1942 BTA LEXIS 642">*642 Petitioners, life beneficiaries of income of a trust, relinquished to trustees the right to certain types of dividends to be held in trust corpus under agreement executed in 1915 by all life tenants. The Orphans' Court of Philadephia County held that the agreement became irrevocable and final in 1931, and that thereafter such dividends on stock in the trust must be held as a part of the trust principal. In the taxable year 1935 a dividend in the nature of an extraordinary distribution was distributed and was held by the trustees, who reported the distribution in their income as fiduciaries and paid tax thereon. Held:
(1) That petitioners had no right of property in the special dividend in 1935 under their agreement and under the Orphans' Court adjudication, which is binding on the Board as a determination of property rights under local law, so that the special dividend was not income distributable to petitioners under section 162(b) of the Revenue Act of 1934.
(2) Assuming that extraordinary dividends originally would have been in a class of distributable income to petitioners, the 1915 agreement constituted a transfer of such future income to trustees by valid assignment, 1942 BTA LEXIS 642">*643 and, as such, was a valid assignment of an equitable interest in the trust and the assignees, trusteesAre taxable on the income from the interest transferred as the owners thereof. Blair v. Commissioner,300 U.S. 5">300 U.S. 5.
47 B.T.A. 843">*844 These proceedings have been consolidated for opinion. The facts and the issue are common to all proceedings. The income tax returns of all the petitioners were filed with the collector for the first district of Pennsylvania. The facts are stipulated.
The deficiences in income tax determined by the respondent and the overpayment of tax claimed in each proceeding are as follows:
| Docket No. | Year | Deficiency | Overpayment claimed |
| 98955 | 1935 | $17,891.07 | $41,280.15 |
| 99053 | 1935 | 18,189.29 | 44,840.78 |
| 1934 | 17,925.11 | (to be determined) | |
| 104335 | 1935 | 15,207.42 | Do. |
The only question is whether certain dividends distributed in the taxable year1942 BTA LEXIS 642">*644 on stock held in the corpus of a trust were income to be distributed currently to the trust beneficiaries and, as such, were taxable to them.
FINDINGS OF FACT.
We adopt as the findings of fact all of the facts as stipulated in each proceeding. We set forth as much of the facts as is necessary.
In Docket No. 98955, the petitioners are the duly appointed executors of the estate of Sallie Houston Henry, referred to hereinafter as the petitioners' decedent. In Docket Nos. 99053 and 104335, the petitioners are individuals residing in Philadelphia. Sallie Houston Henry died testate on June 6, 1938. Her father was Henry H. Houston, hereinafter referred to as the testator, who died in 1895, and her mother was Sallie S. Houston, who died on November 16, 1913. The will of Henry H. Houston was probated in the Orphans' Court of Philadelphia County, which has had jurisdiction at all times of the administration of his estate. Sallie S. Houston, petitioners' decedent, and the other two petitioners were life tenants under the will of Henry H. Houston, entitled to receive for life the income of a testamentary trust 47 B.T.A. 843">*845 in which his residuary estate comprised the corpus. This1942 BTA LEXIS 642">*645 trust is hereinafter referred to as the trust. The life tenants were entitled to receive equal one-fourths of the trust income. After the death ofSallie S. Houston the remaining life tenants were entitled to one-third of the trust income. Upon the death of the last life tenant the trust corpus is to be distributed equally among the testator's grandchildren.
The trustees of the estate of Henry H. Houston held 235,500 shares of the common stock of Standard Oil Co. of New Jersey, which were part of the corpus of the trust created by his will. Those shares of common stock had been derived from 11,775 Standard Oil trust certificates owned by Henry H. Houston at the date of his death, which became part of the corpus of the trust. On March 15, 1935, the trustees received, as a dividend on the Standard Oil common stock, 12,560 shares of the common stock of the Mission Corporation. The parties agree that this distribution was a taxable dividend. The fair market value of the Mission stock on that date was $9.4375 per share, or $118,535, total value. The trustees held the Mission Corporation stock as an addition to the trust corpus by virtue of the terms of a deed of family settlement1942 BTA LEXIS 642">*646 (referred to later), executed on December 31, 1915, by the children of Henry H. and Sallie S. Houston, their respective spouses and adult children.
In their fiduciary return for 1935 the trustees of the estate reported the dividend as a dividend taxable to the trustees, in the amount of $118,535, and they did not include any part of the dividend in the distributable net income of the trust. The trustees paid income tax on the dividend.
The respondent determined that the Mission Corporation stock constituted a dividend to be credited entirely to the income of the estate distributable to the life tenants, and thereby increased Sallie H. Henry's share of the income from the trust by one-third of the fair market value on March 15, 1935, of the dividend, or by $39,511.67. The respondent held that the dividend constituted distributable taxable income to the income beneficiaries of the trust, so that the said $39,511.67 was income currently distributable to Sallie H. Henry. Respondent made the same determination with respect to S. F. Houston and Gertrude Houston Woodward.
On or about August 1, 1938, the trustees of the estate of Henry H. Houston duly filed in the Orphans' 1942 BTA LEXIS 642">*647 Court their first account, covering the period from June 1, 1902, to March 31, 1938. Subsequently, on or about February 13, 1941, the trustees duly filed in the Orphans' Court a supplemental account covering the period from April 1, 1938, to December 31, 1940. On page 218 of their first account the trustees reported to the Orphans' Court the receipt of the 12,560 shares of common stock of Mission Corporation aforesaid and accounted for the said dividend as an addition to the principal or corpus of the trust. The dividend is 47 B.T.A. 843">*846 shown as an item among the principal debits and is carried as principal in the said account, the entry in the account being as follows:
| Personal Estate-Principal Receipts | ||
| 1935 | ||
| Mar. 30 | Received as of 3/15/35 12,560 shares of Mission Corp., common capital stock, representing a dividend out of surplus of Standard Oil Co. of New Jersey, having a market value of 9.4375 per share | $118,535.00 |
On or about September 16, 1938, the Orphans' Court appointed Maurice Heckscher, a member of the Philadelphia Bar, as guardian and trustee ad litem in connection with the audit of the accounts aforesaid, to represent the interests of all1942 BTA LEXIS 642">*648 persons unborn, unascertained, or not yet of age. The accounts aforesaid filed by the trustees were called for audit by the Orphans' Court and audited before the court at three hearings held on September 25, 1940, February 13, 1941, and July 25, 1941, respectively. At the audit before the Orphans' Court the executors of the will of Sallie Houston Henry duly presented to the Orphans' Court a claim demanding distribution to the estate of their decedent of a one-third share of the 12,560 shares of common stock in the Mission Corporation aforesaid.
The guardian ad litem investigated the claim and the accounts filed by the trustees and he opposed the claim, filing a report setting forth the results of his examination of the accounts and his reasons for objecting to the claim. One of the remaindermen also opposed the claim at the audits. Testimony was taken at the audits. Also, briefs were filed by the interested parties.
On October 8, 1941, the Orphans' Court of Philadelphia County entered its adjudication, which became final on October 24, 1941, under which the court disallowed the claim of petitioner's decedent to have distributed to her one-third of the dividend, the stock1942 BTA LEXIS 642">*649 of the Mission Corporation.
The circumstances under which the family settlement agreement of 1915 was executed, the status of that agreement thereafter, and the holdings made by the Orphans' Court are as follows, in so far as it is necessary to understand the issue:
Following the testator's death the trustees received stock dividends on Standard Oil Co. of New Jersey stock, totaling about $14,000,000. The life tenants of the trust believed that the testator intended that the stock dividends should be retained as principal, although they were advised by counsel that the life tenants of the trust were entitled to the stock dividends. Sallie S. Houston was unaware of the size of her estate and that she was entitled to receive as income one-fourth of the above stock dividends. Under her will her residuary estate was to be held in trust for her grandchildren. They were adversely affected 47 B.T.A. 843">*847 by the retention of the stock dividends as principal of the Henry H. Houston trust. A subsequent decree of the Orphan's Court indicated that the will probably was defective. Various matters, accordingly, had to be adjusted following the death of Sallie S. Houston, and to effect settlement1942 BTA LEXIS 642">*650 of the matters the children of Henry H. and Sallie S. Houston and their respective spouses and adult children executed a deed of family settlement on December 31, 1915. The agreement provided, inter alia, that stock dividends of the Standard Oil Co. were to be retained in the Henry H. Houston estate as part of the principal and treated as though part of the estate at the time of his death. Also, under the deed of family settlement the residuary estate of Sallie S. Houston was to be distributed in two parts as stipulated therein. The deed of family settlement is hereinafter referred to as "the agreement."
In December of 1922 the life tenants of the estate of Henry H. Houston executed a supplemental agreement which confirmed the original 1915 agreement and expressly stated that the original settlement was intended to include within its terms all stock dividends on Standard Oil securities thereafter received by the trustees, as well as all other extraordinary corporate distributions received by the trustees.
Prior to and during 1931 all of the parties entitled to sign the family settlement agreement of 1915 had signed and had surrendered their right to revoke the agreement. 1942 BTA LEXIS 642">*651 The Orphans' Court held that in 1931, when the last signatory signed, the agreement became "forever final and binding, and thereafter the assets covered by the agreement must be held by the trustees * * * as a part of the principal of the trust and be distributed only in accordance with the terms of the will." Under the will the life tenants were not entitled to receive any distribution out of principal. The Orphan's Court also held with reference to the distribution of the Mission Corporation stock as a dividend on the Standard Oil stock that:
The stock dividends and other extraordinary corporate distributions on the Standard Oil Company stock, carried in the principal account, have been, and are, properly held as principal, by virtue of the irrevocable family settlement of 1915 and the supplemental agreement of 1922. [Italics added.]
The Orphans' Court recognized the family settlement agreement as a valid agreement binding upon the trustees and the life tenants of the trust. The adjudication of the Orphans' Court, as above quoted, determined the property right to the dividend in question, the Mission stock, as between the trustees and the life tenants and held that1942 BTA LEXIS 642">*652 the trustees had the right to receive and hold the dividend. Under the agreement and the Orphans' Court's adjudication, the trustees could not distribute as income stock dividends and other extraordinary dividends, and, clearly, the dividend in question paid on the Standard Oil stock, to the income beneficiaries of the trust. The trustees were required 47 B.T.A. 843">*848 to retain in the principal of the trust the dividend in question.
When the Mission Corporation stock was distributed as a dividend in 1935, the petitioners' decedent and the other petitioners did not have or acquire any property interest in the dividend. It was income to the trustees as owners thereof. It was not income distributable to the life tenants.
OPINION.
HARRON: The question is whether the dividend on the Standard Oil Co. stock which was paid to the trustees in the taxable year and held by them in the trust corpus was income which was to be distributed currently to the beneficiaries, within sections 161(a)(2) and 162(b) of the Revenue Act of 1934.
Petitioners contend that the Orphans' Court adjudication was a determination of property rights in the dividend which is binding upon this Board, and that1942 BTA LEXIS 642">*653 the court's holding that the dividend was principal of the trust by virtue of the 1915 family settlement agreement is determinative of the question for purposes of the statute, so that the dividend was not income to be distributed currently to the petitioners. Petitioners rely upon , and .
Respondent argues that originally such dividends as are here in question were income which was to be distributed to the income beneficiaries of the trust, the life tenants, the Pennsylvania law making that presumption and there being no contrary provision in the will. Respondent cites ; 162 Alt. 295, 296. See also, . Respondent then contends that petitioners are taxable on the dividend as income, whether or not it was actually distributed, under the theory that the right to the dividend was in petitioners and their direction to the trustees to retain the dividend in trust principal did not transfer liability for tax on income to the trustees. 1942 BTA LEXIS 642">*654 Respondent cites , for the above general principle, although the question here does not turn upon any element of control over income under the particular facts. Respondent contends that the adjudication of the Orphans' Court is not binding on the Board in determining the issue presented.
"The test of taxability to the beneficiary is not receipt of income but the present right to receive it." We assume, arguendo, that under the testator's will and the rule of Pennsylvania law to the effect that an extraordinary distribution paid out of earnings belongs to the life tenant as opposed to the remaindermen, the petitioners originally were entitled to receive any and all such dividends. The family settlement agreement of 1915 and the supplemental agreement of 1922 had the effect of an "assignment" or release 47 B.T.A. 843">*849 to the trustees by the life tenants of their right to receive extraordinary dividends. For convenience we may regard the family settlement agreement as such "assignment" by the life tenant. The assignment became irrevocable and forever binding in 1931. That is1942 BTA LEXIS 642">*655 the ruling of the Orphans' Court of Philadelphia County. That ruling was a determination of property rights in extraordinary corporate distributions. The executors of the estate of Sallie Houston Henry were demanding distribution of a one-third share of the Mission Corporation stock, an extraordinary dividend, under a claim of right thereto. The Orphans' Court denied the claim, holding that the dividend belonged to the trustees as principal of the trust under the 1915 agreement, which became binding on Sallie Houston Henry and others in 1931. That holding of the court determined, as between the trustees and the life tenants, the validity of the assignment of certain kinds of dividends to the trustees under the 1915 agreement. In other words, in 1935, when the stock dividend was paid, all right thereto vested at once in the trustees and at no moment did any of petitioners here have any right of property in the extraordinary corporate distribution. It follows that there was no ownership in the petitioners to which income tax attached, since petitioners had no present right in 1935 to receive the dividend. The question is controlled by 1942 BTA LEXIS 642">*656
The determination of the Orphans' Court, as set forth above, is binding on this Board, because it determined the validity of the assignment by the life tenants to the trustees of all right to certain types of dividends. "The order of the court having jurisdiction of the trust is determinative as to what is distributable income for purpose of division of the tax between the trust and the beneficiary." ;; ;;
Respondent seeks to bring this case within the exception to the rule respecting the binding effect of determinations of property rights by state courts recognized in . The rationale of the Morris case has no application here. In that case the Board refused to apply the state court's decree in determining the issue because there were criteria established by Congress as to what expenses are deductible for Federal1942 BTA LEXIS 642">*657 tax purposes. Here, we may not disregard the holding of the Orphans' Court, for to say that a valid and binding assignment of right to the special dividends to the trustees was not made by the life tenants would be arbitrary, to say the least.
There remains only the question whether the life tenants, petitioners, having made a valid assignment prior to the taxable year of part of their interest in the trust, are still taxable upon the dividends in question. That question is controlled by ;47 B.T.A. 843">*850 ; ; affd., . The original right of the life tenants to receive income was an equitable interest, a property right which was alienable in whole or in part. The trustees became the owners of the specified beneficial interest in income of the trust consisting of special kinds of dividends. In 1935 the trustees received the dividend in question as owners thereof. Owning the beneficial interest in the dividend, the trustees could not have distributed1942 BTA LEXIS 642">*658 it to the life tenants because they no longer owned the beneficial interest. The dividend was not income to be distributed currently. Accordingly, the trustees were taxable on the dividend paid in the Mission stock in 1935. Respondent is reversed.
Decision will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: S. F. Houston, and Gertrude Houston Woodward. ↩