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Petitioner Seeks to Amend Charitable Trust

A New York Probate Lawyer said that, the testatrix died on April 7, 1970. Her will, dated January 30, 1967, was admitted to probate on June 9, 1970 and letters testamentary issued on June 24, 1970. In Paragraph SIXTH thereof she created a perpetual charitable trust to be known as ‘THE MEMORIAL FUND’, hereinafter referred to as the Trust. The beneficiary was the husband of the testatrix and died on February 6, 1961.

A New York Will Lawyer said that, the executors apply for a decree directing that testatrix’ will be deemed to be amended, or, in the alternative, construed to contain certain provisions which will comply with the changes made by Title I, Section 101(a) of the Tax Reform Act of 1969 which added Section 508(e) to the Internal Revenue Code of 1954. It became effective on December 31, 1969. Petitioners allege that the Trust will initially receive funds from three sources, i.e.: (a) an undetermined sum from this estate; (b) approximately $550,000 from the trustees of an Inter vivos trust created by this decedent by agreement dated October 9, 1967; and (c) $200,000 from the trustees of the decedent’s estate by virtue of the power of appointment in his will which was executed by this decedent in favor of the Trust.

The issue in this case is whether the petition to amend the testatrix should be granted.
Although testatrix created a trust, it comes within the purview of Section 501(c)(3) of the Internal Revenue Code and was intended to qualify as an organization described therein which would be exempt from federal income taxes. Contributions to it would be deductible by the donors as provided in Section 170 of said Code. Bequests, legacies, devises, transfers or gifts to it would be deductible for federal estate or gift tax purposes under the provisions of Sections 2055, 2106 and 2522 of said Code.

Section 508(e) of the Code reads as follows: ‘Governing Instruments.– (1) General rule.–A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are– (A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the foundation to tax under section 4942, and (B) to prohibit the foundation from engaging in any act of self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in section 4943(c)), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d)).

Since this decedent did not die until April 7, 1970 and her will creating the Trust was not admitted to probate until June 9, 1970, it appears that the saving provisions titled ‘Special rules for existing private foundations’ do not apply to it. Manhattan Probate Lawyers said the petitioners allege that since the Trust is a ‘private foundation’ within the meaning of Section 508(e) of the Code, it will have no status as a tax exempt organization unless or until its governing instrument, i.e. the will of the testatrix, includes the provisions referred to in said section. Petitioners have been informed that the income to be received from the Inter vivos trust will be subject to federal, state and city income taxes. Similarly as the executors of this estate and the trustees under the will of the decedent are presently accumulating income, it will be subject to income taxes unless the Trust is qualified.
Ruling 70–270 (1970 Internal Revenue Service Bulletin No. 22 at 8) states: a private foundation shall not be exempt under section 501(a) unless its governing instrument includes provisions the effects of which are: (A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the foundation to tax under section 4942, and (B) to prohibit the foundation from engaging in any act of self-dealing (as defined in section 4941(d), from retaining any excess business holdings (as defined in section 4943(c), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in section 4945(d).’

Petitioners seek to have the trust deemed amended so as to include certain provisions in conformity with Internal Revenue Service Treasury decision 7040 (1970 Internal Revenue Bulletin No. 23 at 20) which states: ‘(a) In general. Under section 508(e) of the Internal Revenue Code of 1954 a private foundation (as defined in section 509 of the Code) generally, shall not be exempt under section 501(a) of the Code unless its governing instrument contains certain provisions. New York City Probate Lawyers said that these provisions, generally, must require or prohibit, as the case may be, the foundation to act or refrain from acting so that it shall not be liable to the taxes imposed by sections 4941, 4942, 4943, 4944 and 4945 of the Code. Private foundations organized before January 1, 1970, are not subject to the requirements of such section 508(e) with respect to taxable years beginning before January 1, 1972. (b) Manner of satisfying requirements of section 508(e).

Specifically the petitioners seek the following relief by way of amendment or construction, any other provisions of the will notwithstanding: (a) That the income of the trust for each taxable year shall be distributed at such time and in such manner as not to become subject to the tax on undistributed income imposed by Section 4942 of the Internal Revenue Code of 1954, or corresponding provisions of any subsequent federal tax laws. (Section 4942 imposes a tax of 15% On the undistributed income of a private foundation which has not been distributed by the end of the tax year following the order of receipt. If the distribution is not made within a defined correction period, an additional tax of 100% Of the undistributed amount is imposed);

(b) That the trustees shall not engage in any act of self-dealing as defined in Section 4941(d) of the 1954 Code or corresponding provisions of any subsequent federal tax laws. (Section 4941(d) treats with the subject of ‘self-dealing’, defined as direct or indirect dealing between a private foundation and its managers and directors in such matters as sale, exchange, etc., of property, lending of money or extension of credit, furnishing of goods and services, and payment of compensation. Substantial taxes are imposed for each of self-dealing; (c) That the trustees shall not retain any excess business holdings as defined in Section 4943(c) of the 1954 Code or corresponding provisions of any subsequent [65 Misc.2d 744] federal tax laws. (Section 4943 deals with ‘excess business holdings’ and imposes taxes on a foundation which holds a controlling interest in a business enterprise); (d) That the trustees shall not make any investments in such manner as to incur tax liability under Section 4944 of the 1954 Code, or corresponding provisions of any subsequent federal tax laws. (Section 4944 imposes a tax on a foundation where its investments are made in such manner as to jeopardize the carrying out of any of its exempt purposes); (e) That the trustees shall not make any taxable expenditures as defined in Section 4945(d) of the 1954 Code, or corresponding provisions of any subsequent federal tax laws. The citation issued to the four charitable organizations named in Paragraph SIXTH of the will and to the Attorney General of the State of New York. One charity has appeared but has taken no active part. The Attorney General has appeared. He has filed an answer in which he alleges that it is his responsibility to represent charitable beneficiaries and his duty to enforce and protect their rights by appropriate proceedings in the court.
He avers that under the Tax Reform Act of 1969, it will be necessary for him to take action, both administrative and legal, to correct any violations by foundation or charitable trust administrators of the Internal Revenue Code, Sections 4941 to 4945 inclusive. He recites that this court has inherent and statutory general supervision of the administration of trusts and authority to authorize the relief sought herein; and that the relief is in accord with the general doctrine of trust law of the State of New York pertaining to such matters as self-dealing by a fiduciary, accumulation of income, diversification of investments, avoidance of conflict of interest, speculative investments, the prudent man rule, and the invalidity of a trust for political purposes. He asserts that it is essential for the protection of the ultimate charitable beneficiaries of this trust that a decree be entered directing that the will be deemed to be amended, or in the alternative, be construed to contain the aforesaid provisions required by the Internal Revenue Code. He supports the prayer of the petitioners.

It must be noted that some prohibited transactions under the Tax Act are transactions forbidden to trustees generally, such as self-dealing. Other transactions are prohibited to the trustees of this trust by virtue of the testator’s declaration of intention, expressed thrice in this one paragraph of the will, that only charities exempt from Federal and State income tax shall be eligible beneficiaries under his will. There is the implicit mandate to his trustees to administer the trust in a manner in keeping with this frequently declared purpose. Nevertheless what is sought in this proceeding is a decree specifically limiting and directing the trustees to act as required by the Tax Act, because of the belief that the prohibitions and directions must be set forth in the charter of the Trust, which, of course, is the will as construed by this court, or as amplified or restricted under the Cy pres power.

In order to give effect to the charitable intentions of the testatrix and to enable the trust to comply with the requirements of said Section 508(e), the court directs the trustees to administer the funds now or hereafter in their hands under Paragraph SIXTH of the will pursuant to the following conditions with the same force and effect as if there provisions were contained herein, and for all purposes said provisions shall be deemed to be contained in paragraph SIXTH of the will, anything to the contrary appearing elsewhere in said will notwithstanding. The changes thus effected are as follows:

(a) The income from the trust for each taxable year shall be distributed at such time and in such manner as not to become subject to the tax on undistributed income imposed by Section 4942 of the Internal Revenue Code of 1954 or corresponding provision of any subsequent federal law. There is no difficulty in complying with this requirement. The will explicitly authorizes the trustees ‘to distribute any part of, or all of, the principal, free of trust, to any one or more of the organizations then entitled to receive the income therefrom’, limiting the trustees only to the proportionate share of each charity, and it also clearly states the testatrix’s intent to maintain exemption from State and Federal income taxes in the distribution of income and principal.
(b) The trustees shall not engage in any act of self dealing as defined in Section 4941(d) of said Internal Revenue Code or in corresponding provision of any subsequent federal tax law; (c) The trustees shall not retain any excess business holdings as defined in Section 4943(c) of said Code or corresponding provision of any subsequent federal tax law; (d) The trustees shall not make any investments in such manner as to incur tax liability under Section 4944 of said Code or corresponding provision of any subsequent federal tax law; and (e) The trustees shall not make any taxable expenditures as defined in Section 4945(d) of said Code or corresponding provision of any subsequent federal tax law.

Accordingly, the court held that the compensation of the attorneys for the petitioners will be fixed upon the submission of an affidavit of services together with the decree hereon upon notice.

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