Opinion
Docket No. 6059.
1946-03-29
ESTATE OF WILLIAM P. ALLEN, FIDUCIARY TRUST COMPANY OF NEW YORK, CO-EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Arthur A. Ballantine, Esq., Charles C. MacLean, Jr., Esq., and S. Milton Simpson, Esq., for the petitioner. Scott A. Dahlquist, Esq., for the respondent.
Under a testamentary trust all income was to be distributed currently to the life beneficiary, with the remainder over to the trustees of Rutgers College, a corporation within the class defined in section 23(o)(2), I.R.C. In the event the net income of the trust was less than $1,500 per month, the trustee was directed to invade the corpus to that extent. Capital gains were to be added to the principal. Held, on the facts, that the net capital gains realized in the taxable year were not deductible from gross income of the trust as having been permanently set aside for charitable purposes under section 162(a) of the code. Arthur A. Ballantine, Esq., Charles C. MacLean, Jr., Esq., and S. Milton Simpson, Esq., for the petitioner. Scott A. Dahlquist, Esq., for the respondent.
This proceeding involves a deficiency in income tax in the amount of $2,854.17 for the calendar year 1941. The sole issue is whether net capital gains, credited to principal of the trust estate, are deductible under section 162(a) of the Internal Revenue Code. The case was submitted upon a stipulation of facts and oral testimony. The stipulated facts are so found. Other facts are found from the evidence.
FINDINGS OF FACT.
Petitioner is the estate of William P. Allen, deceased, Fiduciary Trust Co. of New York, coexecutor. Petitioner's income tax return for the year ended December 31, 1941, was filed with the collector of internal revenue for the second district of New York.
In its return petitioner claimed as a deduction from its gross income, under the provisions of section 162(a) of the Internal Revenue Code, gross capital gains in the amount of $10,787.38 (without reduction for capital losses of $6,651.85) on the ground that, pursuant to the terms of the will of William P. Allen, deceased, these gains were permanently set aside for the benefit of the trustees of Rutgers College in New Jersey. The respondent disallowed the deduction on the ground that this amount ‘was not permanently set aside for the benefit of Rutgers College in accordance with the provisions of Section 162(a) of the Internal Revenue Code.‘
William P. Allen died testate on May 17, 1941. Fiduciary Trust Co. of New York and J. Gordon Bohannan are the duly qualified and acting coexecutors and cotrustees under the will.
Article eight of the will of William P. Allen, deceased, reads as follows:
ARTICLE EIGHT
I direct that my Executors, after providing for all of the other legacies, annuities and devises and for all taxes and administration expenses, debts and funeral expenses, shall pay, transfer and deliver all the rest, residue and remainder of my estate, both real and personal, of whatever nature and whereever situated, to my Trustees, hereinafter named, to be invested, reinvested, held and disposed of by them as follows:
A) To pay the entire net income in monthly installments to said Dora W. Allen so long as she shall live.
B) Upon the death of said Dora W. Allen or upon my death, if she shall have predeceased me, I direct my Trustees to assign, transfer, convey and deliver the property then held hereunder to the Trustees of Rutgers College in New Jersey.
C) In the event that the net income referred to in Paragraph A of this Article shall not be sufficient to pay the sum of Fifteen Hundred Dollars ($1500) per month to said Dora W. Allen, I direct that my Trustees draw on the principal of my trust estate so that the payments directed to be made in said paragraphs shall not be less than Fifteen Hundred Dollars ($1500) per month.
D) The right of any beneficiary to any payment of income or principal shall in every case be subject to any charge or deduction which my Trustees may make against the same under the authority granted to my Trustees by law or by any provision of this will.
Article seven of such will provides as follows:
I direct that all legacy, inheritance, transfer or other similar taxes or duties shall be charged against the principal of the residue of my estate.
Article nine reads in part as follows:
I authorize my Executors and also my Trustees, as the case may be, in their absolute discretion:
K) To charge any and all expenses, costs, fees, taxes or other sums of money against the whole or any part of my estate or of the trusts provided for herein, and against principal or income, as they shall determine, except as otherwise expressly provided in Article SEVEN with reference to the inheritance and other taxes or duties mentioned therein.
Article ten provides in part as follows:
No deduction shall be made from income because bonds, notes or evidences of indebtedness are purchased or taken over at amounts greater than the amounts received on the sale or payment of such bonds, notes or evidences of indebtedness; nor shall any part of any gain arising from the sale or payment of securities for amounts greater than the amounts at which such securities were purchased or taken over be counted as income.
All gains on sales of securities realized by the executors of the estate were credited to principal and accounted for as increases in principal, and all losses from the sale of securities realized during such period were charged to principal and accounted for as decreases in principal, pursuant to the provisions of said will and the laws of Delaware. The net amount of the capital gains on such sale during the calendar year 1941 was $4,135.53.
Where, as in the case of the will of William P. Allen, Fiduciary Trust Co. of New York, as testamentary trustee, is vested with discretion to charge fees against either principal or income, it has been its consistent practice to exercise this discretion fairly as between life tenant and remainderman, to wit, by charging one-half thereof against income and the other half against corpus. This has been done in the case of the William P. Allen trust, established November 17, 1942. The fees of the Fiduciary Trust Co. of New York, as trustee, totaled $8,904.24 for the two trust years 1942-43 and 1943-44, of which $4,452.12 was charged to income. To date J. Gordon Bohannan, cotrustee, has not received any trustee's commission. The individual cotrustee would receive a fee not in excess of one-third of the fees paid to the corporate trustee having charge of the investments. Such fee, in accordance with the practice, would be charged equally between income and corpus. Pursuant to the provisions of the will of William P. Allen directing that executors' commissions be paid in accordance with the laws of New York, total commissions of $35,560.70 were paid paid by the estate in 1942 and 1943, of which amount $1,816.88 was charged to income and the balance of $33,744.02 to corpus.
Dora W. Allen, wife of decedent, was born September 19, 1880, and is still living. She was 61 years on the date of decedent's death, May 17, 1941, and had a life expectancy of 13 years, 172 days.
Rutgers College in New Jersey is a corporation which, on May 17, 1941, and at all times since that date, came within the class of corporations defined in section 23(o)(2) of the Internal Revenue Code.
Subject to certain immaterial and minor adjustments, the ordinary gross income and ordinary net income of the estate of William P. Allen and of the testamentary trust set up in November 1942 under article eight of the decedent's will, as shown by the cash ledgers of said estate and trust, and as shown by the income tax returns for the calendar years 1941 to 1944, inclusive, excluding gains or losses on sales of property, were as follows:
+-----------------------------------------------------------------------+ ¦ ¦Per cash ledger ¦Per income tax returns ¦ +-------------------------+---------------------+-----------------------¦ ¦ ¦Gross ¦Net ¦Gross ¦Net ¦ +-------------------------+----------+----------+-----------+-----------¦ ¦Year 1941 (5/17 to 12/31)¦ ¦ ¦ ¦ ¦ +-------------------------+----------+----------+-----------+-----------¦ ¦Estate account ¦$23,005.62¦$22,770.90¦$22,636.47 ¦$22,623.66 ¦ +-------------------------+----------+----------+-----------+-----------¦ ¦Residuary trust account ¦ ¦ ¦ ¦ ¦ +-------------------------+----------+----------+-----------+-----------¦ ¦Total ¦23,005.62 ¦22,770.90 ¦22,636.47 ¦22,623.66 ¦ +-----------------------------------------------------------------------+
Year 1942 Estate account 22,903.73 20,250.47 22,659.82 20,800.43 Residuary trust account (opened Nov. 5,435.34 5,435.34 5,435.34 5,435.34 1942) Total 28,339.07 25,685.81 28,095.16 26,235.77
Year 1943 Estate account (close Nov. 1942) Residuary trust account 27,574.54 25,396.09 27,574.54 25,475.44 Total 27,574.54 25,396.09 27,574.54 25,475.44
Year 1944 Residuary trust account 32,863.51 30,332.58 32,863.51 30,510.49
All distributions to the life beneficiary, Dora W. Allen, were made from income. The distributions made in the years 1941 to 1944, inclusive, to Dora W. Allen by the executors of the estate and trustees of the testamentary trust were as follows:
+---------------------------------------------------------------------+ ¦ ¦ ¦From estate¦From trust¦Total ¦ +----+------------------------------+-----------+----------+----------¦ ¦1941¦June through December ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(on or about the 17th of each ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦month), 7 mos. at $1,500 ¦$10,500.00 ¦ ¦$10,500.00¦ +----+------------------------------+-----------+----------+----------¦ ¦1942¦January through December ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(on or about the 17th of each ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦month), 12 mos. at $1,500 ¦16,500.00 ¦$1,500.00 ¦18,000.00 ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦Net income in excess of ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦$18,000 for year ended 5/17/42¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(paid 6/30/42) ¦12,167.64 ¦ ¦12,167.64 ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦Total ¦28,667.64 ¦1,500.00 ¦30,167.64 ¦ +----+------------------------------+-----------+----------+----------¦ ¦1943¦January through December ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(on or about the 17th of each ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦month), 12 mos. at $1,500 ¦ ¦18,000.00 ¦18,000.00 ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦Net income in excess of ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦$18,000 for year ended 5/17/43¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(paid 9/17/43) ¦ ¦6,332.12 ¦6,332.12 ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦Total ¦ ¦24,332.12 ¦24,332.12 ¦ +----+------------------------------+-----------+----------+----------¦ ¦1944¦January through December ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(on or about the 17th of each ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦month), 12 mos. at $1,500 ¦ ¦18,000.00 ¦18,000.00 ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦Net income in excess of ¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦$18,000 for year ended 5/17/44¦ ¦ ¦ ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦(paid 5/17/44) ¦ ¦9,005.76 ¦9,005.76 ¦ +----+------------------------------+-----------+----------+----------¦ ¦ ¦Total ¦ ¦27,005.76 ¦27,005.76 ¦ +---------------------------------------------------------------------+
The gross estate and residuary estate of decedent passing to his trustees under article eight of his will as of the optional valuation date, after allowances of deduction for his charitable bequests in accordance with the final determination made for Federal estate tax purposes, are as follows:
+----------------------------------------------------------------+ ¦Gross estate ¦ ¦ ¦$795,749.06¦ +--------------------------------+---------+---------+-----------¦ ¦Less: ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Funeral expenses ¦ ¦$2,968.00¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Executor's commissions ¦ ¦34,798.68¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Attorney's fees ¦ ¦5,000.00 ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Misc. administration expenses ¦ ¦4,733.32 ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Debts of decedent ¦ ¦11,705.22¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦59,205.22¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Legacies and bequests ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Dora W. Allen ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Personalty (art. II) ¦$8,077.00¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Real estate (art. III) ¦18,000.00¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Insurance (excess on 40 M) ¦3,160.62 ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦29,237.62¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Mrs. John David Rogers ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Cash (art. IV) ¦ ¦10,000.00¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Miss Gertrude Clair ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Cash (art. V) ¦ ¦10,000.00¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦108,442.84 ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦687,306.22 ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Less: ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Delaware inheritance tax (final)¦ ¦12,344.86¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Federal estate tax (final) ¦ ¦48,347.64¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦60,692.50 ¦ +--------------------------------+---------+---------+-----------¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------+---------+---------+-----------¦ ¦Net residuary estate ¦ ¦ ¦626,613.72 ¦ +----------------------------------------------------------------+
The value of the assets held by the trustees of the residuary trust under article eight of decedent's will, based on current market quotations for the respective dates was as follows:
+-----------------------------------------------+ ¦11/17/42 ¦11/17/43 ¦11/17/44 ¦9/11/45 ¦ +-----------+-----------+-----------+-----------¦ ¦$671,715.38¦$752,967.30¦$838,649.04¦$960,749.79¦ +-----------------------------------------------+
The net income available for distribution to the decedent's wife, the ratio of return on residual principal, and the number of times the net income covered the annual requirements of $1,500 per month, were as follows:
+----------------------------------------------------+ ¦ ¦ ¦Ratio of ¦Income covered¦ +----------------+----------+---------+--------------¦ ¦ ¦Income ¦return on¦annual re- ¦ +----------------+----------+---------+--------------¦ ¦Period ¦available ¦principal¦quirement-- ¦ +----------------+----------+---------+--------------¦ ¦5/17 to 12/31/41¦$22,770.90¦3.63% ¦2.16 times ¦ +----------------+----------+---------+--------------¦ ¦1942 ¦25,685.81 ¦4.10% ¦1.42 times ¦ +----------------+----------+---------+--------------¦ ¦1943 ¦25,396.09 ¦4.05% ¦1.41 times ¦ +----------------------------------------------------+
Investment of the estate and trust is in the hands of a corporation experienced and specializing in the investment of money for an annual fee. It employs a research organization and staff of employees, and has been entrusted for investment with more than $100,000,000.
OPINION.
LEECH, Judge:
The sole issue is whether the net capital gain, in the amount of $4,135.53, realized by the executors of decedent's estate, during the taxable period, is deductible under section 162(a) of the Internal Revenue Code.
The will of decedent, after providing for certain devises and bequests, creates a testamentary trust, the entire income of which is to be paid to his wife for life, with the remainder over to the trustees of Rutgers College, a corporation as defined in section 23(o)(2) of the code. Under the will capital gains are to become a part of the principal of the trust. To the extent necessary to make the monthly payments to decedent's wife of not less than $1,500, the trustees are directed to draw upon the principal of the fund. The respondent contends, since the entire income is to be paid to the life beneficiary, the direction to invade the corpus in the event the ordinary income is insufficient to meet the minimum payments prevents capital gains from being ‘permanently set aside to be used exclusively for educational purposes.‘ The principle that the mere existence of the power to invade corpus requires a denial of a deduction of a charitable bequest of the remainder has not been judicially accepted. The statute has been construed with a view to carrying out its purpose to encourage charitable contributions. Old Colony Trust Co. v. Commissioner, 301 U.S. 379; Ithaca Trust Co. v. United States, 279 U.S. 151; Edwards v. Slocum, 264 U.S. 61. In estate tax cases, the rule is well established that, where the gift is of a remainder interest to a charitable organization and there exists a possibility of the invasion of the corpus, the deduction is allowable if the value of the gift is presently susceptible of reasonably definite ascertainment. Ithaca Trust Co. v. United States, supra; Estate of Edwin E. Jack, 6 T.C. 241. Likewise, if the noninvasion of the corpus can not be predicted with reasonable certainty and the value is thus not presently so ascertainable, the deduction will not be allowed. Merchants National Bank of Boston v. Commissioner, 320 U.S. 256; Humes v. United States, 276 U.S. 487; Estate of John W. Holmes, 5 T.C. 1289. The deduction for income tax purposes stands on no better footing. Merchants National Bank of Boston v. Commissioner, supra; F. G. Bonfils Trust, 40 B.T.A. 1085; affd., 115 Fed.(2d) 788; Commissioner v. Upjohn Estate, 124 Fed.(2d) 73. Cases of this character must stand upon their own facts. The burden is upon petitioner, seeking the deduction, to establish facts and circumstances justifying the conclusion that the possibility of invasion of the corpus is so remote that one may reliably predict that the invasion will not occur. The factors established by petitioner's proof are: The age and expectancy of the life beneficiary; the value of the corpus of the trust at decedent's death and its increase since that time; the available income has been in excess of the minimum payments required under the will; the nature of the corpus; and the fact that the management of the trust fund is entrusted to an experienced trustee. The respondent points out that the life beneficiary, at the death of the decedent, had a life expectancy of 13 years and 172 days; the corpus consists largely of a variety of common stocks; the income is dependent on dividends which fluctuate with economic conditions; the available income has averaged only 1.66 times the required minimum payments; and, since all the annual income is to be paid to the life beneficiary, no reserve will be available in the event the income falls below the minimum requirements. These factors, argues respondent, render it impossible to reliably predict that an invasion of the corpus will not occur during the existence of the trust. We should, and do, take judicial notice that the periods of time covered by petitioner's proof were those covered by the war, when economic conditions were more favorable than at any time in the decade prior to decedent's death in 1941. Nor should we fail to note the existence of economic cycles, when business conditions are alternately good and bad. It appears to us that the decedent, in making provision for the mandatory invasion of the corpus if the income did not reach the amount required to make the minimum payments, was not unaware of those cycles. Petitioner has not informed us of the dividend history of the common stocks forming a large part of the trust corpus. A prior dividend history might have been helpful in determining the probabilities of the future. Aside from other circumstances, the length of the unexpired expectancy of the life beneficiary, the narrowness of the margin of safety of available income over the minimum requirements, and the source of the income constitute factors that do not lend themselves to reliable prediction. They do not justify a conclusion that there exists no reasonable uncertainty an invasion of the corpus will not occur during the existence of the trust. The determination of the respondent is sustained.
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—(a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23(o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit.
Decision will be entered for the respondent.