Court Opinion

ID: 4607293
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:40:19.094251+00
Date Added: 2024-06-11T07:53:30.942871
License: Public Domain

THE UNION TRUST CO. OF PITTSBURGH, TRUSTEE ESTATE OF ANNIE M. WALLACE, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Union Trust Co. v. CommissionerDocket No. 78914.United States Board of Tax Appeals34 B.T.A. 284; 1936 BTA LEXIS 718; April 8, 1936, Promulgated *718  INCOME TAXABLE TO FIDUCIARY WHERE DISTRIBUTIONS MADE OUT OF CORPUS AND INCOME. - Nieces of a testatrix were given substantial rights under a will.  They agreed to accept, in lieu of the gifts made to them by the will, annuities of $5,000 each, payable out of the income of a trust if sufficient for that purpose, but if not, then out of corpus of the trust estate.  During taxable year one-fourth of total paid to them was from corpus.  Held, the income of the trust estate was taxable to the fiduciary and the distributions made by it were not deductible under section 162(b) of the Revenue Act of 1932 as income of a trust estate currently distributed.  Burnet v. Whitehouse,283 U.S. 148">283 U.S. 148; Helvering v. Pardee,200 U.S. 365">200 U.S. 365. William A. Wilson, Esq., for the petitioner.  R. N. McMillan, Esq., and W. H. Payne, Esq., for the respondent.  MELLOTT*284  Petitioner seeks a redetermination of the deficiency in income tax, determined by the respondent for the calendar year 1932, in the amount of $868.40.  The issue for our determination is whether income, received by a fiduciary and distributed to beneficiaries*719  under an instrument requiring definite annual payments to be made to such beneficiaries out of income, if sufficient, but if not, out of principal or corpus, is taxable to the fiduciary or to the beneficiaries.  The facts were developed by the statements and admissions of counsel and by the introduction in evidence of various documents, from which we make the following findings of fact.  FINDINGS OF FACT.  Petitioner is a corporation duly organized and existing under and by virtue of law, with its principal office in Pittsburgh, Pennsylvania.  John C. Wallace, husband of Annie M. Wallace, died December 23, 1906, testate, leaving surviving him his widow and a daughter, Lillian.  By the terms of his will, his wife was given a life estate in his property, "without accounting for profits * * * or income"; *285  "the absolute right to make sale, in fee simple or otherwise" of any portion of the property; and, in the event that she predeceased the daughter, then the property was to vest in the daughter as her separate estate.  In order to make effective the testator's desire that his son-in-law should not participate in the estate, he appointed Fidelity & Trust Co. of Pettsburgh*720  trustee, and directed that upon the death of his wife, said trustee should "take charge of, control and manage" all of the estate, make settlements of the income therefrom with the daughter and continue to function as such trustee for a period of ten years after the death of the wife.  Annie M. Wallace was appointed executrix of the estate of her deceased husband and had full control of the estate without accounting until her death, which occurred on May 15, 1926.  On November 11, 1924, the daughter, Lillian, executed an assignment to her mother of all her interest in the personal estate which was bequeathed to her under the will of her father.  Said Assignment was duly recorded in the office of the Recorder of Allegheny County.  No inventory of the personal estate of John C. Wallace was filed by Annie M. Wallace, but after her death the executors under her will filed an inventory and on May 22, 1926, the Bank of Pittsburgh N. A. was appointed administrator d.b.n.c.t.a. of the estate of John C. Wallace.  The assets of the estate, by decree of the court dated July 14, 1927, were ordered distributed to Fidelity Title & Trust Co., trustee, in trust for Lillian, for the purposes*721  specified in her father's will.  To this decree exceptions were filed by the nieces of Annie M. Wallace and others, and steps were taken to have a guardian ad litem appointed to protect the interests of the grandchildren of Annie M. Wallace.  Annie M. Wallace also left a will, which was duly admitted to probate.  In it she gave and bequeathed to each of her nieces (there were seven then living) the sum of $5,000 to be paid within one year after her death.  She also made certain specific bequests (not here important) and bequeathed and devised all of her residuary estate to the Union Trust Co. of Pittsburgh as trustee for the following purposes: To pay her daughter Lillian $12,000 per year; to pay for the care, education, and support of each of her grandchildren (two in number) $2,500 per year until they attained age twenty-one; to pay annually, "out of any surplus income" to the Pittsburgh Association for the Improvement of the Poor of Pittsburgh $500; "and to divide any further surplus income during the minority of my said grandchildren equally among my nieces" (naming them).  *286  Annie M. Wallace's will further provided that, after the grandchildren attained their*722  majority, $2,500 per annum should be paid to them directly and "out of any further surplus income" the sum of $75 per month shoudl be paid to each of the nieces, and, "as said nieces shall respectively die, the share of such deceased one shall be divided equally among the survivors." The will provided for the termination of the trust and disposition of the property, but the details need not be set forth here.  The assets of the estate or estates of John C. Wallace and his wife were of substantial value - nearly a million dollars.  Various court proceedings were instituted to protect the rights, fancied or real, of all who claimed any interest under either of the wills.  The court proceedings came on for hearing before the same judge, who outlined in general a settlement which he would approve, if agreed upon by all.  After conferences, a settlement was agreed upon, substantially along the lines suggested by the court.  Thereafter, and in January of 1928, a petition, signed by all parties in interest, was filed, in which it was stated that all were "satisfied that a compromise acceptable to all parties in interest would be for the best interests of all persons concerned", the prayer*723  of the petition asking that the court "enter a decree authorizing the said settlement", a copy of the settlement being attached.  On January 27, 1928, "the petition [was] presented in open court and upon consideration thereof the court finds as a fact that there is a question or dispute as to the construction of the last will and testament of Annie M. Wallace, deceased, and of the distribution of the income of her estate, and also as to the distribution of the estate of John C. Wallace * * *." "And the court being satisfied with the settlement of the questions involved in both estates as outlined in the foregoing petition, as well as the copy attached to said petition, * * *" the settlement was approved.  The settlement provided, inter alia, that all parties waived any claims they might have to assert that the property "should become a part of the estate of John C. Wallace, deceased"; that the assignment from Lillian Wallace Lambert to her mother should be declared void and she (Lillian) should execute and deliver to the Union Trust Co. of Pittsburgh, as trustee, a declaration of trust, "creating a trust fund of the surplus income accruing in the hands of The Union Trust*724  Company, Trustee under the will of Annie M. Wallace, deceased * * *"; that "In addition to the pecuniary legacies of $5,000 bequeathed to each of the six nieces of Annie M. Wallace * * * under the fourth paragraph of [her] will * * * each of said nieces shall be paid by the Trustee under the said will out of the income of the residuary estate, if sufficient therefor, but out of the corpus if the income be insufficient, *287  the sum of $5,000 per annum for and during the terms of their natural lives respectively, * * * and the right to said annuities shall accrue from the date of the death of Annie M. Wallace.  The said annuities shall be paid by the said Trustee to the said nieces out of the income of the residuary estate before any of such income shall be available for the payment of the annuities of $12,000 per annum to Mrs. Lambert and $2,500 per annum to each of the two children of Mrs. Lambert, grandchildren of Annie M. Wallace, deceased, as provided for in paragraph seventh of the will of Annie M. Wallace, deceased, so that if there be any deficiency in the income from the residuary estate such deficiency shall be borne by Lillian Wallace Lambert and the two grandchildren*725  of Mrs. Wallace, deceased; and said annuities to said nieces shall be paid to them in lieu of the gifts to said nieces under paragraph seventh of said will." "* * * Pending the distribution of the funds of the estate of Annie M. Wallace, deceased, to the Trustee designated in her will, payment of said annuities to each of said nieces shall be made by the executors under the will of Annie M. Wallace, deceased." "The said nieces * * * release all further claim they may have to share in any of the income accruing in the estate of Annie M. Wallace, deceased, and they also release all further claim, if any they have, to share presently in the corpus of the said estate; but the contingent future interest of the nieces in the corpus of the said estate, under the ninth paragraph of the said will, (to inherit the corpus if Lillian is survived by no living issue) shall remain unaffected by this settlement." During the taxable year petitioner, conformable to the terms of the trust instrument, paid the sum of $5,000 to each of the nieces then living (five in number).  One thousand two hundred and fifty dollars of each payment represented, or was paid from principal or corpus of the trust estate*726  and the balance, or $3,750 from income.  The respondent determined that petitioner received during the taxable year, as income of the trust being administered by it, the sum of $18,189.13.  In its return petitioner reported as income received only $1,250, on the theory that the difference between the amount received and the amount reported, or $17,939.13, having been distributed to the nieces of Annie M. Wallace, could properly be excluded from its taxable income.  The deficiency herein results from respondent's action in adding said amount to the income reported in petitioner's return.  OPINION.  MELLOTT: Petitioner contends that the agreement of the parties "constituted a trust, inter vivos, among the beneficiaries interested in the estate of Annie M. Wallace and John C. Wallace"; that it was *288  not a modification of a will or wills but was directly contrary to the will of Annie M. Wallace; that the payments to the beneficiaries (the nieces) were not in the nature of bequests or gifts to them, but were made under a trust which the parties created; and that such amounts are deductible as income of a trust "distributed currently by the fiduciary to the beneficiaries. *727  " Section 161(a) of the Revenue Act of 1932 provides that "the taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust." Subsection (b) requires that "the tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary." Petitioner bases its claim that the income in question is deductible, on section 162(b) of the Revenue Act of 1932, which reads as follows: (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.  Did the agreement of the parties constitute*728  a modification of the will of John C. Wallace or of the will of Annie M. Wallace?  A few states, among them Rhode Island, recognizing that it is frequently desirable to adjust by compromise controversies arising either under or because of the will of a testator, have enacted statutes providing, in substance, for the modification of a will in accordance with a compromise, and for the administration of a testator's estate under the will as modified.  But no such statute has been enacted in Pennsylvania, though our attention has been called to the Pennsylvania Fiduciary Act of 1917, p. 1, 447, section 140, shown in the margin. 1 This section has not been construed by the courts of Pennsylvania, but, as we read it, it does not seem to permit the probate of a will when modified by a compromise of the litigants as *289  the Rhode Island statute apparently does.  We conclude, therefore, that the agreement in evidence before us is not, under the law of Pennsylvania, a part of the will nor a modification of it.  (Cf. Hu L. McClung et al., Executors,13 B.T.A. 335">13 B.T.A. 335, and cases cited; *729 Barber v. Westcott,43 Atl. 844; Codman v. Commissioner, 50 Fed.(2d) 763.) But our decision upon this point does not determine the question we are called upon to decide.  *730  Petitioner apparently believes that since the agreement provides for the payment of the income to the beneficiaries (the nieces), it follows as a matter of course that they, rather than the trust estate, must pay the tax; but we are of the opinion that under the facts before us the tax is payable by petitioner rather than by the annuitants.  It is immaterial how the rights of the beneficiaries arose, whether under the will, under a modification of it, or under the agreement.  The statute applies to "any kind of property held in trust." The tax is computed upon the net income of the trust and is payable by the fiduciary unless deductible under 162(b), supra. This is true whether the trust is testamentary or established by agreement of the parties.  The statute makes no distinction and we see no reason why we should do so.  It will be noted that the "annuities" are payable to the nieces at all events, without reference to the existence or absence of income.  This, we believe, requires the application of the rule enunciated by the Supreme Court in *731 Burnet v. Whitehouse,283 U.S. 148">283 U.S. 148, and Helvering v. Pardee,290 U.S. 365">290 U.S. 365. These cases hold that where an annuity is "not one to be paid from income, but of a sum certain, payable at all events during each year so long as" the annuitant shall live, it is hot taxable to the annuitant.  While both of the cited cases involved testamentary trusts, no reason is apparent why a different rule should be applied to a trust inter vivos. It would be an anomaly to tax the distributions received by beneficiaries under a trust inter vivos, and exempt them from tax when the distributions are made under a testamentary trust.  The statute by its terms is applicable to "income of estates or of any kind of property held in trust", which, as pointed out above, makes it applicable to the facts before us.  The recent case of Old Colony Trust Co., Trustee,33 B.T.A. 311">33 B.T.A. 311, decided by us October 29, 1935, seems to be quite similar upon its facts.  In that case a trust deed was executed, creating a trust for the purpose of carrying out some wishes of the grantor's brother, who had died intestate, leaving the grantor as his sole heir.  The trust*732  deed directed the trustees to pay certain annuities, and, as we pointed out, disclosed "an intention on the part of the grantor to make the annuities charges upon both the income and corpus." We held that "the annuities were, therefore, gifts and the trustees were not *290  entitled to deduct the amounts paid to the annuitants", citing in that connection Helvering v. Pardee, supra; Burnet v. Whitehouse, supra;Boston Safe Deposit & Trust Co. v. Commissioner, 66 Fed.(2d) 179 (affirming 26 B.T.A. 486">26 B.T.A. 486); certiorari denied, 290 U.S. 700">290 U.S. 700, and Bridgeport-City Trust Co., Trustee,32 B.T.A. 1181">32 B.T.A. 1181. In Bay Trust Co., Trustee,34 B.T.A. 233">34 B.T.A. 233, we held, under facts quite similar to the facts of the instant case, that the amount of a fixed annuity, payable in any event and irrespective of the amount of trust income, was taxable to the trustee of a trust notwithstanding that in the taxable year the payment was made solely from trust income.  Cf. *733 Warner v. Commissioner, 66 Fed.(2d) 403, and cases cited.  The respondent did not err in holding that petitioner could not deduct the distributions of income made by it to the nieces of Annie M. Wallace, and the deficiency as determined by him is approved.  Judgment will be entered for the respondent.Footnotes1. Whenever it shall be proposed to compromise or settle any claim, whether in suit or not, by or against a minor or the estate of a decedent, or to compromise or settle any question or dispute concerning the validity or construction of any last will and testament or the distribution of any decedent's estate, the orphans' court having jurisdiction of the accounts of the fiduciary shall be authorized and empowered, on petition by such fiduciary, setting forth all the facts and circumstances of such claim or question and proposed compromise or settlement, and duly verified by oath or affirmation, and after due notice to all parties interested, and after due consideration, aided, if necessary, by the report of a master, if satisfied that such compromise or settlement will be for the best interests of such minor or of the estate of such decedent, to enter a decree authorizing the same to be made, which decree shall operate to relieve the fiduciary of responsibility in the premises. ↩