Opinion
Docket No. 364.
1944-05-3
ROBERT F. CHAPMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
David P. Brown, Jr., Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
A testamentary trust created by the will of petitioner's father, and of which he and an uncle were the beneficiaries, terminated by the death of the uncle in May 1939. The petition to the Orphans' Court for an order of distribution presented the question whether upon the death of the uncle the petitioner, as sole remaining beneficiary, took the entire corpus under the will of his father or a part of it as the residuary legatee of his mother's will. The court held that the petitioner took the entire corpus under the will of his father and was entitled to the distribution thereof, together with the income therefrom arising subsequent to the uncle's death. Held, that capital gain on an asset in the trust realized subsequent to the uncle's death and prior to the adjudication was not income accumulated in trust for ‘unascertained persons‘ under the provisions of section 161 of the Internal Revenue Code, but was income taxable to petitioner as owner of the corpus. David P. Brown, Jr., Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
The respondent determined a deficiency in income tax against the petitioner for the year 1940 in the amount of $6,637.17. The only issue presented is whether certain capital gain realized in 1940 was taxable to petitioner or to a trust of which he was a beneficiary.
FINDINGS OF FACT.
The greater part of the facts have been stipulated and such facts are found as stipulated.
The petitioner is now a resident of Philadelphia, Pennsylvania, but formerly resided in Virginia, and filed his 1940 income tax return with the collector at Richmond in that state.
The petitioner is the only child of William E. and Julia N. Chapman, and was born on January 12, 1919. William E. Chapman died testate on August 24, 1919. In addition to petitioner, he was survived by his brother, Francis Chapman, and by his widow, Julia N. Chapman.
By his will William E. Chapman named Julia N. and Francis Chapman as executors thereof. By the fourth clause of the will, he left the residuary portion of his estate to them in trust, for the following purposes.
To collect the rents, issues and profits and apply the income one-half to the use and support of my wife, Julia N. Chapman, and our child or children, so long as she shall live, and to apply the proceeds of the remaining one-half to the support of my brother Francis Chapman so long as he shall live.
Should my brother predecease my wife, I direct that the income payable to him shall be received by my wife.
Should my wife predecease my brother, in such case I direct that the income which would have been payable to her had she lived, be paid to my child or children, or their issue surviving my wife; and should my wife predecease my brother leaving no child or the issue of any child her surviving, then both principal and income of the TRUST estate thereby created shall become the property of Francis Chapman absolutely.
Upon the death of both my brother and my wife, my wife having survived my brother, I direct that the corpus of the TRUST hereby created shall be divided between my heirs equally, share and share alike.
There was no provision which by specific words provided for the distribution of corpus upon the contingency of the death of Francis Chapman, in the event he was predeceased by Julia N. Chapman, leaving surviving her a child or children of herself and William E. Chapman.
Julia N. and Francis Chapman qualified as executors of the will of William E. Chapman and letters testamentary were issued to them by the Orphans' Court of Philadelphia County, Pennsylvania, on September 2, 1919. On September 24, 1928, they filed, as executors, their first and final account, which was confirmed by the court on November 9, 1928.
Julia N. Chapman died testate on July 30, 1931, leaving Francis Chapman surviving her. By her will she made certain specific bequests and provided for two trusts the income from which was to be paid to her sister, Florence B. Neely, and her father, Henry B. Neely, respectively, during their respective lives and at their deaths the principal to be paid to petitioner if he had reached the age of 25 years; otherwise it was to become a part of her residuary estate. The residuary portion of her estate was left in trust, with the income therefrom to be used for the maintenance, support, and education of petitioner during his minority and thereafter to be paid to him until he reached the age of 25. The principal of the trust was to be paid to petitioner when he reached the age of 25, unless at any time after he reached the age of 21 the trustee should be of the opinion that it was to his interest or advantage that a part or the whole of the principal should be paid to him. Florence B. Neely was named in the will as personal guardian of petitioner. She qualifies as executrix of the will and, as such, filed her first and final account on April 25, 1932. The account was confirmed by the Orphans' Court of Philadelphia County, Pennsylvania, on May 11, 1932.
On December 11, 1931, and on the petition of Florence B. Neely, the Orphans' Court, of Philadelphia County, Pennsylvania, appointed W. A. Hamilton as guardian of petitioner's estate.
Because of the death of Julia N. Chapman, Francis Chapman, as surviving trustee under the will of William E. Chapman, filed the first account of himself and Julia N. Chapman, trustees, on January 21, 1932. This account covered the period from May 15, 1928, through December 31, 1931, and was confirmed by the Orphans' Court on February 26, 1932.
Francis Chapman continued as surviving trustee under the will of William E. Chapman until May 2, 1939, when he died testate. W. A. Hamilton was named as executor in the will of Francis Chapman, and qualified as such on May 8, 1939. On January 31, 1940, Hamilton, as executor under the will of Francis Chapman, filed the first and final account of Francis Chapman, surviving trustee under the will of William E. Chapman. The account was stated as of January 30, 1940. On January 12, 1940, the petitioner became 21 years of age, and on March 2, 1940, Florence B. Neely, sole executrix and trustee under the will of Julia N. Chapman, certified that in her judgment it was to the interest and advantage of petitioner that he come into possession of the whole of the residue of the estate of Julia N. Chapman and requested that any interest which Julia N. Chapman would be entitled to under the will of William E. Chapman be paid directly and absolutely to the petitioner.
On March 4, 1940, Hamilton, as executor under the will of Francis Chapman, filed a petition in the Orphans' Court for distribution of the trust created by the will of William E. Chapman. In the petition, Hamilton called the attention of the court to the absence from the will of William E. Chapman of words expressly providing for the distribution of the corpus under the situation then existing; that in event there was an intestacy as to one-half of the corpus, such one-half, under the statute of Pennsylvania, would pass one-half to petitioner and one-half to the estate of Julia N. Chapman, the residue of which was left in trust for the petitioner until he should reach the age of 25, unless, in the judgment of the trustee, it should be to petitioner's advantage to pay the amount to him after reaching the age of 21; that petitioner had reached the age of 21, and the trustee of the estate of Julia N. Chapman had filed a statement that in her judgment it would be to petitioner's advantage to have the whole of the residue of the estate paid to him. Request was made for authorization to make distribution of the corpus of the trust under the will of William E. Chapman to petitioner absolutely.
On March 6, 1940, the court confirmed the first and final account of Francis Chapman, surviving trustee under the will of William E. Chapman, which Hamilton had filed on January 31, 1940; found that under the will of his father the petitioner, on the facts here, was intended to take all the income of the estate from and after the death of Francis Chapman; held that there was no intestacy and that petitioner took, unde; the will of his father, the entire corpus of the trust; and directed the distribution to him of the corpus of the trust, as well as the entire income from and after May 2, 1939, the date of Francis Chapman's death. Distribution was made to petitioner as directed by the court.
The corpus of the trust consisted in part of certain shares of stock in Pennsylvania Indemnity Co., which had a basis of $9.564 for determining gain or loss on their disposition and which had been held for more than two years. That company was placed in liquidation on July 31, 1939, and thereafter during 1939 distributions in liquidation were made on the stock in excess of its basis. During the period January 1 to March 6, 1940, distributions in liquidation were made as follows: January 15, 1940, $28,700, and February 20, 1940, $15,306.67.
Subsequent to the adjudication of the Orphans' Court on March 6, 1940, Hamilton filed the 1939 fiduciary income tax return of the trust, in which the capital gain resulting from the distributions in liquidation received on the stock in Pennsylvania Indemnity Co. was reported as income of the trust, but was deducted as distributable to petitioner. In the petitioner's 1939 income tax return, said capital gain was reported as having been received from the trust by petitioner, and as taxable to him. Subsequently, and prior to the time of filing the 1940 returns, the respondent determined that the 1939 capital gain from the Pennsylvania Indemnity Co. stock was taxable to the trust and not to the petitioner; that there was a deficiency in tax of $1,895.90 owing by the trust; and that there was an overassessment of $1,708.04 with respect to petitioner. The 1939 tax liabilities of the petitioner and the trust were settled on that basis. In accordance with that determination and settlement, the capital gain from the stock resulting from the liquidating distributions made in January and February 1940 was reported by the trust as taxable to it. The 1940 capital gain having been reported by the trust as taxable to it, the petitioner did not report it as taxable to him. In determining the deficiency involved herein the respondent determined that said gain was taxable to petitioner, and not to the trust.
OPINION.
TURNER, Judge:
The petitioner and the trust acquiesced in the respondent's determination that the capital gain realized on the Pennsylvania Indemnity Co. stock in 1939 was taxable to the trust, and the correctness of that determination is not an issue in this proceeding. However, the gain arising from the stock during the period January 1 to March 6, 1940, was determined by the respondent to be taxable to the petitioner, and it is the correctness of that determination that is the subject of the controversy here.
The position of the petitioner is that from the death of Francis Chapman on May 2, 1939, until the adjudication of the Orphans' Court on March 6, 1940, the income arising from the corpus of the trust was accumulated in trust from ‘unascertained persons‘ and therefore was taxable to the trust, under the provisions of section 161 of the Internal Revenue Code. The respondent contends that the petitioner took the entire corpus of the trust under the will of his father, and was in fact the owner of the entire corpus from and after May 2, 1939, and, being the owner thereof, the entire income therefrom was his income and taxable to him as such.
The term ‘unascertained persons,‘ as used in section 161, means those whose identification depends on future contingencies rather than on a correct understanding of the application of the law to the existing facts. DeBrabant v. Commissioner, 90 Fed.(2d) 433. The adjudication of the Orphans' Court did not effect the identification of any person; it merely established that under a correct application of the law the petitioner took the entire corpus of the trust under the will of his father, instead of taking part of it as a legatee under the will of his mother. There was never any question but that the petitioner took the entire corpus. The question was whether he took part of it as a legatee under his mother's will. The Orphans' Court merely decided that petitioner was and had been the owner of corpus and income, and entitled to distribution thereof from and after May 2, 1939. Cf. McCaughn v. Girard Trust Co., 19 Fed.(2d) 218, and Freuler v. Helvering, 291 U.S. 35. Such cases as Commissioner v. Owens, 78 Fed.(2d) 768; Hart v. Commissioner, 54 Fed.(2d) 848; and Ferguson v. Forstmann, 25 Fed.(2d) 47, relied on by petitioner, involved special trusts set up by court orders providing for the collection and accumulation of income until the persons entitled to both income and principal were determined by litigation. No situation of that character is presented here, consequently the decisions in those cases are inapplicable.
In view of what has been said above, we sustain the determination of the respondent.
Decision will be entered for the respondent.