Bank of America Nat'l Asso. v. Commissioner

BANK OF AMERICA NATIONAL ASSOCIATION, AS TRUSTEE UNDER THE WILL OF JAMES HALE BATES, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bank of America Nat'l Asso. v. Commissioner Docket No. 40078. United States Board of Tax Appeals 19 B.T.A. 1273; 1930 BTA LEXIS 2232; May 29, 1930, Promulgated *2232 TRUSTS - DEDUCTION. - The testator's will created a trust, the income therefrom to be paid to his wife and daughter during their lives in equal shares and all the income to the survivor. The wife and daughter were given power of appointment over $150,000 and $75,000, respectively, of the principal of the trust. Upon their deaths, $5,000 was to go to a cemetery and the remainder of the principal to be distributed pro rata among 12 charitable, religious, and educational institutions and a certain club, except that the amount so distributed should not exceed one-half of the testator's estate. Any excess above such one-half was to go to the next of kin of the testator, his wife and daughter. In 1926 the trustee sold certain trust assets at a profit. Held that the facts do not show that under the terms of the will any of the trust assets were permanently set aside and that therefore no portion of the profits in question was permanently set aside to be used for religious, charitable, etc., purposes within the meaning of section 219(b)(1) of the Revenue Act of 1926. Richmond L. Brown, Esq., for the petitioner. Harold Allen, Esq., for the respondent. TRUSSELL*2233 *1273 In this proceeding the deficiency, in the amount of $1,809.98 in income tax for the year 1926, is the result of the respondent's proposal to tax the entire profits in the amount of $27,874.81 received by petitioner as trustee upon the sale of certain trust assets. The issue presented is whether all or just a portion of the said profits are taxable. FINDINGS OF FACT. The Bank of America National Association is a national association organized under the laws of the United States, with its principal place of business at 44 Wall Street, New York, N.Y. The Franklin Trust Co. was appointed executor and trustee under the will of James Hale Bates by the Kings County Surrogate's Court on December 6, 1901, and duly qualified as executor and as trustee, and administered the estate and trust thereunder until May 1, 1920, when it was merged with the Bank of America by merger agreement in effect May 1, 1920, in accordance with the provisions of the New York State Banking Law. The Bank of America continued the administration of the trust until March 26, 1928, when the Bank of America was converted into the Bank of America National Association, in accordance with the*2234 laws of the United States, and *1274 the Bank of America National Association has since continued the administration of such trust, and is now acting as such trustee. James Hale Bates was a resident of the State of New York. He died in 1901, leaving a will which provided for numerous specific devises and bequests immaterial to the issue involved in this proceeding, but the pertinent clauses of the said will provided as follows: TENTH: I direct that payment be made of and upon the legacies, bequests and annuities as soon as practicable after may decease and without abatement by reason of any payments prior to the expiration of the year usually allowed. I also direct that any transfer or collateral inheritance taxes imposed be paid out of my estate in addition to the amounts of the legacies and bequests. And after making and providing for the payments hereinbefore directed, I give and bequeath the rest, residue and remainder of my personal estate, including the amount of any lapsed legacies or bequests, to the FRANKLIN TRUST COMPANY OF BROOKLYN, IN TRUST, to hold the principal (except as hereinafter provided) during the lives of my wife, MARY FIELD BATES, and of my daughter, *2235 ALICE BERTHA VAN DEUSEN, to receive and collect the income, issues and profits and to apply and pay over the net income in monthly payments, as nearly as may be, one half thereof to my wife, MARY FIELD BATES and the other half to my daughter, ALICE BERTHA VAN DEUSEN. Upon the death of my wife, one hundred and fifty thousand dollars of the principal of said trust shall belong and be paid and set over as my wife, by her last will and testament, may have directed or appointed. Upon the death of my said daughter, seventy-five thousand dollars of the principal of said trust shall belong and be paid and set over as my said daughter, by her last will and testament, may have directed or appointed. After the death of my said wife or of my said daughter, the whole net income of the remainder of said trust shall be applied and paid over to the survivor during her life. And at the termination of said trust at the death of my said wife or daughter as either may be the survivor, it is my will, and I direct, that the principal remaining of said trust be paid, set over and distributed as prescribed in the two following paragraphs of this will. ELEVENTH: To the Greenwood Cemetery of Brooklyn, *2236 the sum of Five Thousand dollars, the income to be used in the renewal or preservation of the erections or structures on or around my lot in said cemetery or the planting or cultivation of trees, shrubs, flowers or plants in or about my said lot. TWELFTH: To the Brooklyn Home for Aged Men, Twenty thousand dollars. To the Industrial School Association and Home for Destitute Children, Twenty thousand dollars. To the Packer Collegiate Institute, Twenty thousand dollars. To the Long Island Historical Society, Ten thousand dollars. To the Hospital Training School for Nurses, Fifteen thousand dollars. To the Hamilton Club of Brooklyn, Five thousand dollars. To the Congregational Home Missionary Society, Five thousand dollars. To the Church of the Pilgrims, in Brooklyn, Five thousand dollars. To the Society for Improving the Condition of the poor in Brooklyn, Fifteen thousand dollars. To the First Presbyterian Church in Schoolcraft, Michigan, Ten thousand dollars. To the Methodist Church in Proctorsville, Vermont, Five thousand dollars. To the Ladies Library Association of Schoolcraft, Michigan, Ten thousand dollars. To the Branch of the Fletcher Library at Proctorsville, Vermont, *2237 Ten thousand dollars. And if the said remaining principal of said trust shall be insufficient to pay the several sums to the several beneficiaries specified in this paragraph *1275 of my will, it shall be applied pro rata among them. And if it shall exceed the aggregate of the amounts specified, such excess shall be added pro rata. And if any of said beneficiaries named in this and the preceding paragraph shall not exist, or for any reason shall be unable to take the bequests specified, the same shall go to and be divided among the other beneficiaries named in this paragraph in the proportions indicated by the sums herein named. THIRTEENTH: I empower my executors to transfer to the trustee for the trust created by the Tenth Paragraph of this will the stocks, bonds and evidences of investment of whatever description unchanged from the condition in which they may be at the time of my decease, or such of them as may not have been required to be sold or disposed of for payment and satisfaction of the precedent debts, expenses, legacies and bequests. And I expressly authorize the Trustee to continue to hold the property so received in the form of investment it may be*2238 in at the time of my decease, including stocks as well as bonds, with discretionary power to sell and reinvest the proceeds in cases where it is thought best to do so to save the estate from loss. But it is my desire and instruction that in making any new investments and reinvestments, the rules shall be followed which govern the investment of trust funds under the law of New York, except that the Trustees need not be limited to securities actually within said State. * * * FIFTEENTH: It is my purpose by this will to dispose of all my property, real and personal. If it shall occur that the principal of the trust disposed of by the Twelfth Paragraph or as therein enumerated exceed one half my estate (which I do not contemplate can be the case) then any excess above such one half to which such bequests are limited, and also any property as to which it might otherwise appear or be held I had died intestate, I wish and direct to be equally divided and go, one third to the next of kin of myself as if I had died intestate; one third to the next of kin of my wife as if she had died intestate; and one third to the next of kin of my daughter as if she had died intestate; such division*2239 into thirds by the classes named even though some persons may thereby receive more than others by reason of common kinship. * * * The Brooklyn Home for Aged Men, Industrial School Association and Home for Destitute Children, Packer Collegiate Institute, Long Island Historical Society, Hospital Training School for Nurses, Congregational Home Missionary Society, Church of the Pilgrims, Society for Improving the Condition of the Poor in Brooklyn, First Presbyterian Church in Schoolcraft, Michigan, Methodist Church of Proctorsville, Vermont, Ladies' Library Association of Schoolcraft, Michigan, and Branch of the Fletcher Library at Proctorsville, Vermont, are corporations organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, and no part of the net earnings of said corporations inures to the benefit of any private shareholder or individual. The amount of the estate of James Hale Bates, deceased, at the date of his death was $646,632.83, as shown by account of his executor and executrices, Franklin Trust Co., Mary Field Bates Spalding and Alice Bertha Van Deusen del Grella, settled and allowed by decree of the Kings County Surrogate's*2240 Court, dated April 11, 1914. *1276 Mary Field Bates (Spalding) described in said will of james Hale Bates, deceased, as "Mary Field Bates," the widow of the said deceased, died on May 21, 1926. The said Mary Field Bates Spalding, deceased, appointed by her will $150,000 of the principal of said trust created by the tenth clause of said will, in accordance with the provisions of said will. Alice Bertha Van Deusen del Grella, daughter of decedent James Hale Bates and surviving life tenant of trust under the tenth clause of his will, is still living. The Bank of America National Association, as trustee under the will of James Hale Bates, deceased, paid the $150,000 appointed by Mary Field Bates Spalding out of the principal of said trust fund. The amount of the principal of the trust held by the Bank of America National Association as trustee under the tenth clause of the will of James Hale Bates, deceased, after said payment, was $536,197.54, as shown by account of trustee dated March 8, 1927, settled and allowed by decree of the Kings County Surrogate's Court dated January 30, 1928. During 1926 certain securities and rights to purchase certain shares of stock*2241 were sold at a profit of $27,874.81. The petitioner reported this profits as nontaxable income, on the theory that it represented corpus of the estate which would ultimately vest in exempt corporations. The Bureau held that this profits was taxable to the petitioner as trustee, on the theory that it is not possible to determine definitely how much of the remainder estate will be distributed to exempt corporations until the death of the surviving life tenant, Alice Bertha Van Deusen del Grella. The above facts are set forth as agreed to and stipulated by counsel for the parties hereto, except for rearrangement of the order in which the paragraphs are contained in the stipulation. The petitioner, as trustee, filed an income-tax return for 1926, in which it reported a net income in the amount of $27,874.81, and the computation of the tax thereon in the amount of $1,809.98, but claimed that no tax was due for the reason that the principal of the trust would ultimately vest in charitable and other exempt organizations. OPINION. TRUSSELL: The income tax in the amount of $1,809.98 has been proposed by the respondent as a tax on the profit of $27,874.81 derived by the petitioner, *2242 as trustee, upon the sale of certain trust assets in 1926. Section 219 of the Revenue Act of 1926 provides: SEC. 219. (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including - (1) *1277 Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. (b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis*2243 as provided in section 212, except that - (1) There shall be allowed as a deduction (in lieu of the deduction authorized by paragraph (10) of subdivision (a) of section 214) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214, or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit; * * * The issue raised by the pleadings is whether one-half of the said profit was permanently set aside by the trustee under the provisions of the will for religious, educational and charitable institutions within the meaning of the above-quoted section 219(b)(1) and is therefore deductible. The profit of $27,874.81 derived by petitioner, as trustee, from the sale of trust assets was an accretion to the principal of the trust fund and was not distributable to the life*2244 beneficiary. ; ; affirmed without opinion, ; ; In ; ; ; ; ; ; affirmed without opinion, ; . Therefore, the said profits became a portion of the corpus of the trust which will be distributed in accordance with the provisions of the will upon the death of the testator's daughter, the present life beneficiary. The tenth paragraph of the will provides that the testator's daughter shall have the power of appointment over $75,000 of the principal of the trust remaining at the time of her death and the eleventh paragraph provides that such remainder shall be further reduced by the sum of $5,000 bequeathed to the Greenwood Cemetery of Brooklyn for the care of the testator's lot. In the twelfth paragraph of the will the testator made bequests totaling $145,000 to 12 corporations*2245 organized and operated exclusively *1278 for religious, charitable, scientific, literary or educational purposes, and a bequest of $5,000 to the Hamilton Club of Brooklyn, and further provided that if the remaining principal of the trust should be insufficient to pay all of those sums it should be distributed pro rata among them, and that if the remainder should exceed the aggregate of those sums, such excess should be added pro rata, except that, as provided in the fifteenth paragraph of the will, the total amount so distributed should not exceed one-half of his estate. Any excess above such one-half was bequeathed to the next of kin of the testator, his wife and his daughter, as if each of them had died intestate. It is entirely improbable that the testator thought that each of those institutions would get the exact amounts specified, for he could not foretell whether his wife and daughter would exercise their respective powers of appointment over $225,000 of the corpus of the trust fund, nor could he foretell what future accretions or losses to the trust fund might occur. It is clear that his intention was merely to provide for their pro rata shares of an amount to be*2246 determined by future events. In our opinion the testator intended that the pro rata shares of a portion of the trust fund bequeathed to the 13 institutions mentioned in the twelfth paragraph of the will were not to be definitely fixed or permanently set aside until after the death of the two life beneficiaries at some future date. We are also of the opinion that the fifteenth paragraph of the will limits the amount to be so distributed in the future to one-half of the value of the testator's estate, for the language employed in the fifteenth paragraph, considered with the language employed in the twelfth paragraph, plainly refers to the future value of the remainder of the principal of the trust fund after the death of the two life beneficiaries. In the said paragraph the testator states that, "If it shall occur that the principal of the trust disposed of by the Twelfth Paragraph or as therein enumerated exceed one-half my estate," the excess above such one-half shall be divided and go, "one-third to the next of kin of myself as if I had died intestate; one-third to the next of kin of my wife as if she had died intestate; and one-third to the next of kin of my daughter as if she*2247 had died intestate." Clearly, the excess above such one-half of the estate is to be both determined in amount and distributed after the death of the two life beneficiaries. The terms of the will creating the trust do not permanently set aside any ascertainable portion of the trust assets for the bequests made in the twelfth paragraph thereof and therefore no part of the profits in question represents an accretion in the value of trust assets so set aside. The said profits represent an accretion in the value of the total principal of the trust fund, which, upon the death of the *1279 daughter, the present life beneficiary, will be distributed, $75,000 as directed by the daughter if she exercises her power of appointment; $5,000 to the Greenwood Cemetery; an amount not in excess of one-half of the testator's estate as directed in the twelfth paragraph of the will; and the balance, if any, to certain next of kin. Counsel for both parties have argued as to the effect of possible future accretions or losses to the principal of the trust fund, but we can not base our decision upon what may happen in the future. The facts are that in 1926 the amount of the principal of the*2248 trust was sufficient to provide a considerable sum for the next of kin and if we were to deal with probabilities it would be reasonable to say that the profits of $27,874.81, and also future capital gains, would effect merely an increase in the amount left to the next of kin. The petitioner relies upon the case of , but that decision is not in point with the case at bar, for it involved the question of whether the value at the date of the testator's death of gifts to charity could be ascertained for the purpose of a deduction under section 403(a)(3) of the Revenue Act of 1918 in determining the value of the net estate subject to estate tax. The case at bar is also distinguished from the case of , which arose under the Revenue Act of 1916, and, further, the entire residue of the trust fund went to the hospital upon the death of the life annuitant. In the cases of ; *2249 ; ; and , the Board held that income and gains accruing to charitable, religious, and educational institutions under the terms of a will were deductible from the gross income of the estate or trust, but those cases are distinguished from the case at bar in that in each of them the entire residue was left to such institutions and there was no question but that the gains in controversy were permanently set aside for those institutions under the terms of the will. In the case at bar the gains and profits became a part of the whole corpus of the trust, a part of which will be distributed to other than tax-exempt institutions. In the case of , the terms of the will provided for the proportionate interest of each person and tax-exempt institution sharing the residue of the estate and the executors immediately determined and recorded those fractional interests. The Board held that the respective shares of the gains and profits were*2250 fixed and ascertainable, and that the shares belonging to charitable and educational institutions *1280 were permanently set aside under the terms of the will and therefore were deductible from the gross income of the estate. In the case at bar the terms of the will do not provide for any definite proportionate shares of the residue which are to be subject to the powers of appointment, to go to the cemetery, or to be divided among the thirteen institutions named in the twelfth paragraph of the will. We are of the opinion that in taxing the income of a trust, it is the intention of Congress to tax the trust for all income received by it which can not be definitely and legally paid to or permanently set aside for a definite beneficiary under the terms of the will or deed creating the trust. With respect to the case at bar, we are of the opinion that under the terms of the will the income in question in the amount of $27,874.81, or any ascertainable portion thereof, was not permanently set aside for religious, charitable, scientific, literary or educational institutions and that petitioner, as trustee, is not entitled to the deduction sought under section 219(b)(1) of the*2251 Revenue Act of 1926. Compare , and , which, in some respects, are similar to the case at bar. Judgment will be entered for the respondent.