Duke v. Commissioner , 38 B.T.A. 1264 ( 1938 )

ANGIER B. DUKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CORDELIA BIDDLE ROBERTSON, AS GENERAL GUARDIAN OF THE PROPERTY OF ANTHONY N. DUKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Duke v. Commissioner

Docket Nos. 79942, 79943.

United States Board of Tax Appeals

38 B.T.A. 1264; 1938 BTA LEXIS 763;

November 30, 1938, Promulgated

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The petitioners were beneficiaries of trusts under the terms of which the trustees had discretionary power to distribute or accumulate income of the trusts. The accumulated income of one of the trusts was distributed to what the trustees regarded as trusts created by the will of the decedent to receive such income, with the petitioners as beneficiaries thereof. Held, that the income not paid or credited to the petitioners as beneficiaries, but accumulated, whether within a single trust or as corpus of subsidiary trusts, does not constitute income taxable to the petitioners.

John G. Jackson, Esq., for the petitioners.

J. R. Johnston, Esq., for the respondent.

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DISNEY

These proceedings, duly consolidated for hearing and report, involve the redetermination of deficiencies in income tax for 1932, the amount in Docket No. 79942 being $33,188.22 and the amount in Docket No. 79943 being $33,451.11. The deficiency in each instance resulted in part from the inclusion in income of certain amounts as additional distributable income of trusts.

FINDINGS OF FACT.

Cordelia Biddle Robertson is the general guardian of Anthony N. Duke, a minor, and was general guardian of Angier B. Duke until November 30, 1936.

In 1924 James B. Duke, now deceased, created a trust known as the Doris Duke trust, which at the close of 1932 had 12 adult beneficiaries and 22 minor beneficiaries, including Angier B. Duke and Anthony N. Duke, hereinafter referred to as the Duke children. Petitioner Angier B. Duke became of age November 30, 1936, and thereafter was substituted for his general guardian as petitioner in Docket No. 79942.

The trustees were authorized to distribute the net amount of income of the trust to certain designated persons for specified periods, two-thirds to Doris Duke and the remainder per capita to certain persons, including Anthony N. Duke and Angier B. Duke (then Angier B. Duke, Jr.). The trust read as follows respecting the distribution of income to minor beneficiaries:

The trustees hereunder at any time and from time to time with respect to any beneficiary hereunder so long as such beneficiary shall be under twenty-one years of age (but in no event subsequent to the last day of the period of twenty-one years mentioned and described in the "FIRST" division of this Indenture), in the uncontrolled discretion of said trustees, may withhold and accumulate for such beneficiary the whole or any part of the incomes, revenues and profits of this trust which, except for such withholding and accumulation, would be paid and distributed to such beneficiary * * *. Each such accumulation, as well as the incomes, revenues and profits thereof, shall be separately kept and handled by said trustees as respects accounting, investment of funds, and otherwise, and the whole of such accumulations, incomes, revenues and profits shall be fully and finally paid, applied and distributed by said trustees as follows, namely (1) to the beneficiary from whom it was so withheld upon such beneficiary attaining the age of twenty-one years, or upon the said last day of said period of twenty-one years mentioned and described in the "FIRST" division of this Indenture, whichever of said events shall first occur, if such beneficiary shall be then living; * * * provided that the trustees hereunder in their uncontrolled discretion, at any time and from time to time before the happening of any of said events, may pay and apply the whole or any part of any such accumulation, as well as of the incomes, revenues and profits thereof, to and for the support, education and maintenance of the beneficiary from whom the same may have been withheld, in which event said full and final payment and distribution under the foregoing provisions of this division of this Indenture shall be only of what may remain thereof at the time of the making of such full and final payment and distribution. * * *

The corpus of the trust was entered in an account entitled "Corpus of Trust." The income of the trust, allocable to but not paid out for the account of each of the Duke children, was paid into what the trustees characterized as trusts separate from the general trust. The accounts kept by the trustees for the so-called separate trusts consisted of an income account in which entries were made for income from the general trust, earnings of the fund, payments made for the account of the Duke children, and administration costs, and an account for securities in which accumulated income was invested. Separate bank accounts, as well as safe-keeping accounts for securities, were also maintained for each of the so-called trusts for the benefit of the Duke children. These accounts were under the exclusive control of the trustees, and neither the Duke children nor their general guardian had power to withdraw any of the securities or funds. The trustee regarded credits to the income accounts kept for the Duke children's share of the income of the general trust as amounts distributed to the Duke children, and as representing the corpus of trusts separate from the general trust. The distributions were made by a transfer of cash from the general trust to the socalled separate trusts.

In January 1927 the general guardian requested that the portion of the income of the general trust allocable to the Duke children be distributed to her for their support. The trustees responded by distributing to her in 1927 the sum of $2,500 for the account of each beneficiary. In 1928 the guardian requested the distribution of $2,500 for the account of each child for the same purpose and the request was granted. In each case the amount paid was less than the income of the trust allocable to the interest of each child. No similar requests were made thereafter by the general guardian and no distribution of income of the trust was made to her.

In 1932 the amount of income of the general trust allocable to each of the Duke children was $7,003.23, no part of which was paid to them or to their general guardian. The amount was credited to the income accounts kept by the trustee for the Duke children. The amount of income distributable to the beneficiaries of age in 1932 was paid to them after the books of the trust were audited at the end of the year.

The will of Angier B. Duke, Sr., who died in 1923, bequeathed one-fourth in value of his residuary estate to the Farmers Loan & Trust Co., New York City, in trust for the benefit of his son, Angier B. Duke, Jr., and a like share to the same trustee for the benefit of his son, Anthony N. Duke. The decedent directed that the trustee collect and pay over the income of the trust as follows:

* * * Said Trustee shall collect and receive the income, revenues and profits thereof, and shall pay, apply and distribute the same to and for the support, education and maintenance of my son, ANGIER B. DUKE, JR., so long as he shall live, and after his death per capita in equal portions for the support, education and maintenance of his lineal descendants so long as this Trust may thereafter continue. Such payments, applications and distributions during the minority of my said son, ANGIER B. DUKE, JR., shall be in such amounts and at such times as in the uncontrolled discretion of said Trustee may be by it deemed necessary and advantageous for such purposes, it being my intention that the Trustee may, in its discretion, withhold from my said son, ANGIER B. DUKE, JR., during his minority the whole or any part of such income, revenues and profits, and accumulate the same for his benefit. Upon my said son attaining his majority all said accumulations shall be at once paid to him. In case my said son dies before attaining his majority all such accumulations shall become a part of his estate and shall be paid, applied and distributed accordingly. * * * Like provision was made for the disposition of income of the trust created for the benefit of Anthony N. Duke. Provision was made for distribution of income and corpus in the event of death of one or both of the beneficiaries.

The corpus of each trust was received by the trustee in 1926. The trustee set up and maintained accounts for each trust. One account, known as the principal account, contained entries for cash received and disbursed affecting the corpus of the trust, and another, known as an income account, contained entries for cash receipts and disbursements of income. The income collected for 1932 was credited to the income account. Income not distributed or used for the payment of current expenses was invested in securities and held by the trustee for distribution to the beneficiaries when they should become of age. The securities purchased with accumulated income were recorded in the account maintained for each trust as income investments. In 1932 the income and disbursements of each trust were:

	Anthony N. Duke	Angier B. Duke, Jr.
Gross income:
Principal account	$137,621.71	$135,924.29
Income investments	54,072.55	55,082.28
Payments:
Maintenance and support	10,000.00	10,000.00
Taxes	23,031.96	23,074.38
Trustee's commissions	2,774.91	2,737.70

The distributions made for maintenance and support of the beneficiaries were made to the general guardian of the beneficiaries pursuant to the discretionary powers granted the trustee under provisions of the decedent's will. The accumulated income and investments made therefrom were under the exclusive control of the trustee and were not available to the beneficiaries or their guardian.

OPINION.

DISNEY: In his determination of the deficiencies the respondent included in gross income of the petitioners amounts accumulated by the trustees for the account of the Duke children on the ground that they constituted taxable income under the provisions of article 862 of Regulations 77.

Article 862 of Regulations 77 relates to section 162 of the Revenue Act of 1932, which provides in subsection (c) that:

In the case 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 deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

The respondent filed no brief and his position respecting the Angier B. Duke, Sr., trusts is not clear. The amount of $10,000 paid by the trustee of the Angier B. Duke, Sr., trusts to the general guardian of each beneficiary was reported as income in returns filed by the general guardian, and no contention is being made that additional income of the Angier B. Duke, Sr., trusts was paid to the Duke children or to their general guardian, or that undistributed income was paid or credited to subsidiary trusts. The respondent treats the accumulated income as part of the trusts created for each child by the will of the decedent. Was the income not paid over properly credited during 1932 to the petitioners within the meaning of the act? If so, it is includable in their taxable income.

In , the court said:

* * * Such distributions [of income received during the course of administration], and distributions at the discretion of the fiduciary, must be actually made, or irrevocably fixed, before they become the beneficiary's as of right. They should appear in the fiduciary's return, if they are still his; in the beneficiary's, only in case he has become presently entitled to them, or received them.

This serves to determine what is meant by the word, "credited," the alternative to "paid," though we can find no authority on the point. The income must be so definitively allocated to the legatee as to be beyond recall; "credit" for practical purposes is the equivalent of "payment." Therefore, a mere entry on the books of the fiduciary will not serve unless made in such circumstances that it cannot be recalled. * * *

This interpretation was concurred in by the court in ; certiorari denied, , in which it was said that:

* * * The phrase "paid or credited" is used in opposition to the term "accumulated"; so that, the amount which is set aside for and made available to the beneficiary, either by actual payment or by credit, may be deducted, but the amount retained or accumulated forms part of the taxable income of the trust.

"The test of taxability to the beneficiary is not receipt of income, but the present right to receive it." .

In the case of each of the Angier B. Duke, Sr., trusts the trustee at all times important had discretionary power to distribute or accumulate income allocable to the interests of the Duke children. Acting under this discretionary power it withheld all of the income of each trust except $10,000, which was paid to the general guardian. The crediting of the accumulated amounts to accounts kept for the beneficiaries was not equivalent to payment, for it did not make the income available or in any sense subject to the demand of the Duke children or their general guardian prior to the time the Duke children reached 21 years of age, and that event did not occur in or prior to the taxable year. It is clear that under the prevailing rule the petitioners did not receive distributions of income from the Angier B. Duke, Sr., trusts other than the amounts paid and reported as income. We therefore hold that respondent erred in including more than said amounts in income of these petitioners.

The trustees of the Doris Duke trust regarded the income which was withheld from the Duke children but credited to their income accounts as payment to trusts separate from the general trust or, in other words, they treated the amounts as distributions of income to subsidiary trusts as beneficiaries of the general trust. Checks were issued in connection with the distributions. The Commissioner has taxed the income, together with amounts withheld in like manner from other beneficiaries, to the general trust on the ground that the decedent's will did not create more than one trust. It does not appear whether the trustee, as trustee of the subsidiary trusts, returned the amounts as income received from the general trust, or whether the respondent has determined deficiencies against the so-called subsidiary trusts on the ground that they received income as beneficiaries of the general trust. The respondent's theory, as announced at the hearing, is that the accumulated income was credited to the petitioners, no contention being made that amounts were paid to them or for their account.

The intention of the statute is to tax the entire net income of the trust. None of the income of the Doris B. Duke trust during the taxable year was paid directly to the Duke children or to their general guardian. It is unnecessary to decide in these proceedings whether the will of James B. Duke created one trust or, in addition to a general trust, subsidiary trusts for accumulated income of the main trust. If but one trust was created the amount accumulated for each of the Duke children would fall within the same classification as the accumulated income of the Angier B. Duke, Sr., trusts, on which we have already hereinabove reached a conclusion. If the will of the decedent created subsidiary trusts to receive by way of payment or credit, as in , income of the general trust not distributed directly to the Duke children, the amount paid or credited would be deductible by the general trust and constitute income taxable to the separate trusts as beneficiaries of the general trust. As beneficiaries of trusts receiving income of the general trust there would be no crediting of income to them in the absence of a right of election on their part or that of their guardian to receive it from the trustees of the subsidiary trusts. Such a right did not exist. Neither of the Duke children nor their guardian was entitled to receive any part of the accumulated income of the general trust until the Duke children reached their majority, and in the meantime the fund was to be kept under the exclusive control of the trustees, whether as the fiduciary of a single trust or of subsidiary trusts. We hold that the income was not paid or credited to petitioners.

It was error for the respondent to include the amounts in question in the taxable income of the petitioners.

Decision will be entered under Rule 50.