Court Opinion

ID: 4624136
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:32.169558+00
Date Added: 2024-06-11T08:00:01.121802
License: Public Domain

ST. LOUIS UNION TRUST COMPANY, RICHARD MCCULLOCH AND LAWRENCE A. OLWELL, TRUSTEES U/W OF JOHN I. BEGGS, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.St. Louis Union Trust Co. v. CommissionerDocket Nos. 94213, 94214.United States Board of Tax Appeals40 B.T.A. 165; 1939 BTA LEXIS 887; June 29, 1939, Promulgated *887  1.  On facts, held testator's intention gathered from his entire will was to create four separate trusts rather than one trust, thus entitling trustees to file separate returns.  2.  On facts, held testator's intention was not to create an annuity for his daughter payable at all events, and payments of income are deductible by trustees.  3.  Where testator by his will directed trustees to maintain and operate an extensive summer residence for the "use and occupancy" of his daughter during her life, held trust was not thus engaged in business and expenses incurred in this manner are not deductible as ordinary and necessary business expenses.  4.  Where testator's will directed petitioners as trustees arbitrarily to credit each grandchild with certain sums "as interest", although not part of current estate income, held deduction of such sums is not authorized by section 162, Revenue Act of 1934.  Henry J. Richardson, Esq., and C. Powell Fordyce, Esq., Samuel W. Fordyce, Esq., and John Lewis Kelly, Esq., for the petitioners.  W. H. Schwatka, Esq., Thomas R. Charshee, Esq., and Max Turner, Esq., for the respondent.  OPPER*888 *166  These proceedings were brought for a redetermination of deficiencies in petitioners' income tax in the sums of $12,253.05 and $93,822.39 for the calendar years 1934 and 1935, respectively.  Petitioners allege an overpayment of taxes in the sums of $5,635.77 and $29,142.14 for the respective years.  The primary questions presented are (1) whether the will in question created one trust or several; (2) whether under section 162, Revenue Act of 1934, petitioners can deduct as income distributed to the beneficiary of a trust sums currently distributed to testator's daughter out of income in the years in question, pursuant to a provision of the will, or whether the payment was an "annuity"; (3) whether petitioners, as trustees, are entitled under section 23, Revenue Act of 1934, to deduct depreciation and all expenses entailed in maintaining estate property as a home for the use and occupancy of testator's daughter pursuant to the will; and (4) whether petitioners can deduct under section 162, Revenue Act of 1934, sums directed by the will to be allowed each grandchild "as interest" on the accumulated undistributed incomes of their respective trusts.  FINDINGS OF FACT.  *889  The facts are found as stipulated, and for present purposes the following summary is sufficient.  Petitioners are the duly appointed and acting trustees under the will of John I. Beggs, who died October 17, 1925.  As such cotrustees they are the residuary legatees under the will.  The members of decedent's immediate family at the date of his death were Mary G. B. McCulloch, his daughter, then 51 years of age; Richard McCulloch, his son-in-law, then 56 years of age; and three grandchildren, namely, John I. B. McCulloch, then 16 years of age; Robert P. McCulloch, then 14 years of age; and Mary Sue McCulloch, then 12 years of age.  *167  On May 27, 1930, petitioners, as executors under the will, having substantially completed their administration, and having distributed to themselves as trustees the residue of decedent's estate, were discharged as executors.  Specific controversial parts of the will are sections 8, 9, 10, and 11 of the pertinent provisions of which the following is a summary: By section 8 the testator directed his executors to pay his daughter an income at the rate of $30,000 a year, "payable in equal quarterly installments on or as of the first day of*890  each calendar quarter" during the period of administration, and similarly after the death of his daughter to pay her husband $1i,000 a year for so long as testator's youngest surviving grandchild was under the age of 25 years, or $6,000 a year should all the grandchildren be over the age of 25 or deceased.  By section 9 the testator transferred the remainder of his entire estate to trustees, stating in the second paragraph thereof that the trust "is created and shall continue principally, first for the use and benefit of my daughter, for and during her natural life, and for my grandchildren." He directed his trustees to "select and set apart moneys, securities, assets and property amply sufficient, in their judgment and discretion, as well as to the character as to the amount, to serve and sustain, out of the net income thereof" the continuance of the $30,000 per annum payment to his daughter for her life, or the alternative provisions for his daughter's husband, and "The maintenance, operation, insurance, taxes, assessments and general charges of and on my said 'Beggs Isle' property, as hereinbefore described, for so long as said property shall be retained by the Trustees of my*891  residuary estate and for the general requirements and purposes of the estate not specifically enumerated." Testator directed that this "specific trust shall be separately held, administered, invested, reinvested * * *." Upon the entire or partial termination of such trust, as provided in the will, the trustees were to turn the released funds over to the general residuary trust estate, or to the "trusts created and still maintained for my grandchildren * * *." Section 10 provided that the remainder of "the entire trust estate shall be held together as a whole, and in proportions for my grandchildren, to-wit; if there be only one grandchild, the entire trust estate shall be held for such grandchild.  If there be more than one grandchild, the entire trust estate shall be held together, but in undivided proportions, so that one portion shall be held in trust for each of my grandchildren, and one portion in trust for the descendents per stirpes of each deceased grandchild or grandchildren." *168  Payment was directed "out of the net income of the respective trusts" for decedent's grandchildren of amounts for their support, education, and reasonable pleasure until they respectively*892  become 25 years of age, at which time the trustees were directed to expend amounts necessary or advisable to assist them in business or professions, and at that time the trustees in their discretion were also to pay the grandchildren out of their respective trusts $50,000.  At 30 years of age they were to get $100,000 and at 35 years $350,000.  As the respective grandchildren became 40 years of age the fifth paragraph of this section provides that the trust as to them would terminate and the corpus and accumulated income would be paid over to them "except that for the time being the Trustees shall retain such part of the shareof such grandchild as in their sole judgment is proper and proportionate to insure the payment of the annuities and other obligations herein stipulated to be paid." The trustees were given power to invade the principal for the necessary maintenance and education of the grandchildren until they became 25 years of age.  On the death of any of the grandchildren "the income and principal of the portions held in trust for them, respectively", were to be held by the trustees for the grandchild's heirs at law related by blood to the testator, with provisions for*893  the widows of deceased male grandchildren.  On the termination of the trusts as provided, the trustees were to transfer the principal and income thereof "to the beneficiaries then entitled thereto." The instrument, with the express purpose of effecting equal distribution to the grandchildren, provided that the net income of the respective portions of the estate should be determined by the trustees first estimating the net income at the rate of 5 percent on the respective portions of principal theretofore distributed, then calculating such estimated income in hotchpot with the true net income of the entire estate, and then making distributions so that the amount distributed or allotted to the respective beneficiaries would be reduced by the amount of income estimated on the distribution of principal previously made.  Any income accruing to the respective beneficiaries and retained in the estate was to be reinvested, and the beneficiaries entitled to this accumulated income were to receive "allowances of interest thereon out of the general residuary estate at the rate of five per cent per annum." Section 11 provided for the distribution of the estate upon the death of decedent's*894  daughter without descendants, and concluded "except that the Trustees shall at all times retain in their hands, for so long as may be necessary, a sufficient amount of the principal of *169  the entire residuary trust estate to pay any life annuities of this Will created, or other obligations of the estate." Petitioners, in their efforts to comply with section 9 of the will, set apart properties received by them as residuary legatees consisting of bonds and other interest bearing obligations of the face value of $1,586.500, the annual interest on which, if paid, would amount to $82,036.25, and which properties were amply sufficient in their judgment to serve and sustain out of the net income thereof the payment annually of $30,000 to the testator's daughter during her lifetime, and thereafter payment annually of a lessor sum to the testator's son-in-law, during his lifetime.  The property so set apart has since been separately held and administered by petitioners and separate records therefor kept, in accordance with petitioners' construction of the will.  At the same time and in the same manner, in their effort to comply with further provisions of section 9 of the will, *895  petitioners set apart other properties which had been distributed to them as residuary legatees, consisting of bonds and other interest bearing obligations of the face value of $906,000, the annual interest on which, if paid, would amount to $41,400, and which properties were amply sufficient in their judgment to serve and sustain out of the net income thereof what petitioners considered to be the expense of maintenance, operation, insurance, and taxes of the "Beggs Isle" property mentioned in section 5 of the will, and the general requirements and purposes of the estate not specifically enumerated.  The property so set apart has since been separately held and administered by petitioners and separate records therefor kept in accordance with petitioners' construction of the will.  "Beggs Isle", above referred to, is an extensive estate located on an island and adjacent mainland at Lake La Belle, Wisconsin.  The estate includes a trout stream, tennis court, dog kennels, vegetable gardens, head gardener's cottage, extensive flower gardens, garage, ice house, guest house, and other appurtenances in addition to the main residence.  In section 5 of his will testator gave his daughter*896  the right to use and occupy the Beggs Isle property during her lifetime, and after her death the same right to her husband until such time as testator's youngest surviving grandchild should become 25 years of age, and thereafter such right to testator's then surviving descendants.  Because he realized the property might become undersirable or unduly expensive, testator gave the trustees the right to sell it - subject to the approval of his daughter during her lifetime, thereafter of her husband during his lifetime, and thereafter of such of his grandchildren who are over the age of 21 years.  The use and occupancy *170  of the property included its entire contents "together with the automobiles, boats, etc., also tools, and farming implements and appliances ordinarily used on such property." The will (section 5) further provided: All taxes, assessments and general charges on or against the "Beggs Isle" property, as hereinabove described, as well as all costs and expenses incurred in the discretion of my Executors or Trustees for the proper and necessary repairs, upkeep, maintenance and insurance thereof, and for the requisite caretakers and gardeners for its proper protection, *897  care and enjoyment, shall be paid out of my general residuary estate, by my Executors during their tenure of office, and thereafter by the Trustees of the specific trusts hereinafter thereto created and defined, so long, and to such extent, as said properties shall be held as a part of my estate or of the trust estate.  Section 9 provided the funds necessary to carry out these provisions.  After setting apart the properties for the upkeep of "Beggs Isle" and the annual payments to testator's daughter or son-in-law, petitioners, in accordance with their construction of section 10 of the will, held the remainder of the properties which they had received as residuary legatees and devisees together and as a whole in undivided portions, one each for John I. B. McCulloch, Robert P. McCulloch, and Mary Sue McCulloch (Jones), the three grandchildren of the decedent.  Out of the net income of the property set apart for that purpose petitioners during the taxable years 1934 and 1935 paid testator's daughter the sum of $30,000.  These payments have not been allowed by respondent as deductions under section 162 of the Revenue Act of 1934.  For the calendar years 1934 and 1935, petitioners, *898  as cotrustees, filed with the collector of internal revenue at St. Louis, Missouri, fiduciary returns on form 1041 reporting income, expenses, and amounts paid to Mary G. B. McCulloch, in their administration of the property so set aside.  For the calendar year 1934 petitioners likewise filed with the collector a return on form 1040, covering what they considered to be the undistributed taxable income of the properties, and paid the tax shown thereon.  No return on form 1040 was filed for the calendar year 1935 because what petitioners considered to be the undistributed taxable income of the properties amounted to less than $1,000.  The sums of $2,,146.91 and $25,583.17 for 1934 and 1935, respectively, have been paid in connection with the operation and maintenance of the "Beggs Isle" property.  These sums include, among other things: (a) Cost of electricity, fuel, gas, fertilizer, flowers, insurance, telephone and telegraph charges, household supplies and expenses, and salaries and wages of caretakers, gardeners, etc.  *171  (b) The expense of maintaining and repairing automobiles, buildings, furniture and roadways.  (c) Trustees' and attorneys' fees.  (d) Handling*899  and shipping charges on securities sold.  (e) State, income and real estate taxes, state license fees, and Federal check taxes.  At no time prior to January 1, 1936, had the "Beggs Isle" property been income producing or been offered for sale or rent by petitioners.  For the calendar years 1934 and 1935, petitioners, as cotrustees, filed with the collector of internal revenue at St. Louis, Missouri, returns on form 1040 reporting the income from the properties set apart for the maintenance of "Beggs Isle." No deductions for the above enumerated expenses or for depreciation on the "Beggs Isle" property have been allowed by respondent in determining the deficiencies involved herein.  Out of the net income of the remainder of testator's estate held for the grandchildren under section 10 of the will petitioners paid to or for the grandchildren of testator during the taxable years 1934 and 1935 the following amounts: 19341935John I. B. McCulloch$30,927.31Robert P. McCulloch$20,00018,818.87Mary Sue McCulloch Jones20,00018,960.01During each of these years petitioners retained the remainder of the income in accordance with their construction*900  of section 10 of the will.  On March 15, 1935, petitioners, as cotrustees, filed with the collector of internal revenue at St. Louis, Missouri, for the calendar year 1934 a single fiduciary return on form 1041, reporting the income, expense, and payments in their administration of the properties set apart as above indicated; and on March 12, 1935, filed with the collector a single return on form 1040, covering what they considered to be the undistributed taxable income from the properties, and paid the tax reported to be due thereon.  On March 14, 1936, petitioners, as cotrustees under the will, made and filed with the collector of internal revenue at St. Louis, Missouri, three separate fiduciary returns on form 1041 for the calendar year 1935, in which they designated themselves as cotrustees for John I. B. McCulloch, Robert P. McCulloch, and Mary Sue McCulloch (Jones), respectively, and reported what they deemed to be his proportionate part of what they characterized in said return as the income, deductions, distributions, and credits in their administration of the property held for the respective grandchildren; and they likewise *172  filed three separate income tax returns*901  on form 1040 for the calendar year 1935 in which they designated themselves as cotrustees for the respective grandchildren and in which they reported what they characterized therein as undistributed taxable income of the respective proportionate parts of each trust beneficiary, and paid the tax due thereon.  On January 1, 1934, petitioners, as cotrustees, had accumulated what they deemed to be undistributed income for John I. B. McCulloch in the amount of $393,306.40; for Robert P. McCulloch in the amount of $390,695.20; and for Mary Sue McCulloch (Jones) in the amount of $381,347.  On January 1, 1935, petitioners, as cotrustees, had accumulated what they deemed to be undistributed income for John I. B. McCulloch in the amount of $428,302.28; for Robert P. McCulloch in the amount of $426,245.14; and for Mary Sue McCulloch (Jones) in the amount of $416,881.85.  In the taxable year 1934 petitioners made no entry on their books crediting the "interest allowances" provided by the eleventh paragraph of section 10 of the will to said grandchildren, nor did petitioners take any credit therefor upon their fiduciary return on form 1041 which they filed for that year.  In the taxable year*902  1935 petitioners made entries on their books purporting to credit the "interest allowances" to the grandchildren, and took credit therefor on their fiduciary returns on form 1041 which they filed in that year.  In their individual income tax returns filed for the calendar year 1934 decedent's grandchildren did not report any of the "interest allowances." Waivers of the statute of limitations, effective until June 30, 1939, and applicable to the calendar year 1934, have been signed and filed by each of the grandchildren.  In their individual income tax returns filed for the calendar year 1935 the grandchildren reported as income credited to them by petitioners the "interest allowances" and paid the income taxes reported to be due thereon.  Respondent has not allowed these "interest allowances" to petitioners as deductions for the years in question.  No actual payment was made in or for 1934 or 1935 by petitioners of any of the "interest allowances" to any of the grandchildren; nor did petitioners in either of the years do any act or thing which they considered to make any of the "interest allowances" available for withdrawal in the years by said grandchildren.  OPINION.  OPPER: *903  The first issue is as to the number of trusts created by decedent's will.  It is, of course, fundamental, as both parties agree, that this question is to be determined in accordance with the testator's intention.  They differ as to the tests by which that intention may *173  be discovered.  The problem is elusive, for save in the tax realm it may frequently prove immaterial how many "trusts" exist.  But the point must be decided, and it seems to us that our investigation should be directed not to the use of individual words on the one hand, nor to isolated provisions of the will on the other; but that the test is whether, in the effectuation of the testator's plan and, observing the instrument as a whole, it is more reasonable to treat the interests of the beneficiaries as separate and divisible or as one and indivisible.  Applying this principle we conclude that the purpose of the testator was to segregate the interests of the individual grandchildren so that the rights in the property held for them and proportionately distributed to them, both as to principal and income, should be treated in severalty.  Perhaps no single provision of the instrument would suffice for this*904  conclusion.  Without reciting its provisions in detail it seems clear from the entire will and particularly those portions summarized in our findings of fact that it would do violence to the testator's intention to assume that a separate interest was not granted to each grandchild.  If that result follows in the case of the trusts for the benefit of the grandchildren the implication is even stronger with respect to the trust created by section 9 of the trust instrument, for there it is specifically provided that this "specific trust shall be separately held, administered, invested" and reinvested.  There are but two indications that might be said to lead to the conclusion that a single trust was intended.  As to both, however, it is by now definitely settled that such provisions are not inconsistent with the creation of separate trusts.  Neither the requirement that the property be held as one fund, ; , nor the provision for cross-remainders, *905 , requires us to find that there is but a single trust.  We conclude that the effect of decedent's will was to create a trust for each of the three grandchildren and an additional trust for the purposes described in section 9 of the will.  The second issue brings into question the character of the payments to be made to decedent's daughter under section 9 of the will.  The controversy is whether these constituted an annuity payable at all events, , or were income currently distributable to the beneficiary for which petitioners are entitled to a deduction.  . While in this respect the will is not so clear as might be desired, the directions of the testator appear to us to indicate that payments were to be made to the daughter only out of income.  In the third paragraph of section 9 the testator provides that a fund shall be set apart *174  sufficient to "sustain out of the net income thereof" "the continuance of the aforesaid" incomes, to which he refers in the next three subparagraphs, and the first of which is the daughter's*906  annual payment earlier required, by section 8, to be paid during administration.  It will be noted that this provision by itself directs only the creation of the fund and fails to provide for the annual payments to the daughter except possibly by inference.  We should expect to find a further express authorization to the trustees to make these payments; and that in fact appears in a later paragraph (the ninth) of the same section.  At that point the testator enjoins: "Said specific trust shall be separately held, administered, invested, re-invested and the net income thereof applied by my Trustees for the continuance of said incomes during the periods hereinbefore defined; * * *." In the case of the daughter that period is for the remainder of her life.  Thus the language authorizing the trustees to make payments to the daughter is specifically limited to "the net income." And that is the only provision of the will which expressly confers any authority whatever to use the fund or its proceeds for the daughter's benefit.  We conclude that the trustees were limited in executing that part of the trust by the scope of the provision last quoted and that they are not required, *907 , nor in fact permitted, to make the annual payments to the testator's daughter except out of income and unless the income of the fund set apart is sufficient to sustain any payments made.  On this point respondent's determination must be reversed. Another issue arises by reason of the claim of the trustees that they are entitled to deduct as ordinary and necessary business expenses the cost of maintenance and upkeep of the testator's summer place called "Beggs Isle", the use and occupancy of which was devised to testator's daughter during her life and after her death to her husband and children.  The expenses were so paid pursuant to express provisions of the will which required that the trustees establish a fund the income of which would be sufficient for that purpose.  All of the cases cited by petitioners in support of their contention are readily distinguishable on their facts, with a single exception which requires more extended treatment.  In ; *908 ; ; and , there was no question as to the character of the activities engaged in by the trustees or executors.  Their extent and effect was the point at issue and it is clear from those cases as well as others that a trustee, as such, may be engaged in a trade or business by the operation or preservation of a large estate for income producing purposes. *175  We consider , inapplicable because the contention advanced here by respondent was apparently neither made nor considered in the Sparrow proceeding; and the decision went off on the ground that the privilege granted to the beneficiary to occupy the residence was not a life estate and that the expenditures by the trustees were consequently not to be considered as made for or chargeable to the beneficiary.  In the present proceeding there appears to be serious doubt whether testator's daughter did not receive under the will an interest in the real property which was tantamount to an estate for*909  life.  Her rights were given by "devise" and the property was described at length by metes and bounds with a particularity which would be suitable in the case of a conveyance.  She was given not only the "occupancy" but the "use" of the property and it may well be that this language was broad enough to vest in her all of the attributes of a life tenant.  Furthermore, the devise to the trustees is only of the "remainder, residue and increase" of the decedent's estate after the devise to the daughter in a preceding paragraph.  However that may be, the respondent now urges that the maintenance of a residence for the use of a beneficiary is not a trade or business within the meaning of section 23(a) of the Revenue Act of 1934, and it seems to us that this contention must be sustained.  Petitioners cite with approval the definition of the term "business" contained in , as follows: "'That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit'. Bouvier's Law Dictionary, Vil. I, p. 273." [Emphasis added.] There is of course no reason to doubt the accuracy of the definition, *910  but it seems to us that petitioners overlook the force of the italicized language.  For here the activity of the trustees in maintaining the "Beggs Isle" property could in no event be for the purpose of a livelihood or profit.  ; . It is true that the expenditures in question were enjoined upon the trustees by the instrument to which they were subject in administering the trust.  And it is also true that the petitioners in their individual and corporate capacities may have been engaged in the trade or business of acting as trustees.  But just as, according to petitioners' contention, the trust and the beneficiary must each be considered in its respective taxpaying capacity, so it seems to us the trustees as individuals and the trust must be considered in severalty.  It is the trust and not the trustees which is the taxable entity; 1 and it is the trust which must be engaged in a trade or business, just as an individual, if the deduction is to be permitted.  *176 *911 . It having been made clear, as we think, that the trust under no circumstances could be said to have entered into these transactions for the purpose or even with the possibility of obtaining a gain or profit, we conclude that the trust was not thereby engaged in a trade or business and that accordingly the expenses thereof are not deductible.  The contention made on behalf of the petitioners that the expenditures involved were ordinarily and necessarily incurred for the preservation of the property we believe to be equally without force.  The property was being retained and for all that appears will continue to be retained until an indefinite time in the future, not for purposes of lease or sale nor for any other purpose connected with a pecuniary benefit of the trust.  Under these circumstances we find nothing in the facts which would justify the conclusion that any of the expenses of maintenance and operation are necessary or ordinary as applied to any business transaction.  See *912 In one respect, however, respondent does not appear to contest the assertion advanced by petitioners.  That is that taxes paid by them which are deductible under the express language of section 23(c) and regardless of the existence of any trade or business should be allowed.  To that extent the respondent's original determination on this issue is overruled, provided the parties can agree on the proper amount on recomputation.  The final issue does not appear to be urged with great force by petitioners.  It relates to the contention that the trust estate is entitled to deduct as income currently distributable an amount which by the will is to be credited to the grandchildren "as interest" upon undistributed accumulations of income.  Without setting forth the provisions of the will upon which this procedure was based, which are summarized in our findings of fact, it is sufficient to point out that the will merely provides for a method of apportioning to the grandchildren sums which will presumably compensate them respectively and equitably for any unequal distribution of current estate income.  It is apparently a pure bookkeeping item without*913  relation to income actually received by the estate and as far as the record shows it does not represent estate income.  For this reason it seems to us the provisions of section 162 of the revenue act are completely inapplicable, since that section refers only to "the net income of the estate or trust" and provides only for a deduction of such portions of that net income as shall be currently distributable.  Since the amounts in question do not represent estate income in the first place, we find it unnecessary to decide whether or not they were currently distributable and the deductions must be disallowed.  *177  Respondent now concedes that petitioners are entitled to deduct a payment of prepaid fire insurance premiums and petitioners have apparently conceded a question raised as to the distributable character of certain accumulations and there appears to be no present dispute between the parties on these points.  Reviewed by the Board.  Decision will be entered under Rule 50.MURDOCK dissents.  LEECH dissents from the decision of the majority on the second issue.  Footnotes1. Secs. 142(a), 161(b), and 162, Revenue Act of 1934. ↩