Court Opinion

ID: 4608151
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:09.490375+00
Date Added: 2024-06-11T07:53:39.680614
License: Public Domain

ALBERT J. APPELL, EXECUTOR, AND AMANDA APPELL EVANS, EXECUTRIX OF ESTATE OF JACOB APPELL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Appell v. CommissionerDocket No. 7041.United States Board of Tax Appeals10 B.T.A. 1225; 1928 BTA LEXIS 3921; March 8, 1928, Promulgated *3921  Where in construing the decedent's will the court held that the accumulation of income under a tesatmentary trust was invalid and that the beneficiaries were entitled to the income of the trust from the date of the decedent's death, held that said income is taxable to the beneficiaries for the years 1918, 1919, and 1920, and to the petitioners for the year 1917.  Spottswood D. Bowers, Esq., and Benjamin E. Messler, Esq., for the petitioners.  J. F. Greaney, Esq., for the respondent.  MORRIS*1225  This proceeding is for the redetermination of deficiencies in income tax amounting to $1,254.04 for 1917, $1,227.14 for 1918, $9,589.52 for 1919, and $9,545.40 for 1920.  The deficiencies arise from the respondent's determination that the estate, rather than the beneficiaries, is taxable upon certain income for each of the years in question.  FINDINGS OF FACT.  The decedent, Jacob Appell, died December 26, 1915, in the City of New York, where he was a resident, leaving a last will and testament which was duly admitted to probate in the Surrogate's Court, County and State of New York, on January 21, 1916.  By this will he appointed his son*3922  Albert J. Appell, as executor and trustee, and his daughter Amanda Appell (now Amanda Appell Evans), as executrix and trustee.  The son and daughter duly qualified and exercised the duties of their offices.  The major portion of the estate consisted of thirty-five parcels of real estate in New York City and a farm in Westchester County, *1226 N.Y.  The real estate was valued at $755,500 but was encumbered by mortgages amounting to $399,500.  The personal property was valued at $99,231.50.  There were ample funds in the personal property to pay the claims against the decedent, which were all liquidated before December 31, 1916.  By the terms of his will, the testator created a trust for certain specified purposes.  The pertinent provisions of the will, dated July 17, 1895, are as follows: FIRST.  I direct my Executor and Executrix hereinafter named to pay as soon as conveniently may be after my death all my just debts and liabilities.  SECOND.  All the rest, residue and remainder of my property both real and personal of whatsoever kind, to which I may be entitled at the time of my death I give, devise and bequeath to my Executors in trust to collect the rents, issues*3923  and profits of the real estate and the income of the personal property and after paying and deducting all expenses and charges of whatsoever kind to dispose of the net rents and income as follows: First: To pay unto my wife, ROSA, and to each of my children the sum of Eight hundred (800) dollars each per year, payable in equal monthly payments, the issue of any deceased child to take by representation the share their parent would if living have been entitled to: and as to the share of my said wife to pay over the same to her; and as to the share of each of my children to pay over the same to their guardians for their support and maintenance during their minority; and upon each of such children attaining his or her majority to pay over such share to such child; and as to the share of the issue of any deceased child to pay such share to such issue per stirpes and net per capita.  Second, and as to the balance of said net rents and income remaining after the payments as herein provided for in the first subdivision of this second paragraph to create a so-called sinking-fund with which to pay off and discharge the mortgages and other encumbrances of or upon my real estate or to be used*3924  in the improvement of such property.  Third: after such mortgages and other encumbrances shall have been fully paid and discharged out of the balance of said net rents and income as provided for in the second subdivision of the second paragraph, then, in that case, the whole of the net rents and income is to be divided equally among my wife ROSA and all my children share and share alike as named in the first subdivision of the second paragraph of this my Will.  THIRD.  And upon the further Trust, when my youngest child living at the time of my death shall arrive at the age of forty-five (45) years to divide the corpus of my estate equally among all my children, share and share alike, the issue of any deceased child to take per stirpes and not per capita the share their parent would if living have been entitled to; and in the event of such distribution being made during the life-time of my said wife then I direct that the sum of Three thousand (3,000) dollars be paid to her by my said children yearly and each year thereafter during her natural life.  FOURTH.  I authorize and empower my executors hereinafter named to mortgage, lease, sell and convey either at public or private sale, *3925  and to dispose of the whole or any part of my estate at such times and upon such terms and in such manner as to them may seem expedient.  It is my wish that my Executors should endeavor to free from all liens and encumbrances such portions of my real estate as they may deem it advisable to retain and to hold the same for the purposes of the Trusts herein created; and to effect this end I expressly direct them to sell and dispose of my personal *1227  estate and such portion of my real estate as they may deem it inexpedient to retain; it being my opinion that by adopting this course they will secure the safest and best income from my estate.  I further authorize my Executors to alter, repair, and improve any part of my real estate as in their judgment may seem best.  The powers herein conferred upon my Executors shall be exercised by a majority of them or by such of them as shall qualify, the survivor of them their successors or successor.  FIFTH.  The provision herein made for my said wife, ROSA, shall be in lieu of dower and all other claims upon my estate.  SIXTH.  I do hereby nominate and appoint my son, ALBERT J. APPELL, guardian of the persons and estate of my minor*3926  children.  SEVENTH.  I do hereby nominate and appoint as Executor and Executrix and Trustees under this my last Will and Testament my son, Albert J. Appell, and my daughter, Amanda Appell, when she shall attain the age of twenty-one years.  In case of the failure to act or qualify, resignation, death, incapacity to act or removal of any of said persons, I authorize the other Executor or Executrix to fill the vacancy by the appointment in writing duly acknowledged of any other person as such Executor and Trustee; and the person so appointed shall have the same powers, duties and authority as if originally named as Executor and Trustee herein.  The youngest child of the testator became 45 years of age in 1916.  The widow, Rosa Appell, elected to stand on her dower rights rather than take under the provisions of the will, and shortly after decedent's death notified the executor and executrix to that effect.  She prosecuted an action against them to final judgment and it was decreed by the New York Supreme Court that she was entitled to dower in the several parcels of real property therein described, and the court directed the payment to her of $19,666.60 per annum, payable quarterly*3927  during her natural life, as one-third of the rental value of said property for the year 1923.  Judgment in this action was entered November 15, 1923.  The court at the same time decreed that the widow should have "damages herein for the withholding of her dower in said several parcels of property for the period January 1, 1916, to and including December 31, 1921, etc." All the payments provided for by the terms of this judgment were made.  A number of suits were brought in the New York courts either by one or more of the beneficiaries or by the executrix or executor or by both.  One of the first suits was brought by Albert J. Appell for the partition of the real property on the ground that the attempted disposition of the decedent's propery by his last will and testament was invalid.  The Supreme Court of New York, Appellate Division, in its opinion dated April 5, 1917, after stating that, if the disposition of the property was invalid, the testator died intestate as to his real property, and an action for partition would lie, held that the provision for the accumulation of the income and its appropriation to paying off mortgages and encumbrances was invalid, but that *1228 *3928  provision should be eliminated, as so doing would not wholly defeat the intention of the testator.  It further held that by this means the trust provision for the benefit of the widow and children would be preserved, the only effect being that the beneficiaries would be entitled to receive the whole net income from the beginning.  Appell v. Appell, 164, N.Y.S. 246.  Another court action involving this estate was brought by some of the beneficiaries claiming that, as takers of the next eventual estate, they were entitled to the accumulated income, upon the theory that one of the purposes for which the testator erected the trust was void.  The Supreme Court, Appellate Division, under date of January 13, 1922, held: There has been no action or proceeding to have the will construed.  An action was brought by Albert J. Appell for a partition of the real estate on the ground that the entire provision of the will providing for the trust was void, and therefore the testator was to be deemed to have died intestate.  In that action it was determined that one of the trusts was valid, and that, while the other was void, it could be segregated and did not destroy the entire trust * * *. *3929  All that was adjudicated was that Jacob Appell did not die intestate as to his real estate.  All the necessary parties were not before the court for a judicial construction of the will, nor was it determined, if the provision of the will was void, what disposition should be made of the accumulated income.  Therefore it has never been determined that the petitioners were entitled to the "distributive share of an estate." * * * The proper procedure is for the executor and executrix to make their final accounting and in the proceeding ask for a construction of the will.  The decree to be entered therein may direct a disposition of any income accumulated under a void provision of the will, and direct the corpus of the estate necessary to support the valid trusts created by the will to be turned over to the trustees.  (.) Thereafter, and on December 20, 1922, the Surrogate's Court in the City of New York handed down a decree "in the matter of an application for a compulsory accounting in the Estate of Jacob Appell, Deceased, Amanda Appell, Executrix, and Albert J. Appell, Executor, and for an order directing the payment of the distributive*3930  share." The decree in part is as follows: ORDERED, ADJUDGED AND DECREED, that the provision in the will of the testator for the accumulation of income and its appropriation to pay off mortgages is invalid, and further ORDERED, ADJUDGED AND DECREED, that the fund created in trust for the beneficiaries and for the widow is invalid, and further ORDERED, ADJUDGED AND DECREED, that the beneficiaries under will, namely the children of the testator now living, are entitled to receive the whole income from the time of the death of the testator and from its inception, and it is further ORDERED, ADJUDGED AND DECREED, that upon failure of the provisions accumulating income to pay off mortgages and other encumbrances, such income is vested to those entitled to it, and next of issue, and on the death of the testator such beneficiaries were and now are the children of the testator, to wit: Emelia A. Sauer, Albert J. Appell, Anna T. Appell, Robert W. Appell, Matilda Appell, *1229  and Amanda Appell Evans, each one of whom is entitled to a one-sixth share of the net income.  Prior to the decree on December 20, 1922, there had been no final accounting nor had the executor and executrix*3931  received their discharge.  The respondent determined that for 1917 the net income of the estate was $32,577.58, of which $10,799.52 was taxable to the widow and the other beneficiaries, leaving a balance of $21,778.06 taxable to the estate or trust.  As to the remaining years the parties stipulated "that the department, in figuring the 1918 income at $11,407.11, took into consideration the deduction of $6,500 paid to the widow and $799.92 to each of the six beneficiaries, in other words, the income before said deductions was $25,370.64.  In 1919 the gross income of the estate was $63,072.25, from which the Government deducted $6,500 paid to the widow, $799.92 to each of the six beneficiaries, leaving a balance of $51,872.73 on which a tax was demanded.  In 1920 the net income was $65,502.77, from which there was deducted $8,500 paid to the widow and $865.58 paid to each of the six beneficiaries, leaving a balance of $51,803.29, taxable to the estate on which the Government is now asking a tax." OPINION.  MORRIS: The error alleged by the petitioners is that the respondent erroneously held that the income of the trust fund, except that actually distributed to the beneficiaries*3932  during the taxable years, was taxable to the estate.  The respondent contends that, with respect to the deficiency for 1917, since the beneficiaries were required only to return so much of the income as was actually distributed to them, it necessarily follows that the trustees were liable for the tax on the income not distributed, and with respect to the other years in question an examination of the will discloses that the trust created therein is one for accumulation and therefore the trustees were properly taxed on the amount of the income not actually distributed by them.  He further contends that, although the trust provision for accumulation was subsequently held to be void, during the taxable years in question no part of the income in excess of that provided for in the provision of the trust was actually distributed to the beneficiaries and at no time during these years were they able to demand nor had they any right to enforce the payment to them of any part of the income in excess of that actually paid.  Section 2(b) of the Revenue Act of 1916 reads in part as follows: (b) Income received by estates of deceased persons during the period of administration or settlement of*3933  the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or *1230  any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be distributed.  Section 219 of the Revenue Act of 1918 reads in part as follows: (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including - (1) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * * *3934  (3) Income held for future distribution under the terms of the will or trust; and (4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, * * * * * * (c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary.  In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.  (d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed*3935  or not, of the net income of the estate or trust for the taxable year.  * * * The testator in his will, after providing for the payment of all his just debts and obligations, which payments were made from the personal property prior to December 31, 1916, left all the rest and residue of his estate to his executors in trust to collect the rents, etc., and, after deducting the expenses connected therewith, to pay annually out of the income a certain amount to his wife and to each of his children, to set aside in a sinking fund the balance of the income for the purpose of discharging the mortgage indebtedness upon the realty, and after the discharge thereof to divide all of the income among his wife and children, share and share alike.  The will provided that the corpus of the estate should be divided among his children, share and share alike, when his youngest child *1231  should reach the age of 45 years, which event occurred in 1916, but the estate was not so divided.  A number of actions were brought in the courts, in one of which the wife, having elected to take her dower in lieu of the provision in the will, was awarded $19,666.60 per annum in 1923, together with damages*3936  from January 1, 1916.  These payments were made.  In another action "in the matter of an application for compulsory accounting * * * and for an order directing the payment of the distributive share," the court handed down a decree on December 22, 1922, in which it held the provisions of the trust for the accumulation of income for the extinguishment of mortgages and for the beneficiaries were invalid, and that the beneficiaries under the will were entitled to receive the whole income from the time of the death of the testator.  The effect of the above decision, as we construe it, is that the trust was not void, but only those provisions providing for the accumulation of income.  The fact that such decision was rendered after the taxable years in question does not, in the opinion of the respondent, affect the taxability of the trust during those years on the income which under the provisions of the will was to be accumulated.  We can not agree with his position.  In McCaughn v. Girard Trust Co. (Circuit Court of Appeals, Third Circuit, decided April 27, 1927), 19 Fed.(2) 218, the contention of the Government was that when the taxes in question were laid, the trust*3937  provisions of the will were then in force, and that the Government was entitled to levy its tax according to the then situation, and, consequently, to tax the income as accruing to the estate in gross as a trust.  The court held: We are of opinion that the taxation acts as to estates were passed by Congress with appreciation of the fact that, as a practical administrative question, estates would often be in an undetermined situation incident to subsequent litigation as to rights thereto, and the taxation liability could not in such cases be fairly determined and justly laid until such disputed questions were determined.  In the light of this practical consideration, we are of opinion the taxpayer's right and liability depended on facts, and not on appearances; that such facts, though subsequently determined by judicial decree, justly referred back, in this case, for example, to the date of the testator's death, and the rights which then, as found by subsequent decree really accrued.  As finally determined in the instant case the trust was not one for the accumulation of income, or one in which the trustees were granted discretion as to the distribution, but the income was vested*3938  in the beneficiaries and they were entitled to receive the same from the date of the testator's death.  That right, although subsequently determined, fixed the status of the income for the taxable years in question.  Section 219(a)(4) of the Revenue Act of 1918 provides that the tax imposed by sections 210 and 211 shall apply to the income of *1232  any kind of property held in trust, including income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and subdivision (d) of the same section provides that in cases under paragraph (4) of subdivision (a) the tax shall not be paid by the fiduciary.  In our opinion the income in question for the years 1918, 1919 and 1920, falls within the above provisions and is therefore not taxable to the petitioners.  Counsel for the respondent calls our attention to the , and , wherein the important consideration in our conclusions was whether the trustee had actually distributed the income or not during the taxable years involved, and argues that in the instant case, as there was no*3939  distribution of the income in question during the taxable years, the income is taxable to the petitioners.  Those appeals involved trusts wherein the trustee had discretionary power of distribution.  In this proceeding no such power was vested in the trustees, but as already pointed out the beneficiaries were entitled to the income of the trust from the date of the decedent's death. The situation in regard to the undistributed income for the year 1917 necessitates separate consideration due to the difference in the wording of section 2(b) of the 1916 Act and section 219 of the 1918 Act.  Section 2(b) provides that the income of any kind of property held in trust shall be taxed to the trustee, except when the income is returned for the purpose of the tax by the beneficiary, "Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be distributed." Thus it will be seen that under the above section the only provision for the payment of the tax by the beneficiary is where the beneficiary has*3940  returned the income for the purpose of the tax.  In all other cases the income is to be assessed to the executor, administrator, or trustee.  The proviso does not designate another person against whom the tax is to be assessed, but provides that where the income is to be distributed annually or regularly between the beneficiaries the rate of tax and method of computation is to be based upon the amount of the individual share to be distributed, rather than upon the income of the trust in bulk.  We are therefore of the opinion that for the year 1917 the petitioners are taxable upon all the income in question.  See McCaughn v. Girard Trust Co., supra; and ; 6 Am.Fed. Tax Rep. 6663. Judgment will be entered on 10 days' notice, under Rule 50.