Court Opinion

ID: 4481385
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:52.031332+00
Date Added: 2024-06-11T14:54:00.737133
License: Public Domain

Tietjens, Judge'. The respondent determined deficiencies in the income taxes of Mildred Bruchmann as follows: [[Image here]] We must decide whether she was taxable in the years 1949 through 1955 on certain trust income which was not distributed until 1962, after a judicial determination that she was an income beneficiary of the trust. If we decide that she was, then we must decide whether certain expenses, allocable to the judicial determination and deducted by the trustee from its ultimate distribution, should reduce any trust income found to be includable in Mildred Bruchmann’s gross income for the years in issue. FINDINGS OF FACT Some of the facts have been stipulated, and those facts are so found. The petitioner, First National Bank of Rock Island, administrator, had its address in Rock Island, Ill., at the time the petition was filed in this case. On August 28, 1964, it filed Federal income tax returns, using the cash receipts and disbursements method of accounting, on behalf of Mildred Bruchmann for the years 1949 through 1955, with the district director of internal revenue, Chicago, Ill. Mildred Bruchmann, nee Ann Mildred Anderson, was legally adopted by Phillip Bruchmann and his wife Elizabeth on October 9, 1912. In 1949, Mildred Bruchmann was adjudicated an incompetent. In 1952, the petitioner was appointed conservator of her estate and acted in such capacity until her death on April 11, 1959. On or about May 5, 1959, the petitioner was granted a letter of administration as administrator of the Estate of Mildred Bruchmann and is the duly qualified and presently acting administrator of the estate. On July 21, 1922, John Brockman, hereinafter referred to as the settlor, an uncle of Phillip Bruchmann, established a trust with the Security Trust & Savings Bank of Los Angeles, Calif., the successor of which is hereinafter referred to as the trustee. The settlor reserved a life estate in the trust property and the right to revoke the trust during his lifetime. The settlor died on March 29,1925. Under the terms of the trust, after the settlor’s death, the trust property was to be disposed of in various Ways. Since we are only concerned with the disposition in trust of a portion of the trust property, we will hereinafter refer to such disposition in trust as the trust and the property subject to such trust as the trust property. Upon the settlor’s death, the trust property was to be held for 24 nieces and nephews of the settlor. Phillip Bruchmann was one of the nephew beneficiaries of the trust. The trustee was to pay the net income of the trust in equal shares to the nieces and nephews quarterly each year. Upon the death of a nephew, his share of the trust income was to be paid to his widow for as long as such widow remained alive and unmarried. Upon the death or remarriage of the widow, the nephew’s share of the trust ’income was to be paid to his “issue.” Upon the death of all of the nieces and nephews, the trust was to terminate and the corpus and all undistributed net income were to be distributed to the surviving “lawful issue of the bodies” of the nieces and nephews. Phillip Bruchmann died on September 19, 1940, and was survived by his widow, Elizabeth Bruchmann, and his daughter, Mildred Bruchmann. Elizabeth Bruchmann died, not having remarried, on July 6, 1949, survived by Mildred Bruchmann. Except for one child who died in infancy, Phillip Bruchmann had no other children, either natural or adopted, except for Mildred Bruchmann. In 1952, the trustee instituted suit in the Superior Court of the State of California, County of Los Angeles, for declaratory and other relief respecting the trust. One of the questions raised by the trustee was whether adopted children were to be considered as “issue” and “lawful issue of the body” for purposes of the trust. The petitioner, as conservator of the Estate of Mildred Bruchmann, filed an answer requesting the court to find in the affirmative with respect to the above question. The effect of such a finding would have been that Mildred Bruchmann was an income beneficiary of the trust and was capable of becoming a residuary beneficiary when all the nieces and nephews had died. On July 13, 1956, the court entered its findings of fact and conclusions of law determining that, for purposes of the trust, adopted children should be considered as “issue” but not as “lawful issue of the body.” The effect of these holdings was to make Mildred Bruchmann an income beneficiary of the trust but to deny her any chance of becoming a residuary beneficiary. During the years 1949 through 1955, the trustee impounded Mildred Bruchmann’s distributive share of the trust income. The amounts impounded, computed without regard to certain expenses incident to the litigation, were as follows: [[Image here]] In 1962, after the time for appeal in the California litigation expired, the trustee distributed $23,573.92 to the Estate of Mildred Bruchmann. This amount represented the income that accrued to Mildred Bruch-mann from 1949 through 1955 of $41,274.95, less $17,701.03, which, in accordance with the court determination, was withheld by the trustee as her share of attorney and trustee fees and expenses incident to the litigation. All such fees and expenses were disbursed by the trustee in the years 19'59 through 1962. OPINION The principal issue for decision is whether Mildred Bruchmann was taxable in the years 1949 through 1955 on her share of the income earned by the trust in those years, even though it was not distributed by the trust until 1962. Section 641(a) of the Internal Revenue Code of 1954,1 provides in pertinent part : (a) Application op Tax. — The taxes imposed by this chapter on individuals shall apply to the taxable income of estates or of any kind of property held in trust, including — . (1) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) income which is to be distributed currently by the fiduciary to the beneficiaries, * * * Section 651(a) provides: (a) Deduction. — In the case of any trust the terms of which— (1) provide that all of its income is required to be distributed currently, and (2) do not provide that any amounts are to be paid, permanently set aside, or used for the purposes specified in section 642(c) (relation to deduction for charitable, etc., purposes), there shall be allowed as a deduction in computing the taxable income of the trust the amount of the income for the taxable year which is required to be distributed currently. * * * Under section 652 “the amount of income for the taxable year required to be distributed currently by a trust described in section 651 shall be included in the gross income of the beneficiaries to whom the income is required to be distributed, whether distributed or not.” Substantially similar provisions were included in the Internal Revenue Code of 1939.2  Section 641 makes clear that all the income of the trust is subject to taxation, including that which is accumulated and that which is currently distributable. Without doubt, the income of the trust which was set aside for Miss Bruchmann was includable in the trust’s income under section 641. The real issue in the case is whether the tax burden on such income is to be borne by the trust or whether it can be shifted to the beneficiary, and the answer to that question depends upon whether the trust is entitled to a deduction for such income. The language of section 641 has no relevancy in answering that question. Rather, the answer depends upon whether such income is “required to be distributed currently” within the meaning of section 651. Manifestly the terms of the trust provide that all of its income is required to be distributed currently. There is no suggestion in this case that resort to local law for construction of the trust terms could result in any determination other than a finding that the income was required to be distributed currently, either to Mildred Bruchmann or to the other income beneficiaries. On the other hand, the trustee during the taxable years in question was uncertain as to whether Mildred Bruch-mann was entitled to receive a share in the income or whether the other income beneficiaries were entitled to receive such share. Accordingly, under State law, until he could secure an interpretation of the trust instrument, the trustee could not be compelled to distribute the income either to Mildred Bruchmann or to the other income beneficiaries. Bogert, Trust and Trustees, sec. 814 (2d ed. 1962); 2 Scott, Trusts, sec. 182 (3d ed. 1967). See also Feldmeier v. Superior Court, 12 Cal. 2d 302, 83 P. 2d 929 (1938). Instead he impounded the income awaiting determination of Mildred Bruchmann’s claim to it. We hold the trust income was, nevertheless, “required to be distributed currently” within the meaning of section 651, entitling the trust to a deduction therefor, and within the meaning of section 652(a), causing the income to be taxable to the beneficiary (Mildred Bruehmann) to whom the income was required to be distributed. The statutory scheme we are dealing with is one for the allocation of the tax burden as between the trust on the one hand and its income beneficiaries on the other. It distinguishes between income which is to bo distributed currently (whether distributed or not), on the one hand, and income which may be accumulated in trust on the other. This allocation may safely be made and the trust be shown entitled to the deduction provided by section 651 when the terms of the trust provide that all of its income is to be distributed currently and there is no provision for accumulation. That is the case we have before us. In fact the income in this case was impounded, awaiting actual distribution to the income beneficiaries entitled to receive it. The income was “out of the trust,” and it seems reasonable that the trust should be allowed the deduction. At the same time, the statutory scheme clearly contemplates that the income is to be taxable to somebody in the years it is received. Section 652 taxes such income to the beneficiaries to whom it is required to be distributed, whether distributed or not. The subsequent determination of her claim established that Mildred Bruehmann was such a beneficiary. We hold the income was taxable to her in the years it was required to be distributed to her. We think this conclusion is dictated by the holdings of Mary Clark DeBrabant, 34 B.T.A. 951 (1936), affd. 90 F. 2d 433 (C.A. 2, 1937); Estate of Robert A. Dula, 23 T.C. 646 (1955), affirmed sub nom. Polt v. Commissioner, 233 F. 2d 893 (C.A. 2, 1956); and United States v. Higginson, 238 F. 2d 439 (1956), which we follow. The reasoning of those cases is clear and can be gained from the reading. It need not be repeated here. See also Robert F. Chapman, 3 T.C. 708 (1944); F. T. Bedford, 2 T.C. 1189 (1943), affd. 150 F. 2d 341 (C.A. 2, 1945); Thalia W. Malcom, 36 B.T.A. 358 (1937), affd. 97 F. 2d 281 (C.A. 2, 1938) ; Rev. Bul. 62-147, 1962-2 C.B. 151. On the secondary issue we hold that Mildred Bruehmann, a cash basis taxpayer, is not entitled to deductions during the taxable years 1949 through 1955 for the attorney and trustee fees and expenses incident to the litigation which were disbursed from the impounded income by the trustee in the years 1959 through 1962. Reviewed by the Court. Decision will be entered for the respondent. Fat, /., dissents.   All statutory references are to tlie Internal Revenue Code of 1954 unless otherwise indicated.    SBC. 16a. IMPOSITION OF TAX. (a) Application op Tax. — The taxes imposed by this chapter upon individuals shall apply to the income of estates or of any kind of property held in trust, including— (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; ****** * SBC. 162. NET INCOME. The net income of the estate or trust shall he computed in the same manner and on the same basis as in the ease of an individual, except that — • ****** * (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *