First Nat'l Bank v. Commissioner , 39 B.T.A. 828 ( 1939 )

THE FIRST NATIONAL BANK OF PORTLAND, A CORPORATION, EXECUTOR, ESTATE OF L. B. STEARNS, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

First Nat'l Bank v. Commissioner

Docket No. 92288.

United States Board of Tax Appeals

39 B.T.A. 828; 1939 BTA LEXIS 972;

April 25, 1939, Promulgated

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An individual taxpayer, who was both the trustee and a life beneficiary of the residuary income of a trust set up under his wife's will, shortly after her death on October 8, 1933, orally disclaimed his beneficial interest and made no distribution of the income from the trust to himself as beneficiary. On May 6, 1936, he confirmed his renunciation by executing a written disclaimer of all past, present, and future rights, and on September 6, 1936, a state court, in a proceeding brought by a successor trustee, made an explicit finding that the taxpayer had validly disclaimed all rights to income from the estate. Held, the trust income was not taxable as amounts distributable to the taxpayer under section 162 of the Revenue Act of 1934.

Earl S. Nelson, Esq., for the petitioner.

John H. Pigg, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined deficiencies in decedent's income tax of $1,169.91 for 1934, $1,767.80 for 1935, and $184.37 for 1936. He included in decedent's gross income amounts held to have been distributable to decedent from the income of a trust.

FINDINGS OF FACT.

Petitioner, a national banking corporation with principal office at Portland, Oregon, is executor of the estate of L. B. Stearns, who died on June 2, 1936. Mary F. Stearns, his wife, died October 8, 1933. By the terms of the wife's will, under which Stearns was executor, the residue of her estate was devised and bequeathed to him as trustee to pay out of the income $300 a month to the wife's daughter by a former marriage, $300 a month to each of the daughter's two children, and:

(c) to pay all of the balance of said net income from said trust estate to my said husband, Loyal B. Stearns, for his own use and benefit, during the period of his natural life.

The probate court's final order closing the wife's estate was entered September 11, 1935, and Stearns thereafter acted as trustee under the will until his death.

Shortly after his wife's death, Stearns consulted officers of the First National Bank about her estate, and about the trust income payable to him. He said to them at that time that he did not intend to accept any of such income. As executor and trustee he did not pay any part of it to himself individually, and in his individual capacity he did not receive any of the income from the trust. On May 6, 1936, he executed the following

KNOW ALL MEN BY THESE PRESENTS: that I, Loyal B. Stearns, now residing at 822 S. W. King Avenue, Portland, Oregon :in my individual capacity and not as trustee) by these presents do hereby disclaim, disavow, and renunciate all past, present, and future rights, titles, or interests accruing to me in and to the estate of my late wife, Mary F. Stearns, deceased, or any part thereof, either by way of curtesy or as legatee under her will; and I further waive any and all claims that I might have for compensation for services rendered as executor and trustee of said estate.

He executed this instrument on advice of and before the bank's officer, who recommended execution of the instrument because of Stearn's failing health and the bank's prospective administration of the trust.

On September 30, 1936, in a proceeding in the Circuit Court of Oregon for the County of Multnomah, entitled The First National Bank of Portlandv. Mary Helen Clair et al., the court, after reciting the default of the defendants, entered findings of fact and conclusions of law. The following were among the findings:

XI. That the said Loyal B. Stearns at no time subsequent to the death of Mary F. Stearns claimed any right, title or interest in or to any income derived from the estate of the said Mary F. Stearns held by him as Trustee and did not at any time in his individual capacity or for his individual use and benefit attempt to collect or receive any portion of the income from the estate of Mary F. Stearns or any part thereof.

XII. That by an instrument and disclaimer dated the 6th day of May, 1936 and duly and regularly executed by him and delivered to the plaintiff, which said instrument is as follows: £the instrument has been quoted above] the said Loyal B. Stearns disclaimed, disavowed and renunciated all past, present and future rights, titles or interests accruing to him in and to the estate of the said Mary F. Stearns, deceased, and the said Loyal B. Stearns in his individual capacity never accepted or received any of the income derived from the estate of the said Mary F. Stearns, deceased, nor did the said Loyal B. Stearns have any intention at any time of accepting any of the income of said estate or benefiting by the provisions of the said Will of the said Mary F. Stearns, deceased.

The following was among the conclusions of law:

2. That the said Loyal B. Stearns, deceased, at no time prior to his death nor at the time of his death, nor at any time since his death has his estate acquired any right, title, claim or interest in or to any of the income derived from the estate of the said Mary F. Stearns, deceased and particularly in the said sum of $6,462.80, and that said sum, subject to necessary and proper deductions, should be disbursed by the plaintiff in its capacity as trustee of the estate of Mary F. Stearns, deceased, to the persons entitled thereto;

The court entered its decree, declaring plaintiff to be the trustee of the Mary F. Stearns trust, and:

* * * that the said Loyal B. Stearns never accepted or received in his individual capacity any of the income derived from the estate of the said Mary F. Stearns, deceased, and that at the time of his death he had no right, claim, title or interest in any portion of the income of and from the trust estate of the said Mary F. Stearns, deceased, and that the said Loyal B. Stearns, by a valid and legal instrument in writing, disclaimed, disavowed and renunciated all rights, titles or interests in or to the estate and/or income from the estate of Mary F. Stearns, deceased; * * *

In determining the deficiency, the Commissioner added the following amounts to Stearns' income as $5,837.68; 1935, $8,528.30; and 1936, $3,733.89.

OPINION.

STERNHAGEN: The Commissioner determined the deficiency for each of the three calendar years 1934, 1935, and 1936, by adding to Stearns' individual income the amounts set forth in the findings, which he called as follows:

The contention that L. B. Stearns never accepted or received in his individual capacity any income derived from the estate of Mary F. Stearns, deceased, has been denied.

It is noted you state that to constitute constructive receipt be credited or set apart to the taxpayer without any substantial limitation.

Under the provisions of article 162-1(2) of Regulations 86, it is stated:

"Any income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to a beneficiary, whether or not such income is actually distributed.

The disclaimer executed by L. B. Stearns was not filed until May 6, 1936. The agent is sustained in holding that the residuary income from the fiduciary is taxable income to L. B. Stearns.

The determination is thus based squarely upon section 162 of the Revenue Act of 1934, and upon the postulate that the trust income above $900 a month was to the beneficiary. became effective before the three taxable years in question, and hence that the trust income was not The Commissioner, however, answers that the only cognizable disclaimer is found in the written instrument of May 6, 1936; that until that instrument was executed Stearns was entitled to the distribution according to the will, and that being so entitled he is taxable thereon irrespective of whether he chose as a beneficiary not to receive and as a trustee not to distribute. Thus the question is narrowed to whether there was an effective disclaimer prior to the execution of the written instrument of May 6, 1936.

A beneficial interest under a trust may be disclaimed, Restatement of the Law of Trusts, section 36(c), and the disclaimer may be expressed in writing, orally, or by conduct, so long as it is unequivocal, Blake v. Blake,147 Oreg. 43; 31 Pac.:2d) 768. Furthermore, it may operate retroactively so as to obliterate ab initio the rights which it disclaims, Lehr v. Switzer, 213 Lowa, 658; 239 N.W. 564">239 N.W. 564. While a disclaimer is not lightly to be recognized, Chilcoat v. Reid,140 Atl. 100 :Maryland 1928), recognition of it may not be withheld when the evidence is clear, consistent, and undisputed. If there be any wavering by the beneficiary, and if the renunciation be not clear and definitive, he must accept the burdens of the trust which are incident to the benefits it bestows upon him.

By the evidence in the present case it appears that, shortly after his wife's death in 1933, Stearns clearly told two officers of the bank that he intended to take none of the income which was provided for him under the will. One testified:

From the beginning Judge Stearns told me in very certain terms that he never would take any part of the income that was coming to him £ under the will], didn't intend to, he had enough of his own, he wanted no part of her property whatever.

Q. Did he say that to you more than once?

A. Yes, I wouldn't undertake to say how many times, but many times.

The other testified:

Q. Did Loyal B. Stearns make any statement to you will regard to that particular provision of the will which I have just mentioned and the income thereunder?

A. Yes.

Q. What did he say with reference to accepting any income which might have been available, or might at some time be available under the provisions of this will of Mary F. Stearns, the particular provision I have just mentioned to you?

A. He stated that he would accept none of it.

Q. Did he make this statement to you on more than one occasion?

A. Yes.

Stearns in fact took none of the income from the trust, and, acting as the fiduciary, he made no distribution thereof to himself as beneficiary. This was the state of affairs throughout the taxable period, and unless we are to be unwarrantably skeptical, it indicates that by words and conduct there was a disclaimer. Later, on May 6, 1936, Stearns confirmed his renunciation by the written instrument whereby he disclaimed not only his present and future rights but also or done anything in the slightest degree at variance with this renunciation and never having received any of the trust income. Thereafter the successor trustee sought from the state court a decree as to its powers and rights under the trust, and the court, on September 30, 1936, in explicit findings, conclusions, and decree, held that the plaintiff was entitled to administer the trust, the corpus of which then included the accumulated income which under the will might, but for the disclaimer, have gone to Stearns, and that Stearns had no right thereto and had validly disclaimed all rights to income from the estate. While the decree was entered after default of the defendants, this does not derogate from its authority. It must receive here unstinted respect, Freuler v. Helvering,291 U.S. 35">291 U.S. 35; Blair v. Commissioner,300 U.S. 5">300 U.S. 5.

The Commissioner argues that until the written disclaimer of May 6, 1936, Stearns had the election between acceptance and disclaimer under the trust, and therefore during this period of election the income must be regarded as distributable to him. This view, however, does not accord adequate weight to the evidence of oral disclaimer operative from the beginning, nor does it give due respect to the decree of the state court. Obviously Stearns could have avoided all doubt by executing the formal written disclaimer at once, and his omission to do so involved the risk of failure of evidence to establish the disclaimer. But such credible evidence as there is may not be disregarded or given less than full weight, since it is uncontradicted.

In view of the disclaimer, it must be concluded that Stearns in 1934, 1935, and 1936 had no right to receive the trust income which the Commissioner has attributed to him, cf. Freuler v. Helvering, supra, and that it can not correctly be described in the language of the statute as income of the trust which was to be distributed to him currently. He was no more the beneficiary after the effective disclaimer than he would have been after an assignment. Cf. Blair v. Commissioner, supra.

Strangely neither party has introduced or made reference to the returns of the fiduciary which under the statute are necessarily correlative with those of the income beneficiary - the beneficiary must return the distributable income which the fiduciary may deduct, Helvering v. Butterworth,290 U.S. 365">290 U.S. 365; Commissioner v. Dean, 102 Fed.:2d) 699; Old Colony Trust Co. et al., Executors,38 B.T.A. 828">38 B.T.A. 828. But since Stearns as beneficiary did not include any trust income in his individual returns, it may properly be assumed that as trustee he consistently included such income in his fiduciary returns without deduction, or else that, in view of the prima facie case which petitioner has made, the respondent would have gone forward and produced the inconsistent fiduciary returns which had been filed and which presumably were available to the Government.

The determination is reversed.

Reviewed by the Board.

Decision will be entered under Rule 50.

BLACK

BLACK, dissenting: In my opinion, the only effective disclaimer executed by the taxpayer was the one which he executed in writing on May 6, 1936. Moreover, I think such is the effect of the holding of the Circuit Court of Oregon for the County of Multnomah in the proceeding entitled The First National Bank of Portlandv. Mary Helen Clair et al.

The court in its decree, following certain findings of fact and conclusions of law, entered September 30, 1936, refers to only one disclaimer and that was the one which petitioner executed May 6, 1936. The court, speaking of this disclaimer, said: Loyal B. Stearns, by a valid and legal instrument in writing, disclaimed, disowned and renunciated all rights, titles, or interests in or to the estate and/or income from the estate of Mary F. Stearns, deceased.

It may well be that this disclaimer of May 6, 1936, which was unquestionably valid, divested petitioner of all interest in the income of the estate both retroactively and prospectively, as between the parties interested in the income under the will of Mary F. Stearns. The disclaimer could not have any effect, however, on petitioner's income tax liability for 1934 and 1935. The income tax liability of petitioner in those two years was fixed by rights and liabilities which existed in those two years and not by what took place in 1936.

The scheme of the income tax law is to levy income taxes on an annual basis. That proposition is so well established that no citation of authorities on that point seems necessary.

The majority opinion, speaking of the effect of a disclaimer, says: ab initio the rights which it disclaims. already stated, that is doubtless true as between the parties, but not as to income tax liability.

For the reasons stated, I respectfully dissent from the majority opinion.

SMITH, MURDOCK, ARNOLD, and DISNEY agree with this dissent.