Opinion
Docket No. 6546.
Promulgated December 29, 1945.
1. Payments of proceeds of life insurance policies received by petitioner in installments, at her election exercised after the insured's death, are not taxable to her. Commissioner v. Pierce, 146 F.2d 388, affirming 2 T.C. 832, followed.
2. Pursuant to terms of decedent's will, monthly payments made by executors to petitioner, to be charged against her share in the income from his estate pending settlement of the estate and establishment of trust under which she was to receive the net income from its corpus for life, held, taxable to her as income. Irwin v. Gavit, 268 U.S. 161.
Ralph Royall, Esq., for the petitioner.
William Schmitt, Esq., for the respondent.
The respondent determined a deficiency of $2,083.30 in the petitioner's income tax for the year 1941.
The issues are:
(1) Whether certain installment payments received by the petitioner from the proceeds of life insurance policies were taxable to her in part or were subject to no tax whatever; and
(2) Whether payments made to the petitioner by the executors of her husband's will, pursuant to its terms, constituted a legacy or income distributable to her as the beneficiary.
FINDINGS OF FACT.
The facts were stipulated. The portions thereof material to the issues are as follows:
The petitioner is a resident of New York, New York. She filed with the collector of internal revenue for the second district of New York her individual income tax return on the cash basis for the calendar year 1941. She was born February 23, 1888.
Percy Bullard, the husband of the petitioner, was born February 3, 1882. He died a resident of the City, County, and State of New York, on October 24, 1941, leaving a last will and testament which was admitted to probate in the Surrogate's Court, New York County. Article seventh of the will is as follows:
SEVENTH: I hereby direct that pending the administration of the executorship and until the setting up of the trust provided by Article FIFTH of this, my Will, my executors shall pay to my said wife, LOLA G. BULLARD, the sum of two thousand dollars ($2,000.) per month, to be computed from the date of my death to the date of the setting up of the said trust, to be charged against the share of the said LOLA G. BULLARD in the income of my estate for such period.
Article fifth provides in part as follows:
FIFTH: All the rest, residue, and remainder of my estate of every name, nature, and kind whereof I may die seized or possessed or to which I may in any manner be entitled at the time of my death, including therein any legacies or bequests herein contained which shall for any reason lapse or fail, I give, devise, and bequeath to my executors and trustees hereinafter named, in trust, nevertheless for and upon the uses and trusts following: To invest and keep the same invested in the manner hereinafter specified and to recover and receive the income and revenue thereof and to pay over and apply the net income thereof in the following manner:
During the life of my wife, LOLA G. BULLARD, to pay over to her the whole of the said net income, such income to be paid as nearly as practicable in equal monthly installments.
Upon the death of my said wife, LOLA G. BULLARD, to divide the principal of such trust into two parts, one of such parts, known as Part A, to consist of eighty per cent (80%) thereof, and the other of such parts, known as Part B, to consist of twenty per cent (20%) thereof, and to divide and pay over the principal of said parts as follows:
* * * * * * *
Percy Bullard took out several life insurance policies issued by five insurance companies, in all of which the petitioner was at the time of the death of her husband the named beneficiary. The petitioner gave no consideration whatsoever for any interest or rights at any time acquired by her in, to or under any of the policies. Each of the policies contained provision for option settlements which gave to the insured, as well as to the petitioner as the named beneficiary, the right to elect to have the insurance paid to the beneficiary in installments in varying amounts for a fixed number of years or for the life of the beneficiary.
During his lifetime the insured did not elect to exercise any of the option rights. After the death of the insured the petitioner, as beneficiary, did duly elect to take payment of the insurance in the form of installments payable to her during the period of her life, in accordance with the provisions for such optional rights contained in the policies. During the year 1941 the petitioner received from the respective insurance companies installment payments pursuant to the rights under the respective policies and in accordance with the election which had been duly made by her. (A detailed description of the policies and the proceeds thereof appears in the stipulation.)
During 1941 the five insurance companies paid to the petitioner an aggregate amount of $1,797.07 representing the periodic payments due pursuant to the petitioner's election. Of this sum, the Commissioner designated $452.20 as taxable.
The petitioner did not include as a part of her gross income in her income tax return filed by her for the calendar year 1941 the installment payments which had been so received by her, but reported the receipt of such sums as untaxable.
The Commissioner treated $452.20 of the moneys received by the petitioner from the insurance companies as taxable income. The method of computation employed by the Commissioner was to amortize the principal sum payable under the policies on the basis of the life expectancy of the beneficiary and to treat as taxable income the moneys received beyond the amount required for amortization.
Pursuant to the provisions of article seventh of the will, two payments of $2,000 each were made by the executors thereof to the petitioner during the year 1941. The petitioner did not include the payments as a part of her gross income in her income tax return for the year 1941, but reported the receipt of such sums as untaxable. During the year 1941 the executors received income amounting to $13,202.75.
In his notice of deficiency the Commissioner held that the amount of $452.20 constituted interest and was subject to tax. He also held that the payments totaling $4,000 constituted income distributable to the petitioner as life beneficiary and that such amounts were taxable to her and deductible by the estate.
The record discloses that in her income tax return for 1941 the petitioner reported a gross income of $53,813.50 and a net income of $49,895.89.
OPINION.
The petitioner submits that the first issue is governed by the decision of the Circuit Court of Appeals for the Second Circuit (in which this case arises) in Commissioner v. Pierce, 146 F.2d 388, affirming 2 T.C. 832. In that case the petitioner elected, after the death of the insured, to receive the proceeds of the policy in installments for a term of years and as long thereafter as she should live. Here the facts are substantially identical.
In the Pierce case we held, and the Circuit Court of Appeals affirmed, that such installment payments were not taxable to the recipient. The respondent concedes that the Pierce decision is squarely in point, but states that the respondent "does not accept the decision in that case." We adhere to the cited decision and, accordingly, on the authority of the Pierce case, hold for the petitioner on the first issue.
The petitioner relies on Burnet v. Whitehouse, 283 U.S. 148, as controlling the decision in the second issue. The petitioner contends that the plain meaning of article seventh of the testator's will is that the monthly payments were to be paid to her in any event and not necessarily out of income of the estate.
The respondent argues that the testator intended that the petitioner would receive the monthly payments solely from income. He urges that the testator's intent must be determined from the four corners of the will and adds the comment that the testator was obviously familiar with the terms "principal and interest," "annuity," "bequests," and other such legal phrases.
As we view the situation confronting the testator at the time he executed his will, we may fairly assume he was familiar with the terms of the will and that he knew that his estate likely would require a considerable time for settlement; that his wife could not demand her income from the residuary estate, as provided in article fifth, until the amount of that estate should be definitely established and the trust set up accordingly; and that he desired that she be assured of a monthly income of at least $2,000 until she should receive the entire net income from the estate.
Consequently, he added article seventh as an interim provision in the nature of an advance from the income from the estate, designed to guarantee his wife a current monthly income of $2,000 until the formalities of administration and the formation of the trusteeship should be accomplished. It was the obvious intent of the testator to preserve the principal intact until the petitioner's death and to limit the petitioner's rights as beneficiary to the income to be derived from that principal. There is no specific provision in the will permitting invasion of the corpus of the estate or trust.
The phrase "to be charged against the share of the said Lola G. Bullard in the income from my estate for such period" definitely earmarks the income from the estate as the source of the monthly payments. Her "share" was the net income, as is apparent from other portions of the will. The question may be posed, what if the current income were not sufficient to meet the prescribed payment? We have no doubt that if such a contingency should occur a probate court would empower the executors to borrow sufficient to meet the obligation and would authorize them to repay the loan out of the petitioner's share of the income from the estate.
The record discloses that the estate received ample income from which to pay the petitioner the $4,000 under discussion. It is also logical to assume from his familiarity with the property that the testator expected that his estate would produce such a return but that it might not be immediately available to meet his wife's present needs. Accordingly, as we have seen, article seventh provided a minimum monthly distribution of $2,000 to serve that purpose.
In the Whitehouse case, on which petitioner relies, the Supreme Court held that an annuity chargeable against the corpus of an estate constituted a bequest nontaxable to the annuitant as a part of her income and stated that the gift was a charge upon the whole estate during the life of the legatee, to be satisfied as is any ordinary bequest. In view of our construction of the provisions of the will and of the testator's intent in making them, it is obvious that the Whitehouse case is not controlling.
The respondent cites Irwin v. Gavit, 268 U.S. 161, as more nearly governing the situation here. In that case the decedent's will created a trust, the income from one part of which was to be paid to the taxpayer in equal, quarter-yearly payments during his life. The Court held that such payments were taxable income and not gifts by will or bequest, exempt from tax. Here the monthly payments during the administration and pretrust period were to be made and were to be charged against the petitioner's share of the income from the estate realized during that period. Hence, the principles set forth in the Irwin v. Gavit case are applicable and we approve the respondent's determination in the second issue.
Decision will be entered under Rule 50.