Decision will be entered under Rule 50.
1. T was one of several trustees of a trust which terminated in 1960, and which in fact paid $ 920,000 in terminal corpus commissions to the trustees during that year. By prearrangement with the other trustees, T's share of those commissions was retained by one of the other trustees, a bank, and paid out to him in five annual installments beginning in 1961. Held, T is chargeable with receipt of his entire share of the commissions in 1960.
2. T was also a trustee of four other trusts. As a result of an intermediate accounting in respect thereof, the State court entered a decree in 1961 awarding corpus commissions in the aggregate amount of $ 674,273.37 to the trustees. However, at the request of T's attorney, the court decree provided that T's share of those commissions was payable to him ratably over a 4-year period beginning in 1962. The trusts in fact made no payment of any portion of T's share of these commissions in 1961. Held, T's share of these commissions may not be charged to him in 1961.
50 T.C. 602">*603 The Commissioner 1968 U.S. Tax Ct. LEXIS 95">*96 determined deficiencies in petitioners' income tax for 1960 and 1961 in the amounts of $ 156,917.26 and $ 80,523.33, respectively. The only adjustments in controversy are those relating to the Commissioner's determination that petitioner Oliver G. Willits actually or constructively received certain trustee's commissions in the amounts of $ 178,887.88 in 1960 and $ 131,107.95 in 1961.
FINDINGS OF FACT
The stipulation of facts, along with accompanying exhibits, is incorporated herein by this reference.
Petitioners Oliver G. Willits and Margaret F. Willits are husband and wife, residing in Haverford, Pa. They timely filed their 1960 and 1961 joint income tax returns with the district director of internal revenue, Philadelphia, Pa., on the basis of a calendar year, using the cash receipts and disbursements method of accounting. Margaret F. Willits is a party herein solely by reason of the joint returns, and Oliver G. Willits will hereinafter sometimes be referred to as petitioner.
Petitioner had been associated for many years with the Campbell Soup Co., a large diversified food manufacturer. He finally became chairman of its board of directors, and served in that capacity from March 1, 1968 U.S. Tax Ct. LEXIS 95">*97 1956, to February 28, 1962, on which date he retired from the company. He reported income from wages paid by the Campbell Soup Co. of approximately $ 110,000 in each of the years 1960 and 1961, and reported adjusted gross income of $ 202,945.04 and $ 143,643.66 in 1960 and 1961, respectively. Since December 10, 1951, and including the years 1960 and 1961, petitioner also served as one of several trustees of a certain trust and trusts created under the will of John T. Dorrance, deceased, as will be more fully explained hereinafter.
John T. Dorrance, a resident of the township of Cinnaminson, N.J., died testate on September 21, 1930, at which time he owned all the outstanding stock of the Campbell Soup Co. His will, which was probated in the Burlington County (Mt. Holly, N.J.) Common Pleas Court, Orphans' Court Division, in 1930, provided for a testamentary trust (hereinafter sometimes referred to as the Dorrance Trust) for the benefit of his wife and children. Item Fourteenth of his will, which set out the terms and conditions of this trust, provided in part as follows:
the principal of the said rest, residue and remainder of my estate, including all reimbursements made to the said 1968 U.S. Tax Ct. LEXIS 95">*98 principal of my estate from the income 50 T.C. 602">*604 as aforesaid shall be divided into equal parts or shares as follows, viz: -- Two shares representing my wife, Ethel M. Dorrance, two shares representing my oldest son if he be then living, and if he be not then living, two shares representing his issue if he have issue then living, one share representing each child of mine then living, other than my oldest son, and one share representing each child of mine, other than my oldest son, who shall be then deceased leaving issue who shall be then living, * * * and my said Trustees shall from the time of such division pay the net income from two of said equal parts or shares of the said rest, residue and remainder of my estate to my wife, Ethel M. Dorrance, if she be then living, each and every year, in monthly payments as nearly equal as may be, for and during the term of her natural life or until she shall re-marry, * * * and my said Trustees shall pay the net income of two of said equal parts or shares of the said rest, residue and remainder of my estate to my oldest son if he be then living, in monthly payments as nearly equal as may be, each and every year for and during the term of his natural 1968 U.S. Tax Ct. LEXIS 95">*99 life * * *
And I do hereby order and direct that my said Trustees shall pay the net income of one [of] the remaining equal parts or shares of the said rest, residue and remainder of my estate of each to my children, other than my said oldest son, in monthly payments as nearly as may be, for and during the term of their respective natural lives; and from and after the decease of each of my said children, respectively, other than my said oldest son, I order and direct that my said Trustees shall pay the net income of one of said remaining equal parts or shares to his or her child or children, in monthly payments as nearly equal as may be, the child or children of any deceased child of mine, other than my said oldest son, to take and receive the same share thereof to which his, her or their parent would have been entitled if living, until the youngest child of such child of mine so dying, other than my said oldest son, shall arrive at the age of twenty-one years, at which time I hereby order and direct that the principal of said one of said remaining equal parts or shares of the said rest, residue and remainder of my estate shall be paid, transferred and conveyed unto the child or children 1968 U.S. Tax Ct. LEXIS 95">*100 of such child of mine so dying * * *
Surviving John T. Dorrance were his wife, Ethel, and five children, John T., Jr., Elinor, Ethel, Charlotte, and Margaret. Ethel Dorrance, the testator's wife, died on March 10, 1953. Margaret Dorrance Strawbridge, one of the daughters of John T. Dorrance, died on July 31, 1953, survived by two minor children, George Strawbridge, Jr., and Diana Dorrance Strawbridge. Under the terms of the will, the children of Margaret Dorrance Strawbridge succeeded to her interest in the Dorrance Trust. Thus, the beneficiaries of the Dorrance Trust during the years in issue, and their relationship to the testator, were as follows:
| Relationship | |
| Beneficiary | to testator |
| John T. Dorrance, Jr | Son |
| Elinor Dorrance Hill | Daughter |
| Charlotte Dorrance Wright | Daughter |
| Ethel Dorrance Colket | Daughter |
| Diana Dorrance Strawbridge | Grandchild |
| George Strawbridge, Jr | Grandchild |
50 T.C. 602">*605 The Burlington County Orphans' Court retained jurisdiction over the administration of the Estate of John T. Dorrance until the administration terminated in 1935, at which time the Dorrance Trust was set up and the court issued appropriate letters of trusteeship to the trustees named in the will. The trustees of the Dorance 1968 U.S. Tax Ct. LEXIS 95">*101 Trust as originally established in 1935 consisted of the Camden Trust Co. and three individuals, the testator's wife and two brothers. Although the Camden Trust Co. has continued to serve as a trustee throughout the years, various substitutions have been made in respect of the individual trustees. On December 10, 1951, petitioner became one of the trustees.
Under 1968 U.S. Tax Ct. LEXIS 95">*102 New Jersey practice the court made lump-sum commission allowances for the services performed by all the trustees as reflected by the particular account filed. Under the terms of the will of John T. Dorrance, such commissions could not exceed 1 1/2 percent on the principal and 1 1/2 percent on the income which passed through the hands of the trustees. The trustees were authorized to divide the commissions by agreement among themselves based upon the extent of services performed by each trustee. It was the practice of the trustees to hold a meeting after the court had adjudicated a lump-sum allowance of commissions in which they agreed among themselves as to the amount of commissions allocable to each trustee. In the event of disagreement, application could be made to the court for allocation of commissions among the trustees.
From the inception of the trust through August 25, 1959, the trustees rendered seven accounts. Apart from any rights to commissions in respect of the income of the Dorrance Trust over the years, the trustees were entitled to receive commissions in respect of principal. Such principal or corpus commissions were in fact allowed in connection with each of the 1968 U.S. Tax Ct. LEXIS 95">*103 foregoing seven accounts. The dates of the allowance of these accounts, the lump-sum principal commissions approved by the court, and the amounts thereof distributed to the corporate and individual trustees are shown in the following table:
| Division of commission | |||
| Gross | between corporate trustee and | ||
| Date of allowance | principal | individual trustees | |
| commission | |||
| allowed | Camden | Individual | |
| Trust Co. | trustees | ||
| July 25, 1940 | $ 200,000.00 | $ 50,000.00 | $ 150,000.00 |
| Dec. 12, 1946 | 125,000.00 | 31,250.00 | 93,750.00 |
| Dec. 29, 1949 | 92,000.00 | 23,000.00 | 69,000.00 |
| July 24, 1951 | 45,000.00 | 15,000.00 | 30,000.00 |
| June 25, 1953 | 52,000.00 | 17,333.33 | 34,666.67 |
| Nov. 21, 1956 | 350,581.78 | 146,075.74 | 204,506.04 |
| Aug. 25, 1959 | 1,200,000.00 | 500,000.00 | 700,000.00 |
50 T.C. 602">*606 The individual trustees at the time of the seventh account, above, in 1959, and the amount of commissions received by each of them in respect of that account were as follows:
| John T. Dorrance, Jr | $ 233,333.34 |
| Oliver G. Willits | 233,333.33 |
| James McGowan, Jr | 233,333.33 |
| Total | 700,000.00 |
In 1945, the State of New Jersey adopted a new constitution, and, as a result, the jurisdiction formerly exercised by the Burlington County Orphans' Court became vested in the Probate Division of the Burlington County Court. The Superior 1968 U.S. Tax Ct. LEXIS 95">*104 Court of New Jersey, Chancery Division, at this time acquired concurrent jurisdiction with the Probate Division of the County Courts over the approval of trustees' accounts, the awarding of commissions and all other matters relating to trustees' accounts.
From the time that the Dorrance Trust was set up in 1935 until August 31, 1959 (the close of the trust's fiscal year), it was administered as a single trust for the benefit of all the beneficiaries. In anticipation of the approaching majority of Diana Dorrance Strawbridge on August 11, 1960, which event would, under the terms of the will of John T. Dorrance, require distribution to her and her brother, George Strawbridge, Jr., of their share of the principal of the Dorrance Trust, application was duly made by the trustees to the Burlington County Court, Probate Division, 11968 U.S. Tax Ct. LEXIS 95">*105 and granted by that court on October 1, 1959, for the separation of the single trust into five independent trusts of which the beneficiaries were as follows:
| Trust No. 1 | Beneficiary |
| 14810 | John Dorrance, Jr. |
| 14815 | Elinor D. Hill |
| 14820 | Ethel D. Colket |
| 14825 | Charlotte D. Wright |
| 14830 | Diana Dorrance Strawbridge |
| George Strawbridge, Jr. |
The principal asset of each of these five trusts was shares of stock of the Campbell Soup Co. As of January 1, 1960, the trust for John Dorrance, Jr., held 2,903,217 shares and each of the other four trusts held 1,451,608 shares in that company. The market price for these shares 50 T.C. 602">*607 during 1960 ranged from $ 45 to $ 92 per share, and during 1961 ranged from $ 77 to $ 131 per share.
Upon division of the Dorrance Trust into five separate trusts in 1959, the Camden Trust Co. and the three individual trustees at the time of such division became the trustees of each of the newly constituted five individual trusts.
Diana D. Strawbridge Crompton (formerly Diana Dorrance Strawbridge) became 21 years of age on August 11, 1960, and as a result thereof Trust No. 14830, the trust held for her benefit and 1968 U.S. Tax Ct. LEXIS 95">*106 for the benefit of her brother, George Strawbridge, Jr., hereinafter sometimes referred to as the Strawbridge Trust, terminated and became distributable under the terms of the Dorrance will. In view of the majority of the two beneficiaries, no formal accounting was filed in any court, but a "Voluntary Account" for the period September 21, 1959, to August 11, 1960, was prepared and submitted to such beneficiaries for approval. As a result of negotiations between the trustees and their representatives and the two Strawbridge beneficiaries and their representatives, it was agreed, by agreement dated August 31, 1960, that the total commissions payable to the trustees for the period of the trust administration from October 1, 1959, to August 11, 1960, should be $ 920,000. Each beneficiary of the Strawbridge Trust further agreed to create a new trust to which the assets distributed from the Strawbridge Trust would be conveyed, and in which the Camden Trust Co., among others, would be named trustee, and would receive for its services as trustee "compensation on the same basis as it has been compensated for its services in the co-administration of the trust hereby terminated, that is, at 1968 U.S. Tax Ct. LEXIS 95">*107 the rate of 51/81sts of 1 1/2 percent of income collected, and on corpus such amount as will be equal to 1 1/2 percent of the market value of the assets of each trust at the termination thereof pro-rated against a 25-year period and multiplied by 41.667%." The final distribution of the Strawbridge Trust to the two trusts created by George Strawbridge, Jr., and Diana D. Strawbridge Crompton was made as of September 30, 1960. Petitioner was not named as a trustee of either of these new trusts.
At a meeting of the trustees of the terminated Strawbridge Trust, held on October 13, 1960, it was formally resolved that the $ 920,000 of trustees' commissions due to trustees under the agreement with the Strawbridge beneficiaries be apportioned and distributed among the trustees as follows:
| Commission | |
| Trustee | payable |
| 1. Camden Trust Co | $ 383,333.64 |
| 2. Oliver G. Willits (petitioner) | 178,888.78 |
| 3. John T. Dorrance, Jr | 178,888.79 |
| 4. James McGowan, Jr | 178,888.79 |
| Total | 920,000.00 |
50 T.C. 602">*608 It was further resolved at this meeting "that the final corpus commissions of Oliver G. Willits, as set forth above, be paid to Camden Trust Co., to be held in escrow under the agreement of August 30, 1960 [hereinafter set forth]."
Unsigned 1968 U.S. Tax Ct. LEXIS 95">*108 checks to the payees had been brought to the meeting in the amounts set forth below:
| 1. To Camden Trust Co | $ 383,333.64 |
| 2. To Camden Trust Co. under agreement of Aug. 30, | |
| 1960 | 178,888.78 |
| 3. To John T. Dorrance, Jr | 178,888.79 |
| 4. To James McGowan, Jr | 178,888.79 |
| Total | 920,000.00 |
Following the adoption of the above resolutions, these checks were signed by all the trustees on behalf of the Strawbridge Trust and delivered to the payees named therein.
The agreement of August 30, 1960, referred to above was an agreement reached among the trustees, at the request of petitioner, executed and delivered on August 30, 1960. It related to the payment of petitioner's share of the Strawbridge Trust commissions and provided in its entirety as follows:
Agreement Among Trustees of Trust Under the Will of John T. Dorrance
Whereas the bank and Oliver G. Willits are among the Trustees of the Trust under the Will of John T. Dorrance and the Trust will partially terminate on August 31, 1960, and whereas the Trust desires that Willits continue to serve as Co-Trustee, it is agreed that:
1. Willits will receive no corpus commission in 1960 as a result of the termination of the Strawbridge portion of the Trust.
2. The sum of 1968 U.S. Tax Ct. LEXIS 95">*109 $ 178,887.88 will be paid to the bank by the Trust from the amount allocated for commissions to be held under the following terms:
(a) Pay 20% of the amount to Willits on April 1, 1961 and succeeding years.
(b) If Willits should resign or be discharged by order of a Court as a Trustee of the Trust under the Fourteenth Item of the Will of the late John T. Dorrance prior to April 1, 1965, he shall forfeit his right to receive any amount not paid and the bank shall distribute the unpaid amount in equal portions to the other Trustees, including the bank.
(c) If Willits should die prior to April 1, 1965, the unpaid amount shall be paid in equal portions to his surviving children.
50 T.C. 602">*609 3. This agreement is intended to be legally binding and the parties agree to execute such further instruments as may be necessary to carry out this agreement.
| (S) | Oliver G. Willits |
| Oliver G. Willits, Individually | |
| (S) | Bartholomew A. Sheehan |
| Camden Trust Company, Corporate Trustee | |
| (S) | John T. Dorrance, Jr. |
| John T. Dorrance, Jr., Trustee | |
| (S) | Oliver G. Willits |
| Oliver G. Willits, Trustee | |
| (S) | James McGowan, Jr. |
| James McGowan, Jr., Trustee |
There were no conditions or circumstances under which the amount of $ 178,888.78 paid by the Strawbridge 1968 U.S. Tax Ct. LEXIS 95">*110 Trust to the Camden Trust Co. for the benefit of petitioner could revert back to the trust. If any of the contingencies set forth in paragraph 2(b) of the August 30, 1960, agreement were to occur, the forfeited commissions were to be paid to the other trustees as individuals. Petitioner's commissions were held, pending payment to him, by the Camden Trust Co. in its own trust funds account. Interest was not paid on these funds, and all amounts thus on deposit were available to the Camden Trust Co. for use in its own corporate capacity pursuant to a New Jersey statute which permits a fiduciary, whose deposits are in its own commercial department, to use those funds for its own corporate purposes.
The Strawbridge Trust at all times pertinent herein had ample funds to make immediate payment of the entire amount of commissions agreed to by the beneficiaries of that trust in the agreement dated August 31, 1960, and the trust in fact paid the entire $ 920,000 and claimed a deduction therefor in its fiscal year ended August 31, 1960. All of the trustees, with the exception of petitioner, reported their respective shares of commissions in the taxable year 1960. Petitioner's share of the 1968 U.S. Tax Ct. LEXIS 95">*111 commissions was paid to him by the Camden Trust Co. ratably over the period 1961 to 1965 and he reported the same, when received, in his income tax returns for such years.
On March 15, 1961, James McGowan, Jr., a cotrustee of the four remaining Dorrance Trusts (Nos. 14810, 14815, 14820, and 14825), died. Following his death, certain of the beneficiaries of the four 50 T.C. 602">*610 trusts filed suit in the Superior Court of New Jersey, Chancery Division, for the appointment of Elinor D. Hill as cotrustee and for an accounting. The trustees, including petitioner, filed an answer and a counterclaim setting forth an account and claiming commissions for services rendered during the period June 30, 1959, to March 15, 1961.
A hearing on the above matter was held on December 1, 1961, before the Honorable John B. Wick, Judge of the Superior Court, Chancery Division. In accordance with local procedure, Grover C. Richman, Jr., attorney for the trustees, prepared a final judgment for the use of the court. The judgment provided, inter alia, for payment of commissions to the trustees, and also contained the following clause:
And it is further Ordered and adjudged that the share of commissions of Oliver G. Willits 1968 U.S. Tax Ct. LEXIS 95">*112 shall be paid to him as follows: one-fourth thereof on January 2, 1962, one-fourth thereof on January 2, 1963, one-fourth thereof on January 2, 1964 and one-fourth thereof on January 2, 1965;
The judgment also provided that the share of commissions due to the Estate of James McGowan be paid one-half on the entry of the order and one-half on January 2, 1962. Such requests for deferral of the payment of commissions were not a frequent occurrence in New Jersey practice, but were occasionally made.
After the testimony was concluded, Judge Wick asked for applications for counsel fees and commissions and at that time, upon the request of the trustees, allowed a total sum of $ 674,273.37 for commissions. After reviewing the entire judgment submitted by the attorney for the trustees, including the clause deferring the payment of commissions to petitioner, Judge Wick filled in the amount of commissions and counsel fees, and signed the judgment. The deferral of the payment of trustees' commissions was not prompted in any way by the needs of the four Dorrance Trusts, and the court had no interest, other than as an accommodation to the trustees, in determining the time as of which the trustees 1968 U.S. Tax Ct. LEXIS 95">*113 were to receive the commissions which he had ordered the trusts to pay. The corpus of the four Dorrance Trusts as of the date of the entry of the court's order fixing commissions was in excess of $ 97 million.
Judge Wick, in accordance with New Jersey practice made a lump-sum award of commissions, and did not award petitioner any specific amount. A meeting of the trustees of the four Dorrance Trusts was held on December 14, 1961, at which C. Leslie Ransom, assistant trust officer of the Camden Trust Co., presented a statement showing a 50 T.C. 602">*611 distribution of the lump sum commission awarded by Judge Wick to the cotrustees as follows:
| ESTATE OF JOHN T. DORRANCE, TRUSTEES UNDER 14TH ITEM | |||
| OF WILL | |||
| Statement of Fees and Corpus Commission Awarded by Judgment of | |||
| Superior Court, Chancery Division Dated 12/1/61 on Eighth Accounting | |||
| Distribution of Commission | |||
| Total | Trust | Trust | |
| charges | 14810, | 14815, | |
| Dorrance, Jr. | Hill | ||
| Total | $ 674,273.37 | $ 269,709.35 | $ 134,854.68 |
| John T. Dorrance, Jr | 131,107.96 | 52,443.19 | 26,221.59 |
| Oliver G. Willits, 1/3 of 58.333 or | |||
| 19.445% payable from each trust | |||
| in four annual installments | |||
| beginning 1/2/62 through 1/2/65 | 131,107.97 | 52,443.18 | 26,221.60 |
| Estate of James McGowan, Jr., 1/3 | |||
| of 58.333 or 19.444% payable 1/2 | |||
| from each trust now and 1/2 on | |||
| 1/2/62 | 131,107.95 | 52,443.19 | 26,221.59 |
| Camden Trust Co. 41.667% | 280,949.49 | 112,379.79 | 56,189.90 |
| Total | 674,273.37 | 269,709.35 | 134,854.68 |
| ESTATE OF JOHN T. DORRANCE, TRUSTEES UNDER 14TH ITEM | ||
| OF WILL | ||
| Statement of Fees and Corpus Commission Awarded by Judgment of | ||
| Superior Court, Chancery Division Dated 12/1/61 on Eighth Accounting | ||
| Distribution of Commission | ||
| Trust | Trust | |
| 14820, | 14825, | |
| Colket | Wright | |
| Total | $ 134,854.67 | $ 134,854.67 |
| John T. Dorrance, Jr | 26,221.59 | 26,221.59 |
| Oliver G. Willits, 1/3 of 58.333 or | ||
| 19.445% payable from each trust | ||
| in four annual installments | ||
| beginning 1/2/62 through 1/2/65 | 26,221.59 | 26,221.60 |
| Estate of James McGowan, Jr., 1/3 | ||
| of 58.333 or 19.444% payable 1/2 | ||
| from each trust now and 1/2 on | ||
| 1/2/62 | 26,221.59 | 26,221.58 |
| Camden Trust Co. 41.667% | 56,189.90 | 56,189.90 |
| Total | 134,854.67 | 134,854.67 |
| Above approved by Price Waterhouse & Co. 12/6/61. |
A resolution approving the distribution of the commissions on the basis outlined in the above statement was unanimously approved.
The Dorrance Trusts made payments of the 1961 principal commissions on December 14, 1961, as follows:
| To John T. Dorrance, Jr | $ 131,107.96 |
| To Estate of James McGowan, Jr. (1/2) | 65,553.97 |
| To Camden Trust Co | 280,949.49 |
The remaining one-half of the commissions due the Estate of James McGowan, Jr., in the amount of $ 65,553.97 was paid by the trustees on January 31, 1962.
In accordance 1968 U.S. Tax Ct. LEXIS 95">*115 with the judgment of December 1, 1961, no payments were made to petitioner in 1961 on account of his share of the commissions authorized therein. The Dorrance Trusts continued to hold petitioner's share of the commissions, and paid no interest to petitioner in respect of any amounts so held by it. The trusts made payments in the total amount of $ 131,107.97 to petitioner ratably during the period 1962-65, and petitioner reported such payments in his income tax returns for the years in which they were received.
In his notice of deficiency to petitioner dated January 21, 1966, the Commissioner determined that the sum of $ 178,887.88 (approximately petitioner's share of trustees' commissions payable by the Strawbridge Trust by virtue of the agreement of August 31, 1960) 2 had been "actually 50 T.C. 602">*612 or constructively" received by petitioner in 1960, and included the entire amount in petitioner's taxable income for that year. He also determined that the sum of $ 131,107.95 (approximately petitioner's share of trustees' commissions payable by the four remaining Dorrance Trusts by virtue of the order contained in the final judgment of the Superior Court of New Jersey, Chancery Division, dated 1968 U.S. Tax Ct. LEXIS 95">*116 December 1, 1961) 3 had been "actually or constructively" received by petitioner in 1961, and included that amount in petitioner's taxable income for 1961. After further increasing petitioner's taxable income for both 1960 and 1961 in the amount of certain "Agreed Items" ($ 6,379.48 and $ 3,277.41 for 1960 and 1961, respectively) and decreasing petitioner's taxable income for 1961 in the amount of $ 35,777.58 to eliminate the 1961 installment of the trustees' commissions for services rendered to the Strawbridge Trust which petitioner reported in that year and which the Commissioner had determined was includable in full in petitioner's 1960 income, the Commissioner determined total deficiencies in petitioner's income tax of $ 156,917.26 and $ 80,523.33 for the years 1960 and 1961, respectively. The parties have stipulated and agreed that the items designated as "Agreed Items" in the notice of deficiency are not in issue before this Court and that appropriate adjustments will be made with respect to any taxes assessed and paid in respect of such "Agreed Items."
OPINION
The principal question for decision is whether 1968 U.S. Tax Ct. LEXIS 95">*117 petitioner is chargeable (a) in 1960 with his share of the terminal corpus commissions from the Strawbridge Trust allocated to him during that year and (b) in 1961 with his share of the corpus commissions allocated to him during that year in respect of the four remaining Dorrance Trusts. The Government's position is that he "constructively received" such commissions in those years.
The theory of constructive receipt is one of long standing, and regulations embodying that concept have had judicial approval as far back as Loose v. United States, 74 F.2d 147 (C.A. 8, 1934). Thus, although income is not actually reduced to a taxpayer's possession, it is treated as constructively received by him in the taxable year when it is set apart for him, or otherwise made available to him without substantial limitation or restriction. Stated differently, a "taxpayer may not deliberately turn his back upon income and thus select the year for which he will report it." Hamilton Nat. Bank of Chattanooga, Administrator, 29 B.T.A. 63">29 B.T.A. 63, 29 B.T.A. 63">67. Cf. Williams v. United States, 219 F.2d 523 (C.A. 5); Everett Pozzi, 49 T.C. 119">49 T.C. 119; Joseph Frank, 22 T.C. 945">22 T.C. 945, 22 T.C. 945">952-953, 50 T.C. 602">*613 affirmed 226 F.2d 600 (C.A. 6); Richard R. Deupree, 1 T.C. 113">1 T.C. 113; 1968 U.S. Tax Ct. LEXIS 95">*118 William Holden, 6 B.T.A. 605">6 B.T.A. 605; sec. 1.451-2, Income Tax Regs. On the other hand, "a bona fide contract providing for deferred payments * * * [will] be given effect notwithstanding that the obligor might have been willing to contract to make such payments at an earlier time." Ray S. Robinson, 44 T.C. 20">44 T.C. 20, 44 T.C. 20">36. Cf. Commissioner v. Oates, 207 F.2d 711 (C.A. 7), affirming 18 T.C. 570">18 T.C. 570, nonacq. 1952-2 C.B. 5 withdrawn and acq. substituted 1960-1 C.B. 5; Drysdale v. Commissioner, 277 F.2d 413 (C.A. 6), reversing 32 T.C. 378">32 T.C. 378; Commissioner v. Olmsted Incorporated Life Agency, 304 F.2d 16 (C.A. 8), affirming 35 T.C. 429">35 T.C. 429; Kay Kimbell, 41 B.T.A. 940">41 B.T.A. 940, acq. 1940-2 C.B. 5. The issue before us is whether the 1960 and 1961 corpus commissions here in controversy fall on the side of the line controlled by the first group of cases or whether they are on the other side governed by the second group of cases. The question is to a considerable extent a factual one, and differences in the facts require separate consideration of each of the commissions in issue.
1. The 1960 Commissions From the Strawbridge Trust. -- We hold that the $ 178,888.78 terminal corpus commissions allocable to petitioner Oliver 1968 U.S. Tax Ct. LEXIS 95">*119 G. Willits in 1960 must be treated as his income for that year, and may not be spread ("deferred") over a 5-year period beginning in 1961.
In the first place, the Strawbridge Trust, the obligor, terminated its existence in 1960, and actually paid those commissions during that year. This case is therefore sharply to be distinguished from cases like 44 T.C. 20">Ray S. Robinson, supra, where the obligor (pursuant to a bona fide contract entered into with the taxpayer prior to the time that the latter had rendered his services or otherwise had completely furnished consideration for the contract) in fact did not make payment during the tax year. Nor is it a case involving a bona fide novation entered into prior to the time of payment called for in the original contract. Cf. Commissioner v. Oates, 207 F. 2d at 712. Here, the condition requiring the termination of the Strawbridge Trust occurred on August 11, 1960, petitioner had performed the services entitling him to commissions therefor, his share of those commissions was subsequently computed to be $ 178,888.78 and actually paid out by the trust as part of the total corpus commissions of $ 920,000, all prior to the end of 1960. The deferral of 1968 U.S. Tax Ct. LEXIS 95">*120 receipt by the taxpayer was wholly unrelated to any contractual arrangement with the obligor, the Strawbridge Trust, but was based solely upon a private arrangement between petitioner and his cotrustees who acted merely as accommodating parties in petitioner's obvious attempt to avoid tax on this income in 1960 by spreading it over a 5-year period when it would hopefully be taxed at lower 50 T.C. 602">*614 rates. Cf. James E. Lewis, 30 B.T.A. 318">30 B.T.A. 318, 30 B.T.A. 318">324; Leo A. Woodbury, 49 T.C. 180">49 T.C. 180, 49 T.C. 180">196-197.
Petitioner makes much of the fact that his so-called agreement with the other trustees was executed August 30, 1960, whereas the "Voluntary Agreement" providing for the payment of the total of $ 920,000 to the trustees was dated August 31, 1960, and it was not until the October 13, 1960, meeting of the trustees that such commissions were formally allocated among the four trustees with Willits' share being fixed at $ 178,888.78. We think these circumstances are of no controlling significance here. Not only does the blunt fact remain that there was no modification of the Strawbridge Trust's obligation to make payment, but the agreement among the trustees for petitioner's benefit has all the earmarks of a sham.
Notwithstanding 1968 U.S. Tax Ct. LEXIS 95">*121 the sequence of dates recited above, it is all too plain to us that the entire arrangement was worked out and at least informally agreed to at substantially the same time on or prior to August 30, 1960. The August 30 agreement was based on the assumption that the total amount of commissions to all four trustees was $ 920,000 as formally approved by the "Voluntary Agreement" of August 31, and it set forth the precise portion thereof that was formally allocated to petitioner on October 13. 4 We have no doubt that the other trustees had no interest in causing petitioner's share of the commissions to be deferred and that they acted merely as accommodating parties. They had no right to withhold any portion of the commissions due to him. And we think the attempt to spell out consideration for such withholding was spurious.
The August 30 agreement itself is crudely drawn and strongly 1968 U.S. Tax Ct. LEXIS 95">*122 suggests its sham character. It recites that "the bank" and petitioner "are among the Trustees of the Trust under the Will of John T. Dorrance and the Trust will partially terminate on August 31, 1960." This is an inaccurate statement, and it is inaccurate in a critical respect, as will appear shortly. There was no "partial" termination of any trust in 1960. The original Dorrance Trust had been divided into five separate trusts the preceding year. Only the Strawbridge Trust terminated in 1960, and it terminated completely at that time. The four remaining Dorrance Trusts did not terminate in any manner in 1960. Yet the August 30 agreement continues to recite, in an effort to suggest consideration for the contract, that "the Trust desires that Willits continue to serve as Co-Trustee." But the trustees in the administration of the Strawbridge Trust, with their fiduciary obligations to the 50 T.C. 602">*615 beneficiaries thereof, had no right to manipulate the payment of any obligation of that trust for the benefit of the four other trusts with entirely different beneficiaries, and the terminating Strawbridge Trust itself had no interest whatever in the future administration of the four remaining 1968 U.S. Tax Ct. LEXIS 95">*123 trusts. Only by erroneously treating all five trusts as though they were still a single trust was it possible to give the illusion that "the Trust [desired]" to have Willits continue to serve as a cotrustee of the very trust paying the corpus commission, 51968 U.S. Tax Ct. LEXIS 95">*124 and that this was the reason for withholding until later years the full commission that would otherwise be payable to him in 1960. The truth is, as we evaluate the situation, that the recitations in the agreement were only window dressing and did not in fact reflect any such give and take between the parties. The agreement was merely an arrangement among friendly parties to permit Willits to take possession of his share of the commission over a 5-year period notwithstanding that the trust was actually making payment in a single year.
To be sure, the agreement also provided that if petitioner "should resign or be discharged by order of a Court as a Trustee * * * prior to April 1, 1965, he shall forfeit his right to receive any amount not paid and the bank shall distribute the unpaid amount in equal portions to the other Trustees, including the bank." But the agreement also provided that if he 1968 U.S. Tax Ct. LEXIS 95">*125 should die prior to April 1, 1965, the unpaid amount was to be distributed to his surviving children. We would be very much surprised if the parties took the forfeiture provisions seriously, and there is no evidence that they gave any real consideration to the possibility of Willits' resignation or discharge -- the only conditions that might deprive him of the commissions -- or that there was any reasonable likelihood that either of those events might occur. Moreover, even if one of these events did come to pass, it is doubtful that petitioner's attempt to give away his fully earned commissions in this manner would be enforceable in the absence of any consideration for his promise, notwithstanding recitations in the agreement that it is intended to be "legally binding." Finally, under no circumstances 50 T.C. 602">*616 could these commissions revert to the Strawbridge Trust, the obligor and payor of the income.
We are of the opinion that petitioner's corpus commissions were his for the taking in 1960; that his private arrangement with his cotrustees to defer receipt was entered into solely to accomodate him; that the recitations purporting to justify the deferral were false; and that the bank was 1968 U.S. Tax Ct. LEXIS 95">*126 simply acting on his behalf when it received his commissions in 1960. When the bank received those commissions, it obtained them through him by prearrangement. It had no independent right thereto. Payment by the trust in these circumstances must be regarded as payment to petitioner, and he is chargeable in 1960 with the amount thereof whether the situation be viewed as one of constructive or actual receipt.
2. 1961 Trustees Commissions. -- On March 15, 1961, James McGowan, Jr., one of the trustees of the four remaining Dorrance Trusts, died. Following his death, certain of the beneficiaries filed suit in the Superior Court of New Jersey, Chancery Division, for the appointment of a new cotrustee and for an accounting. The remaining trustees filed an answer and a counterclaim, setting forth an account and claiming commissions for services rendered during the period June 30, 1959, to March 15, 1961. On December 1, 1961, after a hearing before the Honorable John B. Wick, the attorney for the trustees submitted a previously prepared final judgment for the use of the court, which judgment provided, inter alia, that:
the share of commissions of Oliver G. Willits [petitioner] shall be paid 1968 U.S. Tax Ct. LEXIS 95">*127 to him as follows: one-fourth thereof on January 2, 1962, one-fourth thereof on January 2, 1963, one-fourth thereof on January 2, 1964 and one-fourth thereof on January 2, 1965;
Judge Wick signed the judgment, and awarded the trustees the total commissions requested of $ 674,273.37. He did not, however, make any division of these total commissions among the trustees, and did not award any specific amount to petitioner. Rather, in accordance with their usual custom, the trustees met a short time after the award was made, on December 14, 1961, and divided the lump-sum award among themselves. At this time, the trustees formally resolved to allocate the sum of $ 131,107.97 to petitioner as his share of the commissions, and to distribute such commissions to him in four annual installments, as provided in the court's decree. Petitioner received none of these commissions in 1961, and did not report his share of the commissions on his return for that year.
The Commissioner does not deny that Judge Wick's decree was binding on the trustees and effectively prevented petitioner from receiving any portion of his commissions from the Dorrance Trusts in 1961. 50 T.C. 602">*617 There is no question that the Superior 1968 U.S. Tax Ct. LEXIS 95">*128 Court of New Jersey had jurisdiction over the parties and over the subject matter of the proceedings, N.J. Const., art. 6, sec. 3, par. 2; see also N.J. Stat. Ann. sec. 3A :2-1; and while it may be the practice of the New Jersey Superior Court in the absence of special circumstances to decline to exercise its jurisdiction in matters of trust administration in favor of the County Court which originally issued the letters of trusteeship, see 7 Clapp, N.J. Practice, Wills and Administration sec. 1447 (3d ed. 1962), the absence of any objection to the court's retention of jurisdiction in this case renders the judgment unimpeachable. Breidenbach v. Breidenbach, 130 N.J. Eq. 214">130 N.J. Eq. 214, 21 A.2d 805 (Err. & App. 1941). The Commissioner, however, points to the fact that the court had no real interest in deferring the payment of petitioner's commissions, other than as an accommodation to the trustees, since the Dorrance Trusts had more than sufficient funds to pay out immediately the entire amount of commissions allowed by the court. He contends that we are therefore not bound by the trial court's decree for tax purposes, but may under the decision of the Supreme Court in Commissioner v. Estate of Bosch, 387 U.S. 456">387 U.S. 456, 1968 U.S. Tax Ct. LEXIS 95">*129 make our own independent determination, under New Jersey law, as to when petitioner should have been entitled to receive these commissions. We think Bosch does not go that far.
The Supreme Court in Bosch laid down the general rule that, where Federal tax consequences turn upon the determination or characterization of a taxpayer's rights or property interests under State law, a Federal court is bound only by decisions of the highest court of the State, and need give only "proper regard" to the decisions of the State's trial and intermediate appellate courts, even if the taxpayer's rights or interests under State law have actually been "authoritatively" defined by the unappealed order of such lower court or courts. Commissioner v. Estate of Bosch, 387 U.S. 456">387 U.S. 456, 387 U.S. 456">465. But the principles enunciated in Bosch do not, in our view, justify a Federal court's redetermining the rights of a taxpayer where the determination of those rights has undoubtedly been committed by State law to the sound discretion of a trial court, and such discretion has been exercised and not clearly abused. Cf. Herman A. Moore Trust, 49 T.C. 430">49 T.C. 430, 49 T.C. 430">440-441.
The Superior Court of New Jersey, which defined petitioner's 1968 U.S. Tax Ct. LEXIS 95">*130 rights to the commissions here in issue, had authority under New Jersey law to determine, in its discretion and within the limitations imposed by the will, the amount of corpus commissions to be paid the trustees. See N.J. Stat. Ann. sec. 3A: 10-1, sec. 3A: 10-2. While corpus commissions are ordinarily fixed on the final accounting of a fiduciary, 50 T.C. 602">*618 when his work is completed and the full course of his administration can be evaluated, see In re Estate of Moore, 50 N.J. 131">50 N.J. 131, 232 A.2d 641, 647 (1967), New Jersey courts have clear authority, exercised in this very case, to allow such commissions at an earlier time, upon the rendering of intermediate accounts, "within conservative limits and with full regard for all which may transpire before the administration is completed, in order to give some limited measure of recompense to the fiduciary for time, effort and overhead." 50 N.J. 131">In re Estate of Moore, supra; see also N.J. Stat. Ann. sec. 3A: 10-2. Given this authority, we think it would be incongruous indeed if a New Jersey court did not also have discretion, either upon the request of a trustee or on its own decision, to defer the payment of commissions by the trust beyond the date on which 1968 U.S. Tax Ct. LEXIS 95">*131 the final judgment is entered. Such authority seems clearly implied by the statutory provisions cited above, and is undoubtedly also inherent in the Chancery Division's general equitable powers to shape a decree suitable to the circumstances before it.
It is difficult to see, moreover, how a court could abuse such discretion where, at the request of a trustee, it orders that payment of his commissions be deferred. Certainly there has been no harm done the trustee who requests such an order, and the trust can only benefit from being entitled to use the funds over a longer period of time. We cannot, in short, imagine the Supreme Court of New Jersey overturning such an order. Indeed, the Commissioner does not question the propriety of the amount of commissions allowed in the decree of the Superior Court in this case, which allowance ultimately served as the basis for most of the deficiency in petitioner's 1961 income tax. In the circumstances, we think he must give equal effect to the provision in the very same decree which limited petitioner's right to receive those commissions to years subsequent to 1961.
Finally, the Commissioner contends that even if the Superior Court's decree is 1968 U.S. Tax Ct. LEXIS 95">*132 given effect, petitioner must still be charged with the constructive receipt of his full share of trustees' commissions in 1961. Although there is considerable similarity between the 1960 Strawbridge Trust commissions and the 1961 commissions here under consideration, we think they fall on opposite sides of the line and that the doctrine of constructive receipt does not apply to the 1961 commissions. The four Dorrance Trusts did not in fact make any payment of petitioner's share of these commissions in 1961 and the New Jersey court decree (which for the first time established the aggregate amount of commissions payable to all trustees) fixed the liability of the trusts to make payment in future years to petitioner just as effectively as though petitioner had entered into contracts with 50 T.C. 602">*619 the trusts themselves. If he had entered into such contracts, he would have been justified, as a cash basis taxpayer, in reporting the commissions only in the years of actual receipt. 6 This is made clear by a number of cases typified by Commissioner v. Oates, 207 F.2d 711 (C.A. 7), affirming 18 T.C. 570">18 T.C. 570, 6 B.T.A. 605">supra at 613, which has now been accepted by the Commissioner, 1960-1 C.B. 5, and which established 1968 U.S. Tax Ct. LEXIS 95">*133 that the doctrine of constructive receipt is not applicable in these circumstances. No more than Oates is this a situation where payment was tendered and refused.
The difference in result between the 1960 and the 1961 commissions in this case may not be a wholly satisfying one, particularly since the practical difference between the two situations does not appear to be great. But as indicated by the cases, 6 B.T.A. 605">supra at 612-613, a line has been drawn, albeit a thin one, and, in our judgment, the two commissions under consideration are on the opposite sides of that line. Compare Friendly, J., in Petschek v. United States, 335 F.2d 734, 737 (C.A. 2), "If the distinction seems fragile, that is not unusual in cases near a frontier, with large hinterlands on 1968 U.S. Tax Ct. LEXIS 95">*134 either side." Cf. Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 312 U.S. 579">583.
Decision will be entered under Rule 50.
Footnotes
1. As designated on the books of the Camden Trust Co., the corporate trustee.
1. The parties incorrectly stipulated that the application was made to the Superior Court of New Jersey, Chancery Division. However, exhibit 6-F, a copy of the complaint and the final judgment in this action, shows that the application was made to the Probate Division of the Burlington County Court, and this has been reflected in the parties' requested findings of fact.↩
2. The exact amount was $ 178,888.78.↩
3. The exact amount was $ 131,107.97.↩
4. While it is true that the amount formally allocated to petitioner on October 13 was actually $ 178,888.78 and the amount set forth in the August 30 agreement was $ 178,887.88, it is obvious that the minor discrepancy of 90 cents was merely a typographical error resulting from the transposition of two digits.↩
5. Notwithstanding that each trustee signed the Aug. 30 agreement as "Trustee," there is no merit to petitioner's contention that the agreement was with "the Trust" rather than with the individual trustees. As indicated above, the Strawbridge Trust itself had no interest whatever in petitioner's continued services on behalf of the four remaining trusts, and, in our view, the agreement was in fact made with the trustees acting as individuals and not on behalf of the Strawbridge Trust. Moreover, the alleged "desire" of "the Trust" that Willits continue to serve as a co-trustee is made highly suspect by the fact that upon termination of the Strawbridge Trust the two Strawbridge children established new trusts with the distributed assets naming the Camden Trust Co. as a trustee without at the same time designating Willits as a cotrustee. Of course, the mere fact that each trustee signed the agreement as "Trustee" does not preclude us from examining the situation to determine whether the capacities in which the parties are thus identified "are truthfully described by the labels which the parties have attached to them." See Graybar Electric Co., 29 T.C. 818">29 T.C. 818, 29 T.C. 818">832, affirmed 267 F.2d 403 (C.A. 2), certiorari denied 361 U.S. 822">361 U.S. 822↩.
6. Such a situation would be in sharp contrast to that which transpired with respect to the Strawbridge Trust, where we found that the agreement was in fact entered into not with the trust, the payor of the income, but with the trustees in their individual capacities, who obligingly undertook to shield petitioner from tax in the year that the trust actually paid petitioner's commissions. See p. 615, supra, and particularly fn. 5, supra↩.