Court Opinion

ID: 4634078
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:16.700484+00
Date Added: 2024-06-11T07:58:09.825325
License: Public Domain

BOSTON SAFE DEPOSIT AND TRUST COMPANY AND EVERETT E. KENT, SURVIVING EXECUTORS OF THE ESTATE OF HERBERT A. WILDER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boston Safe Deposit & Trust Co. v. CommissionerDocket Nos. 48149, 57430.United States Board of Tax Appeals26 B.T.A. 486; 1932 BTA LEXIS 1302; June 21, 1932, Promulgated *1302  1.  Where annuities are payable from income or, if necessary, from the corpus of a trust fund created by a will and are thus a charge on the corpus and not taxable to the annuitants as income, such annuities are not allowable deductions from the income of the estate.  2.  The evidence does not establish that any of the income of the trust was "permanently set aside" for certain possible ultimate charitable beneficiaries.  3.  A finding of the Board in an estate-tax case of the portion of the estate that will ultimately go to charity is not conclusive in an income-tax case involving wholly different questions and considerations, it not appearing that such portion was ever permanently set aside for such purpose.  Harris H. Gilman, Esq., for the petitioners.  C. C. Holmes, Esq., for the respondent.  VAN FOSSAN *487  These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners for the years 1926 and 1927 in the amounts of $3,578.15 and $3,792.53, respectively.  The proceedings were consolidated for hearing and report.  The petitioners allege the following errors by the respondent: (1) Failure to allow*1303  as deductions from gross income the amounts paid to annuitants under the will of Herbert A. Wilder out of the income of the trust established by that will.  (2) Failure to allow as deductions from gross income certain amounts paid or permanently set aside for charitable purposes under the provisions of section 219(b)(1) of the Revenue Act of 1926.  In Docket No. 48149 the petitioners also allege that they are entitled to a deduction of $1,464.77 from gross income on account of inheritance taxes paid to the State of Vermont and attorneys' fees.  No evidence was introduced to support this contention nor was it mentioned in the brief of the petitioners' counsel.  Therefore, it is deemed to have been abandoned.  The parties entered into a stipulation of facts, from which we make our findings of fact.  FINDINGS OF FACT.  Herbert A. Wilder, a resident of Newton, Massachusetts, died October 12, 1923, leaving a will which was duly probated.  The petitioner, the Boston Safe Deposit and Trust Company, is a Massachusetts corporation and the petitioner, Kent, a resident of Newton.  They are the duly appointed and qualified surviving executors of the will of the said decedent.  The parts*1304  of that will material to this proceeding are as follows: Fifth Item: I direct that all the bequests and devises in this my will be made free from all legacy and inheritance taxes and government dues of every kind, and that my executors pay all such taxes and dues attaching at the time of the probate of my will to the various legacies and provisions, from the remaining portion of my estate, so that all the legacies and provisions in the foregoing and the next following items may be undiminished save as the ultimate residue may be affected by having to bear such payments.  *488 Sixth Item: I give, bequeath and devise to my trustees hereinafter named, their survivors, survivor, successors or successor, but IN TRUST NEVERTHELESS, all the rest, residue and remainder of my property and estate, personal or real, wherever found or situated, including the reversions or remainders established or contemplated in the foregoing items of this my will, and any income of benefits which may result to my estate from any transactions I may effect in my lifetime, the same to be invested and held by said trustees in safe and suitable securities and properties, save as hereinafter provided, *1305  and from the income and so much of the principal of the trust fund as may be needed or required from time to time, (a) to pay and keep down all taxes, assessments, insurance, repairs and improvement charges or expenses of any kind, * * * (b) to pay all charges, taxes and expenses upon or connected with the trust or trust property, so long as the trust continues.  * * * (c) to pay annuities, or total net sums in every year, to the persons and in the instalments next below named, or stated, giving to each person named so long as he or she may live, save as hereinafter qualified, respectively, a total annual amount as follows, to wit: To my daughter Constance Perley Wilder, Five thousand dollars, payable in monthly instalments.  [Here follow fifteen or more other annuities.] (d) To each of my grandchildren, whether born before or after my death, I give an annuity or total net sum of Three hundred dollars annually, until each such grandchild shall attain the age of twenty-one years, the same to be deposited in Savings Banks, in the successive years, and each grandchild to be allowed to withdraw the income upon such deposits for his or her benefit respectively, in each year*1306  after the said age of twenty-one years is attained, but the principal not to be withdrawn by the respective grandchild until the age of twenty-eight years be reached.  * * * I direct that out of the trust fund created by this item of my will, any portion of a total of twenty-five thousand dollars may be used in the successive years, from time to time, by my trustees, to amplify any of the benefits provided for my daughters or their families, under this item of my will, in cases of sickness or physical distresses of any of them; such awards from such twenty-five thousand dollar fund, however, to be only in cases of such sickness or necessitous circumstance as in the discretion and judgment of my trustees would constitute special occasion for the enhanced assistance; this sickness benefit fund to be applicable to my children and grandchildren as well as to the other family annuitants mentioned in this connection.  If there be any insufficiency or shortage of funds, wherewith to meet all the provisions of my will, I direct that the legacies, annuities and other benefits in favor of my daughters, shall be met and paid in full, without any deductions, in any event, the same to have*1307  priority over any other benefits in the event of any such deficiency.  * * * (f) at the death of my last surviving daughter, all the annuities given or established by this my will, shall terminate and cease, notwithstanding any language, terms or provisions hereinabove connected with any particular annuity; all and every annuity provision hereinbefore made or stated, being subject and subordinated to this limitation, so that after the death of my last surviving daughter, the distribution and settlement of the entire trust may be in a short time accomplished.  *489  (g) after the death of my last surviving daughter, I give bequeath and devise all the trust funds and estate then remaining or existing, to the final beneficiaries hereinbelow named, in the shares or proportions below stated, to be theirs absolutely and in fee.  I authorize my then surviving or acting trustees or trustee, to convert into money such portion of the then existing trust estate as they or he may deem expedient, or to pay over and distribute either in money or securities to the said final beneficiaries as at the time may be found expedient and judicious.  Such final beneficiaries being the following, *1308  to wit: [Here follow the names of fourteen beneficiaries and their respective proportionate shares of the residual estate.] On behalf of the Wilder estate the petitioners filed income-tax returns for the years 1926 and 1927 showing no taxable income for such years.  The respondent computed net incomes of $53,406.82 and $55,030.88 for 1926 and 1927, respectively.  He denied deductions of $35,082.82 (exclusive of income from nontaxables) for the year 1926 and $33,862.88 for the year 1927 as distributions made to the trustees under the will of the said Wilder and by them to the annuitants.  He also denied deductions for the respective years of $8,324 and $12,992.36 (exclusive of income from nontaxable securities) purporting to have been distributed to the trustees and by them accumulated for the benefit of said charitable and educational institutions named in the will.  The respondent further added to the petitioners' income for the year 1927 the sum of $8,175.64 representing profit from the sale of securities.  That sum likewise was omitted from the petitioners' return because it was considered a capital gain accumulated for the benefit of charities.  The decedent, Herbert A. Wilder, *1309  was survived by three daughters, all of whom are now living, and by three grandchildren, all children of Everett E. and Mary Clement Kent.  No children have been born to any of his daughters since his death.  The value of the estate of the decedent, Herbert A. Wilder, on January 1, 1926, and on January 1, 1927, was not less than $1,003,553.90.  The executors have paid all bequests except annuities and have paid all expenses of the administration and operation of the estate up to and including the years under consideration.  The fourteen institutions named in item six (g) of the Wilder will are corporations organized and operated exclusively for religious, charitable, scientific, literary or educational purposes as contemplated by section 403(a)(3) of the Revenue Act of 1921 and section 219(b)(1) of the Revenue Acts of 1924 and 1926.  It was stipulated that the findings of fact and opinion in , should be accepted as facts in these proceedings and, hence, they are so incorporated herein by reference. *1310 *490  OPINION.  VAN FOSSAN: The petitioners' first contention is that the distribution made by the trustees of the Wilder estate to the annuitants named in the sixth item of the Wilder will constituted deductions allowable under the provisions of section 219 of the Revenue Act of 1926.  The pertinent portions of that section follow: (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including - * * * (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; * * * (b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary.  The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that - * * * (2) 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*1311  which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, 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.  Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) in the same or any succeeding taxable year; (3) 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.  It is stipulated that the funds from which the annuities*1312  were paid were income to the petitioner.  All such income is subject to taxation under section 219(a) and its various subdivisions.  It is obvious, therefore, that in order to obtain a deduction the petitioners must bring themselves strictly within the above provisions defining it - otherwise such income remains taxable.  The petitioners contend that the deduction claimed in the instant case may be taken either under paragraph (b)(2) or paragraph (b)(3) of that section.  Section 219(b)(3) establishes two conditions under which it becomes operative, (1) the income must be received by the estates of deceased persons during the period of administration or settlement *491  of the estate or (2) the income must be either distributed to the beneficiary or accumulated, in the discretion of the fiduciary.  Neither condition exists in the case at bar.  The executors have paid over current income to the trustees who, under the direction of the sixth item under the will, executed the trust therein created.  The fiduciaries have no discretion in the matter.  After having paid the specific legacies contained in the will (and such legacies have all been paid) together with the expenses of*1313  administration and the charges against the estate (and such payments have been made), the petitioners must pay to the trustees and they to the annuitants named in paragraph (c) the sums set forth therein.  Thus, neither the first nor the second condition has been met and section 219(b)(3) is not applicable.  Paragraph (b)(2) of section 219 permits a deduction from income of the amount of the income which is to be distributed "currently by the fiduciary to the beneficiaries." The petitioners assert that the annuities paid under the sixth item are such distributions.  In , promulgated this day, we have held that the amount of the annuities paid to him as a beneficiary under the said sixth item and representative of all other annuitants thereto, constituted a gift or bequest payable in installments and was not taxable to him as income.  Paragraph (b)(2) when read in connection with paragraph (a)(2) clearly contemplates that deductions may be allowed only when they constitute income to the recipients. *1314 ; ; ; . Hence, since the annuities paid to Kent and others were not income received by them as such they are not deductible under section 219(b)(2).  See Burnet v. Whitehouse, 283 u.s. 148.  The petitioners' second contention is that all income received by them in excess of the amounts required to pay fixed charges and annuities may be taken as a deduction under the provisions of section 219(b)(1) of the Revenue Act of 1926, which reads in part as follows: (1) There shall be allowed as a deduction (in lieu of the deduction authorized by paragraph (10) of subdivision (a) of section 214) any part of the gross income without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214, or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or*1315  for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit; * * * Such part of the petitioners' gross income, therefore, as is subject to deduction under this provision must be paid during the taxable *492  year or permanently set aside for the uses set forth in section 214(a)(10) or for certain charitable purposes, pursuant to the terms of the will or deed creating the trust.  It was stipulated that the fourteen institutions named in item six (g) of the Wilder will are such charitable institutions as are contemplated in that section.  The petitioners do not claim that any portion of their income was paid to the charitable organizations named in the will during the taxable years, but they do assert that when they retained the surplus over the amounts paid for fixed charges and to annuitants, they "accumulated" such excess for the benefit of the charities named and thus permanently set it aside "pursuant to the terms of the will or deed creating the trust." It is obvious that the intention of the testator and not the acts, judgment or interpretations of the trustees must*1316  determine this issue.  The Wilder will provided that after the death of the decedent's last surviving daughter all the trust funds then remaining or existing should go to certain "final beneficiaries." There was no designation of the sources from which such ultimate funds should come.  There was no direction that any portion of the income or corpus should be paid over or permanently set aside for any charitable purpose.  The only reference to the disposition of the income was that "from the income and so much of the principal of the trust fund as may be needed or required from time to time" certain charges and the annuities should be paid.  It is clear that the testator anticipated that the income might not be sufficient to pay those charges and bequests and in recognition of the requirements of Massachusetts law specifically directed his executors and trustees to devote the corpus of his estate to such payments, if necessary.  His primary desire and purpose evidently were to see that his bequests to the members of his family and his gifts to his friends should be paid completely during each year of their lives and in the indicated installments, until the death of his last surviving*1317  daughter.  Then, and then only, would the charities receive what was left of his estate, if anything.  The petitioners' counsel make the following statement in their brief: "The possibility of invasion of the original principal, or of the excess income added to principal from year to year to pay these annuities is extremely remote and in such cases it has been clearly decided that no consideration should be given to such a theoretical contingency." We are unable to agree with this conclusion.  A list of the assets of the Wilder estate was not submitted to us, but we do know that the chief source of income was from dividends and that during 1926 and 1927 the returns were approximately 5 per cent on the value of the estate.  The payment of annuities consumed $35,082.82 in 1926 and $33,862.88 in 1927.  The amount paid *493  for taxes and other fixed charges was $6,074.71 in 1926 and $6,592.67 in 1927.  But in 1926 the excess over the payments under item six of the will was $18,324, while in 1927 it was only $12,992.36.  If this rate of diminution were continued the requirements under item six, paragraphs (a), (b) and (c), would soon invade the amounts previously "permanently set*1318  aside" for the eleemosynary and educational institutions enumerated in paragraph (g), and perhaps also the corpus of the estate would be impaired.  Furthermore, we have no evidence that the petitioners did permanently set aside such excess other than their claim for its deduction in their income-tax return "on the ground that it was executed for the benefit of charity as provided in the will." We are of the opinion that the testator intended that neither the prorated shares of the residuary estate bequeathed to the fourteen institutions mentioned in item six (g) of the will, nor any portions thereof derived from income, were to be definitely fixed or permanently set aside until after the death of his last surviving daughter and that, therefore, the petitioners neither could nor did so set aside for the benefit of such institutions the amount of the income received during the years in question in excess of the sums required to pay the expenses of the trust and the annuities established by the will.  See , in which we said, "we are of the opinion that in taxing the income of a trust, it is the intention of*1319  Congress to tax the trust for all income received by it which can not be definitely and legally paid to or permanently set aside for a definite beneficiary under the terms of the will or deed creating the trust." See also . The petitioners are not entitled to the deductions claimed by them under section 219(b)(1) of the Revenue Act of 1926.  The petitioners further claim that, in any event, under our decision in , they are entitled to deduct the earnings of a fund of $345,000 which has already been determined by this Board to be the minimum deductible value for a remainder left to charity.  That case, however, was an estate-tax case in which the sole issue was the amount to be deducted in determining the net estate under section 403(a)(3) of the Revenue Act of 1921.  It involved the same petitioners and the same estate that are before us now.  We there held that the petitioners were entitled to deduct $345,000 representing the value of the residuary estate which would ultimately*1320  go to certain educational and charitable institutions under item six (g) of the Herbert A. Wilder will.  *494  The appraisal of an apparently stable and liquid fund of securities for estate-tax purposes is a far different matter from that of gauging the recurring yearly return from such a fund, from the viewpoint of the income tax thereon.  While we may have felt reasonably sure that in 1923 a fund of $345,000 would be free from invasion by the demands of the sixth item of the will until the death of the testator's last surviving daughter, it does not follow that the possibility of requiring the entire current income to pay constantly increasing tax and expense charges and the definite burden of annuities was extremely remote.  Decedent's care and concern that his daughters should receive a continuous benefit from his estate under all circumstances and an added assistance in times of emergency are apparent from items five and six (d) of his will.  All such needs were to be met fully before the several institutions were to receive any legacy whatever.  No specific fund amounting to $345,000 was segregated, designated or recognized as being the minimum amount which ultimately*1321  will go to charities nor was it permanently set aside for such purpose.  No income, therefore, was identified as arising from securities belonging to the residuary legatees and we have no reason to assume that ultimately they will receive all or any part of such income.  Therefore, by giving to the will of Herbert A. Wilder the interpretation which we believe is clear and unmistakable, we hold that the petitioners are not entitled to the deductions claimed under section 219 of the Revenue Act of 1926 and that the deficiencies in income for the years 1926 and 1927, including the profit from the sale of securities in 1927, as determined by the respondent, should be approved.  Reviewed by the Board.  Decision will be entered for the respondent.