129 F.2d 148 | 3rd Cir. | 1942
The taxpayer is the sole beneficiary of a trust hereinafter referred to as the Buildings Trust created by Section 6
In 1920 the first year of the operation of the said Buildings Trust, in addition to paying the local real estate taxes on the two buildings in question for that year, the trustee withheld from distribution and set aside in a separate bank account, hereinafter known as Account No. 2, the Reserve for Taxes Account, funds out of the 1920 income of the trust for the purpose of paying the real estate taxes on the buildings for the following year 1921. In 1921 and in each subsequent year, including those involved here (1930 to 1933 inclusive), the trustee used a part or all of the money in this reserve fund for the payment of real estate taxes on the said buildings and re
Assuming the soundness of the Pennsylvania cases so cited, the most that ■can be said of them is that the trustee is given the right or discretion to withhold temporarily from distribution a sufficient amount of income to meet expenses falling due early in the following year. The statute here in question, Revenue Acts of 1928 and 1932, Sec. 161(a)(1), 26 U.S.C.A. Int. Rev.Code § 161(a)(1),
“An accumulation is an addition of income to the capital of the trust so that when it is disbursed, it will be paid out as a part of the corpus and not as current revenue. IF THE TRUSTEE SETS APART SOME INCOME AS A CONTINGENT FUND TO MEET FUTURE DEFICIENCIES IN INCOME OR FUTURE TRUST DEBTS, THERE IS A TEMPORARY WITHHOLDING OF THE INCOME SO TREATED, BUT THERE IS NOT AN ACCUMULATION. The sum set apart has not, and never will become a part of the capital sum” (Capitals our own).
The city and school taxes in Pittsburgh are payable in quarterly installments, the last payment of which is made in October and the County taxes are payable as early as May 31st, and accordingly the income withheld by the trustee from the preceding year was not therefore payable in January of the following year. As a matter of fact as the Government contends, since the trustee’s income was well over a million
There is likewise no merit in the contention of the trustee that it had to withhold the money for its own protection lest it become personally liable for taxes in the event of the death of the beneficiary, or the expiration of the trust before the taxes were paid, since the registered owner of the trust property was the “Union Trust Company, Trustee for Helen C. Frick”, not the Union Trust Company. Accordingly, only trust assets would be subject to the payment of taxes and not the assets of the trustee.
Since it is well settled that the question of whether trust income is distributable or not depends upon the trust instrument, Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634; Baltzell v. Mitchell, 1 Cir., 3 F.2d 428, and since no provision was made in the trust instrument in the instant case, giving the trustee discretion to accumulate earning, but rather on the contrary the instrument shows clearly that the testator, Henry C. Frick, intended the entire net income of the Buildings Trust to be distributed to the taxpayer, we hold there was error in the inter-” pretation by the lower court that the trust instrument gave the trustee discretion to accumulate income within the meaning of the applicable Revenue Statutes.
Even if we are to assume that under the Pennsylvania law the trust instrument by some construction did give the trustee discretion to accumulate income, it is submitted that the position of the lower court is nevertheless erroneous, because an analysis of the stipulations and exhibits offered, demonstrates that the taxpayer not alone received distributions equal to the amount of the total of the net income of the trust, but that the amounts so received were current income.
It was stipulated that all of the current income of the Buildings Trust Fund was paid into the current Rent Account, Account No. 1, and from this account was transferred (1) cash distribution to the taxpayer; (2) transfers to Account No. 2, “Reserve for Taxes Account”; (3) transfers to Account No. 3, the “Reserve for Elevators Account”; and (4) transfers to Account No. 4, the “Working Fund Account”, from which all expenses, excepting real estate taxes, were paid.
Keeping in mind this method of handling current income from the Buildings Trust Fund and taking the year 1932 as an illustration (all the other years here in question are the same, except a difference in the amount of the figures), it is quite obvious that the taxpayer received all of the current income for that year. At the beginning of the year the net income of the Buildings Trust for the year 1932, after deduction for real estate taxes paid in that year, was $519,566.72; this amount did not include a balance on hand in Rents Account, No. 1, as of January 1, 1932, which amounted to $117,922.86, for as stipulated this was distributed in cash in February 1932 to the taxpayer and accordingly cannot be considered since it represents income received in the year 1931. As set forth in Defendant’s Exhibit 7, total cash distributions to the taxpayer out of the Rent Account, not including the $117,922.86 heretofore referred to, amounted to $400,-000.00; it was further stipulated that the income on securities held in Account No. 3, Reserve for Elevators, in the amount of $7,564.82, was distributed to the taxpayer, and also the balance in Account No. 1, being the Rent Account and No. 4, the Working Fund Account, less accounts payable, or $67,812.92; it was further stipulated that transfers to Account No. 3 amounting to $60,000.00 were to be treated as distributed to her; the addition of which amounts shows that the total actual distribution to the taxpayer or conceded to be distributed to her, was $535,377.74, which is $15,811.02 in excess of $519,566.72 the total stipulated net income of the Buildings Trust for the year 1932. Taking into account certain adjustments as shown on Defendant’s Exhibit 7, the details of which need not be here gone into, we find the net amount distributed to petitioner to be $519,566.72, which is the stipulated net income both taxable and nontaxable of the Buildings Trust for the year 1932 after the deduction for real estate taxes. It will be noted in the computation as set forth by the Government in Exhibit 7, no amounts actually paid out for real estate taxes, nor the amounts transferred to, or held in Account No. 2, Reserve for Taxes Account, were included in the amounts distributed or distributable to the taxpayer.
The taxpayer relied mainly for the contention she makes, on three cases before the Board of Tax Appeals and one by the Circuit Court of Appeals of the Fifth Circuit, which we feel are in no wise analogous to the case at issue and we shall consider each one separately.
In the case of John D. Rogers, Trustee of the Estate of John D. Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent, 16 B.T.A. 368, the Testator left a plantation in trust to be operated for the benefit of, and the income therefrom, to be distributed among, several persons, with the mandatory duty on the trustee that “the trustee shall retain out of proceeds of each year’s crop sufficient to operate plantation the following year”. In two years funds were withheld by the trustee from the operating receipts of the plantation to defray the expenses of the following year’s operation, to wit: in 1923, $7,060.13 was withheld and in 1924, $16,647.50 was also withheld. The Board held that both of these amounts in full were taxable to the trustee and therefore not taxable to the beneficiaries. Without in anywise passing judgment on the soundness of the Board’s position in the Rogers case, there is a distinct factual difference from the instant case, in that there is a positive direction to the trustee to retain funds necessary for the purposes indicated. In the instant case, the plain duty of the trustee was to distribute the income in accordance with the provisions of Section 6 of the testator’s will.
Another case, Jack M. Franks v. Commissioner of Internal Revenue, 32 B.T.A. 260, the petitioner a resident of Chicago, Illinois, was the beneficiary under a trust created by his father in April 1928. Under the terms of the will a trust agreement entered into by three beneficiaries named in the will and the Chicago Title and Trust Company as trustee, the petitioner was entitled to receive a portion of the net income of the trust. The will authorized the four trustees named therein “to determine the mode in which expenses are to be borne as between capital and income * * * to pay off any and all encumbrances against the trust estate * * * as the same mature if, in the judgment of the trustees, it is advisable so to do”, (2) “incur and make whatever expenses and outlay they may deem necessary, prudent or expedient for the proper administration of their respective trusts” and “to pay'any taxes”. In the year 1929 the trustees set aside out
In Central Hanover Bank & Trust Company and Chauncey Ford Warner, Co.-Executors, Estate of Horace H. Work, Deceased, Petitioner, v. Commissioner of Internal Revenue, 34 B.T.A. 741, the income of two trusts of which the deceased was a beneficiary had been collected by the trustees between January 1 and March 9, 1933, but had not been paid over to the decedent at the time of his death on March 9th and were held by the trustees to meet anticipated taxes and other expenses payable by the trustees under the trust instrument. The Board here held that the amount in the hands of the trustees was not taxable to the decedent as income to be distributed currently. This like the Franks case, supra, was the withholding from current income by the trustees for the purpose of paying taxes which were then due for the taxable period involved, but could not be paid either because they were not known or they had not as yet been obtained. In addition under the trust instrument in each case the beneficiary was entitled to distribution of net income only after payment of all taxes. It is agreed these amounts withheld were not distributable and therefore not taxable to the beneficiary.
In the case of McCrory v. Commissioner, 5 Cir., 69 F.2d 688, the court was concerned with the right and duty of the trustee to withhold and set aside out of net income of one year an estimated amount to pay gift and income taxes, payable on March 15th of the following year. However, in this case the trustee was under an express direction in the trust instrument to withhold from distribution enough money to pay Federal and State taxes due on the estate of the decedent, whose will created the trust. In addition to being made expressly a charge against the income of the trust, they were due during the year in question, but the amount could not be determined until a later'date. So it was held that the amount withheld by the trustee for the payment of the estate taxes was not distributable to the beneficiary and therefore not taxable to it.
In all of these cases the beneficiaries were not entitled' to receive income which the trustee withheld to pay taxes which were then due and a charge against the income of the trust for that year; further the withholding in each of the cases as well as the payment of the obligations was not a recurring one as in our case, and in addition in each of them it was stipulated and proved as a fact that the trustees withheld income whereas as has been shown here the income was not withheld but actually distributed currently to the beneficiary.
The next question raised by the appellant is whether the amount of income tax paid by the trustee which should have been paid by the beneficiary of the trust is to be deducted in computing the amount of income distributed to the beneficiary in the year that the income taxes were paid.
It is felt that the determination of the issues heretofore discussed are decisive of this question, since it has been held that the entire income of the trust was
The third question raised by the appellant is whether the sum of $22,500.00 paid in the year 1931 by the trustee of the Buildings Trust as attorney’s fees for services rendered from 1920 to 1928 is deductible as an ordinary and necessary business expense of the trust in computing its net income within the meaning of Section 23(a) of the Revenue Acts of 1928 and 1932, 26 U.S.C.A. Int.Rev.Code § 23(a) (1), and in the event it is not, is the amount paid by the trustee for the attorney fees taxable to the beneficiary? The statute governing deductions for business expenses, Revenue Acts of 1928, 1932 Section 23(a), provides as follows: “In computing net income there shall be allowed as deductions: (a) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business', including a reasonable allowance for salaries or other compensation for personal services actually rendered.” Here it seems obvious that the attorney’s fee was not an ordinary and necessary expense of the trust as the fees paid were in aid of the beneficiary and not of the business of the trust. Dorr v. United States, D.C., 18 F.Supp. 92. This position is further strengthened by the bill rendered since it bears on its face in the taxpayer’s own handwriting the notation, “O.K.”, signed Helen C. Frick, which certainly is indicative that she considered this her own expense, and it therefore follows that the amount of attorney’s •fee, paid to the counsel for the trustee, may not be deducted by her in computing her own net income.
The last question for disposition is whether the entire cost for repairing obsolete elevators in the buildings here in question and paid for out of the funds of the Endowment Trust should be allowed to the trustee and the taxpayer.
As heretofore related Section 7 of the testator’s will created an Endowment Trust, income and capital of which was to be used for extraordinary repairs, replacements, etc. The amount in controversy (the unrecoverad cost) by stipulation covered eight elevators replaced in the year 1931 amounted to $74,668.84 and three elevators in 1932 amounting to $27,063.03. The court below pro-rated the deduction between the taxpayer and the Trustee on the amount of the trust income the court held was taxable to each.
The government contends that no deductions were properly allowable to either the taxpayer or the trustee for the reason that there was no loss to either as provided in the Revenue Acts of 1928 and 1932 Section 23 (k), 26 U.S.C.A. Int.Rev. Code § 23 (Z)
The judgment of the District Court is reversed and the cause remanded for further proceedings not inconsistent with this opinion.
Section 7: I give and bequeath unto The Union Trust Company of Pittsburgh, of the City of Pittsburgh, Pennsylvania, as Trustee, the sum of One Million Dollars, in Trust, to hold the same during the life of my said daughter Helen C. Frick, and to invest and reinvest the same, and to collect and receive the income thereof, and after paying the expenses of the trust, including a reasonable compensation to said trustee, from time to time to apply said income, or if in the judgment of the said trustee it shall be necessary so to do, any part of the capital of the said trust fund, to the making of extraordinary repairs, restorations, replacements, betterments, additions and improvements in and to the said Frick Building and the Frick Building Annex and their equipment, and to pay and apply the residue of said income not used for those purposes in each and every year to the use of my said daughter Helen O. Frick during her life.
“§ 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 — * * *
“(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;
“(c) In the ease of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income-which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the-estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary,, but the amount so allowed as a deduc—
Section 161 (a) (1): “(1) Income accumulated in trust for the benefit of unbora or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; ‘Jfi $ ^ ))
Section 162(c): “ * * * in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the * * * trust the amount of the income of the * * * trust for its taxable year, which is properly paid or credited during such year to any * * * beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the * * * beneficiary.”
See. 23(k): “Depreciation. A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In tbe case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of tbe property and shall be allowed to tbe life tenant. In tbe ease of property held in trust tbe allowable deduction shall be apportioned between tbe income beneficiaries and the trustee in accordance with the pertinent provisions of tbe instrument creating tbe trust, or, in tbe absence of such provisions, on the basis of tbe trust income allocable to each.”