1927 BTA LEXIS 2920 | B.T.A. | 1927
Lead Opinion
The trustees, including the widow, Henrietta Bend-heim, treated the trust estate as the individual property of the beneficiary. They charged her with depreciation and capital losses, and credited her with capital gains. Her income-tax return for 1920 was a reflection of this accounting; so also was the return of the trustees. Apparently the only exception to this procedure was that the trustees reported the gain arising from the sale of the residence at Deal Branch, N. J., and the beneficiary did not report it. This gain respondent shifted to the life tenant. It becomes our duty therefore, to unravel this tangled skein insofar as the pleadings raise questions relative thereto, and to that extent point out the adjustments which should be made.
Under the will of her husband, Henrietta Bendheim was entitled to receive the net income of the estate after the payment of all legal charges of the trust which related to its production. The first question is whether the commissions paid to the trustees for the receipt and disbursement of income are proper deductions by the trustees, with the result that the beneficiary would receive just that much less taxable income, and if deductible, how much of the paymeats made in 1920 should be allowed as a deduction in that year.
Section 2753, New York Code of Civil Procedure, in part provides:
Sec. 2753: Commissions of executor, administrator, guardian or testamentary-trustee.
On tile settlement of the account of any executor, administrator, guardian or testamentary trustee, the surrogate must allow to him his lust, reasonable and necessary expenses actually paid by him, and if he be an attorney and counselor-at-law of this state, and shall have rendered legal services in connection with his official duties, such compensation for such legal services as shall appear to the surrogate to be just and reasonable; and in addition thereto the surrogate must allow to such executor, administrator, guardian or testamentary trustee for his services in such official capacity, and if there be more than one, apportion among them according to the services rendered by them respectively;
For receiving and paying out all sums of money not exceeding one thousand dollars, at the rate of five per centum.
For receiving and paying out any additional sums not amounting to more than ten thousand dollars, at. the rate of two and one-half per centum.
For all sums above eleven thousand dollars, at the rate of one per centum.
*164 The value of any real of personal property, to be determined in such manner as the surrogate may direct, and the increment thereof, received, distributed or delivered, shall be considered as money in making computation of commissions. But this shall not apply in the case of a specific legacy or devise.
If an executor acting as trustee, or if a trustee or guardian, is required to receive income and pay over the same, and such executor, trustee or guardian pays over said income and renders an annual account to the beneficiary of all his receipts and-disbursemnts on account thereof, he shall be allowed, and may retain, the same commission on the amount so accounted for as he would be allowed upon' principal on a judicial settlement; if he does not render such annual account, he shall be allowed, upon his judicial settlement, his commission upon the total income from any money or property then payable to such beneficiary.
If the gross value of the principal of the estate or fund accounted for amounts to one hundred thousand dollars or more, each executor, administrator, guardian' or testamentary trustee is entitled to the full compensation on principal and income allowed herein to a sole executor, administrator, guardian or testamentary trustee, unless there are more than three, in which case the compensation to which three would be entitled must be apportioned among them according to the services rendered by them, respectively.
Under the above statute and in accord with the settlement made in the surrogate’s court, it is clear that the $16,871 paid to Julius Bendheim and Edwin Bendheim represented commissions paid solely on income received and paid out. These commissions were a charge on income. See In re Smith, 149 N. Y. S. 131. It was not necessary that the trustees report annually to the surrogate’s court. It was sufficient that they accounted annually with the beneficiary. See In re Martin, 196 N. Y. 415; 90 N. E. 46. In an estate like this, where the income was derived from the management, renting and selling of property, the commissions for receiving and paying out such income are in the nature of ordinary and necessary expenses paid in carrying on a trade or business and do not differ in nature from commissions paid to an agent for the management of the property of his principal. They are, therefore, deductible under section 214(a) (1) of the Revenue Act of 1918. Cf. William W. Mead, et al., Executors, v. Commissioner, 6 B. T. A. 752.
The next question is whether the whole of this $12,571 paid in 1920 to Julius and Edwin is deductible in that year from the gross income of the estate, or only a part thereof, and, if only a part, how much. Such deduction will result in a corresponding diminution of the taxable income of Henrietta.
The surrogate’s court allowed, in 1922, this amount as compensation for the collection and disbursement of income. So much of this amount as was allowed for services rendered after 1920, can not be held to have been paid for ordinary and necessary business expenses for that year. Such excess had not been earned in 1920, and there is nothing in the will which gave the trustees the right to pay them
Julius and Edwin received $4,000 in 1919 and $12,571 in 1920, or $16,571 in all, and this was in excess of the commissions allowed them by the law of New York. This excess was allowed by the surrogate’s court, not for extraordinary services, but because the widow consented to the payment. This consent on the part of the widow was tantamount to an assignment by her of her income to Julius and Edwin. The widow can not cut down her taxable income by in effect assigning to the other trustees a part of her income, to which they would not have been entitled but for her consent.
Respondent vigorously contends that if any deduction be permitted in this respect, then the only deduction that should be allowed is that part of the commissions which Was paid on income received and disbursed in 1920. In response to this, it is pointed out that the accounts of the trustees and of the beneficiary were kept on a cash receipts and disbursements basis. Under this method of accounting, commissions can not be accrued. They can be taken into account for income-tax purposes only when in fact paid, just as the executors can be held to have received taxable income from the commissions only when they receive them. The estate was, therefore, entitled to deduct in 1920, from its gross income, so much of the $12,571 paid in that year, which, plus the $4,000 paid in 1919, represented 1 per cent of all amounts of income received and disbursed up to and including December 31, 1920.
The trustees are entitled to a deduction from the gross income of the estate in 1919, of the $4,000 paid in that year as commissions for receipt and disbursement of income since that amount was less than what was due them in that year.
Respondent did not err in refusing to permit the beneficiary, Henrietta Bendheim, to deduct from her gross income capital losses suffered by the trust and depreciation applicable to trust property. See Baltzell v. Mitchell, 3 Fed. (2d) 428; Arthur H. Fleming v. Commissioner, B. T. A. 900; and Estate of Virginia I. Stern v. Commissioner, 7 B. T. A. 853.
It is not necessary to consider the question whether certain sales of trust property, made in 1920, were or were not made on the installment Basis since the beneficiary, Henrietta Bendheim, who is the only person appealing on this question, is not taxable on the income derived from such sales.
Reviewed by the Board.
Judgment will be entered on 15 days'1 notice, v/nder Rule 50.
