Opinion
Docket Nos. 1648 1768.
1945-01-3
THE NORTHERN TRUST COMPANY, AS DISTRIBUTEE OF THE ESTATE OF DANIEL BURKHARTSMEIER, DECEASED, ADDRESSED AS ESTATE OF DANIEL BURKHARTSMEIER, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.THE NORTHERN TRUST COMPANY, AS TRUSTEE ADDRESSED AS ‘DANIEL BURKHARTSMEIER TRUST UNDER WILL, #14568, THE NORTHERN TRUST COMPANY, TRUSTEE,‘ PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Herman A. Fischer, Esq., for the petitioners. Charles J. Munz, Esq., for the respondent.
1. Under a will which sets up a trust in which the trustee is required to pay the beneficiary $12,000 a year from income if sufficient, or if not sufficient, then $500 a month in any event, invading the corpus if necessary to pay such $500 a month, held, the $500 a month was an annuity which is not deductible by the trustee, and the additional amount of $6,000 to make up the $12,000 a year is a distribution of income and is deductible.
2. Under another provision of the will, the executrix was required to transfer to the trustee assets out of which to pay the said $500 a month and, until such transfer to pay the $500 a month for the trustee out of funds of the estate. The executrix in the taxable year paid $500 a month to the individual beneficiary directly. Held, the executrix is not entitled to deduct the $6,000 so paid in the taxable year. Herman A. Fischer, Esq., for the petitioners. Charles J. Munz, Esq., for the respondent.
The Commissioner determined a deficiency of $153.38 in 1940 income tax of the decedent's estate and determined transferee liability for such deficiency against the trustee. He also determined a deficiency of $34.13 in 1940 income tax of the trust created under the decedent's will. The trust and the transferee assail the disallowance of a deduction of $6,000 by each as income currently distributable to the life beneficiary. The transferee also claims that the estate, by failing to take the deduction of $6,000, overpaid its 1940 income tax and that the transferee is entitled to a refund of the amount of such overpayment.
Daniel Burkhartsmeier, a resident of Chicago, Illinois, died on February 7, 1939. On February 15, 1939, his will executed June 6, 1938, was admitted to probate in the Probate Court of Cook County and letters testamentary were issued to Maezie Barbara Woodrich, his daughter.
After providing for the payment of expenses of last illness and funeral, claims against the estate, and cost of administration, the will bequeathed $2,000 to a maid; $10,000 to decedent's secretary; $10,000 to his nephew; the unpaid balance of a mortgage to his nephew; the unpaid balance of a mortgage to the Martha Washington Home for Dependent Crippled Children and sufficient cash to make the bequest equal to $5,000 if no unpaid balance remained; and personal and household things to his daughter, Maezie Barbara Woodrich. If his daughter survived him, the residue was devised to the Northern Trust Co. of Chicago, in trust, with broad powers, including the following:
SECTION EIGHT: * * *
(f) To pay and discharge or make proper agreement or arrangement for the extension or renewal of all indebtedness and obligations of or claims against the trust estate or any part or parts thereof, or against the Trustee as Trustee hereunder, and to create out of the gross income of the trust estate not required for payment to or used for the benefit of my daughter, Maezie Barbara Woodrich, as hereinafter provided, such reserves as the Trustee may consider proper or advisable; and to pay and discharge all taxes, assessments, governmental levies of any kind or nature which may at any time or from time to time be payable by the trustees as trustees hereunder and be levied or assessed or constitute a claim against or lien upon the trust estate or any part thereof, and to pay the costs of administration of the trust estate and of the trust created hereunder, including reasonable compensation to the Trustee for its services and reimbursements for its outlays and all other costs and expenses incurred in the exercise of the powers herein given to the Trustee.
(g) The Trustee may in its uncontrolled discretion determine whether any indebtedness claimed against or expense of the trust estate or any part thereof, shall be paid or discharged out of the income or out of the corpus of the trust estate, or both, and the Trustee may in accordance with such determination, which decision shall be conclusive upon all parties in interest, apply either income or corpus, or both income and corpus of the trust estate to the payment and discharge thereof.
(o) In paying over any income of the trust estate and in making distribution of any of the corpus thereof, as hereinafter provided, said Trustee shall have full power and authority to determine what constitutes income, what constitutes net income, and what constitutes the corpus of the trust estate, including the power and authority to determine whether cash dividends are ordinary or extraordinary, and whether cash dividends, stock dividends, dividends in kind or subscription rights or proceeds thereof shall constitute income or corpus, and all such decisions made by the Trustee shall be binding and conclusive on all parties in interest.
The will further provided:
SECTION NINE: The Trustee hereunder shall pay over and distribute the net income and the corpus of the trust estate as follows:
(a) Out of the net income of said trust estate my said Trustee shall distribute to my daughter, MAEZIE BARBARA WOODRICH, in monthly installments for and during her natural life, commencing with the date of my death, a sum not to exceed One Thousand Dollars ($1,000) per month during any calendar year commencing as of the date of my death, and in case such annual income for any such calendar year shall exceed Twelve Thousand Dollars ($12,000), such excess over such net income of Twelve Thousand Dollars ($12,000) per year shall be accumulated by my Trustee and become part of the corpus of the trust estate. Provided, however, that if at any time there shall not be sufficient annual net income to pay to my daughter, Maezie Barbara Woodrich, an income of at least Five Hundred Dollars ($500) for each month during each such calendar year, my said Trustee shall use so much or such part of the corpus of the trust estate from time to time as may be necessary to make such payments equal Five Hundred Dollars ($500) for each month in any such calendar year.
(b) In the event of any unforeseen emergency or dire necessity, in addition to payments provided under subparagraph (a) of this Section Nine, I give to my said Trustee in its sole discretion the right to use any part of the principal or excess income of the trust estate for medical or other care for my said daughter, and the decision of my said Trustee as to the necessity or expediency of any such payment out of either principal or excess income, to or for the comfort and welfare of my said daughter, Maezie Barbara Woodrich, shall be binding and conclusive upon all beneficiaries hereunder.
SECTION FIFTEEN: I direct my Executrix to transfer to said Trustee immediately after my death sufficient assets out of which to pay to my said daughter MAEZIE BARBARA WOODRICH, from the net income thereof, as hereinbefore provided, at least Five Hundred Dollars ($500) per month from and after the date of my death during the course of administration of my estate, and until such time as such transfer is made my said Executrix may for my Trustee pay to herself out of funds belonging to my estate said sum of Five Hundred Dollars ($500) a month in lieu thereof. Provisions made for monthly payments to my said daughter, Maezie Barbara Woodrich, being in lieu of any child's award which she might be entitled to under the Statutes of the State of Illinois.
SECTION SIXTEEN: During the regular period of administration of my estate in the Probate Court, I give to my Executrix and Trustee joint right, power and authority to mortgage, lease or sell any of my estate for the purpose of paying claims allowed, funeral expenses, costs of administration, specific cash legacies, Federal estate and state inheritance taxes, real estate taxes and personal property taxes, and to carry out the provisions of this Will.
The Northern Trust Co. accepted its appointment as trustee and as such took possession of the real property. On or about December 28, 1939, Burkhartsmeier Building Corporation was dissolved and its entire assets, ‘consisting solely of the building,‘ were transferred to the testamentary trustee and it has ever since been the owner. On August 8, 1941, the executrix completed the administration of the estate and transferred all the remaining personal property to the testamentary trustee as residuary legatee. She thereupon filed her final account and final report in the Probate Court and was discharged. All the specific bequests and legacies made by the will were paid.
In the final account the executrix reported that she had $797.45 cash on hand at date of death; that during 1939 she received $22,835.13 dividends; $2,445.22 interest; $7,130.64 rents, and $20,177.07 other receipts, including principal on loans, settlement on foreclosure, sale of stock rights, or total of $52,588.06; and that she disbursed therefrom $12,786.23, including $1,774.90 claims; $887.76 miscellaneous expenses of administration; $3,963.31, 1938 real estate taxes; $160.26, 1931-1932 personal property taxes; $1,000 to the testamentary trustee, and $5,000 to Maezie Barbara Woodrich as a legacy under section 15 of the will, leaving a balance on hand of $40,599.26. She reported that during 1940 she received $29,284.10 dividends; $1,533.42 interest; $10,700 from the testamentary trustee from corpus for Federal estate tax; $5,500 from the testamentary trustee; $19,604.92 from Burkhartsmeier Cooperage Co. for administration expenses; and other receipts of $35,556.41. She reported disbursements totaling $134,049.29, including $54,698.39 claims; $16,749.22 inheritance tax; $36,941.81 Federal estate tax; $6,507.94, 1939 Federal income tax; $178.22 personal property tax; $861.62 miscellaneous administrative expenses; $112.09 rent to testamentary trustee; $12,000 legacies; and $6,000 to Maezie Barbara Woodrich as a legacy under section 15 of the will, leaving a balance of $8,728.82 cash on hand December 31, 1940. The $6,000 was distributed out of estate income by the executrix to the beneficiary in monthly payments of $500 each.
On May 10, 1941, the executrix filed in the first district of Illinois a 1940 fiduciary income tax return for the estate, in which she reported total income of $32,629.98, including $29,290.35 dividends; $1,453.47 interest; $5,737.76 net short term capital gain; and $3,851.60 net loss from trade or business. She claimed deductions of $3,998.91 interest and $41.28 stock transfer tax, and other deductions of $331.26, totaling $4,373.45, leaving a net taxable income of $28,256.53. The Commissioner, in computing the 1940 deficiency of the estate, disallowed the deduction of $331.26, but it is stipulated that the estate was entitled to deductions totaling $333.26, amounts paid for accounting services and for telephone bills.
The records of the testamentary trustee show a balance of $1,302.12 income cash on hand December 31, 1939, and $400 cash in tax reserve account, total of $1,702.12. Its receipts consisted of $18,579.21 net rents; $103.64 return of insurance premium. Its disbursements, totaling $7,672.64, included fees to testamentary trustee $2,915.23, taxes $3,908.70 and miscellaneous expenses $848.71. On September 16, 1940, it paid $500 on principal of a note. In 1940, out of trust income it made the following distributions to the beneficiary, Maezie Barbara Woodrich:
+--------------+ ¦July 9 ¦$500 ¦ +--------+-----¦ ¦Aug. 7 ¦500 ¦ +--------+-----¦ ¦Sept. 6 ¦500 ¦ +--------+-----¦ ¦Oct. 7 ¦500 ¦ +--------+-----¦ ¦Nov. 6 ¦2,000¦ +--------+-----¦ ¦Nov. 7 ¦500 ¦ +--------+-----¦ ¦Dec. 6 ¦500 ¦ +--------+-----¦ ¦ ¦ ¦ +--------+-----¦ ¦ ¦5,000¦ +--------------+
leaving a balance of $7,212.33 on hand December 31, 1940. From this, the trustee deducted a ‘Tax Reserve‘ of $4,410, leaving a cash balance of $2,802.33. On February 24, 1941, a distribution of $1,000 was made to the beneficiary, which was designated on the records of the trustee as an extra payment and charged to income account.
On March 15, 1941, the trustee filed a fiduciary income and defense tax return for 1940, in which it reported total income of $12,696.06 (rents and royalties of $12,818.63, less a long term capital net loss of $122.57) and claimed under other deductions $2,972.82, leaving a net taxable income of $9,723.24. Attached to the return was the following statement:
This return reports the income received by the trustee on assets held in the trust during the taxable year. It does not take into account income received by the executrix on assets still in her hands.
During the year 1940, $5,000.00 was paid to Maezie Barbara Woodrich and another $1,000.00 was paid to her shortly after the close of the year. These payments, totalling $6,000.00 are considered as being in discharge of the annuity of $500.00 a month to which Mrs. Woodrich is first entitled under the terms of the will.
The Commissioner disallowed other deductions of $251.33 and made two minor adjustments resulting in an increase of income of $7.30. It is stipulated that the trustee is entitled to the deduction of $251.33.
The beneficiary filed her income tax return for 1940 in the first district of Illinois. She did not include the distributions received by her from the executrix and trustee during 1940, but attached a rider to her return stating as follows:
The taxpayer received, during the year 1940, $6,000 from the Estate of Daniel Burkhartsmeier (in addition to an annuity from The Northern Trust Company, as Trustee under the Will of Daniel Burkhartsmeier). This $6,000 was applied on distribution due to the taxpayer out of income of the Estate for 1939, the tax on which has heretobefore been paid by the Estate as such. Accordingly, this $6,000 is not included in this return.
OPINION.
STERNHAGEN, Judge:
In Docket No. 1648 the petitioner is transferee of the assets of the estate of Daniel Burkhartsmeier, deceased, and, while it does not dispute transferee liability for any deficiency of the estate, it assails the deficiency determined for 1940 of $153.38 income tax of the estate which resulted from two adjustments. It also contends that an overpayment in income tax was made by the estate because the estate had failed to take a deduction for $6,000 currently distributed in 1940. The two items upon which the deficiency was based have been settled and the only issue remaining in the transferee's proceeding is whether the estate was entitled to the deduction of $6,000. It has been stipulated that this amount was in fact paid by the executrix ‘to herself as an individual,‘ and this leaves only the question whether this amount was currently distributable or paid by the executrix to the daughter out of income of the estate (I.R.C., sec. 162(b),(c), before the change of the Revenue Act of 1942).
In Docket No. 1768 the petitioner is the trustee of the testamentary trust established by the will of Daniel Burkhartsmeier, consisting of the residuary estate. The items of 1940 income upon which the determination was based have been settled and the only issue remaining is the trustee's claim of overpayment resulting from its own failure to take a deduction for $6,000 distributable by it to the beneficiary during 1940, of which $5,000 was in fact distributed in that year.
The essential question upon which the decision as to overpayment rests in each of these cases is whether the amount paid or payable by each of the fiduciaries to the beneficiary was a distribution of income or a payment of an annuity. By section nine of the will it is provided that the testamentary trustee shall distribute $1,000 per month to the beneficiary out of the net income of the trust, provided that if the net income should not be sufficient to pay $500 the corpus should be invaded to the extent necessary to provide $500. By section fifteen the executrix is directed to transfer to the testamentary trustee ‘sufficient assets) to support the aforesaid payment of $500 per month during administration of the estate and, until the transfer of assets to the trustee, to pay $500 a month ‘for my trustee * * * out of funds‘ of the estate. Thus it appears from the express direction of the will that $500 a month was payable to the beneficiary at all events even though income was insufficient for such payment. This possible insufficiency was the only contingency which permitted the invasion of the corpus, and there is therefore no distinction between the annuity expressly described in Helvering v. Pardee, 290 U.S. 365, and the $500 payable in any event to the daughter. It must be held, therefore that this amount is not deductible in 1940 because it was not a distribution of income, but payment to the legatee of an annuity.
The decisions in Frankel v. Commissioner, 3 T.C. 231; affd., 144 Fed. (2d) 1023, and Horace C. Coleman Trust, 3 T.C. 943, involved a contingency other than the mere inadequacy of trust income to support the distribution, i.e., the contingency that the augmentation of income be actually requested by the beneficiary. This was held in the Frankel case not to affect the gift of net income or change the status of the income beneficiary to that of a legatee. ‘At most it was a contingent grant of an uncertain sum having none of the attributes of an annuity payable at all events.‘ Clearly, the legacy of the Burkhartsmeier will had all of the attributes of an annuity of $6,000 a year payable at all events.
But the payment in excess of $500 a month, to make up the difference in the $12,000 bequeathed, was not to be made in any event, but only from income. Any amount over the $6,000 was therefore not an annuity, such as in the Pardee case, but was a distribution solely out of income. If the income was insufficient to support such a payment, it could not be made; and, if made, it was a distribution of income deductible under the statute.
It is only necessary now to determine which of the trust or the estate is entitled to the deduction of the income distributed. Under the will the estate was not required to distribute income, but could only distribute assets to the trust or, during administration, funds to the beneficiary ‘for the Trustee.‘ It must be assumed that the executrix obeyed the direction of the will, and that the payment by her during 1940 of the $6,000 was a payment for the trustee. By this reasoning, the conclusion is reached that income of the trust was distributable to the beneficiary to the extent of the $6,000 which the executrix distributed in its behalf. The trustee is the trust fiduciary, therefore, to whom must be attributed both the distribution of the annuity of $6,000 and the distributability of the other $6,000 out of income. It is entitled to a deduction of $6,000 income, and no one is entitled to deduct the $6,000 annuity.
Since the estate is not entitled to any deduction for the $6,000 which it paid, constructively to the trustee and actually to the beneficiary, there was no overpayment by the estate as a result of its failure to take the deduction. Since the trustee is entitled to take a deduction of the $6,000 distributable by it from income and it failed to take such deduction, it has made an overpayment of the amount attributable to such deduction.
Decision in each case will be entered under Rule 50.