Court Opinion

ID: 4622486
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:49:31.649832+00
Date Added: 2024-06-11T07:56:11.552562
License: Public Domain

Franc M. Curry, Petitioner, v. Commissioner of Internal Revenue, RespondentCurry v. CommissionerDocket No. 4415United States Tax Court5 T.C. 577; 1945 U.S. Tax Ct. LEXIS 107; August 7, 1945, Promulgated *107 Decision will be entered for the respondent.  Distributions to petitioner as beneficiary of a testamentary trust, out of the income thereof, held taxable to her under section 22 (a) and section 162 (b) of the Revenue Act of 1938 and the Internal Revenue Code, and no part of the distributions constitutes an annuity. Helvering v. Butterworth, 290 U.S. 365">290 U.S. 365. A. L. Gardner, Esq., and Robert C. Barney, Esq., for the petitioner.R. L. Greene, Esq., for the respondent.  Arundell, Judge.  Murdock, J., dissents.  ARUNDELL*577  The petitioner in this proceeding seeks a redetermination of deficiencies in income tax determined by respondent for the calendar years 1938, 1939, 1940, and 1941 in the amounts of $ 170.25, $ 372.33, $ 622.63, and $ 1,538.10, respectively.  The question presented is whether the last will and testament of Harry J. Curry, deceased, husband of petitioner, in establishing a trust for the benefit of petitioner and others, creates an annuity payable to petitioner at all events and regardless of the trust income. *109  The facts have been stipulated, and so far as material here they may be summarized as follows:FINDINGS OF FACT.Petitioner is a resident of Chicago, Illinois, and her income tax returns for the taxable years were filed with the collector for the first district of Illinois.  She is the widow of Harry J. Curry, who died August 19, 1934, a resident of Chicago, Illinois, leaving his last will and testament dated December 1, 1933, which was admitted to probate in Cook County, Illinois, on September 10, 1934.  Article fifth of said will reads in part as follows:Article Fifth: All the rest, residue and remainder of the property, real, personal and mixed, of whatsoever character and wheresoever situated, of which I may die seized or possessed, or which I may own or have any interest in at the time of my death (including all lapsed legacies and bequests), I give, devise and bequeath to my said wife, Frances M. Curry, and The Northern Trust Company, a corporation organized and existing under and by virtue of the laws of the State of Illinois and having its principal banking office in Chicago, Illinois, (or its corporate successor), as Trustees, to hold upon the trusts hereinafter in this*110  Article set forth.  The trust estate comprising the trust by the next preceding sentence created during the period prior to the division thereof in Section 2 of this Article provided for, is hereinafter for convenience referred to as the "general trust estate."Section 1: All the net income each year of the general trust estate commencing from the date of my death and continuing so long as my said wife shall live shall be paid to my said wife, except that, with respect to each of *578  my children continuing to survive, after such child shall have reached the age of twenty-five (25) years and continuing until such child shall have reached the age of thirty (30) years, the Trustees shall pay to such child each year out of such net income the sum of Three Thousand Dollars ($ 3,000.00), and after such child shall have reached the age of thirty (30) years the Trustees shall pay such child each year out of such net income the sum of Six Thousand Dollars ($ 6,000.00); provided, however, that such payment of income to my children shall be made only if the net income of the trust during the year for which such payment is made exceeds Twenty-five Thousand Dollars ($ 25,000.00), and*111  only out of the excess of net income over Twenty-five Thousand Dollars ($ 25,000.00), so that in any year, before any payment of income is made hereunder to a child of mine, my said wife shall be assured of receiving out of the income of the trust not less than Twenty-five Thousand Dollars ($ 25,000.00).  In the event for any year the income of said general trust estate shall be less than Ten Thousand Dollars ($ 10,000.00), then and in that event the Trustees shall have the right to apply the principal of said trust estate in an amount which, together with said income, will equal Ten Thousand Dollars ($ 10,000.00) for the maintenance and support of my wife, it being the intention hereof that the income of the trust estate only shall be used as hereinabove in this section provided, except in the event said income shall for any year fall below Ten Thousand Dollars ($ 10,000.00).Pursuant to the provisions of that article of the will, the residuary estate of the decedent was transferred prior to 1938 to petitioner and the Northern Trust Co., the trustees named in the will, and during the taxable years the property was held and managed by them under the designation "Harry J. Curry Trust." *112  Petitioner and decedent had two children who survived decedent, but neither child had reached the age of twenty-five during the taxable years, and each was dependent upon petitioner for support.The total distributable net income of the Harry J. Curry Trust during each of the taxable years was approximately $ 21,000.  With the exception of small amounts (not here in controversy) distributed to decedent's brother in 1938 and 1939 under another provision of the will, said income was distributed to petitioner during each of the years in question.  A portion of the income consisted of nontaxable interest.  In addition, petitioner had income in the amount of approximately $ 5,000 per annum from her personally owned property.For each of the taxable years the fiduciary returns of the Harry J. Curry Trust and the individual returns of petitioner were prepared on the basis that $ 10,000 of the distributable income of the trust constituted an annuity, no amount of which was taxable to petitioner. The following table shows for each year the amounts of taxable net income of the Harry J. Curry Trust (exclusive of deductions of amounts distributed to beneficiaries), the amounts of taxable income*113  distributed to petitioner by the trust, and the amounts thereof reported and included in gross income in petitioner's individual returns: *579 Amounts of theTaxable netTaxable incometaxable incomeYearincome ofdistributed toincluded intrustpetitioner bypetitioner'strusteesreturns1938$ 13,251.71$ 11,206.15$ 5,207.06193914,669.2813,551.536,723.83194015,540.5114,834.547,767.70194113,450.7114,108.987,120.01No portion of the principal of the trust estate has ever been distributed to petitioner or applied for her benefit.The individual returns of petitioner for the taxable years 1938 and 1939 were filed on March 15, 1939, and March 15, 1940, respectively.  Notice of deficiency for said years was sent to petitioner by registered mail on January 6, 1944, within five years after the returns were filed.The Commissioner determined that the taxable net income of the Harry J. Curry Trust distributed to petitioner during the years in question was taxable to petitioner under section 162 (b) of the Revenue Act of 1938 and of the Internal Revenue Code, and that no portion of said income was distributable to petitioner*114  as an annuity. With respect to the years 1938 and 1939, the determination was also made pursuant to sections 22 (a) and 275 (c) 1 of the Revenue Act of 1938 and of the code.  The additional amounts of trust income so determined to be taxable to the petitioner were as follows:1938$ 5,999.0919396,827.7019407,066.8419416,988.97OPINION.The question presented here is whether the entire amount of taxable income paid over to petitioner as beneficiary of the Harry J. Curry Trust represents income currently distributable, and therefore*115  taxable, to her under the provisions of sections 22 (a) and 162 (b) of the Revenue Act of 1938 and of the Internal Revenue Code, or whether a portion thereof constitutes an annuity not taxable to her by virtue of section 22 (b) (3).  The pertinent statutes appear in the *580  margin.  2 The answer depends upon the construction of the will of petitioner's deceased husband, Harry J. Curry, particularly article fifth, section 1 thereof, set out in the findings.  Petitioner contends that the language of the will creates an annuity in the amount of $ 10,000, payable to her at all events.  Respondent, on the other hand, argues that under the provisions of the will the trustees are directed to pay all the net income to petitioner; that the trustees have only a discretionary and contingent right to invade the corpus; that, therefore, no annuity was created; and that, since the entire income of the trust (with minor exceptions not material here) was currently distributable and was in fact distributed to petitioner, she is taxable thereon in the amounts set out in the deficiency notice.*116 The Supreme Court has determined for us the broad principles of law which must guide our decision.  If the testator intended that the sum of $ 10,000 should be annually payable to petitioner absolutely and at all events, regardless of the amount of the trust income, then under the rule of , and , the distribution represents an annuity and is not taxable to the beneficiary, but if on the other hand the invasion of the principal rests in the sound discretion of the trustees and the $ 10,000 was in fact paid out of income of the trust, then it is taxable to petitioner under the doctrine of .It is our opinion that the Curry will does not create an annuity in *581  the amount of $ 10,000.  The language used in immediate connection with the $ 10,000 item is:* * * In the event for any year the income of said general trust estate shall be less than Ten Thousand Dollars ($ 10,000.00), then and in that event the Trustees shall have the right to apply the principal of said trust*117  estate in an amount which, together with said income, will equal Ten Thousand Dollars ($ 10,000.00) for the maintenance and support of my wife, it being the intention hereof that the income of the trust estate only shall be used as hereinabove in this section provided, except in the event said income shall for any year fall below Ten Thousand Dollars ($ 10,000.00).  [Italics ours].It will be noted that there is no positive direction that the trustees shall apply the principal when the income is insufficient.  It is significant that elsewhere in the will the testator spoke in the imperative. For example, in the same article and section of the will the expression "shall pay" or "shall be paid" appears three times; in section 2 of that article are found the terms "shall divide" and "I direct that one-third (1/3) * * * shall be immediately paid"; in section 4 are directions that the trustees "shall transfer and deliver" and "shall distribute"; in section 5 the testator specifically ordered the trustees to do certain things, repeatedly using the term "I direct."On the other hand, when in section 6 the testator dealt with the investing and managerial powers of the trustees, he reverted*118  to the permissive language used in connection with the $ 10,000 item in section 1. He stated that the trustees "shall have full power, at their discretion, to sell, assign and transfer all personal estate"; that they "shall also have full power * * * to change investments and to invest and reinvest"; that they "may purchase the bonds of any corporation"; and that they "shall have the right to purchase real estate mortgages" and "shall have the right to purchase municipal bonds." [Italics ours.] Could it be logically contended that, in these last two instances, where the testator provided that the trustees "shall have the right to purchase" real estate mortgages and bonds, the trustees were under a mandatory duty so to do?  We think not.When these instances throughout the will are considered collectively, the conclusion is inescapable that the testator intended to give the trustees only a discretionary right to invade the corpus. He used the term "shall have the right" in a permissive sense.  Wherever he wished to command, he used such positive and inequivocal language as "shall pay," "shall divide," "shall distribute," and "I direct."Petitioner relies heavily upon a New*119  York case.  ; . That case was an accounting proceeding between trustees and the beneficiary under a testamentary trust. The issue presented was whether the testator intended to impose upon the trustees an imperative obligation to invade the corpus of the trust so as to produce a certain monthly income for his widow, or whether he intended only to give them a discretionary power so to *582  do.  It was held that the duty was mandatory and that the widow was entitled to receive the monthly sum of $ 1,000, regardless of whether income from the trust fund was sufficient.  The pertinent language used in the testator's will in that case was:* * * I do hereby specifically authorize and empower my said Executors and Trustees, the survivor and survivors, successor and successors of them, if the net rents, issues, income and profits from said fund shall not in any year be sufficient to pay to the said Augusta Carr the monthly sum of One Thousand Dollars, to advance and pay to the said Augusta Carr out of the principal of the said fund so held in trust, whatever amount may be *120  required, in addition to the actual net rents, issues, income and profits, to give her in the aggregate a monthly allowance of One Thousand Dollars. * * *The court found, after reviewing the language of the will as a whole, that the testator intended the power to invade the corpus to be mandatory, and that the term "specifically authorize and empower" expressed for him the idea of the imperative. Much importance was attached to the fact that the testator addressed the direction not only to his trustees, but to the "successor and successors of them," "persons whose identity," said the court, "could not then be known to him."But that case is not controlling here.  It stands for no more than a finding by the court that, taking the instrument as a whole, the testator made a mandatory direction to the trustees to pay a sum certain.  For the reasons we have already set forth in detail, it seems clear to us that the language used by the testator in the instant case granted simply a discretionary right to the trustees.  Nor do , and ,*121  help petitioner.  In both of the latter cases the instruments creating the trusts provided in terms for annuities and the invasion of the corpus of the trust for their payment.We think the conclusion we have reached finds ample support in ; affd., , and in  (cross appeals pending, C. C. A., 3d Cir.).  The right of the beneficiary in each of those cases to receive a sum certain was quite absolute should the beneficiary see fit to make demand on the trustees therefor.  But, even so, we concluded that the respective testators had not provided for a payment to their beneficiaries of a sum certain in any event.We conclude that the entire amount of taxable income paid over to petitioner by the Harry J. Curry Trust represented income currently distributable to her, and that she is taxable thereon under the provisions of sections 22 (a) and 162 (b) of the Revenue Act of 1938 and of the code, in the amounts determined by respondent.Decision will be entered for the respondent.  Footnotes1. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.Except as provided in section 276 --* * * *(c) Omission From Gross Income. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.↩2. SEC. 22. GROSS INCOME.(a) General Definition.  -- "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *(b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this title:* * * *(3) Gifts, bequests, and devises. -- The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income);* * * *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 --* * * *(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, 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 subsection (c) of this section in the same or any succeeding taxable year;* * * *↩