Court Opinion

ID: 4623003
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:51:59.997453+00
Date Added: 2024-06-11T07:56:16.839416
License: Public Domain

John B. Paine, Petitioner, v. Commissioner of Internal Revenue, RespondentPaine v. CommissionerDocket No. 111499United States Tax Court2 T.C. 179; 1943 U.S. Tax Ct. LEXIS 129; June 22, 1943, Promulgated 1943 U.S. Tax Ct. LEXIS 129">*129 Decision will be entered under Rule 50.  Under the terms of a will creating a testamentary trust of which petitioner was the income beneficiary, a class of trust income was under the discretion of the trustees to decide whether it should be treated as income or principal, and the decision of the trustees as to what constituted trust income was final.  During the taxable year some of the trust income consisted of this special income, but the trustees did not decide during the taxable year whether it should be treated as income or principal of the trust.  The trustees made their decision in April of the following year when they credited all of such income to the income account of petitoner.  Held, that the special income was not deductible in the taxable year by the trustees from the gross income of the trust under section 162 (b) or (c) of the Revenue Act of 1938, and petitioner was not required to include the amount thereof in his gross income for the taxable year. J. W. Townsend, Esq., for the petitioner.E. L. Corbin, Esq., for the respondent.  Harron, Judge.  HARRON 2 T.C. 179">*180  Respondent determined a deficiency in income tax for the year 1938 in the amount of $ 1943 U.S. Tax Ct. LEXIS 129">*130  907.69.  Petitioner concedes that respondent properly disallowed a deduction of $ 900 for charitable contributions.  Respondent concedes that he erred in disallowing a deduction for commissions in the amount of $ 132.71.  The only question to be considered is whether petitioner is taxable upon some of the income of a testamentary trust of which he was the income beneficiary. Respondent added the amount of $ 1,903.83 to petitioner's income as income which was distributable to him during 1938.  The parties have agreed that $ 378.32 of the above amount represents nontaxable income.Petitioner filed his income tax return for the year 1938 with the collector for the district of Massachusetts.FINDINGS OF FACT.Petitioner resides in Boston, Massachusetts.  He keeps his books and reports his income on the cash basis.Petitioner's father, Charles J. Paine, died in 1916 and his will was duly proved and allowed in the Probate Court of Middlesex County, Massachusetts, on January 11, 1917.  Under the will of Charles J. Paine, his residuary estate was devised to trustees in trust.  During the year 1938, and previously, the trustees held for petitioner a share in the residuary estate in trust, 1943 U.S. Tax Ct. LEXIS 129">*131  and they were to hold that share in trust during his lifetime, having previously distributed to him the other part of his share of the residuary estate to which he became entitled when he reached the age of 30 years, which was on April 19, 1900.  The material terms of the will of petitioner's father are as follows:* * * As to the share of each son of mine living at my decease, to hold the same until such son attains the age of thirty years, paying over to him the net income thereof, and as each such son attains the age of thirty years, to transfer, pay over and convey to him one-half of the principal of his share, and to hold the other half of his share during his natural life, paying over to him the net income thereof, and on the decease of each such son to transfer, pay over and convey such other one-half of the principal of his share, or the whole thereof, if he die before attaining the age of thirty years, to such person or persons, and in such amounts and proportions, in trust or otherwise, as he by his last will and testament or any instrument of appointment in the nature thereof, duly established, may direct and appoint.  [Italics added.]2 T.C. 179">*181  The will also contained1943 U.S. Tax Ct. LEXIS 129">*132  the following authorization to the trustees:* * * I authorize my trustees to retain as income any dividends from mines or other wasting investments, or to treat such dividends, and any extra or unusual dividends, as capital in their discretion, and the decision of my trustees as to what constitutes net income shall be final.The trustees carried an account on their books in the name of petitioner, to which they made credits of income at various times.  The account was set up to show a principal account and an income account. Whatever the trustees determined to be principal, under their discretionary power under the will, was entered as a credit to principal in the petitioner's account, and whatever they determined to be income, was entered as a credit to income in the account.  All of the income of the trust, other than the special receipts from mines, wasting investments, and extra or unusual dividends, was credited to income in the account in the year of receipt.The trustees were advised in 1937 by a revenue agent to set up a special account on their books as a suspense account in which receipts from mines, wasting investments, and extra or unusual dividends would be carried 1943 U.S. Tax Ct. LEXIS 129">*133  pending the decision of the trustees on whether to treat such receipts as principal or income.  The suspense account was set up on the trustees' books in December of 1937, and at the end of 1937 it showed a balance of $ 2,779.25, no part of which was transferred by the trustees to either principal or income in petitioner's account during 1937.  On March 1, 1938, the trustees transferred $ 2,779.25 to income in petitioner's account by appropriate book entries.During 1938 the trustees received dividends from the United States Smelting, Refining & Mining Co., Kennecott Copper Corporation, and Calumet & Hecla Copper Co., in the total amount of $ 1,973.75.  (The parties are agreed that of this sum $ 69.92 represents depreciation, leaving a net amount of $ 1,903.83.) None of these receipts from mines was credited to income or to principal in petitioner's account during 1938, and no part thereof was paid to petitioner in 1938.  The entire amount was carried in the suspense account during 1938 and the balance of the account at the end of 1938 was $ 1,973.75.  On April 1, 1939, the trustees transferred $ 1,973.75 to income in petitioner's account.In their fiduciary return for 1938 the trustees1943 U.S. Tax Ct. LEXIS 129">*134  reported the receipts from mines which were received during 1938 and carried in the suspense account during that year, and they paid tax on such receipts.  Petitioner did not include in income in his individual return for 1938 any of the net amount of $ 1,903.83.  Exclusive of that amount, petitioner reported trust income in his return for 1938 in the amount of 2 T.C. 179">*182  $ 16,045.11.  In his audit of petitioner's return for 1938, respondent added $ 1,903.83 to income as trust income which was distributable in 1938 to petitioner.OPINION.The parties are agreed that the net receipts in the amount of $ 1,903.83 were "dividends from mines" and, as such, were in the class of receipts which, under the will of petitioner's father were subject to the trustees' decision to treat them as income or principal of the trust.  Petitioner argues that the receipts in question did not become trust income during 1938, the year of receipt, because the trustees did not make any decision in that year to treat them as income.  Petitioner was entitled to receive the net income of the trust.  Petitioner contends, however, that with respect to the special class of receipts from mines, etc., he had no right1943 U.S. Tax Ct. LEXIS 129">*135  to receive them until the trustees made the decision, which they were authorized to make, that the receipts should fall into income.Respondent contends that the receipts became vested in petitioner and subject to his demands as trust income at the end of 1938 upon the failure of the trustees during 1938 to add them to principal.  Respondent takes the view that the trustees were obligated to exercise their discretion and make their decision within the year of the receipt because petitioner was entitled to receive the net income of the trust, and the trustees could not put off from year to year the making of their decision as to what constituted principal and income.  Respondent refers to the rule that "The test of taxability to the beneficiary is not receipt of income, but the present right to receive it." .Respondent contends that the question is whether the receipts from mines in the taxable year were "income * * * which is to be distributed currently by the fiduciary to the beneficiaries." If they were such income, they were deductible by the trustees in their return and were to be "included in computing the net1943 U.S. Tax Ct. LEXIS 129">*136  income of the beneficiaries whether distributed to them or not." Sec. 162 (b), Revenue Act of 1938.The question must be decided under the terms of the will creating the trust of which petitioner is the beneficiary. The will provided that the trustees were to pay over to a beneficiary the "net income" of the testamentary trust. The terms of the will contemplated, however, that certain kinds of receipts, to wit, "any dividends from mines or other wasting investments, and any extra or unusual dividends" should constitute a special class of receipts, and that the trustees should decide whether to treat such receipts as income or capital.  The will provided that "the decision of my trustees as to what constitutes net income shall be final." It would appear to follow that until the trustees exercised 2 T.C. 179">*183  their discretion and made their decision with respect to any receipts which came within the special class, no present right could vest in the income beneficiary of the trust to receive such special receipts.  The will did not require the trustees to exercise their judgment within any stated period of time.  Here there was no great delay.  The decision was made in the early part1943 U.S. Tax Ct. LEXIS 129">*137  of the year following the payment to the trustees of the special receipts.  Until the trustees made their decision, the receipts could not constitute income of the trust.  The clause of the will which made a class of trust receipts subject to the trustees' discretion permitted, in our opinion, the holding of such receipts pending the making of the decision, and the receipts could not become income of the trust "which is to be distributed currently" until the trustees made their decision.  The trustees did not until April 1, 1939, make their decision with respect to the special class of dividends which were received in 1938.  It is held that the net amount of $ 1,903.83 was not income of the trust to be distributed currently during the year 1938, and that it was not required by the terms of the will to be currently distributed to the beneficiary. It was taxable to the trust in 1938, and not to petitioner.Section 161 imposes the tax liability for trust income primarily upon the fiduciary. Section 162, however, provides for specific deductions in computing the net income taxable to the fiduciary. Under section 162 (b) income is deductible by the fiduciary "which is to be distributed1943 U.S. Tax Ct. LEXIS 129">*138  currently by the fiduciaries to the beneficiaries," and the amounts so allowed as deductions shall be included in computing the net income of the beneficiaries, "whether distributed to them or not." As the amount in question was not income of the trust in 1938 which was to be currently distributed to the beneficiary, section 162 (b) does not apply here.Section 162 (c) 1 allows deduction by the fiduciary of income which, in his discretion, may be either distributed or accumulated and which is by him "properly paid or credited during such year" to a beneficiary. None of the special receipts were credited to trust income or to petitioner during 1938.  They could not properly be credited to petitioner during 1938 because the trustees had not decided in 1938 to treat the receipts as income.  Section 162 (c) does not apply here.  2 T.C. 179">*184  Since none of the special dividends received in 1938 were deductible by the trustees in their 1938 fiduciary return, the petitioner was not required to include the sum in question in his gross income for 1938.1943 U.S. Tax Ct. LEXIS 129">*139  Respondent's determination is reversed.Petitioner relies on . The facts there are substantially different from the facts here, and that case is not controlling in and of itself.  It affords some authority for the result reached here, however, in that here we find nothing in the clause of the will placing a special class of trust income within the discretion of the trustees as characterizing such income as currently distributable immediately upon failure of the trustees to add it to principal; "nor do we find any provision directing the immediate addition by the trustee of the income to the principal, the failure of which would necessarily be the event automatically converting it into income to be 'distributed currently' to the beneficiaries." See page 187 of the report in the Orthwein case.Decision will be entered under Rule 50.  Footnotes1. SEC. 162. NET INCOME.The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that --* * * *(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.↩