The U.S. Court of Appeals for the Third
Circuit finds that the Internal Revenue Code prohibits an estate from
claiming a charitable deduction when the proceeds of a single trust are
distributed to both charitable and non-charitable beneficiaries. Galloway v. U.S. (3rd Cir. 6-21-2007), No. 06-3007.

James Galloway created a single trust under which the beneficiaries —
his two children and two charitable entities — would receive an equal,
one-quarter share in the proceeds. Upon Mr. Galloway’s death, the
Pennsylvania Department of Revenue determined that $399,079.33 would be
distributed to charitable entities. The trustee of the estate, Edmond
Galloway, then claimed a charitable deduction in that amount on the
federal estate tax return. Based on Internal Revenue Code § 2055(e),
the IRS disallowed this charitable deduction and computed the estate’s
liability to be $306,604.57. Mr. Galloway paid the additional tax due
and then filed a refund claim, which was denied by the IRS.

Mr. Galloway filed a complaint in the U.S. District Court for the
Western District of Pennsylvania claiming that the trust did not fall
under the purview of IRC § 2055(e). Mr. Galloway argued that the only
kind of such “split-interest” trusts that Congress intended § 2055(e)
to cover are trusts in which a non-charitable beneficiary has a life
interest and the charitable beneficiary has a remainder interest. The
complaint was denied and Mr. Galloway appealed.

The U.S. Court of Appeals, Third Circuit, affirms and holds that the
clear, unambiguous language of IRC § 2055(e) disallows any charitable
deduction where an interest in the same property passes to both
charitable and non-charitable beneficiaries.