Smart v. Commissioner , 4 T.C. 846 ( 1945 )

Paul H. Smart, Petitioner, v. Commissioner of Internal Revenue, Respondent

Smart v. Commissioner

Docket No. 911

United States Tax Court

4 T.C. 846; 1945 U.S. Tax Ct. LEXIS 219;

February 27, 1945, Promulgated

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">*219 Decision will be entered for the respondent.

Petitioner was a cotrustee of a trust from about 1933 to 1944, and as such he received commissions for collecting the income of the trust and also compensation for looking after the corpus. In determining whether petitioner is entitled to the relief provided for in section 107, I. R. C., as amended, for the taxable year 1941, held, the "total compensation for personal services," as that term is used in the code, must include both the commissions for collecting income and also the compensation for looking after the corpus. In applying this test petitioner did not receive in the taxable year at least 75 per centum of his total compensation for personal services as trustee covering a period of sixty months or more. He had received in prior years commissions which must be taken into account in figuring the aggregate, and these amounts when taken into account cause petitioner to fall short of the 75 per centum specified in section 107; held, further, petitioner is not entitled to the relief sought.

Julius L. Neidle, Esq., for the petitioner.

Bernard J. Long, Esq., for the respondent.

Black, Judge.

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BLACK

">*847 The proceeding involves the determination by the respondent against petitioner of a deficiency in income tax for the calendar year 1941 in the amount of $ 19,043.68. The deficiency results from an addition to the net income as disclosed by petitioner's return of an amount of $ 73,197.93, which the respondent, in a statement attached to the">*221 deficiency notice, explains as follows:

It is held that the amount of $ 73,197.93, representing trustee's commissions received by you during the taxable year 1941, is taxable in full on your income tax return for that year and you are not entitled to the relief provided in section 107 of the Internal Revenue Code.

By appropriate assignments of error petitioner contests the above adjustment.

FINDINGS OF FACT.

Petitioner is an individual residing at Noroton, Connecticut, and is a member of the bar of the State of New York. He duly filed his Federal income tax return for the calendar year 1941 with the collector of internal revenue at Hartford, Connecticut.

Petitioner and Josiah Macy Willets were named as executors and trustees in the last will and testament and codicils of Walter G. Ladd, who died May 21, 1933, and whose will was duly probated in the Prerogative Court of the State of New Jersey on June 1, 1933. Petitioner and Willets became trustees of the residuary trust provided for in the will and acted jointly as such from May 21, 1933, to the date of the death of Willets on October 7, 1940. Thereafter, the Fidelity Union Trust Co. of Newark became a substituted trustee in the">*222 place and stead of Willets and, with petitioner, acted as trustees until petitioner resigned as trustee, which resignation was duly accepted on February 7, 1944.

The above mentioned trust comprised two substantial pieces of real property, one at Short Hills, New Jersey, and the other at Bar Harbor, Maine, and securities and personal property valued at approximately $ 10,000,000.

The decedent directed the trustees to maintain the real property during the lifetime of his widow in the same manner in which it had been maintained by him and to pay the income from his personal ">*848 property to her. Upon the death of the widow, the trustees were directed to transfer the entire estate, both real and personal, less five charitable legacies, to a charitable corporation for the purpose of maintaining the real property as a home for deserving gentlewomen who were without funds and who needed rest, hospitalization, and similar charitable attention. Income in excess of the requirements for maintaining the home was to be used in aiding persons recuperating from the effects of illness or impaired health. The balance of income, if any, was to be distributed to and among hospitals, medical ">*223 schools, and other educational institutions. The ultimate beneficiaries of the principal, both real and personal, were two hospitals and three schools.

Petitioner, with his cotrustee, was charged with, and immediately upon the death of the decedent entered upon, the duties of maintaining and operating the property at Short Hills, New Jersey, which consisted of some 918 acres of farm, vegetable gardens, and woodlands, together with numerous houses situated upon the premises. They maintained and supervised 7 miles of private roads and elaborate water systems; they maintained the extensive properties at Bar Harbor, Maine; they had charge of and supervised the employment of over 50 persons continuously working upon the premises; they gave constant and periodic personal supervision, at first daily and thereafter weekly, to the premises and the employees. The maintenance of the real property involved a yearly pay roll and expenditure of between $ 130,000 and $ 137,000. They were also charged with the responsibility of looking after the investments of the trust in securities, which included the duty of collecting dividends and interest and properly accounting therefor.

The securities ">*224 in the trust consisted of very large holdings in common stocks of the oil industry and a lesser percentage of bonds. The problems of diversification in the investments and reinvestments were substantial and complex. The trustees engaged in extensive investigations and analyses to determine the proper investment policy to preserve and protect the principal, which was the expressed intent of the decedent. Petitioner devoted almost daily attention to these problems and met with his cotrustee once a week for purpose of discussion and review of investments and policy. Petitioner and his cotrustee were successful not only in preserving the principal of the trust, but in enhancing its value.

Prior to December 28, 1937, petitioner and Willets, as trustees, filed a "First Intermediate Account" in the New Jersey Prerogative Court, and after due consideration thereof, the court issued a decree, which is in part as follows:

It is on this 28th day of December, 1937, Ordered, Adjudged and Decreed that the said account be in all things allowed as reported, and it appearing that there ">*849 is a balance of corpus remaining in the hands of the said accountants amounting to * * * ($ 9,573,567.80), ">*225 consisting of cash on deposit in various banks amounting to $ 68,402.84, and real estate, securities and other assets at their inventory or appraised value if owned by the testator at the date of his death and at their cost if acquired since the testator's death, amounting to $ 9,505,164.96, and a balance of income amounting to * * * ($ 280,324.63) to be disposed of according to law.

It is Further Ordered that said accountants be allowed and paid out of the aforesaid balance of income the sum of $ 58,836.64, as and for their commissions, being at the rate of 5% on $ 1,176,732.75 income collected * * *.

During November 1941 petitioner, as surviving trustee, and Fidelity Union Trust Co., as substituted trustee, filed a "Second Intermediate Account." In this second account in addition to an application for commissions on income at the rate of 5 percent, an application was also made by petitioner and the representative of the deceased trustee for the allowance of 1 1/2 percent commissions on the corpus of the trust for the services rendered by petitioner and Willets from May 21, 1933, to October 7, 1940. In support of the application for the commissions on the corpus petitioner filed">*226 with the court an affidavit of 14 typewritten pages setting forth in considerable detail the work that had been performed by himself and Willets, as trustees, in looking after the corpus of the trust during the period from May 21, 1933, to October 7, 1940. The application for commissions on the corpus was opposed by counsel for the Fidelity Union Trust Co., successor trustee, and Kate Macy Ladd, the life tenant. After due consideration of both applications, the court issued a decree, which is in part as follows:

It is, on this 9th day of December, 1941, Ordered, Adjudged and Decreed that the second account of the administration of the residuary trust under the last will and testament and codicils thereto of Walter G. Ladd, deceased, * * * be in all things allowed as reported * * *.

It is further Ordered that there be allowed to Paul Smart and Gladys B. Willets, administratrix of the estate of Josiah Macy Willets, deceased trustee, the sum of * * * ($ 146,395.87) as commissions on corpus for services rendered by Paul Smart and Josiah Macy Willets from May 21, 1933, the date on which said trust was set up until October 7, 1940, said allowance to be paid by Paul Smart and Fidelity ">*227 Union Trust Company out of the foregoing balance of principal;

It is further Ordered that there be allowed to Paul Smart and Gladys B. Willets, administratrix of the estate of Josiah Macy Willets, deceased, the sum of * * * ($ 65,595.53) as and for commissions at the rate of 5% on $ 1,311,910.60 of income collected by the said Paul Smart and Josiah Macy Willets, during the period from October 31, 1937 to October 15, 1940, of which sum $ 24,958.08 was paid to Paul Smart and $ 24,958.08 was paid to Josiah Macy Willets, on February 3, 1940, as shown in Schedule L of said account, and the balance of * * * ($ 15,679.37) shall be paid to the said Paul Smart and Gladys B. Willets, administratrix as aforesaid, by Paul Smart and Fidelity Union Trust Company out of the foregoing balance of income;

It is further Ordered that there be allowed to Paul Smart and Fidelity Union Trust Company, trustees, the sum of * * * ($ 12,089.62) as and for their commissions at the rate of 5% on $ 241,792.45 of income collected by them during the period from October 15, 1940 until April 30, 1941, said allowance to be paid ">*850 by the said Paul Smart and Fidelity Union Trust Company out of the foregoing balance">*228 of income.

Pursuant to the two above mentioned decrees, petitioner received the following sums on the dates specified:

December 28, 1937	$ 29,418.32
February 8, 1940	24,958.08
December 29, 1941	87,082.43

In his income tax return for the calendar year 1941, petitioner reported under schedule I as income "Trustees commissions -- Paul Smart and Fidelity Union Trust Co., Trustees u/W Walter G. Ladd, dec'd. $ 13,884.50" and as to the balance of the $ 87,082.43 received during that year, namely, $ 73,197.93, he attached a rider to his return, stating in part as follows:

Pursuant to a Decree of the Prerogative Court of New Jersey, dated and entered the 9th day of December, 1941, on the accounting of the Trustees under the Last Will and Testament of Walter G. Ladd, deceased, it was ordered that there be allowed to this taxpayer, one of the Trustees, as commissions on corpus for services rendered by him from May 21, 1933 "the date on which trust was set up" until October 7, 1940, the sum of $ 73,197.93, said allowance to be paid out of the balance of principal in said trust. This was the first and only payment of corpus commissions on the trust set up in the Last Will and Testament">*229 of Walter G. Ladd, deceased, and was compensation out of corpus of the trust for handling the trust from its inception on May 21, 1933 up to the period of the death of one of the Trustees on October 7, 1940. Nothing had been received by this taxpayer as commissions on corpus of this trust in prior years and this payment covered services rendered for more than five calendar years and was paid in a lump sum to this taxpayer pursuant to the Decree of the Court, said payment being made and received by this taxpayer on December 29th, 1941.

Although this payment covered services in excess of seven years inasmuch as these services only covered the full six calendar years of 1934-5-6-7-8-9, this taxpayer has divided the amount so received into six equal installments and has applied one-sixth of said amount, to wit, $ 12,198.98, as additional income in each of the above-mentioned calendar years of 1934 through 1939, inclusive. This taxpayer has recomputed the returns from 1934 through 1939, inclusive, adding to each of said years the above-mentioned amount of $ 12,198.98 as additional income.

(We here omit the detailed computations for each year and set forth only the recapitulation thereof, ">*230 which is a part of the rider and follows immediately.)

Additional Total Tax Due for the
Respective Years, as Follows:
1934	$ 1,799.27
1935	6,831.43
1936	6,685.21
1937	3,757.77
1938	2,846.54
1939	2,889.80
Total tax due	24,810.02

A third account was duly filed with the New Jersey Prerogative Court covering the period from the last accounting to the date of the ">*851 acceptance of petitioner's resignation as trustee. After due consideration thereof, the court on June 26, 1944, ordered, adjudged, and decreed that $ 10,000 be paid to petitioner from the principal of the trust "as his full and final commissions on principal for the services rendered by said Paul Smart as a trustee of said trust"; that $ 10,000 be paid to Fidelity Union Trust Co. as commissions on principal; that $ 41,290.66 "income commissions heretofore taken by the said Trustees for the period from April 30, 1941 to December 31, 1942 * * * be and the same hereby are approved and allowed"; that $ 20,246.45 be paid to the trustees from income of the trust as and for their commissions on income collected during the period from December 31, 1942, to December 31, 1943; and that $ 1,500.21 be">*231 paid to Fidelity Union Trust Co. as and for commissions on income collected "during the period from December 31, 1943 to February 7, 1944, the said Paul Smart having been inactive during said period prior to his discharge * * *."

Pursuant to the third decree, petitioner received the following sums on the dates specified: March 5, 1943, $ 20,645.33, and July 3, 1944, $ 20,123.22.

The respondent determined that petitioner was not entitled to the relief provided for in section 107 of the Internal Revenue Code, as amended, because the facts showed that he did not come within its provisions; that, therefore, the $ 73,197.93 received in 1941 as commissions on corpus should be included in petitioner's income for that year rather than the years 1934 to 1939, inclusive; that petitioner's correct income tax liability for 1941 was $ 48,816.60; that there had been assessed against petitioner the amount of $ 4,962.90 and also the above mentioned amount of $ 24,810.02; and that there was a deficiency in income tax of $ 19,043.68.

Any part of the stipulation of facts, including the exhibits thereto, not specifically set forth herein is incorporated herein by reference and made a part of these findings">*232 of fact.

OPINION.

Is petitioner entitled to the relief provided for in section 107 of the Internal Revenue Code? This section was added to the code by section 220 of the Revenue Act of 1939 and has been amended by section 139 of the Revenue Act of 1942 and section 119 of the Revenue Act of 1943. Only the 1942 amendment is applicable here, and the material provisions thereof are in the margin. ^{1945 U.S. Tax Ct. LEXIS 219">*233 ">*852 Since the taxable year here involved is one "beginning after December 31, 1940, and not beginning after December 31, 1941" petitioner is entitled to the relief provided for in code section 107, as amended, if at least 75 percent of the "total compensation for personal services" covering a period of sixty calendar months or more "from the beginning to the completion of such services" is received or accrued in one taxable year, namely, the calendar year 1941.}

Petitioner, in effect, contends that the "personal services" here involved consisted only of those rendered as trustee in looking after the corpus; that the "total compensation" received therefor was $ 73,197.93; that "such services" began on May 21, 1933, and were completed on October 7, 1940; that not only at least 75 percent of the total compensation was received in 1941, but 100 percent was thus received; and that petitioner is, therefore, entitled to the relief provided for in code section 107, as amended.

The respondent contends that the "personal services" here involved consisted of those rendered as trustee in looking after the corpus and in collecting the income of the Walter G. Ladd estate, of which he was">*234 one of the trustees; that the "total compensation" received therefor was $ 182,227.38 ($ 29,418.32 of which was received in 1937, $ 24,958.08 in 1940, $ 87,082.43 in 1941, $ 20,645.33 in 1943, and $ 20,123.22 in 1944); that "such services" began on May 21, 1933, but were not completed until February 7, 1944, the date petitioner's resignation as trustee was accepted; that considerably less than 75 percent of the total compensation was received in one taxable year, namely, the calendar year 1941; and that, therefore, petitioner is not entitled to the relief provided for in code section 107, as amended.

The vital factor upon which this controversy turns is whether in determining the "total compensation for personal services" for the purposes of this case, we should consider only those rendered by petitioner as trustee in looking after the corpus, or whether we should also consider in this same connection those rendered by petitioner as trustee in collecting the income. Petitioner contends that for the purposes of ">*853 code section 107, as amended, the services rendered in looking after the corpus should be considered separately from those rendered in collecting the income; that">*235 the two are not to be considered together for the purpose of applying section 107. The respondent contends otherwise and relies upon our decision in Harry Civiletti, 3 T.C. 1274, on review by Circuit Court of Appeals, 2d Circuit.

The Civiletti case involved a trustee of two trusts governed by New York law. The taxable year involved was the calendar year 1940 and the statute involved was code section 107 as added by section 220 of the Revenue Act of 1939, which required that not less than 95 percent of the compensation be paid upon completion of the services in order that the section be applicable. The trustee began his services in 1929 and from 1929 to 1940 he had received at least $ 17,000 "for receiving and paying out the income of the trusts." In 1940 he also received $ 31,025.12 "for receiving and paying out principal." We held that there could be no separation of his two principal duties as trustee so as to bring the compensation received for one within the limits laid down by code section 107; that all amounts received by the trustee were received by him as compensation for his services as trustee; and that, since he did not receive at ">*236 least 95 percent thereof in 1940, he was not entitled to the benefit of section 107.

Petitioner contends that the Civiletti case is not in point:

* * * because under the laws of the State of New York and the decided cases, the principal commissions allowed a New York trustee has no relation to or bearing upon the amount of work performed or the period covered, that is to say, i. e. the trustee will receive the same amount of principal commissions for the most perfunctory of services covering for a period of a month as he will receive for the most complicated services covering a period of ten years. In the State of New Jersey there is no such pro forma allowance to a trustee for services rendered in connection with the principal of the trust, and on the contrary his compensation is measured by the nature and extent of the work he has performed during the particular and distinct period for which he has completed this work and for which he asks an allowance.

For the purposes of the application of code section 107, as amended, we do not think it is material upon what basis the corpus commissions are paid. Such commissions, whether automatic under the New York law, as petitioner">*237 contends, or whether only within the discretion of the judge in the State of New Jersey, as he contends, are parts of his compensation as trustee and must be treated as such in applying section 107. We, therefore, do not agree with petitioner that the Civiletti case is not in point. We think it is in point and is also controlling. Petitioner was rendering services, as a trustee, of a varied character. He collected the income and looked after the corpus and was compensated therefor. We hold that, in determining whether petitioner is entitled to the relief provided for in code section 107, as amended, the "total compensation for personal services" ">*854 factor must include the commissions received by petitioner as trustee for collecting the income as well as for looking after the corpus. Harry Civiletti, supra.On the basis of that holding it is apparent that, regardless of whether "such services" were completed in 1940 or later, less than 75 percent of the total compensation was received in the taxable year 1941. If we regard the date of October 7, 1940, the date of the death of Willets, as the date of the completion of personal services">*238 for looking after corpus, as petitioner contends, for the purposes of section 107, the result is the same. The $ 87,082.43 which petitioner received as commissions in 1941, which includes the $ 73,197.93 for looking after corpus to the date of Willet's death, was not 75 per centum of petitioner's compensation for personal services received up to 1941. Only by excluding the $ 29,418.32 which petitioner received in 1937 and by excluding the $ 24,958.08 which petitioner received in 1940 for collecting income, can the result contended for by petitioner be reached. We do not understand petitioner to contend otherwise. As we have already stated, we see no basis for this exclusion. In this important respect the instant case is clearly distinguishable from Slough v. Commissioner, 147 Fed. (2d) 836, reversing Frank M. Slough, 3 T.C. 565. The Slough case, as we construe it, has no application to the instant case.

We, therefore, sustain the respondent's determination. It thus becomes unnecessary to determine when the services were completed.

Decision will be entered for the respondent.

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Footnotes

• 1. Revenue Act of 1942 --

  SEC. 139. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE.

  (a) Section 107 is amended to read as follows:

  "SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE.

  "(a) Personal Services. -- If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.

  * * * *

  "(c) Fractional Parts of a Month. -- For the purposes of this section a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall be considered as a month."

  (b) The amendment made by subsection (a) shall be applicable to taxable years beginning after December 31, 1940, but with respect to a taxable year beginning after December 31, 1940, and not beginning after December 31, 1941, the period specified in such subsection shall be sixty months in lieu of thirty-six months, and the percentage specified in such subsection shall be 75 per centum in lieu of 80 per centum.↩