Court Opinion

ID: 4591647
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:06:15.889012+00
Date Added: 2024-06-11T07:50:42.770162
License: Public Domain

SALLIE COSBY WRIGHT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wright v. CommissionerDocket No. 88943.United States Board of Tax Appeals38 B.T.A. 746; 1938 BTA LEXIS 825; October 7, 1938, Promulgated 1938 BTA LEXIS 825">*825  Where petitioner terminated a trust of which she was a qualified life beneficiary, thereby accelerating the remainder, in consideration of the remainderman's agreement to hold the property obtained or its reinvested proceeds and to pay her periodically an amount equal to two-thirds of the income therefrom, held that the agreement created a trust relationship between the parties and the payments were taxable as income from a trust rather than as an annuity.  O. H. Tufts, C.P.A., and F. G. Davidson, Jr., Esq., for the petitioner.  John H. Pigg, Esq., for the respondent.  OPPER38 B.T.A. 746">*746  This proceeding involves deficiencies in income tax in the following amounts for the years indicated: 1932$1,252.951934457.871935452.79Total2,163.61FINDINGS OF FACT.  A stipulation filed by the parties is adopted as our findings of fact.  The material portions are quoted or summarized as follows: "1.  The petitioner is a resident of Lynchburg, Virginia.  She is 38 B.T.A. 746">*747  the widow of John S. Wright, deceased.  Her returns for the calendar years 1932, 1934, and 1935 were made to the Collector of Internal Revenue for the District1938 BTA LEXIS 825">*826  of Virginia, at Richmond, Virginia.  "2.  Georgianna B. Wright, the mother of John S. Wright, died testate, on March 30, 1919, a resident of the Borough of Manhattan, New York, New York." Her "will was duly admitted to probate on July 7, 1919, in the Surrogate's Court of the County of New York, New York, and the executor and trustee therein named duly qualified as such.  At all times materal to this proceeding, prior to April 30, 1932, the will was duly executed and administered according to its terms." 3.  Division "ELEVENTH" of the will directed the executor to turn over to the named trustee $300,000, either in cash or securities out of the estate, to sell all real estate and interests in land except decedent's former homestead, "Pine Hill", and all personal property on or appurtenant to the real estate with certain exceptions, the proceeds to be paid over to the trustee upon the following trust: IV.  It is my hope that my former homestead "Pine Hill" of about fifty acres in the town of Duxbury, Plymouth County, Massachusetts may be maintained as nearly as may be in its present condition to be used and occupied as her residence by Mrs. John S. Wright, widow of my son John1938 BTA LEXIS 825">*827  S. Wright.  The said Pine Hill shall be so maintained by my said trustee for the use and occupation of the said Mrs. John S. Wright as a residence; and so long as the said Mrs. John S. Wright shall use and occupy it as her residence she shall be free to use and enjoy in connection therewith such of my furniture and other chattels and belongings, bric-a-brac, pictures, books, rugs, household goods and furnishings which have been commonly used thereon or in connection therewith as she may select within one year after my decease except such thereof as I may have left a request in writing to be given as mementos of me to persons designated.  The net income of the trust created in and by this ELEVENTH Division of my Will shall be devoted to defraying such expenses as in the discretion of the trustee hereinafter named and his successor or successors may properly be incurred in the maintenance and care of said Pine Hill as a residence of the said Mrs. John S. Wright and in meeting her personal expenses occasioned by her use and occupation thereof and the receipts of the said Mrs. John S. Wright shall be a complete acquittance and discharge of the trustee for making such payments; the1938 BTA LEXIS 825">*828  surplus if any there be of such net income over and above the payment for the care and maintenance aforesaid shall be paid to the President and Fellows of Harvard College to be used according to their discretion for medical research and the advancement of medical and surgical sciences.  The trust created in and by this ELEVENTH Division of my Will shall terminate upon the death of said Mrs. John S. Wright, or whenever prior to her death she consents in writing thereto, or whenever she ceases personally to occupy and use said Pine Hill as a residence for at least four consecutive months in any one calendar year unless [excused in a formal notice from the trustee to the President and Fellows of Harvard College].  38 B.T.A. 746">*748  Upon the termination of said trust, I give, devise and bequeath all the property then constituting the principal thereof, including the said Pine Hill itself and such of my chattels and other articles of personal property (except books) as may be then remaining there of those elected as aforesaid by the said Mrs. John S. Wright for her use and enjoyment at said Pine Hill together with all accumulations, accretions and profits and any unspent portion of the1938 BTA LEXIS 825">*829  net income thereof to the President and Fellows of Harvard College to be held as part of their general investments and known together with such other property as is in and by this my Will given, devised and bequeathed to said President and Fellows as the "William J. and Georgianna B. Wright Fund;" the income to be used according to their discretion for medical research and the advancement of medical and surgical sciences; the books aforesaid I give and bequeath to the Duxbury Free Library, a corporation of Duxbury, Massachusetts.  "The 'Mrs. John S. Wright' mentioned in Division 'ELEVENTH' of the will is the petitioner in this proceeding." "4.  There was turned over by the executor to the trustee, pursuant to the provisions of Division 'ELEVENTH' of the aforesaid will, cash in the amount of $424,685.72.  The combined fair market value of the real property, 'Pine Hill', and the personal property 'commonly used thereon or in connection therewith' and as selected by petitioner, likewise referred to and described in said Division 'ELEVENTH' of said will, as at the date of death of the testatrix, was $58,569.55.  "5.  At the time of the death of the testatrix, on March 30, 1919, the1938 BTA LEXIS 825">*830  petitioner was fifty-nine years of age.  Computed upon the basis that petitioner acquired a life estate in the property described in Division 'ELEVENTH' of the aforesaid will, the total value of which, as set forth in Paragraph 4, above, was $483,255.27, and without regard to restrictions or limitations, if any, contained in said Division 'ELEVENTH' upon the use and enjoyment of said property by petitioner, the commuted value (present worth) of said life estate, on March 30, 1919, was $188,108.27 (4% of $483,255.27 times $9.73131 equals $18,108.27).  "6.  Subsequent to the death of the testatrix and prior to April 30, 1932, there had been paid to the petitioner by the trustee, pursuant to the provisions of subdivision 'IV' of Division 'ELEVENTH' of the aforesaid will, sums aggregating $132,000.00, and during the same period there had been expended by the trustee in connection with the maintenance and upkeep of 'Pine Hill', also pursuant to the provisions of subdivision 'IV' of Division 'ELEVENTH' of said will, sums aggregating $107,800.00." 7.  On April 30, 1932, the petitioner entered into a "Memorandum of Agreement" with the President and Fellows of Harvard College, a corporation, 1938 BTA LEXIS 825">*831  which, after reciting her beneficial interest in the trust created by the will of Georgianna B. Wright and her power to terminate the trust prior to her death by an instrument in writing, and the ownership of the remainder interest in the trust property by the 38 B.T.A. 746">*749  President and Fellows of Harvard College, provided that the petitioner would terminate the trust forthwith and in consideration thereof and of the resulting benefits accruing to it, the corporation agreed that it would: * * * pay over or cause the trustee to pay over, to the party of the first part [petitioner] in cash the sum of $10,000, in lieu of any apportionment of the net income received from the trustee; and it will thereafter during the lifetime of the party of the first part hold the principal as the "William J. and Georgianna B. Wright Fund" provided for in the said will, but invested separately, and will pay to the party of the first part for and during her life a sum equivalent to two-thirds of the net income arising from the fund so held by it, upon and subject to the following terms and conditions: 1.  The principal shall be kept invested by the party of the second part in such investments as, 1938 BTA LEXIS 825">*832  in accordance with its usual investment policy, it may deem proper, it being understood that the party of the second part may from time to time invest and reinvest the same in accordance with its usual investment policy without obligation to observe the usual requirements for fiduciary investments.  2.  The party of the second part will use its best efforts to sell the real estate, including said "Pine Hill" tract and real estate over which the executor of said will now has power of sale under Subdivision II of said Eleventh Division, and all personal property and furnishings at Pine Hill (except the said books bequeathed to the Duxbury Free Library) as promptly as possible, for such considerations and on such terms as the party of the second part in its discretion considers reasonable.  The net proceeds of any such sale, whether cash or securities, shall be a part of the principal of said fund.  3.  Until the real estate and personal property referred to in the preceding paragraph shall have been sold as therein provided, the party of the second part may charge to the income of said fund all taxes and assessments thereon, including taxes for the year 1932, and such sums as the1938 BTA LEXIS 825">*833  party of the second part in its discretion considers reasonably necessary and proper to maintain the same in salable condition and to keep the same insured and in repair to the extent that the party of the second part may deem proper.  4.  The net income of the fund shall be computed after making the deductions above provided for and charges and expenses customarily charged to income and in accordance with the usual accounting practice of the party of the second part; and the party of the second part will on July 1, 1932, pay to the party of the first part a sum equivalent to two-thirds of the net income received by it from the date hereof to and including June 30, 1932, and on each quarter day thereafter will pay to the party of the first part a sum equivalent to two-thirds of such net income received in the preceding quarter, accompanied by a quarterly statement of income account, and annually will render the party of the first part a statement of capital account and investments of the fund.  Paragraph 5 of this agreement provided for the cessation of liability for the quarterly payments upon the death of the petitioner, except that the last payment was to be prorated up to the1938 BTA LEXIS 825">*834  date of death.  Paragraph 6 provided that the sum representing income accumulated at the date of the agreement in the hands of the original trustee should be held by the corporation as a reserve for the payment 38 B.T.A. 746">*750  of any liabilities or obligations in connection with the trust property arising before the termination of the original trust, or for any unusual expenditure required in connection with the real estate, and upon the sale of the real estate, should be added to the principal of the fund.  8.  On the same date as the foregoing agreement "the petitioner duly executed and delivered to the trustee 'her consent in writing to the termination of the trust', in accordance with the provisions of Paragraph 'I' of the memorandum agreement dated April 30, 1932.  The trustee duly transferred and delivered to Harvard College 'all the trust property', referred to and described in said memorandum agreement dated April 30, 1932, consisting at the time of the termination of the trust, of: (a) cash $54,149.01; (b) stocks and bonds of the value of $206,769.38; (c) personal effects of the value of $5,000.00, and (d) real property, including "Pine Hill", of the1938 BTA LEXIS 825">*835  value of $28,000.00, an aggregate value of $293,918.39.  Of the cash of $54,149.01, the sum of $19,060.03 represented corpus or principal, and the balance of $35,088.98 represented undistributed income." 9.  "At the time of the execution of the aforesaid memorandum agreement, on April 30, 1932, the petitioner was seventy-three years of age.  Computed upon the basis that the petitioner acquired a life estate in the property described in Division 'ELEVENTH' of the aforesaid will, the total value of which on April 30, 1932, was $258,829.41 (excluding the undistributed income of $35,088.98) as set forth in [the preceding paragraph] and without regard to the restrictions or limitations, if any, contained in said Division 'ELEVENTH' upon the use and enjoyment of said property by petitioner, the commuted value (present worth) of said life estate, on April 30, 1932, was $56,520.89 (4% of $258,829.41 times $5.45928 equals $56,520.89)." 10.  "The commuted value (present worth), as of April 30, 1932, of the rights, if any, accruing to the petitioner under the provisions of the aforesaid memorandum agreement, dated April 30, 1932, was $48,241.28 (4% of two-thirds of $258,829.41 times $5.459281938 BTA LEXIS 825">*836  times 1.01488 plus $10,000.00 equals $48,241.28)." 11.  "There was paid to petitioner, under and pursuant to the provisions of the memorandum agreement dated April 30, 1932, for the years indicated, the following amounts: YearAmount1932 (period)$12,771.9619347,059.8219357,163.3538 B.T.A. 746">*751  The foregoing amount of $12,771.96 includes the sum of $10,000.00, paid petitioner by Harvard College 'in lieu of any apportionment of net income received from the trustee', in accordance with the provisions of Paragraph 'II' of the aforesaid memorandum agreement, dated April 30, 1932.  Said sum of $10,000.00 represented an agreed estimate by the parties to said memorandum agreement of the net income of the testamentary trust between January 1, 1932 and April 30, 1932." 12.  "Of the amounts received by her, as set forth in [the preceding paragraph], petitioner reported in her income tax returns the following amounts: YearAmount1932$ None 19342,869.58 19352,869.58"13.  "In his determination of the deficiencies involved, respondent included the entire amounts so received by petitioner, as set forth in [Finding No. 1938 BTA LEXIS 825">*837  11], in her taxable income for the years during which received, and computed the tax thereon at both normal and surtax rates." OPINION.  OPPER: The question on which the parties are at issue is whether that part of petitioner's income which is the subject of the deficiency was an annuity or the income from a trust fund.  The facts are peculiar.  Petitioner, who had a qualified life interest in the trust left by decedent so long as she should occupy decedent's homestead as her own home and had the right at any time to terminate the trust prior to her death, entered into an agreement with the remaindermen, the President and Fellows of Harvard College, to terminate the trust forthwith in consideration of the latter's agreement to pay her during her lifetime two-thirds of the net income from the property so obtained.  Respondent contends that the relationship thus created was in the nature of a trust and that the income received by petitioner as the beneficiary thereof is taxable to her under the trust provisions of the Revenue Acts of 1932 and 1934. 1 Petitioner takes the position that she purchased an annuity and that there is no deficiency, since she included in her income tax1938 BTA LEXIS 825">*838  returns such amounts as the annuity provisions of the respective revenue acts required. 2 Petitioner's position is further, as stated in her brief, that "we maintain as an alternative proposition that if the 'memorandum of agreement', dated April 30, 1932, did not constitute the purchase of an annuity 38 B.T.A. 746">*752  by the petitioner, then it created a trust for the benefit of the petitioner to the extent of two-thirds of the income therefrom." The precedent most nearly in point seems to be . In that proceeding the widow of decedent released to the owners of the remaining interest her dower right in decedent's real property, in consideration of their agreement to pay her certain sums during her lifetime.  We held that the widow was taxable as the beneficiary of a trust upon the payments received by her under the agreement.  In , the facts were somewhat similar.  There we held that such payments were not properly deductible by the owners of the property in determining their net income but1938 BTA LEXIS 825">*839  were capital items representing expenditures incurred in the acquisition of capital assets.  At first glance the cases are not readily distinguishable, but the Van Aken case, supra, rests upon the doctrine that "a trust exists where the legal title is in one person and the equitable or beneficial interest in another." (P. 159.) In characterizing the relationship created by the agreement between the widow and the owners of the property we said there, "all of these provisions * * * strongly support respondent's contention that, under the agreement, petitioner transferred only the legal title to the trustee, reserving the beneficial interest in the property or right to receive the income for life." (P. 158.) The Hoe case is reconciled by reference to the language of the court which affirmed it on appeal, that there "'the promise was not to pay her one-third of the profits in kind, to say nothing of giving her any right in the land itself; it was general and created a general obligation'", as distinguished from the Van Aken case where "the widow did not exchange her dower interest for the promise of the testamentary trustee to pay 'an amount equal to' one-half of the net1938 BTA LEXIS 825">*840  operating income; she transferred the legal title on condition that the trustee should account for and pay over to her each month one-half of the net operating income derived from the dower lands." (P. 160.) A reading of the entire opinion makes it clear that it was not any special form of words and particularly any such narrow distinction as that between the profits themselves and an amount equal to the profits which was regarded as justifying the Van Aken decision, but rather an examination of the agreement as a whole and the conclusion that in the Van Aken case the relationship was essentially fiduciary.  Indeed, the opinion itself states that "it has been said many times that no particular form of words is required to create a trust." (P. 159.) In the Hoe case, supra, the question arose as to the income of the grantee, and the transaction is discussed from the standpoint of what it received, namely, an interest in real property which the widow had 38 B.T.A. 746">*753  formerly owned for her life.  Thus, the opinion states: "The annual payments to the widow were in fulfillment of the contractual obligation assumed by the petitioner and we consider them to be a part of the1938 BTA LEXIS 825">*841  purchase price which the petitioner paid for the property which it acquired." (P. 908.) Here, we think it impossible to say that the petitioner in any sense transferred property or an interest therein.  Once petitioner terminated the trust any interest in the property obtained by the remaindermen was the result of the provisions of the will.  The consideration to petitioner thus approximates payment for a service rendered, in the form of an agreement of the remaindermen to hold the property in trust for petitioner's benefit.  But be that as it may, we regard the Van Aken case as deciding that in such a case as this the relationship between the parties is to be viewed as a whole; and since there that relationship appeared to be essentially of a fiduciary nature, income received by the beneficiary was taxable to her.  Our analysis of the arrangement here leads us to the same conclusion.  We do not base this result on any single provision, but some of the terms of the agreement which we consider significant may be briefly mentioned.  The remaindermen agree that they will "during the lifetime of" the petitioner "hold the principal as the 'William J. and Georgianna B. Wright Fund' 1938 BTA LEXIS 825">*842  provided for in the said will, but invested separately." They agree that they "will pay to the" petitioner "for and during her life a sum equivalent to two-thirds of the net income arising from the fund so held." They undertake that "the principal shall be kept invested by" them.  They reserve the privilege of investment "without obligation to observe the usual requirements for fiduciary investments." They agree that if the real estate is sold the net proceeds of any such sale "shall be a part of the principal of said funds." They provide for "making the * * * charges and expenses customarily charged to income", and they agree that they will furnish "a quarterly statement of income account, and annually will render" to the petitioner "a statement of capital account and investments of the fund." Such provisions, and the agreement as a whole, lead to our conclusion that petitioner was in effect the beneficiary of a trust, and taxable as such.  Petitioner cites the case of . As we view that decision, it is inconsistent with our determination in this proceeding.  But we regard it as having in effect1938 BTA LEXIS 825">*843  been overruled by the Supreme Court's decision in , for the cases on which it is based 3 were expressly disapproved in the Butterworth opinion. . 38 B.T.A. 746">*754  Since respondent now concedes that petitioner, being taxable as the beneficiary of a trust, is consequently entitled to deduction for dividends received by the trustee and included in the income paid to her, 4 no issue remains on this question.  With that exception respondent's determination is sustained.  Decision will be entered under Rule 50.Footnotes1. Secs. 161(a)(2) and 162(b).  ↩2. Sec. 22(b)(2), Revenues Acts of 1932 and 1934. ↩3. ; ; . ↩4. Revenue Acts of 1932 and 1934, secs. 25(a)(1) and 163(b). ↩