Brenneman v. Commissioner

E. L. E. BRENNEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. VERNA L. BRENNEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. DAVID E. BRENNEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brenneman v. Commissioner Docket Nos. 8323, 8324, 8361. United States Board of Tax Appeals 10 B.T.A. 544; 1928 BTA LEXIS 4087; February 6, 1928, Promulgated *4087 1. Terms of a trust instrument construed to require distribution of net income, as used in the Revenue Acts, to the beneficiaries. 2. In computing net income for the purpose of distribution to beneficiaries, the trustees, under the facts in this case, may deduct amounts for depreciation and depletion of an oil-producing property comprising part of the trust, and the amounts so deducted are neither distributable nor taxable to the beneficiaries in the proportionate shares. 3. In computing net income of the trust for the purpose of distribution the trustees may not deduct the amount of a capital loss incurred by the trust, and the action of the Commissioner in restoring same to income of petitioners, Verna and David E. Brenneman, is approved. 4. The distributions from the trust are income to the beneficiaries and are not to any extent the bequest so as to be exempt. George D. Widener, et al.,8 B.T.A. 651. S. Leo Ruslander, Esq., and George R. Beneman, Esq., for the petitioners. A. George Bouchard, Esq., for the respondent. LOVE *545 These proceedings were consolidated for hearing and disposition. The Commissioner*4088 determined deficiencies in income tax as to E. L. E. Brenneman for the years 1919, 1920, and 1921, in the amounts of $2,422.24, $1,504.28, and $327.56, respectively; as to Verna L. Brenneman for the years 1919, 1920, and 1921, in the amounts of $1,388.27 $1,339,74, and $658.94, respectively; and as to David E. Brenneman for the years 1919, 1920, and 1921, in the amounts of $1,248.52, $1,472.98, and $275.92, respectively. The petitioners alleged that in determining the deficiencies herein for the years in question, the Commissioner erred, first, in including in their taxable income the amount of depreciation and depletion deducted by the trustees, and not distributed to them, from the income of the corpus of a trust of which they were beneficiaries; and, second, in failing to exclude from their respective income any and all of the distributions received by them of income from the corpus of the trust, pursuant to the terms of a certain will. In addition to these errors assigned on behalf of all of the petitioners, it is alleged on behalf of Verna and David E. Brenneman that the Commissioner further erred in disallowing deductions from their respective gross income on account of*4089 a capital loss incurred in 1920 by the trust of which they were beneficiaries. The parties stipulated some of the facts and the rest are found from the evidence. FINDINGS OF FACT. The petitioners are beneficiaries under a trust created by the will of L. A. Brenneman, who died March 2, 1914, a resident of Pittsburgh, Pa. After giving his wife the use of the family residence and furnishings for life, which provision is not material to this issue, he provided: Third: All the rest, residue and remainder of my estate, both real, personal and mixed and whatsoever consisting of and wheresoever situate, (including the remainder over the real and personal property devised in the second paragraph hereof), and hereinafter referred to as the "trust estate", I give, devise and bequeath unto my said wife, Evalena Emery Brenneman, William Bayliss *546 and Eugene Mackey, Trustees, to have and to hold the same unto them, their heirs, successors and assigns, forever, in trust, however, as follows: (a) To invest and from time to time re-invest the said trust estate in such safe interest bearing securities or property as the said trustees may in their judgment deem best, continuing*4090 the estate in such form of investment as I may leave the same in at the time of my decease, until such time as the said trustees may deem it advisable to change the same or any part thereof, when they shall be at liberty so to do. The said trustees shall collect and receive the income or interest from the said trust estate and pay out and disburse the same as hereinafter provided, and any surplus, if any, they shall invest and re-invest in the manner aforesaid. I give to the said trustees full power and authority at any time and from time to time to sell, assign and transfer, whenever in their judgment they shall deem it best to do so, any part of the trust estate, be it real, personal or mixed, and to invest and re-invest the same. This power and authority to be exercised by the trustees whenever from time to time they in their judgment deem it advisable to change the form of investment of the trust estate or any part thereof, or the accumulated income or interest therefrom. It is my will, however, and I do so direct that my trustees in making or re-making any investment of the trust estate shall prefer safety of investment to size of income. (b) Immediately upon my decease, *4091 I order and direct the said trustees to set aside, exclusively for the use of my wife, one-third part of the said trust estate (over and above the real and personal estate devised to her for life in the second paragraph hereof), and to pay her annually during her natural life the net income or interest therefrom, and upon her death the said third part so set aside shall be returned again into the general trust estate and be disposed of by the trustees in accordance with the provisions and directions contained in sub-paragraphs (e), (f), (g), (h), (i), and (j) hereof. (c) Immediately upon my decease my executors hereinafter named are to value and appraise my personal estate, and if after my debts and funeral expenses are paid it exceeds in value according to such valuation and appraisement the sum of three hundred thousand dollars then I direct my said trustees to set aside Fifty thousand dollars of the said trust estate and the net income or interest therefrom shall be by my trustees divided equally between the following persons: My brother, James H. Brenneman, now residing at Sistersville, West Virginia; my brother A. L. Brenneman, now residing at Aspinwall, Allegheny County; Pennsylvania; *4092 my sister Elizabeth Gordon, now residing at Orange, Virginia; my sister Anna Shawkey, now residing at Aspinwall, Allegheny County, Pennsylvania; my sister-in-law, Isabella Brenneman, wife of my brother, C. C. Brenneman, now residing at or near Tarentum, Pennsylvania. Upon the death of either of my brothers, James H. Brenneman and A. L. Brenneman, or of my sisters Elizabeth Gordon and Anna Shawkey, or of my sister-in-law, Isabella Brenneman, either before or after my decease, then the said fund of fifty thousand dollars shall be reduced one-fifth for each death and that part returned again to the general trust estate and treated as if originally a part thereof; except only that upon the death of my said sister-in-law, Isabella Brenneman, my trustees may in their judgment continue the payment of her share of the said income or interest of my said brother, C. C. Brenneman, during his life time, so long as they way consider it advisable to do so with the right on their part at any time and from time to time after the death of my sister-in-law, to either terminate such payments absolutely or suspend the same until his conduct shall be such as to warrant their renewal. In the event the*4093 trustees terminate such payments to him absolutely then one-fifth of the said fifty *547 thousand dollars shall be returned again to the general fund to become a part thereof, but if they should suspend such payments to him temporarily, then during such suspension his share of the income or interest shall be treated by my trustees as income or interest on the general trust estate and disbursement made by them accordingly. If at the time of my decease my personal estate according to such valuation and appraisement and after the payment of my debts and funeral expenses should be less than three hundred thousand dollars, then the fifty thousand of my personal estate so to be set aside shall be reduced proportionately. (d) Out of and from the remainder of the income or interest of my said estate I direct the said trustees to pay annually such sum or sums as they may deem best for the maintenance and education of my son, David Emery Brenneman, and my daughter, Verna Brenneman, which education I direct shall be as liberal as the income of my estate will permit and the said trustees shall deem advisable. (e) It is my wish and desire and I do will and direct that all the rest, *4094 residue and remainder of the trust estate shall be divided between and paid by the said trustees to my son, David Emery Brenneman, and my daughter, Verna Brenneman, share and share alike; and to that end when my said son arrives at the age of twenty-one years the trustees shall pay to him the one-twelfth part of the whole trust estate, together with any accumulations of income or interest thereon, if any; and when he arrives at the age of twenty-five another twelfth part, and at thirty years the remainder of his share in the trust estate then for distribution; and if my wife and my said brothers, sisters and sister-in-law are dead, then his share of the whole estate. (f) When my said daughter arrives at the age of twenty-one years the said trustees shall pay to her the one-twelfth part of the trust estate, with any accumulations of income or interest thereon, if any, the same to be hers absolutely; and when she arrives at the age of twenty-five another twelfth, and at thirty the remainder of her share in the trust estate then for distribution; but if my wife and my brothers, sisters and sister-in-law are dead, then her share of the whole estate. (g) When my son and daughter arrive*4095 at the age of twenty-one years the trustees shall annually thereafter pay to each of them his or her share of the income and interest on the trust estate, the payment to each to be proportionate to his or her share in the said trust estate itself. (h) If my son should at any time become intemperate, profligate or acquire injurious habits of life, the said trustees are to withhold payments of the trust fund even past his thirtieth year until in their judgment he has acquired such habits of sobriety, economy and thrift as will warrant them in paying to him the portions of the trust estate herein provided for; but provided, further, also, that if my son so becomes intemperate, profligate or acquires injurious habits then during such period as he is afflicted with them my trustees may in their discretion pay to him the whole or a portion of the income of the trust estate; but in no event shall my trustees withhold any of my son's share beyond his thirty-fifth year, it being my will and desire and I do order and direct that when he arrives at that age all of his share in the trust estate shall be paid to him whatever his habits; but whatever income or interest I grant to him hereunder*4096 under shall be paid to him in person and individually and shall not be subject to assignment by him, attachment or sequestration by creditors of any kind for the purpose of paying his debts, but shall be paid to him personally, free and clear of the same. *548 (i) If my said daughter shall marry and her husband should in the judgment of my trustees be an improper person to handle, receive or advise her in the disposition of her estate, they may in their discretion withhold any of the payments herein provided for to be made to her until such time as in the judgment of my said trustees, even if it run beyond her thirtieth year, they shall deem it advisable to pay the same to her; but in no event shall my trustees withhold any of my daughter's share beyond her thirty-fifth year, it being my will and desire and I do order and direct that when she arrives at that age all of her share in the trust estate shall be paid to her in any event; but during such period I direct that the income of the trust estate belonging to my said daughter shall be paid to her individually, and all payments hereon, whether of the trust estate itself or of the interest or income therefrom, shall be paid*4097 to my daughter in person and individually, and shall not be subject to any claim, demand, right of curtesy or otherwise, of any husband whom she shall marry, but the same shall belong to her absolutely, free and clear of any claim which he might make thereto as her husband. And all payments hereunder of both trust estate, interest and income, shall not be liable for any claim by any dreditor whatsoever, either by attachment or sequestration, and shall not be paid upon her order or assignment, but to her in person. (j) In the event of the death of either of my said children before the termination of the said trust, then I give the share of such deceased child to the issue thereof, if any, and direct the trustees to hold such share in trust until such issue shall arrive at full and lawful age, paying the income thereof to such issue during minority for the purpose of the support and education thereof; but if either of my said children shall die without issue then I give the share of such deceased child to the surviving child, and direct the trustees to pay the same to such surviving child subject to all the terms and conditions herein recited. In the event of both of my said children*4098 dying before the termination of the said trust without leaving issue, then I give the shares of such deceased children to my wife to be disposed of as she shall deem best; but in the event of the death of my wife before the termination of said trust, then upon the death of my two children without issue surviving I give the said trust estate to the children of my said brothers and sisters, to be divided between them share and share alike. (k) In the event of a vacancy occurring among the said trustees, either by death, resignation or otherwise, then I direct the surviving trustees or trustee to fill such vacancy or vacancies, and in the event they are unable to do so, such vacancy or vacancies shall, upon petition filed, be filled by the judges of the Orphans' Court of Allegheny County, Pennsylvania. (l) All powers of sale of either real, personal or mixed trust estate provided for in this will shall be exercised by my trustees without application to any court whatever and the title acquired by the purchaser under any such sale shall be one of fee simple and as full and complete as if authority to make such sale had first been granted to the trustees by a court of competent jurisdiction. *4099 In the event that my trustees are unable to be unanimous upon any of the powers or duties conferred by this will, a majority of them shall rule. My trustees may also lease any of the trust estate upon such terms as they may deem best; but they shall not do so for a longer period than the term of the trust. The decedent's estate consisted of personal and real property, including a one-half interest in certain oil-producing property, which interest constituted the principal asset of the estate. *549 The trustees took over the trust property and proceeded to carry out the trust according to their interpretation of the will. It was the understanding of the trustees that the corpus of the trust was to be kept intact and before making the distribution of income therefrom they set aside a sufficient amount to care for depreciation and depletion, and this amount was at no time distributed to the beneficiaries. The beneficiaries acquiesced in this interpretation and from the time the trustee took over the trust, this procedure was followed out. One-third of the personal property, as provided in the will, was set aside for the widow and she received the income therefrom. *4100 It was impracticable, however, to set aside a one-third interest in the oil-producing property for the widow, so the trustees included that property in the trust from which the children were receiving income and after deducting amounts for depreciation and depletion, the income so determined was distributed - one-third to the widow and the remainder to the son and daughter in accordance with the terms of the will. No part of the amount deducted by the trustees for depreciation or depletion has even been distributed to the beneficiaries. The value of the oil-producing property for the purpose of depreciation and depletion was $144,114.87. The amounts of depreciation and depletion set aside by the trustees and of the income from the property are not in dispute, and for the years in question were as follows: [1919] $14,585.49 [1920] 17,078.16 [1921] 16,034.44 The Commissioner determined that the amounts so deducted constituted taxable income to the beneficiaries and restored the amounts to income of the beneficiaries. The amounts restored as to E.L.E. Brenneman were: [1919] $4,861.83 [1920] 5,692.72 [1921] 5,344.82 all of which represented proceeds*4101 of the sale of oil from the oil-producing property acquired under the will of the decedent, her husband. At the time of decedent's death, E.L.E. Brenneman was 47 years of age, with an expectancy of life of 23.08 years. Her life interest in the oil property was $48,038.29, which reduced to present worth as of decedent's death is $29,902.24. Aside from the oil-producing property, the estate of the decedent consisted of stocks, bonds, and other personal property, of a value of $247,371.90. E.L.E. Brenneman's interest in that property as of the date of decedent's death, based on her expectancy of life, was $44,461.03. *550 Verna L. Brenneman at the time of decedent's death had a life expectancy of 45.50 years and the value of her interest in the oilproducing property was $35,039.13. Her interest in the other assets comprising the estate as of the date of her father's death was $60,144.43. On attaining the age of 21 years, which was in 1919, Verna L. Brenneman received outright a one-twelfth part of the trust estate created by the decedent, her father. The amounts restored to her taxable income by reason of the deductions taken for depreciation and depletion were as*4102 follows: [1919] $4,051.52 [1920] 4,473.93 [1921] 4,454.02 all of which represented proceeds of the sale of oil from the oilproducing property acquired by her under the will of the decedent. David E. Brenneman at the time of his father's death had a life expectancy of 44.19 years and the value of his interest in the oilproducing property was $34,429.02. His interest in the other assets of the estate as of the same date was $59,097.22. On attaining the age of 21 years, which was in 1917, he received outright a one-twelfth part of the trust estate and on attaining the age of 25, which was in 1921, he further received a one-twelfth part of the trust. The amounts restored to his taxable income by reason of the deduction taken by the trustees for depreciation and depletion were: [1919] $4,051.52 [1920] $4,743.93 [1921] 3,563.21 all of which represented proceeds of the sale of oil from the oilproducing property acquired by him under the will of the decedent, his father. In 1916, the trustees purchased 200 shares of Pacific Gas & Electric Co. common stock, for which $13,300 was paid. On December 10, 1920, this stock was sold for $8,933, by reason of*4103 which a loss of $4,367 was incurred. This stock was part of the trust from which Verna L. and David E. Brenneman received income. The trustees deducted the amount of the loss from gross income in their fiduciary return in determining the amount to be distributed to those beneficiaries, and the amount thus deducted was at no time distributed to the beneficiaries. The Commissioner determined that the amount of the loss should not be deducted by the trustees and restored one-half of the loss so deducted to each of the respective beneficiaries. The books of account of the trustees and of the beneficiaries were kept on a cash receipt and disbursements basis. *551 OPINION. LOVE: The first error assigned by the petitioners is that the respondent included in their respective taxable income for the years in question the amounts of depreciation and depletion deducted by the trustees from the gross income of the oil-producing property, no part of the amounts so deducted having been distributed to them. It is contended by the petitioners that the amounts deducted by the trustees were not distributable and, therefore, not taxable to them. Section 219 of the Revenue Act*4104 of 1918, in part, provides: (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including - * * * (4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by guardian of an infant to be held or distributed as the court may direct. * * * (d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within*4105 the fiscal or calendar year upon the basis of which such beneficiary's net income is computed. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust. This section was construed in ; 5 Am.Fed. Tax Rep. 5230. This decision is also applicable to section 219 of the Revenue Act of 1921. See , and . In the Baltzell case it was said: In considering section 219 alone and apart from the other sections of the act, it is evident that in it Congress employed words which lead to confusion of thought. It states under subdivision (d) that the income under paragraph 4 of which the tax is to be assessed and collected shall be "his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year." The beneficiary clearly has no distributive*4106 share in the net income of the estate or trust; but he has a distributive share of income to be paid him under and in accordance with the terms of the trust, and resort must be had to them to ascertain his proportion of the income or his distributive share. The beneficiary is not interested in the capital of the trust, but only in the income. If there are accretions to the capital, these are not distributable as income, so that the beneficiary may receive any *552 part of them; and if there are capital losses they cannot be made good out of the income. The capital may be depleted by such losses; but the income for that taxable year is not. It may in future years be diminished because of the diminution of the capital. We must, therefore, look to the will of L. A. Brenneman to discover what was the distributable share of income of each of the petitioners. See Paragraph (a) of the third clause of the will directs the trustees to "invest and from time to time re-invest the said trust estate * * *." And, in the same paragraph, it is provided that "the said trustees shall collect and receive the income or interest from said*4107 trust estate and pay out and disburse the same as hereinafter provided * * *." Paragraph (b) of the third clause directs the trustees "to set aside exclusively for the use of my wife, one-third of said trust estate * * * and to pay her annually during her natural life the net income or interest therefrom * * *." Paragraph (g) of the third clause directs that "when my son and daughter arrive at the age of twenty-one years the trustees shall annually thereafter pay to each of them his or her share of the income and interests on the trust estate, the payment to each to be proportionate to his or her share in said trust estate itself. Prior to the years in question the trustees, with the acquiescence of the beneficiaries, interpreted the directions of the decedent to mean that only "net income" of the trust estate, as that term is used in the taxing statutes, should be distributed to the beneficiaries. Accordingly, they set up reserves to conserve the corpus of the trust. In 1917 and 1918, as well as the years in question, the trustees took deductions for depreciation and depletion of the oil-producing property and distributed to the beneficiaries only the net income so determined. *4108 It is strenuously urged by the petitioners that the interpretation thus placed on the will can not be collaterally attacked. It is undoubtedly true that as between the parties in interest an interpretation of long standing placed on the instrument by them will not be disturbed and the courts of Pennsylvania have so held. ; . We are not inclined therefore lightly to cast aside or disregard the interpretation placed upon the trust instrument by the parties thereto and adopt a contrary view as a basis for the taxes in question. See . We think that the decedent's will is susceptible of the interpretation placed thereon by the parties in interest and, consequently, we hold that the deductions for depreciation and depletion, the amounts of which are not in dispute, were properly taken by the trustees and do not constitute income to the beneficiaries. The respondent's action in restoring the amounts *553 so taken as deductions by the trustees to taxable income of the respective beneficiaries is, therefore, reversed. With respect*4109 to the item of loss of $4,367 occasioned by the purchase and sale of the Pacific Gas & Electric Co. stock, it will be noted that this stock was purchased by the trustees in 1916, and was not a part of the corpus of the original estate, except that it may have been purchased with funds of the estate. The evidence does not disclose whether it was purchased in whole or in part with corpus funds; neither does the record disclose the fact as to whether or not there were prior or subsequent capital losses reimbursed out of income and acquiesced in by the beneficiaries. In view of such a situation we are unable to sustain petitioners' assignment of error on that point, and hence approve the action of the Commissioner. The last error assigned by the petitioners is that the respondent erred in failing to exclude from their respective income any or all of the distributions received by them from the trust estate. Apparently this was an alternative assignment of error presupposing an adverse decision with respect to the deductions taken by the trustees. It is contended that the value of the expectancy or life interest, the right to receive annual income, was capital to each of them acquired*4110 by bequest, and that they are entitled to set aside annually an amount equal to the value of the respective expectancies divided by their respective life expectancies. It is further contended that the amount received represented the proceeds of property acquired by devise and bequest and as such is not taxable. The same contentions were fully considered by the Board in , and decided adversely to the petitioners. It is unnecessary, therefore, to discuss petitioners' contentions in this respect. It appears that the deficiencies herein do not result wholly from the respondent's action in respect of which error was alleged. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50. ARUNDELL dissents.