Court Opinion

ID: 4612722
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:51:47.85561+00
Date Added: 2024-06-11T07:54:29.422576
License: Public Domain

FLORENCE M. SWEET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sweet v. CommissionerDocket No. 101786.United States Board of Tax Appeals44 B.T.A. 871; 1941 BTA LEXIS 1264; July 3, 1941, Promulgated *1264  Under the provisions of a will creating a testamentary trust, petitioner was given "so much of the net income thereof as she may desire in each and every year", and any unexpended portion of the net income at the end of the year was to be added to the principal of the trust.  The trustee distributed to petitioner only a portion of the income for 1932 and 1933, although she had expressed a desire for it all, and the balance was added to principal.  In 1935 the trustee paid to petitioner all the ordinary net income of the trust and she returned it all for taxation, except a small amount of H.O.L.C. interest which she now concedes is taxable to her.  The trustee also distributed to petitioner in 1935 a substantial part of the undistributed income of the trust for 1932 and 1933.  This latter amount she did not return for taxation and the Commissioner has added it to the income reported by petitioner, characterizing it as capital gains of the trust for 1935.  Held, that none of the amount in question was capital gain of the trust in 1935 and it is not taxable to petitioner.  2.  For the years 1932 and 1933, petitioner reported for taxation on her income tax returns only the amounts*1265  which she actually received from the trust.  She contended then, and still contends, that the testamentary trust set up by her husband's will was one where the income was distributable to her within the descretion of the trustee and she is taxable upon only such income as she actually receives from the trust.  Held, that such contention, though it may be in error, does not estop petitioner from contending that amounts distributed to her in 1935 from income of the trust for prior years is not taxable to her in 1935.  Francis H. Russell, Esq., for the petitioner.  David Haskin, Esq., for the respondent.  BLACK *871  The respondent has determined a deficiency in income tax against petitioner for the calendar year 1935 in the amount of $11,532.76.  In his determination of this deficiency, the respondent added to income $31,195.27, representing $200 interest on H.O.L.C. bonds and $30,995.27 paid to petitioner in 1935 as income beneficiary of a testamentary trust created by her deceased husband's will, which was not reported by her in that year.  The petitioner alleges that the deficiency is based upon the following errors: (a) The inclusion of*1266  the amount of $31,195.27 in the net income of the taxpayer, neither the trust nor the taxpayer having received said amount, nor any portion thereof, as income for the year 1935.  *872  (b) A tax has been paid on the amount of income in question for the years 1932 and 1933 and has been received and accepted by the Collector of Internal Revenue.  In his answer to the petition the respondent affirmatively alleges that the petitioner is now estopped to claim that a payment of $30,995.25 made to her in 1935 by the trustee of the Joseph L. Sweet trust constituted income to her in the years 1932 and 1933 in the respective amounts of $19,528.13 and $11,467.14, instead of income to her in the year 1935.  FINDINGS OF FACT.  The petitioner is the widow of Joseph L. Sweet, who died testate July 21, 1932.  Under the will of Joseph L. Sweet the residue of his estate was left to Harold E. Sweet in trust to invest and reinvest the same, and to distribute the net income and principal as follows: Twenty-ninth.  All the rest, residue and remainder of my estate, * * * (b) To pay to my said wife, Florence M. Sweet, so much of the net income thereof as she may desire in each and every*1267  year, for and during the term of her natural life, it being my intention under any contingency, in so far as I can, to make provision for her, a comfortable maintenance and under normal conditions to enable her, in her discretion, to contribute to worthy beneficent objects.  (c) To add to the principal sum of said trust at the end of each year, any unexpended portion or portions of the net income, the same to become a part of such principal sum and subject to the trusts herein provided.  The will further provided that upon the death of the testator's wife, petitioner here, the rest and residue of the trust fund, together with all accumulation therein, would go to the Attleboro Hospital, a Massachusetts charitable corporation, to be added to the general funds of the corporation.  The trust under the residuary clause of the will was not formally set up separately until January 1, 1934, when assets of the estate in the amount of $619,640.08 were transferred by the executor of the estate to Harold E. Sweet, trustee of the trust.  Harold E. Sweet was also executor of the estate and the residuary trust was administered by him in his capacity as executor until January 1, 1934.  In*1268  1932 and 1933 the trustee and the life beneficiary of the trust, petitioner here, had several conversations relative to the payment of the income to her.  In these conversations the petitioner indicated to the trustee that she desired all the income from the trust in order to provide funds for various philanthropic purposes, including the construction of a war memorial for the city of Attleboro, Massachusetts.  She had provided the sum of $30,000 in her will for such memorial, but desired to have it constructed during her lifetime.  *873  For the period from the death of the testator on July 21, 1932, to December 31, 1932, the estate had a total income of $24,896.37 (not including capital gains of $3,733.23) available to the beneficiary of the trust.  Of this amount, $5,368.24 was distributed to petitioner, leaving a balance undistributed in that year of $19,528.13.  For the period July 22 to December 31, 1932, the executor filed a Federal income tax return on Form 1040 showing net income of $15,462.79 and a tax on such income of $570.71, which was paid by the estate.  Later a proposed overassessment of $570.71 was accepted by the executor and the amount of $570.71 was refunded*1269  on the basis that the income of the estate or the trust not paid to the beneficiary was, under the terms of the will, permanently set aside for charity, the Attleboro Hospital.  On petitioner's income tax return for 1932 she reported $5,368.24 as income from the estate of Joseph L. Sweet.  No consent was ever requested by the Bureau of Internal Revenue or executed by the petitioner extending the time within which income tax for 1932 could be assessed.  For the year 1933 the executor of the estate filed a return on Form 1041 showing total gross income of the estate of Joseph L. Sweet of $127,920.70 and tax-exempt interest of $9,523.27.  The amount of $127,920.70 was made up of taxable interest, $38,560.34; dividends, $24.673.03; and capital gains from sale of stocks and bonds, $64,687.33.  The return also claimed deductions aggregating $94,021.89, leaving a net income of $33,898.81.  On the return it was reported that $20,802.07 of the taxable interest of $38,560.34 and $13,310.31 of the dividends of $24,673.03, or a total of $34,112.38, was paid to the petitioner; $5,194.69 of the tax-exempt interest of $9,523.27 was also paid to petitioner.  It was also reported on the return, *1270  under "Beneficiaries' share of income and credits" that the Attleboro Hospital was "paid" the balance of the gross income from interest, dividends and capital gains in the amount of $93,808.32 and was charged all of the interest and tax deductions shown on the return (except $213.57, dividend tax which was charged to petitioner) in the amount of $89,874.54, leaving a net amount of $3,933.78 "paid" to the hospital.  No amount was in fact paid to the hospital and no Federal income tax return on Form 1040 was filed by either the estate or the trust for the year 1933.  On the petitioner's Federal income tax return for the year 1933, filed on March 5, 1934, she reported the receipt of total income of $45,522.57, consisting of the following items: Interest on bank deposits, etc$5,254.15Interest on tax-free covenant bondsDirect$4,497.89From fiduciary11,971.0316,468.92Income from fiduciaries - Estate of Joseph L. Sweet8,831.04Rents and royalties1,114.15Dividends on stock of domestic corporationsDirect$544.00From fiduciary13,310.3113,854.31*874  On such return the petitioner reported total deductions of $5,769.71*1271  and a net income of $39,752.86.  No consent was ever requested by the Bureau of Internal Revenue or executed by the petitioner extending the time within which income taxes for 1933 could be assessed.  For the year 1935 Harold E. Sweet, trustee, filed a fiduciary return of income on Form 1041 in the name of the Joseph L. Sweet trust.  On this return the following items were reported: Income:Interest on bank deposits, etc$5,545.53Interest on tax-free covenant bonds11,198.39Capital gain37,912.06Dividends on stock of domestic corporations19,983.40Other income - H.O.L.C. bond interest200.00Total(sic) 74,749.38Deductions:Taxes paid1,049.18Contributions - The Attleborough Hospital37,912.06Other deductions2,909.44Total41,870.68Net income32,878.70On the return receipt of tax-exempt interest of $2,190.96 was also reported.  On such return it was reported that dividends of $19,983.40, other income of $12,695.30 and H.O.L.C. bond interest of $200, a total of $32,878.70, and in addition thereto tax-exempt interest of $2,190.96, was paid to petitioner.  Also in addition to the above described amounts the Joseph L. Sweet*1272  trust paid to petitioner in 1935 the sum of $30,995.27.  This latter amount was not reported on the 1935 fiduciary return as having been paid to her.  At the time of such payment the trust had realized at least $33,000 of the capital gains shown on the fiduciary return filed for the year 1935.  The trust did not in fact pay $37,912.06 to the Attleboro Hospital during 1935.  No return was filed by it on Form 1040 for the year 1935 and no Federal income tax was paid by it for that year.  *875  On the petitioner's Federal income tax return for the year 1935 she reported the receipt of total income of $49,616.76, consisting of the following items: Interest on bank deposits, etc$6,378.55Interest on tax-free convenant bondsDirect$6,152.10From fiduciary11,198.3917,350.49Income from fiduciaries - Harold E. Sweet, trustee1,496.91Rents and royalties1,179.93Capital gain1,533.48Taxable interest on liberty bonds350.00Dividends on stock of domestic corporationsDirect$1,344.00From fiduciary19,983.4021,327.40On such return the petitioner reported deductions of $5,222.68 and a net income of $44,394.08.  The*1273  above mentioned "Income from fiduciaries - Harold E. Sweet, trustee $1,496.91" represented "Income on bank deposits, etc. $5,455.53" less "Taxes paid $1,049.18" and "Other Deductions $2,909.44." There was no closing entry made on the books of the estate of Joseph L. Sweet at the end of 1932.  A closing entry was made as of December 31, 1933, covering the years 1932 and 1933 and transferring any undistributed income to the principal.  An entry was made at the close of every year thereafter transferring the excess of anything over expenses and the excess of capital gains over capital losses to trust capital or estate capital, as the case might be.  When petitioner's 1932 income tax return was being examined by the Bureau of Internal Revenue, the Bureau proposed to tax the petitioner on all the income (except capital gain) of the estate of Joseph L. Sweet or of the Joseph L. Sweet trust, whether or not such income had been distributed to her.  On April 25, 1934, in protest against respondent's proposed action, the petitioner represented to the Bureau as follows: Between July 21 and December 31, 1932, the total net income of the estate of Joseph L. Sweet was $21,620.03, of which*1274  the taxpayer desired, requested and was paid $5,368.24.  This amount was reported by the taxpayer in her income tax return for the calendar year 1932 under Item 6, Income from Fiduciaries.  The balance of the income of the estate was retained by the executor, added to the principal of the residue and on January 1, 1934, turned over as a part of the principal of the residue to himself as trustee of the said residuary trust.  * * * the taxpayer is taxable only on the amount of income which she receives and not on income not received by her and by the terms of the will added to the principal sum of the trust.  The additional income is not taxable to the taxpayer for the further reason that it is by the terms of the will "permanently set aside" for charitable purposes *876  at the end of each year and, therefore, comes within Sec. 162(a) of Rev. Act of 1932.  The income in question does not come within Reg. 77, Art. 332 because it was neither "credited to the account of" nor "set apart for" the taxpayer.  After conferences held after the filing of petitioner's protest, the proposed additional income tax was not assessed.  On or about December 29, 1939, after the petitioner*1275  learned that the respondent was about to determine a deficiency on the basis that the amount of $30,995.27 was paid from capital gains of the trust in 1935, she transmitted to the collector of internal revenue at Boston, Massachusetts, a check in the amount of $3,921.99.  Such amount was submitted in payment of computed deficiencies in taxes for the year 1932 in the amount of $703.34, for 1933 in the amount of $3,170.65, and for 1935 in the amount of $48.  The check was cashed by the collector and no amount with respect thereto has been repaid to the petitioner by the Government.  No payment was tendered by the petitioner for interest on these computed deficiencies.  As of December 29, 1939, interest on the computed deficiencies, if collectible, would amount to $1,398.55.  The petitioner kept her books and filed returns on the cash receipts and disbursements basis.  In 1935, after a discussion with the investment counsel for the trust, the trustee had the auditor, Edward C. Daley, prepare a statement of the income and payments made to the widow for the years 1932, 1933, and 1934 and up to July 1935.  This statement showed balances of income which had not been paid to the petitioner*1276  of $18,162.20 for the year 1932, $33,343.41 for the year 1933, $6,386.71 for the year 1934, and $7,820.85 for the year 1935.  Subsequently, the trustee consulted Francis H. Russell, the counsel for the trust, Edward C. Daley, the auditor, and John J. McCarte, an internal revenue agent, at a conference held in his office.  At this conference the statement prepared by the accountant was called to the attention of those present and questions of the legality of the payment to petitioner of the unpaid balances for respective years and its tax effect were discussed.  Following this conference, Harold E. Sweet, trustee of the Joseph L. Sweet trust, paid to petitioner the $30,995.27 which is involved in this proceeding.  A portion of this amount was included in a check for $33,000 delivered to petitioner by the trustee on October 15, 1935.  The second account of the trustee of the trust for the period January 1 to December 31, 1935, showed payments to petitioner of $35,069.66 on account of income and $30,995.27 on account of principal.  In computing the deficiency here in question the respondent added to petitioner's income for 1935 $200 representing interest from *877  H.O.L.C. *1277  bonds, and $30,995.27 representing an amount paid to petitioner by the trustee in 1935 but not reported by her in her income tax return for that year.  Respondent explained his action in adding the above items to petitioner's net income for 1935, as follows: Distributions to you during the year 1935 from the income of Joseph L. Sweet Trust and not otherwise reported for tax purposes are considered taxable to you, in accordance with the provisions of section 162(b) of the Revenue Act of 1934 * * * The foregoing facts have been found from a stipulation of facts filed at the hearing and from oral testimony and documentary evidence.  Any facts embodied in the stipulation which are not included in these findings of fact are made a part hereof by reference.  OPINION.  BLACK: In the taxable year 1935, as will be seen from our findings of fact, the Joseph L. Sweet trust had net income from dividends and other sources of $32,878.70, nontaxable income of $2,190.96, and capital gains of $37,912.06.  In that year the trustee paid to petitioner, the life beneficiary of the trust, $66,064.93, which amount was made up, according to the books and records of the trust, of dividends and other*1278  income of $32,878.70, nontaxable income of $2,190.96, and payment from "principal" $30,995.27.  In her income tax return for 1935 the petitioner included in income $32,678.70 received from the trustee but did not include the payment to her from "principal" in the amount of $30,995.27, and interest from H.O.L.C. bonds in the amount of $200.  Petitioner now concedes that the $200 interest from the H.O.L.C. bonds is taxable to her, but contests the respondent's action in adding to income the amount of $30,995.27 paid to her from "principal." The only question before us, therefore, is whether the respondent erred in adding to petitioner's income the amount of $30,995.27 in question.  The petitioner contends that the amount of $30,995.27 represents income for the years 1932 and 1933, to which she was entitled in those years but did not receive until 1935, that it was principal when received, and, therefore, is not taxable to her in 1935.  The respondent contends that the amount in question was capital gain of the trust in 1935 and is taxable to petitioner as income for that year since it was actually distributed to her.  He further contends that the petitioner is estopped to claim*1279  that the amount in question should have been taxed to her as income in 1932 and 1933.  *878  The provisions of section 162 of the Revenue Acts of 1932 and 1934 are identical and section 162 of the Revenue Act of 1934 is printed in the margin. 1*1280  If we assume that the Joseph L. Sweet testamentary trust, of which petitioner was the income beneficiary for life, was one in which the income was currently distributable to her, as respondent has determined in his deficiency notice, it is clear that petitioner has returned all of such income for taxation of her 1935 income tax return except the $200 H.O.L.C. bond interest which she now concedes is taxable to her.  It is true the trust had gains and profits of $37,912.06 from the sale of stocks and bonds in 1935 which petitioner did not return for taxation, but under the laws of the State of Massachusetts capital gains from a trust estate belong to the remainderman and are not distributable to the life beneficiary unless there is provision in the trust instrument to the contrary.  ; ; ; ; ; ; *1281 ; and see . It seems clear that there was no provision in decedent's will in the instant case which authorized the distribution of capital gains of the trust to petitioner.  We do not understand respondent to so contend in his brief, though he does contend that the $30,995.27 in question was actually distributed from capital gains.  It seems perfectly clear from *879  the facts of record in the instant case that the trustee did not intend to distribute to petitioner the capital gains of the trust for the year 1935 or of any other year, nor did he do so.  The facts seem to us to show clearly that in 1935 the trustee concluded that there was ordinary income of the estate or trust for the years 1932 and 1933 which had not been distributed to petitioner as she might have requested be done.  The facts also show that petitioner was anxious to have this income paid over to her in order that she might construct a war memorial bridge for the city of Attleboro, Massachusetts.  She made known her wishes to the trustee and the trustee asked advice of his counsel as to whether he had the legal authority to make*1282  such a distribution at such late date and counsel gave an affirmative answer.  It is not our function to say whether that answer was correct or not.  That is a function for the Massachusetts courts.  We have only to decide the tax consequences of such a distribution and, inasmuch as it seems entirely clear that the $30,995.27 in question was not paid from the 1935 ordinary income or from the capital gain of the trust, but from income of the estate or trust in prior years, it is not taxable to petitioner in 1935.  And that is true, whether the trust is held to be one where the income is currently distributable to the beneficiary as respondent has determined in his deficiency notice or whether it be held to be one where the income is only distributable within the discretion of the trustee, as petitioner contends and respondent seems to have determined in prior years.  In , the Board, among other things, said: * * * during the taxable years there was distributed to the petitioners not only their distributable share of the income of each of those years, but payments from distributable income of prior years.  This seems to us to be of*1283  no importance.  The law provides that the beneficiary shall include as his income his distributable share of the income, whether or not distributed.  Amounts which properly became distributable in prior years were taxable in those years, not in the years of distribution and distribution in the years before us can serve neither to increase the taxable income of those years nor to affect the construction of the will.  If the trust is held to be one where the income is currently distributable to the beneficiary, then all of 1932 and 1933 income was taxable to petitioner in those years, as was held in the Chambers case above cited.  If the trust is held to be one where the income is distributable to petitioner only in the discretion of the trustee, then petitioner was taxable only in 1932 and 1933 with the income which was properly paid or credited to her in those years and the balance *880  of the income was taxable to the fiduciary.  In all events, all of the income of an estate or trust in any one year is taxable either to the fiduciary or the beneficiary in such year, to one or the other, or both, depending upon what kind of a trust it is.  See sec. 162, supra; *1284 . Whether petitioner owed the increases in taxes for 1932 and 1933 which in 1939 she tendered and paid to the Commissioner, we pass no opinion.  Those years are not before us.  What we do hold is that, when parts of 1932 and 1933 income of the trust were distributed to petitioner in 1935, such amounts had already become principal of the trust and were not taxable to petitioner in 1935.  The facts in the instant case are distinguishable from those present in ; affd., . In the Letts case, the income in question, representing gains and profits from the liquidation of the shares of stock of a corporation, was actually distributed by the trustee as income to the beneficiaries and the court of California having appropriate jurisdiction of the subject matter approved the distribution as income. Under these circumstances we held that we had no cause to treat the distribution as anything else but income and we, therefore, approved the Commissioner's determination. In the instant case, the trustee did not distribute the $30,995.27 in question as income, *1285  but on the contrary he distinctly noted it as a distribution of principal to the beneficiary and in his report to the Massachusetts Probate Court he reported the amount as a distribution of principal.  Under these circumstances we think we must hold that it was a distribution of principal and not of income.  Cf. ; . Respondent strongly argues that petitioner is estopped from claiming that the $30,995.27 in question was not taxable income to her in the year 1935 when she received it from the trust.  We fail to see where respondent has established that petitioner is estopped from making the contention which she is making.  Whether the testamentary trust set up by the will of decedent's husband is one where the income is currently distributable to petitioner or whether it is one where the income is distributable within the discretion of the trustee, is a question of law.  The respondent had full opportunity to read the terms of the will and make his own construction of its terms.  There is no evidence that petitioner has deceived him.  Petitioner has contended all along, both in her protest from which a*1286  quotation is taken in our findings of fact and in her brief filed in this proceeding, that the trust is one where the income is distributable to petitioner within the discretion of the trustee and she *881  is taxable only on the income which is actually distributed to her.  We fail to see where these facts show any estoppel against petitioner.  . The evidence does show that the trust itself, in filing its fiduciary returns for 1933 and 1935 on Form 1041, made certain incorrect statements about the residue of the income in those years having been paid to the Attleboro Hospital, a charitable corporation for the State of Massachusetts, and the trust filed no income tax return on Form 1040 for those two years and paid no tax.  It might well be that, if we had the trust before us as a taxpayer, these statements in regard to income being paid to the Attleboro Hospital in those years, when in fact none was paid, would work an estoppel against it and affect its tax liability adversely.  We pass no opinion on that question because we do not have the trust before us as a taxpayer and there is nothing to show that petitioner had*1287  any connection whatever with such untrue statements.  Respondent's plea of estoppel is not sustained by the evidence and we hold against it.  Decision will be entered under Rule 50.Footnotes1. SEC. 162.  NET INCOME.  The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - (a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23 (o)) 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 section 23(o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or 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; (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; (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. ↩