                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-21-2007

Galloway v. USA
Precedential or Non-Precedential: Precedential

Docket No. 06-3007




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                                         PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT


                     No. 06-3007


    EDMOND C. GALLOWAY, Successor Trustee

                           Appellant
                           v.

          UNITED STATES OF AMERICA


    On Appeal from the United States District Court
       for the Western District of Pennsylvania
               (D.C. No. 05-cv-00050E)
    District Judge: Honorable Sean J. McLaughlin


                Argued May 15, 2007
Before: FISHER, NYGAARD and ROTH, Circuit Judges.

                (Filed: June 21, 2007)
Arthur D. Martinucci (Argued)
The Quinn Law Firm
2222 West Grandview Boulevard
Erie, PA 16506-4508
       Attorney for Appellant

John A. Dudeck, Jr. (Argued)
Kenneth L. Greene
U.S. Department of Justice
Tax Division
P.O. Box 502
Washington, DC 20044
      Attorneys for Appellee



                 OPINION OF THE COURT


FISHER, Circuit Judge.

        This case comes to us on appeal from the decision of the
District Court affirming the Internal Revenue Service’s (“IRS”)
decision to disallow a nearly $400,000 charitable deduction
claimed by the James D. Galloway Revocable Living Trust (“the
Trust”). We are asked to determine whether Internal Revenue
Code (“IRC”) § 2055(e) prevents an estate from claiming a
charitable deduction when distributing the proceeds of a single
trust to both charitable and non-charitable beneficiaries. We
hold that it does, and, for the reasons set forth below, we will
affirm the judgment of the District Court.

                               2
                                I.

                                A.

       On March 5, 1991, James D. Galloway (“the Decedent”)
created the Trust, which was amended on three separate
occasions during his lifetime: May 20, 1994; July 3, 1995; and
September 7, 1996. As amended in 1996, the residue of the
Decedent’s estate is held in trust. The beneficiaries include two
natural persons – Edmond C. Galloway (“Galloway”), the
Decedent’s son, and Karen Minns, the Decedent’s
granddaughter – and two charitable entities – the James D.
Galloway Scholarship Fund of the Federated Church of East
Springfield, Pa., and the WLD Ranch of the Federated Church
of East Springfield, Pa. Each beneficiary is to receive an equal,
one-quarter share in the Trust. The Trust documents instruct
that each beneficiary shall receive one-half of its one-quarter
share on January 1, 2006, and the remainder on January 1, 2016.
The Trust contains the further condition that, with respect to the
natural person beneficiaries, if either is no longer living at the
time of a distribution, his or her share will be distributed to the
remaining beneficiaries in equal parts.

         The original Trust document contains the powers of the
trustee, which were not altered by any of the subsequent
amendments to the Trust. The trustee is entitled to sell any and
all real estate and mixed or personal property, invest Trust assets
in appropriate certificates of deposit and government bonds, and
reinvest the proceeds from the sale of any stocks owned by the
Decedent at the time of his death in corporate bonds that have an
“A” or “B” rating with Standard & Poors. The Decedent was

                                3
the trustee during his lifetime, with Galloway named as the
trustee after his death.

                               B.

        Following the Decedent’s death, his attorney requested
that the Commonwealth of Pennsylvania Department of
Revenue calculate the value of the residuary interest under the
Trust. The Department of Revenue determined that the entire
value of the residuary interest was $690,475.60, of which
$399,079.33 would be distributed to the charitable entities.1
Therefore, on its federal estate tax return, the Estate claimed a
charitable deduction of $399,079.33. Following the deduction,
the Estate had a taxable income of $1,059,850.53 and had a
calculated estate tax of $168,637.09. The Estate paid the tax in
three installments.

       The IRS notified Galloway on April 27, 2000, that the
Estate’s tax return would be audited. In October, 2000, based
on IRC § 2055(e), the IRS disallowed the charitable deduction,
determining that the Decedent’s Trust provided for a split-
interest bequest that was not cast in a qualifying form under
§ 2055(e). Therefore, the Estate’s liability was computed to be
$306,604.57. Thereafter, Galloway paid the additional tax in
two payments. He timely filed a refund claim for $160,394.13
under IRC § 6511(a) on July 22, 2002. The IRS denied the
claim on February 5, 2003.

       1
        These numbers are based on the Appellant’s findings of
material facts not in dispute and the undisputed facts in the
parties’ briefs.

                               4
       Following the IRS’s denial of his refund request,
Galloway filed a complaint in the United States District Court
for the Western District of Pennsylvania. The parties filed
cross-motions for summary judgment. The District Court
granted the United States’ motion for summary judgment and
denied Galloway’s, finding that the plain language of § 2055(e)
required that the charitable deduction be disallowed. This
timely appeal followed.

                                II.

       The District Court had jurisdiction over this taxpayer suit
under 26 U.S.C. §§ 6532(a)(1), 7422(a), and 28 U.S.C.
§ 1346(a)(1). We have jurisdiction pursuant to 28 U.S.C.
§ 1291. We review a district court’s grant of summary judgment
de novo. Gordon v. Lewistown Hosp., 423 F.3d 184, 207 (3d
Cir. 2005). Summary judgment shall be granted “if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(c). Interpretation of the IRC is a question of
statutory construction, over which we exercise plenary review.
In re CM Holdings, Inc., 301 F.3d 96, 101 n.3 (3d Cir. 2002).

                               III.

       The sole issue in this appeal is whether the IRS rested its
disallowance of the Estate’s $399,079.33 deduction on a proper
interpretation of IRC § 2055(e). As with all cases involving
statutory interpretation, we begin with the statute itself. IRC

                                5
§ 2055(a) allows a deduction from a decedent’s estate for the
amount of “all bequests, legacies, devises or transfers” to a
qualifying charitable organization. 26 U.S.C. § 2055(a).2 Prior
to the Tax Reform Act of 1969, if a document created a split-
interest trust – transferring property to both a charitable and
non-charitable beneficiary – the value of the charitable
beneficial interest could be deducted so long as the amount was
readily ascertainable. See 26 C.F.R. § 20.2055-2(a); Rev. Rul.
89-31, 1989-1 C.B. 277. When the split-interest trust provided
a non-charitable individual with a life interest in an estate with
the remainder passing to the charity, the charitable deduction
was determined using actuarial life-expectancy tables and an
assumed interest rate. Oetting v. United States, 712 F.2d 358,
360 (8th Cir. 1983). However, Congress found that “the rules
for determining the amount of a charitable deduction in the case
of gifts of remainder interests in trusts do not necessarily have
any relation to the value of the benefit which the charity
receives.” Id. (quoting S. Rep. No. 552, 91st Cong., 1st Sess.,
reprinted in 1969 U.S. Code & Cong. Admin. News 2027,
2116). This was so because trustees were investing the corpus
of a trust in high-risk, high-yield investments, which maximized
the amount the life-beneficiary received but substantially
reduced the amount of the corpus left for the charity when the
remainder converted to it. Id.




       2
       The parties do not dispute that the James D. Galloway
Scholarship Fund of the Federated Church and the WLD Ranch
of the Federated Church are charitable organizations for
purposes of § 2055(a).

                                6
       Therefore, Congress enacted IRC § 2055(e), which
disallows a charitable deduction for a split-interest bequest
unless, in the case of a remainder, the charity’s interest is in the
form of a charitable remainder annuity trust,3 a unitrust,4 or a
pooled income fund,5 or, in the case of any other trust, the
charitable beneficiary receives a guaranteed annuity or yearly
fixed percentage. The pertinent portion of IRC § 2055(e)
provides:

       (e) Disallowance of deductions in certain cases.–

               (1) No deduction shall be allowed under
               this section for a transfer to or for the use
               of an organization or trust described in
               section 508(d) or 4948(c)(4) subject to the
               conditions specified in such sections.

               (2) Where an interest in property (other
               than an interest described in section
               170(f)(3)(B)) passes or has passed from


       3
        A charitable remainder annuity trust is one which
requires the payment of a sum certain at least once every year.
26 C.F.R. § 1.664-2.
       4
        A unitrust is one which requires the annual payment of
a fixed percentage of the trust. 26 C.F.R. § 1.664-3.
       5
        A pooled income fund is a trust which grants an
irrevocable interest in property to a charity while the donor
retains a life interest in the property. 26 C.F.R. § 1.642(c)-5.

                                 7
             the decedent to a person, or for a use,
             described in subsection (a), and an interest
             (other than an interest which is
             extinguished upon the decedent's death) in
             the same property passes or has passed (for
             less than an adequate and full
             consideration in money or money's worth)
             from the decedent to a person, or for a use,
             not described in subsection (a), no
             deduction shall be allowed under this
             section for the interest which passes or has
             passed to the person, or for the use,
             described in subsection (a) unless –

                       (A) in the case of a remainder
                       interest, such interest is in a trust
                       which is a charitable remainder
                       annuity trust or a charitable
                       remainder unitrust (described in
                       section 664) or a pooled income
                       fund (described in section
                       642(c)(5)), or

             (B) in the case of any other interest, such
             interest is in the form of a guaranteed
             annuity or is a fixed percentage distributed
             yearly of the fair market value of the
             property (to be determined yearly).

26 U.S.C. § 2055(e).



                                 8
        The parties do not dispute that the Trust does not fall into
one of the excepted categories set forth in subsections (A) and
(B). The charities do not receive a fixed percentage distributed
yearly pursuant to subsection (B), and, as the charities do not
receive a remainder interest, subsection (A) is inapplicable.
Therefore, the only way that a deduction can properly be taken
is if § 2055(e) does not apply to the Trust. The Government
argues that § 2055(e) clearly applies to the bequests at issue
here. It argues that a split-interest trust is clearly defined by the
language of § 2055(e). The Government asks us to determine
that “[t]he trust documents create one trust from one set of
property, and the trust holds the property for both the charitable
and individual beneficiaries.” (Appl’s Br. 19.) “Accordingly,
since charitable and non-charitable interests ‘in the same
property’ passed ‘from the decedent,’ the decedent’s trust
provided for a split-interest within the meaning of Section
2055(e)(2).” (Id. at 20.)

        However, Galloway contends that the statute is inherently
ambiguous in that it fails to clearly define what Congress
considered to be a “split-interest” trust and what is meant by the
“in the same property” requirement. Therefore, he asks that we
turn to the legislative history of the section to determine what
Congress intended when it passed § 2055(e) into law.

        Our first task, then, is to determine whether there is any
ambiguity in § 2055(e) such that we may look outside the statute
to determine its meaning. We find that there is not. It is a well-
established precept of tax law that, in interpreting statutes, the
literal meaning of the statute is most important, and we are
always to read the statute in its “ordinary and natural sense.”

                                 9
Estate of Cassidy v. Comm’r, T.C. Mem. 1985-37 (Jan. 22,
1985) (citing United States v. Merriam, 263 U.S. 179, 187-88
(1923); DeGanny v. Lederer, 250 U.S. 376, 381-82 (1919)). In
particular, courts are admonished to strictly construe deductions
and to allow such deductions “only ‘as there is a clear provision
therefor.’” INDOPCO, Inc. v. C.I.R., 503 U.S. 79, 84 (1992)
(quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934); Deputy v. Du Pont, 308 U.S. 488, 493 (1940)).

        Section 2055(e) presents clear, unambiguous language.
It states:

       Where an interest in property (other than an
       interest described in section 170(f)(3)(B)) passes
       or has passed from the decedent to a person, or for
       a use, described in subsection (a) [a charitable
       beneficiary], and an interest (other than an interest
       which is extinguished upon the decedent's death)
       in the same property passes or has passed (for less
       than an adequate and full consideration in money
       or money's worth) from the decedent to a person,
       or for a use, not described in subsection (a) [a
       non-charitable beneficiary], no deduction shall be
       allowed under this section for the interest which
       passes or has passed to the person, or for the use,
       described in subsection (a) [the charitable
       beneficiary] . . . .

26 U.S.C. § 2055(e). Under the plain language of § 2055(e),
where an interest in the same property passes to both charitable
and non-charitable beneficiaries, no deduction is allowed.

                                10
        The Trust divides a single property between charitable
and non-charitable beneficiaries, falling directly within the
language of § 2055(e). The Trust documents create a single
trust, the James D. Galloway Revocable Living Trust. Article
III, which delineates the powers of the trustee, refers to the Trust
in the singular, as does each of the three amendments to the
Trust. The Trust property remains single and undivided until the
two distributions in 2006 and 2016. In short, two charitable and
two non-charitable beneficiaries have interests in the same
property – the Trust – bringing the Trust within the meaning of
§ 2055(e). Therefore, the IRS properly disallowed the
deduction.

        In order to avoid this result, Galloway argues that the
legislative history of § 2055(e) makes the statutory language
ambiguous and that it precludes a finding that the Trust falls
under the provisions of § 2055(e). He argues that the only kind
of split-interest trusts Congress intended § 2055(e) to cover are
split-interest trusts in which a non-charitable beneficiary has a
life interest and the charitable beneficiary has a remainder
interest. The legislative history of § 2055(e) does suggest this
type of split-interest trust was at the forefront of the
congressional consciousness when enacting § 2055(e). See S.
Rep. No. 552, 91st Cong., 1st Sess., reprinted in 1969 U.S.
Code & Cong. Admin. News 2027, 2116. However, both the
Supreme Court and this Court have made clear that we may not
turn to legislative history in order to muddy the waters of an
otherwise clear statute. Exxon Mobil Corp. v. Allapattah Servs.,
Inc., 545 U.S. 546, 568 (2005); Morgan v. Gay, 471 F.3d 469,
473 (3d Cir. 2006). “[T]he authoritative statement is the
statutory text, not the legislative history or any other extrinsic

                                11
material.” Exxon Mobil, 545 U.S. at 568. Therefore, where, as
here, the language of the statute is clear and unambiguous, we
will not create an ambiguity through the use of legislative
history. The language of § 2055(e) does not refer only to trusts
creating a remainder interest. It also refers to “any other
interest.” 26 U.S.C. § 2055(e)(2)(B). We will not use
legislative history that focuses on a particular type of trust to
narrow the broad language Congress chose to use when enacting
the statute.

       In so saying, we recognize the unfortunate result in this
case. Section 2055(e) was passed to protect against abuses that
resulted most frequently from non-charitable beneficiaries
exploiting their life interest in an estate and leaving a charitable
beneficiary with a shadow of what was bequeathed to it. In this
instance, there is little chance that the same sort of abuse would
take place. Each beneficiary of the Trust, charitable and non-
charitable, shares equally in the risk of loss and the benefit of
good investing as each beneficiary receives an equal share in the
property. However, the fact that the abuses Congress sought to
protect against are not present here does not give us license to
circumvent the clear language presented in the statute. In the
future, should testators seek to bequeath their estates to both
charitable and non-charitable beneficiaries, they must use the
tools provided in §§ 2055(e)(2)(A) and (e)(2)(B).

       Our holding comports with the decisions of other courts
that have found § 2055(e) to be clear and unambiguous. See,
e.g., Estate of Johnson v. United States, 941 F.2d 1318, 1321
(5th Cir. 1991); Estate of Edgar v. Comm’r, 74 T.C. 983, 987
(1980); Zabel v. United States, 995 F. Supp. 1036, 1047 (D.

                                12
Neb. 1998). Galloway’s attempts to distinguish these cases are
unavailing. In Zabel, in particular, the United States District
Court for the District of Nebraska recognized that the operation
of the trust presented to it protected against the same abuses
prevented by § 2055(e). However, even with that recognition,
it found the language of the statute unambiguous and affirmed
the IRS’s decision to disallow the charitable deduction. Zabel,
995 F. Supp. at 1047. The mere fact that the abuses are not
present will likewise not take this Trust outside § 2055(e).

        Furthermore, the line of cases beginning with the United
States Court of Appeals for the Eighth Circuit’s decision in
Oetting v. United States is not to the contrary. In Oetting, the
court held that § 2055(e) did not disallow a charitable deduction
where a charitable beneficiary’s remainder interest in property
passed directly to the charity through a settlement. 712 F.2d at
363. Because the money had passed directly to the charitable
beneficiary, there was no possibility of the non-charitable
beneficiaries benefitting themselves at the expense of the
charitable beneficiary’s interest. Id. Rather, the money passed
directly to the charity, removing any shared interest by the non-
charitable beneficiary. For that reason, the deduction was
allowed. Id. Based on this language, a number of courts have
allowed deductions when a charity receives its interest following
a settlement. See, e.g., First Nat’l Bank of Fayetteville v. United
States, 727 F.2d 741, 746 (8th Cir. 1984); Strock v. United
States, 665 F. Supp. 1334, 1338-40 (W.D. Pa. 1987); Northern
Trust Co. v. United States, 41 A.F.T.R.2d 78-1523 (N.D. Ill.
1977).




                                13
        These cases are easily distinguishable from the situation
currently before us. In Oetting, and every case to allow the
deduction using its reasoning, the charitable beneficiary had
already received its interest in the trust. Therefore, the non-
charitable beneficiary no longer had any interest in that
property. At that point, the charitable and non-charitable
beneficiaries no longer had an interest in the same property. In
the case before us, at the time the deduction was claimed in
2000, the charitable and non-charitable beneficiaries retained an
interest in the same property. Their interests did not diverge
until the first distribution in 2006, six years after the claimed
deduction. Therefore, at the time of the claimed deduction, the
two charitable and two non-charitable beneficiaries had an
interest in the same property, and § 2055(e) precluded any
deduction for the charitable beneficiaries’ interests in that
property.6

                               IV.

       The language of § 2055(e) clearly disallows any
charitable deduction when an interest in the same property
passes to both charitable and non-charitable beneficiaries.
Because the language is clear, we do not look to the legislative
history. The Decedent created a single Trust that was to be
distributed evenly between charitable and non-charitable

       6
        We also reject Galloway’s argument based on Treasury
Regulation § 20.2055-2(e)(i). Section 20.2055-2(e)(i) refers
only to undivided interests in property that are not held in trust,
see 26 C.F.R. § 20-2055-2(e)(i), and is therefore inapplicable to
the question before us.

                                14
beneficiaries. His bequest falls clearly within the parameters of
§ 2055(e)’s disallowance and, therefore, the IRS properly
disallowed any charitable deduction. For this reason, and for
those set forth above, we will affirm the judgment of the District
Court.




                               15
