Docket No. 101-66.
James A. Glascock, Jr., for the petitioner. Paul H. Frankel and Robert S. Gorin, for the respondent.
James A. Glascock, Jr., for the petitioner. Paul H. Frankel and Robert S. Gorin, for the respondent.
The Clark Trust was created to provide perpetual care for cemetery lots located in the trustee's cemetery. The trust agreement provided that the trustee was to ‘apply’ trust income to perpetual care of the cemetery lots. There was no express power to accumulate income. Held, the trust agreement must be interpreted so as to fulfill the purposes of the grantor, and due to the nature of those purposes, the Clark Trust is not required to distribute all of its income currently.
The respondent determined a deficiency of $40 in the income tax of the William A. Clark Trust for the taxable year 1962. The issue for decision is whether the William A. Clark Trust is entitled to a personal exemption of $300 as a trust required to distribute all of its income currently or is entitled to a personal exemption of $100 as a trust not so required.
FINDINGS OF FACT
Some of the facts were stipulated, and those facts are so found.
The petitioner, the Woodlawn Cemetery (the Cemetery), is the trustee of the William A. Clark Trust (the Clark Trust) and had its principal office in New York, N.Y., at the time the petition was filed in this case.
William A. Clark was the owner, at the time of his death in 1925, of lots 8161-8172 in the Cemetery and of a mausoleum located on the lots. Clark's will provided with regard to such lots:
I direct my Executors to arrange with the corporation known as Woodlawn Cemetery for the perpetual care of my Mausoleum erected in said Cemetery, and to pay said corporation a lump sum sufficient to provide for such perpetual care.
On January 6, 1926, Clark's executors entered into a trust agreement, under which the Clark Trust was established, with the Cemetery that provided in part:
WITNESSETH, that in consideration of TWELVE THOUSAND TWO HUNDRED AND FIFTY ($12,250) DOLLARS, paid by the Executors to the Cemetery, receipt whereof is hereby acknowledged, the Cemetery agrees to invest the same on bond and mortgage, or other interest-bearing securities, as the Directors of said Cemetery shall in their discretion deem to be best for that purpose, and to apply the income arising therefrom to the repair, preservation, or renewal of any tomb, monument, or other structure, and the planting and cultivating of trees, shrubs, flowers, or plants in and around lots 8161 to 8172 inclusive in Sections 84 and 85 in the Cemetery grounds of the said corporation, situated in the City of New York and County of Bronx; and to apply the surplus of such income, if any, to the improvement and embellishment of said lots.
The Cemetery is a membership corporation organized under the laws of the State of New York. It sells burial lots and provides perpetual care services. In addition, the Cemetery acts as trustee of several thousand trusts, including the Clark Trust, created to provide perpetual care for lots, monuments, and mausoleums located on the Cemetery's grounds. A small number of similar trusts were administered by trustees other than the Cemetery. On December 31, 1962, the aggregate principal of the perpetual care trusts held by the Cemetery was $13,920,396.57.
A reference to the perpetual care trusts means those trusts treated by the Cemetery as such and does not include the Restricted Funds account.
The aggregate income of the perpetual care trusts for the year 1962 was $563,817.81 after deducting expenses, consisting of bond premium amortization, bank custody fees, and mortgage department expenses, directly connected with the production of that income. This amount included the 1962 income of the Clark Trust, after deduction of its prorata share of those direct expenses. The $563,817.81 was transferred from time to time by the Cemetery as trustee during 1962 to an account on its books labeled ‘Restricted Funds.’ Income of $19,700.47 was earned in 1962 by the cemetery from investment of the funds in the Restricted Funds account. The Cemetery allocated $14.30 of such income to the Clark lots.
The Cemetery charged the Restricted Funds account with the indirect expenses of administering the perpetual care trusts, such as for investment counsel, legal and accounting services, and a portion of administrative and clerical salaries. A portion of the indirect expenses was chargeable to the Cemetery's operations as distinguished from its services as trustee, and such portion appeared in other accounts on the Cemetery's books. The indirect expenses were charged to the Restricted Funds account rather than directly to the perpetual care trusts because at the times of the transfers of funds from the trusts, the Cemetery did not know the exact amounts of the indirect expenses.
For 1962, the Clark Trust's share of the $563,817.81 of income of the perpetual care trusts, reduced by its share of the indirect expenses, was $529.70. When this amount is added to the $14.30 of income from the Restricted Funds account, $544 of 1962 income was available for use in regard to the Clark lots. The Cemetery then charged to the Clark lots expenses for services, such as maintenance and labor, in the amount of $487.13 in 1962, leaving a surplus for the year of $56.87. Such a surplus is retained by the Cemetery to meet extraordinary expenses, such as repointing a mausoleum or repairing a mausoleum roof. For example, the Cemetery in 1963 expended $577.15 for repair of the Clark mausoleum.
During 1962, the Clark Trust realized capital gains of $13.03, which was credited to trust principal.
The Cemetery's fiduciary income tax return (Form 1041) for the Clark Trust for 1962 was filed with the district director of internal revenue, Manhattan, New York. Ordinary income of $529.70 and capital gains of $13.03 were reported on the return, and a deduction of $300 for a personal exemption for the Clark Trust was claimed.
The question presented in this case is whether the Clark Trust is a ‘trust which, under its governing instrument, is required to distribute all of its income currently’ within the meaning of section 642(b) of the Internal Revenue Code of 1954. Such a trust is commonly referred to as a ‘simple’ trust. If the Clark Trust is not a simple trust, it is entitled to a personal exemption of $100 rather than the $300 claimed on its 1962 return.
All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.
The respondent argues that the trust agreement allows the Cemetery to accumulate trust income and that the applicable New York law also permits such accumulation. In addition, the respondent states that the Clark Trust earned $544 of income in 1962 and only expended $487.13; thus, the Cemetery in fact accumulated $56.87 of trust income in 1962.
On the other hand, the Cemetery argues that the trust agreement and the applicable New York law require the Clark Trust to distribute all of its income currently and that it did in fact distribute all of its income in 1962. The Cemetery argues that the transfer of Clark Trust income to the Restricted Funds account is the required distribution of income. In other words, the Cemetery maintains that its Restricted Funds account is held by it as operator of the Cemetery and not as trustee of the Clark Trust.
The parties agree that resolution of this case is dependent upon the interpretation and application of the following language in section 1.651(a)-2(a), Income Tax Regs:
(a) The determination of whether trust income is required to be distributed currently depends upon the terms of the trust instrument and the applicable local law. For this purpose, if the trust instrument provides that the trustee in determining the distributable income shall first retain a reserve for depreciation or otherwise make due allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose, the retention of current income for that purpose will not disqualify the trust from being a ‘simple’ trust. * * *
The Cemetery contends that since the trust instrument requires it ‘to apply’ the trust income to the perpetual care of the lots, it is required to distribute all of the trust income currently. It relies upon three New York cases that interpret the word ‘apply,‘ which appears in the Clark Trust agreement, to mean ‘pay over as income accrues.’ Gasquet v. Pollock, 1 App.Div. 512, 37 N.Y.Supp. 357 (Sup. Ct. 1896), affd. 158 N.Y. 734, 53 N.E. 1125 (1899); In re Tefft's Will, 130 N.Y.S.2d 192 (Surr. Ct. 1954); In re Geltman's Estate, 194 Misc. 704, 86 N.Y.S.2d 818 (Surr. Ct. 1949). However, these cases all involved a dispute over whether income was to be applied currently for the benefit of a life beneficiary or whether the income was to be accumulated for remaindermen. Thus, the dispute concerned not merely when was the income to be distributed, but more importantly, to whom was it to be distributed. In each case, the court concluded that since the trust instrument directed that the income was to be applied for the life beneficiary, the income was to be distributed to him. Thus, the decisions primarily determined who would receive the income and have no relevancy to a case involving a trust for perpetual care of cemetery lots in which there is no controversy over who will receive the income, but merely when will it be distributed.
We think the proper rule to be applied in this case is to determine the intention of the grantor, Clark, and construe the trust agreement in a manner that will carry out his intention. In re Bishop's Trust, 123 N.Y.S.2d 887 (Sup. Ct. 1953); 4 Scott, Trusts 1160, 1370-1373 (2d ed. 1956). In the trust agreement, the Cemetery, as trustee, was directed to apply trust income ‘to the repair, preservation, or renewal of any tomb, monument, or other structure, and the planting and cultivating of trees, shrubs, flowers, or plants' in and around the Clark lots and ‘to apply the surplus of such income, if any, to the improvement and embellishment of said lots.’ This language clearly shows that Clark intended all of the income to be applied to the Clark lots, but it does not require that all the income be applied to the lots as it accrues. He must have recognized that the expenditures for perpetual care would not exactly coincide each year with the income of the trust. In some years, the expenses would be less than the income; in other years, they would exceed the income. The Cemetery as trustee was expected to use its sound discretion in the application of the trust income. If proper care of the lots in a particular year should require only $490 of $500 trust income, surely it was not intended that the Cemetery find some way to spend the extra $10 in that year. It must have been contemplated that major repairs on the mausoleum would be needed occasionally, and that excess income would be accumulated to take care of such repairs. It is recognized by New York law that a trustee may anticipate such expenditures. In re Bohmert's Will, 102 N.Y.S.2d 394 (Surr. Ct. 1950); Ridge v. Felt, 184 Misc. 11, 52 N.Y.S.2d 826 (Sup. Ct. 1945). We therefore find that the Cemetery, as trustee, may accumulate reasonable amounts of trust income in order to carry out effectively the purposes of the trust.
The parties agree that if we should interpret the trust agreement as allowing the Cemetery some discretion in accumulating trust income, New York law does not prevent or preclude such accumulation. N.Y. Real Prop. Law sec. 61-1; N.Y. Pers. Prop. Law sec. 16-a (now N.Y. Est., Powers and Trusts Law sec. 8-1.7).
The Cemetery next maintains that should we decide that under the trust agreement and New York law it can accumulate income to the extent necessary to provide for major repairs of the mausoleum or lots, the second sentence of section 1.651(a)-2(a), Income Tax Regs., is applicable to it. We do not agree. The second sentence of the regulations provides that retention of income for a reasonable reserve to keep the trust corpus intact, such as a depreciation reserve, will not prevent a trust from being a simple trust. But in this case, the Cemetery's accumulations are not for the purpose of keeping the trust corpus in tact; the accumulations are maintained to fulfill more efficiently the purpose of the trust.
The last argument made by the Cemetery is that it in fact distributed all the Clark Trust income in 1962. The Cemetery argues that it occupied two positions in regard to its perpetual care trusts: First, it acted as trustee of the trusts; second, it maintained and operated the cemetery. Therefore, the Cemetery contends that when it transferred the funds from the trust to the Restricted Funds account, there was a distribution by that trust to the operator of the cemetery.
We believe that a transfer of trust funds by a trustee from one pocket to another does not absolve the trustee of his fiduciary responsibilities. Certainly, Clark did not intend the Cemetery to control any portion of his money unencumbered by any fiduciary responsibilities. In addition, section 92 of the New York Membership Corporation Law provides that such perpetual car funds shall be trust funds. Therefore, the transfer of funds from the Trust to the Restricted Funds account is not a distribution of such funds.
Accordingly, we find that the Clark Trust is not required by its trust agreement and the applicable New York law to distribute all of its income currently. The Clark Trust is therefore not a simple trust and is entitled to only the $100 personal exemption allowed by section 642(b).
Decision will be entered for the respondent.