Court Opinion

ID: 4617770
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:37:14.709844+00
Date Added: 2024-06-11T07:55:21.189569
License: Public Domain

TRUST U/W OF CARL HICKS WHITE, DECEASED, HUSTON THOMPSON AND STEPHEN H. TALLMAN, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Trust U/W of White v. CommissionerDocket No. 92417.United States Board of Tax Appeals40 B.T.A. 664; 1939 BTA LEXIS 819; October 11, 1939, Promulgated *819  1.  Held, on the facts shown, that expenses of a judicial proceeding for the construction of the provisions of a testamentary trust and of the will establishing it are not ordinary and necessary expenses paid or incurred in carrying on a trade or business and hence are not deductible from income, regardless of whether the trust was carrying on a trade or business.  2.  Held, that there is no evidence in the record to overcome the presumption of correctness of respondent's determination that certain moneys included in taxpayer's income for tax purposes were properly so included.  Oscar P. Mast, Esq., for the petitioners.  D. D. Smith, Esq., for the respondent.  HILL *664  The respondent determined an income tax deficiency for 1935 in the amount of $2,967.98 against petitioners.  The petitioners in their petition allege that respondent committed error (a) in disallowing a deduction of $11,420.70 representing attorneys' fees and other expenses expended in an action to construe the will creating the trust, (b) in including in the income of the trust $17,000 which petitioners claim represents corporation dividends received by a corporation*820  whose capital stock was owned by the trust, and (c) in denying a loss deduction in the amount of $7,308.07.  The last assignment of error was abandoned by petitioners' counsel at the hearing and is therefore eliminated from our consideration.  The petitioners claimed in their petition that the adjustments in their return called for in their petition will result in an overpayment of income taxes for the year in the amount of $1,530.43.  FINDINGS OF FACT.  Carl Hicks White, a resident of West Orange, Essex County, State of New Jersey, died on the 20th day of March 1933, leaving an estate of about $985,733.94, consisting largely of stocks and bonds located in New York City, and real estate located at Bennington, Vermont.  The decedent left a last will and testament dated the 3d day of February 1933, which was admitted to probate in the Surrogate's Court of New York, New York, on the 20th day of April 1933.  Huston Thompson, of Washington, D.C., and Stephen H. Tallman, of New York City, petitioners, and William H. Berg, of Newark, New Jersey, were the executors under the last will and testament and the petitioners are the trustees thereunder.  *665  The estate of decedent consisted*821  of 8,500 shares of the capital stock of the Health Products Corporation, a New Jersey corporation, all the capital stock of Sunnyside, Inc., a domestic corporation having its principal place of business at Bennington, Vermont, two residence properties with furnishings at Bennington, Vermont, and personal belongings of decedent.  Decedent by his last will and testament devised his entire residuary estate to petitioners in trust for the uses and benufits and with powers and directions in material part as hereinafter set forth.  Paragraph III of decedent's will is in material part as follows: I direct my said Trustees, when my estate is transferred to them by my Executors, to hold all of the personal property consisting of capital stocks, bonds, debentures, securities and choses in action, and all of the income from the real property, of which I may die possessed, for the sole benefit of my son Carl Hicks White, Jr., in a trust estate for the following uses, namely: My said Trustees shall have the power to invest and reinvest both the principal and income from the said trust estate as in their sole discretion shall be deemed advantageous for my said son.  When my said son arrives*822  at the age of twenty-one years, then one-third of the principal of said trust estate, either in cash, or in securities, or real property, or any of them, equal in value to one-third of said principal, and all of the accrued income and increment from the said trust estate shall be delivered to him to be his absolute property.  I further direct that my said Trustees shall convert one-third of the principal of said trust estate into cash when my said son arrives at the age of twenty-one years and with said cash my Trustees shall purchase such an annuity or annuities for the life of my said son and for his benefit as to my said Trustees shall be deemed most advantageous, with full discretion lodged in them as to the terms thereof.  I further direct that my said Trustees shall hold the remaining one-third of the said trust estate until my said son arrives at the age of thirty years, when it shall be delivered to him to become his absolute property.  * * * I further direct that no charges, except taxes due thereon, and the expenses and fees of the Trustees incident to its care and maintenance, and other necessary expenses incident to the care of the said trust estate, shall be made*823  against said estate save and except as hereinafter provided; The guardians of my said son, during his minority, shall have the right to receive from said fund any moneys by them deemed necessary, the same to be first approved by the Trustees, to provide for the proper care, education, and subsistence of my said son in his position in life.  Paragraph IV of the will directs the trustees after the creation of the trust estate, "keeping in mind the conservation of said trust estate, and with full discretion as to time and payment or delivery" of the bequests, (1) to execute and deliver to William H. Berg 300 shares of class B common stock of the Health Products Corporation; (2) to execute and deliver to William S. Woodhull 100 shares of class B common stock of that corporation; (3) to give to Frank A. Hayek a certain described piano; (4) to set aside out of the estate two certain funds in the amounts of $6,000 and $10,000, respectively, when in the *666  discretion of the trustees they can be so set aside without detriment to the estate.  The income from the $6,000 fund is to be expended by the trustees for the religious education of the young people of the First Baptist Church*824  of Bennington, Vermont.  The income from the $10,000 fund is directed to be turned over by the trustees under the will to the trustees of the First Baptist Church of Bennington, Vermont, to be expended by them for the physical upkeep of the properties of the church or the needs of the congregation thereof "as the best judgment of the trustees of the said church shall dictate"; (5) to pay out of the trust estate annually until decedent's son, Carl Hicks White, Jr., reaches the age of 21 years, the sum of $4,000 to each of four named relatives of decedent; and (6) to distribute to the employees in decedent's household or personal service at the time of his death certain sums of money not in excess of a total of $7,000.  Paragraphs VI and VII of the will provide that decedent's stepmother and his aunt shall each have the free use and occupancy of the residence "she now occupies" together with the household furnishings and all other articles of domestic and personal use therein for and during her lifetime.  Paragraphs VIII and IX of the will provide that in the event decedent's son should die before reaching the age of 21 years, the trustees shall place all of the trust estate in a*825  perpetual trust fund, to be known as "The Anne Woodhull White Memorial Fund" and that the fund be devoted, according to the best judgment and discretion of the trustees, to certain specified educational and charitable purposes.  Decedent in his will nominated two persons to be the guardians of the person and estate of his son, Carl Hicks White, Jr., and directed that the trustees pay over from time to time, to whomsoever the court shall appoint to be guardian or guardians of his son, such moneys out of the income of the trust estate as shall be required in the discretion of the guardian or guardians and trustees in order to make suitable provision for one in his son's position of life.  By the will of decedent petitioners were vested with full general powers in the administration of the trust, including power to invest and reinvest both the principal and income from the trust estate in their sole discretion; power of sale and exchange without any restriction whatever; power to employ counsel, contractors, clerks, servants, and other necessary assistants, and to pay them reasonable compensation; and power in their discretion to do any and all things necessary for the complete discharge*826  of their respective duties.  By decree of the Surrogate's Court of the County of New York, New York, entered on January 4, 1935, the executors were discharged and it was ordered that the residuary estate, which then had a value of $769,406.96, be delivered to the petitioners as trustees, upon their *667  qualifying as such, except for the sum of $25,000 withheld by the executors to pay Federal income and estate taxes and state inheritance taxes and expenses in connection therewith.  On January 7, 1935, the petitioners herein qualified as trustees under the will of decedent and letters of trusteeship were duly issued to them by the Surrogate's Court on that date.  On that date also all of the residuary estate of decedent, except $25,000, was turned over to the petitioners to be administered by them under the trust created by the will.  Questions having arisen as to the meaning and intent of the provisions of the will respecting the disposition of certain properties and the relative rights of legatees and beneficiaries under the will and the trust created thereby, the guardians of Carl Hicks White, Jr., and certain other legatees under the will insisted that proceedings be*827  instituted in the court for a construction of the will.  Accordingly, Stephen H. Tallman, one of the trustees, filed a petition in the Surrogate's Court of New York, New York, on March 6, 1935, for a construction of the will.  Huston Thompson, the other trustee, the guardians of Carl Hicks White, Jr., and all other legatees and beneficiaries named under the will were cited to appear in such proceeding.  The petition in paragraph seventh thereof recited that: Before proceeding further however, to administer said trust estate with his cotrustees, your petitioner desires to have determined the following questions: (a) The validity of the trust or trusts purported to have been created by the testator; (b) The authority of the trustee to comply with the testator's directions in respect of certain legacies set forth in Paragraph IV, subdivisions 1 to 3 inclusive; (c) The intention and meaning of the language of the testator in Paragraph IV, subdivisions 4, 5 and 6.  (d) The intention and meaning of the testator in respect of the property described in Paragraphs VI and VII, and particularly the use of the expression "free use and occupancy." (e) The intention and meaning of the*828  testator with respect to the trust purported to have been created by Paragraphs VIII and IX, and the validity thereof.  (f) Such other instructions as the Court may deem it advisable to give to the trustees, based upon or arising out of any questions presented in this proceeding.  The parties interested appeared in the proceeding and a decree of the court construing the will was filed July 10, 1935.  In its decree the court directed that certain expenses covering attorneys' fees and other items incurred in connection with the proceeding be paid by the trustees "out of the principal of the trust of the residuary estate." Those expenses included (a) $1,500 to Adrian P. Burke, one of the guardians of the minor son, for his services as guardian ad litem in the proceeding; (b) $4,000 to attorneys for services rendered *668  to Stephen H. Tallman in the proceeding; (c) $210.70 to Tallman for costs and disbursements; (d) $3,000 to attorneys for trustee Huston Thompson in the proceeding; (e) $70 to Huston Thompson for his costs and disbursements therein; (f) $2,500 to attorneys for certain legatees under the will; (g) $70 for costs and disbursements of said legatees therein; *829  and (h) $70 as costs of the First Baptist Church of Bennington, Vermont, in the proceeding.  The total amount of such attorneys' fees and costs is $11,420.70.  The several items thereof were paid by the trustees in July 1935, out of the income of the trust, for the reason that their payment out of the principal of the trust would entail a sacrifice of the trust's liquid assets, which the trustees desired to avoid.  However, notwithstanding that such items were actually paid out of the trust income, they were charged to the principal of the trust fund and that charge was reported in the trustees' account to the Surrogate's Court.  The court approved the account, including such charge.  Said attorneys' fees and other expenses were not paid out of or charged to the $25,000 withheld by the executors under the decree of January 4, 1935, and this $25,000 has no connection with such items.  In the income tax return of the trust for 1935 the trustees claimed deduction from gross income of $11,420.70 as attorneys' fees and other expenses paid in the proceeding for the construction of the will, on the theory that they were ordinary and necessary expenses of the trust, incurred in the taxable*830  year in carrying on business.  Respondent disallowed the deduction.  The income of the trust amounts to about $60,000 per annum, of which the petitioners are required to invest and reinvest about $40,000 per annum.  Up to the present time the investments made by the petitioners amount to approximately $200,000, which are chiefly in stocks and bonds, although the petitioners have made some real estate loans in New Jersey.  The petitioners are constantly selling and buying stocks and bonds and it is necessary for them to keep in constant communication with each other in this respect and to have investment counsel.  The petitioners are required to do some things in connection with the trust almost every day and to make trips to New York and Washington several times during each year.  Petitioners have also been required to make several trips to Bennington, Vermont, to attend to the matters of the estate there, including the properties of Sunnyside, Inc., all of the capital stock of which is owned by the trust.  Petitioner Huston Thompson is president of Sunnyside, Inc.  In connection with the properties located at Bennington, Vermont, the petitioners have been required to employ an attorney*831  there to look after titles and to attend the meetings of the board and supervise generally the work of Sunnyside, Inc.  *669  The chief asset of the estate consists of approximately 8,500 shares of the stock of the Health Products Corporation, located at Newark, New Jersey.  Petitioner Stephen H. Tallman is a member of the board of directors of this corporation and is required to attend its meetings, and both of the petitioners attend its stockholders' meetings and constantly get reports in that connection which are checked by them.  Among the things the petitioners were required to do during the year 1935 in connection with the Health Products Corporation stock was to confer with the other heavy stockholders and decide the question of whether the stock should be put on the market, which one of the petitioners strenuously resisted.  The interests of the petitioners in the stock of the Health Products Corporation require their constant attention.  The petitioners are also required to give their attention to the memorial funds set up by the will of the decedent, requiring constant communication with the attorneys for the memorial funds to keep them advised as to investments, *832  and petitioners make annual reports to those attorneys in this connection.  In the trust's income tax return for 1935 there was included as income $20,700 representing dividends received on stock of the Health Products Corporation owned by Sunnyside, Inc.  The income-producing assets of Sunnyside, Inc., consisted of about 2,300 shares of common stock of the Health Products Corporation.  For the period from the time of the incorporation of Sunnyside, Inc., in 1932 to the time of the death of decedent on March 20, 1933, respondent determined that dividends of the Health Products Corporation stock to Sunnyside, Inc., were taxable to decedent's estate.  In accordance with that determination, petitioners included such dividends in their income tax returns for all subsequent years, including the year 1935.  The respondent in his audit of petitioners' return for 1935 determined that of the $20,700 received by Sunnyside, Inc., as dividends from the Health Products Corporation, $17,000 only was received by petitioners as dividends from Sunnyside, Inc.  Accordingly, respondent reduced by $3,700 the amount of dividends received by petitioners from domestic corporations.  Petitioners assign*833  as error the inclusion in income of the item of $17,000 or any part thereof, on the ground that it represents income from dividends on Health Products Corporation stock to Sunnyside, Inc., and not income to petitioners.  OPINION.  HILL: Two questions are presented for decision in our redetermination herein - (1) Is the item of $11,420.70 representing expenses incurred in the proceeding to construe the will deductible from gross *670  income? and (2) Is the item of $17,000 determined by respondent to represent dividends received by petitioners from Sunnyside, Inc., includable in petitioners' income?  We shall consider these questions in the order named.  Petitioners claim that the item in question number (1) is deductible under section 23(a) of the Revenue Act of 1934.  That section in material part is as follows: In computing net income there shall be allowed as deductions: (a) EXPENSES. - All of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * * In other words, petitioners contend that the*834  trust was engaged in carrying on business and that the item of $11,420.70 comprised ordinary and necessary expenses paid during the taxable year in carrying on such business.  Respondent contends, on the other hand, (a) that the trust was not engaged in carrying on business, and (b) regardless of whether it was so engaged, the payments comprised in the item in question were not ordinary and necessary expenses paid or incurred in carrying on a trade or business.  A trust whose trustees are invested merely with the power and duty to hold the trust estate and to invest and reinvest the same, collect the income therefrom, and distribute it to the beneficiaries under the trust, is not engaged in carrying on business.  ; ; . On the other hand it is held that "a person of property, who devotes his time to the active management of it and also to active participation in the management of the companies in which his property is invested, and who maintains an office for that purpose where*835  he spends a substantial part of his time, is carrying on business within the meaning of this statute.  * * * The line comes between those who take the position of passive investors, doing only what is necessary from an investment point of view, and those who associate themselves actively in the enterprises in which they are financially interested and devote a substantial part of their time to that work as a matter of business." . See also ; . If in the light of the cited decisions it be held that the trust was engaged in carrying on business, that business consisted of the activities of the trust through its trustees in the management and control of the trust properties and their participation in the management of *671  the corporations in which the trust had investments.  In order, therefore, to render the claimed deduction allowable it must appear that it represented ordinary and necessary expenses paid or incurred in connection with such management and control.  In our opinion no such relationship*836  has been shown.  The proceeding to construe the will did not involve the question of the powers and duties of the trustees with reference to how the trust estate should be managed and controlled, but involved only questions of the relative rights of the beneficiaries under the trust and the legatees under the will of decedent.  The construction of the will was sought as a guide to the trustees in properly interpreting the provisions of the will directing distribution of specific legacies and in allocating the distributable income of the trust property among the various beneficiaries under the trust.  The expenses for which the deduction is claimed were incurred and paid not in the management and control of the trust estate but in a proceeding for a judicial determination of the rights of the various legatees under the will and of the beneficiaries of the trust.  The only persons financially interested in the proceeding were such legatees and beneficiaries.  It was their rights that were thus determined.  They were the real parties in interest in the proceeding.  The trust in no way benefited therefrom and the cost of such proceeding was not properly chargeable to the income of the*837  trust.  We hold, therefore, that the expenses for which deduction is claimed were not paid or incurred by the trust as ordinary and necessary expenses in carrying on a trade or business and hence are not deductible.  For the purpose of our consideration of this point we have assumed that the trust was engaged in carrying on business.  In view of our conclusion that the claimed deduction is not allowable regardless of whether the trust was so engaged, it is unnecessary to determine whether the trust was in fact engaged in carrying on a trade or business.  The second question for our consideration is whether the item of $17,000 determined by respondent to represent dividends received by petitioners from Sunnyside, Inc., is includable in petitioners' income for tax purposes.  The petitioners contend that the item is not so includable, for the assigned reason that it represents identical moneys which Sunnyside, Inc., received as dividends from the Health Products Corporation and is therefore income of Sunnyside, Inc., and not income of petitioners.  Petitioners further argue that, since those dividends have been taxed to Sunnyside, Inc., it would be inequitable to include $17,000 of*838  the amount of said dividends in petitioners' income for tax purposes.  The respondent's reply to this argument is that the dividends so received by Sunnyside, Inc., were properly included in its income for tax purposes, and that the $17,000 in question was received by petitioners from Sunnyside, Inc., and constituted *672  dividends from that corporation and is, therefore, includable in petitioners' income for tax purposes.  We agree with respondent's contention.  The fact that the source of the money received by petitioners as dividends from Sunnyside, Inc., was the dividends to that corporation from the Health Products Corporation does not alter the fact that it was taxable income to petitioners.  Nor does the fact that Sunnyside, Inc., paid taxes on the income out of which it paid dividends to petitioners render such dividends nontaxable income to petitioners.  In determining the deficiency herein respondent determined that petitioners received in the taxable year $17,000 of dividends on stock in Sunnyside, Inc.  His determination is prima facie correct.  There is no evidence in the record and none was offered to the effect that the trust herein did not receive as stockholder*839  of Sunnyside, Inc., in the taxable year the $17,000 in question or that it was not so received as dividends.  We, therefore, agree with respondent's contention on this point and hold that the item of $17,000 is properly included in petitioner's income for tax purposes.  Reviewed by the Board.  Decision will be entered for respondent.