Opinion
Docket No. 111104.
1943-09-8
ITOLA M. EVANS RANSOM, E. A. PRELLWITZ, GUARDIAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert R. Thompson, Esq., for the petitioner. Charles Munz, Esq., for the respondent.
Petitioner is the income beneficiary of a testamentary trust required to be set up out of the residue of the estate under the will of her deceased uncle, who died testate in 1930. The estate of the decedent was in process of administration or settlement until October 11, 1938, when the final accounts of the executors were approved by the court and the residue of the estate was transferred to a trustee to be administered according to the terms of the will and the income to be currently distributable to petitioner. Held, that petitioner is not taxable on the income of the estate of decedent during the period January 1 to October 11, 1938, during which time the estate was still in process of administration or settlement, except as to $4,000, which was paid to her during such period out of the income of the estate. Petitioner concedes that she is taxable on the latter amount under Section 162(c) Revenue Act of 1938. Petitioner also concedes that she is taxable under the provisions of section 162(b), Revenue Act of 1938, on $1,551,59 income of the testamentary trust earned during the period October 11 to December 31, 1938. Robert R. Thompson, Esq., for the petitioner. Charles Munz, Esq., for the respondent.
The Commissioner has determined a deficiency in the income tax of petitioner of $1,034.59 for the year 1938. The deficiency results from the following adjustments made by the Commissioner in the net income as reported by petitioner in her income tax return filed for the year 1938:
+--------------------------------------------------------------------------+ ¦ADJUSTMENTS TO NET INCOME ¦ +--------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ +--------------------------------------------------+----------+------------¦ ¦Net loss as disclosed by return ¦ ¦($23,010.51)¦ +--------------------------------------------------+----------+------------¦ ¦Unallowable deductions and additional income: ¦ ¦ ¦ +--------------------------------------------------+----------+------------¦ ¦(a) Income from fiduciary ¦$17,329.19¦ ¦ +--------------------------------------------------+----------+------------¦ ¦(b) Disallowance of fiduciary loss ¦21,773.55 ¦ ¦ +--------------------------------------------------+----------+------------¦ ¦ ¦ ¦39,102.74 ¦ +--------------------------------------------------+----------+------------¦ ¦Total ¦ ¦$16,092.23 ¦ +--------------------------------------------------+----------+------------¦ ¦Nontaxable income and additional deductions: ¦ ¦ ¦ +--------------------------------------------------+----------+------------¦ ¦(c) Adjustment of loss on sale of grocery business¦ ¦.11 ¦ +--------------------------------------------------+----------+------------¦ ¦Net income adjusted ¦ ¦$16,092.12 ¦ +--------------------------------------------------------------------------+
Petitioner has assigned error only as to adjustment (a) named above. Adjustment (a) is explained in the deficiency notice as follows:
(a) It has been determined that during the entire year 1938 you were an income beneficiary of the trusts established by subdivision VII of the Thirteenth paragraph of the Will of Albert W. Priest, deceased, of which the original trustees were First Trust Company of Appleton, George Randall and Alfred C. Bosser, and the successor trustee is First Trust Company in Oshkosh; and that the income of said trust for the taxable year 1938, which was to be distributed currently to you as income beneficiary, amounted to the sum of $17,329.19. In your 1938 return you reported a loss of minus quantity from this source in the net amount of $21,773.55, which was the result of your claiming the benefit of alleged corpus losses. The loss so claimed has been disallowed for the reason that corpus losses, if any, should be reflected in the return of the fiduciary as a separate taxable entity. In lieu thereof the distributable income to the amount indicated above has been included in your taxable income pursuant to Section 162(b) of the Revenue Act of 1938. It is held that the Estate of Albert W. Priest had ceased to be in process of administration prior to January 1, 1938, and that during the entire year 1938 the property from which the above-mentioned income was derived was held in trust under the WILL of said decedent, within the purview of Section 162(b) of the Revenue Act of 1938 and Article 162-1 of Regulations 101.
Petitioner by appropriate assignments of error alleges error as to $15,777.60 of the $17,329.19 income included by the Commissioner in adjustment (a) above.
At the hearing a stipulation of facts was introduced by the parties and petitioner introduced in evidence nine exhibits, from which we make the following findings of fact.
FINDINGS OF FACT.
The petitioner, E. A. Prellwitz, is the duly appointed guardian of the estate of Itola M. Ransom, also know as Itola M. Evans Ransom, an incompetent, and letters of guardianship were issued to him by the County Court of Winnebago County, Wisconsin, under date of February 17, 1942.
Albert W. Priest died testate on February 5, 1930.
The last will and testament of Albert W. Priest, dated September 8, 1927, was admitted to probate by the County Court of Outagamie County, Wisconsin, on March 13, 1930.
Letters testamentary were issued by the County Court of Outagamie County, Wisconsin, under date of March 27, 1930, to George Randall, Alfred C. Bosser and First Trust Co. of Appleton, the persons named and nominated in the codicil to the will of Albert W. Priest as executors.
Under the will of Albert W. Priest the residue of his estate was devised in trust to the same persons named as executors, to hold, control, and manage said residue for a period of five years from the death of the decedent, the resources to be converted into good, safe securities, and during that time they were to pay to Itola Baker Evans (Ransom) and Leila Baker Randall, two nieces, $5,000 a year each. At the expiration of said five-year period the trust was to be divided into three parts, two of which were to be for the niece, Itola Baker Evans (Ransom) and the remaining part to be for the niece, Leila Baker Randall, each niece to have only the income from her said share during her lifetime.
The portions of the will which make the foregoing read as follows:
Thirteenth. All of the rest, residue and remainder of my estate, of whatsoever nature, real, personal or mixed, and wheresoever situated, I give, devise and bequeath to the First Trust Company of Appleton, a banking corporation, located in the City of Appleton, Wisconsin, George Randall, of Oshkosh, Wisconsin, and Itola Baker Evans, of Oshkosh, Wisconsin, in trust nevertheless, for the uses and purposes hereinafter set forth, as follows, to wit:
I
Until the expiration of a period of Five (5) years from the date of my death, said trustees shall hold, control and manage all of said residue of my property to the best of their judgment and ability for the best interests of my estate, and for the use and benefit of my two nieces, Itola Baker Evans, and Leila Baker Randall, both of the city of Oshkosh, Wisconsin. It being my intention, by the creation of this trust to provide that the residue of my estate, for said period, be held, controlled, and managed by said trustees, in whose ability and integrity I place especial confidence.
VI
During the continuance of this trust, said trustees shall pay the sum of Five Thousand ($5,000.00) Dollars per year each to my two nieces, Itola Baker Evans and Leila Baker Randall, both of the city of Oshkosh, Wisconsin; said sums to be paid in equal monthly installments of any funds available from said estate.
VII
Said trust shall terminate upon the expiration of Five (5) years from the date of my death, and said trustees shall thereupon divide all of said estate then in their hands, equally into three parts, two parts of which shall be for my nieces (sic), Itola Baker Evans and the remaining part to be for my niece Leila Baker Randall, said nieces have the income of said portions during the remainder of their lives, and upon the death of Itola Baker Evans, said two parts to be divided equally and paid to her two children, and upon the death of Leila Baker Randall her said share to be paid to her child. In the event of the death of any of the said three grandnieces, children of the said Itola Baker Evans, and Leila Baker Randall, during the life of her mother, said grandniece's share shall be divided equally and paid to the surviving grandniece or grandnieces.
Lelia Baker Randall died on May 30, 1937, subsequent to the death of Albert W. Priest, and on May 30, 1937, the trust established by the will for her and her daughter Gwendolyn Randall Thalhofer ceased and the share of the residue payable to Lelia Baker Randall and her daughter Gwendolyn Randall Thalhofer became due and payable to the daughter.
The gross estate of Albert W. Priest, deceased, as determined by the Commissioner for Federal estate tax, consisted of the following:
+----------------------------------------------+ ¦Real estate ¦$88,610.90¦ +-----------------------------------+----------¦ ¦Stocks and bonds ¦718,636.60¦ +-----------------------------------+----------¦ ¦Mortgage notes, cash, and insurance¦84,481.26 ¦ +-----------------------------------+----------¦ ¦Other miscellaneous property ¦500.00 ¦ +----------------------------------------------+
A general inventory and appraisal of the estate of Albert W. Priest deceased, signed and sworn to by the executors, was filed with the County Court of Outagamie County under date of February 12, 1932. The final account of George H. Randall, Alfred C. Bosser, and First Trust Co. of Appleton, as executors of the estate of Albert W. Priest, dated April 21, 1938, was filed with the County Court of Outagamie County on May 2, 1938. A supplemental final account of the executors, First Trust Co. of Appleton, George H. Randall, and Alfred C. Bosser, was filed with the said County Court of Outagamie County on July 1, 1938. A second supplemental final account of the executors, First Trust Co. of Appleton, George H. Randall, and Alfred C. Bosser was filed with the County Court of Outagamie County on October 11, 1938.
During the period covered by the final account of the executors there were paid to Leila Baker Randall (Mrs. George H. Randall) and Itola M. Ransom each sums amounting in aggregate to $5,000 during each year of the five-year period subsequent to the death of Albert W. Priest on February 5, 1930, and until February 5, 1935. There was paid by said executors to each of said persons during the period from February 5, 1935, to May 5, 1937, the sum of $300 per month. Subsequent to the death of Leila Baker Randall and during the period from June 11, 1937, to March 5, 1938, there was paid by the executors to Itola M. Ransom the sum of $400 per month and to Gwendolyn Randall the sum of $200 per month. The executors continued these payments of $400 per month to Itola M. Ransom and of $200 to Gwendolyn Thalhofer (formerly Gwendolyn Randall) during the periods covered by their supplemental and second supplemental final accounts.
On or about February 5, 1931, the executors paid upon an estimated basis Wisconsin inheritance taxes in the amount of $82,075.85. On August 19, 1938, an order was entered by the County Court of Outagamie County determining the amount of the Wisconsin inheritance tax due from the estate of Albert W. Priest, deceased. The balance of taxes due as determined by said order was paid on or about August 18, 1938, in the amount of $4,444.07.
On October 11, 1938, the County Court of Outagamie County, Wisconsin issued a final decree in the matter of the estate of Albert W. Priest, deceased, allowing the accounts of the executors, and assigned the residue of the estate as follows:
That the residue of said personal estate consisting of money, goods, chattels, rights and credits aforesaid be and the same is hereby assigned in accordance with the provisions of the last will and testament of said decedent, as follows:
1/3 thereof to Gwendolyn Thalhofer, and
2/3 thereof to the First Trust Company of Oshkosh as trustee for the share of the said Itola M. Ransom and her two daughters, Margaret Ellen Evans and Janet Evans, provided, that said Itola M. Ransom is to have the income of said trust estate during the remainder of her life and upon her death said trust estate is to be divided equally and paid to her two children. Provided further, however, in the event of the death of either of said two children of said Itola M. Ransom during the life time of said Itola M. Ransom, said child's share shall be divided equally and paid to the surviving children of the said Leila Baker Randall and Itola M. Ransom.
IT IS FURTHER ORDERED AND ADJUDGED, That the real estate aforesaid be and the same is hereby assigned as of the date of the death of said decedent, February 5, 1930, (subject however to the sales that were made by said First Trust Company of Appleton, George H. Randall and Alfred C. Bosser, Executors and Trustees in this matter during the administration of this estate), as follows:
1/3 thereof to Gwendolyn Thalhofer, and
2/3 thereof to the First Trust Company of Oshkosh, successor trustee for the benefit of Itola M. Ransom, the income thereof to be paid to her during her lifetime and upon her death the said 2/3rds interest in said real estate to be the property of her daughters, Margaret Ellen Evans and Janet Evans, provided however, that if either of said children should predecease the mother, then her share shall be divided equally between the surviving children of the sisters, Leila Baker Randall and Itola M. Ransom.
Letters of trust to First Trust Co. in Oshkosh were issued by the County Court of Outagamie County under date of October 11, 1938. This same court entered an order under date of February 21, 1939, discharging First Trust Co. of Appleton and Alfred C. Bosser as surviving executors of the estate of Albert W. Priest, deceased, said order reciting that George H. Randall had previously died. The persons named and appointed as executors acted only as executors during the full course of the administration of the estate and at all times reported to the court as such.
So far as the record shows, no trust of the residue of the estate was ever set up and established until October 11, 1938, when judgement was entered allowing the accounts of the executors and the residue was then assigned one-third outright to Gwendolyn Randall Thalhofer and two-thirds in trust to First Trust Co. of Oshkosh, as trustee for Itola M. Ransom and her two children.
The executors were performing duties as such during 1938 and up to the time of the allowance of their accounts on October 11, 1938, and prior thereto, they were converting assets into cash, selling real estate, securities, and household goods during 1936 and 1937.
They were paying interest in substantial amounts during the years prior to 1935 and 1936 were settling additional Wisconsin income taxes for the years 1932, 1933, and 1935 in the amount of $3,481.63. They were selling and converting real estate and securities in 1938 and effecting recoveries on assets and paying the balance due of Wisconsin state inheritance tax.
The estate of Albert W. Priest, deceased, was in process of administration or settlement until October 11, 1938.
OPINION.
BLACK, Judge:
The assignments of error in the petition contest the action of the Commissioner as to all the $17,329.19 which he added to petitioner's income under adjustment (a), except $1,551.39 income which was received by First National Bank in Oshkosh, trustee from October 11 to December 31, 1938. The petitioner, however, makes the following concession in his brief, which will be given effect in a recomputation under Rule 50:
With respect to the amount of $4,000.00 received by petitioner's ward from the executors of the estate during the period January 1, 1938 to October 11, 1938, it is conceded that this amount is income of an estate allowable as a deduction to the estate as properly paid to a legatee and therefore to be included in computing the net income of the legatee within the purview and meaning of Section 162(c) of the Revenue Act of 1938, and it is also conceded that the amount of $1,551.59 received by petitioner's ward from First Trust Company in Oshkosh, trustee under the will of Albert W. Priest, deceased, during the period from October 11, 1938 to December 31, 1938 is income currently distributable by a trustee to a beneficiary and should be included in computing the net income of the beneficiary within the purview and meaning of Section 162(b) of the Revenue Act of 1938.
As to the balance of said income, amounting to the sum of $11,777.60, petitioner contends that it was income to the estate of Albert W. Priest, deceased, and assessable only to said estate for the reason that said income was received by the executors between January 1 and October 11, 1938, which was during the period of administration or settlement of the estate within the purview and meaning of section 161(a)(3) of the Revenue Act of 1938, and was not paid over or credited to petitioner during said period. The portion of section 161 relied upon by petitioner reads as follows:
(a) APPLICATION OF TAX.— The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * *
Respondent's contention that the entire amount which he had added to petitioner's income under adjustment (a) was properly added thereto is based primarily upon his determination that at some time prior to January 1, 1938, the administration and settlement of the estate of Albert W. Priest had been completed; that the testamentary trusts provided for in the will of decedent had been set prior to January 1, 1938; that petitioner was the income beneficiary of one of these trusts during the lifetime and the income from this trust was currently distributable to her and was therefore distributed to her or not.
We think respondent should undoubtedly be correct in this contention if in fact settlement and administration of the estate had been completed prior to January 1, 1938. However, from the facts which are in evidence it seems clear to us that the estate was in process of administration or settlement until October 11, 1938, when the final accounts of the executors were approved and the residue of the estate was ordered distributed, one-third to Gwendolyn Thalhofer and two-thirds to the First Trust Co. of Oshkosh as trustee for Itola M. Ransom and her two daughters.
As we see it, it was then the permanent trust, following the five-year period after decedent's death, for the benefit of Itola M. Ransom provided for in the will of decedent was set up. The income from this trust was to be currently distributable to Itola M. Ransom during her lifetime and, following the actual setting up of the trust under section 162(b), such income is taxable to her whether distributed or not. Petitioner concedes as much. Therefore he has conceded that $1,551.59 of the income in question is taxable to petitioner because it represents income of the trust covering the period October 11 to December 31, 1938.
As a general rule the income of an estate received while in process of administration or settlement is taxable to the estate as a separate taxable entity under section 161(a)(3), supra. See Estate of Robert W. Harwood, 46 B.T.A. 750, and cases there cited. See also Mertens Law of Federal Income Taxation, section 36.31, in which the author, among other things, says:
Frequently it is not an easy task to separate the functions of executor and trustee so as to determine whether income is that of an estate during the period of administration or of a trust. Ordinarily, where the executors are required to perform acts in the administration d settlement of an estate, any income received between the date of the decedent's death and the performance by the executors of their duties as such, and the rendering of their account in settlement thereof, is to be treated as the income of an estate in process of administration or settlement. Simply because a will provides for a trust it will not be held that the tax should be computed on the basis that the income is that of a trust instead of an estate during the period of administration or settlement.
Therefore, we think that, unless we are to sustain respondent in his alternative contention hereinafter stated, we must hold in favor of petitioner. Respondent's alternative contention is to the effect that, even though it be conceded that the estate of Albert W. Priest was in process of administration or settlement up until October 11, 1938, nevertheless petitioner is taxable on the entire amount of income in question under section 162(b) and (c), Revenue Act of 1938, printed in the margin.
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, and the amount of the income collected by a guardian of infant which is to be held or distributed as the court may direct, 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. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year:(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir or beneficiary.
As we have already stated, petitioner concedes that the estate properly paid $4,000 of the income of the estate to petitioner during the period January 1 to October 11, 1938, and that this $4,000 is taxable to petitioner under section 162(c), supra. Petitioner, however, denies that the income of the estate as such was currently distributable to her and, therefore, taxable to her under section 162(b) or that any greater amount of income than $4,000 was paid to petitioner during the period January 1 to October 11, 1938, and, therefore, taxable to her under section 162(c). Respondent relies upon Commissioner v. Bishop Trust Co., Ltd., Executor, 136 Fed.(2d) 390, affirming 42 B.T.A. 1309, in support of his contention that the income of the estate from January 1 to October 11, 1938, is taxable to petitioner under section 162(c) even though it be conceded that administration was still in progress.
The petitioner contends that the Bishop Trust Co. case is distinguishable from the instant case because in that case the executors paid over to themselves as trustees the residue of the estate. As executors they claimed that a portion of the residue so turned over to the trustees was income and took credit in their income tax return as executors for such income on the grounds that same was properly paid to a legatee or a beneficiary within the meaning or purview of section 162(c). The petitioner points out that the Board and the court sustained this contention of the taxpayer in that case on the ground that under the laws of Hawaii the amount in question was properly paid over as income by the executors to the trustee of the trust, which was entitled to receive the income.
Petitioner points out that in the instant case the order of the court directing the executors to assign two-thirds of the residue of the estate to the First Trust Co. of Oshkosh, as trustee, to be administered in trust for Itola M. Ransom and her two children, says nothing about the transfer of income but treats the transfer of the entire two-thirds of the residue of the estate as a transfer of corpus, none of it to be distributed to the income beneficiary, but to be administered by the trustee and the net income thereafter from such corpus to be currently distributable to the income beneficiary, Itola M. Ransom.
Under these circumstances petitioner contends that Weigel v. Commissioner, 96 Fed.(2d) 387, affirming 34 B.T.A. 237, distinguished by the court in the Bishop Trust Co. case, is applicable. While the line of distinction between Commissioner v. Bishop Trust Co., supra, and Weigel v. Commissioner, supra, may seem a narrow one, nevertheless, we think, as said by the Ninth Circuit, that the cases are distinguishable. Furthermore, we think, as argued by petitioner, that the instant case of its face is ruled by Weigel v. Commissioner, rather than by Commissioner v. Bishop Trust Co. The gist of the court's ruling in the Weigel case is found, we think, in the following portion its opinion:
* * * By the terms of the will, the residue of the estate, including all estate income as personal property which passed to the executors, became and constituted the corpus of the trust estate; and, in our opinion, the residue of the estate was received by the trustees as a bequest or device of trust corpus and not as a payment of income, either trust or estate. The property thus received came within the classification of section 22(b)(3) and was, therefore, exempt from the tax imposed by the act of 1928.
We think the above quoted language of the court is applicable in the instant case and in view of what we have already said needs no further discussion. We, therefore, hold that of the $17,329.19 income which was added by the Commissioner in adjustment (a) to the income as reported on petitioner's return, only the $4,000 which was actually paid to petitioner during the period January 1 to October 11, 1938, and the $1,551.59 which was conceded to the income of the trust from October 11 to December 31, 1938, is taxable to her. As to the balance of said income we hold the Commissioner was in error.
Decision will be entered under Rule 50.