Doty v. Commissioner

Caroline Gove Doty, Petitioner, v. Commissioner of Internal Revenue, Respondent

Doty v. Commissioner

Docket No. 2274

United States Tax Court

3 T.C. 1013; 1944 U.S. Tax Ct. LEXIS 103;

June 19, 1944, Promulgated

---

Decision will be entered for the respondent.

By a testamentary trust, holding shares of stock, the income was, by one provision, to be distributed quarterly to the beneficiary for life, and the trustee was, by another provision, given power to determine whether accretions should be considered as income or as principal. The trust received an ordinary dividend upon the shares, and the trustee determined the amount to be principal and withheld distribution thereof. Held, the trustee had no power to classify the dividend as principal, and the amount is income distributable to the beneficiary and properly included within her gross income under Internal Revenue Code, section 161 (a) (3).

Frank J. Albus, Esq., for the petitioner.

E. L. Corbin, Esq., for the respondent.

Sternhagen, Judge.

---

STERNHAGEN

The Commissioner determined a deficiency of $ 2,638.90 in income tax for 1940. The petitioner assails the inclusion in her gross income of income of a trust of which she was a beneficiary but received no distribution.

FINDINGS OF FACT.

The petitioner resides at Swampscott, Massachusetts. Her individual income tax return for 1940 was filed in Massachusetts.

On May 21, 1939, Aroline C. Gove, mother of petitioner, died testate. Lydia P. Gove, petitioner's sister, is the executrix of and the trustee under trust B, one of the trusts created by the will

In the will three trusts were created -- trusts A, B, and C, respectively. To trust A was bequeathed one-half of testatrix' shares of Lydia E. Pinkham Medicine Co. and one-half of her shares of Northeastern Advertising Agency, Inc., in trust for her three granddaughters, the income of which was to be added to principal and invested and reinvested until all of the granddaughters reached the age of 30 years or had died leaving issue, with certain exceptions not here material. In the event all the granddaughters died without issue before the termination of trust A, the principal and accumulated income was to be added to trust B. To trust B was bequeathed the remaining half of the shares in trust for the daughter, Caroline Doty, the "income of Trust B * * * to be paid at least quarterly to said Caroline Doty during her lifetime" (paragraph fourth). At the death of Caroline Doty, the income of trust B is to be added to principal and invested and reinvested until all of the three grandsons of the testatrix reach the age of 30 years or die leaving issue, with certain exceptions not material. If upon the death of Caroline Doty the three grandsons have reached the age of 40 years, the trust is to terminate and the principal thereof is to be divided equally among the grandsons then living, the issue of any deceased grandson to take his share by right of representation. In the event all the grandsons die without issue before the termination of the trust, the principal and accumulated income is to be added to and become a part of trust A. After certain specific bequests, all the rest and residue of decedent's estate was bequeathed in trust (trust C), for the payment of certain life annuities, and the balance of the income of trust C is to be divided into two equal parts and:

(1) One-half of the income is to be administered, accumulated and/or paid over to the same person or persons in the same manner and under the same conditions as if governed by the provisions of Trust A.

(2) The other half of the income is to be administered, accumulated and/or paid over to the same person or persons in the same manner and under the same conditions as if governed by the provisions of Trust B.

Upon the death of the annuitants and Caroline Doty, the principal and accumulated income of trust C are to be divided into two equal parts and one-half thereof accumulated and paid over to the same person or persons in the same manner and under the same conditions as if governed by the provisions of trust A, provided that upon each of the granddaughters reaching the age of 30 years she is to receive outright her proportionate share of the principal and accumulated income, the issue of any deceased granddaughter taking by right of representation, and the other one-half thereof accumulated and paid over to the same persons and in the same manner and under the same conditions as if governed by trust B, provided that upon each of the three grandsons reaching the age of 30 years he shall receive outright his proportionate share of the principal and accumulated income, the issue of any deceased grandson taking by right of representation. In paragraph thirteen, setting forth the powers of the trustees, it is provided, inter alia:

* * * They shall have full power and authority to determine in all cases what accretions to the Trust property shall be considered as income and what as principal, and what expenses shall be charged to income and to principal respectively, and especially, without restricting the generality of the foregoing powers, to determine in case of the receipt by them of any securities, money, or other property, either by way of a stock dividend, extra dividend, or upon a reorganization or in liquidation of a corporation or organization, what portion, if any, of such securities money or property shall be considered as income and what as principal, and they may decide whether or not any amortization shall be made for bonds bought at a premium or for what are ordinarily considered as wasting investments, all without regard to the general rule of law on the subject. * * *

Notwithstanding the provisions of any of the foregoing Trusts, the Trustee or Trustees may in their discretion expend and apply the whole or such part of the income or principal of any Trust established by this will as they deem proper for the support and maintenance and education of the persons beneficially provided for in the respective Trusts, provided however that any such advances made by the Trustee or Trustees shall be charged against the interest of the beneficiary for whose support, maintenance, and education and comfort it has been applied.

During 1940 dividends in the amount of $ 7,901.78 were received by trust B on the shares received under the will and this was the only income received by trust B during 1940.

The trustee of trust B determined that the amount of $ 7,901.78 was part of the corpus of the trust and has ever since held such funds as such. At no time has any portion of the $ 7,901.78 been paid or credited to the petitioner.

On or about March 15, 1941, the trustee of trust B filed a fiduciary income and defense tax return for 1940, in the income of which was included the sum of $ 7,901.78, and paid income tax thereon.

OPINION.

The taxpayer was the named beneficiary of trust B, set up by the will of her mother, but she did not receive any distribution from the trust, because the trustee, in what she regarded as her proper discretion under paragraph thirteenth, determined that the amount of dividends received by the trust was an accretion to the trust property, which the trustee had the power to consider as principal, and that as principal it was not distributable to the beneficiary under paragraph fourth of the will. The taxpayer, in her return, in reliance upon this action of the trustee, omitted from her income the dividend received by the trust, and the Commissioner included the amount ($ 7,901.78) in her income and determined the resulting deficiency. Thus the issue here is between the Commissioner's determination under Internal Revenue Code, section 161 (a), subdivision (2), "Income which is to be distributed currently by the fiduciary to the beneficiaries," or the taxpayer's view under subdivision (4), "Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated."

The difficulty arises from an apparent ambiguity in the will, since paragraph fourth provides that: "The income of trust B is to be paid at least quarterly to said Caroline Doty during her lifetime," and paragraph thirteenth provides that:

the Trustees * * * shall have full power and authority to determine in all cases what accretions to the Trust property shall be considered as income and what as principal * * * and especially, without restricting the generality of the foregoing powers, to determine in case of the receipt by them of any securities, money, or other property, either by way of a stock dividend, extra dividend, or upon a reorganization or in liquidation of a corporation or organization, what portion, if any, of such securities money or property shall be considered as income and what as principal, * * * all without regard to the general rule of law on the subject.

The thirteenth paragraph thus bestows upon the trustee, not the power to determine, generally and in all instances of trust receipts, what shall be considered income and what principal, but only the power, after the duty of paying income quarterly, to determine what accretions to the trust property shall be considered income and what principal. This is a clear limitation upon the power to that of determining the character of accretions. The word accretions as so used has no clearly defined meaning, but there are no cases which hold that it includes ordinary cash dividends on corporate stock. Cf. Revloc Supply Co. v. Troxell, 126 Atl. 774. And we can think of no reason for supposing that the testator intended the word in her will to have that meaning. Dumaine v. Dumaine, 16 N. E. (2d) 625.As to all indisputable income (and ordinary cash dividends are as a matter of law within that class), paragraph fourth provides explicitly that it shall be paid quarterly to the beneficiary; but, as to accretions, the trustee has authority to classify them as income or principal. This is a recognition by the testator of a difference between indisputable income and accretions which may be questionable, a view which is borne out by the express mention of stock dividends, extra dividends, and reorganization and liquidation distributions. Accretions may also include gains from sales. Cf. Dumaine v. Dumaine, supra.Had it been intended that the "generality of the powers" of the trustee included the classification of all ordinary income as principal, there would be little or no substantial meaning in the provision in paragraph fourth that the income "is to be paid" quarterly to the beneficiary. It is reasonably apparent that indisputable income, such for example as ordinary dividends or interest, is distributable quarterly to the beneficiary, and that doubtful receipts, or "accretions," such as stock dividends, extra dividends, or gains from sales, are to be classified by the trustee, in her discretion, as income or principal. The authority so to classify is limited to receipts as to which there may be "honest doubt." American Security & Trust Co. v. Frost, 117 Fed. (2d) 283.

* * * Obviously the quoted privision in the trust instrument is not to be read so literally as to * * * deprive [the beneficiary] of all income during the life of the trust. The trustees are merely authorized to make allocations as between principal and income where the proper allocation is a matter of honest doubt. Cf. American Security & Trust Co. v. Frost, App. D. C., 117 F.2d 283">117 F. 2d 283, 285, 286; 52 Harv. L. Rev. 1369">52 Harv. L. Rev. 1369. The income now involved is ordinary dividends on corporate stock. A court of equity would call the trustees to account if they undertook to treat this as principal. Under a fair reading of the trust instrument the trustees are required to pay out such income to [the beneficiary] * * * in quarterly installments. [Commissioner v. O'Keeffe, 118 Fed. (2d) 639.]

The fact that the trustee did indeed classify the dividend as principal and withhold it from distribution does not establish that this was a correct exercise of power, nor does the fact that the beneficiary failed to demand it. It is, in our opinion, nevertheless true that a court of equity would call the trustee to account for her failure to make a distribution of clear income. The power to classify the dividend as principal did not exist, and the exercise of an assumed power by withholding distribution thereof would not affect the duty to account.

The decision in John B. Paine, 2 T.C. 179">2 T. C. 179, cited by petitioner, is not in point, for the trustees had the power in their discretion to classify a special class of receipts as capital, and the question under the tax law was as to whether before the trustees' classification the special class of income could be taxed to the beneficiary as distributable income. The decision held that it could not. There was no doubt that the income in question in that case was clearly within the trustees' power to classify, and hence no doubt as to the uncertainty of the beneficiary's right to receive it. In the instant case, we think there was no doubt from the time the trust received the ordinary dividend that it was income and the beneficiary had the right to its distribution. Dorothy McBride Orthwein, 45 B. T. A. 184, was a case in which the trustees were expressly given the power to determine whether the income should be distributed or added to corpus, whereas we think that the trustee in the instant case had no such power in respect of the income received by way of ordinary dividends.

It is our opinion that the $ 7,901.78 ordinary dividend received by the trust in 1940 was income to be distributed currently by the fiduciary to the beneficiary (sec. 161 (a) (2)), and not income which, in the discretion of the fiduciary, might be either distributed to the beneficiary or accumulated (sec. 161 (a) (4)). It is therefore properly included within the gross income of the beneficiary (sec. 162 (b)). The Commissioner's determination is sustained.

Decision will be entered for the respondent.