Peoples Trust Co. v. Commissioner

PEOPLES TRUST CO., TRUSTEE, ESTATE OF BURT H. WHITELEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Peoples Trust Co. v. Commissioner

Docket No. 8472.

United States Board of Tax Appeals

10 B.T.A. 1385; 1928 BTA LEXIS 3886;

March 15, 1928, Promulgated

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The testator created a trust of his residuary estate and directed the trustees to pay to certain individuals for life the income from certain stocks or the income from the reinvested proceeds thereof, and thereafter to certain charitable corporations. In 1920, by reason of the redemption and sale of part of the stock held in trust, the trustees derived a profit of $36,197.25. Held, that the amount so derived was permanently set aside for corporations described in section 219(b) of the Revenue Act of 1918, and is exempt from taxation.

Harry H. Orr, Esq., for the petitioner.

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

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LOVE

The Commissioner determined a deficiency in income tax for the calendar year 1920 of $5,399.31 and imposed a penalty of $1,349.83 for failure to file a return for that year.

The petitioner alleges that, in determining the deficiency, the Commissioner erred in holding that the income upon which the deficiency is proposed was not permanently set aside during the taxable year for corporations organized and operated exclusively for charitable purposes, no part of whose income inured to the benefit of any stockholder or individual.

FINDINGS OF FACT.

The petitioner is trustee under the testamentary trust created by Burt H. Whiteley, deceased, who died March 21, 1917. The pertinent provisions of the will are:

ITEM 1. For the purpose of more fully defining, setting out and establishing my "residue estate", embracing all moneys, stocks, bonds or other investments, including my interest in real estate which may be possessed by me at the time of my death, excluding everything designated and disposed of by the provisions of "EXHIBIT A", which accompanies and is made a part of this will, also excluding all property otherwise disposed by this will,

I GIVE, DEVISE AND BEQUEATH the property in this item, hereinafter specially enumerated and described, and by me hereinafter referred to as my "residue estate", to "Peoples Trust Company" of Muncie, Indiana, its successor or successors, and to Mary E. Whiteley, my wife, Amos Whiteley, Jr., my son, Elmer J. Whiteley, my brother and Amos Whiteley, Sr., my father, as executors of this, my Last Will, "In trust" for the carrying out and making effectual the provisions of this will.

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ALSO, that when said report shall have been approved according to law and their trust ended, and they shall have been discharged as "executors", that thereupon the title to the said "residue estate" shall pass into the hands of the same persons, whom I have herein designated as executors, as Trustees in trust for the execution and performance of the trust created by this will, and that such property and all property then remaining in my residue estate shall be theirs as such "trustees", absolutely and in fee simple, forever, with full power as such trustees to sell and dispose of same and reinvest the proceeds of such sale in any way that, in their judgment, shall be for the best interest of the trusts, by this will created.

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ITEM 4. Instead of setting apart the income, or any portion of the income, from any investment or investments for the purpose of creating and maintaining an Endowment Trust Fund for the benefit of the First Universalist Church of Springfield, Ohio, as I had done in a previous will and later realized that the investment I had set apart for that purpose had proved to be, at present, a non-dividend paying investment of problematical value, I have decided to make an annual contribution from my residue estate, embracing all resources, investments, etc., and to accomplish this.

I HEREBY AUTHORIZE AND DIRECT my executors and trustees to pay annually, out of my residue estate, about February First of each year, the sum of Two HUNDRED DOLLARS ( $200), to the Trustees of the First Universalist Church of Springfield, Ohio, or to the Trustees of any church who may lawfully become the successor of said First Universalist Church of Springfield, Ohio, to be used by said trustees, or their successors, in defraying the expenses of maintaining and conducting church service, including the minister's salary, etc. These annual payments will be made by me during my life, and after my death are to be continued by my executors and trustees FOREVER, or so long as said First Universalist Church, of Springfield, Ohio, or its lawful successor, shall employ a pastor and conduct regular church services every week, or substantially so.

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CONTINUING PAYMENTS.

ITEM 9. I HEREBY AUTHORIZE AND DIRECT my executors or trustees, to pay out of my "residue estate," to my Cousin "Rose Kelly McClelland," in person, for her personal use, but not transferable, the sum of $20 per month; these payments to be continued monthly, so long as she may live and remain single, after my decease.

DONATIONS, GRATUITIES, CHRISTMAS PRESENT, ETC.

ITEM 10. I HEREBY AUTHORIZE AND DIRECT my executors or trustees, to pay annually, about the first of December of each year, forever, out of my "residue estate" to the following designated orders, associations and charities, the amounts hereinafter specified, to be used by said orders, associations and charities for providing and distributing good cheer and holiday reminders:

TO THE ELKS LODGE NO. 245, or its lawful successor in that society or order.

THE SUM OF ONE HUNDRED FIFTY DOLLARS ( $150).

TO THE HEAD OF THE LOCAL OR MUNCIE DIVISION OF THE SALVATION ARMY, or any person whom my executors or trustees may seelct as suitable to receive and expend this bequest, in aid of the work of the Salvation Army in Muncie, Indiana, preferably some officer or official representative of the Salvation Army,

THE SUM OF ONE HUNDRED DOLLARS ( $100).

TO THE CHIEF OF THE CITY FIRE DEPARTMENT, "IN TRUST" to be distributed by him to the firemen of the City Fire Department, including himself

THE SUM OF ONE HUNDRED FIFTY DOLLARS ( $150).

ITEM II. I HEREBY GIVE, DEVISE AND BEQUEATH to the "Benevolent Protective Order of Elks Lodge No. 245" of Muncie, Indiana, or its lawful successor in that society or order, the sum of FIVE THOUSAND DOLLARS ($5000), and direct my executors or trustees to pay this amount, out of my "residue estate", as soon after my death as the funds may be required by the management of said Lodge No. 245, or its lawful successor in that society or order, for use in completing and furnishing the ElksHome, which is to be erected in Muncie.

PROVIDED, this bequest has not been paid to said Lodge No. 245 during my life, and it is also understood that this bequest may be paid to said Lodge No. 245 in installments, as the funds may be accumulated in my residue estate, in addition to other specific payments to be made, by my executors and trustees, therefrom.

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ITEM 14. As indicating a part of my agreement in the "Four Part Contract", entered into with Home Hospital, of Muncie, Indiana, or its successor, Peoples Trust Company, of Muncie, Indiana, abrogating all former contracts and agreements heretofore made.

I have agreed for myself, my executors, administrators and assigns, that I will, as soon as said Four Part Agreement has been executed by all of the parties thereto, and all of the stocks, contract, assignments, etc., which were assigned and transferred by me to the Peoples Trust Company, January 22d, 1914, have been returned to me, pay to Peoples Trust Company, TRUSTEE of "Burt H. Whiteley Charity Fund", the sum of ONE THOUSAND DOLLARS ($1000) to be credited by said trustee to "Burt H. Whiteley Charity Fund Account."

Which is to be the title of the account, which will carry all of the funds provided for the use of, and to be drawn upon by the "Board of Trustees" of the Burt H. Whiteley Charity Fund, for the payment of all bills, to be paid by said trustees out of said "Burt H. Whiteley Charity Fund Account" as more fully set out herein and in accompanying "EXHIBIT B" instructions to the Board of Trustees of the Burt H. Whiteley Charity Fund.

And have also agreed, that I will make further and additional payments to said trustee, to be credited by it to said "Burt H. Whiteley Charity Fund Account" in sums not exceeding five thousand dollars ($5,000) annually, forever, upon requisitions, duly made by the "Board of Trustees" of Burt H. Whiteley Charity Fund, to me during my life, and to said trustee after my death, which requisitions shall certify that the amounts thereof are needed, for the proper fulfillment of the terms of my agreements in the Four Part Contract herein referred to, and accompanying "Exhibit B", instructions to the Board of Trustees of the Burt H. Whiteley Charity Fund.

With this definite explanation, I HEREBY AUTHORIZE AND DIRECT my executors and trustees, after my death, to carry out this agreement forever, by making the necessary payments, out of my "residue estate", and charging same to "Burt H. Whiteley Charity Fund Account", for the use of said "Board of Trustees" of Burt H. Whiteley Charity Fund.

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DISTRIBUTION OF EARNINGS OF STOCKS AND BONDS.

ITEM 16. After my death, I HEREBY AUTHORIZE AND DIRECT MY executors or trustees, to pay, out of my "RESIDUE ESTATE" to the parties hereinafter designated, as the interest or dividend earnings are received by my executors or trustees, subject to the following conditions, viz:

TO MARY E. WHITELEY, DURING HER LIFE:

An amount equal to the dividend earnings of the following shares of stocks and bonds, which are made a part of my "residue estate", and the proportionate amount of the earnings of any property in which the proceeds of said shares of stocks and bonds may, by my executors or trustees, be invested, and the proportionate amount of the earnings of such proceeds or reinvestments:

25 SHARES OF ANDREWS THEATRE COMPANY STOCK

50 SHARES OF HOME MOTION PICTURE COMPANY STOCK

122 SHARES OF WHITELEY STEEL CO. STOCK

439 SHARES OF WHITELEY MALLEABLE CASTINGS CO. STOCK

150 SHARES OF CLARK COUNTY BUILDING & SAVINGS CO. STOCK

15 ONE THOUSAND DOLLAR BONDS OF UNION LEAGUE CLUB

TO AMOS WHITELEY, JR. DURING HIS LIFE:

An amount equal to the dividend earnings of the following shares of stocks, which are made a part of my "residue estate", and the proportionate amount of the earnings of any property in which the proceeds of said shares of stocks may, by my executors or trustees, be invested, and the proportionate amount of the earnings of such proceeds or reinvestments:

25 SHARES OF ANDREWS THEATRE COMPANY STOCK

50 SHARES OF HOME MOTION PICTURE COMPANY STOCK

122 SHARES OF WHITELEY STEEL CO. STOCK

438 SHARES OF WHITELEY MALLEABLE CASTINGS CO. STOCK

TO BELLE PAINTER, DURING HER LIFE:

An amount equal to the dividend earnings of the following shares of stock, which are made a part of my "residue estate", and the proportionate amount of the earnings of any property in which the proceeds of said shares of stock may, by my executors or trustees, be invested, and proportionate amount of the earnings of such proceeds or reinvestments;

150 SHARES OF WHITELEY MALLEABLE CASTINGS CO. STOCK

ITEM 17. AFTER THE DEATH OF my son, Amos Whiteley, Jr., if his wife, "Mabel Stewart Whiteley" BE THEN LIVING, I direct my executors or trustees to pay to her annually, out of my residue estate, during her life, the proportionate amount of the earnings of the 438 shares of Whiteley Malleable Castings Co. stock, which is to be paid to Amos Whiteley, Jr. during his life, and the proportionate amount of earnings of any property in which the proceeds of said shares of stock may, by my executors or trustees, be invested, and the earnings of such proceeds or reinvestments, viz:

TO MABLE STEWART WHITELEY, DURING HER LIFE:

An amount equal to the dividend earnings of 438 shares of Whiteley Malleable Castings Co. stock, or the proceeds of said stock, if sold, or reinvestments thereof

ITEM 18. For the purpose of increasing GEORGE W. WAGNER's interest in the success of the future business of Whiteley Malleable Castings Co., and increasing his compensation for services as Superintendent of the manufacturing department of said corporation.

I HEREBY AUTHORIZE AND DIRECT my executors or trustees, to transfer and deliver to said GEORGE W. WAGNER, October 1st, of each year, after my death, ONE CERTIFICATE FOR TEN (10) SHARES of Whiteley Malleable Castings Co stock, which transfer will carry with the stock the dividend earnings on same for that, and following calendar years.

These contributions of ten shares of Whiteley Malleable Castings Co. stock, to be made to George W. Wagner each year, shall continue for ten years, aggregating ONE HUNDRED SHARES (100) of said stock PROVIDED he lives for that term and continues his connection with the business of said corporation.

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I ALSO DIRECT that the surplus of funds belonging to my residue estate, while not required for making payments as directed herein, be invested in safe, interest bearing securities, or deposited with building and loan or savings bank companies, where the deposits will draw the highest rate of interest obtainable.

My executors and trustees are fully advised, by the provisions of this will, as to cash bequests and all other payments, to be made during the life of beneficiaries designated, and other payments to be continued forever, and it will be the duty, of my executors or trustees to maintain my residue estate INTACT to the extent that the incomes earnings will be more than ample to provide for all payments, to be made to beneficiaries during life; also for all annual contributions and all other payments, including contributions to the "Burt H. Whiteley Charity Fund," which are to be continued by my executors or trustees, forever.

However, recognizing that, as annual payments, to be made during the life of the beneficiaries and other conditional payments are completed, there may be left, or accumulated, in my "residue estate," a considerable surplus over the amount required to provide annual incomes, or much more than the amount required to make annual payments, provided to be paid to the Burt H. Whiteley Charity Fund, and other contributions to be paid by my trustees forever, as clearly designated herein.

I particularly desire and direct that any portion, and eventually all of the surplus of my "residue estate" may be wisely and conservatively used by my trustees in providing for an additional contribution of earnings to be paid to the Park Trustees, or their successors as trustees, of the Muncie, Indiana Parks, and as soon as a surplus of $10,000 has accumulated, which is not required in maintaining the residue estate, I direct that that amount be invested by my trustees in desirable, safe, interest bearing securities, and that thereafter the earnings of that investment shall, as received by my trustees, be paid to the "Park Trustees," to be handled as other payments referred to in Item 19, of this will.

Also, as soon thereafter as an additional $10,000 has accumulated, which is not required in maintaining the residue estate, I direct that, that amount be invested by my trustees in desirable, safe, interest bearing securities, and that thereafter the earnings of that investment shall, as received by my trustees, be paid to the said Park Trustees, to be handled as other payments referred to in Item 19, of this will.

My object being, to provide for payment to the Park Trustees of the aggregate earnings of the investments of $50,000, to be used by said trustees as indicated in Item 19, of this will.

Also, as the surplus of funds in my "residue estate" increase, which is not required for other purposes designated herein, I DESIRE AND DIRECT my "TRUSTEES," after fully conferring with the trustees of the "Burt H. Whiteley Charity Fund," to make additional payments, out of the surplus of my "residue estate," in aid of other approved movements looking to promoting and caring for the health, comfort and enjoyment of the class of worthy people, citizens of the City of Muncie, in Delaware County, Indiana, who are unable to provide such comforts, enjoyments and necessities for themselves.

Also, in making contributions, at Christmas time, providing good cheer and pleasant reminders, to the inmates of the Delaware County Orphans Home and the inmates of the Delaware County Infirmary, leaving this to the judgment of my trustees named in this will, and their successors, together with the trustees of the "Burt H. Whiteley Charity Fund" and their successors, acting in accordance with their best judgment as to what they consider most meritorious.

Also, if Home Hospital shall be reorganized, reincorporated or another hospital corporation or association shall be organized and incorporated, for the purpose of taking over and becoming the successor of Home Hospital, on a basis that will provide for taking over Home Hospital, having off all of its liabilities and continuing and extending the property, equipment and usefulness of the hospital now conducted by Home Hospital, on a basis that will secure good business management, and extend the beneficial influence of the hospital, to meet the approval of my trustees and the trustees of the Burt H. Whiteley Charity Fund.

IN THAT EVENT, I desire and direct my trustees to aid said approved hospital, to such an extent as may be deemed proper and advisable, by investing, from my "residue estate," in the issues of, or contributing in aid of said approved hospital company or association.

On May 29, 1918, all property comprising the residue estate was transferred to the trustee. The property transferred to the trustee, the income from which was applicable under decedent's will to pay charges against "residue estate" and none other, consisted of the following:

10 shares ( $100 par) Peoples Trust Co.

72 shares ( $100 par) Am. Seed. Mach. Co.

1117 shares ($ 50 par) Whiteley Malleable Castings Co.

244 shares ($ 50 par) Whiteley Steel Co. (upon which a stock dividend of 50 per cent. was paid Dec. 27, 1919.)

50 shares ($100 par) Andrews Theatre Co.

100 shares ( $100 par) Home Motion Picture Co.

Cash in the amount of $141.93.

During the year 1920, both the Whiteley Malleable Castings Co., and the Whiteley Steel Co. liquidated, paying all stockholders at par. In the same year, 1920, the stock of the Andrews Theatre Co. was sold at par by the trustee. As a result of the liquidations and the sale, a profit of $36,197.25 was derived by the trustee of the residue estate. The amount of profits so derived was treated by the trustee as principal and was reinvested by it.

Mary E. Whiteley, decedent's widow, died on June 6, 1920. Prior to her death, she had received the income from the groups of stocks and from the reinvestment of the profit derived from the redemption and sale of part thereof, the income from which she was entitled to receive for life.

Amos Whiteley, decedent's son, died March 6, 1924. Prior to his death, including 1920, he had received the income from the group of stocks and from the reinvestment of the profit derived from the redemption and sale of part thereof, the income from which he was entitled to receive for life. Mabel Whiteley, the son's widow, is still living, and has been and still is receiving the income from the reinvestment of the profit derived from the sale and redemption of the stock, the income from which she is entitled to receive for life. Belle Painter has been and still is receiving the income from the reinvestment of the profit from the sale and redemption of the stock, the income from which she is entitled to receive.

From the residuary estate, the trustee, in accordance with the terms of the will, has paid annually:

First Universalist Church	$200
Rose K. McClelland	240
Muncie Elks Lodge	150
Salvation Army	100
Chief of City fire department	150
	840

However, the securities comprising the trust, other than those specifically set apart for the named life beneficiaries, produced income in the amount of $964.08 in 1920. This amount was sufficient to discharge the fixed payments $840totaling but was insufficient to take care of the maximum amount specified for the Home Hospital. This situation arose by reason of the outstanding life interests of the beneficiaries named above.

Amos Whiteley, Sr., realizing that this situation would exist until the death of all of the life benficiaries, made various gifts to the income of the residuary estate, the total amount being $27,000.

Out of the income of the residuary estate, thus augmented, the trustee has since 1918, paid to the Muncie Home Hospital, an exempt corporation, various amounts each year in the manner provided in the will.

The petitioner did not file for the year 1920 a return of income on Form 1040, as it was the opinion of the trustee that the profit derived from the redemption and sale of stock in that year did not constitute taxable income to it. Petitioner did, however, file a fiduciary return, showing distributable income.

The Commissioner determined that the amount of $36,197.25 profit derived from the redemption and sale of stock by the trustee constituted taxable income for 1920, and, accordingly, a deficiency of $5,399.31 was asserted together with a delinquency penalty of $1,349.93.

OPINION.

LOVE: The petitioner contends, and the Commissioner denies, that the profit of $36,197.25 derived by it in 1920, as trustee of the residuary estate, vested in it immediately and was set aside permanently for a corporation organized and operated exclusively for charitable purposes, or in case of a surplus, then to the extent of the surplus, for a political subdivision of the State of Indiana.

The stock of the Andrews Theatre Co., the Whiteley Steel Co., and the Whiteley Malleable Castings Co. was held by the trustee who was directed to pay the income therefrom or the income from the reinvested proceeds thereof, to certain named beneficiaries for life and thereafter to the Muncie Home Hospital, an exempt corporation.

In the year 1920, both the Whiteley Steel Co. and the Whiteley Malleable Castings Co. liquidated and the stocks of the respective companies held by the trustee were redeemed at par. In the same year the trustee sold the stock of the Andrews Theatre Co. which it held. By reason of the sale and redemption of those stocks, the trustee derived a profit of $36,197.25 which was immediately reinvested, chiefly in Liberty bonds, and the income therefrom paid to the respective life beneficiaries in the respective proportionate amounts, as provided by the will.

It is clear that the fixed annual payments amounting to only $840 were provided for by the income from securities other than those, the income from which was to be paid to the life beneficiaries and thereafter to the Home Hospital. We come, therefore, to the question as to whether the amount of $36,197.25, which immediately became part of the corpus of the trust, constituted taxable income to the trustee by reason of the fact that the income from the reinvested proceeds was payable to certain individual beneficiaries for life.

It should be observed that no part of the profit derived from the sale and redemption of the securities was, as such, paid to the individual beneficiaries. On the contrary, it became a part of the corpus of the trust, the income from which, at least to the extent of the income from those securities set aside for the individual life beneficiaries, was vested in a charitable corporation, subject only to the life interests of the respective beneficiaries.

We are of the opinion that the amount of $36,197.25, the income in question upon which the Commissioner is attempting to assert a tax, was permanently set aside for a charitable corporation as described in section 219(b) of the 1918 Act. It seems clear to us that if that income ($36,197.25) should be reduced by the amount of the proposed tax, merely because certain beneficiaries are for life entitled to receive the income from the reinvestment thereof, the loss occasioned thereby would fall directly upon the Muncie Home Hospital, the exempt corporation. It is our opinion, therefore, that the income in question is deductible under the provisions of section 219(b) in determining the net income of the estate, for to hold otherwise "would be to destroy the beneficent purpose of Congress." .

The Commissioner asserted a penalty of $1,349.83, representing 25 per cent of the deficiency proposed, for delinquency on the part of the petitioner. It is urged that, as the petitioner filed only a fiduciary return for 1920, there was a failure to file the return required by law. It is further urged that the assessment of the penalty is mandatory under section 3176 of the Revised Statutes of the United States, as amended.

The parties hereto have agreed that petitioner filed a fiduciary return for 1920, which we assume was Form 1041, showing distributable income. They have also agreed that Form 1040, showing income to the trustee, was not filed.

Section 3176 of the Revised Statutes, as amended, reads:

In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax.

The petitioner filed a fiduciary return showing distributable income, fully believing that the amount of $36,197.25 did not constitute taxable income in its hands and we have herein held that such was the case. Obviously, there is no tax for 1920 by which to measure a penalty.

Reviewed by the Board.

Judgment will be entered for the petitioner.