First Trust & Deposit Co. v. Commissioner

FIRST TRUST & DEPOSIT COMPANY AND GWYNN W. HOYT, AS GUARDIANS OF THE PROPERTY OF WILLARD C. LIPE, JR., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FIRST TRUST & DEPOSIT COMPANY AND GWYNN W. HOYT, AS GUARDIANS OF THE PROPERTY OF GORDON C. LIPE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FIRST TRUST & DEPOSIT COMPANY AND GWYNN W. HOYT, AS GUARDIANS OF THE PROPERTY OF SUZANNE H. LIPE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. First Trust & Deposit Co. v. Commissioner Docket Nos. 90749, 90750, 90751. United States Board of Tax Appeals 41 B.T.A. 107; 1940 BTA LEXIS 1229; January 19, 1940, Promulgated *1229 Petitioners' wards were remaindermen of a trust created in 1926 in the State of New York, where it was administered. The trust provided that, upon the death of the survivor of two life beneficiaries, the inheritance taxes against the estate of the settlor should be paid out of corpus and that the corpus, together with any accumulations thereon, be paid over to petitioners' wards in equal parts. The life beneficiaries died simultaneously in 1929. The inheritance taxes were not all determined nor paid until August 1934. In May 1935, the trust instituted action for judicial settlement of its account, which was not concluded until after 1935. Held, none of the income of this trust became currently distributable to petitioners within the meaning of section 162(b) of the Revenue Acts of 1932 and 1934 during 1933, 1934, or 1935, nor was it taxable to petitioners for any of those years. Benjamin E. Shove, Esq., for the petitioners. Thomas H. Lewis, Jr., Esq., for the respondent. LEECH *108 These are consolidated proceedings to redetermine deficiencies in income taxes as follows: Deficiency Name Docket No. [1935] Willard C. Lipe, Jr 90749 $1,037.46 $439.57 $629.90 Gordon C. Lipe 90750 1,039.95 492.06 668.87 Suzanne H. Lipe 90751 1,028.81 475.39 594.46 *1230 They present the common issue of whether the guardians of the above three individuals must pay an income tax on the respective distributive shares of their wards in the income of the W. Charles Lipe Insurance Trust for the calendar years 1933, 1934, and 1935. A second question is whether there is deductible by the trust from distributable trust income (a) certain estate and transfer taxes paid in 1933 and (b) interest paid in that year on a deficiency in the estate tax. FINDINGS OF FACT. Willard C. Lipe, Jr., Gordon C. Lipe, and Suzanne H. Lipe were, in the taxable years here involved, infant children of W. Charles Lipe, who died testate on August 16, 1929. The petitioners are their duly appointed guardians. On October 21, 1926, W. Charles Lipe duly executed his last will and testament. This will, after making certain specific bequests and devises to the testator's wife, left the residuary estate in trust. The trustees were to receive the income from the assets comprising the residuary estate and to pay it to the wife for life. Upon her death, or if she should predecease the testator, the principal was to be divided into as many shares as there were children then living. *1231 Thereafter the trustees were to hold each share in trust until the respective child reached the age of 35, paying the income to them meanwhile, and at that time the share would go to the child outright. The City Bank Trust Co., a New York corporation doing business in Syracuse, and the testator's wife were appointed executors and trustees. Thereafter, and on November 16, 1926, W. Charles Lipe entered into an inter vivos trust agreement (hereinafter called the insurance *109 trust) with the City Bank Trust Co., trustee. By the trust deed, the grantor conveyed to the trustee certain bonds having a per value of $100,000, and two insurance policies on his life of $75,000 each. The pertinent provisions of this trust deed were: FIRST: To receive, hold, manage, sell, invest and reinvest the same and every part thereof (including all the rights, powers and authority to collect and receive on the death of the Grantor the respective principal sums payable under and by the terms of said life insurance policies and to hold the proceeds thereof as an increase to the capital of the trust estate or estates hereby created in the manner hereinafter specified), and to collect, recover*1232 and receive the rents, issues, interest, income and profits thereof, hereinafter called "income" and after deducting the commissions of the Trustee as hereinafter provided, and paying the premiums on the life insurance policies, if any, and the proper and necessary expenses in connection with the administration of the trust, to pay the same in quarterly installments of equal amount, or as nearly equal as possible: (1) To the Grantor for and during the term of his life, and (2) Upon his death to pay the same to Eloise Hoyt Lipe, the wife of the Grantor, and (3) Upon her death or in case she shall have predeceased the Grantor to divide the capital together with all accumulations into as many equal parts as there are children of the Grantor and the said Eloise and the issue of any such deceased children per stirpes and not per capita and to pay over, deliver and convey one of such equal parts to each child and one of such equal parts to the issue of each deceased child, share and share alike, and (4) If, at the death of the said Eloise Hoyt Lipe there shall be then living no children of the Grantor and the said Eloise or issue of any such children, then the Trustee shall pay over*1233 and deliver the capital hereof together with all accumulations to the then next of kin of the Grantor according to the Statutes of Distributions of the State of New York. (5) If the said Grantor shall die without said Eloise or any children of him and said Eloise or issue of any such children surviving him, then the capital together with all accumulations shall revert to and become a part of the estate of the Grantor. * * * EIGHTH: It shall be the duty of the several persons to whom the Trustee is directed to pay the net income or the principal of the trust estate to notify the Trustee of the happening of the event or events by virtue of which they may become entitled to receive any such payment and to furnish proof to the reasonable satisfaction of the Trustee of the happening of any such event or events, and any payment, whether of income or principal, made in good faith by the Trustee before receiving such notice and satisfactory proof, shall be deemed to have been made in the lawful execution of the trust hereby created. * * * ELEVENTH: The Trustee is further authorized and empowered to pay out of the income received from the trust fund any and all taxes which properly*1234 may become payable from time to time, under the laws of the United States, or of any State, County or Municipality on said trust property, or for any transfer thereof or transaction affecting the same, and to affix and cancel tax stamps in accordance with the provisions of said laws. The Trustee is further authorized and empowered and directed, unless the Grantor shall in his last Will and Testament otherwise direct, to pay out of the *110 principal hereof (including the proceeds of life insurance policies) any and all Estate Inheritance, Transfer or Succession Taxes arising on account of his death and the transfer of any property of the grantor, or interest therein or income therefrom, under this or any other instrument, or any will or codicil, or under any intestate laws. The grantor made no direction respecting the payment of taxes in his will. W. Charles Lipe and his wife died in a common disaster on August 16, 1929, leaving surviving the three children who are represented by petitioners herein. The will was duly probated. On September 12 and 13, 1929, the trustee under the insurance trust collected the proceeds of the two policies upon the life of the decedent*1235 grantor and added them to corpus. The trustee under the insurance trust paid estate taxes on the estate out of the corpus of the insurance trust as follows: FEDERAL ESTATE TAX August 12, 1930 $1,407.03 August 21, 1931 4,012.24 November 28, 1933 10,168.20 With interest 11/28/33 of 1,974.04 NEW YORK INHERITANCE TAX September 9, 1930 $8,837.91 February 16, 1931 50,000.00 June 20, 1933 7,166.59 August 14, 1934 38,024.87 (Paid under section 233 of New York Tax Law) August 17, 1934 25.02 The amount of the Federal estate tax against the estate of W. Charles Lipe was finally determined in October 1933, and the amount of the New York inheritance or transfer tax was finally determined in August 1934. In May 1935, the trustee of the insurance trust commenced an action in the New York Supreme Court, Onondaga County, to secure a judicial settlement of its accounts as trustee. This action was not so settled during 1935. On December 9, 1935, a court order was entered requiring distribution of $15,000 of the trust income to each of the three children of W. Charles Lipe, and the trustee complied with this order on December 17, 1935. *1236 No other payments or credits to petitioners and/or their wards were made by the trust during the tax years. By court order, final distribution of corpus was directed September 24, 1937, and the trustee obeyed this order on September 25, 1937. The trustee has returned and paid income tax on all the income of the insurance trust. The First Trust & Deposit Co., is the successor to City Bank Trust Co. *111 OPINION. LEECH: Respondent has included one-third of the trust income from the insurance trust for the years 1933, 1934, and 1935, in the income of each of the wards of these petitioners. He has also refused to allow the trustee to deduct from the 1933 gross income, said to be distributable to the guardians of the three children, an amount paid as interest in 1933 on a Federal estate tax deficiency as well as amounts paid in 1933 on account of Federal estate taxes and New York inheritance taxes. Petitioners assume that, because the proceeds of the insurance paid to the insurance trust were a part of decedent's statutory gross estate for Federal estate tax purposes, the insurance trust income includes the income of the estate of W. Charles Lipe, deceased, the*1237 settlor of that trust. From this premise they argue that section 161(a)(3) 1 and section 162(c) 2 of the Revenue Acts of 1932 and 1934, apply and the conclusion then follows, they say, that since none of the contested income was "properly paid or credited" during any of the taxable years to the beneficiaries, the respondent erred in including any of this income in that of any of the beneficiaries during those years. *1238 We agree with respondent that petitioners have misconceived the issue and the controlling statutory provisions. Although it is true that the statutory gross estate for Federal estate tax purposes did include the proceeds of the insurance paid to the trust, as well as the remainder of its corpus (Revenue Act of 1926, sec. 302(c)), the estate of the deceased settlor, during the period of its administration, is wholly different and distinct, for Federal income tax purposes, from the insurance trust, with the income of which, alone, we are here concerned. ; affirmed on this issue, ; certiorari denied, ; ; . Thus respondent has proceeded on the theory that the contested income of the insurance trust was currently distributable within *112 section 161(a)(2) of the Revenue Acts of 1932 and 1934, 3 and, therefore, on its receipt by the trust, this income was taxable to the beneficiaries to whom it was so distributable, "whether distributed to them or not", under section 162(b) *1239 4 of the same revenue acts. See . *1240 Our inquiry then is whether the income of the insurance trust for 1933, 1934, and 1935 was "to be distributed currently" under the terms of the trust. See . We think not. A careful scrutiny of that document indicates that, normally, the corpus was to go outright in equal shares to the children of W. Charles Lipe upon the death of the survivor of him and his wife. The trustee was directed to collect the trust "income" and, after paying the expenses of administration of the trust and the premiums on the life insurance policies, was directed to distribute the balance in quarterly installments to the grantor or his surviving widow. It was then provided that, "Upon her death or in case she shall have predeceased the Grantor [the trustee was] to divide the capital together with all accumulations into as many equal parts as there are children of the Grantor and the said Eloise and the issue of any such deceased children per stirpes and not per capita and to pay over, deliver and convey one of such equal parts to each child and one of such equal parts to the issue of each deceased child, share and share*1241 alike." This discloses an intention that any income realized by the trust after the death of the survivor of the grantor and his wife should go to the guardians of the three children only as and when accumulations on corpus were so distributable. The settlor and his wife died simultaneously in 1929. Normally, the corpus of the trust and its accumulations would then have been distributable. However, the trust conclusively evidences that one of *113 its primary purposes and functions was the payment of the settlor's estate and transfer taxes out of its corpus. Thus, the life of the trust was extended beyond the death of the survivor of the settlor and his wife. Respondent concedes this. However, his position seems to be that the trustee was not justified in withholding distribution of the income because, after the death of the settlor and his wife, no reason existed therefor since the only purpose for extending the life of the trust was the payment of the estate and inheritance taxes which could only be made from corpus - so, from the time of the deaths of the settlor and his wife, the income was currently distributable when received by the trust. He cites *1242 , and other authorities to the same effect, holding that it is the right to receive a distribution of trust income and not its actual receipt upon which taxability to the beneficiaries depends. Undoubtedly, if the premise were correct, the conclusion for which those cases stand would follow. But the stated premise does not exist here. The insurance trust income, after the death of the settlor and his wife, was distributable only if, as, and when the corpus was distributable. The corpus was to be used for the payment of taxes arising upon the death of the settlor - the amounts of which were not all determined nor paid until August of 1934. Certainly, before that time no corpus and therefore no income was currently distributable. In May 1935, the trustee of the insurance trust instituted a proper action for a judicial settlement of its account as trustee. This account was not so settled during 1935. Final distribution therein was ordered by the court on September 24, 1937, which order was obeyed by the trustee on September 25, 1937. This record, in our judgment, satisfactorily establishes that there was no unreasonable delay*1243 in this administration, at least until after the close of 1935, the last year involved here. Without such delay, under the law controlling in this procedure, no distribution was legally enforceable until after that time. So, in ; , where a trust provided for the payment of corpus to a remainderman upon the death of a life beneficiary, it was held that the remainderman could not compel payment of the trust fund or any part thereof until the trustee had accounted. See also ; ; ; . Since the current distribution of the trust income for none of the three tax years could have been compelled, it was therefore not "to be distributed currently." This is so whether the view of the Board in , be followed, or that of the reversing Circuit Court of Appeals in *1244 . *114 It may be, as respondent seems to suggest, that the trustee could have distributed trust income during the tax years without judicial interference. However, even if that be so, it could not have been forced. Such distribution would have been only discretionary in the trustee (; reversed on another point, ), and the same tax result would follow here since no trust income was paid or credited to the petitioning guardians of the children for any of the taxable years. Revenue Acts of 1932 and 1934, sections 161(a)(4) 5 and 162(c), supra.6 In this statement we disregard the apparent exception in the fact that in December 1935 a court order directed the trustee to pay the guardians of the children $15,000 from income for each of the children, which was paid. *1245 The inference from the record is that the income to which this order was directed was that of years prior to 1933 and thus not involved here. Moreover, the respondent has not even suggested at any time the taxation of any income to the guardians of the children on any theory other than that it was "to be distributed currently." Thus, although the fact that this order was made and obeyed indicates that the trustee did not consider the income even discretionarily distributable, any significance in the fact is ignored by us as it was and is now by respondent. Respondent erred in taxing the trust income to the guardians of the children for those years. This conclusion obviates any necessity of deciding the second issue. Decisions will be entered for petitioners. Footnotes 1. 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 - * * * (3) Income received by estates of deceased persons during the period of administration or settlement of the estate. ↩ 2. 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 - * * * (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, her, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. ↩ 3. 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 - * * * (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. ↩ 4. 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. ↩ 5. 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 - * * * (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. ↩ 6. See also sections 161(a)(2) and 162(b) of the revenue acts, (supra), as to taxability of trust income collected↩ by a guardian of an infant "which is to be held or distributed as the court may direct * * *."