Blair v. Commissioner

EDWARD T. BLAIR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Blair v. Commissioner Docket No. 25684. United States Board of Tax Appeals 18 B.T.A. 69; 1929 BTA LEXIS 2127; November 9, 1929, Promulgated *2127 A beneficiary of a life interest in a trust estate assigned a portion thereof irrevocably and by an enforceable instrument. Held, the grantor is not taxable on the income subsequently accruing on the assigned portion of the trust estate. Calvin F. Selfridge, Esq., and J. F. Dammann, Jr., Esq., for the petitioner. J. Arthur Adams, Esq., for the respondent. LITTLETON *69 The Commissioner determined a deficiency of $8,773.73 in income tax for 1923. Petitioner admits the correctness of $2,922.80 thereof, but claims that respondent erred relative to the balance of $5,850.93 *70 by including in his income $21,000, which was not income received by or chargeable to him, but was income of a trust estate created by his father and which had been assigned by petitioner to his three children. Said sum of $21,000 was received by the children and tax paid by them. FINDINGS OF FACT. The petitioner is a resident of Chicago, Ill. His father, William Blair, was also a resident of Chicago. The latter died May 10, 1899, leaving a last will and testament wherein he provided, among other things, substantially as follows: He created a trust*2128 estate naming Chauncey J. Blair and Edward T. Blair, the petitioner, as trustees, by the terms of which the wife of the testator was to receive one-half of the net income of the trust estate, during her life, and the petitioner was to receive the other half; and after the death of the wife of the testator the petitioner was to receive the whole of the net income of the trust for and during the term of his natural life. The will of William Blair was duly established, admitted to probate and put to record. "Clause Fourteenth," which creates the trust above mentioned, is as follows: To my nephew Chauncey J. Blair and my son Edward Tyler Blair, of Chicago, I give, devise and bequeath all the rest and residue of my real estate situated in the State of Illinois, including the brick store building standing on the east half of the west half of lot seven (7) in block nineteen (19) in the original town of Chicago, leased by me of the estate of the late John High, deceased, and including also my said homestead above described subject to the life estate therein of my said wife as herein given to her and also all shares of stock in the Merchants National Bank of Chicago and all shares*2129 of stock or bonds which I may own at the time of my decease of any municipal corporation or incorporated company, To have and to hold the same to them and to the survivor of them and to their successors, and to the heirs executors and administrators of such survivor and successor, but in trust however to and for the following uses and purposes namely: in trust to hold, manage control, improve and lease the same, at their discretion, and the same to keep well insured and in good and tenantable repair and condition and the same to rebuild in case of damage or destruction by fire or otherwise, and the income from said trust fund and estate to use expend account for and pay as follows to-wit: A. To pay all the taxes, assessments and premiums for insurance thereon, all the costs and expenses of the necessary repairs upon the said real estate; all the cost and expense of the necessary additions to and alterations and improvements in any of the buildings upon said real estate; all the cost and expense of re-building and repairing any building destroyed or damaged by fire or other casualty and also any and all other costs and expenses necessarily incident to the care, management protection*2130 and preservation of said trust estate; all of the above to be done and performed by the trustees of said fund and estate as they, in their discretion and judgment shall deem for the best interest thereof and of those interested therein. *71 B. To pay to my said wife, as the same shall from time to time be received, one equal half part of all the net income which shall arise or accrue from the said trust fund and estate for and during the full term of her natural life. C. To pay to my said son, as the same shall from time to time be received the other equal half part of all the net income which shall arise or accrue from the said trust fund and estate for and during the full term of his natural life. D. At and after the decease of my said wife to pay my said son the whole of said net income for and during the full term of his natural life. Other paragraphs of "Clause Fourteenth" relate to the disposition of the trust after the death of petitioner and in various other contingencies none of which are involved here. The wife of the testator died March 13, 1923, and thereupon, according to the terms of the will, petitioner became entitled to the entire*2131 income during life of the trust created under "Clause Fourteenth" of the will of William Blair. "Clause Twenty" of William Blair's will is as follows: I do hereby declare and direct that the income from said trust fund and estate which is herein ordered to be, from time to time as the same shall be received, paid to my said wife and to my said son and to his said wife and to their children and descendants of children in the cases aforesaid shall be paid to them directly upon their separate order and receipt therefor, for their sole and separate use respectively, and that the same shall not be nor be made nor held in any manner nor by any proceedings whether in law or equity while yet in the hands of said trustees liable for or subject to the payment of any of the debts or obligations of either of the persons entitled to the same as above herein set forth. On April 2, 1923, the petitioner assigned and transferred to his daughter, Lucy Blair Linn, for her life, an interest amounting to $6,000 for the remainder of the calendar year 1923, and $9,000 in each calendar year thereafter in the net income which petitioner was entitled to receive during his life from the Trustees*2132 under the said will of William Blair. This assignment was in the words and figures as follows: THIS INDENTURE Made and entered into this 2nd day of April A.D. 1923, by and between EDWARD T. BLAIR of the City of Chicago, County of Cook and State of Illinois, party of the first part, and LUCY BLAIR LINN, of the said City of Chicago, party of the second part, WITNESSETH: That the said party of the first part, in consideration of love and affection and One Dollar ($1) in hand paid by the party of the second part, the receipt whereof is hereby acknowledged, does hereby sell, assign, transfer and set over unto said party of the second part an interest amounting to Six Thousand Dollars ($6,000) for the remainder of the current calendar year, and Nine Thousand Dollars ($9,000) in each calendar year thereafter in the net income which the said party of the first part now is, or may hereafter be, entitled to receive during his life from the Trustees under the Will of William *72 Blair, Deceased, late of the said City of Chicago; and the said party of the first part hereby authorizes and empowers said party of the second part, either in her own name or in the name of the said party*2133 of the first part, to receive and receipt to the Trustees under the Will of William Blair, deceased, for Six Thousand Dollars ($6,000) for the remainder of the current calendar year and for Nine Thousand Dollars ($9,000) in each year thereafter of the income and moneys which shall at any time become payable to said party of the first part under or by virtue of the terms and provisions of the said Will of William Blair, Deceased. All payments hereunder shall be made in person to said party of the second part and not upon any written or verbal order nor upon any assignment, nor upon any transfer by operation of law, and shall cease upon the death of either party hereto. IN WITNESS WHEREOF the parties hereto have set their hands and seals the day and year first above written. EDWARD T. BLAIR [Seal] LUCY BLAIR LINN [Seal] On the same date, April 2, 1923, the petitioner notified the then trustees under the said will of William Blair in writing of said assignment to Lucy Blair Linn and the said trustees in writing accepted said assignment. This notice and acceptance are in the words and figures as follows: TO EDWARD TYLER BLAIR and WILLIAM MCCORMICK BLAIR, as Trustees*2134 under the Last Will and Testament of William Blair, Deceased. You are hereby notified that I have this day assigned, transferred and set over to my daughter, LUCY BLAIR LINN, an interest amounting to Six Thousand Dollars ($6,000.00) for the remainder of the current calendar year, and Nine Thousand Dollars ($9,000.00) in each calendar year thereafter in the net income which may become due and payable to me during my life from you as Trustees under the Last Will and Testament of William Blair, Deceased; and that said LUCY BLAIR LINN is authorized to sign and receipt to you, either in her own name, or in my name, for Six Thousand Dollars ($6,000.00) for the remainder of the current calendar year, and Nine Thousand Dollars ($9,000.00) in each calendar year thereafter of the income and moneys which shall become payable to me during my life under or by virtue of the terms and provisions of said Last Will and Testament of William Blair, Deceased; and that the said receipts of said LUCY BLAIR LINN for the income paid to her in pursuance hereof shall be a sufficient voucher for the income so paid to her, and shall have the like effect as though such receipts and vouchers were signed by me*2135 in my own proper person, and you are hereby requested and directed to pay said LUCY BLAIR LINN out of the net income of said estate Six Thousand Dollars ($6,000.00) during the remainder of the current calendar year, and Nine Thousand Dollars ($9,000.00) in each calendar year thereafter, said payments to be in such installments as may be convenient to said Trustees. IN WITNESS WHEREOF I have hereunto set my hand and seal this 2nd day of April, A.D. 1923. EDWARD T. BLAIR [Seal] Accepted this 2d day of April, A.D., 1923. EDWARD T. BLAIR W. MCC. BLAIR As Trustees under the Last Will and Testament of William Blair, Deceased. *73 On April 2, 1923, the petitioner assigned and transferred to his daughter, Edith Blair, "an interest amounting to Nine Thousand Dollars ($9,000.00) in each calendar year (including the remainder of the current calendar year) in the net income" which he was entitled to receive during his life from the trustees under the said will of William Blair. On April 2, 1923, petitioner assigned and transferred to his son, Edward Seymour Blair, "an interest amounting to Nine Thousand Dollars ($9,000.00) in each calendar year (including the remainder*2136 of the current calendar year) in the net income" which petitioner was entitled to receive during his life from the trustees under the said will of William Blair. The assignments to Edith Blair and Edward Seymour Blair were identical with the assignment to Lucy Blair Linn except the amount of the interest assigned, which in each case was described in the last two preceding paragraphs. On April 2, 1923, notices were executed by petitioner and delivered to the trustees notifying the said trustees of the assignments of April 2, 1923, to Edith Blair and Edward Seymour Blair, and these notices were accepted by the trustees in writing as in the case of Lucy Blair Linn. During the remainder of the calendar year 1923 the trustees under the said will of William Blair paid over to Lucy Blair Linn, Edith Blair and Edward Seymour Blair part of the net income of the trust estate pursuant to the three assignments of April 2, 1923. At the hearing of this case it was agreed between the parties by their respective attorneys and ordered by the Board that if the decision of the Board is that all the income of the trust is taxable income of petitioner, then this deficiency tax is correct, but if*2137 the Board decides that the amounts actually paid to the assignees under these assignments by the trustees was not taxable income to this petitioner, then further proof may be made by the petitioner of the amounts so paid by the trustees to the said assignees. Respondent in his audit of petitioner's income-tax return for the year 1923, as shown by respondent's 60-day letter dated January 31, 1927, included, as taxable income of petitioner, the amounts assigned by him to his children and increased petitioner's distributive income from the estate of William Blair. Chauncey J. Blair, one of the trustees named in the will, was succeeded as such by William McCormick Blair, under the terms of the will. OPINION. LITTLETON: The Board has held in a number of cases that the Cestui que trust of a trust estate may make an assignment of his *74 interest therein and that income from the estate subsequently accruing to the assignee is not taxable to the assignor. Under the will of William Blair a trust was created and after the death of the testator's wife the petitioner became entitled to the entire income thereof during his life. By the assignments set out in the findings*2138 of fact he irrevocably assigned a certain portion thereof to his three children. Under Illinois law, where all of these parties resided and the trust estate was located, these assignments were valid and conveyed petitioner's interest in the estate to the extent indicated. In ; , the court said: In equity * * * the cestui que trust may deal with his equitable estate as property. He is he beneficial and substantial owner, and if under no disability may sell and dispose of his estate, and any legal conveyance will have the same operation upon the equitable estate as a similar conveyance of the legal estate would have at law upon the legal estate. (1 Perry on Trusts Sec. 321). There is a fundamental proposition that equitable estates are governed by the same rule as legal estates, otherwise inextricable confusion would ensue. (Ibid sec. 357). In the consideration of a court of equity the cestui que trust is actually seized of the freehold. He may alien it, and any legal conveyance by him will have the same operation in equity upon the trust estate as it would have*2139 had at law upon the legal estate. . The recent case of , is very similar to this case. There the taxpayer was the beneficiary of a trust created by his grandfather and assigned to his wife an undivided two-thirds interest in all the net income of two-fifths of the residuary estate of Marshall Field, deceased. The Board upheld the assignment and said: The first question raised in this proceeding is whether certain income from a trust fund, received by the petitioner's wife pursuant to a formal and complete assignment by him to her of his right or interest, is nevertheless taxable to the petitioner. The right of the petitioner in the trust was clearly and definitely established and determined by the courts of the State of Illinois, and as to property rights, its decree is unquestionably binding on this Board. From this decree it is apparent that as to the two-fifths trust, the petitioner's right or interest is adjudged to be unqualified to the extent that he is not only entitled to all the income but is so entitled thereto with all the incidents of absolute ownership. *2140 By virtue of those provisions in the decree the right or interest in question is as freely assignable as any beneficial right or interest under a testamentary trust ever can be. That the petitioner's vested estate in the two-fifths trust was assignable under the applicable law, namely, that of the State of Illinois, is not questioned. Consideration is not necessary to support and render perfect and irrevocable an executed assignment of a vested equitable right or interest such as the petitioner's interest in the two-fifths trust. . The petitioner by such assignment completely divested himself of any interest *75 in the right to receive such income and it follows that he may not be taxed therefor. We regard this case as controlling here. Without further elaboration we refer to the following cases in which assignments of interest in or income from a trust estate were held valid and that subsequent income was not taxable to the assignor. ; *2141 ; ; ; . We do not regard the cases cited by respondent as applicable to the facts in this case, as they were not trust cases, except , and . In the Stieff case the petitioner and assignor was the trustee and there was no written evidence of the assignment. He merely gave he income to his daughter. The Board held that the income was taxable to Stieff because there was no written or other transfer to his daughter. In the Shellabarger case there was no irrevocable transfer or assignment. It was a mere agreement to pay certain sums from income in compromise of a will contest. In this proceeding it is of no consequence that petitioner was one of the trustees, as his powers and duties were clearly and strictly defined by the will of William Blair and the law applicable thereto and he was powerless to act except in conjunction with his cotrustee. Clause twenty*2142 of the will and certain expressions in the assignments from petitioner to his children are merely efforts to make the income free of the claims of creditors, but, whatever may be their effect, there is no limitation by which the income should return to the petitioner. We conclude that the income paid to the assignees Lucy Blair Linn, Edith Blair, and Edward Seymour Blair, under the assignments in question during 1923 was not taxable to the petitioner. Judgment will be entered under Rule 50.