The opinion of the court was delivered by: LECHNER
Earl J. Reddert ("Earl") executed his Last Will and Testament on 9 November 1978 ("Earl's Will").
Stipulation, P 1; Earl's Will at 14. The parties agree Earl's Will established a trust (the "Trust") from which the remainder interest is payable outright to eleven charitable organizations recognized by the Internal Revenue Service (the "IRS") as exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code (the "Code"), 26 U.S.C. § 501(c)(3) (the "Section 501(c)(3) Charities").
Stipulation, P 2; Earl's Will at 3-7. Earl died on 31 December 1978. Stipulation, P 3. Earl's wife, Esther D. Reddert ("Testatrix") executed her Last Will and Testament on 9 July 1985 ("Testatrix's Will").
Id., P 4; Testatrix's Will at 8. Under the terms of Testatrix's Will, her residuary estate pours over into the Trust. Stipulation, P 5; Testatrix's Will at 4-5.
Testatrix died on 4 January 1987. Stipulation, P 6.
The Trust provides, inter alia, upon the death of Earl, net income of the Trust is to be used for the benefit of Testatrix. Id., P 8; Earl's Will at 3. After the death of Testatrix, the net income of the Trust is to be used for the benefit of Earl's daughter Audrey Oakes ("Oakes"). Stipulation, P 8; Earl's Will at 3-4. Upon the death of Testatrix and Oakes, the Trust is to be divided into a number of shares equal to the number of then living children of Oakes plus one additional share for each child of Oakes who predeceases her leaving then surviving issue. Stipulation, P 9; Earl's Will at 4-5. After the payment of $ 75,000.00 in principal toward each such share, whether paid to the child outright or from a trust established for the child's benefit (or a deceased child's issue's benefit), the remainder is to be poured into the Trust and distributed to certain enumerated Section 501(c)(3) Charities set forth in the Trust. Stipulation, P 10; Earl's Will at 5-6.
The parties agree Testatrix's Will provides a bequest of $ 5,000.00 to each great grandchild of Testatrix born or adopted after her death and during the continuation of the Trust. Stipulation, P 11; Testatrix's Will at 4-5.
Testatrix's Will also directs all death taxes to be paid out of the residue of her estate. Stipulation, P 14; Testatrix's Will at 8.
1. Initial Payment of Taxes and IRS Audit
The parties agree the Estate declared and timely paid $ 155,680.00 in Federal estate taxes with the filing of its Federal estate tax return on or about 15 September 1987. Stipulation, P 15. The IRS audited the Estate's tax return and presented adjustments resulting in a Federal estate tax deficiency plus statutory deficiencies (the "Alleged Deficiencies"). Id., P 16. The Alleged Deficiencies resulted from three adjustments to the gross estate of Testatrix: "(a) A $ 22,500 increase in the value of certain real property; (b) Denial of $ 93,000 in funeral and administration expenses; (c) Denial of $ 593,964 of charitable deductions consisting of outright gifts to charity and a $ 539,964 gift in the form of a charitable remainder trust." Id., P 17. On or about 2 March 1990, the Government assessed the Alleged Deficiencies against the Estate requiring payment of additional Federal estate tax in the amount of $ 240,810.00 and statutory additions of $ 72,275.24. Id., P 18.
2. The Estate's Claims for Refund
On or about 18 June 1990, the Estate filed a Claim for Refund of Federal estate tax (the "Claim for Refund I"). Id., P 19; Complaint, Exh. A. On or about 4 April 1992, the IRS permitted $ 68,712.00 of the Claim for Refund I (the "Permitted Claim") and disallowed $ 172,098.00 of the Claim for Refund I (the "Disallowed Claim"). Stipulation, P 20. The Permitted Claim resulted from a $ 22,500.00 decrease in Testatrix's gross estate relating to valuation of real property and a $ 167,642.00 increase in deductions due to the allowance of $ 126,642.00 for executor's commissions and attorney's fees and $ 41,000.00 for certain outright charitable contributions. Complaint, P 6. The Disallowed Claim was attributable solely to the disallowance of a charitable deduction in the amount of $ 539,964.00 for the gift of a remainder interest in the Trust to Section 501(c)(3) Charities. Stipulation, P 21. The Estate appealed the Disallowed Claim on or about 22 May 1992. Id., P 22.
On or about 29 July 1993, the IRS issued a Final Notice of Disallowance of the Claim for Refund I in the amount of $ 172,098.00 of estate tax. Id., P 23. The parties agree the Estate timely paid Federal estate taxes of $ 172,098.00, interest of $ 166,396.57 and penalties of $ 43,024.50 on or about 20 December 1994. Id., P 24.
The tax, interest and penalties paid totaled $ 381,519.07. Id. On or about 7 April 1995, the Estate timely filed a second Claim for Refund (the "Claim for Refund II") seeking a refund of the payment of Federal estate taxes, interest and penalties in the amount of $ 381,519.07.