I recently stumbled across an old blogpost of mine about a fascinating legal squabble I learned about when I lived in Philadelphia. This concerns the infamous Holdeen Trusts, and a series of cases and legal disputes centered around these trusts. I learned about it in an article in the Philadelphia Inquirer by L. Stuart Ditzen, “Quiet Finish To A No-tax Dream Visionary’s Plan To Wipe Out Pa. Taxes Ends After A 50-year Legal Fight,” (Oct. 9, 1996). ((See also The Holdeen Funds, by Rajan Mylavaganam.)) As Ditzen’s article notes:
A 50-year legal battle set off by a fanatically thrifty millionaire who wanted to do away with taxes in Pennsylvania forever – and make his descendants rich at the same time – has come to an end in Philadelphia Orphans Court.
Sadly, the people of Pennsylvania are still going to have to pay taxes.
The legal case, involving a labyrinth of trusts created in the 1940s and 1950s by an eccentric New York lawyer named Jonathan Holdeen, was settled without a trial last Wednesday in the chambers of Judge Edmund S. Pawelec in City Hall.
What happened here was that an eccentric millionaire and New York lawyer, Jonathan Holdeen, set up a complicated series of trusts that he hoped would one day totally wipe out taxes, at least in Pennsylvania. Holdeen set up the trusts in Pennsylvania in the 1940s and 1950s, which were to last for hundreds of years, with the accumulated trillions of dollars to be eventually used to endow and completely fund the operation of the government of Pennsylvania. He chose Pennsylvania, believing that that state’s laws were most favorable to the validity of such trusts. Holdeen “modeled his plan somewhat after that of the thrifty Benjamin Franklin who limited himself to two hundred years (1790-1990).” ((Holdeen v. Ratterree, 270 F.2d 701 (2d Cir. 1959); see also Holdeen v. Ratterree, 190 F.Supp 752 (N.D. N.Y. 1960); In re Trusts of Holdeen, 486 Pa. 1, 403 A.2d 978 (1979).))
Unfortunately, in 1977, a “judge ruled invalid a plan Holdeen had dreamed up to make Pennsylvania’s the first tax-free government in the history of the world.” Over the years, Holdeen deposited $2.8 million in several charitable trusts for the benefit of Pennsylvania. “His plan was to let the trusts grow, and to keep plowing the investment income back into them, for 500 to 1,000 years. Since charitable trusts are tax-exempt, the pool of money would become immense.”
By Holdeen’s calculations, the trusts would contain quadrillions or quintillions of dollars after a few centuries – more than enough to pay all the expenses of Pennsylvania government. All state taxes could then be abolished, and Pennsylvania would be a tax-free model for the world.
The Internal Revenue Service pounced on the plan right away. The tax agency saw it as an elaborate scheme by Holdeen to avoid taxes and to benefit his family.
[...] From the 1940s to the 1970s, Holdeen and his heirs battled with the IRS over the validity of the charitable trusts. In the end, the IRS lost. The U.S. Tax Court ruled in 1975 that the trusts were legitimate.
But a separate legal fight had developed in 1971 in Orphans Court, which has jurisdiction over trusts and estates in Pennsylvania.
To try to make his plan conform with legal requirements, Holdeen had named the Unitarian Universalist Church as a beneficiary of charitable trusts, with the understanding that the church would get a tiny portion of the yearly trust income.
While Holdeen was alive, church officials consented to the arrangement. After his death, the church filed suit in Orphans Court seeking all the income. Its lawyers contended that piling up money for 500 or 1,000 years was unreasonable and potentially dangerous.
Eventually, the church argued, the Holdeen trusts would soak up all the world’s money, and Jonathan Holdeen’s descendants, who were to remain in charge of the trusts, would have unimaginable power.
In 1977, [Judge] Pawelec ruled in favor of the church, concluding that Holdeen’s scheme was ‘visionary, unreasonable and socially and economically unsound.’
From then on, income from the trusts, which had grown to more than $20 million, was paid to the Unitarian Church at about $1 million a year.
A fascinating legal squabble. It would probably not be a good idea to fund a state like this, even if it would mean no taxes, since the state would just use this immense wealth to wage war and wield power over its subjects. But a similar idea could be used to set up some kind of trust that could in time accumulate billions of dollars, to endow a massive anti-state think tank/activist center–or a group like the Mises Institute. Imagine finding a jurisdiction where such trusts are permitted, setting it up, and in 200-300 years, the Mises Institute has a $500 billion endowment. Ah, well, one can dream.