Shellabarger v. Commissioner , 14 B.T.A. 695 ( 1928 )

MAUD DUNLAP SHELLABARGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Shellabarger v. Commissioner

Docket No. 19453.

United States Board of Tax Appeals

14 B.T.A. 695; 1928 BTA LEXIS 2929;

December 13, 1928, Promulgated

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To avoid a contest of her father's will, petitioner agreed in writing to pay to her sister, and a trustee, in trust, principally for the benefit of the sister's children, a certain portion of the income she received from two trusts created by the will. Held that the amount of $12,506.58 paid by petitioner in 1924 under the terms of said agreement is taxable income to her.

Lawrence H. Cake, Esq., for the petitioner.

A. H. Fast, Esq., for the respondent.

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ARUNDELL

The respondent has determined a deficiency of $577.52 in income tax for the year 1924, in connection with which petitioner claims he erred in holding that the whole amount received by her from two trusts created by her father's will is taxable income.

FINDINGS OF FACT.

Petitioner's father, Austin Bryan Dunlap, died in 1919, at Phoenix, Ariz., leaving surviving him two daughters, Maud Dunlap, now Maud Dunlap Shellabarger, the petitioner, and Georgia Warde, now Georgia Dow. Under the will of her father petitioner was bequeathed the sum of $20,000, all of the income for life from a $300,000 trust, and the income for life from a second trust after paying therefrom certain specified sums monthly to other designated persons for life. Georgia Warde was left a legacy of $100 and $100 per month for life from the second trust.

Prior to the hearing on the probating of the will, which was filed for probate in the superior court at Phoenix, Georgia Warde notified the other beneficiaries thereof of her intention to contest the will unless a satisfactory settlement was made with her. As the result of negotiations between the parties in interest, on July 24, 1919, the petitioner and Georgia Warde entered into an agreement which, with certain exceptions not here material, reads as follows:

The party of the first part [Maud Dunlap] further agrees that upon receipt by her of any income paid to her during her lifetime under the said last Will and Testament of Austin Bryan Dunlap, deceased, she will pay three-tenths (3/10) thereof to the party of second part, [Georgia Warde] and one-fifth (1/5) thereof to The Phoenix Savings Bank and Trust Company, of Phoenix, Arizona, said amount so paid to said The Phoenix Savings Bank and Trust Company, to be paid to it and held and handled by it in Trust upon the following terms and conditions, and for the following uses and purposes, to wit:

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If any child of the party of the second part for whose benefit a share of said trust fund shall have been set apart as above provided, shall thereafter die the share of said child so dying of such part thereof as remains undistributed shall be paid, turned over and delivered by said Trustee to the party of the second part, if living, and if deceased, then to the children of such child share and share alike and, if no such children, then to the surviving children of the party of the second part, and if no such children then surviving, then to the party of the first part or her heirs.

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Up to the time of the division of said trust fund and the setting apart of the respective shares by said Trustees upon the arrival of Charles Reese Warde, Jr., at the age of 21 years or in the event of his death prior to arriving at said age, upon the arrival of the time when he would, if living, have arrived at said age, as above provided, and after the arrival of any child of the party of the second part at the age of 14 years, and prior to the arrival of such child at the age of 21 years, said Trustee may advance to the party of the second part, or to the guardian of any child of the party of the second part such sums not to exceed in all for any child, however, the sum of One Thousand ($1,000.00) Dollars a year, as may in the judgment of said Trustee be necessary for the education of such child. No such advances shall, however, be made unless approved by the party of the first part, if living. After said division of said trust fund and said setting apart of the respective shares by said Trustee provided for herein, said Trustee may advance to the party of the second part or in case of hfr death to the guardian of any child of the party of the second part, from the share of any child such sums as may in its judgment be necessary for the education of such child not to exceed for any such child the sum of One Thousand ($1,000.00) Dollars a year, and such advances however to be made for any child only after attaining the age of 14 years and prior to attaining the age of 21 years, and no such advances shall be made unless first approved by the party of the first part, if living.

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In the event at any time there should cease to be any living children of the party of the second part entitled to share hereunder and the party of the second part should then be deceased said Trustee shall pay and deliver over all the trust property in its hands to the grandchildren if any then living to the party of the second part, share and share alike, and if none, then to the party of the first part or her heirs.

In the event of the death of the party of the second part leaving minor children her surviving said Trustees may pay to the guardian of any such minor children from said trust property such sums as may in the judgment of said Trustee be necessary for the support and maintenance and best interest of such children. If such payments are made prior to the time of the division of said trust property into equal shares and the setting apart of said shares hereinbefore provided for, said payments shall be made from the general trust fund but if made after said division and setting apart the payments made for the support and maintenance and best interest of any child shall be made from the share of the child for whose benefit the payment is made. No payments for maintenance and support and best interests of said children shall be made unless first approved by the party of the first part, if living.

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If prior to the death of the party of the first part, there shall be living neither the party of the second part or any children or grandchildren of hers all payments by the party of the first part hereunder shall cease.

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It is understood and agreed that the party of the second part shall not hypothecate or in any manner assign the payments to be made to her hereunder by the party of the first part without the written consent of the party of the first part, except that the party of the second part may hypothecate or assign said payments within fifteen months from the date hereof to the extent of Five Thousand ($5,000.00) Dollars and no more.

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It is understood and agreed by the parties hereto that if at any time the party of the second part shall contest or cause to be contested in any manner said last Will and Testament or shall attempt in any manner to prevent or set aside said last Will and Testament or the probate thereof or any of the provisions of said last Will and Testament, or in the event party of the second part violates any of the terms of this agreement all payments provided to be made herein by the party of the first part shall cease and the party of the first part shall be released from any further obligations hereunder.

The will was admitted to probate and record after the aforementioned agreement was executed. During the year 1924 petitioner received the sum of $25,920.26 as income from the two trusts created by the will. Of the amount received, petitioner paid the total sum of $12,506.58 to Georgia Warde and the Phoenix Savings Bank & Trust Co. pursuant to the terms of the agreement of July 24, 1919.

Petitioner kept her books and filed her return for 1924 on the cash receipts and disbursements basis.

In her income-tax return for the year 1924 petitioner reported the sum of $13,413.68 as income received by her from the two trusts, with the statement that the balance of $12,506.58 had been paid to Georgia Warde and the Phoenix Savings Bank & Trust Co., trustee, under the agreement of July 24, 1919. On an audit of the return, respondent increased petitioner's net income by said amount of $12,506.58 on the ground that the payments were in the nature of gifts, resulting in the deficiency in controversy.

OPINION.

ARUNDELL: Petitioner's argument against the respondent's action in taxing her on the item in controversy is based, in substance, on the ground that the agreement of July 24, 1919, operates to divest her of any right or claim to the sum. We are unable to concur in this construction of the instrument.

By the terms of the agreement of July 24, 1919, petitioner did not irrevocably transfer or assign any part of her life interest in the income from the two trusts created by the will of her father so as to give her sister, Georgia Warde, or the Phoenix Savings Bank & Trust Co. trustee, a right to demand and collect from the trustees appointed by the will the sums payable to them under the agreement. It was merely an agreement on the part of petitioner to pay to Georgia Warde and the trustee a stipulated portion of the income she actually received from the estate. Any right or claim they may have had to a part of the income of the two trusts created by the will was against petitioner and not the trustees under the will. Not until petitioner was in receipt of income from the trusts could any right of their attach to any specific part of the fund. Furthermore, petitioner did not by the terms of the agreement completely deprive herself of the right to retain the income payable under the agreement or give Georgia Warde or the trustee absolute control over the sums paid to them. In the event Georgia Warde, her children and her grandchildren predeceased petitioner, the funds in trust were to be paid to her to her heirs; advances could not be made by the trustee for the education of the children for whose benefit the trust was created without petitioner's approval; payments from the trust fund for maintenance and support of the children had to be approved by petitioner; all payments under the agreement were to cease in case petitioner survived Georgia Warde and all of her children and grandchildren; with one exception, the amounts payable under the agreement were not to be hypothecated or assigned by Georgia Warde without petitioner's written consent; and petitioner was to be released of all of her obligations under the contract in the event Georgia Warde contested the will or violated any of the terms of the agreement.

In the case of , the testator, after making certain specific bequests, gave the residue of his estate to the appellant. William J. Booth, sole heir of decedent, contested the will. During the course of the trial on the issues involved the suit was compromised by an agreement under which Booth received $70,000 of the residue of the estate. The will was thereupon admitted to probate. The question before the court was whether the amount of the inheritance tax should be determined by the provisions of the will or by the compromise settlement, which was approved by the court. In affirming the judgment of the court below in favor of the defendant, the court said:

The portion received by Booth was not nominated in the will, nor did he inherit it. Though it may have come from the testator's estate, it was not of the estate, but of the property of the residuary legatee. It was a consideration paid to him by MacKenzie out of what he [MacKenzie] obtained from the estate of Souffrien to withdraw the contest and consent to the will's being probated. (Italics supplied.)

Facts similar to those here were before the court in , wherein it was said:

To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property the income therefrom should be taxable to him as fully when he grants it as a gift in advance of its receipt as it clearly is despite a gift thereof immediately after its receipt.

The Board cases hold that where the taxpayer retains his interest in the property or fund from which the income was derived, the income is taxable to him and not to the person who eventually receives the money. ; ; certiorari denied, ); ; ; ; and .

Petitioner has cited , followed in , as being controlling. The facts there are clearly distinguishable from those here. There the plaintiff irrevocably assigned, among other things, all of her interest in the income of the trust created by a certain will with directions to pay the income to her husband in trust for the benefit of her children. The plaintiff never received the income and had no control whatever over its disposition. Here, Georgia Warde and the bank have no interest in the income in the hands of the trustees named in the will, or any legal right to demand payment from them. Their right to a part of the income from the trusts does not attach in any form until there has been a receipt of income by the petitioner.

Judgment will be entered for the respondent.