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In re Transfer Inheritance Tax Assessment

Decided: April 25, 1968.

IN THE MATTER OF THE TRANSFER INHERITANCE TAX ASSESSMENT IN THE ESTATE OF CHARLES F. WALLACE, DECEASED. JOSEPH C. CORNWALL AND FIDELITY UNION TRUST COMPANY, A NEW JERSEY BANKING CORPORATION, EXECUTORS OF THE LAST WILL AND TESTAMENT OF CHARLES F. WALLACE, DECEASED, APPELLANTS,
v.
WILLIAM KINGSLEY, ACTING DIRECTOR, DIVISION OF TAXATION, DEPARTMENT OF THE TREASURY, STATE OF NEW JERSEY, RESPONDENT



Gaulkin, Lewis and Kolovsky. The opinion of the Court was delivered by Gaulkin, S.j.a.d.

Gaulkin

The Transfer Inheritance Tax Bureau of the Division of Taxation, Department of the Treasury (hereafter the State) ruled that (a) the testamentary transfer of the residue of the estate of Charles F. Wallace to the "Trustees of the Florence Murray Wallace Fund" is subject to an inheritance tax of $993,606.29, and (b) the proceeds of certain refund annuity contracts which, upon the death of the testator, passed to The Eljabar Foundation are subject to a transfer tax of $22,065.65. The executors appeal, claiming that the transfers are exempt under N.J.S.A. 54:34-4(d). We agree and reverse.

N.J.S.A. 54:34-4(d) exempts from transfer inheritance tax

"That part of the estate of any decedent which passes to, for the use of or in trust for any educational institution, church, hospital, orphan asylum, public library or bible and tract society or to, for the use of or in trust for any institution or organization organized and operated exclusively for religious, charitable, benevolent,

scientific, literary or educational purposes, including any institution instructing the blind in the use of dogs as guides, no part of the net earnings of which inures to the benefit of any private stockholder or other individual or corporation; provided, that this exemption shall not extend to transfers of property to such educational institutions and organizations of other States, the District of Columbia, territories and foreign countries which do not grant an equal, and like exemption of transfers of property for the benefit of such institutions and organizations of this State."

Testator died in 1964. The Eljabar Foundation (hereafter the Foundation) was organized in 1933 as a nonprofit corporation pursuant to N.J.S.A. 15:1-1 et seq. Its certificate of incorporation provided that it was "* * * to collect and expend funds exclusively for philanthropic and welfare work, either directly or through other philanthropic and welfare organizations." The Florence Murray Wallace Fund (hereafter the Fund) is a trust created April 24, 1958 by a trust agreement between testator's three daughters, grantors, and testator, the husbands of the three grantors and one Parry, trustees. The trust agreement provided:

"THIRD: The FUND shall be a public charitable trust created under the laws of the State of New Jersey and shall be governed by, and construed in accordance with, the laws of the State of New Jersey. The FUND is organized and shall be operated exclusively for religious, charitable, scientific, literary or educational purposes or for the prevention of cruelty to children or animals and no part of the FUND's activities shall be the carrying on of propaganda or otherwise attempting to influence legislation, or participating in or intervening in (including the publishing or distributing of statements) any political campaign on behalf of any candidate for public office."

The State concedes that both the Foundation and the Fund are organized and operated for charitable purposes. The United States Internal Revenue Service has classified them as tax exempt charitable organizations under 26 U.S.C.A. ยง 501(c)(3).

The State argues that the transfers nevertheless are not exempt under N.J.S.A. 54:34-4(d) but taxable under N.J.S.A. 54:34-2(d).

I

The State points out that the trustees of the Fund have absolute discretion in the selection of the religious, charitable, scientific, literary or educational institutions which are to receive money from the Fund; and that the trust agreement provides that the contributions shall be made "* * * in such amounts and to such extent as the Trustees, in their sole and exclusive judgment and discretion, shall determine to be reasonable in order to carry out the purposes of the FUND," and gives the trustees complete discretion in investing the assets and wide discretion in what shall be considered income and what principal. The State therefore calls the Fund a "conduit trust," which seems to us an apt description. Such trusts, says the State, are not exempt because "in order for a gift to be exempt * * * it must be identified with a particular institution." We understand the State's argument to be that a gift directly to a charitable institution to help it carry on its work would be exempt; a gift to X in ...


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