## Facts

- A testator died in 1976 with an estate valued at about $49 million and left the residue to charitable organizations, including Hartwick College and two other charities.
- The will directed (1) payment of debts and administrative expenses and (2) payment of death and related taxes from the general estate as administration expenses, with the remaining residue passing to the charities.
- For the estate’s first fiduciary income-tax year, the executors reported roughly $3.5 million of income, claimed deductions and exemptions of about $1.1 million, reported about $2.4 million of taxable income, and paid about $1.7 million in federal income tax without claiming a charitable set-aside deduction under I.R.C. § 642(c).
- During state accounting proceedings, Hartwick objected that the executors should have claimed a charitable deduction; the executors then filed an amended return that produced a partial refund.
- Hartwick’s president later submitted another amended return claiming a § 642(c) deduction equal to the full taxable income as amounts “permanently set aside” for the charitable residuary legatees, seeking a full refund; the government did not act after being told the filing was unauthorized by the executors.
- After the state court discharged the executors except for limited tax-amendment tasks, the charitable residuary legatees brought a federal refund suit on behalf of the estate.
- The parties disputed whether any § 642(c) deduction had to be limited to what the charities would receive after income taxes (post-tax), or could equal the gross income set aside for charity under the will (pre-tax).

## Issues

1. Whether the district court lacked subject-matter jurisdiction because the charitable residuary legatees, rather than executors, pursued the administrative refund claim and lawsuit.
2. Whether I.R.C. § 642(c) limits an estate’s charitable deduction for amounts “permanently set aside” to the post-tax amount ultimately received by charities, or permits a deduction measured by the pre-tax amount of gross income set aside for them.

## Decision

- The Second Circuit affirmed.
- The court held the charitable residuary legatees could maintain the refund action on behalf of the estate and that the government’s administrative-exhaustion objection did not defeat jurisdiction.
- The court held the § 642(c) deduction is measured by the pre-tax amount of gross income permanently set aside for charitable purposes under the will, not merely the net amount remaining after income tax.

## Legal Principles

- In appropriate circumstances, residuary legatees who will receive the benefit of the refund may pursue an estate income-tax refund claim and suit when executors have been discharged, consistent with IRS practice reflected in administrative guidance.
- Under I.R.C. § 642(c), an estate may deduct “any amount of the gross income” that is “permanently set aside” for charitable purposes pursuant to the governing instrument.
- Section 642(c)’s text does not impose an automatic after-tax limitation on the deductible amount where the residue is devoted to charitable beneficiaries.
- Statutory interpretation of § 642(c) favors effectuating Congress’s purpose to encourage charitable transfers and avoiding results that would defeat a testator’s expressed charitable residuary plan.

## Conclusion

The Second Circuit upheld jurisdiction over a refund suit brought by charitable residuary legatees and ruled that an estate’s § 642(c) charitable deduction is based on the gross income permanently set aside for charity under the will, measured on a pre-tax basis rather than reduced to the amount charities would receive after income tax.


Hartwick Coll. v. United States, 801 F.2d 608 (2d Cir. 1986)