Opinion
Docket No. 11682.
1948-09-23
JOSEPH BLAKE KOEPFLI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ralph Kohlmier, Esq., for the petitioner. Douglas L. Barnes, Esq., for the respondent.
1. Held, on the facts, that trust income was to be distributed, currently and therefore was taxable to petitioner as beneficiary, under section 162(b), Internal Revenue Code.
2. Held, that there is no evidence to sustain the respondent's prayer for increased deficiency on the ground that capital losses were charged to corpus and were not deductible from trust income taxable to the petitioner. Ralph Kohlmier, Esq., for the petitioner. Douglas L. Barnes, Esq., for the respondent.
This proceeding involves a deficiency in the amount of $843.03 in the income tax liability of petitioner for 1941. Respondent, in an amended answer filed at the hearing, asked for an increase in the deficiency in the amount of $1,152.72, making the aggregate proposed deficiency the amount of $1,995.75.
The questions presented to this Court for determination are: (1) Did the respondent properly determine that petitioner is the real owner of the trust property of the Joseph O. Koepfli Trust No. 1, and is therefore taxable on the income of the trust for 1941 under section 22(a) of the Internal Revenue Code, or was the income of the trust currently distributable to petitioner, and, accordingly, was it includible in the income of petitioner under sections 161 and 162(b) of the Internal Revenue Code? (2) Is petitioner taxable upon an amount equal to the capital losses sustained by the trust?
A stipulation of facts was filed. We adopt same by reference and find the facts therein set forth. Such parts thereof as it is considered necessary to set forth are included with other facts found from evidence adduced in our findings of facts.
FINDINGS OF FACT.
The petitioner, Joseph Blake Koepfli, also known as J. Blake Koepfli, a resident of San Marino, California, filed his individual income tax return for the year 1941 with the collector of internal revenue at Los Angeles, California.
In 1941 petitioner had two children, Daphne and David Koepfli, born March 9, 1938, and August 7, 1940, respectively. Petitioner had no deceased issue.
In the year 1931 Joseph O. Koepfli and Juliette B. Koepfli transferred to Joseph O. Koepfli, as trustee of a trust for the benefit of their only children, Joseph Blake Koepfli, petitioner herein, and his sister, Hortense Koepfli Somervell, 12,000 shares of National Biscuit Co. stock, worth about $900,000. It was intended that the trust should provide regular income for the petitioner and his sister, and particularly that income would be made available for the use of Hortense Somervell, an ‘unworldly‘ person who then expected to marry and live abroad.
The pertinent provisions of the Koepfli Trust No. 1 (referred to sometimes as the trust), in so far as it is material to this controversy, are as follows:
FIRST: The said Trustee, and his successor and successors in trust, shall enjoy, have and possess and he, she and they are hereby vested with full, absolute and exclusive dominion and discretion over said trust properties or any property exchanged or substituted therefor, with full power to collect and receive all dividends, interest, rents and other income of whatsoever nature accruing thereon or receivable therefrom, and are hereby authorized to invest, reinvest, and keep invested the whole or any part of the principal sums of money of the trust. The Trustee and his successor or successors are not limited in investing or reinvesting the funds of the trust property, or any part of the corpus thereof, in legal investments for savings banks or trust funds, but may invest and reinvest the same from time to time and keep the corpus invested in such investments as at the time of making such investments shall, in the sole judgment of the Trustee and his successor or successors, seem best. No order of Court authorizing or confirming any sale, mortgage, lease, disposition or reinvestment of any part of said trust property or of any income derived therefrom, need be procured by the Trustee, nor shall be required as a condition precedent or condition subsequent to any act or deed by any Trustee or Trustees. Although this Trust shall not at any time be termed or considered a Court Trust, should a beneficiary hereof feel aggrieved or dissatisfied with the management or with a settlement hereunder, he or she may invoke the processes of a Court.
The said Trustee and all Succeeding Trustee or Trustees are particularly authorized and empowered and the privileges, powers and duties are so reposed in said Trustee and Succeeding Trustee or Trustees as follows:
(a) To possess, manage, control, grant, bargain, sell, convey, exchange, convert, encumber, mortgage, hypothecate, trade, loan, lease for a term or terms either within or beyond the duration of this Trust, pledge, assign as collateral for a loan or otherwise, partition, divide, subdivide, improve, loan, re-loan, invest and reinvest the said trust properties or any part thereof or any interest therein, as well as all revenues, income, avails and proceeds thereof, at such time or times and in such manner, either public or private and upon such terms as to him or his successors may seem in his, her or their absolute and uncontrolled judgment to be for the best interest of said Trust, and may substitute other property for any portion thereof sold or otherwise disposed of, and invest the said trust properties in whatever form it may take, in such securities and property as shall the best judgment of the said Trustee dictate.
SECOND: In the event that a dispute should arise as to what is corpus or income of the said trust properties, I direct that all realized capital gains to said trust shall be treated as income. In all other particulars the said Trustee and/or Trustees are vested with absolute and uncontrolled discretion and power, insofar as he, she or they may lawfully do so, to determine what shall constitute principal or corpus of said trust or the gross income therefrom or net income available for distribution under the terms of this trust; and said Trustee and/or Trustees also, at his, her or their discretion, may improve any real property subject to this trust, repair, alter, build any improvements thereon of such character, amount, cost and from such funds or property subject to this trust as he, she or they may deem advisable.
THIRD: The profits and losses, if any, arising from any activity of the Trustee and/or the Trustees as such shall respectively inure to the benefit of or be chargeable against the trust and not the trustee and/or trustees, or any of them.
SIXTH: From the gross income received and derived from the trust properties, and/or from the principal thereof if the Trustee deems that advisable or necessary, said Trustee shall first fully pay and discharge any and all taxes, assessments, including governmental charges and costs, expenses and liabilities incurred by him as such Trustee, or to which he may be entitled in connection with the care, administration, management, protection or preservation of said trust property, including a reasonable compensation to said Trustee, his attorneys, agents and employees.
SEVENTH: The entire net income received and derived from the trust properties and available for distribution hereunder shall be by said Trustee and/or Trustees paid and delivered only and personally, no less frequently than quarterly if possible, in equal parts, share and share alike, to HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI during the term of their natural lives, and upon the death of one of the said HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI, the income shall thereafter be paid to the survivor so long as he or she may live.
(a) In the event of the death of both of the said HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI prior to the arrival of the day one year immediately after the time herein designated for the second succeeding trustees to assume office, leaving issue him or her surviving, then upon the death of the last survivor of the said HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI prior to the time just above designated, this Trust shall be terminated and the then Trustee or Trustees shall forthwith pay over, convey and distribute all the corpus and undistributed income thereof to the issue of HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI, in equal parts, share and share alike, the issue taking per capita and not per stirpes, and if only one of said issue, then said issue to take all
(b) Should the said HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI both decease prior to the day one year immediately after the time herein designated for the second succeeding trustees to assume office, without leaving issue him or her surviving, then this trust shall, upon the death of the survivor of them before the time just above designated, be terminated and the corpus and all undistributed income therefrom be forthwith paid over, conveyed and distributed to the SECURITY-FIRST NATIONAL BANK of LOS ANGELES, a national banking association, with its principal place of business at Los Angeles, California, and to its qualified successors in trust for the charitable uses and purposes and with the powers and duties, both as to principal and income, which are fully set forth in a Resolution * * * ' which original Resolution and the amendment thereof provide for a community charitable trust designated as CALIFORNIA COMMUNITY FOUNDATION, and are incorporated herein by reference with the same force and effect as if herein set forth at length.
(e) In the event that HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI, or the survivor of them, should decease after the day one year immediately after the time herein designated for the second succeeding trustees to assume office without exercising his or her power of appointment, then upon the death of the survivor thereof this trust shall be terminated and the then trustees shall pay over and distribute the then corpus and undistributed income thereof to the issue of the said HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI in equal parts, share and share alike, the issue taking per capita and not per stirpes, and if only one of said issue, then said issue to take all; and in the event that neither of the said HORTENSE KOEPFLI SOMERVELL and JOSEPH B. KOEPFLI should leave issue, then to the SECURITY-FIRST NATIONAL BANK OF LOS ANGELES, a national banking association with its principal place of business at Los Angeles, California, in trust for the uses and purposes heretofore set forth in sub-paragraph (b) of paragraph SEVENTH, with like powers and discretions.
NINTH: If, in the absolute and uncontrolled discretion of the said trustee or his successor or successors in trust, the net income from his or her beneficial interest of the trust should not be sufficient to provide for the reasonable needs and comforts of the said JOSEPH B. KOEPFLI and HORTENSE KOEPFLI SOMERVELL during any period or periods of his or her illness or other want or necessity, said trustee or trustees may, and he, she or they are hereby authorized and empowered, but in no event required so to do, and as often as he, she or they shall deem necessary, pay to or use, apply or expend for the use and benefit of the said JOSEPH B. KOEPFLI and HORTENSE KOEPFLI SOMERVELL, such portions of the principal of the trust up to and including the whole thereof as said trustee or trustees in his, her, or their absolute discretion may determine to be adequate to provide for the said JOSEPH B. KOEPFLI and HORTENSE KOEPFLI SOMERVELL during such period or periods.
TWELFTH: Each and every trustee of this trust shall and will render to each beneficiary thereof a correct accounting at the end of each and every year from the date hereof until the termination thereof, which accounting among other things shall show the correct amount of income and disbursements during such year, with a description of the then corpus of the trust.
THIRTEENTH: This trust is and shall remain irrevocable. This trust is intended to and does divest the creators thereof at the time of the execution of this instrument, of all their right, title, interest and estate in and to said trust property and the earnings and income therefrom, and vests the title thereto in the trustee and his successor or successors for the purposes herein provided. The said creators retain no beneficial interest, right or estate of any kind or character in said trust property, and reserve no right or power to revoke, modify or alter this trust in any respect whatsoever.
Hortense Koepfli Somervell died in 1933, leaving no issue, and thereafter petitioner became the sole beneficiary of the trust.
On March 7, 1936, petitioner's mother Juliette B. Koepfli, renounced her right to succeed as ‘First Succeeding Trustee‘ under the terms of the original indenture. On the same date Charles F. Longley and John T. Cooper, designated as joint ‘Second Succeeding Trustees‘ with petitioner, also renounced their rights to succeed as trustees.
On March 24, 1936, Joseph O. Koepfli executed a written instrument, addressed to Joseph B. Koepfli, which reads in part as follows:
I, JOSEPH O. KOEPFLI, Trustee of the above referred to trust, under power granted to me in ARTICLE 14 of said trust, do hereby appoint you as sole Second Succeeding Trustee. This Appointment is occasioned by the resignation of Charles F. Longley and John T. Cooper.
On the same date (March 24, 1936) Joseph O. Koepfli resigned as trustee under the declaration of trust by a written instrument and on the same day petitioner executed a written instrument, which reads in part as follows:
Please be advised that I, the undersigned, Joseph B. Koepfli, one of the Second Succeeding Trustees named in the foregoing trust which was executed February 14, 1931, wherein you were designated as the Original Trustee, do hereby accept the appointment of sole Second Succeeding Trustee made by you on March 9, 1936, and do accept the office of sole Second Succeeding Trustee, agreeing to act as such and fully perform and carry out the terms and conditions of said Declaration of Trust.
During 1937 a controversy arose with the Bureau of Internal Revenue with respect to the question whether the trust was a mandatory or a discretionary trust and whether its income was required to be distributed to the beneficiary. The difficulties attending the petitioner's position as sole trustee and sole beneficiary were pointed out to him by his advisors, but he experienced considerable trouble in finding anyone suitable to act as cotrustee. The petitioner did not want corporate trustees because of the possibility that ‘they would want to have discretion as to their judgment as to investments,‘ while petitioner definitely preferred to follow the advice of his investment counsel. On March 15, 1937, petitioner appointed his wife, Margaret Koepfli, and his mother, Juliette B. Koepfli, to act with him as second succeeding trustees.
On June 23, 1937, Joseph O. Koepfli and Juliette B. Koepfli joined with petitioner in the execution of the following instrument:
CONSTRUCTION, INTERPRETATION AND/OR AMENDMENT
of
KOEPFLI TRUST NO. 1
WHEREAS, a question might be raised as to the true meaning, intent, and effect of certain provisions of that certain Declaration of Trust known as ‘KOEPFLI TRUST NO. 1‘, heretofore executed on the 25th day of February, 1931, by Joseph O. Koepfli, of Los Angeles, California, therein designated as Trustee, and consented to, approved and accepted on said day by Joseph B. Koepfli and Hortense Koepfli Somervell, through their attorney in fact, Charles F. Longley, therein designated as beneficiaries, all parties interested in such Declaration of Trust being sui juris and being desirous of expressing the original intent and understanding of said instrument and the manner in which same should be interpreted and construed, do hereby certify that it was our intent at the time said instrument was drawn and executed, and it is our wish and desire that said instrument be at all times interpreted, construed and effective to provide that the Trustee or Trustees thereof may, in their or his sole discretion, pay out, distribute, withhold or accumulate at any and all times or from time to time the whole or any part of the income earned, realized by, or received by the said trust, or the Trustees or Trustee thereof, and said Trustee or Trustees are and is empowered to determine what shall be income from the sale of all capital assets at any time owned or disposed of by said trust.
The said parties hereto so express their original intent. If, however, for any reason the within said construction, interpretation and/or amendment should not in a court of competent jurisdiction be interpreted and construed as effecting from the beginning the construction of said Declaration of Trust as hereinabove expressed, then and in that event, but only in that event, the parties hereto desire that said Declaration of Trust be amended in accordance with the intent and wishes of the parties as here expressed.
As construed, interpreted and/or amended, the said Declaration of Trust is approved, confirmed, and accepted by us, the undersigned.
Between 1931 and 1935 the National Biscuit Co. stock depreciated greatly in value and Joseph P. Koepfli, as trustee, sold the stock for $309,963.61. Previous to this sale it had been decided to diversity the trust holdings. At all times subsequent to the sale of the National Biscuit Co. stock in 1935, the trust corpus was handled in accordance with the advice of petitioner's investment counsel.
Petitioner received no income from the trust until 1934, and no income was ever paid in quarterly installments. No annual statement or accounting was ever made by any of the trustees. All the stocks held by the trust were in an agency account in the name of petitioner during the year 1941. During the years 1935 to 1941, inclusive, numerous purchases and sales of stocks were made.
The trust's Federal fiduciary income tax returns reflect the following:
+---------------------------------------------+ ¦ ¦ ¦ ¦Amount ¦ +----+--------------+----------+--------------¦ ¦ ¦Net capital ¦Net income¦distributed ¦ +----+--------------+----------+--------------¦ ¦Year¦gain (or loss)¦ ¦to petitioner-¦ +----+--------------+----------+--------------¦ ¦ ¦ ¦ ¦beneficiary ¦ +----+--------------+----------+--------------¦ ¦1935¦$18,097.51 ¦$26,093.76¦$7,996.25 ¦ +----+--------------+----------+--------------¦ ¦1936¦54,926.77 ¦63,244.02 ¦34,743.21 ¦ +----+--------------+----------+--------------¦ ¦1937¦(73.37) ¦5,940.62 ¦4,000.00 ¦ +----+--------------+----------+--------------¦ ¦1938¦(1,265.84) ¦2,221.15 ¦3,137.66 ¦ +----+--------------+----------+--------------¦ ¦1939¦(4,119.94) ¦1,143.74 ¦None ¦ +----+--------------+----------+--------------¦ ¦1940¦(4,980.15) ¦5,684.70 ¦None ¦ +----+--------------+----------+--------------¦ ¦1941¦(4,538.36) ¦6,343.97 ¦None ¦ +---------------------------------------------+
After the appointment of Juliette B. Koepfli and Margaret Koepfli as cotrustees in 1937, petitioner prepared sheets of pages authorizing himself to carry out purported directions of the ‘co-trustees.‘ These sheets were filled in by petitioner, who then procured the signatures of his mother and wife, signed his own name, and filed the papers as ‘minutes‘ among the trust records.
Joseph O. Koepfli died in 1942. Juliette B. Koepfli died in 1944.
During the year 1939 the trust had income in the amount of $8,236.77, net long term capital loss in the amount of $4,119.94 (actual capital loss in the amount of $8,629.53), and deductions in the amount of $2,973.09. The net income as reported on the Federal fiduciary income tax return was $1,143.74. No income was shown to have been distributed to petitioner in that year by the trust. In 1940 specific orders were prepared by petitioner and his ‘co-trustees‘ in the manner indicated above, which provided for distribution of the purported 1939 income. The amount distributed in accordance with the orders was $6,896.25. Petitioner did not include the amount in his individual income tax return for either of the years 1939 or 1940.
During the year 1940 the trust had income in the amount of $11,751.47, net long term capital loss in the amount of $4,980.15 (actual capital loss in the amount of $12,218.83), and deductions in the amount of $1,086.62. The net income, as reported on the Federal fiduciary income tax return was $5,684.70. No income was shown to have been distributed to petitioner in that year by the trust. In 1941 specific orders were prepared by petitioner and his ‘co-trustees‘ in the manner indicated above, which provided for distribution of the purported 1940 income. The amount distributed in accordance with the orders was $11,248.59. Petitioner did not include the amount in his individual income tax return for either of the years 1940 or 1941.
During the year 1941 the trust had income in the amount of $12,153.58, net long term capital loss in the amount of $4,538.36 (actual capital loss in the amount of $9,861.28), and deductions in the amount of $1,271.25. The net income as reported on the Federal fiduciary income tax return was $6,343.97. No income was shown to have been distributed to petitioner in that year by the trust.
OPINION.
DISNEY, Judge:
The first question presented for our consideration here is whether petitioner is taxable, either under section 22(a),
or sections 161
SEC. 22. GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income‘ includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *
and 162(b) of the Internal Revenue Code,
SEC. 161. IMPOSITION OF TAX(a) APPLICATION OF TAX.— The taxes imposed by this chapter 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) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
on the income of the trust. It would be superfluous to discuss the application of section 22(a), for we have come to the conclusion, after much study of the interesting briefs presented, that petitioner is liable for taxation under sections 161 and 162(b). The application of these sections depends upon whether under the text thereof the income ‘is to be distributed currently.‘ In my opinion, from the facts before us, the income was so currently distributable. Article seventh of the trust instrument contains the statement: ‘the entire net income received and derived from the trust properties and available for distribution hereunder shall be * * * paid and delivered * * * no less frequently than quarterly is possible * * * ‘ to the beneficiaries. The respondent, of course, relies primarily upon this provision to bring the matter under sections 161 and 162(b). To overcome the impact of the above quoted language petitioner argues in substance that article second primarily, and other language to which we hereinafter refer, indicates that the income for 1941 and herein involved was not ‘available for distribution‘ within the language of article seventh, and that, therefore, that article does not apply. Article second (after providing that in event of dispute the trustor directs that capital gains be treated as income) provides that in all other particulars the trustee is vested with absolute and uncontrolled discretion, so far as lawful, ‘to determine what shall constitute principal or corpus of said trust or the gross income therefrom or net income available for distribution under the terms of this trust.‘ Petitioner, therefore, contends that distribution of the income was discretionary with the trustees and the income was not, under article seventh, ‘available for distribution,‘ so it was not, under section 162(b), ‘to be distributed currently.‘ To support this argument petitioner first points out that article first of the trust instrument provides that a court order shall not be necessary for the ‘sale, mortgage, lease, disposition or reinvestment of any part of said trust property or of any income derived therefrom * * * ‘; also that in article first (a) power is given to the trustees to ‘invest and reinvest the said trust properties * * * as well as all revenues, income, avails and proceeds thereof * * * .‘ The weakness of this point is that, immediately prior to the language first above quoted, article first distinctly provides that the trustees are ‘hereby authorized to invest, reinvest, and keep invested the whole or any part of the principal sums of money of the trust,‘ also that the trustees ‘are not limited in investing or reinvesting the funds of the trust property or any part of the corpus thereof, in legal investments * * * but may invest and reinvest the same from time to time and keep the corpus invested * * * in investments which seem best.‘ To us this language definitely indicates that only corpus is to be invested, and it is not overcome by the following expression, quoted as above by petitioner where in referring to court orders not only as to investments, but as to sales, mortgages, leases, or dispositions, the word income is brought in. In the light of the previous language authorizing investment of corpus, we regard ‘income‘ in the language relied on by petitioner to have reference to court orders as to sale, mortgage, lease or disposition— a general expression, not demonstrating that reinvestment refers to income, contrary to the earlier language. The same is true of article first (a), relied on by the petitioner, for the sentence is a long and involved expression involving management, control, sale, exchange, investment, and reinvestment, etc., of trust property, revenues, income, avails, and proceeds, and in our view in the course of such general language the use of the word income does not indicate that ‘invest and reinvest‘ refers to income, as against the previous limitation of investment to trust corpus. We would not be justified by the general catch-all expressions which petitioner points out in concluding that the trustor did not mean, as earlier stated, that investment was to be of ‘the principal source of money of the trust,‘ or that accumulation of income is demonstrated.
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 legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, ‘income which is to be distributed currently ‘ includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. 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.
The petitioner next points out that article seventh (a), (b), and (e) provides that under certain circumstances the trust shall be terminated and that undistributed income‘ shall be distributed.
The petitioner concludes that the language of article seventh as to quarterly distribution of income, when read with the other provisions relied on by him, indicates that the income available for distribution is the income which the trustees have in their discretion elected to distribute and have not placed in the category of undistributed income and reinvested pursuant to the other provisions.
We have examined petitioner's contentions with care. First, we do not think them valid so far as concerns the reference to undistributed income in connection with the termination of the trust. It is obvious that upon the termination of the trust there might be some undistributed income unless it terminated immediately after the distribution of all income, so we consider this a phrase of no value to the petitioner's contention. Article second, however, has occasioned close study. We construe it to mean as follows: The settlor at once disposes of any question as to how capital gains shall be treated and says they shall be treated as income. (That the article says ‘In the event that a dispute should arise as to what is corpus or income * * * ‘ before providing that capital gains be treated as income, we take to mean merely that they shall be so treated, and that any question on that score is settled in advance by the trustor. It can not reasonably be considered to mean that trustee and beneficiary could, if there was no dispute, agree that capital gains should be added to corpus). He then goes on to provide that in all other particulars the trustee (or trustees) have uncontrolled discretion in certain respects: The first is to determine what shall constitute principal or corpus. This, of course, is on its face not sufficient to give the trustee discretionary power as to distribution of income. The next is discretionary power to determine what shall constitute ‘gross income therefrom,‘ that is, from the principal or corpus. We likewise see in this language no discretionary power as to disposition of trust income. Lastly, the settlor gives the trustees discretionary power to determine ‘net income available for distribution‘ under the terms of the trust. This language too, in our opinion, fails to confer the power for which the petitioner argues. Determination of the net income would involve questions of expenses, deductions, etc., but such power is far from one to determine whether income shall be distributed to the beneficiaries. It seems much more reasonable to interpret the language as meaning that the trustees may figure the net income and that after it is so determined it is, consistent with article seventh, available for distribution.
Article sixth provides that the trustee shall ‘first fully pay and discharge‘ the expenses, including taxes and trustee's compensation. Then follows immediately the language of article seventh that ‘The entire net income received and derived from the trust properties and available for distribution hereunder * * * ‘ shall be paid to the beneficiaries. This indicates, we think, that ‘net income * * * available for distribution * * * ‘means what is left after payment of the expenses just mentioned by the instrument, rather than what is determined by the trustee to be distributable. That it was the intent of the trustor that the net income go to the beneficiaries according to their respective proportions is plainly indicated in article ninth, which sets forth that, if within the discretion of the trustee such net income should not be sufficient to provide for the reasonable needs and comforts of the beneficiaries, the trust principal could be expended to the extent determined to be adequate to provide for the beneficiary during periods of illness or other want or necessity.
Intent to distribute income currently is also strongly indicated by article twelfth, which provides that the trustee ‘shall and will render each beneficiary thereof a correct accounting at the end of each and every year * * * ,‘ showing ‘the current amount of income and disbursements during such year * * * .‘ Had there been no necessity for current distribution, the provision would have been pointless. In addition, the provision of article seventh that income available for distribution should be paid ‘no less frequently than quarterly if possible‘ goes far to negative any idea that income could be accumulated instead of paid out. If there was any income it was, of course, possible to pay it out. The use of the word ‘possible,‘ as well as the quarterly payment, is inconsistent with the thought of accumulation.
The petitioner's argument amounts to this: That the trustee had discretionary power to accumulate income for distribution in a later year. This is in fact what had been done in 1939 and 1940, for income of each of those years was paid to the petitioner in the succeeding year and the petitioner now contends that the income of 1941 is not distributable to him in 1941. The weakness of this contention is that the trust instrument nowhere provides or refers to accumulation of income for distribution in later years or otherwise. It is not uncommon for trust instruments to provide for accumulation of income, such as during minority of a child and for payment to him at majority. Had there been intention to accumulate income, obviously such idea could easily and simply have been expressed in the trust instrument. Yet the word accumulate does not appear therein. We are, nevertheless, asked to infer it, from language which in our opinion altogether fails to sustain the inference. As above stated, we have concluded that the first sentence of article second of the trust instrument was intended to provide definitely that capital gains should be income and not augmentation of the corpus. With capital gains considered as income, only three possible courses of action appear to be open to the trustee. If the instrument so provided, he might, as the respondent contends here, distribute the income currently; second, he might accumulate the income for distribution in later years; and, third, he might add the income to the corpus. The trust instrument here is possibly open to the construction that except as to capital gains the trustee might add income to corpus. However, if, as we have concluded, the settlor did not intend capital gains to be added to corpus, it seems unreasonable to think that he intended other income (for instance dividends) to be added to corpus. We therefore think the language as to allowing the trustee to determine what shall constitute principal or corpus was not intended to permit him to add income to the corpus, but that it had reference rather to the determination of the status of the proceeds of sale of corpus or additional contributions thereto.
If, however, we are wrong in this respect and the trustee could add income other than capital gains to corpus, that situation is not presented here. The petitioner does not contend that the income for 1941, here involved, was added to corpus, and treatment of the income for 1939, which appears to be the treatment contended for by the petitioner here for 1941, likewise indicates that there was no addition to corpus for article ninth of the trust instrument, as above seen, provides for distribution of corpus only in case net income is insufficient to provide for the reasonable needs and comforts of the beneficiary, in periods of illness, want, or necessity. Yet income for 1939 was distributed in 1940 with no indication of such illness, want, or necessity and without prior application of the 1940 income to the reasonable needs and comforts of the beneficiary. Likewise, in 1941 the petitioner received 1940 income without prior application of the 1941 income, for under petitioner's theory the 1941 income was not distributed, and with no suggestion of illness, want, or necessity. Petitioner's theory, therefore, is plainly not based on addition of the income to corpus; therefore, it is and must be that income may be accumulated. We find in the trust instrument no basis for such contention. However, the petitioner offers ground for this theory outside of the trust agreement. He testified that his father, the trustor, stated to him that he wanted a method to protect petitioner's sister, and that he might want for some reason or other to withhold giving her any money or having any money come to her. Though we recognize that such testimony is competent in this action between the petitioner and the respondent, we are unable to give it the weight desired by the petitioner. It is, of course, highly interested testimony. It is given some sixteen years after the drawing of the trust instrument. In particular, we feel that, since it is to the effect that income could be accumulated, it is not logically explanatory of, but contradictory to, an instrument which nowhere provides for such accumulation, but provides for quarterly distribution of income. The testimony might be viewed differently had the instrument provided for accumulation of income, though in ambiguous or self-contradictory provisions. The instrument here involved containing no such provisions, we may not logically give more than a minimum of weight to testimony which imports into the picture something not mentioned in the trust instrument. The language used in article second is not, in our view, after mush study, rationally to be considered as meaning that there should be accumulation of income, and such meaning, of accumulation of income, should not be permitted to be added by petitioner's testimony.
However, the petitioner further points to the instrument executed on June 23, 1937, by the settlor, Joseph O. Koepfli, and his wife, as well as the petitioner, entitled, ‘Construction, Interpretation and/or Amendment of the Trust.‘ As an amendment we reject it immediately, since the trust specifically provides that there is no reservation by the creators of the right or power to revoke, modify or alter ‘in any respect whatsoever.‘ As construction or interpretation, the instrument of June 23, 1937, so far as executed by the petitioner, is subject to the same weaknesses as his testimony above discussed. As concerns the construction or interpretation by Joseph O. Koepfli and his wife, the instrument, they being dead at the time of trial, is a declaration of deceased persons. Unless self-disserving, such an instrument may not safely be given weight. The maker thereof is not available for cross-examination or testing of his memory, interest, or bias. Obviously, here construction or interpretation was self-serving in that it construed the instrument as desired by the trustors and in favor of their son, the petitioner here. This seems the more true since the instrument construing or interpreting the trust instrument was drawn at a time when a dispute had arisen with the Bureau of Internal Revenue as to the treatment of the income of the trust, as to whether it was discretionary or mandatory. The dispute was the occasion of the drawing of the instrument. Obviously, an instrument drawn to sustain the views of the interested parties in a dispute which was in effect the same dispute as here involved is self-serving evidence, and, to say the least, of dubious value. We think we could not soundly base a conclusion thereon and that we should not give it weight, but should follow the instrument itself, which, as above stated, altogether fails to state or, in our opinion, to infer that trust income could be accumulated for distribution in later years, as the petitioner desires.
The petitioner urges also that the fact that he did not receive any income from the trust prior to 1934 indicates that the parties construed the trust as discretionary. We can not give weight to this idea, for we are not informed by the record whether any income had been realized prior to 1934. We can not so assume. The trust corpus was at that time National Biscuit Co. stock, which depreciated greatly in value between 1931 and 1934, so that it is possible that the trust may not have had any income prior to 1934. Moreover, failure to carry out a trust provision is scant proof that it does not exist, particularly in a family matter such as this. We note in this connection that though article twelfth, as above seen, positively required rendition of an annual accounting to each beneficiary, none was ever made by any trustee.
For the above reasons, we hold that the trust income of the taxable year was to be distributed currently and, therefore, it is taxable to the petitioner under sections 161 and 162(b) of the Internal Revenue Code.
There remains for consideration the question as to whether the petitioner is taxable under the facts upon an amount equal to the capital losses sustained by the trust. The point was raised by the Commissioner in an amended answer. He had, in the determination of the deficiency, taken no issue in this respect with the net income as reported by the petitioner. Of course, if capital losses were charged to corpus petitioner may not deduct them from the trust income taxable to him; but if, on the other hand, they were charged to income, the beneficiary is not to be taxed. Irma L. Harris, 5 T.C. 493. The petitioner urges, and we agree, that no evidence was adduced to show that capital losses for 1941 were charged to corpus. Evidence as to previous years does not sustain the respondent's contention. The fiduciary return for 1941 likewise fails to do so. It merely shows that in the computation of fiduciary income certain capital losses were deducted from other income. We therefore sustain petitioner on this issue.
Decision will be entered under Rule 50.