Brown v. Commissioner

JACOB F. BROWN, TRUSTEE, AND RAY SLATER MURPHY, BENEFICIARY, UNDER THE WILL OF H. N. SLATER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Brown v. Commissioner

Docket No. 8191.

United States Board of Tax Appeals

9 B.T.A. 521; 1927 BTA LEXIS 2568;

December 9, 1927, Promulgated

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The entire income from property held in trust was distributed by the trustee in 1920 to the beneficiaries of the trust pursuant to the direction of the testator creating the trust. Held, that the trustee is not liable to income tax in respect of the amounts of income of 1920 distributed but that the beneficiaries receiving such income are liable to income tax on the amounts received by them.

M. B. Angell, Esq., and Blount Ralls, Esq., for the petitioners.

R. E. Copes, Esq., for the respondent.

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SMITH

This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $16,218.15. The question in issue is whether a trustee holding property in trust, under the terms of which the trust property was distributable on or after July 12, 1920, and which was distributed to the beneficiaries in 1920, is liable to income tax in respect of income received by him from January 1, 1920, or whether the beneficiaries receiving the income are liable to tax upon such income.

FINDINGS OF FACT.

1. Horatio N. Slater, a resident of Webster, Mass., died August 12, 1899, leaving a will and testament dated February 19, 1895.

2. The fourteenth clause of his will provided:

I give devise and bequeath to the trustees hereinafter named all the rest and residue of my property both real and personal of which I may die seized and possessed or to which I may be entitled at the time of my decease and also all that may come to my estate after my decease from any source whatsoever and also any that may fall into the residuum through any provision of this will to hold manage, invest and reinvest the same as a trust fund or estate upon the following trusts:

1st. To collect the income and annually or oftener to add the same to the principal of the trust fund or estate for the period of twenty years and eleven months from my decease unless the period for such accumulation is sooner terminated in accordance with the terms and provisions of this clause of my will; and to pay over and convey to the children of my marriage with my wife Mabel, share and share alike, the said trust fund or estate so accumulated, one half of each child's share on the arrival of such child at the age of twenty-five years and the remainder of each child's share on the arrival of such child at the age of thirty years; but in case said children shall not respectively reach the age of twenty-five years or thirty years, as the case may be, before the expiration of the period of twenty years and eleven months from my decease then the interest or share of each of said children in said trust fund or estate shall vest in and be paid over and conveyed to such children at the expiration of the period of twenty years and eleven months from my decease; whether it be one half or the whole of each child's share.

2nd. In case any of the children of my said marriage with my wife Mabel shall die after my death and before reaching the age of twenty-five years or thirty years as the case may be, and before the expiration of the period of twenty years and eleven months from my death leaving issue living at the time of the decease of such child, such issue shall succeed to the rights of the parent in the trust fund or estate by right of representation; but the time at which such issue shall receive from said trustees their share or shares of said trust fund or estate shall be at the expiration of the period of twenty years and eleven months from my decease.

3rd. In case any of the children of my said marriage with my wife Mabel shall die after my death and before attaining the age of twenty-five years or thirty years, as the case may be, and before the expiration of twenty years and eleven months from my death leaving no issue living at the time of the decease of such child, the share of such child shall go to and be added to the share or shares of the surviving brothers and sisters, or of the issue of such brothers and sisters who may have previously died leaving issue living at the time of their decease, by right of representation.

4th. If there shall be no issue of my said marriage with my said wife Mabel who shall survive so as to take the interests and shares in this trust fund or estate which I have above provided for such issue then at the expiration ration of twenty years and eleven months from my death my said trustees shall pay over and convey the entire trust fund or estate to the person or persons who under the statutes of the Commonwealth of Massachusetts governing the descent of the real estate and the distribution of the personal property of intestates would have become entitled to said estate or fund at my death; if I had died intestate, and without leaving a widow or any child such persons if more than one to take the shares in which they would have taken my said estate under such statutes.

3. The surviving beneficiaries of the trust in 1920 were Esther Slater Welles (now Esther Slater Kerrigan) who was entitled to a one-fourth share; Horatio Nelson Slater, who was entitled to a one-fourth share; and Ray Slater Murphy, who was entitled to a one-half share.

4. In each year prior to the taxable year 1920, the trustee accumulated and retained the rents and profits realized on the principal of the trust fund as required by the terms of the trust instrument, and each year made return thereof and paid the income tax thereon.

5. In 1920, the current income amounted to $82,686.56. This amount, together with the principal and the income accumulated in past years, was distributed to the aforesaid beneficiaries in accordance with the provisions of the fourteenth clause of the will. These distributions were made by several checks, the last of which was dated November 18, 1920.

6. The trustee regularly made his Federal income-tax returns on the calendar year basis. His return for the year 1920, though stated to be for the period January 1 to November 18, was not intended as a departure from the regular practice of making returns on the calendar year basis. The 1920 return was an information return on Form 1041. No taxable income was shown thereon, but the current income was shown as having been distributed to the beneficiaries during that year.

7. The trustee, through his accountants, advised the three beneficiaries ficiaries of the trust by letter that they should report as their own income for Federal tax purposes the income distributed to them in 1920.

8. The return of the beneficiary and petitioner, Ray Slater Murphy, for the year 1920 was made on the calendar year basis. Esther Slater Welles, another beneficiary, also made an income-tax return for the calendar year 1920 and such return was made on the calendar year basis.

9. The trustee reported no income subject to the tax in 1920. The Commissioner computed the deficiency by holding him liable to income tax upon the income of the trust fund from January 1, to July 12, 1920.

OPINION.

SMITH: The question presented is whether the trustee is liable to income tax upon the income of the trust from January 1, 1920, to the date of distribution to the beneficiaries in 1920, or whether the petitioners are liable to income tax in respect of such income. The petitioners contend that the trustee is not liable to income tax upon the income. The trustee filed an information return on Form 1041 for 1920, which return showed no tax due from the trustee. The respondent contends that under section 219 of the Revenue Act of 1918 the rents, profits, and income of the trust from January 1, 1920, were properly taxable to the trustee and not to the beneficiaries.

Section 219 of the Revenue Act of 1918 provides as follows:

(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including -

(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;

(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;

(3) Income held for future distribution under the terms of the will or trust; and

(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that there shall also be allowed as a deduction (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary's distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.

(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.

(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary's net income is computed. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.

In , we said at page 1014:

It is also quite clear that the imposing clause contained in subdivision (a) provides that the tax shall be paid by the fiduciary unless otherwise provided. From the general imposing clause the statute turns to the specific classifications that are to be included within subdivision (a).

and at page 1015 we said:

The intention of the statute is to let the tax be imposed in accordance with what actually transpired * * * Paragraph (3) treats of "income held for future distribution under the terms of the will or trust." It could hardly be contended under this paragraph that income actually distributed by a trustee, who had the discretion to distribute or hold for future distribution, was taxable to the trustee as income being "held for future distribution." Also, it is to be noted, in such a case, the terms of the will or trust would have been complied with, as the trustee had the discretionary power to so distribute. Thus, the intention again seems to be to let the tax be imposed in accordance with what actually occurred.

If this be true of the income of a discretionary trust paid over to beneficiaries, a fortiori, it is true of the income distributed to the beneficiaries in the instant case, which income was distributed in accordance with the express provisions of the instrument creating the trust. We regard it as immaterial that the income of the trust fund was to be accumulated for a period of years, which period came to an end during the taxable year. The income received by the trustee in 1920 was not held for future distribution under the terms of the will or trust for the entire year. It was paid over to the beneficiaries during the year. The trustee was merely the conduit through which they received their income. The conduit should not be charged with income tax in respect of the income paid over to the beneficiaries during the taxable year.

Reviewed by the Board.

Judgment will be entered for the petitioners.