Opinion
Docket No. 4094.
Promulgated December 29, 1945.
Petitioner was a beneficiary of a trust created by the will of her deceased husband which provided that the trustees should pay to her "such portion of the income as she [petitioner] deems necessary for her own support" and the maintenance of her children, and directed that the "surplus income" be applied by the trustees to the payment of the testator's indebtedness, and after the payment of this indebtedness it was to be paid in equal shares to his children upon their reaching majority. Before the taxable years the indebtedness had been paid and the testator's two children were of age. During the taxable years 1938 to 1941, inclusive, the annual net income of the trust was respectively $58,000, $53,000, $137,000, and $191,000. The trustees paid one-half of it to petitioner and one-quarter to each of the children, pursuant to an agreement by the beneficiaries. In 1944 one of the children objected to the trustees' payment of one-half of the trust income to petitioner and in a contested accounting action before the proper court of Pennsylvania it was decided that petitioner had no right to payments from the trust "beyond her necessities for support" and that "the Court will deem $30,000 sufficient for the widow's maintenance and support until it appears that a different allowance should be made." Respondent determined that petitioner was taxable on the entire net income of the trust. Held:
(1) Petitioner was not entitled to payments from trust income "beyond her necessities for support" and therefore not taxable on entire net income of trust. Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 F.2d 1, distinguished.
(2) Under the facts, petitioner was entitled to receive from trust income for "necessities for support" in the taxable years $30,000 and is taxable on either that amount or, when a larger amount was paid to her, then on the larger amount which she received.
Percy W. Phillips, Esq., for the petitioner.
William B. Harris, Esq., for the respondent.
Respondent determined deficiencies in petitioner's income taxes for the taxable years 1938 to 1941, inclusive, in the following amounts:
1938 .............................. $9,195.54 1939 .............................. 8,097.37 1940 .............................. 45,452.26 1941 .............................. 66,592.56
The issue presented is whether respondent erred in his determination that the entire net income of a testamentary trust created by petitioner's deceased husband is taxable to petitioner even though only a part of such income was actually distributed to her.
FINDINGS OF FACT.
The facts have been stipulated by the parties. We find them to be as stipulated, and set out those facts necessary for an understanding of the issue.
Petitioner is the widow of Robert T. Townsend, who died a resident of Allegheny County, Pennsylvania, on September 13, 1928. Surviving him, in addition to petitioner, were two children, Robert T. Townsend, Jr., born February 18, 1910, and Margaret Emma Townsend (now Margaret T. Reid), born July 6, 1914. Both of said children are now living.
Robert T. Townsend's last will and testament provided in part as follows:
THIRD. All the rest, residue and remainder of my estate, real, personal and mixed, I give, devise and bequeath to my Trustees, as hereinafter provided, and their successors, in trust, nevertheless, for the following purposes:
"To invest and re-invest the same; to collect the income, rents, issues and profits thereof, and after deducting all necessary expenses, to pay to my wife, for and during her natural life, such portion of the income as she deems necessary for her own support and for the maintenance, education and support of my children, and to apply any balance remaining to the reduction of any of my indebtedness, and in the event my indebtedness is entirely paid, either before or after my decease, then I direct my Trustees, during the minority of my children, to invest any surplus income as they deem best and add the same to the corpus of the trust estate. When my oldest child arrives of age, and after the payment of all of my indebtedness, then I direct my trustees to divide any surplus income equally between my children, and to pay to each one his or her equal share, they as Trustees retaining the shares of such of my children as may be under age until they arrive at maturity.
The executors of the will of Robert T. Townsend, deceased, filed their final account in the Orphans' Court of Allegheny County, Pennsylvania, in February 1930. A decree was entered awarding the residuary estate to the trustees for the purposes specified in the will.
The income-producing property in the trust created under the will consisted almost entirely of common stock in Townsend Co. of New Brighton, Pennsylvania. The stock owned and the dividends paid on that stock to the testator, or to the executors or trustees of his estate, from 1913 to 1943 were as follows:
Dividend Year Shares owned or Rate Amount acquired paid 1913 Jan. 1, shares of record ...... 3133 6% $18,798.00 1914 " " " ...... 3133 6% 18,798.00 Dec. 5, acquired .............. 609 -------- 1915 Jan. 1, shares of record ...... 3742 5% 18,710.00 1916 " " " ...... 3742 5% 18,710.00 1917 " " " ...... 3742 10% 37,420.00 1918 " " " ...... 3742 12% 44,904.00 1919 " " " ...... 3742 6% 22,452.00 Apr. 29, acquired ............. 19 -------- 3761 4% 15,044.00 1920 Jan. 1, shares of record ...... 3761 10% 37,610.00 1921 " " " ...... 3761 8% 30,088.00 1922 " " " ...... 3761 Apr. 11, acquired ............. 5 June 23, " ............. 5 July 14, " ............. 79 4/9 July 25, " ............. 23 8/9 -------- 3874 3/9 6% 23,246.00 1923 Jan. 1, shares of record ...... 3874 3/9 7 1/2% 29,057.50 1924 " " " ...... 3874 3/9 12% 46,492.00 1925 " " " ...... 3874 3/9 10% 38,743.33 1926 " " " ...... 3874 3/9 9% 34,869.00 Oct. 6, acquired .............. 200 -------- 4074 3/9 3% 12,223.00 1927 Jan. 1, shares of record ...... 4074 3/9 6% 24,446.00 1928 " " " ...... 4074 3/9 7 1/2% 30,557.50 1928 Dec. 10, (estimate of R. T. Townsend) .................... 4074 3/9 3% 12,223.00 1929 Jan. 1, shares of record ...... 4074 3/9 14% 57,040.66 1930 " " " ...... 4074 3/9 16% 65,189.32 1931 " " " ...... 4074 3/9 16% 65,189.32 1932 " " " ...... 4074 3/9 16% 65,189.32 1933 " " " ...... 4074 3/9 8% 32,594.66 1934 " " " ...... 4074 3/9 16% 65,189.33 1935 " " " ...... 4074 3/9 13% 52,966.30 1936 " " " ...... 4074 3/9 18% 73,338.00 1937 " " " ...... 4074 3/9 37% 150,750.34 1938 " " " ...... 4074 3/9 15% 61,114.98 1939 " " " ...... 4074 3/9 14% 57,040.66 1940 " " " ...... 4074 3/9 35% 142,601.66 1941 " " " ...... 4074 3/9 50% 203,716.67 1942 " " " ...... 4074 3/9 39% 158,899.01 1943 " " " ...... 4074 3/9 36% 146,675.98 ----------- ------------ ------------ Total dividends paid ............................ 1,911,887.54 From the start of the trust in December 1931 through 1937 the trust net income amounted to a total of $424,000.52. Of this income the sum of $100,391.32 was used to pay the testator's indebtedness referred to in his will. During these same years petitioner was paid a total of $180,717.26, exclusive of income taxes paid by the trust in her behalf in the amount of $19,909.53. During these same years decedent's daughter Margaret and decedent's son Robert were each paid a total of $49,216.47.During the year 1936 the last of the indebtedness of the decedent, Robert T. Townsend, referred to in his will, was paid. Beginning in the year 1938 the trust income was paid one-half to petitioner and one-quarter to each of decedent's two children. During the years 1938 through 1942 trust income was received and paid in the following amounts:
Year Distributable Paid to Eva Paid to trust net V. Townsend children income (one-half to each child) 1938 ........................... $58,361.74 $29,180.87 $29,180.87 1939 ........................... 53,817.24 26,908.62 26,908.62 1940 ........................... 137,279.68 68,639.84 68,639.84 1941 ........................... 191,627.32 95,813.66 95,813.66 1942 ........................... 149,644.99 74,822.49 74,822.50 From the amounts of trust income distributed to her petitioner supported herself, paid her taxes, made substantial gifts to various persons, and, in addition, accumulated a personal estate in excess of $200,000. The amounts distributed by the trustees to the petitioner during the taxable years were in excess of the amounts expended by her for her support.Decedent's son, Robert T. Townsend, Jr., was married prior to 1938, and during all the years since his marriage he has maintained his own home. He now has five children. Decedent's daughter, Margaret T. Reid, was married in 1939, and she maintains a home with her husband. She has one child, born February 10, 1942. During all the years involved the decedent's children have paid income taxes on the trust income distributed to them.
On April 11, 1944, attorneys representing Margaret Townsend Reid wrote a letter to the trustees of the trust, stating that in the future their client did not wish to abide by the arrangement made in 1937 under which petitioner was to receive one-half and each of decedent's children one-quarter of the trust net income. The letter pointed out that the trust income had increased greatly since 1937; that petitioner had been receiving trust income greatly in excess of her needs and was building up a sizeable personal estate; and that the financial responsibilities of Mrs. Reid and her brother had increased greatly since 1937. The attorneys stated that the effect of the 1937 arrangement had been to give petitioner far more than was intended by the testator in his will. The letter concluded with a notice to the trustees that Mrs. Reid would object to any distributions to petitioner in excess of $7,500 per quarter, or a yearly rate of $30,000, and that any distributions to petitioner by the trustees in excess of that amount would be made at their peril. They stated that their client had been reluctant to question the actions of Mrs. Townsend and had expected the latter to suggest a revision of the 1937 arrangement on her own initiative.
On April 21, 1944, attorneys representing petitioner wrote a letter to the corporate trustee and Robert T. Townsend, Jr., cotrustee, acknowledging receipt from them of a copy of the letter referred to above, and demanding that in the future all trust income be paid to her, including the undistributed income then in the hands of the corporate trustee. In this letter petitioner's attorneys asserted that she was entitled, under the terms of her husband's will, to all trust income during her life. The trustees were requested to file an account so that the matters in dispute could be adjudicated by the Orphans' Court.
On April 25, 1944, the Union Trust Co. of Pittsburgh, the corporate trustee of the trust created under the will of petitioner's husband, filed an audit statement and an account in the Orphans' Court of Allegheny County, Pennsylvania. In this audit statement and account the corporate trustee recited to the court:
(a) that during the period January 30, 1940 to February 26, 1944 it had had available for distribution the sum of $616,015.63 and had distributed such sum to the beneficiaries on the basis of 50% to Eva V. Townsend and 25% to each of the decedent's two children;
(b) that it had on hand on April 25, 1944 available for distribution to the beneficiaries the sum of $73,397.38;
(c) that Margaret Townsend Reid, daughter of the testator and one of the income beneficiaries, had served notice on it, the corporate trustee, that Mrs. Townsend was not entitled under the terms of the testator's will to income in excess of her needs, which did not exceed $7,500 per quarter or $30,000 per annum;
(d) that Eva V. Townsend, the testator's widow, had demanded that the entire sum on hand be paid to her on the ground that she was entitled to all of the trust income during her life.
After outlining the above situation, the corporate trustee, as the accountant, asked the court to adjudicate the conflicting claims asserted with respect to the fund before the court and the funds to be received in the future.
The account came up for hearing before the Orphans' Court on June 16, 1944. The corporate trustee was represented by counsel, petitioner was represented by counsel, Mrs. Reid was represented by counsel, and Robert Townsend, Jr., was present in person. Testimony was taken in open court, and the court heard oral argument from counsel. Briefs were filed by counsel for petitioner and counsel for Mrs. Reid.
On July 12, 1944, the Orphans' Court issued its decree awarding to petitioner $30,000 of the sum in dispute held by the trustees, and awarding to decedent's children, in equal shares, the balance of such sum. The opinion of the Orphans' Court accompanying the decree was as follows:
TRIMBLE, P. J. The Fourth Account of the Trustees, now before the Court for Audit, raises the question: Are the Trustees required to pay all of the net income arising from the investments to the widow upon her demand?
Robert Townsend Townsend made his Last Will and Testament on March 9, 1922, which was unrevoked at the time of his death on September 30, 1928. The executors named in the will administered and the balance for distribution was decreed to the Trustees. The present accounting trustees are Eva Viola Townsend, the widow; Robert T. Townsend, Jr., a son; and the Union Trust Company of Pittsburgh. All debts have been paid and the net balance of the principal for distribution to the trustees is $684,838.08. The principal consists mainly of capital stock of the Townsend Corporation. By a temporary family agreement the income has been divided and paid one-half to the widow and one-fourth to each of the two children. The children are now of full age, are married and are no longer under the widow's care. The son lives in Beaver, Pennsylvania, and has a wife and five children. The daughter lives in Bethesda, Maryland, and has a husband and one daughter. Testator's son and daughter claim that the distribution of income is not in accordance with the terms of the will and demand all of it except so much as is necessary for the support and maintenance of the widow. A distribution of $30,000.00 to Mrs. Townsend for the year 1944 would enable her to live comfortably for this year in the manner to which she has been accustomed and desires to continue. The children have no objection to the payment of that amount. The income has been very large and payments to the widow, herself, have far exceeded $30,000.00 but she claims the right to all or any part of the income that she may deem necessary. The children deny the widow's right to more than is necessary for her comfortable support.
The Testator, by his will, provided as follows:
[The court here quotes or refers to the third, fifth, sixth and eighth paragraphs of decedent's will.]
The intention of the testator is not doubtful in one respect at least. Clearly he directs the Trustees to invest and capitalize income not necessary for the payment of debts or for the support of the widow and the maintenance, education and support of the two children during their minority. It is also clear that when the oldest of the two children arrives "at age" any surplus income must be divided and paid by the Trustees to each of the children "his or her equal share", and, it is clearly provided that surplus income beyond the widow's necessities for her own support and the maintenance and support of her children must be invested by the Trustees for the children and paid to them at the time fixed in the will by the Testator. It is claimed by the widow that she has a power under the will which she can exercise at will and claim the whole of the income, notwithstanding the clear direction that she is to receive only "such portion of the income as she deems necessary for her own support and for the maintenance, education and support of my children, * * *"
If the widow's claim is correct, then undoubtedly she has an arbitrary right by the exercise of which she can defeat the intent to accumulate the excess of the income beyond the necessities of the three primary beneficiaries, and also the direction to the Trustees to invest any surplus income "as they deem best" by dividing it equally between the children. Her claim is based upon a supposed arbitrary discretion implicit in the power to "deem" the income as her own and, if we would give it that effect, surely we would disregard the testator's intention that the Trustees were to invest all excess income over and above her necessities. To hold that her power to "deem" all of the income as her own for the purpose specified, in disregard of the testator's intention that the Trustees invest the excess, would then substitute an arbitrary discretion for a reasonable interpretation of the testator's intent. It would follow that, if her position is unassailable, the Trustees' power to invest "as they deem best" would silence all objections to principal invested by them. Testator could have said "I give, devise and bequeath to my wife all of the income from my estate during her life" and there would be no question about the widow's rights.
Discretion cannot be exercised so as to defeat a lawfully planned scheme of distribution clearly expressed. An arbitrary exercise of discretion if permitted by the widow would be quite unreasonable in that her annual expenses of living do not now exceed $30,000.00 and the share she demands for income already earned in 1944 is far in excess of that sum. The testator's intention was that the widow should not be stinted at any time, either before or after the older of the two children became "of age". The discretion given to the widow and the Trustees is legal, it is not arbitrary. The same distinction was applied in Neeb's Estate, 263 Pa. Supreme Court 197.
Counsel for the widow cites Cunningham's Estate, 340 Pa. Supreme Ct. 265, as parallel. There it was held that "the general rule is that expressions for the support or maintenance of a beneficiary and the support, instruction and education of the beneficiary's children are considered explanatory of the gift and not as vesting any interest in the children referred to; they are regarded as explanations of the motive for making the gift and not as limitations of it." But, in the instant case, the Trustees are required by the terms of the will to invest the surplus beyond the family necessities for the benefit of the children during their minority and after they reach their majority to pay the surplus to them equally. They have both reached their majority. This provision of the will requires the Trustees to refuse payments to the widow beyond her necessities for support. Consequently, the Court will deem $30,000.00 sufficient for the widow's maintenance and support until it appears that a different allowance should be made.
On July 22, 1944, counsel for petitioner filed exceptions to the above mentioned decree, asserting as follows:
1. The Court erred in disallowing the claim of Eva Viola Townsend, widow, to all of the net income of the trust estate received during the year 1944, as reported in the Fourth Account of the Trustees and supplement thereto; and in awarding to her only Thirty Thousand ($30,000) Dollars of such income under the provisions of paragraph Third of the Will of Robert Townsend Townsend, deceased, pursuant to the opinion of the Auditing Judge filed with said decree.
2. The Court erred in construing paragraph Third of the Will of Robert Townsend Townsend to mean that Eva Viola Townsend, widow, was entitled to receive only so much of the net income of the trust estate as was reasonably required for her support, and that the widow did not have the right to demand and take all of the income.
Oral argument on the exceptions was heard by the Orphans' Court en banc on September 6, 1944, and on September 18, 1944, the court entered a decree, per curiam, dismissing the exceptions and confirming the decree of the auditing judge.
OPINION.
Respondent has determined that the entire net income of the testamentary trust here in question for the years 1938, 1939, 1940, and 1941 is taxable to petitioner. As authority for this determination he relies strongly on Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 F.2d 1; certiorari denied, 324 U.S. 871; rehearing denied. In that case the taxpayer was the beneficiary of a trust and had the right, "currently and without any restriction whatever," to take the entire income of the trust in excess of $10,000 payable to his wife. We there held that taxpayer was taxable upon the income of the trust which he could thus take, even though it was not actually requested by and paid to him. In our opinion we relied upon Helvering v. Clifford, 309 U.S. 331, and Corliss v. Bowers, 281 U.S. 376. In the latter case, as in the Mallinckrodt case, the income in question was subject to the taxpayer's "unfettered command" and he was free to enjoy it at his own option.
In the instant case a state court having jurisdiction over the trust in a contested proceeding involving its accounting held in 1944 that petitioner was not entitled to payments "beyond her necessities for support," and it allowed to her from the trust income for that year $30,000 as "sufficient for the widow's maintenance and support until it appears that a different allowance should be made" and directed the payment of the balance to petitioner's adult children. Since the proceeding before the state court was an adversary action in which the question involving rights under the trust was decided on its merits by a court of competent jurisdiction, and no collusion is shown to have existed with regard thereto, its decision upon the property rights litigated before it is binding upon us, even though we were disposed, as we are not, to question the correctness of its decision. Freuler v. Helvering, 291 U.S. 35; Blair v. Commissioner, 300 U.S. 5; Louise Savage Knapp Trust A, 46 B. T. A. 846; Eisenmenger v. Commissioner, 145 F.2d 103.
It should be pointed out that two questions were involved in the proceedings before the state court: (1) Whether under the trust instrument petitioner was entitled to whatever portion of the trust income she in her untrammeled discretion should demand, or was entitled only to that portion of the trust income which a court administering the trust would consider necessary for her support and maintenance, and, if her rights were thus limited, (2) what portion of the trust income was in the opinion of the court necessary for her support and maintenance in 1944. The decision by the state court on the first question would by logical necessity apply to petitioner's rights under the trust at all times subsequent to its creation, while its decision on the second question would be binding only as to the year for which the accounting was presented.
We conclude that petitioner during the taxable years was entitled to only that portion of the trust income which was necessary for her support and maintenance and that the actual amount thus payable to her was determinable by judicial discretion and not by her personal "arbitrary discretion."
It therefore follows that petitioner, under the Mallinckrodt case, is not taxable on all the trust income, but only on that part of the trust income which, during the taxable years, was necessary for her maintenance and support, even though she did not receive the full amount.
For the year 1944 the state court decided that the amount so sufficient was $30,000. As we have pointed out, this decision is not binding on us as to the amounts so sufficient for the taxable years. However, the facts stipulated clearly indicate that this amount was sufficient for her maintenance and support in the taxable years. From 1931 to 1937 petitioner was paid an average of $30,000 a year from the trust. From 1938 to 1942 she was paid an average of $59,000 a year. However, it is stipulated that from the amounts so paid she made substantial gifts and accumulated a personal estate in excess of $200,000. We conclude that petitioner was entitled during the taxable years to income from the trust in the amount of $30,000, but not in excess thereof.
Since the income actually received by her from the trust in 1938 and 1939 and upon which she paid taxes was less than this amount, there will be deficiencies in her taxes for those years. The amounts erroneously paid to her by the trustees in 1940 and 1941 in excess of this amount were reported by her in her tax returns in the full amount paid, and consequently no deficiencies exist as to those two years.
Decision will be entered under Rule 50.