author: HaRRon:

text:
    Leonard Marx, Petitioner, v. Commissioner of Internal Revenue, Respondent. Emily Marx, Petitioner, v. Commissioner of Internal Revenue, Respondent. Regina Marx, Petitioner, v. Commissioner of Internal Revenue, Respondent. Leonard Marx and Emily Marx, Trustees under the Last Will and Testament of Joseph E. Marx, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 83831, 83832, 83833, 88593, 88594, 88595.
    Promulgated March 7, 1939.

      Emily Marx, Esq., for the petitioners.

      S. L. Yowng, Esq., for the respondent.
   OPINION.

HaRRon:

Issue 1. — In the cases of Leonard, Emily, and Regina Marx, individual taxpayers and petitioners, part of the deficiency results from the action of the respondent in adding to their respective taxable incomes certain amounts, representing one-third of the trust income received by the trustees in the taxable year or years under the will of Joseph E. Marx, which amounts were not reported by said individuals in their separate, individual income tax returns because the amounts were not paid over to them by the trustees in the taxable year or years. Respondent determined that such trust income was taxable to the three beneficiaries as income “which is to be distributed currently” by the fiduciaries to the beneficiaries under the provisions of section 161 (a) (2) of the Revenue Act of 1932. Thereupon, respondent allowed to the fiduciaries deductions for such amounts from the gross income of the trust, under section 162 (b), and taxed the beneficiaries for such income, whether distributed to them or not, under section 162 (b). Determination of the question involved in the main issue in these consolidated proceedings affects the tax liability of the trustees in Docket No. 88594 for the year 1933, accordingly. The trustees, in their fiduciary return for the year 1933, computed and paid income tax on fiduciary income after deducting $10,500 as income “which is to be distributed currently.” Despondent determined that the amount of the income to be distributed currently was, rather, $12,601.46 and allowed as additional deductions, accordingly, the amount of $2,101.46. The deficiency of the trustee resulted from other determinations now stipulated out of these proceedings.

The main question in all the consolidated proceedings is whether the annual income of the trust or trusts in the taxable years is taxable to the beneficiaries as income which is to be distributed currently although no distribution was made to them. The question arises under sections 161 and 162 of the Devenue Act of 1932.

In determining this question it is necessary to examine article third of the will, which directs the trustees:

* * * to divide the principal into three equal shares * * * and to dispose of the principal and income of the said shares as follows:
I. To apply the income of the share set apart for my said wife, Regina Marx, to her use during her life, and upon her death, to divide the principal thereof into two parts and to dispose of the said parts * * *.
II. To apply the income of the share set apart for my said son, Leonard M. Marx, to his use, during his life or until he has attained the age of thirty years and thereupon to convey, transfer and pay over to him the principal thereof * * *.
III. To apply the income of the share set apart for my daughter, Emily Marx, to her use during her life, and upon her death, to convey, transfer and pay over the principal thereof * * *. [Italics supplied.]

The petitioners construe the will as giving to the trustees power to distribute or accumulate the income for future distribution at their discretion, as they shall deem proper to meet current needs of the beneficiaries. To support this construction, petitioners endeavor to import an intention from the decedent out of his action in deleting from early drafts of his will such words as would direct the trustees “to pay the income over to” any beneficiary and substituting therefor the words which appear in the last will, “to apply the income to his (or her) use.” The trustees and the beneficiaries believe that the testator intended to give the trustees power to distribute only trust income necessary for the support and maintenance of the beneficiaries and, since they entered upon their duties, the trustees have administered the trust or trusts as, what they term, “discretionary trusts.” Their position is stated to be in their reply brief (p. 24) “that the trustees must expend whatever income is needed by the life beneficiaries, when it is so needed, and that in order to do this they must hold, temporarily, income not needed in any year by the life beneficiaries. The accrued income in their hands is alleged to be a temporary accumulation, a temporary surplus, which they allege they must hold to meet future needs of the beneficiaries. Petitioners contend that the trustees are custodians and conservators of any accrued and unexpended amount of income received in each year and that such “accumulation of a temporary surplus” is not invalid nor an illegal accumulation within the meaning of section 16 of the New York Personal Property Law. In brief, petitioners contend that there is to be found in the will an implied discretion in the trustees to hold the trust income in any year for future distribution and in that sense accumulate it.

Two of the beneficiaries of the trust, or trusts, and the trustees are the same individuals. It is easy to understand the procedure followed by the trustees in holding the trust income in the absence of demand for distribution or need therefor. However, it is not the beliefs of the interested parties that control, but the terms of the will. Commissioner v. Guitar Trust, 12 Fed. (2d) 544. Also, the mere fact that the parties have consented to the withholding of the trust income as it accrued can not affect or change the applicable law, i. e., the local law and the Federal income tax law. In re Israelites Estate, 279 N. Y. S. 699; Hubbell v. Burnet, 46 Fed. (2d) 446.

The testator’s intent with respect to the trust income is clearly expressed in the will. It appears that decedent drafted his last will carefully. There is no ambiguity. At the time he executed his will in 1928, it appears to be a fact that none of the petitioners were minors. It also appears that all were competent. Under the law of New York State a direction to a trustee to accumulate income is forbidden except in the case of a minor. Personal Property Law, McKinney’s Consolidated Laws of New York, vol. 40, sec. 16; In re Rogers, 48 N. Y. S. 181; In re Hartman's Estate, 215 N. Y. S. 802; In re Hoyt, 101 N. Y. S. 557; Hendricks v. Hendricks, 8 App. Div. 604; aff'd., 154 N. Y. 751; Yukon Alaska Trust, 26 B. T. A. 635, 641; Commissioner v. Morris, 90 Fed. (2d) 962; Morris v. Morris, 272 N. Y. 110; 5 N. E. (2d) 56. The will contains no express direction to the trustees to accumulate income. No provision is made for any disposition of accumulated income. There is no express limitation on the trustees to distribute income each year only in accordance with the needs of the beneficiaries. Nor can it be concluded that there is any such implied discretion in the trustees because the testator adopted the phraseology “to apply to the use of” the beneficiaries, instead of “to pay to” the beneficiaries. Article fourth, paragraph 1, of the will is not applicable, since all the petitioners were adults. The courts of New York have construed the phrase “to apply to the use of” to be equivalent to the phrase “to pay” whei’e the intent of the testator is not found to be otherwise in the terms of his bequest. Moore v. Hegemen, 72 N. Y. 376, 378; Gasquet v. Pollock, 37 N. Y. S. 357; Scharmann et al., 63 Misc. 640; 118 Y. Y. S. 687; In re Van Hoesen’s Estate, 273 Y. Y. S. 540. It is concluded that the testator did not give and did not intend to give the trustees any express or implied discretion to accumulate the trust income.

It is evident that the position taken by the petitioners is founded upon the absence in the will of any direction as to the time when trust income is to be applied to the use of the beneficiaries, i. e., the will does not direct the trustees to dispose of the income at the end of each year or at any time within the year. The beneficiaries, except Kegina Marx, and the trustees, are the same individuals. It has suited the convenience of the parties, according to their needs, to let the trust income be retained by the trustees. The parties have stipulated that none of the trust income so retained by the trustees was “available” to any of the beneficiaries in the taxable years. The use of the term “available” in the stipulation can be regarded only in the sense that the income was not paid to the beneficiaries because they agreed to let the trustee hold it. It is another matter whether the trust income was legally available to the beneficiaries. It is a matter for legal construction, also, whether the trust income was “currently distributable” to the beneficiaries so as to be taxable to them within the meaning of section 161 (a) (2) and section 162 (b) where the testator did not expressly direct the trustees to distribute the income periodically at fixed times. The mere fact that the beneficiaries agreed that the income be held by the trustees can not change the application of the law with respect to taxation of the income in any year. Also, the beliefs of the interested parties do not control, but the terms of the will must govern in determination of the question involved. Cf. Commissioner v. Guitar Trust, supra; Hubbell v. Burnet, supra. The essential question is whether the beneficiaries had a legal right to receive accrued trust income at the end of each year in the absence of an express direction in the will that the trustees apply the trust income to the use of each beneficiary at the end of each year, as will be developed hereafter.

It is the right of the petitioners, beneficiaries, to receive the trust income at the end of each year, not the actual or constructive receipt of such income during the year, which fixes the liability for the tax thereon, as income “currently distributable” during the year under sections 161 (a) (2) and 162 (b), supra. In Freuler v. Helvering, 291 U. S. 35, it is stated, “The test of taxability to the beneficiary is not receipt of income but the right to receive it.” See also, Mary Clark de Brabant, 34 B. T. A. 951, 955. This brings us to the question of ownership of the income in question. The testator directed the trustees to divide the principal of the trust into three equal shares (physical division being- left in the discretion of the trustees except when necessary to make a distribution of principal, article IV, paragraph II), and to dispose of income by applying the income of each share set apart for each beneficiary, to the use of the beneficiary for life, or, in the case of Leonard Marx, until he attained thirty years of age. The trustees opened separate income accounts .in the name of each beneficiary in the “Estates General Ledger” and at the end of each year credited to each account the one-third of the annual, net trust income, plus one-third of total capital profits and minus one-third of capital losses. (Cf. Nellie S. Alexander, 36 B. T. A. 929, on the matter of deduction of capital losses from distributable trust income.) Thus, it is clear that the trustees kept each year’s net income separate from the principal of the trust or trusts and each beneficiary could ascertain how much of the trust income was available for distribution at the end of each year. The income was available for the use of the beneficiaries; it could be assigned without affecting the trust; it could be reached by their creditors. It is also clear that each beneficiary had a vested, beneficial interest in the income of one-third of the trust property. Reference to decisions of the courts of Hew York, as well as the terms of the will, support the conclusion, which is made, that ownership of the net income of one-third of the trust property vested in each beneficiary upon its being received by the trustees. This conclusion is dictated, further, by the New York law under which a postponement of such vesting for however short a time would offend the statute against unlawful accommulations. Each beneficiary was the owner of the entire income and it was available to him and he was entitled to have it applied to his use by having it paid over as it accrued. In re Keogh, 112 App. Div. 414; 98 N. Y. S. 433; Smith v. Parsons, 146 N. Y. 116; 40 N. E. 736; Scharmann et al., supra; Gasquet v. Pollock, supra; Curtis v. Curtis, 185 App. Div. 391; Hendricks v. Hendricks, supra. The gift of income to the beneficiaries was not just so much of the net income as the trustees determined to apply. Cf. New York Trust Co. v. Black, 164 N. Y. S. 967; Matter of Connolly, 130 N. Y. S. 194; Schmidt’s Estate, 240 N. Y. S. 206.

It has been established that “the one who is to receive the income as the owner of the beneficial interest is to pay the tax” under the provisions of the revenue acts imposing upon the beneficiary of a trust the liability for the tax upon the income distributable currently to the beneficiary. Also, it has been held that the term “income currently distributable to the beneficiary” is merely descriptive of the one entitled to the beneficial interest. Blair v. Commissioner, 300 U. S. 5. If the trust income is the property of the equitable life tenant at the moment it is earned, then the liability for the tax is on the equitable life tenant and not on the trustees, Sewell v. United States (Ct. Cls.), 19 Fed. Supp. 657; whether paid over to him or not, Lynchburg Trust & Savings Bank v. Commissioner, 68 Fed. (2d) 356.

There is no question involved here whether the trustees could lawfully hold the trust income as it was received in each year for future distribution to the beneficiaries. As far as can be discovered from review of New York court decisions referred to by the parties, the temporary holding of the trust income by the trustees was not illegal under New York law in the absence of any direction in the will to accumulate income contrary to law. As stated in Bogert, Trusts and Trustees (1935), vol. I, p. 665, par. 217:

A cestui cannot by Ms consent validate a provision for accumulation wMeb violates tbe statute and concerning wMeh another party has a rigM to object; but, if there is no accumulation clause in the trust instrument, a cestui and trustee may agree that the trustee shall retain for a time income which he is under a duty to pay over or apply. This latter type of agreement is in effect creating a new trust by agreement between cestui and trustee.

But the apparent agreement between the parties in these proceedings, as cestuis and trustees, in their respective capacities, effecting a new trust of the undistributed income does not affect or alter the determination of the main question in these proceedings. Each beneficiary owned his share of the trust income as it was received by the trustees and the trustees were in effect applying such income to the use of each beneficiary by holding it in trust just as effectually as though it were paid over to each beneficiary. Cf. Ordway v. Wilcutts, 12 Fed. (2d) 105. The procedure adopted voluntarily was equivalent to the beneficiaries receiving the income at the end of each year and paying it over to the trustees in a new trust or trusts. Further, the trustees’ oral declaration that they held one-third of net trust income, personal property in praesenti, for each beneficiary creates express trusts for the three beneficiaries and the beneficial interest is considered as vested in each cestui. Rollestone v. National Bank of Commerce, 299 Mo. 57; 252 S. W. 394. Under such circumstances the trust income held is not taxable to the trustees. Cf. Lynchburg Trust & Savings Bank v. Commissioner, supra.

It is held that the net trust income is taxable to each petitioner, Leonard, Emily, and Begina Marx, for the taxable years under the provisions of section 162 (b), supra. Respondent is sustained on this issue.

Issue f. — The second issue relates to the fiduciaries and affects Docket No. 88594. Respondent has construed the third article of the will as creating a single trust for three beneficiaries. Petitioners contend that the will creates three separate trusts. We believe the evidence shows that the trustees have construed the will as creating three trusts, the fact that income tax returns for 1982 and 1938 were made originally as for one trust, to the contrary notwithstanding. It is stipulated that the attorney for the trustees became aware of the procedure of filing one return on the basis of one trust for the first time in October 1934, and that thereafter, upon advice of counsel, the trustees filed three amended returns for three trusts for each taxable year. On the basis of three trusts the total income tax for 1932 was less than the tax computed on the basis of one trust and, simultaneously, the trustees filed a claim for refund of part of the taxes paid on the original return filed for 1932. For 1933, the tax liability on the basis of three trusts was more than on the basis of one trust, and simultaneously the trustees paid an additional tax. However, when the respondent indicated an intention to tax the trust income for 1933 to the beneficiaries (issue 1), the trustees, on February 14, 1936, filed a claim for refund of taxes paid by them on trust income. It appears, therefore, that the question involved in issue 2 is important to the petitioners, because, if three trusts were created, in-comé taxes on them, as fiduciaries, are less than if there was one trust. It is noted that the petition of the fiduciaries, Docket No. 88594, is from a deficiency for the year 1933 only.

Whether or not an instrument creates one or several trusts depends on the testator’s or donor’s intention as derived from the terms expressed in the instrument. Huntington National Bank v. Commissioner, 90 Fed. (2d) 876. The terms of the will of Joseph Marx leave little room to doubt that he intended to create by the third article of his will three separate trusts for the benefit each of his wife and two children. The residuary estate was conveyed to the trustees with the direction “to divide the principal thereof into three equal shares, one for my said wife, Regina Marx, one for my son, Leonard M. Marx, and one for my daughter, Emily Marx, and to dispose of the principal and income of said shares as follows: * .* *” Thereafter, the testator refers to each share as “the share set apart for” the named beneficiary for her or his use, during life, (or, in the case of the son, until he is thirty years old). The gift of income to each beneficiary is the “income of the share set apart”, and not one-third of the income of a trust. In the fourth article the trustees are authorized, in their discretion, to “keep the trust property in one or more consolidated funds in which the separate shares shall have undivided interests.” (Italics ours.) That is, the trustees are not required to make physical division of the trust funds, except when necessary for distribution of principal, and if the separate shares are kept in one fund in sólido, each beneficiary has an undivided interest in the fund. The term “trust funds” is used in the will rather than “trust fund” and the term “trust” as opposed to “trusts” does not appear except that the residuary estate is given “in trust” to be divided into three equal shares. Each undivided interest runs for a separate and distinct period, i. e., the life of each beneficiary, or, in the case of the son, until he is 30 years old. It seems reasonable to construe the will as showing an intent in the testator to create three trusts running for each single life. Turning to the limitations over of the remainders, each share or trust is kept separate and apart so as to dispose of and terminate each trust in and of itself. The testator directed that at the end of each life estate in each share “the principal thereof” shall be distributed by the trustees to designated remaindermen. The principal of the share set apart for Kegina Marx is to be divided into two parts upon her death and final disposition of the principal of each part of the one share is provided. Final disposition of each of the other shares is provided for in similar fashion. In brief, the provisions for disposition of the remainders over follow the same division of three separate trusts, prescribing the ultimate disposition of each principal, separately, to designated remaindermen. This is inconsistent with the idea of a single trust.

The difficulty presented is that the trustees did not make any physical division of the trust funds into three separate principals. The parties have stipulated that the nature of the trust funds or property:

* * * was such as to make physical segregation of the assets inadvisable and in some cases impossible. Therefore, the trustees did not separate the property received by them pursuant to said Article “Third” of the will into three separate and distinct parts but kept said property intact.

It is evident that actual separation of the property received by the trustees into three shares was not necessary because the interests in the accruing income of each share are equal and several. However, physical separation of assets is not indispensable or prerequisite to the existence of several trusts. A trust may be created in any property which is of value, real or personal, legal or equitable. Perry on Trusts (7th Ed.) pars. 67, 68, pp. 52, 53. An undivided interest in property may constitute the corpus of a trust. United States Trust Co. v. Commissioner, 296 U. S. 481. “Where there is an intention to create separate trusts, the fact that ‘the trusts’ are ‘kept in one fund’ does not necessarily defeat the intention and require the conclusion that there is but a single trust.” In re Colegrove's Estate, 221 N. Y. 455, 459; 117 N. E. 813; Vanderpoel v. Loew, 112 N. Y. 167, 180; 19 N. E. 481, 484.

It is concluded that the shares and interests of Kegina, Emily, and Leonard Marx are several, although the trust property was undivided, which was unnecessary. There is a separate and distinct trust as to each share in which each beneficiary had an equitable life estate; an undivided one-third interest. As pointed out in Commissioner v. McIlvaine, 78 Fed. (2d) 787, the matter that gives concern is income rather than physical possession of the property that produces it, and “the receipt of the entire income (by the trustees) will he deemed in equity the receipt of it for the three undivided trust estates.” It follows that the trustees’ tax liability must be determined on the basis of three trusts, i. e., income of the trust property, where it is properly taxable to the trustees (see issue 1), is taxable to three trusts and not to a single trust, notwithstanding the property was not segregated. On this issue, petitioners are sustained.

Respondent calls attention to several cases where it has been held that a single trust was created: Johnson v. United States, 65 Ct. Cls. 285; certiorari denied, 278 U. S. 611; John J. Rauers et al., Trustees, 28 B. T. A. 516; State Savings Loan & Trust Co. v. Commissioner, 68 Fed. (2d) 482; Margaret B. Sparrow, 18 B. T. A. 1; Langford Investment Co., Trustee, 28 B. T. A. 222. We do not think those cases are controlling here. Each case must be decided with reference to the particular trust instrument involved. This proceeding comes clearly within the general principles discussed in United States Trust Co. v. Commissioner, supra, which is controlling here.

Issue S. — The third issue arises out of the deficiency determined in Docket No. 88595. The material provisions of the Marian House trust executed by Emily Marx, petitioner, are set forth in the findings of fact. At the outset, it is pointed out that the question presented is whether all or part of the sum of $8,500 paid to the guardian of Marian House pursuant to the new trust, on December 30, 1933, is taxable to the settlor, Emily Marx, or to the guardian of Marian House. Petitioner errs in arguing that the stipulation of facts forecloses any consideration by this Board of the question in its entirety. Petitioner would circumscribe the question in a manner not warranted by anything in the stipulation of facts. The parties may not limit the jurisdiction of this Board by any manner of posing a question in their briefs. Petitioner’s counsel errs in endeavoring so to do.

Petitioner’s theory is that she assigned property to the Marian House trustee, consisting of part of her equitable interest in the Joseph Marx trust to the extent of $3,500 per year. If this theory of petitioner is correct, a point we do not now decide, then only that part of the sum of $3,500 which in fact accrued after the date of execution of the assignment is taxable to the assignee. Income accruing to the interest of Emily Marx in the Joseph Marx trust prior to December 15, 1933, is clearly the income of Emily Marx (see issue 1, above), for which she is liable for tax notwithstanding the later assignment thereof. The cases controlling on this phase of the question are Edith H. Blaney, 13 B. T. A. 1315; Robert G. Dodge, 29 B. T. A. 632; William Ernest Seatree, 25 B. T. A. 396. The parties have stipulated that the net income of the Joseph Marx trust for Emily Marx was $6,763.22 for the year ending December 31, 1933. The parties have presented no facts, stipulated or otherwise, to show what part of said income accrued or was received by the Joseph Marx trust trustees prior to December 15, 1933. Lacking evidence to prove that any part of the sum of $3,500 was received by the trustees of the Joseph Marx trust after December 15, it is held that the petitioner, Emily Marx, is taxable upon the entire amount, in spite of the subsequent assignment thereof.

Upon this conclusion, there remains no further question in this proceeding for decision with respect to the effect of the assignment of December 15 on petitioner’s income tax liability for the year 1933.

Decision will be entered wader Bule. 50 in Docket Nos. 83831, 83832, 88593, 88594, and 88595. Decision will be entered for the respondent in Docket No. 83833.


source: Caselaw Access Project

author: Disney :

license: Public Domain

text:
    Robert Barbour, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81059.
    Promulgated March 7, 1939.

      Prew Savoy, Esq., John F. Evans, Esq., and Winthrop Travell, Esq., for the petitioner.

      Gerald W. Brooks, Esq., and Irving M. Tullar, Esq., for the respondent.
   OPINION.

Disney :

It is not disputed by petitioner that the amount of $10,000 was received in each of the years in issue, 1932 and 1933, by petitioner’s former wife as the result of the aforesaid separation agreement — adopted and ratified by the Nevada court in its divorce decree — as well as the Hamilton Trust Co. trust heretofore described. The petitioner contends that the amounts should not be included in his gross income for purposes of Federal income tax in the years in issue, for the reason that the separation agreement of April 8, 1925, was purely a property settlement and not an agreement to pay alimony, and, since the Nevada court adopted the provisions of the separation agreement, its decree did not grant alimony, but merely provided for a division of property between them, alimony not being mentioned or involved and, therefore, the income received by the wife or beneficiary of the agreement and trust should not be included in the petitioner’s income. Briefly, and as stated by petitioner, the payments made to petitioner’s former wife “are not in satisfaction of the legal obligation to pay alimony, or of any other obligation such as to require that the amounts so paid be included in petitioner’s gross income for 1932 and 1933.”

In considering and discussing the above issues, counsel for petitioner presents and presses numerous arguments, all of which we have carefully considered, though only such as in our opinion are important and material in determining the issues are herein discussed.

In the instant case the petitioner’s attitude and arguments are the same or similar to those presented by the petitioner in the case of Reginald Brooks, 31 B. T. A. 70, the decision in which was reversed, the court saying, in part, in 82 Fed. (2d) 173:

The Board’s decision was rendered prior to the Supreme Court’s opinion in Douglas v. Willcuts, 296 U. S. 1, 56 S. Ct. 59, 60, 80 L. Ed. —, which the commissioner contends is conclusive in Ms favor. The taxpayer argues that there is a distinction between an agreement to pay alimony and an agreement for the settlement of property rights between husband and wife. The asserted distinction is without substance on the present issue. Whether the trust income is used to discharge the husband’s duty, made specific by agreement, to support the wife, or to discharge an obligation to pay her agreed sums for a release of rights in his property, cannot be material in determining the taxability of the husband. The creation of a trust the income of which is to be used to discharge any legal obligation of the settlor enables him to enjoy the benefit of the income; hence the income is properly taxable to him. Compare Helvering v. Blummenthal, 296 U. S. 552, 56 S. Ct. 305, 80 L. Ed. 390; Helvering v. Schweitzer, 296 U. S. 551, 56 S. Ct. 304, 80 L. Ed. 389; Helvering v. Stokes, 296 U. S. 551, 56 S. Ct. 308, 80 L. Ed. 389; Helvering v. Coxey, 297 U. S. 694, 56 S. Ct. 498, 80 L. Ed. 986, all of which have been recently decided on the authority of Douglas v. Willcuts. Indeed, in the Douglas Case itself the trust provisions for the wife were in settlement not only of alimony but also “of any and all dower rights or statutory interests in the estate’’ of the husband, and the court pointed out (296 U. S. 1, at page 8, 56 S. Ct. 59, 62, 80 L. Ed.-) that this did not affect the essential quality of the payments.

In John Ernest Goldring, 36 B. T. A. 719, 785, the petitioner therein also argued that a distinction must be made between agreements for settlement of property rights and agreements contemplating divorce for the purpose of discharging a husband’s family obligations. In its decision therein, the Board said, in part:

* * * If any such distinction can be drawn from the decided cases it can not be made here. * * * Moreover, the language of the agreements here definitely establishes that, they were entered into for the specific purpose of providing for the support of the petitioner’s wife and children. * * *

In the instant case, the separation agreement recites that it is the desire of the husband, the petitioner, “to make provision for the maintenance and support” of his wife “so long as she shall live.”

The separation agreement and the trust instrument executed pursuant thereto both recognize the purpose and duty of petitioner to maintain and support his wife during the term of her natural life. The agreement provided that the obligation of the petitioner to make financial provision for his wife as indicated therein should “survive and be unaffected by any judgment or decree by which marital ties of the parties” might “at any time be severed,” and the trust was to likewise so continue “whether or not any judgment or decree be entered or made dissolving or annulling the marital status” of the parties.

It is evident, therefore, that the amounts paid in accordance with the terms of the separation agreement and the trust and received by petitioner’s former wife during the years 1932 and 1933 were intended to and did satisfy and discharge an obligation of petitioner. In Robert Glendinning et al., Executors, 36 B. T. A. 486, we held, in substance, that income from a trust paid to a divorced and remarried wife is taxable to tbe husband who created the trust, under the terms of the trust agreement, even though, in the absence of such agreement, his obligation to support and maintain his wife would have been terminated, under the law of Pennsylvania, by her divorce and remarriage. In brief of petitioner it is insisted that our decision therein is clearly wrong, but we are convinced of the correctness of our determination and the same has been affirmed by the Circuit Court of Appeals of the Third Circuit, 97 Fed. (2d) 51.

It is also insisted in behalf of the petitioner in the instant case that for the same reasons assigned in the Glendwmmg case, supra, the decision of the Circuit Court of Appeals of the Third Circuit in the case of Alsop v. Commissioner, 92 Fed. (2d) 148, is likewise wrong. We, however, are not convinced of any error therein and quote briefly, as pertinent and appropriate, from the court’s decision affirming the determination of the Board, as follows: “It may seem hard that the petitioner must pay taxes on the income which supports another man’s wife, but it is a condition for which he is responsible and which he created as a substitute for his obligation to support her.” The United States Supreme Court denied application therein for certiorari, 302 U. S. 767.

The petitioner further contends that since the agreement of separation entered into by the petitioner and his former wife on April 8, 1925, was an agreement to facilitate a divorce, the divorce decree was collusive and, therefore, invalid. Consequently, the petitioner argues, the payments received by the petitioner’s former wife under the trusts created to carry out the separation agreement and the decree are not in satisfaction of a legal obligation. Such an argument is clearly and concisely answered by the Circuit Court of Appeals for the Second Circuit in its decision in the case of Commissioner v. Hyde, 82 Fed. (2d) 174, reversing 31 B. T. A. 256. In that case Hyde and his wife entered into an agreement on October 29, 1918, reciting that they were living apart and contemplated divorce. A trust instrument was, signed by both parties and the wife released all claims for alimony, dower, support, and maintenance. In these respects the facts are similar to those in the instant case. The court held that the payments by the trusts were income to Hyde, and, in answer to the argument that the agreement was invalid since it was one for promoting divorce, said:

Obviously the argument is highly technical. The husband has had the full benefit of the agreement, whether valid or not. But for his promise to create the trust, the wife would undoubtedly have ashed for and obtained in her decree of divorce terms providing for alimony for herself and support for their child. Both parties have performed the agreement and equity would leave them where it finds them, even if the agreement were illegal. See Schley v. Andrews, 22S N. Y. 110, 113, 121 N. E. 812. The trust indenture itself contains a relinquishment by the wife of all claims for support and dower and an agreement by her to execute sucli further instruments as may he necessary to effectuate such relinquishment. Under such circumstances to hold that the trust was established as a voluntary gift and that the trust income has not been used to satisfy the husband’s obligation of support would be to close one’s eyes to the realities. In substance the situation is no different than in Helvering, Commissioner, v. Brooks.

Petitioner also contends that the divorce decree was invalid, and in effect that the duty of support of wife continued until her remarriage, but that thereafter there was no such duty and therefore from that date the trust income was not taxable to him; and that, in the absence of a valid decree of divorce adopting the agreement between the parties, such agreement would be effective only until the remarriage of the wife, because dependent upon the duty of support. In Helvering v. Brooks, 82 Fed. (2d) 178, the court denied validity to an attempted distinction between an agreement to pay alimony and an agreement for property settlement. Therefore, we consider the agreement for property settlement sufficient, even in the absence of a valid decree of divorce, to serve as the basis for the trust agreement between husband and wife; and in Robert Glendirmmg et al., Executors, supra, we held that a predivorce agreement, not dissimilar to the agreement here involved, created an obligation subjecting the husband to payment of income tax upon the income of the trust, though the wife had remarried after divorce. In Cap Andrew Tilles, 38 B. T. A. 545 (548-549), we considered the effect of a trust agreement before divorce, followed by divorce and remarriage of the wife, beneficiary under the trust, and held that there was such continuing obligation on the part of the husband to support his former wife as to subject him to income tax upon the trust property. The agreement herein involved was made under circumstances, and in terms, plainly indicating intent to provide for the wife for life, in spite of the fact that discontinuance of marital duties on her part and the possibility of marriage by her to another were obviously taken into consideration. The agreement under such circumstances having been made in consideration of her release of any and all claims on her part against her husband or his estate, including, of course, right to continued support, which she might, or might not, otherwise have surrendered, we conclude that any invalidity of divorce and the fact of remarriage do not suffice to relieve the husband from obligation to pay income tax upon the trust income.

In our opinion and we so hold, the amounts so paid were in satisfaction and discharge of a legal obligation of petitioner and are, therefore, taxable to him.

In addition to authorities already quoted or cited in support of our determination, see also the following: Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine Rail road Co., 279 U. S. 732; Douglas v. Willcuts, 296 U. S. 1; Albert C. Whitaker, 33 B. T. A. 865; Frank G. Hogan, 35 B. T. A. 26; Thorne Donnelley, 37 B. T. A. 90, and Stephen J. Leonard, 36 B. T. A. 563, wherein we pointed out that:

The Supreme Court held a settlor of a trust taxable with the trust income where it was used to pay his debts in Helvering v. Blumenthal, 296 U. S. 552, in reversing the Second Circuit (76 Fed. (2d) 507), and where it was used to discharge his obligation to maintain and support his minor children in Helvering v. Schweitzer, 296 U. S. 551, in reversing the Seventh Circuit (75 Fed. (2d) 702), and in Helvering v. Stokes, 296 U. S. 551, in reversing the Third Circuit (79 Fed. (2d) 256), and where the beneficiary of a trust irrevocably assigned a part of the trust income to his wife who subsequently obtained a divorce in which the decree made no provision for alimony in Helvering v. Coxey, 297 U. S. 694, in reversing the Third Circuit (79 Fed. (2d) 661).

Cf. Harry S. Blumenthal, 34 B. T. A. 994; aff'd., 91 Fed. (2d) 1009.

With respect to the deduction claimed by petitioner on account of his Hamilton Trust Co. common stock becoming worthless in 1933— which deduction was disallowed by the respondent — the latter in his brief presents no argument to support his disallowance, but simply submits that issue to the Board on the basis of the evidence presented.

There is no occasion for any lengthy discussion of this issue, which involves 150 shares of the common stock of the Hamilton Trust Co. of Paterson, New Jersey. It is stipulated that 100 shares of the stock cost petitioner $21,650 and by the stipulation the respondent concedes the cost of the 50 additional shares to the extent of $7,500, the petitioner reserving the right to introduce evidence to show that the cost of the latter stock was in excess of $7,500. Evidence introduced by petitioner at the hearing, in our opinion, shows, and we so find, that the 50 shares cost petitioner $15,000, making the entire cost of the 150 aforesaid shares $36,650.

In March and April 1933, after the bank holiday, the assets of the Hamilton Trust Co. were insufficient by approximately $500,000 to pay depositors. The depositors released to the bank 30 percent of their deposits, or $1,725,000, but instead thereof received preferred stock redeemable at $1,725,000, leaving the common stock in the same relative position as before. The record shows comparatively few transfers of the common stock after June 21, 1933, and those were at prices from 2yz cents to 10 cents per share. Under such conditions it is evident that the common stock of the Hamilton Trust Co. became worthless in 1933. We so hold. We therefore hold that the petitioner is entitled to the claimed deduction of $36,650, the cost of his aforesaid 150 shares of common stock of the Hamilton Trust Co., as well as for the stipulated loss deduction of $1,512, sustained the same year, on his common stock ox the Harriman National Bank & Trust Co. of New York City.

Decision will be entered wider Buie 50.


author: Smith:

text:
    The Peoples National Bank of Charlottesville, Virginia, Administrator c. t. a., and George J. Roberts, Executor of Martha Roberts Farish, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89594.
    Promulgated March 7, 1939.

      H. W. Walsh, Esq., and Lyttelton Waddell, Esq., for tbe petitioners.

      Irving M. TvLlar, Esq., for the respondent.
   OPINION.

Smith:

The respondent has determined a deficiency for 1984 of $227.64 in the income tax of Martha Roberts Farish, deceased, of whose estate the petitioners are the administrator c. t. a. and the executor. Only $138.57 of the deficiency determined by the respondent is in controversy.

The sole question in issue is whether a net capital loss sustained during the taxable year by the trust estate, of which the taxpayer was a life beneficiary with a general power of appointment as to all of the trust assets, is deductible in computing the amount of the trust income distributable to and taxable to the beneficiary. The facts are not in disDute.

During the year 1934 the taxpayer was the life beneficiary and sole distributee of the income of a trust estate created in 1929 by her brother, George J. Roberts. The trust agreement provided that the income of the trust, after payment of taxes and expenses chargeable to income, should be paid to Martha Roberts Farish for life and that:

Ajíticle III. The said Martha Roberts Parish shall have the right to dispose by will of the Trust Fund, and, if she die intestate as to the Trust Fund, then it shall be divided among those who, at the death of the said Martha Roberts Farish, are her heirs at law and distributees under the Virginia statutes for Descents and Distributions as then in effect. * * *

During the year 1934 the trustee disposed of certain securities belonging to the trust estate at a net capital loss to the trust of $3,230.67. In an amended return filed on behalf of the trust estate for 1934 the trustee deducted $2,000 of such net capital loss, being the fuE amount allowable under the statutory limitation on capital loss deductions, and reported a net income of $8,469.89. The respondent has determined that the life beneficiary is taxable on all of the distributable income of the trust, without the benefit of any deduction on account of the net capital loss sustained by the trust estate.

The respondent’s determination is in accord with the decisions of the Board and of the courts in Baltzell v. Casey, 1 Fed. (2d) 29; aff'd., Baltzell v. Mitchell, 3 Fed. (2d) 428; certiorari denied, 268 U. S. 690; Ardenghi v. Helvering, 100 Fed. (2d) 406, affirming 37 B. T. A. 345; Abell v. Tait, 30 Fed. (2d) 54; T. Rosslyn Beatty, 28 B. T. A. 1286; County National Bank & Trust Co. of Santa Barbara, Executor, 39 B. T. A. 357, and other cases of like import. In County National Bank & Trust Co. of Santa Barbara, Executor, suyra, the taxpayer was the sole beneficiary of an estate in process of administration, which has the same taxable status as a trust estate, and was also the sole heir and devisee in respect of the trust assets. We held nevertheless that the trust estate and the beneficiary were separate tax entities and that, although the beneficiary had a vested interest in the assets of the trust estate, he was not entitled to a deduction in his individual return of the capital losses sustained upon the sale of the trust assets.

There is a provision in the Revenue Act of 1934, section 24 (b), specifically denying to holders of life or terminable interests any deduction for losses to the trust estate such as the one here under consideration. This provision of the statute is as follows:

Seo. 24. Items not deductible.
*******
(b) Holdees op Life or Terminable Interest. — Amounts paid under tbe laws of any State, Territory, District of Columbia, possession of tbe United States, or foreign country as income to tbe bolder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act (except the deductions provided for in subsections (1) and (m) of section 23) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled.

Petitioners make the argument that the taxpayer’s interest in the trust assets here was more than a mere life or terminable interest; that by reason of the life interest coupled with the general power of appointment she had such an interest in the assets themselves that a loss to the trust estate was a personal loss to her.

Just what was the nature and extent of the interest in the trust assets which the general power of appointment conferred on the taxpayer? In Carver v. Astor, 4 Pet. 1, it was said that “a power to dispose of land in the seisin of a third person, is, in no just sense, an estate in the land itself.” Unless and until a power of appointment is exercised by the donee the property subject to the power does not become a part of the donee’s estate. Jones v. Clifton, 101 U. S. 225; United States v. Field, 255 U. S. 257. The Court said in Jones v. Clifton, supra, that a power of revocation and appointment to other uses contained in a deed of conveyance “is not an interest in the property which can be transferred to another, or sold on execution, or devised by will. * * * Nor is the power a chose in action. It did not, therefore, in our judgment constitute assets of the bankrupt which passed to his assignee.”

It is a commonly accepted rule that where a general power of appointment is exercised, equity will regard the property appointed as a part of the donee’s assets for the purpose of paying his creditors, in preference to the claims of the voluntary appointees, “but the mere existence of the power does not of itself vest any estate in the donee,” and, “whether the power be or be not exercised, the property that was subject to the appointment is not subject to distribution as part of the estate of the donee.” United States v. Field, supra.

Thus, it is clear that the power of appointment reposing in the taxpayer during the taxable year added nothing to her interest in the trust assets which would entitle her, any more than as a mere life beneficiary, to the benefit of a deduction of the capital losses sustained by the trust estate. See County National Bank & Trust Co. of Santa Barbara, Executor, supra.

Judgment will be entered under Rule 50.


author: Murdock:

text:
    Hassard Short, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89894.
    Promulgated March 8, 1939.

      Michael Kurz, Esq., for the petitioner.

      S. U. Uihen, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined deficiencies in the petitioner’s income taxes as follows:

1933_ $60
1934- 315
1935- 298

The only question for decision is whether the petitioner is entitled to a personal exemption of $2,500 as the head of a family. We hereby find the facts as agreed upon by the parties in their stipulation, including those which the respondent objected to as immaterial.

The petitioner is an alien, a subject of Great Britain. He maintained during the taxable years a residence at his ancestral home in England and was domiciled there. His mother, who was aged and infirm, resided there and was supported and maintained by the petitioner in that home during all of the taxable years. The petitioner resided there with her whenever he was in England. His father died in 1933. The petitioner has been engaged in the business of directing and producing theatrical plays in the United States and England. The conduct of that business required him to spend about one-half of his time in the United States. He maintained a residence in the city of New York, where he resided while in the United States on business. The parties agree that the petitioner is a resident alien of the United States for income tax purposes. The petitioner claimed an exemption of $2,500 for each year as the head of a family. The Commissioner disallowed that claim and allowed instead a personal exemption of $1,000 and a credit of $400 for a dependent mother.

Section 25 (c) of the Revenue Act of 1932 and the corresponding section of the Revenue Act of 1934 provide that individuals shall be allowed certain credits against net income, including a personal exemption of $1,000 in the case of a single person and of $2,500 “in the case of the head of a family or a married person living with husband or wife.” The parties correctly assume that the above provision applies to a resident alien. Compare section 214, which shows that nonresident aliens are not allowed the exemption of $2,500 as head of a family. Article 292 of Regulations 77, promulgated under the Revenue Act of 1932, is as follows:

Personal exemption of' head, of a family. — A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the Act must depend on the character of the separation. If a father is absent on business, or a child or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously mates his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. As to the amount of exemption, see article 291.

The petitioner is an individual who actually supports and maintains in one household one individual who is closely connected with him by blood relationship. His right to exercise family control and provide for this dependent individual is based upon a moral or legal obligation. So far, he clearly comes within the definition of the head of a family contained in article 292. Similar regulations have been approved as proper. Alfred E. Fuhlage, 32 B. T. A. 222. The petitioner and his mother do not reside together continuously and, therefore, under the regulation, the question of whether or not this person with a dependent relative is the head of a family within the meaning of the act “must depend upon the character of the separation.” The regulation gives several examples and draws a distinction between a separation for which there is no necessity and a separation which is occasioned by some necessity, such as business. This petitioner maintained two residences. The only reason that he maintained a residence in the United States was that he had to come here on business. It was not convenient for him to bring his mother with him. The evidence indicates that she was not able to leave home. However, he returned to England and lived with his mother in their home there whenever business permitted. Thus, the character of the separation of this petitioner from his family was such that he would be entitled to the exemption as head of a family under the regulation.

The respondent argues, however, that the following sentence of the regulation is controlling and denies to this petitioner the exemption which he claims: “A resident alien with children abroad is not thereby entitled to credit as the head of a family.” This example might seem at first glance to be the one most nearly like the present case. Cf. Meier S. Block, 37 B. T. A. 945. However, upon further study, we have come to the conclusion that the sentence was not intended to deny the exemption in a situation like the present. A proper interpretation of the sentence would seem to be that a resident alien is not entitled to credit as a head of a family merely because he has children who live abroad, but in his case, like all others, the credit depends “upon the character of the separation.” If it appears, as here, that he has not only a residence in this country, but also a residence abroad; his dependents live in his residence abroad; he lives there with them and is separated from them only because of the necessity of coming to this country during a part of the year to conduct his business, then he would seem to be entitled to the exemption. But however that may be, we conclude that this petitioner is entitled to the exemption as head of a family.

Reviewed by the Board.

Decision will be entered for the 'petitioner.

       Prior and subsequent regulations contain substantially identical provisions.


text:
    Lewis Spencer Morris and United States Trust Company of New York, as Executors of the Last Will and Testament of Emily Pell Coster, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90915.
    Promulgated March 9, 1939.

      John A. Lyon, Esq., and Arthur A. Brody, G. P. A., for the petitioners.

      Thomas H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Smith:

The question for our determination is whether the property belonging to the residuary estate of Charles Henry Coster over which the decedent exercised the power of appointment in her will is includable in her gross estate.

It is provided in section 302 of tbe Revenue Act of 1926, as amended by section 803 (b) of the Revenue Act of 1932, that:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (A) the possession or enjoyment of, or the right to the income from, the property, or (B) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth; * * *

Whether property is includable in tbe gross estate under this provision of tbe statute depends upon whether under the laws of the state having jurisdiction thereof it actually passed to the appointees by reason of the exercise of the appointive power. Helvering v. Grinnell, 294 U. S. 153; Estate of Frederick B. Shepherd, 39 B. T. A. 38.

The respondent has determined that the property in dispute, of an agreed value at the time of decedent’s death of $2,297,370.38, passed under the general power of appointment exercised by the decedent in her will and is therefore includable in her gross estate under the above quoted provisions of the statute. Petitioners contend that under the laws of the State of New York the only property subject to the power of appointment which passed under the exercise of the power by the decedent in her will, and therefore the only property which is includable in the gross estate under section 302 (f) of the Revenue Act of 1926, are the remainder interests of the issue of Helen Coster Train and Maud Salm-Hoogstraeten.

The rule for determining whether property “passes” under the exercise of a power of appointment and is therefore subject to the New York estate tax was stated by the Court of Appeals for the State of New York in In re Duryea's Estate, 277 N. Y. 310; 14 N. E. (2d) 369, as follows:

* * * tbe true rule to be applied can be reached only by an entire disregard of any intention to elect or of what has been termed an election, and may be stated to be that where a person named under the exercise of the power takes the same or less than he would have taken under the original will, if the power of appointment had not been exercised, his interest is taxable in the estate of the donor and not in the estate of the donee. * * *

See also In re Lansing's Estate, 182 N. Y. 238; 74 N. E. 882, cited with approval in Helvering v. Grinnell, supra.

Did the appointees under the decedent’s will by such appointment take the same, or less, of the residuary estate of Charles Henry Coster as they would have taken had the decedent not exercised the power? The will of Charles Henry Coster provides for the residuary estate to be held in trust for the life of his wife, the decedent, “and after the death of my said wife the same to go as she may provide by Will, or, if she leave no Will, to go as the law may provide.” As to this provision of the donor’s will the respondent makes the argument that:

* * * The estates [in remainder after the life estate of the wife] were contingent both as to the takers, who could not be ascertained before the happening of a future event which might not happen, and as to the condition upon the fulfillment of which the estate became vested.
The appointees by virtue of the exercise of the power took vested estates; in default of such exercise they could have taken at most contingent estates “under the original will.”

We think it is clear that the testator’s intention was that upon the wife’s death the remainder of his residuary estate should be distributed in accordance with the laws of the State of New York relating to descent and distribution, unless otherwise disposed of by the wife in the exercise of her power of appointment, by her will.

It is not material to our present inquiry whether the remainder interests, after the wife’s death, vested upon the death of Charles Henry Coster or upon the death of his wife. (For discussion of vested future interests under the laws of the State of New York see William, Korn et al., Executors, 35 B. T. A. 1071, and cases therein cited. See also New York Life Insurance & Trust Co. v. Winthrop, 237 N. Y. 93; 142 N. E. 431.) In either event, under the laws of the State of New York, such interests passed under the will of the prior decedent and not by the exercise of the power of appointment, if the appointees took no more under the exercise of the power than they would have taken otherwise. Helvering v. Grinnell, supra.

The Surrogate’s Court of Orange County, New York, held in a New York estate tax proceeding, In re Coster's Estate, 4 N. Y. S. (2d) 970, that the remainder interests in the residuary estate of Charles Henry Coster over which the power of appointment was exercised by the decedent in her will were not taxable in the decedent’s gross estate. The decision of the court there was based primarily on the fact that a binding compromise agreement had been entered into in a prior year by which the remainder interests in question were taxed in the estate of Charles Henry Coster. The court in its opinion said, however, that:

Obviously, there could ultimately be but one vesting of this remainder, either solely or severally, and it was this vesting that was indeterminable and the tax upon which was thus compromised, for the property passed under the will of the donor of the power and not under that of the donee. Matter of Burch’s Estate, 160 Misc. 342, 289 N. Y. S. 966; Matter of Bradford’s Estate, 159 Misc. 482, 288 N. Y. S. 153; Matter of Stewart, 131 N. Y. 274, 30 N. E. 184, 14 L. R. A. 836; Matter of Harbeck, 161 N. Y. 211, 55 N. E. 850; Edersole v. McGrath, D. C. 271 F. 995.

The fourth paragraph of the court’s syllabus reads as follows:

4. Taxation.
The passing of remainder interest in property by testamentary exercise of a power of appointment given by prior wiE resulted in only one vesting of the remainder, which occurred under prior will, and hence comprise settlement of estate tax due upon such remainder, in proceeding involving the prior will, precluded taxing of the remainder as part of donee’s estate. Tax Law, § 249-r, subd. 7; Laws 1897, c. 284, ¡§ 6, amending Tax Law, § 230; Laws 1900, c. 379.

Charles Henry Coster was survived by his wife and their four children, all of whom survived the wife, and, with the children of two of them, became the appointees under the wife’s will as shown above. It is stipulated in this proceeding (paragraph 16 of the written stipulation) that each of the four children upon the death of the wife would have received a one-fourth equal part of the residuary estate of Charles Henry Coster, amounting to approximately $624,342.60, if the wife had died intestate. This is likewise the interest that each would have received under the will of Charles Henry Coster and under the laws of the State of New York had the decedent, though leaving a will, failed to exercise the power of appointment. It is so alleged in paragraph seven, subparagraph 11, of the petition herein and admitted by the respondent in paragraph 7 of his answer.

By her will the decedent appointed to two of her children, Emily Coster Morris and Charles Henry Coster, a one-fourth interest each in all of the residuary estate of Charles Henry Coster subject to the power of appointment, except for the real estate, and to the other two children, Helen Coster Train and Maud Salm-Hoogstraeten, a one-fourth interest each in trust for life, with the remainder over to their issue. It is stipulated that the value of each of the appointed one-fourth interests was $574,342.60. This is the portion of the property over which the power of appointment was exercised that each would have received under the will of Charles Henry Coster had the decedent failed to exercise the power of appointment. Thus, no one of the decedent’s four children received any more under the appointments than he or she would otherwise have received. Two of them, the two who received an outright one-fourth interest, took exactly the same proportionate parts that they would have taken under the will of Charles Henry Coster, that is, a one-fourth interest, and the other two, who received each a life interest only in a one-fourth share, took a lesser amount.

Petitioner concedes that the remainder interests in the two one-fourth shares of the property which were appointed to the issue of Helen Coster Train and Maud Salm-Hoogstraeten passed under the power of appointment exercised by the decedent in her will and are therefore includable in her gross estate. It is stipulated that these remainder intei'ests had an aggregate value at the time of decedent’s death of $455,246.94.

We are of the opinion that the respondent erred in including in decedent’s gross estate any greater amount than $455,246.94 as representing property passing under a general power of appointment exercised by the decedent in her will.

Judgment will he entered, under Bule SO.


author: Arnold :

text:
    William Lee Tracy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89304.
    Promulgated March 10, 1939.

      F. A. Pike, G. P. A., for the petitioner.

      E. A. Fonjes, Esq., and B. T. Miller, Esq., for the respondent.
   OPINION.

Arnold :

The deductions claimed by the petitioner are allowable, if at all, under section 23 (a) of the Revenue Act of 1934, the pertinent portions of which are set forth in the margin.

It is petitioner’s contention that the bestowal of gratuities on the employees of different studios is an ordinary and necessary expense of a featured motion picture actor. He further contends that his expenditures for meals and lodging while he was away from home in pursuit of his business as a professional actor are deductible as ordinary and necessary expenses of his business. There is no dispute as to the amounts involved, and petitioner is entitled to deduct the entire amount claimed in each instance if he is entitled to any deduction whatsoever.

We will consider first whether the so-called studio gratuities were ordinary and necessary expenses of petitioner’s business. The testimony in this case shows that the distribution of gratuities among studio employees is a customary practice among leading actors and actresses, and petitioner testified that his distribution was a recognition that the studio employees had rendered additional services beyond what was required of them by the employing studio in the production of the picture.

We have considered the right to deduct “tips” in a number of cases, both where the tip formed a part of a larger deduction, and where it was a separate deduction, Lenore Ulric, 27 B. T. A. 666, reversed by mandate of Second Circuit, without opinion, February 14, 1935; Blackmer v. Commissioner (C. C. A., 2d Cir.), 70 Fed. (2d) 255, reversing memorandum opinion of the Board; and Charles Hutchison, 13 B. T. A. 1187.

In Reginald Denny, 33 B. T. A. 738, the amount of the gift was so large that the Board refused to consider it as either an ordinary or a necessary expense without a showing that the services were in some way commensurate with the outlay, citing Welch v. Helvering, 290 U. S. 111.

The success and earning power of motion picture actors depend upon their appeal to the public. Their salaries are based largely on their ability through public popularity to increase box office receipts. Seasonable expenditures, although in the nature of gratuities, designed to improve the quality of their work and enhance their reputation as actors, promote popularity with the public and result in better box office receipts. This in turn enhances the earning power of featured actors. Better cooperation of studio employees tends to that end. It contributes to the build-up of the actors which justifies the studio in paying for their services salaries in proportion to their drawing power. Cf. Blackmer v. Commissioner, supra.

The gratuities given by Tracy were not of such large amounts as to come within the doctrine of the Denny case, supra. None of the recipients of Tracy’s bounty was in his employ and there was no obligation on his part to make the gifts, but they were made in accordance with a custom in the motion picture industry and for a recognized business purpose. It was his association with these studio employees in making pictures and their services for him that prompted the making of the gifts. The gratuity to each was an acknowledgment by petitioner that the extra personal services rendered were of benefit to him in making the pictures. In our opinion there was a direct relationship between the expenditures and petitioner’s business as a professional actor. For the foregoing reasons it is our opinion that the $161 should be allowed as an ordinary and necessary business expense. .

The other deduction in controversy involves $2,600, representing petitioner’s expenses for meals and lodging during 1934. Petitioner’s entire argument with respect to this deduction is based upon his claim that Trucksville, Pennsylvania, is his home, and that while he was in California in pursuit of his business as a professional actor, he was “away from home” within the meaning of the statute. Petitioner’s “home” within the meaning of the controlling statute includes his business location, post, or station, George W. Lindsay, 34 B. T. A. 840; Mort L. Bixler, 5 B. T. A. 1181; and Charles E. Duncan, 17 B. T. A. 1088; affirmed without opinion, 47 Fed. (2d) 1082, and clearly under the facts in this case his “home” was in California. He testified that by 1929 he had definitely determined to pursue a career as a professional actor. Necessarily such a career would have taken bim away from Trucksville, as there were no opportunities there for a professional actor. His purpose in going to California was to pursue his vocation as an actor, particularly in motion pictures. He further testified that during 1933 and 1934 he spent practically his entire time in California pursuing his career. In view of these facts his expenditures for meals and lodging represent his personal living expenses, which are not deductible from gross income. Sec. 24, Eevenue Act of 1934.

In his return for the taxable year the petitioner claimed an exemption of $2,500 as the head of a family. In determining the deficiency he was allowed this exemption but, by an amendment to the answer, respondent asserts that petitioner is entitled only to the exemption allowed a single man, namely, $1,000. The evidence shows that petitioner inherited the family home from his father in 1928, that it was occupied by his mother and his niece, that his'mother had a small independent income, but that more than 50 percent of the funds needed to support the family was provided by petitioner. It further appears that petitioner exercised control so far as the determination of major questions relating to the family home was concerned, and that his mother operated the home and took care of his niece, who was less than 18 years of age.

Section 25 (b) (1) of the Eevenue Act of 1934 provides that the personal exemption “in the case of a head of a family or a married person living with husband or wife” is $2,500. Article 25-4 of Regulations 86 states:

A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the Act must depend on the character of the separation. * * *

This petitioner actually supported and maintained in one household two individuals who were closely connected with him, his mother and niece, and exercised a certain amount of family control over them. He provided the home inherited from his father and approximately $2,500 for their care and maintenance during the taxable year. Petitioner was morally and legally obligated to support his widowed mother to the extent needed, and certainly there was a moral obligation to support Iris dependent niece. The evidence clearly discloses the character of the separation of Tracy from his family. The pursuit of his profession required his presence in California, but we do not understand the regulations or the decided cases to hold that Tracy must have resided with his mother and niece in order to be entitled to the exemption. Cf. Olive Ross, 37 B. T. A. 928, and cases cited. In determining the present deficiency the respondent allowed the petitioner a personal exemption as a head of a family, and in our opinion, the evidence in this case shows that such an exemption is correct.

Reviewed by the Board.

Decision will be entered under Buie 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * *


author: Haeron :

text:
    Gerald A. Eubank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86200.
    Promulgated March 14, 1939.

      Harry J. Budich, Esq., for the petitioner.

      Albert E. Arent, Esq., for the respondent.
   OPINION.

Haeron :

The sole question presented in this proceeding is whether petitioner is taxable upon commissions paid in the taxable year to an assignee. The commissions are of a particular type, i. e., commissions payable by insurance companies upon insurance renewal premiums paid by policyholders to them. Respondent contends that such commissions constitute earned income, “compensation for personal service”, within the definition of gross income as defined in section 22 (a) of the Revenue Act of 1932, set forth below in part, and that such income is taxable to petitioner, regardless of the assignments in earlier years, because he is the person who earned the income.

Respondent urges that the question be considered in its broad aspects rather than upon any possible distinctions between the form of the assignment made in 1924, of the interest in the contract, and of the one made in 1928, of the commissions. Respondent argues that the principle expressed in Lucas v. Earl, 281 U. S. 111, is controlling.

Petitioner contends that he is not taxable on the commissions paid in 1933 upon either or both of the following arguments: (a) He contends that the commissions were fully earned prior to the assignments, his services having been performed fully, so that the assignment was of “past earnings” and, therefore, the tax liability is on the assignee. Petitioner argues that the principle of the Lucas v. Earl case is limited to assignment of earnings only where future services are required, (b) The right to receive future commissions was a type of property in praesenti at the time of the assignments, which may be assigned, and the commissions, when paid, vest in the as-signee and are taxable to him. Petitioner relies on Hall v. Burnet, 54 Fed. (2d) 443. Other cases relied on by petitioner for either or both propositions are Matchette v. Helvering, 81 Fed. (2d) 73; certiorari denied, 298 U. S. 677; Shanley v. Bowers, 81 Fed. (2d) 13; Walter L. Ross, 30 B. T. A. 496; aff'd., 83 Fed. (2d) 18; Julius E. Lilienfeld, 35 B. T. A. 391; Louis Boehm, 35 B. T. A. 1106; Blair v. Commissioner, 300 U. S. 5. These cases are not controlling and are distinguishable.

The notice of deficiency refers to a separate instrument said to relate to a trust and to have been executed by petitioner June 18, 1928. The record does not contain any explanation of this reference, nor any denial of such, and the pleadings raise no question about the use of the commissions in question, so that this is not a case of income attributable to an assignor or settlor by reason of application of the income for his use or benefit. Cf. Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine Railroad Co., 279 U. S. 732; Burnet v. Wells, 289 U. S. 670; Douglas v. Willcuts, 296 U. S. 1, 9; Lucy A. Blumenthal, 30 B. T. A. 591; aff'd., 296 U. S. 552; United States v. L. Manuel Hendler, 303 U. S. 564; Helvering v. Coxey, 297 U. S. 694. And, in the way the question is presented, the burden of proof on petitioner does not extend to proving that the commissions were not under petitioner’s control or were not applied to his use or benefit. Cf. Commissioner v. Grosvenor, 85 Fed. (2d) 2, 3; Bishop v. Commissioner, 54 Fed. (2d) 298; Hall v. Helvering, 68 Fed. (2d) 399. If the question involved is one which should be decided on the principle that earned income is taxable to the earner and that his tax liability may not be escaped by anticipatory arrangements, it will become immaterial, in cases like this, what use is made of the commissions by the assignee. On the other hand, if it should be finally decided by the courts that an effective assignment for income tax purposes can be made of such commissions, relieving the earner-assignor from tax liability, then it will become important, in later cases, to prove that the commissions are not applied to the benefit of the assignor or used according to his control. Cf. Burnet v. Wells, supra, where it was pointed out that tax liability may rest upon the enjoyment of privileges and benefits by the taxpayer so as to require consideration of the ends in the mind of the assignor in combination with assignment of bare legal title.

Taxation of commissions on renewal commissions has been considered in a few cases by this Board and in several cases by the Circuit Courts of Appeal, and the present unsettled state of the law on the question is to be found by reference to these particular cases, set forth in a schedule below for convenience. In all reported cases, this Board has held such commissions taxable to the earner-assignor. In all the cases before the courts, subsequent to the Edwards and Woods cases, the courts have held the commissions taxable to the earner-assignor, except in the Hall v. Burnet case. The Edwards and Woods cases did not involve any question of tax liability of an earner-assignor, for no assignment of commissions was involved in those cases. In all the other insurance commissions cases, the question was essentially the same, although there appear to be some differences in the terms of assignments. It is difficult to find any essential differences in the question before the courts in the cases where assignment of the commissions was made and there is a conflict between the Hall v. Burnet case and the others.

In this proceeding, the assignments executed by petitioner adopted different phraseology. In the 1924 assignment all interest in an agency contract is assigned. In the 1928 assignment all commissions due or to become due and all right to them is assigned. We regard these differences as immaterial in this proceeding because it is evident that in both instances petitioner intended to assign future commissions. No evidence is present to the contrary. The question presented here does not relate to any question arising between the assignor and assignee under the assignments. The question arises out of a conflict between petitioner and the Commissioner over taxation of commissions paid in 1933. It is clear that petitioner in executing the assignments anticipated that commissions might be paid in the future, and he attempted to assign them to another in advance of payment of the commissions. The commissions were paid. It comes to the same thing so far as the tax question is concerned, whether one or the other phrases was used in the assignment as will be shown.

The contracts under which petitioner was an agent of the insurance companies were contracts of employment, in a broad sense. Compensation for services of petitioner consisted, in part, of commissions on renewal premiums which the companies agreed to pay over periods of ten years, more or less, from and after the time the first premium was paid on a policy. While the agency contracts under which petitioner obtained the business giving rise to the commissions were terminated, nevertheless, the contingent obligations of the companies to pay future commissions continued. The companies retained certain rights, among them the right to offset any debt of petitioner against any commissions payable and the right to change the percentage at which commissions should be payable. It is provided that petitioner can not dispose of any interest in the contracts without the consent and approval of the insurance companies.

As for the right to commissions arising out of said contracts and payable after their termination, it is clear that in 1824 and 1928, when the assignments were made, the rights were future rights. No present rights had matured when the assignments were made. The obligations of the insurance companies to pay the premiums could not arise until at a future time when, as, and if policyholders should pay renewal premiums on business obtained by petitioner. His rights to commissions at the dates of the assignments were contingent, unmatured, uncertain, and unascertained. The amounts of future commissions were uncertain. The insurance companies did not accept in writing the assignments of future commissions made by petitioner. They paid the commissions in 1838 to the assignee, but, as far as we know, they were not legally obliged to do so. It appears that, even after making the assignments, petitioner might have collected the future commissions. Cf. Wood v. Commissioner, 74 Fed. (2d) 78. Therefore, it is clear that petitioner had no present matured rights to assign and divest himself of, in 1924 and 1928, and, at best, the assignments were of money not yet due or of a contingent future debt of the insurance companies. No legal title to the future commissions was conveyed in 1924 and 1928, because all that was assigned was a chose in action. Kather, petitioner gave his assignee a power to collect and keep the commissions when they should be paid. Petitioner’s assignee obtained, under the assignments when made, only an equitable interest in contingent, future commissions. “The assignment of future earnings cannot be regarded as an immediate transfer of any property, but the assignee has an authority or power to collect, and an implied agreement on the assignor’s part not to revoke the power.” Williston on Contracts, vol. 1, sec. 414. See also, section 447. From the above, we believe it follows that it comes to the same thing whether one or the other phrases of assignment is used, i. e., all interest in the agency contracts, or the right to receive commissions. It is not enough to describe the assignments as relating to an interest in an existing contract, but it is necessary to consider what present interest the assignments could cover.

From the above, it is difficult to agree with the premise upon which the court in the Hall v. Burnet case arrived at its conclusion. The court in that case found that what was assigned was a species of property that gave rise to future income. The court recognized that if what was sought to be conveyed was personal earnings, such would be taxable to the assignor though he never received it. The line drawn is fine. Commissions on renewal premiums are compensation for personal service and are income within the statutory definition thereof. Woods v. Lewellyn, 252 Fed. 106. When the commissions are paid, they represent compensation for past services, earned income. So do salary and wages. Where salary is payable under a contract of ordinary employment, the right to salary under such contract is a future right that does not mature until salary becomes payable. A right to future salary under a contract of ordinary employment may be validly assigned. So it would seem to follow, from the doctrine of the Hall v. Burnet case, that if an earner should assign all interest in a contract of ordinary employment, consisting of a future right to future salary, it would be said that the assignment was of a property right and not of salary. But, if this were correct, it would not follow that the earner-assignor of the future salary would not be liable for income tax on such salary when it was paid. This would be contra to the rule of the Lucas v. Earl case. That case involved a question of taxation of salary and the problem here is whether to apply the rule of that case to such facts and compensation as is involved in this proceeding. It is worth while to compare the facts briefly.

In 1901 Earl agreed with his wife that any property either had or should acquire in the future should be treated as owned by them as joint tenants, and such property was to comprise earnings, salary, fees, or any rights in contracts and all the proceeds of such property. In 1920 and 1921 Earl received certain salary and fees and he claimed to be liable for income tax upon only one-half thereof. As for earnings, salary, and fees, such were Earl’s property. They„were_ the fruits of his work. The Supreme Court refused to separate the right he had to receive salary from the salary itself or from his work, i. e., to treat the salary as growing out of the contract between Earl and his wife. The Supreme Court did not regard the salary as money produced by the contractual right Earl’s wife had obtained, but viewed it as growing out of Earl’s services.

In this case the assignments were made in 1924 and 1928. The commissions in question were paid in 1938. The commissions were the fruits of petitioner’s past work. We find no grounds here for treating the commissions as growing out of an interest in a contract of employment instead of out of petitioner’s personal services that could not have been found in the Lucas v. Earl case. But why not consider the similarities between this case and the Earl case? The subject there was salary; here, commissions. Both are compensation for personal services. Insurance commissions make up a large part of the compensation of an insurance agent, in addition to whatever salary’he may receive. In a sense, the agent does not “earn” the commissions until third parties pay renewal premiums. JSTo doubt the insurance companies regard the value of an agent’s work in obtaining a new policy as dependent upon how long the policy is maintained. The insurance company elects to pay its agent for his work in obtaining the policy, on a commission basis, over a period of, usually, ten years, or for so long as the policy is maintained, up to ten years. Whether or not the commissions are ever paid depends on the ability of the insurance company to pay them, which in turn depends on whether policyholders pay renewal commissions. Likewise, whether future salary is ever to be paid depends upon the ability of the employer to pay the salary. Therefore, it seems reasonable to regard such commissions as we have here as in the same class with salary. Each is a form of compensation for personal service. Also, to resume the comparison between this case and the Earl case, the assignments made by petitioner in 1924 and 1928 were just as much an “anticipatory arrangement” as was the 1901 contract made by Earl. Here, petitioner anticipated that the commissions would be paid. They were paid. He gave to another the right to collect and keep the premiums. In effect, Earl gave his wife the right to collect and keep one-half of his future salary. We think it should be concluded here that the commissions in question grew out of petitioner’s services and not out of assigned interests in a chose in action, keeping in mind the fact that we are dealing with an income tax question. We believe the doctrine of Lucas v. Earl is applicable here and that the rule of that case extends to commissions that are compensation for personal service and that tax on such commissions can not be escaped by anticipatory arrangements devised to prevent such compensation from vesting in the person who earned them.

If it appears to be a troublesome factor in applying the doctrine of Lucas v. Earl that no further services of petitioner were required to entitle him to receive the commissions, it is nevertheless true that the commissions represented future compensation at the date of the assignments and they were, in a sense, not “earned” until they became payable. Further, where payments are for personal services, it need not be a determining factor, in deciding upon whom tax liability falls, that services have been fully performed. The rule, as we understand it, is that earned income is taxable to the earner. See Blair v. Commissioner, supra; cf. Daugherty v. Commissioner, 63 Fed. (2d) 77; Rossmoore v. Commissioner, 76 Fed. (2d) 520; Chicago Title & Trust Co., Executor, 33 B. T. A. 65; James M. Stokes, Jr., 22 B. T. A. 1386. The definition of gross income is broad and is to be considered in the light of the evident intent of Congress “to use its power to tax to the full extent.” Douglas v. Willcuts, supra. If an earner of income may divest himself of earned income before it is payable, the intent of Congress to tax the earner of income is defeated at the start. Such assignments of future income in the guise of assigning some type of contractual right or an interest in a chose in action may become a device for withdrawing from the Government the benefit of graduated taxes and surtaxes applicable to income when concentrated in a single ownership. Cf. Burnet v. Wells, supra. For purposes of income tax, we believe that earnings are in a separate class from other types of income, cf. Matchette v. Helvering supra, and insurance commissions are a type of earnings.

It has been a guiding principle in the consideration of tax questions that taxation is not so much concerned with refinements of title as it is with the actual benefit for which the tax is paid. Corliss v. Bowers, 281 U. S. 376. And if the rule is made certain that earned income is taxable to the earner, no confusion need arise because in one case an earner assigns his right under a contract to future income and in another he assigns the bare, future income. The rule is bottomed upon the distinction between the source of income earned by the performance of personal services and income produced by interests that clearly are property, separate from the person. Cf. Blair v. Commissioner, supra, where the Court points to a distinction between a beneficial interest and a chose in action. We agree with the conclusion reached in the Van Meter case, supra, that the rules of the Lucas v. Earl and the Corliss cases are opposed to the view expressed in the Hall v. Burnet case and it is concluded here that, while the earner of such commissions as we have here may in a legally binding way dispose of his future earnings, whether they are earned or are to be earned, he does not thereby affect his status as earner, or “his resulting liability for taxation thereon as income.”

It is held that petitioner is taxable upon the commissions paid in the stipulated sum of $15,612.79. Respondent is sustained.

Reviewed by the Board.

Decision will be entered under Rule 50.

MuRdock concurs only in the result.

Aecndell, Leech, and Arnold dissent.

       SBC. 22. GROSS INCOME.
      (a) General Definition. — “Gross Income” Includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived front any source whatever. * * *

       Board cases: Arthur F. Hall, 17 B. T. A. 752; reversed, Hall v. Burnet, supra; James M. Stokes, Jr., 22 B. T. A. 1386. Court cases: Edwards v. Keith, 231 Fed. 110 (C. C. A., 2d Cir.); Woods v. Lewellyn, 252 Fed. 106 (C. C. A., 3d Cir.); Hall v. Burnet, 54 Fed. (2d) 443 (App. D. C.); Bishop v. Commissioner, 54 Fed. (2d) 298 (C. C. A., 10th Cir.); Parker v. Routzahn, 56 Fed. (2d) 730 (C. C. A., 6th Cir.); Fan Meter v. Commissioner, 61 Fed. (2d) 817 (C. C. A., 8th Cir.); Hall V. Helvering, 68 Fed. (2d) 399 (App. D. C.).