Opinion
Docket No. 3026.
Promulgated May 3, 1945.
A nonresident alien individual who, as a beneficiary of a trust, was entitled to the entire income of the trust after the deduction therefrom of expenses, held not taxable on any income in excess of the amount received by her from the trust.
James P. Hill, Esq., for the petitioners.
Arthur H. Fast, Esq., for the respondent.
The respondent determined deficiencies in income tax against the petitioners, as withholding agents for Augusta Wodrich, a nonresident alien, in the amounts of $407.60 for 1940 and $623.24 for 1941. The deficiencies arise from the action of the respondent in adding to the taxable income reported for Augusta Wodrich the amounts of $2,470.32 for 1940 and $2,266.30 for 1941. The sole issue is whether those additions are proper.
The case was presented on a stipulation of facts and several exhibits filed at the hearing. The facts appearing in the stipulation and exhibits, to the extent that they are not set forth below, are adopted by reference as part of our findings herein.
FINDINGS OF FACT.
The petitioners are the same persons who, prior to and during the taxable years, were the duly appointed, qualified, and acting trustees of a trust created by the will of Albert H. Freye. The will was probated in Duval County, Florida, on September 17, 1937. The will devised and bequeathed the residuary estate, consisting of corporate stocks, mortgages and notes, and improved and unimproved real estate, to the petitioners, as trustees, with full power to manage, mortgage, and sell any part thereof, to invest and reinvest the proceeds, and to collect the income from the corpus.
The will provided, inter alia, as follows:
(b) I further will and direct that my said trustees shall pay to my sister, Augusta Wodrich of Hanover, Germany, the entire net income derived from said trust estate, after deduction of proper expenses therefrom, and that after my said trustees have provided for and paid the legacies hereinafter made and bequeathed, that my said trustees shall pay to my said sister aforesaid the cash proceeds derived from the sale of the assets comprising the corpus of this trust estate, it being my intention that my said sister aforesaid shall be paid all of the rest and residue of said trust estate, after providing for and paying the cash legacies hereinafter made and bequeathed, in cash immediately upon the sale and disposition by my said trustees of all or any part of the property, real, personal and mixed comprising the corpus of said trust estate.
The legacies included in the above paragraph amounted to $5,000 in cash.
The petitioners, as trustees, received dividends, interest, and rents in the amounts of $4,208.44 during 1940 and $3,363.88 during 1941. They paid, during those years, in connection with the property comprising the corpus of the trust, real estate taxes, fire insurance premiums, and management expenses, which, together with a reasonable allowance for depreciation on the trust property, amounted to $2,470.32 in 1940 and $2,266.30 in 1941.
During 1940 and 1941 Augusta Wodrich was an alien and a resident of Hanover, Germany, and she had no office or place of business in the United States and was not engaged in trade or business therein. All of her gross income from sources within the United States for the taxable years of 1940 and 1941 consisted of the income to which she was entitled under the trust created by the will of Albert H. Freye.
The petitioners, as trustees, filed with the collector for the district of Florida fiduciary income tax returns and also returns of income tax to be paid at the source on income paid to a nonresident alien individual, covering the years 1940 and 1941. In computing the net income distributable to the beneficiary on the fiduciary returns, and in reporting the gross income paid to her on the returns of income tax paid at the source, the petitioners deducted the amounts of $2,470.32 in 1940 and $2,266.30 in 1941, referred to above. In determining the deficiency, the respondent increased the taxable income as reported on the returns of income tax paid at the source by the amounts of $2,470.32 for the year 1940 and $2,266.30 for the year 1941.
OPINION.
In the case of a nonresident alien individual not engaged in trade or business within the United States and not having an office or place of business therein, section 211 (a) (1) of the Internal Revenue Code of 1939 imposes a tax:
* * * upon the amount received, * * * [by her] from sources within the United States as interest * * * dividends, rents, * * * or other fixed or determinable annual or periodical gains, profits, and income, * * *
This provision, it is to be noted, imposes the tax upon "the amount received," and it has repeatedly been interpreted by the Commissioner as imposing the tax upon the "amount of gross income received" and as prohibiting any allowance for deductions. C. B. XV-2, p. 112, 114; Regulations 94, art. 211-7; 213-1; Regulations 101, arts. 211-7; 213-1; Regulations 103, arts. 19.211-7, 19.213-1.
The question argued by the parties is whether the amount received by the nonresident alien beneficiary of the Freye trust is the gross income of the trust, undiminished by the expenditures of the trustees for real estate taxes, insurance, and management, and by reasonable depreciation, as the respondent contends, or whether it is the gross income, less those expenditures and depreciation, or the net income of the trust, as the petitioners contend.
In stipulating the facts, the parties state that the petitioners, as trustees, paid on the property comprising the corpus of the trust real estate taxes, fire insurance premiums, and other expenses of management, "including reasonable depreciation." Only the total amount of such items for each year is stated — $2,470.32 for 1940 and $2,266.30 for 1941; and it is stipulated also that those amounts would be allowable as deductions from gross income if the beneficiary was not a nonresident alien. We fail to understand how the trustees can be said to have paid out any sum for reasonable depreciation, but, as counsel draw no distinction in argument between the depreciation and the other items, and as they treat all items included in the total amounts stipulated as expenditures by the trustees, we assume, for the purpose of decision, that those amounts were expended by the trustees. We also assume that, as a consequence, they represent "proper expenses" which by the terms of the will were to be paid out of the income of the trust estate before any part of the income could be received by the beneficiary.
The beneficiary had no right to all the income received by the trustees from interest, dividends, and rent. The trustees held the corpus of the trust, with complete power to manage and dispose of it and collect the income therefrom, and they were charged with the duty of paying all expenses of the trust. They were to pay the entire net income to Augusta Wodrich, "after deduction of proper expenses." It is thus clear that the beneficiary could not have received the gross income undiminished by the operating expenses, and the depreciation, and the stipulated facts further show that the trustees actually paid such expenses. The amount received by the beneficiary therefore was the amount of income remaining in the hands of the trustees (after the payment of expenses and provision for depreciation) as reported in the withholding returns by the petitioners, and, in view of the plain terms of the statute, it was error for the respondent to increase the taxable income of the nonresident alien beneficiary by the amounts of $2,470.32 for 1940 and $2,266.30 for 1941.
Since the statute deals with gross income of nonresident alien individuals and forbids the allowance of deductions therefrom, the respondent would apparently bring this case within it on the theory that the nonresident alien beneficiary was the owner of the corpus of the trust and the trustees acted merely as her agents in managing the property and collecting the income. He relies principally on Evelyn M. L. Neill, 46 B. T. A. 197. Because the trustees were required to distribute the entire net income to the beneficiary, Augusta Wodrich and were to sell and dispose of the corpus at the earliest possible moment and pay the cash proceeds to her, after payment of specific legacies, respondent says that "for all practical intents and purposes, substantially all of the trust corpus and all of the trust income was the property of the nonresident alien beneficiary." The cash legacies amounted to $5,000, and they had to be paid from sales of the assets before Augusta Wodrich could receive the proceeds of any assets which were sold. There is, therefore, no sound reason for treating Augusta Wodrich as the owner of the trust property. Nor is there any sound reason for treating the trustees as her agents in the handling of the trust property, since she did not create the trust and had no control whatsoever over it or over the trustees in the disposition of the income or proceeds. What was said in Anna Vondermuhll, 29 B. T. A. 895, 899; affd., 75 Fed. 2d 656, is apposite here:
With reference to the contention of petitioner that the trustees were her agents and therefore deposits made by them were her deposits and payments made to them were payments to her, it is pointed out that under the trust instruments petitioner had no ownership of or control over the trust funds or how they should be invested and no control over the deposits, where or how they should be made, how long continued or how or by whom withdrawn; she had no power herself to draw on either the trust funds or income from them; she did not have any voice in filling a vacancy in the trusteeship, in case of a vacancy, and no power to remove or control a trustee in any manner. It is elemental that an agent is subject to the control of his principal. There does not appear to be any one of the requisites of agency present here. A trustee is not an agent. Taylor v. Davis, 110 U.S. 330.
See also Gustava Kluehn, 46 B. T. A. 1211.
The case of Evelyn M. L. Neill, supra, is clearly distinguishable. There the nonresident alien was taxed upon the gross rentals received by her American agents from property owned by her and situated in the United States and was denied the deduction therefrom of interest and other expenses paid for her by those agents in connection with the property. We have no such case here. Augusta Wodrich received no income from any one representing her as agent and she did not own the property from which the income here involved was derived.
The determination of the respondent is disapproved, and
Decision will be entered under Rule 50.