Central Hanover Bank & Trust Co. v. Commissioner , 34 B.T.A. 741 ( 1936 )

CENTRAL HANOVER BANK & TRUST COMPANY AND CHAUNCEY FORD WARNER, CO-EXECUTORS, ESTATE OF HORACE H. WORK, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Central Hanover Bank & Trust Co. v. Commissioner

Docket No. 81027.

United States Board of Tax Appeals

34 B.T.A. 741; 1936 BTA LEXIS 653;

July 1, 1936, Promulgated

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The income of two trusts of which the decedent was a beneficiary, which had been collected by the trustees between January 1 and March 9, 1933, had not been paid over to decedent at the time of his death on March 9, but was being held by the trustees to meet anticipated taxes and other expenses payable by the trustees under the trust instruments. Held, that the amount in the hands of the trustees was not taxable to decedent as income to be distributed currently.

Wm. Cogger, Esq., for the petitioners.

Wilford H. Payne, Esq., and P. A. Sebastian, Esq., for the respondent.

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ARUNDELL

In this proceeding the Commissioner proposes a deficiency of $718.64 in income tax for the period January 1 to March 9, 1933, against the decedent, Horace H. Work, who died on the latter date. The issue is whether the amount collected after January 1, 1933, by trustees of two trusts of which the decedent was the beneficiary, but not paid over to the beneficiary, was taxable as income to him in the period January 1 to March 9. FINDINGS OF FACT.

Horace H. Work died on March 9, 1933. He was the beneficiary of one trust established by his deceased mother, Alice C. Work, under which he was entitled to receive for life from certain real property located at Fifth Avenue and 39th Street, New York City, the net rents, issues, and profits after the payment of all necessary and proper charges and expenses in the execution of the trust. Under another trust created by the will of his grandfather, Horace A. Hutchins, he was entitled to receive for life the income of part of the residuary estate, consisting mostly of common stock, chiefly common stock of the Standard Oil Co. The trustees of this trust were empowered to use so much of the income as might be necessary to pay and discharge one-half of the expenses of maintenance of the grantor's former residence and estate, "Beechwood", at Madison, New Jersey, including all the cost of care, upkeep and taxes, and wages of household servants and employees of all kinds, for so long a time as the estate should be maintained as the joint residence of the grantor's son and his grandson, Horace H. Work.

The trust instruments did not specify any periodical dates for distribution of the income. It had generally been the policy of the trustees to make distribution whenever they were requested by the beneficiary if the trustees considered sufficient funds to be available in excess of those needed to pay debts or expenses coming due, and at the end of each year a final distribution was made of all the remaining net income on hand. As a rule, no request for distribution was made until about the last of May of any year, when the decedent usually returned to New York from wintering in Florida decedent usually returned to New York from wintering in Florida. Alice C. Work trust, totaling $50,449.35. A new lease on the Fifth Avenue property was made in June 1932, under which the trust was obligated to pay the real estate taxes, so that in 1932 there were only two distributions of income, on December 20 and December 31, totaling $8,806.56. From the Horace A. Hutchins trust, the 1931 and 1932 distributions to the decedent were as follows:

Date	Amount
May 8, 1931	$50,000.00
July 1, 1931	40,000.00
September 23, 1931	40,000.00
December 16, 1931	45,000.00
December 31, 1931	6,030.24
Total	181,030.24
April 28, 1932	$35,000.00
July 6, 1932	30,000.00
September 16, 1932	35,000.00
December 20, 1932	30,000.00
December 31, 1932	4,933.34
Total	134,933.34

The chief source of income from the Hutchins trust was dividends from Standard Oil Co. stock, which were paid on March 15, June 15, September 15, and December 15.

From January 1 to March 9, 1933, the date of decedent's death, there had been no distribution from either trust and no requests for any. The gross income of the Alice C. Work trust received for the benefit of decedent up to the date of his death was $11,409.79. Similarly, income of the Hutchins trust up to that date was $3,222.90. The Work trust had semiannual real estate taxes of $10,479.37 coming due on May 1 and the Hutchins trust was preparing to pay $1,040.25 in semiannual real estate taxes also due in may. The trustees were accumulating income to meet these payments. It was006customary for one of the trustees of each trust to accept 1 percent007per annum as commission. All expenses of the Beachwood estate, customary for one of the trustees of each trust to accept 1 percent per annum as commission. All expenses of the Beachwood estate, except taxes, were by agreement paid by the residents from their personal funds and not by the trust.

Both the trusts and the petitioner were on a cash receipts and disbursements basis.

OPINION.

ARUNDELL: The aim of the statute dealing with the income of estates and trusts is to tax such income either in the hands of the fiduciary or the beneficiary. Secs. 161 and 162, Revenue Act of 1932. Under section 162(b) the fiduciary takes a deduction for the amount of the trust income "which is to be distributed currently by the fiduciary to the beneficiaries", and such income is taxable to the beneficiaries. As to income of this sort "the scheme of the act is to treat the amount so distributable, not as the trust's income, but as the beneficiary's." . There seems to us no room for doubt that the income of the trusts here under consideration was of this kind. But this does not necessarily mean that all of the income collected by the trustee at any particular moment was currently distributable. In fact the trust instruments specifically provide for the discharge by the trustees of certain expenses.

The phrase "to be distributed currently" as used in the statute "presupposes a periodic duty of the trustee" to distribute as directed by the trust instrument. . Where the trust instrument provides for payment of expenses, taxes and other charges, it is not until after provision therefor is made by the trustee that he can determine the amount of income currently distributable. Not until then can it be known what amount the beneficiary has a right to receive. The test of taxability to the beneficiary is his "present right to receive" income. The question here thus narrows down to whether or not the beneficiary had, prior to his death, the present right to receive the trust income as and when collected by the trustees. As we read the trust instruments the trustees were required to make provision for the designated charges before distributing to the beneficiary. In the trust established by Alice C. Work the direction to the trustees is: "* * * after paying * * * all the necessary and proper charges and expenses * * * to apply the said net rents, issues and profits to the use of the said Horace Hutchins Work * * *." In the Hutchins trust the trustees are directed "to apply the net income" of the trust to the use of the beneficiary, and are further authorized and empowered "to use so much of the income of the said trust as may be necessary to pay and discharge one-half of the expense of maintenance of my residence and estate at Madison, New Jersey, including all the cost, care, upkeep and taxes incidental thereto * * *." In , where the trustee was directed to pay certain taxes and distribute the remainder annually, he set aside a sum to meet estimated taxes and then claimed that such amount was currently distributable and taxable to the beneficiaries. The Board and the Circuit Court held otherwise, the court saying:

The right of the beneficiaries to a distribution does not depend on the will or discretion of the trustee, but on there being enough income to enable him to make a distribution. The right, however, is conditioned on his first setting aside a sufficient amount to discharge the burdens of the trust. , but it is not necessary that they should have been discharged nor even precisely ascertained. The trustee cannot escape a distribution by refusing or neglecting to ascertain them. If they cannot be exactly estimated, his duty is plain to set aside what is reasonably sufficient to cover them and to distribute the balance.

The rule of the McCrory case applied here sanctions the act of the trustees in withholding from distribution, as they did, an amount sufficient to meet estimated charges against the trust. There is no showing that the amounts so withheld were unreasonable. Indeed, the evidence shows that taxes coming due shortly after the death of the decedent would absorb nearly all of the income received up to that date. Counsel for the respondent proposes that we look ahead from the date of death and see what additional income might be anticipated between that date and the tax-due dates. However, he does not couple this with any showing of certainty that any future income would be realized, and it is more in keeping with a trustee's duties to rely on income in hand than to speculate on the future. Having regard for the provisions of the trust instruments which directed and controlled the actions of the trustees, we think that, under the rule of the Freuler and McCrory cases, te beneficiary had no present right at or prior to his death to the income then in the hands of the trustees; hence, it was not currently distributable and was not income to him. Whether it was taxable as income to the trustees or subject to estate tax as corpus of decedent's estate is not before us for decision.

Decision will be entered for petitioners.