Buder v. United States
7 F.3d 1382, 1993 WL 434837 (1993)
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Rule of Law:
For federal estate tax purposes, a bequest in trust qualifies for a charitable deduction under 26 U.S.C. § 2055(a)(3) if the testator's overarching charitable intent is clear from the entire will, even if specific language grants trustees discretion, provided that discretion is limited by the overarching charitable purpose. Additionally, a court may properly refuse to consider a setoff defense raised by the government if it is not timely pleaded or noticed to the opposing party, especially when violating pretrial orders.
Facts:
- G.A. Buder, Jr., a St. Louis attorney, died in 1984, leaving a substantial estate and a will he personally drafted.
- Article V of Buder's will provided that "twenty-five percent (25%) of my remaining net estate ... shall be divided among and paid to the following charitable, benevolent or educational organizations or entities."
- Paragraph D of Article V (the "Paragraph D Trust") bequeathed 10% of those Article V assets to five listed persons, "IN TRUST, however, to be used solely and exclusively in fostering and promoting the cause of patriotism, loyalty and fundamental constitutional government in the United States of America, and in combating subversive activities, socialism and communism," including, if deemed advisable, teaching conservatism to students, with trustees empowered to use principal and income as they deemed advisable for these objectives, and to make contributions to other organizations with similar purposes.
- Article VI of Buder's will placed the remainder of his estate in a residual trust for his wife and children, with Article VI(e) stating that trustees "shall pay over and deliver to her monthly any portion or all of the net income of the trust estate as they may in their discretion deem advisable."
- After an IRS audit in 1988 but before assessment of additional taxes, the trustees of the Paragraph D Trust executed an ancillary Indenture of Trust, agreeing that the Trust would contribute only to 501(c)(3) qualified charitable, scientific, literary, or educational organizations consistent with the will's purposes.
- In 1989, the IRS determined that the G.A. Buder, Jr. Charitable Trust (the Paragraph D Trust and its ancillary Indenture) qualified as a tax-exempt organization under 26 U.S.C. § 501(c)(3).
- Substantially all donations made from the Paragraph D Trust prior to the ancillary Indenture were to tax-exempt organizations.
Procedural Posture:
- G.A. Buder, Jr.'s estate timely filed its federal estate tax return in 1986, claiming a marital deduction for a residual trust under the qualified terminable interest property (QTIP) provisions and a charitable deduction for the Paragraph D Trust.
- In 1988, an Internal Revenue Service (IRS) audit determined a tax deficiency, primarily due to the disallowance of the Paragraph D Trust's charitable deduction, but did not challenge the QTIP deduction.
- The estate paid the assessed deficiency.
- The estate filed an administrative claim for a refund, which the IRS denied.
- The estate subsequently brought an action in the United States District Court for the Eastern District of Missouri for a refund.
- During trial preparations, the Government (United States) belatedly determined the estate's QTIP deduction should have been disallowed and attempted to raise this as a setoff defense ten days before the scheduled trial, without previously pleading it or providing adequate notice.
- The District Court concluded that the Paragraph D Trust qualified as a charitable deduction and refused to consider the Government’s untimely setoff defense.
- The District Court ordered the federal estate tax refund.
- The United States (Government) appealed the judgment of the District Court to the Eighth Circuit.
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Issue:
1. Does a testamentary trust, established within a will's clearly charitable article and specifying purposes like promoting patriotism and combating communism, qualify for a federal estate tax charitable deduction under 26 U.S.C. § 2055(a)(3), even if it grants trustees discretion? 2. Did the District Court abuse its discretion by refusing to consider the Government's untimely setoff defense challenging a qualified terminable interest property (QTIP) deduction, which was raised only ten days before trial and not previously pleaded or noticed?
Opinions:
Majority - BOWMAN, Circuit Judge
Yes, the Paragraph D Trust qualified as a charitable deduction under 26 U.S.C. § 2055(a)(3), and no, the District Court did not abuse its discretion by refusing to consider the Government's untimely setoff defense. Regarding the charitable deduction, the court affirmed the District Court's finding that the Paragraph D Trust qualified. Under Missouri law, the testator's intent controls the interpretation of a will and must be ascertained from the whole document. Buder's intent was clearly charitable, as evidenced by the introductory language of Article V, which explicitly states that the assets were to be distributed to "charitable, benevolent or educational organizations or entities." The Paragraph D Trust, being one of thirteen bequests within Article V, is governed by this overarching charitable intent. The specific language in Paragraph D, such as fostering patriotism and combating communism, serves to limit the trustees' discretion to specific charitable activities rather than granting them unfettered non-charitable powers. The court rejected the Government's argument that the will needed to explicitly include restrictive language against lobbying or political campaigning beyond the general charitable intent, stating that such a "cramped interpretation" would set an unduly rigorous standard for testators. The court found support in the facts that the trustees themselves interpreted the language charitably, made donations to tax-exempt organizations, and the IRS subsequently granted the trust 501(c)(3) tax-exempt status. Regarding the Government's setoff defense, the court concluded that the Government waived its right to raise the issue. The Government did not challenge the estate's QTIP deduction during its audit, nor did it plead or amend its complaint to include this defense. Instead, it raised the issue for the first time in its trial brief, only ten days before the scheduled trial date. The court found that a belated notice of deposition (which never occurred) indicating an intent to ask about trust income distribution was insufficient to put the estate on notice of a challenge to the QTIP deduction. Furthermore, the District Court's refusal to consider the defense was a proper exercise of discretion, given its pretrial order requiring all final changes to pleadings not less than fifteen days before trial. Allowing such a late defense would render pretrial orders meaningless.
Analysis:
This case offers crucial insights into testamentary interpretation for charitable deductions and the procedural requirements for asserting defenses. It underscores that courts will interpret a testator's intent for charitable purposes broadly from the entire will, preventing overly strict readings that could frustrate philanthropic giving. For tax litigation, the ruling serves as a strong reminder to the IRS and other litigants of the importance of timely raising and pleading all claims and defenses, reinforcing the finality and efficiency of judicial proceedings. Future cases involving charitable bequests with specific, seemingly non-traditional purposes may cite this case to argue for their charitable intent if an overarching charitable article exists.
