Harrison v. Commissioner , 41 B.T.A. 1217 ( 1940 )

LUCILE BRIAN HARRISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Harrison v. Commissioner

Docket No. 90919.

United States Board of Tax Appeals

41 B.T.A. 1217; 1940 BTA LEXIS 1086;

May 22, 1940, Promulgated

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">*1086 Petitioner was one of the beneficiaries of a testamentary trust for $300,000, which her deceased husband's will directed should be set up. Under the laws of the State of Illinois she was also decedent's sole heir and, being dissatisfied with provisions made for her in the will, she threatened to stand on her rights as decedent's sole heir. A compromise agreement was effected between petitioner and the residuary legatee by which petitioner was paid $100,000 in cash in addition to provisions made for her under the will, and also was paid $21,041.41 denominated as interest at the rate of 6 percent per annum on the $300,000 specified to go into the testamentary trust, from the date of the death of her husband to the date it was paid her in 1931, after taking into consideration certain payments made to another heneficiary of the trust. Held, the $21,041.41 was paid in lieu of income from the testamentary trust and under the doctrine of Irwin v. Gavit,268 U.S. 161">268 U.S. 161, it is taxable income to petitioner. Chase National Bank of the City of New York et al., Executors,40 B.T.A. 44">40 B.T.A. 44, distinguished.

John O. Snook, Esq., for the petitioner.

">*1087 Alvin B. Peterson, Esq., for the respondent.

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BLACK

">*1218 The Commissioner has determined a deficiency in petitioner's income tax liability for the year 1931 of $20,806.71. The deficiency results from the addition of $100,000, by the respondent to petitioner's income for the year 1931.

The petitioner not only assigns error as to the inclusion by the Commissioner of this $100,000 in question, but also alleges that petitioner erroneously paid taxes on $21,041.41 paid to her in 1931, which $21,041.41, as well as the $100,000, was paid to her by reason of the fact that she was the sole heir of John H. Harrison, deceased, and that under the Supreme Court's decision in , none of said amounts was taxable income to her.

Petitioner not only claims that there is no deficiency, but that she has overpaid her tax to the extent of $980.85, and that such overpayment was made within two years before the filing of a valid claim for refund. The Commissioner now concedes that he erred in adding the $100,000 to petitioner's income and, therefore, there is no deficiency. He contends, however, that the $21,041.41 in question">*1088 was correctly taxed to petitioner as income for 1931, and that there is no overpayment.

FINDINGS OF FACT.

The facts have all been stipulated, and we adopt the stipulation together with the exhibits attached thereto as our findings of fact. We state herein such of the facts as we deem necessary to an understanding of the issue to be decided, as follows:

The petitioner is an individual, whose address is Evanston, Illinois.

John H. Harrison and petitioner were married on June 23, 1928.

On June 22, 1928, immediately prior to their marriage, petitioner and her husband entered into a prenuptial agreement, which contained among other things the following provision:

That said John H. Harrison undertakes and agrees that he will duly and legally make and execute, and thereafter during his entire life keep in force and effect, his will which will provide, among other things, that property of his having a value of not less than Two Hundred Fifty Thousand Dollars ">*1219 ($250,000.00) shall be set aside in trust for and during the natural life of said Lucile Brian Gilmore, and of which said property so placed in trust, she shall receive after his death and for and during her">*1089 natural life, the entire income thereof for her own use and benefit. The principal of said property to be disposed of by said will at the death of said Lucile Brian Gilmore in such manner as said John H. Harrison shall by said will provide.

John H. Harrison died testate on March 2, 1930, leaving a last will and testament, which has been duly probated in the Probate Court of Vermilion County, Illinois. Among other things, this will contained the following provision:

x. It is my will that my Executors, as soon as may be convenient, shall turn over money and/or securities, in their hands, resulting from the sale of my property, having a value of Three Hundred Thousand Dollars ($300,000.00), to Chicago Trust Company of Chicago, Illinois, as Trustee, to have and to hold the same in trust, upon the following uses, purposes and trusts, viz:

* * *

INCOME. After paying the necessary expenses of administering this trust, and of caring for, maintaining, conserving, and defending the trust fund, including taxes and compensation of Trustee, the net income arising from the property in the hands of Trustee shall inure to and be held by Trustee, and be by it paid out and distributed to">*1090 the persons, in the respective amounts, and upon the contingencies following, to-wit:

(a) To my cousin, Caroline Sims of Frankfort, Indiana, on the first day of each month, during her lifetime, the sum of One Hundred Fifty Dollars ($150.00).

(b) The rest and residue of said net income shall be paid by Trustee in quarterly installments to my wife, Lucile Harrison, for and during her natural life.

The provision hereby made for my wife, Lucile Harrison, is by prenuptial agreement with her, and is in lieu of all her other right, interest or estate, of dower, homestead, or otherwise, in my property.

John H. Harrison at his death left him surviving petitioner, his widow, but no child or children, nor descendant thereof, nor parent, brother, or sister, nor descendant thereof. Under the laws of the State of Illinois, petitioner, as widow of John H Harrison, was his sole heir at law and next of kin, and entitled to his entire estate if he died intestate. Petitioner was entitled under the Illinois statute, except for the prenuptial agreement, to renounce the will and to take in her own right one-half of the real and personal estate of her husband, after the payment of all debts.

">*1091 The net worth of John H. Harrison at the time of entering into the prenuptial agreement and the net value of the estate of John H. Harrison at the time of his death was in each case approximately $1,200,000. Petitioner contended that at the time of the making of the prenuptial agreement John H. Harrison failed to fully disclose to petitioner his financial resources and that such resources were much in excess of what petitioner believed them to be at the time of the agreement.

">*1220 On November 25, 1930, petitioner and De Pauw University, the residuary legatee under the will, entered into a certain compromise agreement. In 1931 the executors under the last will of John H. Harrison paid to petitioner the sums of $100,000 and $21,041.41 in accordance with the provisions of the compromise agreement. The compromise agreement contained, among other things, the following provisions:

1. That the party of the first part, for and in consideration of One Hundred Thousand Dollars ($100,000.00) to be paid to her as hereinafter set forth, and the payment to her of interest at the rate of six per cent (6%) on the trust fund of Three Hundred Thousand Dollars ($300,000.00) until">*1092 said amount is paid to the Trustee, and for the further consideration of the conveyance to her of the following described real estate, to-wit: [here describing real estate], does hereby waive, relinquish and forebear all right to file any bill to contest the last will and testament of John H. Harrison, deceased, and/or to set aside the pre-nuptial agreement entered into between herself and the said John H. Harrison prior to their marriage, either in the State of Illinois, the State of California, or elsewhere; and also, for the same consideration, does hereby covenant and agree that she does hereby irrevocably accept all provisions made for her in and by said will, and that she will not relinquish nor renounce said will, or the provisions made for her in and by the terms of said will, in the administration of said estate in the State of Illinois, or the State of California, or elsewhere.

* * *

3. That the said executors shall pay to the party of the first part interest at the rate of six per cent. (6%) on the Three Hundred Thousand Dollars ($300,000.00) which the will of John H. Harrison provides shall be paid by said executors to Chicago Trust Company, of Chicago, Illinois, ">*1093 as Trustee for the party of the first part, said interest to be computed from the date of the death of John H. Harrison on March 2nd, 1930, and to be paid to the party of the first part until said Three Hundred Thousand Dollars ($300,000.00) is paid by the said executors to said Trustee, and in making said payment of said interest the said executors shall have credit for One Hundred Fifty Dollars ($150.00) per month during said period of time that they have paid to Caroline Sims, one of the beneficiaries under said trust. It is understood by the parties to this agreement that this provision is equitable because said will made no provision for the support of the party of the first part and said Caroline Sims, the beneficiaries under said trust fund, from the date of the@ death of said deceased, to the time that said trust fund shall be paid to said Trustee, and said trust fund cannot be paid under the terms of said will until the stock of the deceased in the Commercial-News is sold, and during said interim the earnings of said stock in said Commercial-News will be more than the six per cent. (6%) interest herein provided for to be paid to the party of the first part. The interest">*1094 to be paid as aforesaid shall be paid quarter annually on the last days of March, June, September and December respectively. The executors never transferred the property in trust as provided in article X of the will and the trust provided for in that article was never set up.

On July 2, 1934, the collector of internal revenue at Chicago, Illinois, or a representative of said collector, prepared and forwarded ">*1221 to the Commissioner of Internal Revenue a return for petitioner covering the calendar year 1931. The return was not approved by the Commissioner, but the Commissioner approved an amended return based on a revenue agent's report, which included as taxable income the sum of $21,041.41, but did not include as taxable income the sum of $100,000 paid to petitioner pursuant to the agreement. The Commissioner thereupon mailed to petitioner a thirty-day letter proposing a deficiency against petitioner for the year 1931 in the amount of $980.85. The proposed deficiency was based solely on the inclusion of the $21,041.41 in petitioner's taxable income, since petitioner's exemptions and credits exceeded her net income before including that sum. After protest by petitioner, ">*1095 which was denied by the Commissioner, petitioner signed Treasury form 870, being "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax," and consented to the assessment of the proposed deficiency plus interest as provided by law. Thereafter the Commissioner made a deficiency assessment pursuant to the waiver. After demand for payment of the deficiency of $980.85, petitioner paid the same on June 8, 1936, with interest in the amount of $247.47, as provided by law, making a total payment of $1,228.32. Thereafter, on July 16, 1936, petitioner filed claim for refund therefor. The Commissioner rejected the claim for refund and notified petitioner of the rejection by registered mail sent on August 5, 1937. The Commissioner, or his representatives, made no claim to petitioner that the sum of $100,000 so paid to her by the executors constituted taxable income to her until the issuance of the deficiency notice which furnished the basis of this appeal.

The parties have agreed that the only point in controversy in this proceeding is whether the sum of $21,041.41 was properly included in petitioner's income for the calendar year 1931, and consequently, whether the payment">*1096 of additional tax of $980.85 plus interest thereon was an overpayment of tax by petitioner. They have further agreed that "If the United States Board of Tax Appeals shall find that said sum of $21,041.41 was erroneously included in petitioner's income for said year, then petitioner has overpaid her tax for 1931 in the amount aforesaid, all of which was paid within two (2) years before the filing of said claim for refund. If the Board shall find that said sum of $21,041.41 was properly included in petitioner's income, then there is no overpayment of tax for the year 1931."

OPINION.

BLACK: Petitioner contends that the $21,041.41 in controversy, under the terms of the agreement had to be paid in all events, out of the principal of the estate as well as out of income and, therefore, the rule governs which was laid down by the Supreme Court of the ">*1222 United States in ; and , and that as a consequence the $21,041.41 is neither income to petitioner nor was it deductible from the income of the estate of decedent, John H. Harrison, in making its own income tax return. ">*1097 In our opinion the two cases above cited are not applicable to the question which we have here to decide.

If the $21,041.41 in question was paid to petitioner as interest or as compensation in lieu of income from a delayed testamentary trust of which she was the principal beneficiary, it is taxable to her regardless of what fund it was paid from. Cf. ; affd., . In that case, among other things, we said:

* * * Once the proposition is accepted that the amount is interest and received by the petitioner as such, it matters not what the source of the interest is; and, just as in the Whitehouse case it was said that annuities are tax free irrespective of the adventitious fact that they may in one year be paid from income and in another year from corpus, so interest is taxable irrespective of whether it be paid from income or corpus. * * *

But, says petitioner in the instant case, the $21,041.41 was not interest, qua interest, and that calling it by that name in the compromise agreement does not make it interest. Petitioner cites in support of that contention numerous decisions by the Board and the">*1098 courts which have held that the mere calling a payment "interest" does not make it interest if the facts show that it is not such. We are in agreement with these decisions and feel that it is unnecessary to discuss them in detail.

In view of the fact that decedent by the terms of a prenuptial agreement expressly agreed that he would set aside $250,000 of his property in his will to be held in trust for and during the natural life of petitioner, of which she should receive the entire net income for life, and in view of the fact that decedent's will expressly recognized the validity of this prenuptial agreement and the further fact that notwithstanding these provisions, such payment has never been made by the executors to the testamentary trustee, we do not think the compromise agreement does violence to the usual and ordinarily understood meaning of the term "interest" when it says that, "the said executors shall pay to the party of the first part [petitioner] interest at the rate of six per cent. (6%) on the Three Hundred Thousand Dollars ($300,000) which the will of John H. Harrison provides shall be paid by said executors to Chicago Trust Company, of Chicago, Illinois, as Trustee">*1099 for the party of the first part * * *." *tBut even if the $21,041.41 here involved can not be correctly denominated "interest" within the meaning of the word as used in ">*1223 section 22(a) of the Revenue Act of 1928, we still think it is taxable to petitioner. If the $300,000 testamentary trust had been set up as directed by decedent's will and the income therefrom paid to petitioner, it is true that it would not have been interest paid to her. Nevertheless, the income from the testamentary trust would have been taxable income to petitioner. .

Although the decedent has now been dead more than ten years, the testamentary trust which the will directed should be set up has never been set up. However, by agreement which seems to be satisfactory to all the interested parties, the petitioner is being paid, in lieu of the income from such a trust, 6 percent on $300,000, less a credit of $150 per month paid to Caroline Sims, the other beneficiary of the testamentary trust. These payments presumably are being made quarterly to petitioner on the last days of March, June, September, and December, respectively. Also, it seems clear">*1100 that such payments are being made out of income of the estate, for paragraph 3 of the compromise agreement, from which we have quoted in our findings of fact, contains, among other things, the following language: "said trust fund cannot be paid under the terms of said will until the stock of the deceased in the Commercial-News is sold, and during said interim the earnings of said stock in said Commercial-News will be more than the six per cent. (6%) interest herein provided for to be paid to the party of the first part." Can it be said that such payments, even though strictly speaking they are not interest, are not taxable income to petitioner? For reasons we have already stated, we think no such contention can soundly be made. Petitioner contends that if , and , are not sufficient authority to exclude such payments from taxable income, then certainly the recent Supreme Court decision in , would exclude them. Petitioner contends that there is no difference in tax incidence between the $100,000 payment made to petitioner under the compromise agreement">*1101 and the $21,041.41 made to her under the same agreement. We can not agree.

It is clear that the $100,000 payment was made to her not under the will, but because she was the sole heir, under the laws of the State of Illinois, of decedent John H. Harrison, and it is equally clear that under , none of this $100,000 is taxable income to her. The Commissioner concedes as much and no longer contends that petitioner owes any deficiency for 1931.

While it is true that payment of the $21,041.41 was made under the same compromise agreement as the $100,000, we do not think that the nature of the two payments is the same. It seems perfectly clear to us that this $21,041.41 payment was made to petitioner ">*1224 not because she was the sole heir to John H. Harrison, but to carry out the terms of a prenuptial agreement recognized in the will, and was in lieu of income which she otherwise would have received under the will from a testamentary trust which has never been set up. The compromise agreement seems to clearly show that fact. So far as the record shows, petitioner is still receiving these payments at the rate of 6 percent per annum">*1102 on $300,000 less the $150 per month paid to Caroline Sims. If the $21,041.14 in question is not taxable to petitioner because of , then by the same line of reasoning none of these subsequent payments of 6 percent on $300,000 would be taxable to petitioner.

We do not think that , stands for so broad a doctrine as that. In her brief, petitioner, in addition to the authorities which we have already discussed, strongly urges as a decision in her favor the Board's recent decision in . We think that case is distinguishable on its facts from those in the instant case. There the widow by compromise agreement was to receive an annuity of $9,000 for life, payable in all events whether there was income or not, in addition to an annuity of $9,000 which she was already entitled to receive under the will of her deceased husband. It is plain that this additional life annuity of $9,000 which she received was as an heir of decedent, and not as an income beneficiary under the terms of the will, just as it is plain in the">*1103 instant case that petitioner received the $100,000 as an heir of decedent. Under the circumstances narrated above, we held in the Chase National Bank case that both , and , forbade the taxing of the $9,000 annuity to the widow or allowing it as a deduction from the income of the estate. For the reasons already stated, we do not think such a rule applies to the $21,041.41 here in question. This $21,041.41 was no part of an annuity, as we view it, but was income received from the estate in lieu of other income which would have been received if the testamentary trust had been set up. As to this item we sustain the Commissioner.

Reviewed by the Board.

Decision will be entered that there is no deficiency and no overpayment in income tax for the year 1931.