Ink v. Commissioner

MARY INK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ink v. Commissioner Docket No. 75731. United States Board of Tax Appeals 35 B.T.A. 846; 1937 BTA LEXIS 828; April 6, 1937, Promulgated *828 Decedent, by his will, gave petitioner an annuity of $24,000 per year and made it a specific charge against certain real estate devised to others. His executors were directed to hold his personal estate intact for five years and if rentals of the real estate securing the annuity were insufficient to meet the payments, to supplement such security by transfers from the personal estate. The rentals in question were sufficient to meet the annuity payments. The five-year period elapsed during the taxable year, after $4,000 of the total payments to be made petitioner for that year had been made. The personal estate was thereupon distributed and thereafter the lessee of the real estate paid direct to petitioner the $20,000 balance of the annuity in making its rental payments. Held, such annuity represented a bequest to petitioner, and the amounts received by her were, therefore, not taxable income. Revenue Act of 1928, sec. 22(b)(3). Albert B. Arbaugh, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. LEECH *846 Respondent determined a deficiency in income tax against petitioner for the calendar year 1931 in the amount of*829 $1,445.55. This determination resulted from the action of respondent in including in petitioner's income for that year, $4,000 she received from the executor of the estate of Harry H. Ink, and $20,000 from the lessees of certain property, under the provisions of the last will and testament of Harry H. Ink, deceased. The propriety of that action is the only issue presented. FINDINGS OF FACT. The petitioner, Mary Ink, the widow of Harry H. Ink, who died testate February 20, 1926, while a resident of Canton, Ohio, received the sum of $24,000 from rentals of the Palace Theatre property during the calendar year 1931, under the provisions of the will of Harry H. Ink, deceased. *847 The will of Harry H. Ink, so far as material, provides as follows: ITEM FOUR: I hereby Will and Bequeath unto my wife, Mary Ink, the sum of Twenty-Four Thousand Dollars ($24,000) per year, payable in monthly payments of Two Thousand Dollars ($2000.00) each, said annuity to be received by her in full of her dower, distributive share, year's support, and any and all other claims or demands whatsoever that she may or might have against my estate, and I hereby make said annuity a specific charge*830 against my theatre property hereinafter referred to. ITEM FIVE: All the remainder of my property, both real and personal, and wheresoever situated, I hereby devise and bequeath unto my children, Carrie E. Ink, Harper H. Ink, Joseph W. Ink, James Ink and Catherine Ink, share and share alike, subject however, to the various provisions and conditions contained in this Will. ITEM SIX: It is my Will that my Executor and Trustee, hereinafter named, shall have entire charge of my estate for the period of five years (5) from and after my decease. I now have a Real Estate Agency to look after the renting and collection of rentals of certain of my real estate, and I desire my Executor to consult with my Son, Harper H. Ink and my Daughter, Carrie E. Ink and permit them to determine whether or not said Real Estate Agency or any other Real Estate Agency in the City of Canton, Ohio, shall continue to act in said capacity, and if my said Son and Daughter desires to have a Real Estate Agency continue to so act, then my Executor is authorized to pay to said Real Estate Agency the fees allowed real estate agents in the City of Canton, Ohio therefor. Should my Son and Daughter desire to discontinue*831 having a Real Estate Agency look after said renting and the collection of said rentals, then my Executor is authorized to look after the renting and collection of rentals, in which event my Executor is authorized to charge the same fee as is allowed real estate agents in the City of Canton, Ohio. It is my Will that during said Five Year (5) period, my Executor shall pay the legacies hereinbefore set forth out of the income of my estate. It is my further Will that the annuities hereinbefore set forth shall be paid from the income from my estate. The remainder of the income from my estate shall be paid to my said children, but I instruct and direct my Executor that for the first year after my decease, said Executor pay to each of my children, the one-third (1/3) of his or her share of said net income; that for the Second Year (2) said Executor pay to each of said children the One-Half (1/2) of the year's net income; for the Third Year (3) the Two-Thirds (2/3) of said year's net income; for the Fourth Year (4) the entire year's net income; and for the Fifth Year (5) the entire year's net income, together with the income accumulated during the preceding years. ITEM SEVEN: At the*832 end of the Fifth Year after my decease, I direct my Executor to distribute my personal property among my said Five Children (5), share and share alike. ITEM EIGHT: The title to my real estate shall be in my children, subject to the provisions in this Will set forth, and it is my Will that the Windham Block, situated at the South West corner of Sixth St. N.W. and Market Ave. North in the City of Canton, Ohio, be not sold for a period of at least Five Years (5) after my decease; that the property known as the Schaeffer Block, and which is a part of Lot No. Forty-Nine (#49) in the City of Canton, Ohio, be not sold for a period of at least Fifteen Years (15) after my decease; and that the property on which I am now constructing a theatre building, and *848 located at the North West corner of Market Ave. North and Sixth St. N.W., and which is leased for a period of Thirty Years (30) after its completion, shall not be sold prior to the termination of said lease. ITEM NINE: I have already made certain financial arrangements and will hereafter make further financial arrangements for the completion of the construction of said Theatre Building, but should it become necessary after*833 my decease to raise additional funds to complete said construction, then my Executor is authorized to use sufficient personal property from my estate to pay the balance of said construction cost. ITEM TEN: The rental which shall become due on said Theatre property cannot be determined until said Theatre is constructed, but I have every reason to believe that the yearly rental will be in excess of Twenty-Four Thousand Dollars ($24,000.00) per year, and for that reason I have made said annuity to be paid my said Wife a specific charge on said Theatre property, but in the event the rentals from said Theatre Building are not sufficient to pay said annuity of Twenty-Four Thousand Dollars ($24,000.00), per year to my said Wife, then my said Executor and Trustee shall hold sufficient personal property so that the income therefrom may make up any deficiency. At the end of said Five Year (5) period, hereinbefore set forth, if said rentals from said Theatre property are sufficient to pay said annuity of Twenty-four Thousand Dollars ($24,000.00) per year to my said Wife, and said annuity of One Hundred Dollars ($100.00) per month to my said Brother, L. W. Ink, then and in that event, the*834 administration of my estate shall be closed at said time and my entire personal property shall then be distributed, and all of my real estate shall be turned over to my said children, and the Lessees of said Theatre property shall thereafter pay to my said Wife, during the remainder of her natural life, the sum of Two Thousand Dollars ($2000.00) per month; to my Brother, L. W. Ink, the sum of One Hundred Dollars ($100.00) per month, and after his decease to his present wife the sum of Fifty Dollars ($50.00) per month, during the remainder of her natural life; and the remainder of said rental shall be paid to my Five Children (5) share and share alike. In the event said rental from said Theatre property is not sufficient to pay all of said annuities, then my Executor must continue to act as Trustee and hold sufficient personal property so that the income therefrom shall make up the deficiency in said rentals. ITEM ELEVEN: In the event any of my said real estate shall be destroyed or damaged by fire, or other casualty in such manner as would make it impracticable to rebuild along the present lines, then my residuary devisees are authorized to encumber the property so destroyed so*835 as to construct thereon a building suitable for the location, and are also authorized to use the insurance money collected for said construction. Since the title to all of my real estate shall be in my said children, all insurance policies shall be taken in the name of my said children except as may be modified by any leases. ITEM TWELVE: I have carefully considered the interests of my said wife, Mary Ink, and I believe that said sum of Two Thousand Dollars ($2000.00) per month will represent more than the income to which my said wife would be entitled under the law, and will be more than ample to support her during the remainder of her natural life, but should my said wife refuse to accept under this Will and desire to take under the law, then my said Executor hereinafter named shall pay to her as soon after my decease as is convenient, such share of my personal property as she is entitled to and that her dower in my real estate be worked out to the best interests of my estate. *849 On the 20th day of February 1931, the George D. Harter Bank, as executor, and trustee, under the last will and testament of Harry H. Ink, deceased, distributed the property and assets of*836 the estate in accordance with the terms thereof and terminated its duties as trustee, in collection and distribution of rentals. Thereafter and until November 23, 1932, the lessee of the Palace Theatre property paid directly to Mary Ink and L. W. Ink, annuitants, their respective annuities monthly from the Palace Theatre rental and paid the balance of said monthly rental by separate checks to each of the five children entitled thereto. At the time of the distribution of the estate by the executor and trustee the Palace Theatre rental was sufficient to pay the annuities set up in the decedent's last will and testament and no personal property was retained by the executor or trustee to make up any deficiency and it was not necessary for the executor and trustee to sell any of the decedent's real estate for the payment of his debts. During the calendar year 1931 petitioner received the sum of $4,000 from and through the George D. Harter Bank, executor and trustee, and the balance of $20,000 from and through the lessee of the theatre property. All payments received by the petitioner from either the executor of the Harry H. Ink estate or the lessee of the Palace Theatre property*837 were received in payment and satisfaction of the annual annuity provided for the petitioner by the last will and testament of Harry H. Ink, deceased. OPINION. LEECH: Our inquiry is resolved by the correct legal characterization of the contested receipts. If those receipts are bequests, they are not taxable income to petitioner. Revenue Act of 1928, sec. 22(b)(3). 1 Respondent now concedes the $4,000 payment received from the executor was a bequest, but denies that status to the $20,000 received from the lessees of the theatre property. He cites Helvering v. Pardee,290 U.S. 365; Bridgeport-City Trust Co., Trustee,32 B.T.A. 1181; *838 Bay Trust Co., Trustee,34 B.T.A. 233; Arthur U. Crosby et al., Executors,34 B.T.A. 433, as supporting that conception. We think those authorities and others characterize both receipts as bequests. *850 Whether the receipts in dispute are bequests depends upon the intent of the testator, as expressed in his will, to permit their payment from either corpus of the estate or its income. Helvering v. Pardee, supra;Bridgeport-City Trust Co., Trustee, supra;Bay Trust Co., Trustee, supra;Arthur U. Crosby et al., Executors, supra;Burnet v. Whitchouse,283 U.S. 148. The present will permitted the payment of the amounts in question either from corpus or income. This will consistently designated the interest of the petitioner thereunder as an "annuity" and, not only did not limit its source of payment to income, but expressly made the "annuity a specific charge against my theatre property * * *." See *839 Arthur U. Crosby et al., Executors, supra. Item four is as follows: ITEM FOUR: I hereby Will and Bequeath unto my wife, Mary Ink, the sum of Twenty-Four Thousand Dollars ($24,000) per year, payable in monthly payments of Two Thousand Dollars ($2000.00) each, said annuity to be received by her in full of her dower, distributive share, year's support, and any and all other claims or demands whatsoever that she may or might have against my estate, and I hereby make said annuity a specific charge against my theatre property hereinafter referred to. The adventitious circumstance that the questioned payments to petitioner were actually made from income is not material. Helvering v. Pardee, supra. That the source of the payments of petitioner's annuity was limited to a specific part of the corpus does not change the controlling fact that the contested distributions could be made legally from corpus. Burnet v. Whitehouse, supra; Boston Safe Deposit & Trust Co. v. Commissioner, 66 Fed.(2d) 179; certiorari denied, *840 290 U.S. 700; Warner v. Commissioner, 66 Fed.(2d) 403; certiorari denied, 290 U.S. 688. Nor is our conclusion disturbed by the termination of the testator's trust during the taxable year and the fact that, thereafter, $20,000 of the disputed payments were made by the lessees of the theatre property. Helvering v. Pardee, supra;Commissioner v. Smiley, 86 Fed.(2d) 658, reversing 33 B.T.A. 198; Hanes v. Munger,40 Ohio St. 493, and Yearly v. Long,40 Ohio St. 27. Despite the termination of the trust, the distribution of the testator's personal property and the provision in the will that the theatre property, upon which petitioner's annuity was a specific charge, "which is leased for a period of Thirty Years (30) after its completion, shall not be sold prior to the termination of said lease," clearly, under the last cited authorities, petitioner still had a lien on the theatre property, itself, for her annuity, and could enforce its payment therefrom. And, in our opinion, that conclusion is not affected by item six or item ten of the will. In*841 the face of the provision in item four, quoted above, making petitioner's annuity "a specifc charge against [the] theatre property" and its reiteration in item ten, those first-mentioned statements are no more than expressions of expectation, *851 hope, and belief that the income would be sufficient to meet the annuity. Such expressions are not enough to restrict the source of payment of the annuity here to income alone. Arthur U. Crosby et al., Executors, supra, and cases cited therein. The distribution of the testator's personal property, at the expiration of the five-year period, as required by item ten of the will, only limited the source of petitioner's bequest, to the theatre property and the devisees of that property. Commissioner v. Smiley, supra;Hanes v. Munger, supra, and Yearly v. Long, supra. We conclude that the payments in question were received by petitioner as bequests and that they are, therefore, not taxable income to her. Revenue Act of 1928, sec. 22(b)(3), supra; *842 George D. Harter Bank, Executor,29 B.T.A. 926. Decision will be entered for the petitioner. Footnotes 1. SEC. 22. GROSS INCOME. * * * (b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: * * * (3) GIFTS, BEQUESTS, AND DEVISES. - The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income). ↩