Opinion
Docket No. 43662.
1955-01-18
ESTATE OF ROBERT L. DULA, DECEASED, GLORIA M. PACKARD POLT, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Jac M. Wolff, Esq., for the petitioner. William G. O'Neill, Esq., for the respondent.
Jac M. Wolff, Esq., for the petitioner. William G. O'Neill, Esq., for the respondent.
SEC. 162(b), I.R.C. 1939— INCOME CURRENTLY DISTRIBUTABLE— YEAR OF TAXABILITY— ESTOPPEL.— Decedent was the life income beneficiary of a trust, part of the corpus of which consisted of interests in bonds and mortgages on two pieces of real property. The trustee foreclosed the mortgages and in 1944 and 1945 sold the properties after having engaged in mortgage-salvage operations for a number of years. The consideration for the sale consisted partly of cash and partly of purchase money bonds and mortgages. The trustee allocated to decedent in May of 1945 a certain portion of the sales proceeds as required by the laws of New York. Decedent died on November 15, 1945, and the trust was terminated by his death. A petitioner for settlement of the trustee's final account was filed with the surrogate in 1946. The surrogate's final decree approving the account and ordering distribution was entered in 1947.
1. Held, the portion of the proceeds allocated to decedent from the sale in 1945 of one of the properties was taxable to him in the return filed for his last taxable period, January 1, 1945, to November 15, 1945.
2. Held, further, decedent was not taxable in his last taxable period for his allocable share of the proceeds from the sale made in 1944. Robert W. Johnston, 1 T.C. 228,affd. (C.A. 2) 141 F.2d, 208, followed.
3. Held, further, respondent not estopped.
Respondent determined a deficiency in income tax in the amount of $26,690.51 for the period January 1, 1945, to November 15, 1945.
The principal question for decision is whether respondent properly included in income for the above period certain sums consisting of cash and proportionate interests in bonds and mortgages which were part of the proceeds of a mortgage-salvage operation conducted by a trust of which decedent was the income beneficiary.
Petitioner has also raised a question as to whether or not respondent is estopped from determining the deficiency.
An adjustment for medical expenses is involved which depends upon disposition of the main question.
FINDINGS OF FACT.
Some of the facts have been stipulated and the stipulation is included herein by reference.
Robert L. Dula, hereafter called decedent, died on November 15, 1945. Gloria M. Packard Polt is the executrix of his estate. The income tax return for the period January 1, 1945, to November 15, 1945, was filed with the collector of internal revenue for the second district of New York.
Decedent's father died April 27, 1926. Under his will trusts were established for his children ‘the net income and profits from which shall be paid semi-annually or quarterly’ to the beneficiaries for 10 years, then subject to other disposition. By codicil the trustee was directed, with respect to the trust created for decedent, to pay ‘the net income’ to decedent or any legal representative of his, ‘during his lifetime.’ At his death the principal sum and any ‘unexpended income’ was to be distributed to decedent's issue. The Guaranty Trust Company of New York was named trustee.
In 1929 the trust for decedent became the owner of an undivided interest in a bond and mortgage on property, for convenience called the 45th Street property, and sometime later the trust also acquired an interest in a bond and mortgage on property called the Gansevoort property, both properties being located in New York, New York.
In August 1933 the mortgagor of the 45th Street property defaulted and in March 1934 the trustee foreclosed the mortgage and took title to the property as trustee. In April 1945 the trustee sold and conveyed the property for a consideration of $125,000 in cash and a bond and mortgage in the sum of $500,000.
In March 1938 the mortgagor of the Gansevoort property defaulted and the trustee foreclosed and took title to the property as trustee in November 1938. In November 1944 the trustee sold and conveyed the property for $100,000 in cash and a bond and mortgage in the sum of $200,000.
Thereafter, the trustee computed the interests in the sales proceeds from the properties as between the life beneficiary of the trust and the principal in accordance with its understanding of the laws of New York, particularly section 17-c of the Personal Property Law of New York and the so-called ‘Chapal-Otis Rule’ (In re Chapal's Will, 269 N.Y. 464, and In re Otis' Will, 276 N.Y. 101). As a result of these computations allocations were made in the trustee's records on May 1, 1945, of the sales proceeds among the participating interests. These allocations reflected the amounts allotted to principal and to income beneficiaries.
The cash portion of the sales proceeds allocated to decedent was turned over to decedent in 1945.
The trust terminated on November 15, 1945, with the death of decedent.
In its fiduciary income tax return for the year 1945 the trustee included the following statement with regard to the 45th Street property:
This trust originally held a 1/4 interest in $1,425,000. Bond and Mortgage of 11 East 45 St. Inc. covering premises 11/7 East 45 St. N.Y.C. deed in lieu of foreclosure was received 3/29/34 by the trustee(s) of this trust. The trustee(s) operated the property until its sale on 4/16/45. There was a loss on the sale of $267,213.48.
Allocation of the proceeds of sale of this property to the income account of this trust was made as follows:
+---------------------------------+ ¦Cash ¦7,899.18 ¦ +-----------------------+---------¦ ¦Purchase money mortgage¦32,814.92¦ +---------------------------------+
The above figures are not included in the trust income, and are subject to Trustee's Commission of $1,044.39.
The record does not disclose the treatment accorded the Gansevoort property proceeds for tax purposes by the trustee.
The allocated portions of the bonds and mortgages were not distributed in kind but were held by the trustee pending settlement of the trustee's final account by the Surrogate's Court, County of New York. A petition for that purpose was filed, dated August 12, 1946. The Surrogate's Court entered its final decree on November 17, 1947, and among other things
ADJUDGED AND DECREED that after retaining the amounts as aforesaid said Trustee pay over and distribute to IRMA M. DULA, as executrix of the Will of Robert L. Dula, deceased, the following securities representing the balance of income accrued through November 15, 1945, she have consented thereto pursuant to Section 268 of the Surrogate's Court Act, to wit:
+-----------------------------------------------------------------------------+ ¦$3,899.88 p/aA/I/B/PMM Gansevoort Holding Corp. covering premises¦ ¦ ¦E/S Washington St. from Gansevoort St. to Little West 12th St., ¦ ¦ ¦New York City due 11/1/54. Interest at 3%. In addition, the above¦$3,597.87 ¦ ¦represents this trust's realization, if any, from items 1a, b and¦ ¦ ¦c, as set forth at end of Exhibit A attached to schedule M of ¦ ¦ ¦account dated 31st May, 1946 ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Plus additional funds expended (see Schedule G-2 of account dated¦602.72 ¦ ¦31st May, 1946) ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦ ¦___________¦ +-----------------------------------------------------------------+-----------¦ ¦ ¦$4,200.59 ¦ +-----------------------------------------------------------------+-----------¦ ¦Less amortization payments received ¦300.71 ¦ +-----------------------------------------------------------------+-----------¦ ¦ ¦___________¦ +-----------------------------------------------------------------+-----------¦ ¦ ¦$3,899.88 ¦ +-----------------------------------------------------------------+-----------¦ ¦$31,830.56 equitable interest in p/a part interest in B/PMM ¦ ¦ ¦Rosetta Sneider covering premises 11/17 E. 45th St., New York ¦$31,830.56 ¦ ¦City, due 4/16/52. Interest at 4% representing proportionate ¦ ¦ ¦share allocable to income on sale of said premises ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦ ¦___________¦ +-----------------------------------------------------------------+-----------¦ ¦Balance of income accrued through November 15, 1945 ¦$35,730.44 ¦ +-----------------------------------------------------------------+-----------¦ ¦ ¦___________¦ +-----------------------------------------------------------------------------+
On January 14, 1948, the executrix of the last will and testament of the decedent executed a receipt and release to the trustee setting forth among other things that the estate agreed to accept in kind, in lieu of the money value, the undivided and equitable interests in the bonds and mortgages above described in accordance with the final decree of the Surrogate's Court.
On or about March 15, 1948, amended tax returns were filed on behalf of decedent for the years 1933 to 1944, inclusive, and for the taxable period involved herein. In the amended returns there was included in each year an allocable amount of the total interests of decedent in the above-described bonds and mortgages as income. The cash distributions received in 1945 were not included therein. The additional tax shown on the amended returns was thereafter paid and where interest was due it was also paid according to a schedule in evidence herein.
In determining the deficiency herein, respondent included in decedent's income for the last taxable period, January 1, 1945, to November 15, 1945, the allocations made by the trustee to the trust for decedent with respect to the 45th Street and Gansevoort properties in 1945, totaling $7,899.18 cash and $36,262.52 bond and mortgage allocation.
OPINION.
TIETJENS, Judge:
This case presents the often troublesome question of the proper year in which income is to be taxed.
Decedent was the life beneficiary of a trust and entitled to the net income therefrom. Part of the assets of the trust consisted of interests in bonds and mortgages on two pieces of real estate on which the mortgagors defaulted. The trustee foreclosed and took title, on the 45th Street property in 1934 and on the Gansevoort property in 1938. Thereafter, the trustee engaged in mortgage-salvage operations with respect of the properties and finally sold them in April 1945 and November 1944, respectively. On their sale the trustee received as consideration partly cash and also bonds and mortgages. In 1945 the trustee computed the proportionate share of the proceeds of the sales of the properties to be allocated to the decedent as the life beneficiary and the share to be allocated to the principal of the trust. The cash share was paid to decedent in 1945 and in May of that year the trustee made an allocation in its records showing the share of the decedent as income beneficiary in the bonds and mortgages.
No controversy apparently exists over the cash share paid to decedent in 1945.
Petitioner also concedes that the proportionate share in the mortgage-salvage proceeds represented by the bonds and mortgages allocated to the decedent, constituted taxable income, and well this concession might be made in view of Plunkett v. Commissioner, (C.A. 1) 118 F.2d 644, affirming 41 B.T.A. 700, and Johnston v. Helvering, (C.A. 2) 141 F.2d 208, affirming 1 T.C. 228.
The brunt of petitioner's argument is directed to the contention that respondent improperly determined that the income was taxable to decedent for the period January 1, 1945, to November 15, 1945 (the date of his death). Petitioner's contention is that until entry of the decree of the Surrogate's Court in 1947 neither the decedent nor his estate had any present right to receive the income; that the ‘allocation’ made by the trustee in 1945 was nothing more than a computation or rough approximation of the share to which decedent was entitled as income which gave him no present enforceable right; and other arguments of like import.
Respondent, on the other hand, supports his determination by relying on section 162(b), Internal Revenue Code of 1939. That section allows as a deduction to the trustee the net income of the trust which ‘is to be distributed currently,‘ but taxes to the beneficiary the amount allowed as a deduction to the trustee ‘whether distributed * * * or not.’
Under the terms of the trust before us we have no doubt that the net income thereof was to be distributed currently to the decedent and that the trustee was under a duty to make periodic distributions. Petitioner argues that since the income in question consisted of undivided interests in bonds and mortgages it was the kind of income which the testator meant to be distributed currently. We find no merit in this contention. Cf. De Brabant v. Commissioner, (C.A. 2) 90 F.2d 433, affirming 34 B.T.A. 951. This case is distinguishable from Commissioner v. First Trust & Deposit Co., 118 F.2d 449 (41 T.B.A. 112) cited by petitioner, where the Court held the situation to be comparable to an estate in the course of administration and the trustee to be under no duty to make periodic distributions.
The case before us is not unlike Robert W. Johnston, 1 T.C. 228, cited above, as affirmed in 141 F.2d 208. The Johnston case was concerned with the life beneficiaries of trusts engaged in mortgage-salvage operations. The trustees foreclosed the mortgage and later bought in the property which they sold in 1937. The laws of New York, which governed, required the trustees to allocate to the petitioners a certain portion of the proceeds of the sale, which they did in 1937. The proceeds there, as here, consisted of cash and a purchase money bond and mortgage. No part of the bond and mortgage was transferred in 1937 to the petitioners nor was any certificate of interest or participation therein given them. We held that petitioners were taxable in 1937 on their proportionate share of the bond and mortgage. In doing so, this Court pointed out, at page 240:
Although no part of the bond and mortgage nor any interest therein has at any time been transferred or assigned by the trustees to either of the petitioners (see paragraph 20 of our findings), it would seem that from and after the date of sale on January 11, 1937, each petitioner was the equitable owner of property rights in the bond and mortgage which had a fair market value of $48,105.48. It was a right which either one could have sold or given away. It is true that it may have been impracticable for the trustees to have divided the bond and mortgage and to have distributed to petitioners their part within the taxable year, but nevertheless we think petitioners' proportional part of the bond and mortgage represented distributable income to them in that year.
Petitioner seeks to distinguish the Johnston case on the ground that it did not involve the question of the year of taxability, but only the question as to whether the allocated portion of the bond and mortgage constituted income at all. We think both questions were presented and decided by this Court in the Johnston case and we are unable to distinguish it on that basis.
Petitioner makes the further contention, that the present case is different because here the question of the proper allocation to decedent was presented to the Surrogate's Court and until the final decree of that court neither the decedent nor his estate had any right in the mortgages and bonds. With this we do not agree. The only reason, so far as we can see, that the Surrogate's Court was resorted to was that the life beneficiary died, the trust was thereby terminated, and it became necessary to file a final accounting. We do not think this fact affects the tax consequences of the transactions with respect to the mortgage-salvage operations which took place before the beneficiary's death. At most this might have had the effect of postponing actual distribution of the interest in the bonds and mortgages, but as demonstrated by the quotation above from the Johnston case, actual distribution is not the ‘taxable event’ in situations of this character. As we said in Mary Clark de Brabant, 34 B.T.A. 951, affd. (C.A. 2) 90 F.2d 433, at page 955:
It is that right of petitioner, beneficiary, to receive the contested income then, not her actual or constructive receipt of such income during that year, which fixes her liability for the tax thereon, as income ‘currently distributable’ during that year, under sections 161(a)(2) and 162(b), supra. The possession that right to receive income, not its actual or constructive receipt, is the test of petitioner's liability here.
The instant case is, if anything, stronger for respondent than Robert W. Johnston, supra. In the Johnston case we held that the proportions to be allocated as between the life beneficiaries and the principal of the trust was governed by the so-called ‘Chapal-Otis rule,‘ a rule embodied in court decisions. This rule, as applicable to the present case, has been modified by statute— section 17-c Personal Property Law of New York, 1940. Subparagraph 2(d) of that section expressly declares:
(d) The purpose of the enactment of this subdivision is declared to be the simplification of the rules of procedure in mortgage salvage operations and the elimination of present complications which work to the disadvantage of the life tenant, who is usually the principal object of the testator's or settlor's bounty, by depriving him of a fixed right to the actual payment of any net income earned by the property. Such fixed right is granted in lieu of the discretion now given to the trustee to pay net income or any part thereof to the life tenant. The general rules of the apportionment of the proceeds of sale between life tenant and remainderman are retained subject to the express modifications made herein. * * *
Also in the report of the commission set up to consider this problem the following appears:
(a) The Chapal-Otis rule authorizes the trustee to pay surplus net income in his discretion. Trustees have hesitated to pay such net income because in the case of overpayment to the life tenant, the trustee might be surcharged with that amount. The life tenant of the trust must wait in the majority of cases for a long period of time before he becomes entitled to the payment of any income, because of the present requirement that advances from principal for the expenses of foreclosure and for arrears of taxes and other liens must first be paid from the net income of the property. The amendment provides for the immediate payment of income to the life tenant beginning with the date of the acquisition of the property by the trustee by foreclosure or conveyance in lieu of foreclosure. Under the new provisions net income up to three per centum of the face amount of the mortgage is so payable. * * * (40 McKinney's Consolidated Laws of New York (Annotated), Personal Property Law, p. 173.)
Thus the right of decedent to receive the contested income is expressly conferred by statute. It needs no court action to confirm it.
We point out that this case is only concerned with when the apportioned part of the proceeds of sale became income taxable to the life beneficiary. This is done for the reason that section 17-c, 2(a), of the Personal Property Law referred to above confers on the life beneficiary the right to payments of 3 per cent on the principal amount of the mortgage during the salvage operation and further, that the amount of such payments ‘shall be taken into account, however, in the apportionment of the proceeds of sale and shall be charged against the share of the life tenant.’ We are unable to ascertain whether the apportionment of the proceeds with which we are concerned reflects the change referred to in the statute. However, neither party has referred to the 3 per cent statutory payments in their arguments or complained that the apportionment was improper, and for the purposes of this case we assume that the apportionment was properly computed and that the statutory charge was made against the life beneficiary's share by the trustee in determining the amounts here involved.
Petitioner also contends that the apportioned proceeds of the sale of the mortgaged property should have been taxed allocably over the years prior to 1945 during which the mortgage-salvage operation was carried on, because the proceeds of that operation really represented income of which the life beneficiary was deprived during those years. The answer to this argument is that during those years the decedent received none of the proceeds from the sale of the mortgaged properties with which we are here concerned and had no right to receive any. His right to his share of the sale proceeds matured in the years when the sales of the properties were made by the trustee and he thereupon became entitled to the allocation as provided by the New York Laws.
Applying the principles of the Johnston case, we hold that income with respect to the Gansevoort property was taxable to decedent in 1944 when the sale of that property was made by the trustee. This income, therefore, was not taxable to decedent in his last taxable period. On the other hand, the income with respect to the 45th Street property, which the trustee sold in 1945, was properly taxable to decedent in his last taxable period as determined by respondent.
Finally, petitioner contends that, in any event, respondent is estopped from making the determination in question because he accepted amended returns on behalf of decedent in which the income here involved was allocated over the years 1933 to 1944, and in some instances demanded and received interest on the amounts of tax shown in such returns. We find none of the elements of estoppel in these facts. The amended returns were voluntarily filed. No representations as to their effect were made by respondent and he did nothing to induce such action on behalf of decedent.
Decision will be entered under Rule 50.