DocketNumber： Docket Nos. 61205, 69832.
Judges： Hill
Filed Date： 4/2/1937
Status： Precedential
Modified Date： 11/2/2024
1937 BTA LEXIS 834">*834 TRUST INCOME. - Where certain trust income earned during the taxable calendar years 1929 and 1930 was distributable to petitioner on January 4 of the following year, if petitioner were then alive, but if his death occurred during the period December 31 to January 4, the amount would be added to corpus and ultimately distributed to others,
35 B.T.A. 839">*839 These consolidated proceedings are for the redetermination of deficiencies in income tax for the calendar years 1929 and 1930 in the amounts of $980.80 and $214.72, respectively. The issues raised by the pleadings are (1) whether respondent erred in including in petitioner's income for the year 1929 the sum of $9,000 as income of a trust distributable to petitioner within the taxable year, and whether respondent erred in failing1937 BTA LEXIS 834">*835 to allow as a deduction from the income reported by petitioner for the year 1930 the sum of $10,000 alleged to be income of a trust distributable to petitioner within the taxable year; and (2) whether respondent erred in disallowing deductions of $1,621.70 and $1,651.74 from petitioner's income for the years 1929 and 1930, respectively, on account of depreciation of property owned by a trust estate of which petitioner was a beneficiary.
FINDINGS OF FACT.
Petitioner is a citizen of the United States, and a resident of Johnson County, Kansas.
Petitioner timely filed his income tax return for the calendar year 1929, disclosing a net income of $31,494.25. As the result of field and office audits, respondent made a net addition to petitioner's net income for 1929 in the sum of $7,357.50, such net addition being described by respondent as "income from fiduciary", and being further described as the amount of distributive income out of the estate of Oliver H. Dean, deceased. Petitioner had reported $1,000 of net income distributed to him out of the said estate, to which respondent added the sum of $9,000.
For the calendar year 1930 petitioner timely filed his income tax return, 1937 BTA LEXIS 834">*836 disclosing a net income of $29,987.30. As the result of field 35 B.T.A. 839">*840 and office audits, respondent made a net addition to petitioner's net income for 1930 in the sum of $1,651.74, such net addition being petitioner's pro rata share of depreciation taken in petitioner's return as originally filed for said calendar year on the property of the Oliver H. Dean trust estate.
In the return filed by petitioner for the calendar year 1930, petitioner included as an item of income the sum of $10,000 distributed to him as a beneficiary of the trust estate on January 4, 1930.
No deduction was made either by petitioner or respondent for the calendar year 1930 of the amount allowed by respondent as a deduction in the calendar year 1929, to wit, $462.50, being the amortization of the gift tax paid by the petitioner because of a gift to him out of the estate of his mother.
On January 3, 1928, one Oliver H. Dean died testate in Kansas City, Jackson County, Missouri, leaving a considerable estate to be administered in trust and ultimately distributed under the terms of his will. Petitioner and one James G. Smart were named therein as cotrustees. They duly qualified, and have since acted1937 BTA LEXIS 834">*837 and are now acting as trustees under and by virtue of said will.
In his will the decedent directed the trustees to pay out of the net income of the trust fund or estate to petitioner and another named beneficiary, each, the sum of $10,000 per year "so long as they shall respectively live, and the balance, if any, of said net income shall yearly and every year be added to and become part of the corpus of said trust fund and estate and be disposed of as hereinafter provided."
The will further directed that payments be made to the beneficiaries only upon their personal receipts, without any power whatever to encumber or dispose of the same by way of anticipation prior to actual payment.
During the calendar year 1928 the said trustees, under their then interpretation of the will, paid to this petitioner and another beneficiary, in monthly installments of $833.33, the total sum of $9,000 to each beneficiary, said payments being made from the general assets rather than from income of the trust estate. Such payments were challenged by one of the trustees as improperly made, and a civil action in equity was instituted in the Circuit Court of Jackson County, Missouri, at Independence, 1937 BTA LEXIS 834">*838 on March 28, 1929, the style of the case being "Alice Dean Green Swobe et al., plaintiffs, versus Mason L. Dean et al., defendants." In answer to the action so instituted, the defendants alleged that neither the payments theretofore made to the beneficiaries nor the payments to be subsequently made, nor any part thereof, might under the will be lawfully distributed or paid before January 3, 1929, or before the end of the 35 B.T.A. 839">*841 administrative year, which was one year from the date of the death of Oliver H. Dean. The plaintiffs' petition prayed for an interpretation of the will.
The Circuit Court of Jackson County, Missouri, was a court of competent jurisdiction, and on January 24, 1930, after due hearing, entered a decree construing the will and finding in substance that said payments made by the trustees under the will could be made only from income and not from the general funds of the estate, and could be made only at the end of each administrative year.
An appeal was taken to the Supreme Court of Missouri from the decree rendered by the Circuit Court of Jackson County by all of the parties to the controversy. Pending the hearing of the appeals on writs of error, all1937 BTA LEXIS 834">*839 parties entered into a stipulation providing for a settlement of the litigation, subject to approval of said court.
Upon the filing of the stipulation, the Supreme Court of Missouri on April 10, 1934, entered its judgment of record approving the stipulation and in effect affirming in part and modifying in part the judgment of the Circuit Court of Jackson County. The stipulation filed by the parties and the judgment in the supreme court based thereon modified the order of the circuit court only in respect of amounts allowed as attorneys' fees and expenses. Otherwise, the judgment of the circuit court was affirmed.
A return of income was duly made by the trustees of the Oliver H. Dean estate for the calendar year 1929. The only deduction appearing upon the return so filed for payments made to the beneficiaries of the trust estate was an item of $2,000 representing payments of $1,000 made to each of the two beneficiaries on January 4, 1929, this petitioner being one of the beneficiaries. This deduction of $2,000 was allowed by respondent, resulting in payment of tax by the trustees on the additional sum of $18,000 later distributed to the beneficiaries but earned by the trust1937 BTA LEXIS 834">*840 estate in 1929.
On the return filed by the trustees for 1929 a deduction was taken in the amount of $3,248.40 as depreciation on the property of the trust estate. As the result of field and office audits, this deduction was disallowed by respondent as being allowable to the beneficiaries.
OPINION.
HILL: The first and principal issue for decision here is whether respondent erred in including in petitioner's income for 1929 the amount of $9,000 as distributable income of the trust of which petitioner was a beneficiary, and in failing to allow as a deduction from the income reported by petitioner in his return for 1930 the sum of $10,000 alleged to have been erroneously reported as distributable 35 B.T.A. 839">*842 income of the same trust. The applicable provisions of the Revenue Act of 1928 are quoted in the margin. 1937 BTA LEXIS 834">*841 Petitioner contends that all the income of the trust estate was properly taxable to the trustees, under the statute and the terms of the trust instrument, and therefore the income in controversy is not taxable to him. Respondent has submitted no brief in this case; nor did he in the deficiency letters disclose the theory or reasons upon which his action was based.
The trust instrument involved was construed by the Circuit Court of Jackson County, Missouri, the court having jurisdiction of the trustees and of the trust estate, and by decree entered on January 24, 1930, it was held in substance that payments to the beneficiaries could be made by the trustees only out of income and only at the end of each administrative year beginning with January 3, 1928, the date of the decedent's death. The decree of the circuit court was affirmed by the Supreme Court of Missouri, in so far as it related to the construction of the trust instrument, and by that construction we are bound. ; 1937 BTA LEXIS 834">*842 ; ; .
During the year 1928, the trustees paid to petitioner the sum of $9,000 from the general assets of the estate rather than from income. On January 4, 1929, the trustees paid to petitioner the sum of $1,000, and on January 4, 1930, the sum of $10,000. Petitioner reported as taxable income in his return for 1929 the amount of $1,000 paid to him by the trustees on January 4 of that year, and respondent in computing the deficiency for 1929 added thereto the sum of $9,000. In his return for 1930 petitioner reported as income the amount of $10,000 paid to him on January 4 of that year, which amount he now contends was erroneously reported and should be deducted in determining his correct tax liability for 1930. Petitioner also assails the action of the respondent in adding to income reported 35 B.T.A. 839">*843 for 1929 the amount of $9,000 above mentioned. Petitioner's contentions, we think, must be sustained.
As has been many times pointed out, tax liability is determinable upon the basis of annual accounting1937 BTA LEXIS 834">*843 periods. Both petitioner and the trustees made their returns on the basis of calendar years. The statute imposes a tax upon the net income of a trust estate computed in the same manner and on the same basis as in the case of an individual. It is the clearly expressed intention of Congress to exact a tax upon all the income of a trust estate, but in some instances the tax is payable by the fiduciary, in others by the beneficiary, or a part may be payable by each. In the case of income accumulated in trust for the benefit of unascertained persons or persons with contingent interests, the tax is payable by the fiduciary. Such, in our opinion, is the situation presented here.
As of December 31 of each of the taxable years, it was the duty of the trustees to report all income of the trust estate earned during that year, deducting therefrom, in addition to other deductions, the amount of the income distributed or then distributable to the beneficiaries, whether or not distribution had actually been made. Any income so deducted, the statute required the beneficiaries to include in their net income.
At the close of each of the taxable years, there was no income of the trust estate1937 BTA LEXIS 834">*844 distributable to this petitioner. His interest therein was wholly prospective or contingent. The will of the decedent authorized payments of income to be made by the trustees to the beneficiaries only upon their personal receipts, without any power whatever to encumber or dispose of the same by way of anticipation prior to actual payment. Payments were to be made to this petitioner as a beneficiary of the trust estate, so long as he should live. Upon his death, therefore, his interest as beneficiary would cease. In such event he could no longer execute personal receipts for payments, and he was without power to assign, transfer, or otherwise dispose of his interest by way of anticipation. His estate could not acquire any interest in the trust income.
The income earned by the trust during each of the taxable calendar years did not become distributable and could not be distributed by the trustees under the terms of the trust instrument, as construed by the state courts, until on or after January 4 of the following year. Hence, at December 31 of each taxable year, it could not be known what beneficiary would become entitled to receive the accumulated income on the following1937 BTA LEXIS 834">*845 January 4. If petitioner had died subsequent to December 31 and prior to the later date, neither he nor his estate would have any interest in the income earned during the preceding calendar year, but the will provided that such income should 35 B.T.A. 839">*844 be added to and become a part of the corpus of the trust estate and ultimately be distributed to others, together with the original principal fund.
The income earned by the trust estate from January 1 to 3, inclusive, of each year became distributable and was in fact distributed to the beneficiaries on January 4, within the calendar year. The amount so distributed to petitioner, if any, was deductible by the trustees and should be included by petitioner in his net income. However, the income earned by the trust estate from January 3 to December 31 of each taxable year was not distributable until January 4 of the following year, and this income, in our opinion, was at December 31 of each year income accumulated in trust for the benefit of unascertained persons or persons with contingent interests, within the meaning of the taxing statute. Also, under the express terms of the will as construed by the Missouri courts, the income1937 BTA LEXIS 834">*846 earned in any calendar year after January 3 was not distributable within such calendar year regardless of any question as to unascertained beneficiaries or contingent interests. Such income was taxable to the trustees, and could not again be taxed to the petitioner as income when distributed to him in the following year, after he had become an ascertained person or his contingent interest had become vested and for the further reason that such income was distributable in no event until January 4 next following the calendar year in which it was earned. While the statute requires a tax to be paid upon all the income of the trust estate, it does not contemplate double taxation, or payment of tax by the trustees and a second payment of tax on the same income by the beneficiaries.
In , the facts in all material respects were the same as in the present case, and we there held that the income earned by the trust estate from the last distribution date to the close of the taxable year was income accumulated in trust for the benefit of unascertained persons or persons with contingent interests, and was taxable to the trustees. In our opinion1937 BTA LEXIS 834">*847 beginning at page 825, we said:
The respondent has urged that, since under the will the income of the trust was to be distributed semiannually, it therefore was income to be distributed currently and under the provisions of section 162(b) [Revenue Act of 1928,
And see also , where we applied substantially the same principle in holding that income credited to the invested capital accounts of the beneficiaries on the books of the trust after the close of the taxable year did not constitute credit in such year, and was not allowable as an additional deduction in computing the net income of the trust.
The case of , is clearly distinguishable on the facts from the instant proceeding. There, distributable income of a trust was withheld during the taxable year by the trustee on the ground that a part or all of the amount withheld was corpus and not income, but it was conclusively adjudicated in a later year as distributable income, and we held it was taxable not to the trust, but to the beneficiary for the year when it became1937 BTA LEXIS 834">*849 distributable, whether or not it was then distributed. In the case at bar no part of the income in controversy (other than the income earned, if any, between the dates of January 1 and 3 of each year) was
On authority of the decisions hereinabove cited, we hold that the income in question, except to the extent before mentioned, is not taxable to petitioner. If any part of the income was earned by the trust estate during the period January 1 to 3, inclusive, of either taxable year, such amount is properly includable in petitioner's net income for such year. The parties may stipulate the amount so earned, if any, and the stipulation will be given effect in the recomputation under Rule 50. Otherwise, upon motion of either party, these proceedings will be set down for further hearing, at which time evidence may be offered to establish the necessary facts.
The conclusion reached above renders it unnecessary, at least at this time, to consider the second issue raised by petitioner. Unless it shall be made to appear that some portion of the trust income is taxable to petitioner, he is not entitled1937 BTA LEXIS 834">*850 to any deduction for depreciation of the trust property.
On brief petitioner argues that he is entitled to an additional deduction of $462.50 from income for 1930 on account of amortization of the gift tax paid by petitioner because of the gift to him out of the estate of his mother. The parties stipulated that such a deduction was allowed by respondent for 1929, but was neither 35 B.T.A. 839">*846 claimed nor allowed for 1930. We have no further information concerning this item, and the stipulation on its face obviously is insufficient to sustain petitioner's contention. Furthermore, the issue was not raised in the pleadings, and therefore will not be considered by us here. ; ; .
1. SEC 161. IMPOSITION OF TAX.
(a)
(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that -
* * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * * ↩