estate tax

In 1930 a New York resident created a revocable trust that was amended in 1931. The trust directed income from the corpus to his wife for life. It also granted her a general power of appointment. In default of appointment half the corpus passed to the decedent's heirs and half to the wife's heirs. In 1951 the wife executed an instrument that purported to release the general power and convert it into a special power. The decedent died in 1957. His estate claimed a marital deduction for the widow's trust on the federal estate tax return. The Commissioner disallowed the deduction under section 2056(b)(5) of the 1954 Code and assessed a deficiency. The estate petitioned the Tax Court for redetermination. While that proceeding was pending the estate obtained a New York Supreme Court decree declaring the 1951 release a nullity. The Tax Court accepted the decree as controlling and allowed the deduction. A divided Second Circuit affirmed. The companion case involved the estate of a Connecticut decedent who died in 1958. His will directed payment of estate taxes without proration and created a residuary trust granting his wife a general testamentary power of appointment. The Commissioner disallowed part of the marital deduction. The executor then obtained a probate court order applying the state proration statute. The District Court refused to treat the probate decree as binding on federal tax questions. The Second Circuit agreed the decree was not conclusive. The two cases reached the Supreme Court after the Second Circuit panels reached differing conclusions on the effect of the state decrees. Certiorari was granted to resolve the conflict among the circuits.

Until 1970 the Internal Revenue Service granted tax-exempt status to private schools without regard to their racial admissions policies under section 501(c)(3) of the Internal Revenue Code. On January 12, 1970, a three-judge district court issued a preliminary injunction in Green v. Kennedy prohibiting the IRS from according tax-exempt status to private schools in Mississippi that discriminated on the basis of race. In July 1970 the IRS concluded it could no longer legally justify allowing tax-exempt status to private schools practicing racial discrimination and announced it would not treat gifts to such schools as charitable deductions. The IRS formalized its revised policy in Revenue Ruling 71-447, stating that a school not having a racially nondiscriminatory policy as to students is not charitable within the common-law concepts reflected in sections 170 and 501(c)(3). Bob Jones University is a nonprofit corporation located in Greenville, South Carolina, whose purpose is to conduct an institution of learning giving special emphasis to the Christian religion and the ethics revealed in the Holy Scriptures. The university operates a school with an enrollment of approximately 5,000 students from kindergarten through college and graduate school and requires its teachers to be devout Christians while teaching all courses according to the Bible. Until 1971 the university completely excluded Negroes. From 1971 to May 1975 it accepted no applications from unmarried Negroes but did accept applications from Negroes married within their race. Following the Fourth Circuit decision in McCrary v. Runyon, the university revised its policy. Since May 1975 the university has permitted unmarried Negroes to enroll while maintaining a disciplinary rule that prohibits interracial dating and marriage and expels students who violate it. The university continues to deny admission to applicants engaged in an interracial marriage or known to advocate interracial marriage or dating. Until 1970 the IRS extended tax-exempt status to Bob Jones University under section 501(c)(3). On January 19, 1976, the IRS officially revoked the university's tax-exempt status effective December 1, 1970. The university paid a $21 federal unemployment tax for 1975, had its refund request denied, and filed suit in the United States District Court for the District of South Carolina seeking recovery of that amount while the government counterclaimed for $489,675.59 in unpaid taxes for 1971 through 1975. The district court ordered the IRS to pay the refund and rejected the counterclaim, but the Fourth Circuit reversed. Goldsboro Christian Schools is a nonprofit corporation located in Goldsboro, North Carolina, established to conduct an institution of learning giving special emphasis to the Christian religion and the ethics revealed in the Holy Scriptures. Since its incorporation in 1963 the school has maintained a racially discriminatory admissions policy based upon its interpretation of the Bible. Goldsboro has for the most part accepted only Caucasians. On occasion, however, the school has accepted children from racially mixed marriages in which one of the parents is Caucasian. Upon audit the IRS determined that Goldsboro was not an organization described in section 501(c)(3) and required it to pay taxes under the Federal Insurance Contribution Act and the Federal Unemployment Tax Act. Goldsboro paid the IRS $3,459.93 in taxes for one employee for the years 1969 through 1972 and filed suit in the United States District Court for the Eastern District of North Carolina seeking a refund while the government counterclaimed for $160,073.96 in unpaid taxes. The district court granted summary judgment to the IRS on its counterclaim, and the Fourth Circuit affirmed per curiam. The Supreme Court granted certiorari in both cases. The cases were argued on October 12, 1982. The Court decided the cases on May 24, 1983.

In 1972, Helen Nesmith, with assistance from her cousin Frederic T. Greenhalge II, prepared a document entitled “MEMORANDUM.” This document listed forty-nine specific bequests of her tangible personal property. In 1976, she modified that list by interlineations, additions, and deletions. Neither edition mentioned the large oil painting of a farm scene signed by T.H. Muckley and dated 1833 that hung above the fireplace in her mother’s bedroom. Helen Nesmith executed her will in 1977. The will named Greenhalge as executor of her estate. The will further identified Greenhalge as the principal beneficiary of her tangible personal property except for items she might designate by a memorandum left by her and known to him or in accordance with her known wishes. She kept a plastic-covered notebook titled “List to be given Helen Nesmith 1979” in the drawer of a desk in her study. She periodically wrote entries in it, including one that read “Ginny Clark farm picture hanging over fireplace. Ma’s room.” Her private nurses Imogene Conway and Joan Dragoumanos observed her writing in the notebook. They heard her state that the farm scene painting was to go to Virginia Clark. Virginia Clark and Helen Nesmith had been close friends since approximately 1940. Clark frequently visited the room containing the painting. In January or February 1980, Nesmith told Clark that the painting would belong to her after Nesmith’s death. She said she would record the gift in the notebook she kept for that purpose. Nesmith executed two codicils to her will on May 30, 1980, and October 23, 1980. These codicils ratified the will in all other respects. Nesmith died on January 28, 1986. Greenhalge received the notebook shortly after her death. He distributed property in accordance with the will, the 1972 memorandum, and some notebook entries. He refused to deliver the farm scene painting to Clark because he wanted to keep it for himself. He accepted other bequests to himself that appeared in the notebook. Clark then commenced an action in probate court seeking delivery of the painting. The probate judge found that Nesmith wanted Clark to have the painting. The judge also found that the notebook was in existence when the 1980 codicils were executed. The Appeals Court affirmed the probate judge’s decision in an unpublished memorandum and order. The Supreme Judicial Court granted further appellate review.