United States Trust Co. v. Internal Revenue Service

Alexander Chisolm died in 1974. In his will, he left 10 percent of his gross estate to the Chisholm Foundation, a tax-exempt organization. The 10 percent amounted to $2,473,719. The funds were paid out by his estate in 1975 and 1976. On the estate’s federal estate-tax return, the executor, United States Trust Company (plaintiff), claimed an estate-tax deduction for the entire bequest, which was allowed by the Internal Revenue Service (IRS) (defendant). The estate also filed an income-tax return and claimed an income-tax deduction for $1,240,467 of the cash distributions made to the Chisholm Foundation as a deduction for distributions made to a beneficiary. The IRS disallowed the deduction. The IRS argued that by including the charitable contributions within the gross estate for estate-tax-deduction purposes, the estate could not then receive an income-tax deduction from paying those sums to beneficiaries. While a deduction could be given for estate income paid to beneficiaries, this was not so for all funds paid. A treasury regulation provided that an entity that took the income-tax deduction for a charitable gift could not also take the income tax deduction for distribution to a beneficiary. The estate paid the additional taxes and then filed suit for a refund. The trial court heard cross-motions for summary judgment and ruled for the estate. The IRS appealed.