Docket No. 93575.
03-05-1940
ESTATE OF IDA A. WHITE, DECEASED, MAUD K. BELL, EXECUTRIX, AND EDGAR S. BYERS, EXECUTOR, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edgar S. Byers, Esq., for the petitioners. W. W. Kerr, Esq., for the respondent.
Edgar S. Byers, Esq., for the petitioners.
W. W. Kerr, Esq., for the respondent.
This proceeding was brought to redetermine a deficiency in the income tax of the petitioners for the year 1936 in the sum of $42,766.51.
The sole issue is whether income on a residuary estate, received by the executors of the estate and paid over to the testamentary trustees, is taxable to the petitioners as executors, or is deductible under the provisions of section 162 (c) of the Revenue Act of 1936.
FINDINGS OF FACT.
Certain facts were stipulated substantially as follows:
Ida A. White died December 5, 1935, leaving a will executed in 1924 and codicils thereto, the latest of which was dated December 1, 1930. The will was probated in Cuyahoga County, Ohio, on September 20, 1935, and the petitioners are the executors thereof, duly qualified and acting as such. For Federal estate tax purposes the gross estate of the decedent was valued at $3,430,698.13.
The will provided for certain specified bequests. The following are the clauses of the will pertinent to the issue:
ELEVENTH:
If my grandson, Henry Packard White, shall survive me, or if issue of his body shall survive him and myself, then I direct that my executors, as soon as may be practicable, shall sell any real estate of which I may die possessed, and any personal or other property which is not otherwise by this my will disposed of, excepting only so much of my personal estate as may be in the form of such corporate stocks and such bonds or securities as it may not be necessary to sell to pay the bequests and create the trusts hereinbefore declared and provided.
Article fourteenth empowered the trustees to sell such trust securities if two or more of them should deem it advisable.
FIFTEENTH:
Each of said named Corporate Trustees shall pay, out of the income of the said trusts, to my niece Maude K. Bell, to be used by her as she shall think best, for the education and maintenance of my Grandson, Henry Packard White, Two Thousand Two Hundred and Fifty Dollars ($2,250.00) per year until my said grandson shall reach the age of twenty-one (21) years, and thereafter until he shall be thirty (30) years old each shall pay Three Thousand Dollars ($3,000.00) per year to him, payments to be made quarterly. * * *
Article Twenty-fifth of the will authorized the trustees to pay further sums from trust income to Henry Packard White if in their opinion the income provided in the will would not be sufficient for his reasonable support. The will further provided for the disposition of the trusts if Henry Packard White should or should not reach the age of 30 years.
By a codicil dated September 20, 1927, it was provided:
ITEM III. For and in place of the Clause or Article of my said will designated "Twelfth" My Residuary Estate, I hereby substitute as more effectively declaring my purpose as intended to be expressed therein, the following:
All of the remaining proceeds of such sales, and all such corporate stocks and such bonds and securities as it may not be necessary to sell to carry out the purposes of my will, and any and all other property of whatsoever kind or nature of which I may die possessed, I direct shall be divided into two parts as nearly equal as may be, and one of these two parts I give to The Union Trust Company of Cleveland, Ohio, and its successors and one to The Cleveland Trust Company of Cleveland, Ohio, and its successors, it being my will that each of such trustees shall receive, as nearly as may be, the same amount and value of each of the corporate stocks, bonds and securities, of which I may die possessed, to be held by them, respectively, in trust, and for the uses and purposes hereinafter set forth.
The Central National Bank of Cleveland qualified as trustee in place of the Union Trust Co., now in liquidation. Henry Packard White was born April 29, 1909. He was living on April 29, 1939.
Contemporaneously with the appointment of the petitioners as executors under the will of Ida A. White, deceased, on September 20, 1935, the Probate Court of Cuyahoga County, Ohio, entered an order directing that all the stocks, bonds, notes, land trust certificates, and other securities in the estate of the decedent (all of which will hereinafter be referred to as "securities"), be deposited with the Central National Bank of Cleveland, as depository, subject to the further order of the court.
Pursuant to that order all of the securities were delivered to the depository, and the depository thereupon opened an account on the books of its estates trust department, known as trust No. A 2897, in which account it credited all of the net proceeds of the sale or other disposition (such as surrender of called bonds) of any of the securities, and such proceeds were in that account separately entered as principal cash and income cash, as the facts might be; however, only income properly such, as distinguished from any capital gain, was designated as income in the trust account.
At about the same time there was also opened a savings account in the names of the petitioners, known as account No. 35060, in the Central National Bank of Cleveland, into which account, from time to time, the depository paid amounts which had previously been credited in trust account No. A 2897 as principal cash. All income upon securities disposed of and credited as income in trust account No. A 2897 was from time to time paid by the depository into an account of the executors, called executors' savings account No. B 20842. in the said bank.
No effort was made by the executors to segregate income cash from principal cash in their bank accounts, but at all times they kept separate record of income (as distinguished from principal or from capital gains) which was paid to them directly, and the depository kept separate record of income as distinguished from principal or capital gains.
On September 15, 1936, the Cleveland Trust Co. and Edgar S. Byers, jointly, and the Central National Bank of Cleveland and Edgar S. Byers, jointly, were duly appointed as the respective testamentary cotrustees of the trusts provided for in the last will of the decedent. They qualified as such cotrustees and have been so acting since that time, all by order of the probate court.
During the month of September 1936, prior to the delivery of the trust estates to the cotrustees, the petitioners entered into separate written agreements, similar in form, with the cotrustees of each of the trusts. That agreement provided that, after the executors should deliver to the trustees the securities which were to form the corpus of such trusts, the trustees would sell any of such securities to pay certain outstanding obligations of the estate if and when the executors should so request. The agreement recited that the executors had paid all bequests but not all obligations of the estate, particularly Federal estate and state taxes.
On October 16, 1936, upon application duly made by the petitioners, the probate court directed the depository to make delivery of the securities determined by the petitioners to constitute each of such trust estates, to the Cleveland Trust Co., as corporate cotrustee, and the Central National Bank of Cleveland, as corporate cotrustee, respectively; and on October 29, 1936, the depository began to make delivery of the securities, as directed by the court, and proceeded in accordance with such order until all of the securities had been transferred and delivered.
About November 30, 1936, the petitioners determined the actual income which had been received by the executors from and after September 5, 1935 (the date of death of testatrix), upon the securities comprising the two trust estates, to be $107,489.88. Subsequent to the time of such determination additional income upon some of the trust securities to the amount of $880 was received in the year 1936 by the petitioners, as executors. This sum was income upon securities the transfer of which to the trustees had not been completed as of November 30, 1936.
On October 28, 1936, the petitioners paid in cash the sum of $10,000 to the Central National Bank, as cotrustee, and the sum of $10,000 to the Cleveland Trust Co., as cotrustee, at the request of the cotrustees of the respective trusts. Such sums were paid in 1936 by the cotrustees to the beneficiary of the trusts, Henry Packard White, as income, pursuant to the exercise of the discretion reposed in the trustees by the terms of the will.
In order to pay to the trustees the remainder of the determined income of $107,489.88 on the securities comprising the trusts after deducting the payments totaling $20,000 made on October 28, 1936, the petitioners, upon application duly made, secured an order from the probate court on December 11, 1936, directing the depository, Central National Bank of Cleveland, to pay to the cotrustees of each of the trusts the sum of $43,744.94 from bank account No. 35060. Such payments were duly made about December 11, 1936. The order directed the payments to be made:
* * * to the duly appointed trustees under the will of Ida A. White, deceased, for the purpose of enabling said coexecutors to pay to said trustees the income now due them, and which was received by said coexecutors from said decedent's residuary estate.
In addition to such payments, during the year 1936 and subsequent to November 30, the petitioners paid the cotrustees of each trust the sum of $440 representing the additional income received by the petitioners in 1936 upon such trust estate securities, the transfer of which had not been completed because of technical delays.
The cotrustees of each trust have credited to their respective trust accounts, as income, one-half of the total sum of $108,369.88 ($107,489.88+$880), heretofore mentioned, and the cotrustees of each trust included in their income tax returns for the year 1936, one-half of the sum of $72,290.57 accounted for and paid to them by the executors as taxable income for the year 1936. Taxable income in the total sum of $72,290.57 was received by the petitioners, as executors, during the year 1936, upon the securities in the trust estates so determined.
After determining the securities which, in their judgment should comprise the trust estates, the petitioners, as such executors, had in hand as of October 15, 1936, cash and other property including one parcel of real estate, the value of all of which was in excess of one million dollars, with which to pay obligations of the decedent's estate; and at that time such known obligations were in excess of one million dollars.
The petitioners did not sell such real estate for cash, but, instead, they sold it in December 1936 to Henry Packard White, principal beneficiary of the aforesaid trusts, for $5,000 cash and noninterest-bearing notes secured by a purchase money mortgage in the sum of $41,580. These notes and mortgage were in that month transferred and delivered to the trustees.
On October 15, 1937, the petitioners received from the cotrustees the sum of $100,000, which was by the trustees charged to their principal cash accounts and was used by the executors to pay obligations of the decedent's estate. This amount was deposited in the executors' bank account No. 35060. On February 9, 1938, petitioners received from the trustees the sum of $15,000, which was treated in the same manner.
The petitioners, as executors, have filed two partial accounts with the Probate Court, covering their account of receipts and disbursements from the date of the death of the decedent throughout the year 1936. The accounts have been duly approved by the court.
The record discloses the following additional facts:
After the division of the securities belonging to the estate and their transfer to the testamentary trusts, pursuant to the terms of the decedent's will, the executors had remaining securities and other assets not included in the said trusts. Certain of these assets consisted of claims to impounded funds, real estate, and notes. At the time of the payment of the $115,000 by the trustees, as mentioned above, the petitioners believed that such retained assets would increase in value and, therefore, did not sell them. The assets amounted to more than the sum of $115,000.
The petitioners kept no independent books of records relating to their sales of securities and other transactions as executors, but, by reference to the accounts of the depository bank and the court orders authorizing such sales and transactions, they could compute the condition of their stewardship at any given time. By that means the petitioners determined that they had retained sufficient assets to meet the obligations of the estate after they transferred the securities to the trustees of the testamentary trusts.
The value of the securities transferred by petitioners to the trustees was approximately $2,000,000.
OPINION.
VAN FOSSAN:
The petitioners contend that the income in question, $72,290.57, being that part of the total sum of $108,369.88 received by them during 1936 as interest and dividends on securities delivered to the trustees, and returned by the latter for taxation as income, belonged to the trustees and that the executors were legally obligated to pay over such income to the trustees under section 162 (c) of the Revenue Act of 1936.
SEC. 162. NET INCOME.
The respondent's position is that the income does not meet the requirements of section 162 (c). He argues that there was no proper distribution of the income as such, but that it was received by the trustees as a part of the corpus of the residuum of the decedent's estate. He also asserts that the trustees were not a "legatee, heir or beneficiary" as contemplated by the statute.
We have no doubt that a trust, and hence its controlling trustees, can be a legatee within the contemplation of the statute. Crawford v. Mound Grove Cemetery Association, 218 Ill. 399; 75 N. E. 998; In re Logan, 131 N. Y. 456; 30 N. E. 485. The word "legatee" connotes the recipient or object of a legacy. The trustees, being such recipient here, became the "legatee" under the direction of the will. The trust was a taxable entity and returned the income received for taxation. Here the securities not needed to pay the debts of the estate were specifically bequeathed to the trustees by the codicil to Mrs. White's will. They were thus made legatees by force of its testamentary language.
The second point urged by respondent raises the question whether or not the facts bring the case within the purview of the statute. The record is clear that the income fund under discussion was received by the petitioners as income, was so treated by the depository bank, and was so paid over to the trustees under a proper order of the Probate Court. Its character and identity as income were thus established and maintained by all persons connected with the transactions. The stipulation itself so brands it.
The conduct of the petitioners is in harmony with this view. The will reposed in them, as executors, the discretion and judgment to determine what securities were not required to pay the bequests and the debts of the estate. In the exercise of that discretion, they segregated such assets and, in the course of their administration of the decedent's estate, transferred them to the trustees. They also separated from their total income all dividends and interest arising from the assets turned over to the trusts and paid such segregated income to the trustees. That income followed the securities and was transferred as such pursuant to the purpose of item III of the codicil to the will dated September 20, 1927.
The action of the petitioners was in strict accord with the provisions and directions of the will and thus the income was "properly paid" as required by the statute. The order of the Probate Court also directed the payment for the purpose of enabling the petitioners "to pay to said trustees the income now due them."
The will provided that the trustees might, in their discretion, pay to Henry Packard White any part or all of the trust income if such should be needed for his reasonable support and maintenance. Hence, the entire amount of the income derived from the securities transferred by court order to the trust corpus might have been required for that purpose and the trustees unquestionably were entitled to the possession of all income derived from such securities.
There is no controversy as to the $20,000 which the petitioners paid to the trustees and the trustees in turn paid to Henry Packard White. The respondent allowed that deduction. The deductibility of that item differs in no basic respect from the deductibility of the remainder of the income. It arose from the same source, it was treated similarly by the petitioners, the banks, and the trustees, and the trustees accepted it as income and so paid it over to the beneficiary. The trustees retained the $72,290.57 for future distribution as income to Henry Packard White if and when they should determine that his reasonable needs should so require.
The trustees complied with the provisions of section 162 (c) by returning as income all the amounts received by them as such. The underlying provisions of the will and the actions of the petitioners and the trustees pursuant thereto fully comport with the language and purpose of the statute. The sum of $72,290.57, therefore, is deductible from the petitioners' income for the year 1936.
The respondent cites Weigel v. Commissioner, 96 Fed. (2d) 387, affirming 34 B. T. A. 237. The facts in that case are readily distinguishable from those in the case at bar. There the question involved was the gain realized from the sale of corpus. By the terms of the will all estate income became part of the corpus of the trust estate. That situation does not exist here. We find that the income in question preserved its identity from its receipt by the petitioners to its payment to the legatee. It was paid as income. See Weigel v. Commissioner, supra . Henry Packard White did not receive the $20,000 as the res of a testamentary trust, nor was the remainder of the income to which he was potentially entitled transformed into corpus by the provisions of the will. It was properly paid as income and is entitled to be deducted by the petitioners.
Reviewed by the Board.
Decision will be entered under Rule 50.
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
* * * * * * *
(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.