Tullgren v. Commissioner

HERBERT W. TULLGREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. S. MINARD TULLGREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tullgren v. Commissioner Docket Nos. 9738, 32599, 32600. United States Board of Tax Appeals 14 B.T.A. 915; 1928 BTA LEXIS 2884; December 26, 1928, Promulgated *2884 ANNUITIES - CHARGE ON LAND DEVISED. - By the will of petitioners' father an annuity of $6,000 a year was given their mother, directed to be paid by petitioners. By that will certain real property was devised them subject to the payment of the annuity. Held, that the annuity was a charge first against the income from the property and as to any arrearage against the corpus, and the income in the several years in question being less than the amount of the annuity, none of it represented income taxable to petitioners. Further, held, that payments from personal funds by petitioners of arrearages in the annuity did not represent losses to them but were capital transactions representing items of cost to them of the property in satisfying the annuity lien. Frank Hormuth, Esq., for the petitioners. J. F. Greaney, Esq., for the respondent. TRUSSELL *916 These proceedings, consolidated for hearing and decision, are appeals from deficiencies determined by respondent in income taxes of petitioners for years and in amounts as follows: [1924] Herbert W. Tullgren None. $379.01 S. Minard Tullgren $172.86 360.07 All*2885 three of these deficiencies involve the same question, the disallowance by respondent of certain deductions made by petitioners from gross income in their returns in the years in question as representing payments made in those years of an annuity provided by their father's will, to be paid their mother and charged by that will upon a certain piece of real property devised them. Respondent, at the hearing, moved that the deficiency as to S. Minard Tullgren for the year 1923, be increased by the inclusion in his gross income of the amount received by him in that year as rents from the property in question. FINDINGS OF FACT. Petitioners are sons of Martin Tullgren, deceased, formerly a resident of White Fish Bay, Milwaukee County, Wis., and are residents of that State. The said Martin Tullgren left a last will and testament, provisions of which pertinent to these proceedings being as follows: Paragraph Two. I hereby give and bequeath to my wife, Barbara K. Tullgren, and direct that there be paid to her by my sons, S. Minard Tullgren and Herbert W. Tullgren, the sum of Five Hundred ($500.00) per month during the term of her natural life, said payments to be made on or before*2886 the 10th day of each and every month during said term, and that the payment thereof be and remain secured as hereinafter, in Paragraph Three of this my Last Will and Testament provided for. *917 Paragraph Three. I hereby give, devise and bequeath unto my sons, S. Minard Tullgren and Herbert W. Tullgren, share and share alike, to be theirs, their heirs and assigns forever, all of my right, title and interest in and to that certain apartment building and the land upon which same is situated and which is located at what is known as No. 6 Prospect Avenue, in the City of Milwaukee, Milwaukee County, Wisconsin, and further described as follows: (Here follows description of property) Subject, however, to the payment of the bequest to my said wife, Barbara K. Tullgren, of the sum of Five Hundred Dollars ($500.00) per month as provided for in Paragraph Two of this my Last Will and Testament. Paragraph Four. All the rest, residue and remainder of my property and estate of every name and nature whatsoever and wheresoever situated, I give, devise and bequeath to my sons, S. Minard Tullgren and Herbert W. Tullgren, share and share alike, to be theirs, their heirs and assigns*2887 forever. Paragraph Five. I hereby authorize and empower my wife, Barbara K. Tullgren, at any time that she may deem best, to relinquish the said property hereinbefore described and located on Prospect Avenue from the lien or charge for the security of the payment to her of the bequest herein provided, either by taking in its place other security or by making such other arrangement as to her shall be satisfactory. Paragraph Six. I hereby will and direct that no part of my said estate is or shall be in any wise chargeable or shall be charged as security for the payment of the said sum of Five Hundred Dollars ($500.00) herein bequeathed to my wife, Barbara K. Tullgren, except my interest in the Prospect Avenue property hereinbefore described, and that as to all other property herein devised and bequeathed to my said sons, S. Minard Tullgren and Herbert W. Tullgren, they or either of them acting individually, jointly or through any partnership or corporation in which they may be interested, may dispose of all such property and properties free and clear of any claim, right or title thereto on behalf or in favor of my wife, Barbara K. Tullgren. This will designated W. *2888 H. and Thomas T. Churchill of Milwaukee as executors and was by them duly offered for probate on October 24, 1922, and distribution of the estate in accordance therewith was ordered by the county court of Milwaukee County by decree of April 3, 1925. In that decree the court, after describing the property referred to in paragraph 3 of the will as above set out, and determining that decedent had a two-thirds interest therein, provided: That the real estate hereinbefore described be and the same hereby is assigned and transferred unto S. Minard Tullgren and Herbert W. Tullgren, share and share alike, as tenants in common thereof, that is, unto each an undivided one-half interest therein and thereto, to be theirs, their heirs and assigns forever, subject, however, to the payment by the said S. Minard Tullgren and Herbert W. Tullgren, of the sum of Five Hundred ($500.00) Dollars per month to Barbara K. Tullgren, widow of said Martin Tullgren, deceased, for and *918 during the term of her natural life, said payments to be made on or before the 10th day of each and every month during said term, and to remain a lien or charge upon said real estate as the security for the payment*2889 to her of said bequest, conditional, however, in that the said Barbara K. Tullgren at any time she may deem best relinquish the said real estate hereinbefore described from the said lien or charge for the security of the payment to her of the bequest herein provided either by taking in its place other security or by making such other arrangements as to her shall be satisfactory. In making his return for the calendar year 1923 the petitioner, S. Minard Tullgren, included in income the sum of $414.56 as representing a one-third undivided share of profits from rents of the Lake Shore Apartment for that year and deducted the sum of $3,000 as representing a payment in that year on the annuity of $6,000 due his mother. Respondent, in determining the deficiency in that petitioner's income for that year eliminated from gross income the item of $414.56 referred to and disallowed the deduction of $3,000 claimed as paid on the annuity. Neither petitioner, in making his return for the calendar year 1924, reported income as received from the Lake Shore Apartment, and each deducted $3,000 as representing payments made in that year of the $6,000 annuity to their mother. OPINION. TRUSSELL: *2890 By his will petitioners' father bequeathed to his widow an annuity of $6,000 per year, charging that it be paid by petitioners. By a subsequent clause of the will he devised to these petitioners certain real property "subject" to the payment of the annuity mentioned. The balance of his estate he gave to petitioners, specifically excepting it from charge on account of the annuity. By bequests of this character the question is raised as to whether the payment of the annuity is to be construed as a condition precedent or subsequent or as a charge upon the land, and by the great weight of authority it is held that it is not a condition precedent unless expressly so directed by the will in language which shows such to have been the testator's intention, and that in the absence of an evidenced intention that failure of the devisee to pay the annuity should work a forfeiture it will not be construed as a condition subsequent but merely a charge upon the land. ; ; *2891 ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; . Even where the devisee is specifically *919 directed by the will to pay the annuity as a condition of the devise the courts hold that the effect is merely to create a charge upon the lands. ; ; ; ; ; *2892 ; ; ; ; ; ; ; ; ; ; ; . In , where the testatrix left certain real estate to a son and daughter "conditioned upon" their paying to other of her children specified sums and providing support for another son during his life, the court said: The first question raised is whether the payment of the sums stated is a condition precedent or condition subsequent, or a charge upon the real estate devised. It is plain that the will does not create a condition precedent, because the devises are to take effect upon the death of the testatrix, while the payment is postponed for three years; nor a condition subsequent, because there is nothing in the will to show an intention of the testatrix to subject*2893 the estate to forfeiture. The payments were not for the benefit of her estate or of her heirs, generally, to whom a forfeiture would inure, but a mode of equalizing her gifts by requiring children to whom real estate was devised to make payments of money to other children who received no other gift from her, * * *. The use of the word "conditioned" does not necessarily imply a strict condition, either precedent or subsequent. The intention must control. 2 Washb. Real Property (5th Ed.) 446, par. 3, and cases cited in Note 5. We think that the intent in this case was to make the payments a charge upon the estate devised. The rule discussed above is accepted and applied by the courts of Wisconsin, in which State decedent resided, and the will was probated, and under whose laws the rights and obligations of these parties with respect to the property in question must be determined. In ; , in which a bequest similar to the one here in question was involved, the court said: The will does not, in terms, provide that the same should be a charge, but uses the expression that the devise to William is upon the condition*2894 that he shall, within one year after the widow's death, pay this amount to Phillipina. The expression "upon condition," if not otherwise qualified, might be construed as a condition precedent so that William could not take the land at all without making such payment, but since he was to take in possession immediately upon his mother's death, and was not required to make the payment until afterwards, namely, within a year, of course no condition precedent was intended. If, then, it is a condition at all, it is a condition subsequent; but there is no suggestion that his title is to be divested upon breach of that condition, and no provision is made for any one else to take the land upon such breach. Hence, it seems necessary to deduce some other practical meaning and purpose from this language. We are persuaded that the trial court reached substantially the right conclusion on this subject. We think it plain that this *920 $5,000 provision for the daughter - all that she receives under the will - was a very dominant purpose in the mind of the testator, and that his wishes, as evidenced by the will, would not be satisfied unless she receives it; hence that he intended to declare*2895 his will that out of this farm, constituting nearly half of his estate, should be paid, in any event, $5,000 to the daughter Phillipina; that this purpose should not be defeated either through William's inability to raise that amount of money upon his limited estate therein, or otherwise. To reach this result he must have intended to confer upon her the right to a lien or charge for this amount upon the whole title in these premises, and we agree with the trial court in holding that the will does so. In the case before us the devise to these petitioners is to take effect upon the death of the testator, the payments of the annuity being for succeeding years. There is no indication of an intent that the passing of title should await the expiration of the term of the annuity and that the payment of same is to be a condition precedent; nor is there an indication of an intent that the failure to make such payments shall work a forfeiture, and no such intention can be presumed in view of the fact that the forfeiture would not effect a change in petitioners' interest in the property, for any interest which they might forfeit under this specific devise they would thereupon take, in identically*2896 the same proportion, as residuary legatees. An annunity which is a charge against property is from its nature payable first out of income and any deficiency charged against corpus. ; ; ; ; ; ; (affd. ); ; ; ; ; ; . See also . In ; , the court said: Even if there were no express provision in regard to payment, the division of the legacies to each of his children into five equal parts, one to be paid in each year, would be an indication that they were to be paid from income, rather than from the principal of his estate. *2897 In , it was said that "the very nature of an annuity suggests, when those charged with the payment of it have in their hands a fund producing income sufficient to pay it, that the payment should be made from the income, and not from the principal." In the light of the decisions above cited we conclude that these petitioners each took, under the will of their father, an undivided one-third interest in this real property over and above a charge against such interests in the sum of $6,000 a year in favor of their mother, payable first out of the yearly income and as to any deficiency out of corpus. The record shows that in none of the years here involved were the rents from this property sufficient to pay the full amount of the *921 annuity. We hold that none of this represented income taxable to petitioners. The amount necessary in each year to make up the sum of $6,000 was paid by these two petitioners, in equal propertions, from personal funds. These payments are claimed by them to represent losses but it can be readily seen that they are merely payments which would otherwise be satisfied out of the*2898 corpus of the property and are no more than the payment of petitioners of any other incumbrance representing a lien upon property to which they hold title. These payments, although made from personal funds, are in fact payments out of the corpus of the property and can not represent losses to these petitioners, for what they took under the will was merely the residuum of the property over and above the extent to which it might be exhausted in meeting annuity payments. Such payments are capital transactions and represent items of the cost to them of the property in satisfying the lien of the annuity. We accordingly sustain the determination of deficiencies as made by respondent in respect to these two petitioners for the years in question. Judgment will be entered accordingly.