Lonergan v. Commissioner

Trust Estate of Thomas Lonergan, Robert L. Jackson, C. P. LeMire and T. H. Mastin, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent Lonergan v. Commissioner Docket No. 7844 United States Tax Court 6 T.C. 715; 1946 U.S. Tax Ct. LEXIS 234; April 12, 1946, Promulgated *234 Decision will be entered under Rule 50. 1. A decree of the Missouri Circuit Court, entered in a proceeding to construe decedent's will, directed the trustees of the testamentary trust created by the will to first satisfy a judgment against decedent's estate by the payment of $ 300 monthly thereon out of the income of the trust estate. Held, the payments on this judgment did not constitute distributions to a beneficiary, as such, but were payments on account of a debt of the decedent and consequently were not deductible in computing the net taxable income of the trust estate under section 162 (b), I. R. C. 2. Section 23 (c) (1) (A), I. R. C., specifically prohibiting a deduction of Federal income taxes paid or accrued, is applicable to trust estates. James E. Campbell, Esq., for the petitioners. Gene W. Reardon, Esq., for the respondent. Leech, Judge. LEECH *715 This proceeding involves an income tax deficiency in the amount of $ 1,152.49 for the taxable year 1942. The issues are (1) whether Federal income taxes paid by a trust in one year are deductible in the succeeding tax year; (2) whether payments made by the trustees, in the taxable year, in liquidation of a contract indebtedness of decedent, constitute a distribution to a beneficiary within the purview of section 162 (b) of the Internal Revenue Code; and (3) whether attorneys' fees, in the amount of $ 750, paid by the trustees in a proceeding to construe *716 decedent's will, are deductible. The respondent concedes, on brief, that the attorneys' fees are deductible under the*236 authority of Bingham v. Commissioner, 325 U.S. 365. The case was submitted on a stipulation of facts and oral testimony and exhibits. The facts stipulated are so found. Other facts are found from the evidence. FINDINGS OF FACT. The taxpayer is a trust estate created under the will of Thomas Lonergan, deceased. The fiduciary income tax return for the taxable year 1942 was filed with the collector of internal revenue for the sixth district of Missouri. The return showed no tax liability. Under date of July 18, 1928, Thomas Lonergan, the decedent, entered into a written agreement with Harris Robinson and Clyde Elaine Robinson. Pursuant to the agreement, the Robinsons conveyed to decedent real estate situated in Kansas City, Missouri, consisting of a lot and residence thereon, an unimproved lot, bonds having a stated value of $ 12,000, cash of approximately $ 19,000, and jewelry amounting to approximately $ 8,000. In consideration of the transfer of this property the decedent agreed to pay the sum of $ 300 per month to the Robinsons for a period of 20 years, or until the earlier death of the survivor. On the trial expert testimony was introduced*237 to the effect that the real estate with the residence had a value of $ 20,000 and the unimproved lot $ 300, as of July 18, 1928. Thomas Lonergan died May 24, 1935, leaving a will which was duly admitted to probate by the Probate Court of Jackson County, Missouri. The will of decedent, after giving directions for the payment of claims allowed and after making certain bequests and legacies, contains the following material provisions: 9th. The balance of my monthly income, after the necessary expense of handling my Estate each month has been deducted therefrom, shall be divided in the proportion of four-eighths (4/8) to my good friends, Harris and Clyde Elaine Robinson of Kansas City, Missouri, one-half (1/2) thereof to be paid to each of them; in the event of the death of either of them, the whole four-eighths (4/8) of such income shall be paid to the survivor, provided such monthly payments shall in no event extend beyond the period of twenty (20) years from the date of my demise and at the death of both of them all such payments shall cease. One-eighth (1/8) of such monthly income to my niece, Blanche Lilly, daughter of Mary C. Lilly of Hinsdale, Illinois; one-eighth (1/8) to my*238 friend Ada K. Hall, widow of Dr. Parks Hall of Kansas City, Missouri; one-eighth (1/8) to my cousin, Thomas P. Fenlon of Kansas City, Missouri; and one-eighth (1/8) to my good friend and secretary for many years, Mercy Snitzmier of Kansas City, Missouri, or in the event of her death, to her son, John Snitzmier; provided such last named one-eighth (1/8) monthly payments shall in no event extend beyond the period of twenty (20) years, and in no event extend to any of them beyond the period of his or her natural lifetime. * * * * *717 11th. After the payment of the bequests hereinbefore made and the payment of the annuity for scholarships at Rockhurst College and after the payment of any just indebtedness, such as a specific contract that I made on July 18, 1928, with Harris and Clyde Elaine Robinson of Kansas City, Missouri in connection with the exchange of various bonds, stocks, real estate et cetera, should the funds derived as income from my Estate or otherwise be in any one month insufficient to pay in full the monthly bequests herein made, such bequests shall be abolished for that particular month or pro rated for that particular month, so as to bring them all within*239 the amount available for such payments, such pro ration to be made in the ratio that each individual monthly bequest at that time bears to the total amount of all monthly bequests payable to those beneficiaries who are alive at that time. [Emphasis supplied.] Harris and Clyde Elaine Robinson filed a claim against the decedent's estate based on the July 18, 1928, contract. On March 12, 1936, a judgment for $ 47,400 was entered by the probate court. With respect to the judgment, the court decreed, in substance, that it should be satisfied by a monthly payment of $ 300 to these claimants or the survivor of them, until the $ 47,400 was fully paid, with the express provision that if both Harris Robinson and Clyde Elaine Robinson should die before August 1, 1948, the unpaid balance of the judgment should revert to the estate of Thomas Lonergan, and the judgment as to these claimants and their heirs, executors, administrators and assigns should be deemed to be satisfied in full. Harris Robinson died April 5, 1938. At the expiration of the period of probate, a suit was filed in the Circuit Court of Jackson County, Missouri, wherein an interpretation of the will of decedent was asked. *240 The circuit court accepted jurisdiction of the trust estate and has since retained jurisdiction. The circuit court in that proceeding, inter alia, adjudged and decreed that the trustees of the estate of Thomas Lonergan "shall pay said judgment only by paying the sum of $ 300.00 per month thereon." In the income tax return of the trust estate for the year 1942, a deduction of $ 3,600, representing payments to Clyde Elaine Robinson, was taken, in computing gross income, as a "Debt (repayment of capital) in accordance with contract, judgment and award of Court as directed in the will." The respondent disallowed the deduction. In the return an additional deduction of $ 10,479.96, representing an amount distributed currently to Clyde Elaine Robinson, as beneficiary of the trust, was claimed and allowed by respondent. All net income of the trust estate, except the $ 300 monthly payment on the Robinson indebtedness and all sums paid for Federal income tax purposes, was distributed currently to the beneficiaries of the trust estate and was allowed as a deduction from gross income for income tax purposes. OPINION. The primary question is whether the $ 300 monthly payments made by the*241 trustees to Clyde Elaine Robinson, in the taxable *718 year, are deductible in determining the Federal income tax liability of the trust estate. The answer, we think, depends on the character of such payments. If the payments were distributions to a beneficiary pursuant to the trust instrument, they are deductible under section 162 (b) of the Internal Revenue Code. 1 On the other hand, if the payments were in satisfaction of an indebtedness of the decedent, they are not deductible under this section. It is the respondent's position that the payments in question were of the latter character. *242 A proceeding was instituted in the Circuit Court of Missouri for the purpose of having the will of the decedent construed. That court found, inter alia, that the decedent at the time of his death was a member of a partnership; that under the agreement of partnership, the decedent's estate was to receive 50 percent of the partnership earnings for a period of 21 years; and that it was the intent of the decedent that this income was to be applied to the payment of decedent's indebtedness to the Robinsons under the contract of July 18, 1928. In its decree the court directed the trustees to discharge such liability by the payment of $ 300 per month thereon. The balance of the income of the trust estate was to be currently distributed to the several designated beneficiaries, one of whom was Clyde Elaine Robinson. Under the revenue acts, trust estates are treated as taxable entities for Federal income tax purposes. Secs. 161 to 172, I. R. C. In Central Hanover Bank & Trust Co., Executor, 34 B. T. A. 741, 743, we said: The aim of the statute dealing with the income of estates and trusts is to tax such income either in the hands of the fiduciary or the*243 beneficiary. Secs. 161 and 162, Revenue Act of 1932. Under section 162 (b) the fiduciary takes a deduction for the amount of the trust income "which is to be distributed currently by the fiduciary to the beneficiaries", and such income is taxable to the beneficiaries. As to income of this sort "the scheme of the act is to treat the amount so distributable, not as the trust's income, but as the beneficiary's." Freuler v. Helvering, 291 U.S. 35. There seems to us no room for doubt that the income of the trusts here under consideration was of this kind. But this does not necessarily mean that all of the income collected by the trustee at any particular moment was currently distributable. * * * The narrow issue is whether this $ 3,600, paid to Clyde Elaine Robinson, is income currently distributable and so taxable to her, since *719 the parties are in accord that the balance of the net income is taxable to the respective beneficiaries and thus deductible by the trust estate. The facts here compel the conclusion that the $ 3,600 was income taxable to the trust estate. The contract of decedent with the Robinsons, dated July 18, 1928, created*244 a debt from him to them. He recognized this fact in paragraph "11th" of his will, i. e., "* * * after the payment of any just indebtedness, such as a specific contract that I made on July 18, 1928, with Harris and Clyde Elaine Robinson * * *." The Robinsons elected to have this unliquidated debt under the contract of July 18, 1928, reduced to a judgment against the decedent's estate. Their status is thus that of creditors. The circuit court, in construing decedent's will, recognized this relationship and directed that such liability be satisfied out of the income accruing to the trust estate. It seems clear to us that the payments, aggregating $ 3,600, to Clyde Elaine Robinson in the taxable year were paid to her in her capacity of a creditor of decedent and not as a beneficiary of the trust estate. The amounts so paid were a part of the consideration for the property conveyed to the decedent. It follows that they are not deductible by the trust, but are taxable as its income. Sec. 162 (b), I. R. C. We sustain the respondent's disallowance of this deduction. In the alternative, petitioners contend that a proportionate part of the $ 3,600, i. e., $ 528.55, constituted a payment*245 of interest by the trust and is therefore deductible under section 23 (b) of the code. The basis upon which this argument is predicated is that if all the payments were made under the July 18, 1928, contract, the aggregate would total $ 72,000; that the value of the property transferred to the decedent was $ 57,300; and that the difference between these two sums is $ 14,700, constituting interest. We find no merit in this contention. The contract makes no provision for interest. Upon this record we hold that the amounts paid by the trustee in the taxable year to Clyde Elaine Robinson on account of the judgment are not interest, but, as already stated, were payments of consideration for the property previously transferred to decedent. Cf. Gillespie & Sons Co. v. Commissioner, 154 Fed. (2d) 913. Petitioners also contest respondent's disallowance of a deduction of the sum of $ 1,028.78 representing the amount of Federal income tax paid by the trust estate for the year 1941. They contend that a denial of such deduction makes the trust estate and the beneficiaries liable to tax on the same income, to that extent. We are not impressed with this *246 argument. As we have heretofore held, that part of the income of the trust estate directed by the circuit court to be applied to the satisfaction of decedent's indebtedness is taxable income of the trust estate. The trust thus properly paid the tax thereon as a taxable entity. Section 23 (c) (1) (A) of the code specifically provides that *720 Federal income taxes are not deductible from gross income. That section is applicable to trust estates as well as to individuals, since section 162 of the code requires the net income of a trust to be computed in the same manner and on the same basis as in the case of an individual. We think the Federal income taxes required to be paid by the trust estate are of no more concern to the beneficiaries than are the other expenses and charges against the trust estate. Cf. McCrory v. Commissioner, 69 Fed. (2d) 688. The fact that the payment of Federal income taxes and other expenses of the trust necessarily reduce the amount distributable to the beneficiaries does not result in any double taxation. The taxable income of the trust included the amounts upon which the income tax was paid. Those amounts, as*247 we have held, were net income and thus not taxable, as such, to Clyde Elaine Robinson. The respondent properly disallowed any deduction for the Federal income tax paid by the trust estate. Since the respondent concedes he erroneously denied petitioners a deduction of the amount of $ 750, paid by the trust estate in the taxable year, Decision will be entered under Rule 50. Footnotes 1. 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 legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. * * *↩