BLANEY v. COMMISSIONER ( 1928 )

EDITH H. BLANEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

BLANEY v. COMMISSIONER

Docket No. 10613.

United States Board of Tax Appeals

13 B.T.A. 1315; 1928 BTA LEXIS 3062;

October 31, 1928, Promulgated

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The petitioner, under a trust established by the will of her father, had an equitable life interest therein consisting of the right to receive one-sixth of the income of the trust. On February 21, 1921, petitioner, in consideration of love and affection, assigned to her husband and her children portions of her right to receive such income from the trust. Payments, pursuant to the right assigned, were thereafter made by the trustees to the assignees, the first payment in 1921 of $2,250 being made from funds accumulated prior to the assignments. Held, that the amount of $2,250 is income to petitioner in 1921; held further, that the amounts paid to the assignees, which amounts were accumulated subsequent to the assignments, did not constitute income to the petitioner.

Allison L. H. Newton, Esq., for the petitioner.

John W. Fisher, Esq., for the respondent.

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LOVE

This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1921, 1922, and 1923, in the amounts of $1,849.50, $1,532.91, and $1,727.94, respectively. The petitioner alleges that, in determining the deficiencies, the Commissioner erred in including in her taxable income amounts received by her husband and children pursuant to assignments made by her whereby she assigned portions of her right to receive income from a trust created by her father.

FINDINGS OF FACT.

The petitioner, Edith H. Blaney, is an individual residing at Boston, Mass. She is a life beneficiary of a trust created by the will of her father and duly recorded in Norfolk County, State of Massachusetts. The pertinent provisions of the will are:

TWENTY-FIRST: All the residue and remainder of my property and estate, whatsoever and wheresoever, whether acquired hitherto or hereafter, of which I may die seized and possessed, or to which I may be entitled at the time of my decease, I hereby give, devise and dequeath unto my said Trustees hereinbefore named, to have and to hold the same unto and to the use of them, their heirs and assigns, upon the following trusts, that is to say, to hold the said property invested as they may receive the same, or at their discretion to sell the same or any part thereof, and any property at any time held upon these trusts, by public or private sale, without the aid of any Court - the purchaser in no event to be answerable for the application of the purchase money - making all suitable deeds and transfers thereof, and to invest the proceeds of all such sales according to their best judgment, to collect the rents and income of said trust property original and substituted, and after deducting the expenses of taxes, insurance and repairs, and all other necessary and proper charges and expenses, to apply and pay over the net rents, profits or income in quarter-yearly payments as follows:

* * *

5. Unto my daughter, Edith W. Hill, when she arrives at the age of twenty-one years, and during her natural life thereafter, one-sixth part.

By several instruments under seal, petitioner on February 21, 1921, assigned portions of her life interest, the right to receive income from the trust, to her husband and each of her five children. Except as to parties, the provisions of the assignments are identical and read as follows:

KNOW ALL MEN BY THESE PRESENTS that I, Edith H. Blaney, in consideration of my love and affection for my hereby assign, transfer and set over unto said the right to receive from the trustees under the will of my deceased father, William H. Hill, from the income which under the terms of said will is payable to me the sum of fifteen hundred (1500) dollars yearly in each year from and after January 1, 1921, until the death of said or my death, whichever first occurs, such payments to be made in equal quarterly installments as and when distributions of income are made by said trustees pursuant to the provisions of said will, provided, however, that no payment made pursuant to this assignment from any distribution by said trustees shall exceed five (5) per cent, of the aggregate amount of the distribution that would have been payable to me had I not made this and five other similar assignments of even date and like terms herewith, but in case any quarterly payment in any year is reduced by the foregoing limitation such reduction shall be made up in any succeeding quarters in which the distribution by said trustees is sufficient to make up such deficiency without violating said limitation, but shall not be so made up by payment in any succeeding year. Upon the termination of the interest hereby granted by my death or the death of said assignee, none of the income payable at the quarterly distribution of income by said trustees next following such termination shall be payable to the assignee hereunder, but all shall be payable to me or my estate.

And I hereby irrevocably authorize and direct said trustees during the continuance of said trust for my benefit to make the payments herein provided for from the income that but for this assignment would have been payable by them to me.

IN WITNESS WHEREOF I, the said Edith H. Blaney, hereto set my hand and seal this twenty-first day of February A.D. 1921.

(Signed) EDITH H. BLANEY.

Witness:

ELIZABETH D. PEABODY.

[SEAL.]

And on the same day, February 21, 1921, petitioner notified the trustees of her action as follows:

BOSTON, MASS., February , 1921.

CHARLES H. W. FOSTER, Esq.,

GEORGE S. MUMFORD, Esq.,

WILLIAM H. DUNBAR, Esq.,

Trustees under the will of William H. Hill, deceased.

50 State Street, Boston, Mass.

GENTLEMEN: Herewith I send you copies of assignments which I have made of parts of my life interest under the will of William H. Hill. I request that from this date you make payments of income which by the terms of the will would be payable to me in accordance with these assignments, and I release you from all liability arising from you following this request. Until other notice from any one of the assignees the addresses of all the assignees will be 82 Mt. Vernon Street, Boston.

Yours very truly,

(Signed) EDITH H. BLANEY.

Encls.

The trustees, pursuant to the assignments and directions from petitioner, paid, during the year 1921, to petitioner's husband and each of her five children the amount of $1,125, respectively, of which amount $375 had been accumulated by the trustees prior to the assignments. In other words, during that year the amount of $2,250 was paid to the assignees from funds accumulated prior to the date of the assignments.

Each of the assignees was during each of the years 1922 and 1923 paid the amount of $1,500, no part of which had been accumulated prior to the date of the assignments.

Petitioner made her returns for the years in question upon a cash receipts and disbursements basis and upon audit thereof the Commissioner determined that the amounts paid by the trustees to petitioner's assignees constituted income to her and accordingly restored the amounts so paid to her taxable income.

OPINION.

LOVE: The petitioner contends that her assignees under the assignments of February 21, 1921, became substituted beneficiaries of a portion of the trust income to the extent of the respective assignments, and that she, the assignor, ceased to be a beneficiary of the trust to the extent of the portion assigned.

In support of this position it is urged that the assignments irrevocably vested title in the respective assignees to the portions of the trust income assigned prior to the accrual or receipt thereof to or by the petitioner.

The Commissioner, on the other hand, contends that by the assignments the respective assignees were not vested with a present title to the income of the trust, and that, therefore, the income thereof must first become the property of petitioner before it becomes the property of the assignees.

In support of this position, it is urged that the assignments in question, at most, were only executory agreements to transfer the income when accrued to or received by the petitioner, and, as an assignment of future income does not operate as a present transfer, it is essential that it be based on a valuable consideration moving from the assignee.

It is undoubtedly correct that valuable consideration is necessary to support an executory agreement to transfer future income. See ; . But, in this proceeding, we are not concerned with the question of consideration, for the reason that if the assignments in question were executory agreements, as contended by the Commissioner, the income transferred thereby first must have accrued to the petitioner, and no matter how she attempted to dispose of it or did dispose of it, it was taxable to her. On the other hand, if the assignments in question could operate only as executory agreements, as contended by the Commissioner, and failed by reason of the fact that they were based on good, as distinguished from valuable consideration, the transfer of income accrued subsequent to the making thereof was merely a gratuitous or voluntary transfer of income which had accrued to petitioner, on which she was taxable.

We come, therefore, to the question as to whether by the assignments the petitioner vested in the assignees present interests in her equitable life interest in the trust. If present interests were vested in the assignees, consideration for the assignments is immaterial, because the transactions were completely executed.

It will be observed from the terms of the will creating the trust that the petitioner was given an equitable life interest therein, which consisted of the right to receive a one-sixth part of the income of the trust. The testator placed no limitation or restriction upon her right of alienation and in the absence thereof it is well settled that such an interest can be dealt with and conveyed if such action is not contrary to statute. 26 R.C.L. 1264. That such an interest may be alienated in Massachusetts is shown by the statement of the court in the case of ; , wherein it was said:

Where a will creating a trust to pay income to a beneficiary does not forbid the beneficiary assigning the interest, it is assignable.

And it is clear that a married woman may directly transfer real or personal property to her husband and children. Massachusetts General Laws, ch. 231.

The petitioner having under the law of Massachusetts the right to alienate her equitable life interest - the right to receive income - in the trust, we must consider what was the legal effect of the assignments of February 21, 1921.

As above stated, petitioner's interest in the trust was an equitable one for life, consisting of the right to receive income therefrom. It is our opinion that this right to receive income was a present chosf in action of which the petitioner was vested and which was properly the subject of a present transfer in whole or in part. In the case of ; , the court said, in considering the interests of a life beneficiary of a trust and of his assignee:

The right of Cheney and the right of the assignee to receive the income of the trust fund, was a present, equitable right of ownership which ripened into an ordinary property right when the income accumulated in the hands of the trustees and became payable under the terms of the trust; and was not a right or an assignment of a right in a debt to be created in the future or of the bare possibility of there ever being such a debt. (Citing authorities.)

In the recently decided case of , the facts, in all pertinent elements, are the same as in the instant case. The contentions of the Government were the same as also were the contentions of the petitioner. Judge Bodine, in rendering his decision sustaining the contentions of the taxpayer, among other things said in his opinion:

Mrs. Young, by reason of the trust created by her father, had a vested property right which could be taken upon execution, and which she could assign and convey. Though she might not be able to bargain with and sell to her husband, she certainly could grant and convey. And there can certainly be no doubt of that where the common law prevails.

Judge Bodine cites with approval the case of .

We conclude, therefore, that by the assignments in question, the petitioner vested in the assignees present interest in the trust, to wit, portions of her right to receive income, which, under the law of Massachusetts, was a property right and the subject of a present transfer. However, it should be noted that at the time of making the assignments, February 21, 1921, income in the amount of $2,250 had accumulated in the hands of the trustees, which amount was subsequent to that date paid to the assignees. As to this amount, it seems clear that having accrued to petitioner it is taxable to her nothwithstanding the subsequent assignment thereof.

Accordingly, the Commissioner's action in including the amount of $2,250 in petitioner's income for the year 1921 is approved, and his action in including all other amounts paid to the assignees pursuant to the assignments in the years 1921, 1922, and 1923, is reversed.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.