Opinion
Docket No. 25708.
1952-07-29
RUTH B. KAISER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
F. O. Rousset, Esq., for the petitioner. Jackson L. Bailey, Esq., for the respondent.
Petitioner is the life beneficiary of a trust created under the will of her deceased husband, the corpus of which consists of one-fifth of the outstanding shares of stock of a family-owned corporation, the other stockholders being the children of the deceased husband by a former wife. The officers of the corporation were also of that group. They directed the affairs of the corporation, to the end that no dividends were distributed for a number of years, which caused petitioner to institute suit against the corporation and its officers for an accounting. An agreement of settlement was reached providing that the corporation would thereafter pay $200 per month to petitioner, the said amount to be paid out of corporate income before the payment of salaries to the officers or employees. The trustee under the above trust thereafter procured an order from the court approving the settlement made and directing it to continue to retain the said shares of stock by way of investment, and holding that the sums paid and to be paid under the terms of the agreement of settlement represented net income of the trust estate. Held, that the payments to petitioner, as set forth above, during the taxable years represented income to her and are not to be excluded under the provisions of section 22(b)(3) of the Internal Revenue Code. F. O. Rousset, Esq., for the petitioner. Jackson L. Bailey, Esq., for the respondent.
The respondent determined deficiencies in income tax against the petitioner for the taxable years as follows:
+----------------+ ¦Year ¦Amount ¦ +------+---------¦ ¦1943 ¦$648.20 ¦ +------+---------¦ ¦1944 ¦504.00 ¦ +------+---------¦ ¦1945 ¦509.00 ¦ +------+---------¦ ¦1946 ¦405.00 ¦ +----------------+
The only question presented is whether the amount of $2,400 received by petitioner in each of the taxable years, pursuant to the will of her deceased husband and a compromise agreement with other parties in interest, is taxable to her.
FINDINGS OF FACT.
Some of the facts are stipulated and are found as stipulated.
Petitioner is an individual, and resides at New Orleans, Louisiana. She filed her income tax returns for the years involved with the collector of internal revenue at New Orleans, Louisiana.
Petitioner is the widow of Nat Kaiser, who died testate in the latter part of 1928, while a resident of Atlanta, Georgia. She was his second wife. He left surviving him at his death, four children by his first marriage and four grandchildren. There were three sons, Herbert, Irving and Grover C. Kaiser, and one daughter, Helen Kaiser Schwab.
Kaiser's will was duly probated on or about February 4, 1929, in the Court of Ordinary, Fulton County, Georgia, and Herbert Kaiser and Robert W. Schwab, the latter Kaiser's son-in-law, qualified as executors under the will.
The will provided in part as follows:
ITEM SEVEN
I will and desire that one-fifth (1/5 th) of my estate, except as hereinbefore provided, be vested in THE FOURTH NATIONAL BANK OF ATLANTA, as Trustee for my wife, RUTH B. KAISER, and for the remaindermen as indicated in this item. I desire that my wife, RUTH B. KAISER, shall receive the net income from said one-fifth (1/5 th) of my estate so long as she shall remain unmarried, but either upon her death or marriage, I desire that said portion of my estate in this Item referred to shall go and belong in fee simple to my children then living and the descendants of any deceased child of mine, the descendants of a deceased child to take per stirpes. In the event said grandchild or grandchildren or any of them should not be of age at the time they may become entitled to any of my estate, then I appoint the said THE FOURTH NATIONAL BANK OF ATLANTA, as their testamentary guardian hereunder, and relieve it as such from making any inventories, returns or bonds, and from having any appraisements made. The provision made in this item for my wife is in lieu of dower and year's support.
ITEM EIGHT
I will and desire that one-fifth (1/5 th) of my estate, except as hereinbefore provided, be vested in my son, HERBERT KAISER, as Trustee for my son, IRVING R. KAISER, and for the remaindermen as indicated in this item. I desire my son, IRVING R. KAISER, shall receive the net income from said one-fifth of my estate as long as he shall live, but upon his death, I desire that said portion of my estate in this Item referred to shall go to the person or persons designated to receive the same by the will of my said son, IRVING R. KAISER. In the event the said IRVING R. KAISER should fail to dispose of said property by his Will, it shall go and belong in Fee Simple to my children then living, and the descendants of any deceased child of mine, the descendant's of a deceased child to take per stirpes. In the event said grandchild or grandchildren, or any of them should not be of age at the time they may become entitled to any of my estate, then I appoint the said HERBERT KAISER as their Testamentary Guardian hereunder, relieving him as such from giving any bonds, making any inventories or returns, and from having any appraisements made. Any portion of my estate which in any way may go to my son, IRVING R. KAISER, under this Will shall be included within the trust provided by this Item, and subject to the conditions thereof.
In the event of the death, resignation or refusal to act of my said son, HERBERT KAISER, I desire that my daughter, HELEN KAISER SCHWAB, shall act as Trustee and/or Testamentary Guardian in his place.
ITEM NINE
I give, devise and bequeath one-fifth (1/5 th) of my estate, except as hereinbefore provided, unto my son, GROVER C. KAISER, absolutely and in fee simple.
ITEM TEN
I give, devise and bequeath one-fifth (1/5 th) of my estate, except as hereinbefore provided, unto my son, HERBERT KAISER, absolutely and in fee simple.
ITEM ELEVEN
I give, devise and bequeath the remaining one-fifth (1/5 th) of my estate, except as hereinbefore provided, unto my daughter, HELEN KAISER SCHWAB, absolutely and in fee simple.
In Item 14 decedent expressed the desire that 90 per cent of the net income from his estate be divided under the terms of the will, but not less frequently than every four months.
In Item 15 the testator expressed the desire that if any of the legatees or beneficiaries of his will should contest it or interfere to defeat its purposes, the legatee or legatees, or beneficiary or beneficiaries, should be deprived of any of the legacies or benefits provided by the will, with a provision for the disposition of such legacies or benefits.
The legacy provided for petitioner under Item 7 of the will was accepted by her according to its terms.
The estate left by Kaiser was valued at $426,765.80. After all special legacies had been made, as provided by the will, the estate consisted of 2,980 shares of stock in the Nat Kaiser Investment Company, a corporation domiciled in Atlanta, Georgia. The total number of outstanding shares of the company was 3,000.
Petitioner received $300 a month for about two years, during 1929 and 1930, after which she received nothing for approximately four years. She was advised that the Nat Kaiser Investment Company was to be operated in a different manner and that no more dividends would be declared.
Pursuant to petition filed by the executors, the Court of Ordinary, by order dated April 6, 1932, approved the distribution which had been made of the assets of the Nat Kaiser estate. The assets consisted of $430 in cash and 2,980 shares of stock in the Nat Kaiser Investment Company. By reason of such distribution, and pursuant to Item 7 of the will, the First National Bank of Atlanta, successor to the Fourth National Bank of Atlanta, received in distribution 596 shares of the capital stock of the said company as trustee for petitioner and the remaindermen.
Aside from her interest as life beneficiary in the trust above, the petitioner was also the owner in fee simple of four shares of the company's capital stock.
On September 29, 1932, Ruth B. Kaiser, the petitioner herein, filed a petition in the Superior Court of Fulton County, Georgia, naming as defendants Nat Kaiser Investment Company, Herbert Kaiser and Robert W. Schwab individually. In the petition it was alleged, among other things, that the individual defendants, as individuals and in their representative capacities, were directing the affairs of the company for their personal benefit to the detriment of the petitioner, that the corporate profits had been diverted and paid out in the guise of salaries and not distributed as dividends as they should have been, all to the end that petitioner Ruth B. Kaiser was being deprived of income to which she was entitled and which had been contemplated by the decedent Nat Kaiser in his will. In the petition she asked for an accounting by the company, its officers, directors and stockholders, for payment of certain moneys as dividends and for other relief.
On March 21, 1933, Ruth B. Kaiser, the petitioner herein, filed a petition in the Superior Court of DeKalb County, Georgia, naming Herbert Kaiser, Helen Kaiser Schwab, Grover C. Kaiser, Irving R. Kaiser and Nat Kaiser Investment Company as defendants. In the petition it was alleged that the charter of Nat Kaiser Investment Company had expired on the seventh day of January 1933; that the defendants had not in ignorance allowed the charter to expire; that on February 27, 1933, a petition for reviver of the charter had been filed, wherein it was alleged that the corporation had continued in the exercise of its functions as a corporation, in ignorance of the expiration of its charter; that a reviver of the charter was not to the best interests of the parties; and prayed that the defendants be enjoined and restrained from proceeding further with the petition for reviver and that the assets of the corporation be disposed of as in cases of corporations whose charters have expired. After hearing evidence and argument, the court on May 31, 1933, granted the restraining order prayed for and directed that the same continue until further order of the court.
On April 22, 1935, the petitioner entered into an agreement with the company, Herbert Kaiser, Helen Kaiser Schwab, Irving R. Kaiser, and Grover C. Kaiser, which provided, inter alia, as follows:
THIS AGREEMENT, made and entered into this the 22nd day of April, 1935, between NAT KAISER INVESTMENT COMPANY, a corporation of said County, HERBERT KAISER and MRS. HELEN KAISER SCHWAB, of said County, and IRVING R. KAISER and GROVER C. KAISER, of the State of California, all hereinafter referred to as the first parties, and MRS. RUTH B. KAISER, of the State of Louisiana, hereinafter referred to as the second party,
WITNESSETH:
The second party is a life tenant under the Will of Nat Kaiser, deceased, in five hundred ninety-six (596) shares of stock in the Nat Kaiser Investment Company, which stock is held in trust by the First National Bank of Atlanta under said Will as Trustee for the said Mrs. Kaiser.
3. The Nat Kaiser Investment Company agrees and undertakes to pay to the second party on or before the 10th day of each month, beginning with the month of May, 1935, the sum of two hundred ($200.00) dollars for the rest of her life or until she remarries, the life estate held by the second party in the stock in the Nat Kaiser Investment Company under the Will of Nat Kaiser terminating upon her death or remarriage. * * *
Notwithstanding any other language or provision of this agreement, the $200.00 per month herein provided to be paid to the second party shall be templated by the will of Nat Kaiser, deceased, in respect to payments of dividends by that Company for the benefit of the second party on the stock in said Company held by said Trustee for the benefit of the second party, and said Trustee, as is contemplated by all parties, will promptly transmit said sum without any deduction for fees or commissions to the second party.
5. The above and foregoing described sum of $200.00 per month to be paid to said Trustee for the second party is to be paid by the Nat Kaiser Investment Company out of its income, but it is understood by the parties hereto that the Nat Kaiser Investment Company in order to protect its ability to make payment to said Trustee for the second party will have to pay out of its gross income all taxes due by it from year to year, all interest due by it to its several creditors, and such reductions on the principal of its debts as its creditors may require, and such additional incidental expenses as are absolutely necessary to keep its property in condition to rent to its several tenants. However, it is understood that out of the income of the Nat Kaiser Investment Company the said second party shall be entitled to receive the monthly payments herein provided to be made to her before any sums are paid by said Company as salaries to any of its officers or employees, and it is expressly agreed by all parties hereto that payments to the second party will be made monthly before any sums are disbursed as salaries to officers or employees, or contemporaneously therewith, and all of the parties of the first part undertake to bind themselves to see that all such payments are made to the second party from month to month before any such salaries have been paid by the Nat Kaiser Investment Company. Should one or more of the individual first parties hereto dispose of his or her stock in the Nat Kaiser Investment Company, the remaining individual first parties agree and undertake not to dispose of their stock so as to lose control of the Nat Kaiser Investment Company, and such of the individual first parties as retain their stock in the Nat Kaiser Investment Company agree and undertake to see that the provisions of this contract are carried out, even though one or more of said individual first parties may have disposed of their stock in said Company.
6. In addition to the foregoing provisions in favor of the party of the second part, it is further agreed that if during any calendar year during the widowhood of the second party the Nat Kaiser Investment Company shall declare and pay to its stockholders dividends which, on the prorata basis, exceed the sum of two hundred ($200.00) dollars per month for the year on five hundred ninety-six (596) shares of stock in said Company as now capitalized, then and in that event any such excess of such dividends for that year on said 596 shares of stock over and above the sum of two thousand four hundred ($2,400.00) dollars shall also be paid to the second party through her Trustee, The First National Bank of Atlanta, Georgia. It is further agrees (sic) that each calendar year is to be taken as a separate period, and that if the dividends in any year on said 596 shares of stock do not amount to as much as $2,400.00, the second party is to be paid said sum of $200.00 per month nevertheless, with the full right to any excess over said $2,400.00 in any particular year in which dividends are declared and paid in excess of that sum on the said 596 shares of stock. However, in any and every particular year in which said dividends declared and paid amount to less than $2,400.00 on said 596 shares of stock, all such dividends are to be retained by the Nat Kaiser Investment Company and in lieu thereof the said sum of $200.00 per month to be paid to the second party. The payments provided in this paragraph to be made to the second party are to be paid by said Company directly to her Trustee, The First National Bank of Atlanta, or its successor as Trustee for her.
7. The individual first parties hereto agree and undertake that they will not make any disposition of their stock the effect of which would be to lose the control of said corporation, and they will not voluntarily do anything to lose such control or to render the Nat Kaiser Investment Company unable to perform its obligations to the second party hereunder. However, the individual first parties hereto do not personally assume liability for the payments herein agreed to be made to the second party, but they do obligate themselves to so operate and manage the Nat Kaiser Investment Company as to insure that the Nat Kaiser Investment Company will make the payments herein agreed to be made so long as it has an income out of which such payments can be made after the payment by it of taxes, interest and other absolutely necessary expenses hereinbefore described, and they obligate themselves to see that the second party receives the payments hereunder provided for before the Nat Kaiser Investment Company disburses any sums as salaries to officers, directors or employes. It is understood by all parties hereto that the Nat Kaiser Investment Company is largely indebted to various creditors and that its assets consist for the most part of real estate on the major portion of which there are outstanding mortgages in large sums, and that under prevailing business conditions it is possible that the Nat Kaiser Investment Company may lose a large part or even all of its assets to such creditors. In the light of these facts is it agreed that the first parties hereto cannot guarantee the payments to the second party as against the demands of the creditors of the Nat Kaiser Investment Company or as against any results that may follow from any action these creditors may take, but the parties of the first part are vitally interested in preserving the assets of the Nat Kaiser Investment Company and will in good faith make every reasonable effort to preserve its assets and produce as large annual income for said Company as may be, and so long as the Nat Kaiser Investment Company can and does produce such income over and above the taxes, interest and expenses, as hereinbefore outlined, the first parties all agree and undertake to the best of their ability to preserve the assets and income of the Nat Kaiser Investment Company, and when and if such income is produced, they undertake to see that the second party is paid therefrom in the manner and under the conditions hereinbefore set forth, unless and until its creditors take some action which will make it impossible for them to do so; and the first parties agree in good faith that they will make every reasonable effort to handle the activities of said Company and keep the creditors thereof satisfied so that such creditors will not interrupt or embarrass the operations of said Nat Kaiser Investment Company. So long as the Nat Kaiser Investment Company produces an income sufficient to pay the second party, in the manner and under the conditions hereinbefore stated, the first parties agree and undertake to see that such payments are made out of such income so long as they are able to retain the control of said Company as against any action that might be taken by the creditors thereof.
So long as the first parties faithfully perform the stipulations herein contained and make the payments to the second party, as hereinbefore provided, the second party shall have no further or additional rights, claims, or or demands of any character against the first parties or either of them and shall have no right to participate in the management or control of Nat Kaiser Investment Company; but should the first parties fail to comply with any of the material terms of this agreement, the second party shall have the right to treat this contract as abrogated, to retain all the payments she has received hereunder, to recover the four (4) shares of stock herein conveyed, and to resume and assert her status as the owner of a life interest in said 596 shares of stock in the Nat Kaiser Investment Company, as a beneficiary under the will of Nat Kaiser, with all of her rights therein unimpaired in any respect by reason of her having signed this contract. In addition thereto, on a breach of this contract by the first parties, she shall have the right to sue for a breach thereof according to the rules of law applicable to the situation then presented.
The petitioner then withdrew her lawsuits against the company and others and turned in the four shares of stock she had owned.
Under date of May 3, 1935, counsel for Ruth B. Kaiser, the petitioner herein, signed a writing directed to the clerk of the Fulton County Superior Court authorizing and directing an entry showing the suit instituted by the filing of the petition on September 29, 1932, as settled. Also on May 3, 1935, counsel for Ruth B. Kaiser signed a writing directed to the clerk of the DeKalb County Superior Court authorizing and directing dismissal of the proceeding in that court instituted by Ruth B. Kaiser on March 21, 1933, and whereunder she obtained the restraining order described above.
On May 20, 1935, a petition was filed in the Superior Court for Fulton County by the First National Bank of Atlanta, as trustee under the will of Nat Kaiser, reciting Item 7 of the will of Nat Kaiser and the setting up of the trust under which Ruth B. Kaiser, petitioner herein, was life beneficiary; reciting also the settlement agreement of April 22, 1935, and praying that the bank, as trustee, be authorized to continue to retain, by way of investment, the 596 shares of stock of the Nat Kaiser Investment Company; to accede to the contract of settlement; to marshal and settle the accounts between the bank, as trustee, and Ruth B. Kaiser, in accordance with the settlement; and to treat as net income of said trust estate the sums paid and to be paid under the terms of the agreement of settlement to Ruth B. Kaiser, plus commissions to the trustee. On September 6, 1935, the court entered its final order and decree and after finding that the agreement of settlement was to the interest of the trust property and ‘will be of benefit not only to the life tenant but to the remaindermen as well; that the sums paid and to be paid to Mrs. Ruth B. Kaiser, plus the commissions to the Trustee, under the terms of the agreement of settlement, represent net income of the trust estate,‘ ordered that the prayers in the petition be granted. By the said order the bank was authorized as trustee, ‘to continue to retain by way of investment the 596 shares of the stock of the Nat Kaiser Investment Company which it received from the Nat Kaiser Estate * * * and * * * to treat as net income of said Trust Estate the sums paid and to be paid under the terms of said agreement of settlement to Mrs. Ruth B. Kaiser, plus commissions to the Trustee.‘
During the taxable years 1942 and 1946, inclusive, monthly payments in the amount of $200, or $2,400 a year, were made to the petitioner by the company in conformity with the agreement dated April 22, 1935. Petitioner did not know whether the payments she thus received represented dividends nor did she ever receive notice that the company had declared or was paying dividends.
The respondent in his statement attached to the deficiency notice, with respect to the deficiencies, made the following explanation:
It is held upon the basis of the evidence of record that the amount of $2,400.00 received by you in each of the years 1942, 1943, 1944, and 1945, and 1946 from The First National Bank of Atlanta, Trustee, under the terms of the agreement dated April 22, 1935, with Nat Kaiser Investment Company, et al., constitutes taxable income under the provisions of section 22(a) of the Internal Revenue Code.
OPINION.
TURNER, Judge:
It is the contention of the petitioner that the above payments received by her during the taxable years were not income within the meaning of section 22(a) of the Internal Revenue Code, ‘either because they are a return of capital or gift, or because they are exempt under Section 22(b)(3) I.R.C.‘
SEC. 22. GROSS INCOME.(b) EXCLUSIONS FROM GROSS INCOME.— The following items shall not be included in gross income and shall be exempt from taxation under this chapter:(3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES.— The value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph, the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property;
As we read the petitioner's brief, the argument as to exemption under section 22(b)(3) is that the money payments received in the taxable years were ‘not the fruits of a legacy,‘ but ‘the legacy itself,‘ and were therefore property acquired by bequest and exempt under the statutory provision referred to. The simple answer is that the statute is to the contrary. While it is provided that the value of property acquired by bequest is to be excluded from gross income, it is further provided that the income from property devised is not to be excluded. And where the bequest itself ‘is of income from property,‘ such income is likewise not to be excluded from gross income. It is also provided that if the bequest by its terms is to be paid or credited at intervals, then, to the extent that it is paid or credited out of income from property, ‘it shall be considered a * * * bequest * * * of income from property ‘ which as already noted, ‘shall not be excluded from gross income. ‘
We accordingly conclude, and hold, that the claim of exemption under section 22(b)(3) is not well taken, and is denied. Alice M. Townsend, 12 T.C. 692; see also Helvering v. Butterworth, 290 U.S. 365; and Irwin v. Gavit, 268 U.S. 161.
While the decision in Carlisle v. Commissioner, 165 F.2d 645, affirming 8 T.C. 563, does not support the disposition of the instant case contended for by the petitioner, and petitioner makes no claim that it does, the opinion is cited by her because of language appearing at page 646 which seemingly supports her contention. From a reading of the opinion it is apparent that the court there, in referring to bequests to be paid or credited at intervals, misread the statute in that it did not note that under the sentence in question a bequest paid or credited at intervals ‘shall be considered a * * * bequest * * * of income from property‘ to the extent that it is paid or credited out of income from property, and under the preceding sentence income from property ‘shall not be excluded from gross income,‘ and is not exempt as the court suggested.
The other argument appears to be that whatever the nature of the bequest, its character was changed by reason of the agreement reached between the petitioner, the Nat Kaiser Investment Company and others who were likewise beneficiaries under the will of Nat Kaiser, and that the payments thereafter received by petitioner were not distributions of income but in the nature of realization of capital. This contention is, in our opinion, without merit. The estate of Nat Kaiser had been fully administered and the assets distributed according to the terms of Kaiser's will. The petitioner had become the life beneficiary of a trust the corpus of which consisted of 596 shares of the capital stock of the Nat Kaiser Investment Company. Her complaint in the state court, apparently a just one, was that the other beneficiaries of the Nat Kaiser estate, through their control of the Nat Kaiser Investment Company, were wrongfully diverting the earnings and profits of the company to themselves, to the end that the trust in which she was a life beneficiary was not receiving the income which was its due and, as a result, she individually was being deprived of such income. She accordingly instituted the suit in question, which, among other things, called for an accounting by the corporation and asked that the court enter such orders as would cure the situation which existed. The settlement was the result. The trust which held shares was not a party to the suit, nor to the agreement. At no time was any action taken or any orders entered by the court bringing an end to the trust or otherwise changing the status of Ruth B. Kaiser as a life beneficiary thereof. The suits filed and the agreement reached did, however, again start the flow of income from the corporation to the trust. The fact that the agreement reached had to do with the distributions and payments made for the benefit of Ruth B. Kaiser, life beneficiary of the 596 shares of the stock held by the trust, and did not relate to the holders of the other outstanding shares of the stock in the corporation, does not establish the status of the payments as having any character other than dividends. That such was the situation, is borne out by the proceeding thereafter instituted by the First National Bank of Atlanta, as trustee, and the order entered. By its order, the court authorized the bank, as trustee, ‘to continue to retain by way of investment the 596 shares of the stock of the Nat Kaiser Investment Company‘ and found that the sums paid and to be paid under the terms of the agreement of settlement to Ruth B. Kaiser represented net income of the trust estate and directed that it be so treated by the trustee. We find no basis for any conclusion that the payments made were, in nature and character, payments of capital. Lyeth v. Hoey, 305 U.S. 188, and the cases decided thereunder, relied on by the petitioner, are wholly different and are not this case. The petitioner's claim is denied.
Decision will be entered for the respondent.