip S. Wilder, Jr., filed another amended return on behalf of the estate, claiming the entire $2.4 million as charitable deduction, with no tax due, and a full refund of $1.7 million due. Soon thereafter, an attorney for the estate told the IRS that Wilder’s return had not been filed with the estate’s direction or authorization. Accordingly, the IRS took no action. Finally, Hartwick filed suit against the government (defendant) for that refund in a New York district court. The district court ruled in Hartwick’s favor, and the government appealed. At issue was not only whether Hartwick was the proper party to make the claim but also whether the amount of deduction should be the amount set aside for the charities or the amount actually received by the charities after taxes were paid. Hartwick maintained that because the issue would resolve its right to money from the Dewar estate, it could bring the suit, and that the deduction should be pretax and not post-tax, with the entire directed $2.4 million being deductible. The government argued both points. Facts indicated that $2.4 million of taxable income had existed, with $1 million used for administrative expenses and previously deducted on the estate-tax return. The government argued that with $1 million in nondeductible expenses and a tax rate of 70 percent, the remaining $1.4 million would essentially be divided, with $700,000 going to Hartwick and $700,000 due in income tax.