Kirchner v. Commissioner

ESTATE OF FREDERICK C. KIRCHNER, DECEASED, EMMA R. KIRCHNER, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Kirchner v. Commissioner Docket No. 102381. United States Board of Tax Appeals 46 B.T.A. 578; 1942 BTA LEXIS 847; March 11, 1942, Promulgated *847 1. For a number of years the General Electric Co., decedent's employer, followed the practice of creating profit sharing trusts for the benefit of deserving employees. The beneficiaries who were to share in those trusts were disignated by the president of the company after the trusts were created and usually several months after the close of the calendar year covered by the particular trust. Prior to the decedent's death he had been designated a beneficiary of the trusts covering the years 1930 to 1934, inclusive. He was not at the time of his death a beneficiary of the trust covering 1935 and it was not until two months after his death that he was so designated. Held, the decedent's interests in the five trusts covering the years 1930 to 1934, inclusive, should be included in his income as "amounts accrued up to the date of his death" within the meaning of section 42 of the Revenue Act of 1936; held, further, that the decedent at the time of his death had no interest in the trust covering 1935 and such interest later acquired by his estate should not be treated as amounts accrued up to the date of his death within the meaning of the statute. 2. Petitioner failed*848 to file an income tax return for the decedent for the year 1936, but such failure was due to reasonable cause and not due to willful neglect. Held, the respondent erred in imposing the 25 percent penalty under section 291 of the Revenue Act of 1936. John W. Ford, Esq., for the petitioner. Stanley B. Pierson, Esq., for the respondent. TURNER *579 The respondent determined a deficiency in income tax for the year 1936 in the amount of $18,118.96, and added a 25 percent penalty of $4,529.74 for failure to file a return. The principal question is whether the respondent erred in including in the decedent's taxable income, under section 42 of the Revenue Act of 1936, his interests in certain profit sharing trusts set up by his employer, the General Electric Co. The other issue is whether petitioner is subject to the 25 percent penalty for failure to file a return. FINDINGS OF FACT. The petitioner, Emma R. Kirchner, is the duly appointed executrix of the estate of Frederick C. Kirchner, who died a resident of Youngstown, Ohio, on March 25, 1936. The estate tax return was filed with the collector of internal revenue for the eighteenth district*849 of Ohio. For many years prior to his death the decedent was in the employ of the General Electric Co., a corporation, as manager of its branch plant, the General Electric Lamp Works, Youngstown, Ohio. During the years 1930 to 1935, inclusive, the General Electric Co. established profit sharing plans, represented by a trust fund set up for each year, for the benefit of deserving employees "as a reward for meritorious services and as an incentive for future effort." The six trusts were covered by separate written agreements between the General Electric Co. and the Bankers Trust Co. of New York, as trustee, the terms of which were substantially identical. Each trust was designated as an "Electrical Fund" and they were numbered from 7 to 12, inclusive. Each trust was to terminate upon the death of certain individuals named in the agreement, or in any event, not later than April 30 of the sixth year following the year in which the agreement was executed. Upon the execution of each trust agreement, the General Electric Co. paid to the trustee an amount of money, out of its estimated *580 profits for that year, to be held, managed, and invested by such trustee, upon the advice*850 and approval of a committee of individuals named therein, for the benefit of such employees and in such amounts or proportions as might thereafter be designated by the president of the company, "to the end that the net avails of said fund, with the additions thereto and accumulated earnings thereof, be distributed to such employees upon the termination of the trust." The trusts were irrevocable, the intention being to vest the legal title to the securities and funds composing the trusts in the trustee and to confer on each of the employee beneficiaries an equitable interest in the net proceeds to arise from the sale or other disposition of the securities and funds upon the termination thereof. After the employee beneficiaries were designated, nontransferable receipts were issued to them evidencing their share or interest in the trust. The beneficiaries had no right to call for any distribution of the funds before the termination of each trust, but in the event they desired to withdraw from participation they could make written application to the committee named and the committee had the power, in its absolute discretion, to grant or refuse such application. The committee had the*851 power, in its absolute and uncontrolled discretion, to direct beneficiary to surrender his receipt and have the trustee pay him the amount allotted to him plus interest from the date of allotment. Each trust agreement provided that in the event of death of a beneficiary prior to the termination of the trust the personal representatives, heirs, legatees, or distributees of such deceased beneficiary had the right, upon thirty days' written notice given within one year after the death of the beneficiary, to request and receive payment of the decedent's interest in the fund. Each agreement provided that whenever it became necessary to determine the value of any beneficiary's interest such value would be determined by the committee and would be based upon the market value of the securities and assets held by the trustee, which value when so determined would be taken as the value thereof for all purposes under the agreement. The actual value of each beneficiary's interest was thus ascertainable at all times. The president of the General Electric Co., on the basis of recommendations made to him by the various departments of the company, designated the employees selected to become beneficiaries*852 under each trust and also designated the share or interest to which he would be entitled, such interest being expressed in dollar units. Such designations were made in respect of each trust agreement after the final payment was made by the company and several months after the expiration of the year in which the trust agreement was executed. The decedent *581 was designated to have the following allotments under each of the trust agreements: Electrical fund No. Date of execution Amount Date of designation [7] Mar. 27, 1930 $9,630 Apr. 6, 1931 [8] May 5, 1931 8,820 Mar. 25, 1932 [9] Apr. 18, 1932 6,795 Mar. 27, 1933 [10] Feb. 25, 1933 7,452 Sept. 13, 1934 [11] Mar. 20, 1934 7,960 May 27, 1935 [12] Feb. 14, 1935 7,470 May 25, 1936 None of the trusts in question had terminated at the time of the decedent's death and no notice was given by the representatives of his estate that they elected to receive payment of his interests in the trusts. Upon the termination of each trust agreement in accordance with the terms thereof the decedent's estate received the following distribution: Electrical fund No. Date received Amount Date received Amount [7] Apr. 1936 $8,667.00 May 1937 $46.90 [8] Apr. 1937 18,610.20 Oct. 1937 16.91 [9] Apr. 1938 12,502.80 Sept. 1938 44.69 [10] Apr. 1939 11,625.12 Dec. 1939 204.22 [11] Apr. 1940 12,497.20 June 1940 5.44 [12] Apr. 1941 8,067.60 *853 The actual distributions made under each of the trusts upon the termination thereof, and under similar trust agreements for five years prior thereto, expressed in dollars as compared with one dollar of allotment to beneficiaries thereunder, are as follows: Electrical Fund No. Date distributed Amount distributed per dollar paid in [2] Apr. 1931 $1.856 [3] Apr. 1932 .655 [4] Apr. 1933 .42 [5] Apr. 1934 .50 [6] Apr. 1935 .373 [7] Apr. 1936 .90 [8] Apr. 1937 $2.11 [9] Apr. 1938 1.84 [10] Apr. 1939 1.56 [11] Apr. 1940 1.57 [12] Apr. 1941 1.08 The total number of beneficiaries under the trust agreements varied from year to year between 250 and 850, according to the prosperity of the company. Departments of the General Electric Co. showing no profits were not included. Most of the money received by the trustee was invested in securities, approximately 85 percent thereof being invested in common stocks. In April 1936 a representative of the decedent's estate requested the committee of individuals named in the trust agreements to determine the value of the decedent's interest in each of the trust agreements as *582 of March 25, 1936, the date*854 of his death. The values so determined were as follows: Electrical Fund No. 7 $8,715.15 Electrical Fund No. 8 16,431.66 Electrical Fund No. 9 13,358.97 Electrical Fund No. 10 12,347.10 Electrical Fund No. 11 12,274.32 The committee placed no value on the decedent's interest in Electrical Fund No. 12 because at that time the president of the company had made no designation of nor allotments to the beneficiaries thereunder. The decedent's interest in that fund was designated on May 25, 1936, two months after his death. In the decedent's estate tax return, filed on June 23, 1937, the petitioner included in the gross estate the six trusts in question, using the committee's valuations for the first five trusts and $7,470 for Electrical Fund No. 12, making a total of $70,597.20. The gross estate reported in the return was $82,384.55. Prior to his death the decedent filed his income tax return on the cash receipts and disbursements basis. Petitioner filed no income tax return for the decedent for the period between January 1, 1936, and the date of his death, March 25, 1936. The decedent's gross income for that period, excluding the electrical fund trusts, *855 was $1,790.12. At the time of the decedent's death, his widow, the petitioner herein, was confined to her bed with a stroke. She has since had several other strokes and also suffers from diabetes. In the fall of 1936 she developed gangrene in her right leg and during the last months of that year and the first part of 1937 her doctors were of the opinion that she would not recover. During that period she was not physically or mentally capable of looking after her business affairs. She was 65 years of age and had little or no knowledge of business affairs. A son-in-law, Clyde Dyson, was a practicing attorney but was unfamiliar with Federal tax matters. He declined to act as counsel for the estate for family reasons, but on his recommendation another local attorney, Hiram G. Bye, was engaged. Bye handled the affairs of the estate until the first part of November 1936, when he suffered a cerebral stroke. Dyson later talked with Bye in respect of the tax matters of the estate, but the latter was in such condition that he could hardly talk. Dyson understood that he was to get in touch with an accountant named Gilboy, who had handled the decedent's tax returns for a number of*856 years. Gilboy told Dyson that income tax returns had been filed. Dyson learned that the estate tax return had not been filed and thereupon prepared and filed the return. He declined to act as attorney in any further matters, and early in 1938 the executrix engaged one Bennett, who has since handled the estate. Dyson believed that *583 income tax returns had been filed until his attention was called to the deficiency notice wherein the respondent imposed a penalty for failure to file a return. Dyson never had any power of attorney or any other formal authority to act as attorney for the estate. OPINION. TURNER: On the first issue the respondent determined that the decedent's interests in the so-called Electrical Funds, Nos. 5 to 12, inclusive, should be included in his income as "amounts accrued up to the date of his death" within the meaning of section 42 of the Revenue Act of 1936. 1 The amounts set up in the deficiency notice as accrued income are the same as the values reported in the estate tax return. On brief, the respondent calls attention to the fact that upon the decedent's death his representatives had the right, under the provisions of the trust agreements, *857 to elect to receive payments of his interests in the trust funds, and that the trust agreements prescribed a method of determining the values of his interests in the event that such election was made. Then he contends that the values so determined should be treated as "amounts accrued" within the meaning of the act. He states that the issue is controlled by ; and . Petitioner contends that with respect to Electrical Funds Nos. 7 to 11, inclusive, the decedent's interests*858 therein were not capable of approximate valuation at the time of his death within the test laid down in the Enright case; that, since the trust funds consisted largely of common stocks, the distributions that eventually would be made to the decedent's estate upon the termination of each trust were contingent and uncertain; and, further, that the value of the decedent's interests at the time of his death was too indefinite for accrual. In respect of Electrical Fund No. 12, petitioner points to the fact that at the time of the decedent's death the president of the company had not designated the employees who were to become beneficiaries under the trust, nor had he designated the amount or proportion to which each would be entitled. Therefore, she argues, the decedent had no rights of any kind at the time of his death in respect of this trust which might be treated as accrued. We think petitioner's contention with respect to Electrical Funds Nos. 7 to 11, inclusive, must be rejected. At the time of the decedent's *584 death the company had made its final payment to the trustee and the decedent had been designated as a beneficiary and there was no contingency or uncertainty*859 as to the proportionate share to which he was entitled. Upon his death his representatives were entitled to demand payment of his interests therein and the trust agreements stipulated a method of computing the value thereof. There were no unknown factors which would render uncertain the value of his interests in the event that his representatives elected to receive payment therefor. If they had so elected, the decedent's interests could have been ascertained by the application of the method set forth in the trust agreements, a pure mathematical computation. We decide this issue for the respondent on the authority of the Enright case. Cf. . With respect to Electrical Fund No. 12, we think the petitioner's contention must be sustained. At the time of the decedent's death, neither he nor anyone else had been designated as a beneficiary under that trust agreement and of course no allotments had been made. It was not certain that the decedent would be designated, and it was not until two months after his death that he was designated. Obviously he had no interest in that trust at the time of his death, and there was nothing*860 to accrue. We decide this issue for the petitioner. Cf. . The respondent added a 25 percent penalty for failure to file a return. On brief, he contends that under section 291 of the Revenue Act of 1936 the imposition of the penalty is mandatory. He makes no contention that petitioner did not show reasonable cause for her failure to file the return. He cites a number of cases involving section 291 of the Revenue Act of 1934 and corresponding provisions of earlier revenue acts. Petitioner concedes that the imposition of the penalty under the 1934 Act has been held to be mandatory, but contends that changes made in section 291 of the Revenue Act of 1936 resulted in the removal of the mandatory provision and made the test whether the failure to file the return was due to reasonable cause and not to willful neglect. She contends that reasonable cause has been shown here and that the penalty should not be imposed. Section 291 of the Revenue Act of 1934, which is substantially identical to corresponding provisions of prior acts, provides in part as follows: In case of any failure to make and*861 file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * * [Emphasis supplied.] *585 The Board and the courts have held that this provision of the 1934 and prior acts requires that a return be filed by the taxpayer at some time as a prerequisite to a plea of reasonable cause. ; affd., ; certiorari denied, ; ; ; affd., ; ; affd., ; ; reversed on other grounds, *862 ; and . These are the cases cited and relied on by the respondent. Cf. . Section 291 of the Revenue Act of 1936 provides in part as follows: In case on any failure to make and file return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: * * * [Emphasis supplied.] The Congressional Committee Reports pertaining to the 1936 Act throw no light on the reason for the changes made in this provision, but the new provision is unambiguous and in our opinion effectively removed that part of the prior provision which made mandatory the imposition of the penalty in cases where no returns had been filed. We can not presume that Congress made this change inadvertently. The term "any failure" obviously includes a complete failure and the test laid down is whether "such failure is due to reasonable cause and not due to*863 willful neglect." In , we held that there was no reasonable cause for failure to file a return, and therefore found it unnecessary to pass upon petitioner's contention that under the wording of the 1936 Act proof of reasonable cause would relieve it from the imposition of the penalty. In , no return was filed, and we said, "The question under the Revenue Act of 1936, section 291, is whether there was reasonable cause for the failure." In that case we held there was no reasonable cause. In the instant case we think the petitioner has shown reasonable cause for failure to file the return. The facts are set forth in our findings and will not be repeated here. The respondent erred in imposing the penalty. In the following cases we and the courts have sustained the imposition of the penalty under the 1936 Act: ; nolle prosse (C.C.A., 2d Cir., Apr. 3, 1941); ; affd., *864 ; ; ; and . In none of those cases, however, do the facts show that there was reasonable cause for the failure to *586 file the return and any statements made therein to the effect that the imposition of the penalty is mandatory is obiter dictum and is not controlling here. Reviewed by the Board. Decision will be entered under Rule 50. Footnotes 1. SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise property includible in respect of such period or a prior period. ↩