Spreckels v. Commissioner

ADOLPH BERNARD SPRECKELS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Spreckels v. Commissioner Docket No. 85651. United States Board of Tax Appeals 37 B.T.A. 709; 1938 BTA LEXIS 998; April 15, 1938, Promulgated *998 1. Petitioner's guardian paid from his funds an amount for attorney's fees to protect petitioner's interest in his father's estate. Held, this expense is a personal and not a business expense and is not deductible. Van Wart v. Commissioner,295 U.S. 112. 2. A trust received income from dividends in the year 1932 to be paid to petitioner October 30, 1932, if petitioner was living. Petitioner received the income thus held for him from January 1 to October 20. Held, the petitioner and not the trust is taxable for this income in 1932 under the provisions of section 162(b), Revenue Act of 1932. Walter Slack, Esq., for the petitioner. E. A. Tonjes, Esq., and Frank M. Thompson, Jr., Esq., for the respondent. HARRON *709 The Commissioner has determined a deficiency of $3,886.11 in income tax liability for the year 1932. Two questions are involved: (1) Whether respondent erred in disallowing a claimed deduction of $625 attorney's fees paid for petitioner's account by his guardian; (2) whether respondent erred in having included in petitioner's income $8,042.65 representing income of a trust accumulated for the*999 benefit of the petitioner during the taxable year and distributed to him upon his attaining the age of majority in that year. FINDINGS OF FACT. Petitioner is an individual, residing in San Francisco, California. Petitioner's father, Adolph B. Spreckels, died June 28, 1924. Petitioner was born October 30, 1911. He reached the age of 21 years, his legal majority, on October 30, 1932. *710 In the year 1932 petitioner was under the guardianship of his mother, Alma de Bretteville Spreckels, who had been appointed guardian by the Superior Court of the State of California, in the City and County of San Francisco. About the beginning of the year 1932 proceedings were instituted in the probate of the will of petitioner's father, Adolph B. Spreckels, and the accounts of the executors under the will were presented to the Superior Court in San Francisco for settlement and allowance. The question arose as to whether the fees claimed by the executors of the estate were proper and the guardian of the petitioner employed an attorney to examine the executors' accounts with a view to accomplish savings in executors' and attorney's fees claimed at the time of the proposed settlement*1000 of the executors' accounts. Petitioner's guardian in 1932 paid from the funds of the petitioner the sum of $625 on account of the legal services which she had employed. In his income tax return for 1932, petitioner claimed as a deduction the amount of $625. Petitioner claimed the deduction as a necessary expense in connection with the protection of his interests in the estate of his father. Respondent disallowed the deduction claimed. The last will and testament of Adolph B. Spreckels was admitted to probate in the Superior Court of the State of California, in the City and County of San Francisco, and, after proceedings had been taken in the probate of this last will and testament, a decree of final distribution was entered February 24, 1932. The residue of the estate of the decedent was distributed to six named trustees upon a certain trust set out in the decree of final distribution. It was provided in the trust made part of the decree of distribution that the trustees are empowered to manage, invest and reinvest the trust property and to collect the income of the said trust estate and to accumulate and dispose of the income of the trust as follows: (1) One-half of the net*1001 income of the trust estate is to be paid to Alma de Bretteville Spreckels during her lifetime; (2) during the lifetime of Alma de Bretteville Spreckels, the remaining half of the net income of the trust estate shall belong to and go to Alma Spreckels Rosekrans, Adolph Bernard Spreckels, petitioner, and Dorothy Constance Spreckels, children of the decedent and of Alma de Bretteville Spreckels, share and share alike; provided, however, that during the minority of any of said children, their respective shares of said net income shall be accumulated and disposed of by the trustees, as follows: As each child attains the age of majority, he or she shall receive from the Trustees his or her proper share of the accumulated net income, and also shall thereafter receive his or her proper share of the current net income, which shares shall be determined by a fraction whose numerator shall be the number one (1) and whose denominator shall express the number of said children then living; including the issue of any deceased child as one person, in representation *711 of his or her parent; and such issue shall take the share his or her parent would have taken if living, by right of representation. *1002 When the last of said children, viz., Alma Spreckels Rosekrans, Adolph Bernard Spreckels, and Dorothy Constance Spreckels, who may survive, shall reach the age of legal majority, one-half (1/2) of the corpus or principal of the trust estate shall (subject to the provisions hereinafter made for the payment of the annuity to Alma de Bretteville) be divided and distributed among said children then living, share and share alike, and, if said Alma de Bretteville Spreckels be dead at said time, then the whole of the corpus or principal shall be so divided and distributed (subject, however, to the provisions hereinafter made for the payment of the annuity to Alma de Bretteville.) Should said Alma de Bretteville Spreckels be living when the last of said children, viz., Alma Spreckels Rosekrans, Adolph Bernard Spreckels and Dorothy Constance Spreckels, who may survive, reaches the age of legal majority, then, upon the death of said Alma de Bretteville Spreckels, the remaining one-half (1/2) of the trust estate (that is, the part which shall have been retained by the Trustees to provide income for her) shall (subject to the provisions hereinafter made for the payment of the annuity to Alma*1003 de Bretteville) also be so divided and distributed among said children who may be then living. If, at the time any divisions or distribution of any part of said trust estate, any of said children, viz., Alma Spreckels Rosekrans, Adolph Bernard Spreckels, and Dorothy Constance Spreckels, shall have died leaving issue surviving, then such issue shall take the share which his or her parent would have taken, if living, by right of representation, notwithstanding anything hereinbefore contained. The Trustees, in their discretion, are authorized and empowered, at any time, to advance to or for the benefit of any of said children such sums of money as they may deem proper, always charging the share which such child shall ultimately receive with the amount so advanced, together with a reasonable rate of interest, so that all of said children shall ultimately share equally in said estate. The children of Adolph B. Spreckels, deceased, Alma Spreckels Rosekrans, Adolph Bernard Spreckels, petitioner herein, and Dorothy Constance Spreckels, and Alma de Bretteville Spreckels were all living throughout the entire calendar year 1932. Petitioner's sister, Alma, was born August 23, 1909, and*1004 Dorothy was born March 9, 1913. On October 30, 1932, the date upon which petitioner attained majority, there was in the hands of the trustees under the trust, net income of the trust in the sum of $8,042.65, which had accrued from January 1 to October 29, 1932, both dates inclusive, which was payable to petitioner under the trust. All of this income represented dividends received by the trustees during that period. This income was paid to petitioner. During the period from October 30 to December 31, 1932, both dates inclusive, petitioner received as his share of the net income of the trust, accruing during the latter period, the sum of $2,985.88, all of which represented dividends received by the trustees during the latter period. Petitioner filed with the collector at San Francisco an income tax return for the calendar year 1932 and paid the tax shown due thereon *712 in the sum of $19,137.92. In making the return petitioner did not include in his taxable income the income of the trust accrued from January 1 to October 30, 1932. The Commissioner included the accrued income of the trust in petitioner's taxable income. OPINION. *1005 HARRON: (1) The amount of $625 attorney's fees paid from petitioner's funds by his guardian in 1932 was a personal expense, which is not deductible. The expenditure was not a business expense. ; affd., . This issue involves the same question as was before the Supreme Court in , and that opinion of the Court is controlling here. The respondent's determination in this issue is sustained. (2) The second issue in this proceeding involves the question whether a trust or a beneficiary of a trust is taxable in 1932 on income of the trust for that year paid to the beneficiary in that same year. Respondent contends that the income is taxable to the beneficiary under the provisions of section 162(b), Revenue Act of 1932. We agree with respondent's contention. Subsection (b) of section 162 is set forth in the margin. 1 This subsection is one of three subsections prescribing the manner of determining the net income of a trust for taxation of income of the trust. It is phrased in positive terms and not permissive terms, viz: "There shall be allowed*1006 as an additional deduction * * *, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not." (Italics supplied.) Turning to what deduction shall be allowed a trust and shall be included in the net income of a beneficiary, we*1007 find the following specified: "the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries." In this proceeding, we are concerned with the question of who is taxable upon the amount of $8,042.65 in the taxable year, the fiduciary or the beneficiary. This amount represents income of a trust received *713 by it during the taxable year in the interval between January and October. There is no question regarding the nature of the amount involved. It is income from principal of a trust. The trust provides that any distribution of principal to the beneficiary, who is our petitioner, shall be made upon such contingencies as the facts show will be subsequent to the taxable year, i.e., on or after March 9, 1934, when petitioner's younger sister attains her legal majority. Also, the trust does not provide that any of the net income of the trust should be added to the principal of the trust. The trust, by its terms, directs the manner of distributing income of the trust. Congress intended that income of trusts should be taxed as other income is taxed and so provided in sections 161 2 and 162*1008 of the Revenue Act of 1932. We conclude that the amount of $8,042.65 in question was income. See ; . Turning to the question of who is taxable for this income, we deem it pertinent to observe that consideration of the issue presented*1009 should be given with recognition of the oft-stated principle that taxation is a practical matter. The trust and the petitioner had the same calendar year and at the close of that year each was required to prepare his respective income tax return. At the close of the year 1932, one contingent right, referred to in the trust, had matured, namely, the petitioner, a beneficiary, had attained his legal majority. His right to receive current income of the trust held for him during the period from January 1 to October 30, 1932, had become an enforceable right to receive payment of such income. Within the taxable year it became the duty of the fiduciary to distribute such income to our petitioner. Cf. . In fact, he had received it; the fiduciary had paid it to him. While we do not have the trust before us as a petitioner, we may refer to the intent of the statute as to what deductions it allows the trust to receive in computing its taxable net income. It appears to be clear that section 162(b) allows the trust a deduction for the amount of its income for the taxable year which is distributed in the taxable year to a beneficiary. *1010 *714 The meaning of sections 161 and 162 has been considered before now. Those sections are not new in the revenue acts. Sections 161 and 162 of the Revenue Act of 1932 are substantially the same as sections 219(a) and (b) of the Revenue Act of 1924. This latter section was involved in , which was affirmed by the Supreme Court in . In the latter case the Supreme Court made the following statement upon the meaning of the pertinent statutory provisions: The evident general purpose of the statute was to tax in some way the whole income of all trust estates. If nothing was payable to beneficiaries, the income without deduction was assessable to the fiduciary. But he was entitled to credit for any sum paid to a beneficiary within the intendment of that word, and this amount then became taxable to the beneficiary. [Italics supplied.] We consider that the proper determination of the issue here turns upon the fact that within the taxable year of the trust the $8,042.65 income it had received in that year was properly payable to and paid to our*1011 petitioner and that the trust was entitled to deduction from its gross income for such amount in computing its taxable trust income. This being so, the statute prescribes that the beneficiary shall include in his net income the amount of such deduction. The amount in question was distributed to our petitioner and we conclude that he is taxable for it. In arriving at the above conclusion, we have followed the reasoning expressed in The petitioner relies upon , which reversed the Board's decision in . The following is noted. In this proceeding the amount in question, distributed to the petitioner, was income of the trust and it was distributed to petitioner as income. In the Roebling case, a will created a trust by the terms of which the trustees were to pay to a beneficiary a share of principal with any accumulated income thereon. The Circuit Court of Appeals construed the terms of the trust to mean that accumulated income of a trust came to the beneficiary as part of the principal of the trust. Both principal*1012 and accumulated income of the trust were distributed to the beneficiary in the taxable year. The court held that what had been income to the trust became something totally different when it was received by the petitioner and that, since the petitioner did not receive "income" from the trust, he was not taxable upon the distribution to him by the trustees. The Butterworth case dealt with current income of a trust paid to a beneficiary. This proceeding, likewise, is concerned with current income of a trust paid to a beneficiary. We find no terms in the trust involved here which change the character of what was income of the trust to something else when distributed to our petitioner. He received *715 no principal from the trust in the taxable year. We, therefore, believe that there are differences in the facts in this proceeding which distinguish it from the Roebling case. However, to the extent that this proceeding is not distinguishable from the case of , we respectfully decline to follow the conclusions reached by the Circuit Court. Reviewed by the Board. Decision will be entered for the respondent.*1013 STERNHAGEN STERNHAGEN, dissenting: The amount of the trust income which the petitioner received in 1932 was, in my opinion, not what the statute describes as income "which is to be distributed currently by the fiduciary to the beneficiaries." The distribution was entirely because the beneficiary had reached his majority, and I do not think the word "currently" can be appropriately applied to it. The conclusion of Roebling v. Commissioner, 78 Fed.(2d) 444, seems to me to be correct. ARUNDELL, SMITH, VAN FOSSAN, and MURDOCK agree with this dissent. Footnotes 1. SEC. 162. NET INCOME. The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that - * * * (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year. ↩ 2. SEC. 161. IMPOSITION OF TAX. (a) APPLICATION OF TAX. - The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including - (1) 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. ↩