Whitehurst v. Commissioner , 12 B.T.A. 1416 ( 1928 )

JOHN L. WHITEHURST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MARY M. WHITEHURST AND PEARL W. DORE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Whitehurst v. Commissioner

Docket Nos. 12446, 12447.

United States Board of Tax Appeals

12 B.T.A. 1416; 1928 BTA LEXIS 3335;

July 20, 1928, Promulgated

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The action of the respondent in adding to income of petitioners the amount deducted by the trustees herein for the exhaustion of the trust interest in certain patents, disapproved.

William A. Goodhart, Esq., for the petitioners.

L. L. Hight, Esq., for the respondent.

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MARQUETTE

These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income tax asserted by the respondent as follows:

	1920	1921
John L. Whitehurst	$1,075.26	$1,117.05
Mary M. Whitehurst	369.94	491.07
Pearl W. Dore	368.67	263.36

The questions for decision are: (1) Whether the petitioner John L. Whitehurst is entitled in computing his net income for the years 1920 and 1921 to deduct any amounts as allowances for the exhaustion of certain patents in which he owned an undivided interest, and (2) whether there should be included in the income of the petitioners Mary M. Whitehurst and Pearl W. Dore for the years 1920 and 1921 the amount of the deductions taken in those years by the trustees of certain trusts of which Mary M. Whitehurst and Pearl W. Dore were life beneficiaries, for the exhaustion of said patents in which said trustees held undivided interest.

FINDINGS OF FACT.

The petitioner Mary M. Whitehurst is the widow and the petitioners John L. Whitehurst and Pearl W. Dore are the children of John T. Whitehurst, who died testate on or about February 1, 1920, a resident of Baltimore, Md.

The last will and testament of John T. Whitehurst, which was executed on March 21, 1919, provided, after making certain bequests not material here, that:

12. I give, devise and bequeath all of the rest, residue and remainder of my estate and property of every kind and description, real or personal, and wherever situate, to be divided into three equal shares or portions. And I authorize and empower my executors to make such division of my residuary estate and to sell for that purpose any of the property, real or personal, belonging to my estate, without the necessity for any previous order or subsequent ratification by the Orphan's Court or any other court. And I respectively give, devise and bequeath each of said three shares or portions as follows:

13. One of said three equal shares or portions I give, devise and bequeath to my son John L. Whitehurst absolutely.

14. Another of said three shares or portions I give, devise and bequeath unte the Mercantile Trust and Deposit Company of Baltimore and my son John L. Whitehurst as trustees, in trust to pay the net income therefrom over to my wife Mary Whitehurst for and during her life, and upon her death I will and direct that the same shall be divided into two equal shares or portions, one of which I give, devise and bequeath to my said son John L. Whitehurst, his heirs, personal representatives and assigns, and the other thereof I give, devise and bequeath to the trustees mentioned in the next item of this will, in trust, for the same uses and purposes therein set forth.

15. And the third of said equal shares or portions I give, devise and bequeath to the Mercantile Trust and Deposit Company of Baltimore and my son John L. Whitehurst as trustees, in trust to pay the net income therefrom over to my daughter, Pearl V. Whitehurst, for and during her life. And upon the death of my said daughter, should she leave any child or descendant living at her death, then the corpus or principal thereof shall vest in such child, children and issue of any deceased child or children of my said daughter, per stirpes, as may be living at the time of her death; and the same shall be accordingly distributed and paid over to and among them by said trustees, absolutely free of further trust. But should my said daughter leave no such child or descendant living at the time of her death, then the same shall vest in my said son John L. Whitehurst, if then living, or if he be then dead, then is such child, children and issue of any deceased child or children of my said son, per stirpes, as may be then living, or in default of such in those persons who under the now existing laws of Maryland would be my next of kin to take by distribution personal property of which I had died possessed and intestate if I had survived until such time and then died possessed thereof.

16. I authorize and empower the trustees to whom two of the shares of my residuary estate are hereinbefore devised and bequeathed as aforesaid, or any successors in said trusteeship, to sell or otherwise dispose of any of the property or investments from time to time held in trust hereunder, either for the purpose of changing investments or for the purpose of making any division or distribution thereof among the beneficiaries in whom the same may ultimately vest, or for any other purpose deemed advisable in the administration of said trusts.

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Among the assets of which John T. Whitehurst died seized and which were included in his residuary estate, were 17 patents issued by the United States at various times from July 30, 1907, and one application for a patent, each patent having a life of 17 years from the date of issue. The patents and the application for a patent were included in the estate of John T. Whitehurst for the purpose of the Federal estate tax at the value of $44,961.69 and the tax paid thereon; and they were distributed, together with the remainder of the residuary estate, as follows: An undivided one-third interest therein to John L. Whitehurt, absolutely, an undivided one-third to the Mercantile Trust & Deposit Co. of Baltimore and John L. Whitehurst as trustees for Mary M. Whitehurst, and an undivided one-third to the said Mercantile Trust & Deposit Co. and John L. Whitehurst as trustees for Pearl W. Dore.

By an agreement made by and between the decedent John T. Whitehurst and Burt Machine Co., a corporation, the Burt Machine Co. was given the exclusive right to use the patents mentioned upon the payment of certain royalties therefor. Subsequent to the death of John T. Whitehurst these royalties were paid to John L. Whitehurst and the two trusts mentioned in equal amounts.

In his income-tax return for the years 1920 and 1921 John L. Whitehurst deducted for the exhaustion of his one-third interest in the patents mentioned, one-third of an amount computed by allocating the amount of $44,961.69, the value at which these patents were included in the estate of John T. Whitehurst for Federal estate-tax purposes, to the several patents and amortizing the amount allocated to each patent over the remaining life thereof.

The trustees of the two trusts, in computing the net income thereof, also deducted and retained as allowances for the exhaustion of the trust interests in said patents, amounts computed by allocating said value of $44,961.69 to the several patents and amortizing the amount allocated to each patent over the remaining life thereof. The net incomes so determined by deducting and retaining allowances for the exhaustion of the trust interests in said patents, and only such incomes, were paid by said trustees to Mary M. Whitehurst and Pearl W. Dore in accordance with the last will and testament of John T. Whitehurst, and were reported by Mary M. Whitehurst and Pearl W. Dore in their individual income-tax returns for 1920 and 1921. The respondent, upon audit of the returns of the petitioners for the years 1920 and 1921, disallowed the deductions taken by the petitioner John L. Whitehurst for the exhaustion of his undivided interest in said patents, and added to the incomes of the petitioners Mary M. Whitehurst and Pearl W. Dore, respectively, the amounts deducted and retained by the trustees of said trusts for the exhaustion of the trust interests in said patents.

OPINION.

MARQUETTE: The only questions herein are whether the petitioner John L. Whitehurst is entitled, in computing his net income, to deduct any amount for the exhaustion of his one-third interest in the patents mentioned in the findings of fact, and whether there should be added to the respective incomes of the petitioners Mary M. Whitehurst and Pearl W. Dore the amounts deducted and retained by the trustees in computing the net income of the two trusts, as allowances for the exhaustion of the interest of the trusts in the patents. Since the case of John L. Whitehurst differs from the cases of the other two petitioners, in that he owned outright one-third of the patents, we will discuss and dispose of it first.

We are of the opinion that John L. Whitehurst is clearly entitled to the deductions claimed by him. He was the owner of an undivided interest in the patents in question, and we think he computed the deductions by the proper method and on the proper basis. This Board has consistently held that patents are subject to exhaustion and that under the several revenue acts the owner of a patent may deduct in computing his net income, an annual allowance for the exhaustion thereof. ; ; .

We are also of the opinion that the respondent erred in adding to the taxable income of the petitioners Mary M. Whitehurst and Pearl W. Dore, as reported by them, the amounts deducted and retained by the trustees for the exhaustion of the trust interest of the patents in question. It appears that the trustees construed the provision of the will of John T. Whitehurst that the "net income" of the trusts should be paid to his widow and daughter, to mean that such net income should be the income after deducting from gross income and retaining in the corpus of the trust a sufficient amount to cover the amortization and exhaustion of the trust interest in the patents, and that the beneficiaries have acquiesced in that construction. The beneficiaries reported in their returns and paid tax on the entire amount distributed to them by the trustees, and we are of the opinion that under the circumstances the amount so received and reported by the beneficiaries are the amounts which were "distributable" to them under the last will and testament of John T. Whitehurst. .

Reviewed by the Board.

Judgment will be entered under Rule 50.