1935 BTA LEXIS 837">*837 Under the terms of a testamentary trust the trustees were directed to pay from the income thereof to testator's wife, for life, annually, $50,000, and after accumulating from the excess income the sum of $50,000, which was to be added to the principal of the fund, to pay the excess income annually, over the amount directed to be paid to his wife, to his three children, share and share alike. By another provision of the will, testator provided that it was his will that "the annuity provided for my wife in the fifth item of this will shall be paid to her out of the income of the trust property held for that purpose, if it be sufficient", but if insufficient, the trustees were directed to use sufficient of the corpus to make up the deficiency so that "at all events, and every year" his wife should receive $50,000. Excepting a comparatively small amount paid in a year prior to those here in controversy, all payments to the widow were made from income. Held, that the widow was the legatee of an annuity, a charge against the whole trust estate, both corpus and income; that the payments in question were made by the trustee in discharge of that legacy, and, therefore, were not deductible1935 BTA LEXIS 837">*838 from the gross income of the trust estate in computing its taxable income. Helvering v. Pardee,290 U.S. 365">290 U.S. 365; Burnet v. Whitehouse,283 U.S. 148">283 U.S. 148, followed.
32 B.T.A. 1181">*1181 These proceedings, which have been consolidated, are for the redetermination of deficiencies in income tax determined by the respondent for the years 1924, 1925, and 1926, in the respective amounts of $3,599.25, $2,449.50, and $3,726.98. The only issue for determination is whether the sum of $50,000 which was paid out of the income of a testamentary trust to the widow in each of the taxable years, in accordance with the provisions of the decedent's will, constitutes an allowable deduction from the gross income of the trust estate. In addition to a formal stipulation of some facts, the parties stipulated that certain portions of the dividends received by the trustee on the Warner Brothers Co. stock in 1924 and 1925 were not taxable because not paid out of earnings accumulated since March 1, 1913, and that respondent in computing the deficiencies for1935 BTA LEXIS 837">*839 1924 and 1925 failed to make any deduction or allowance with respect to such dividends. In 1926 the trustee received from Warner Brothers Co. as dividends the sum of $25,672. He did not report the receipt of this sum, having been advised by his accountants that the sum was paid 32 B.T.A. 1181">*1182 out of surplus accumulated prior to March 1, 1913, and was, therefore, not taxable. The Internal Revenue Bureau subsequently ruled, and the petitioner has accepted the ruling, that to the extent of 5.77 percent, or $1,481.27, the dividends received by the trustee from Warner Brothers Co. in 1926 were paid out of income arising since March 1, 1913. Effect will be given to such adjustments upon the recomputation herein under Rule 50.
FINDINGS OF FACT.
Petitioner is the surviving trustee of a testamentary trust created by the will of I. DeVer Warner, late of Bridgeport, Connecticut, who died on January 11, 1913, leaving a will and codicils thereto.
The fifth item of the will is as follows:
FIFTH: I give and bequeath to my Trustees named in this will Fifteen hundred (1500) shares of the capital stock of the Bridgeport Hydraulic Company, Five hundred (500) shares of the capital stock of1935 BTA LEXIS 837">*840 the New York, New Haven and Hartford Railroad Company, Five hundred (500) shares of the capital stock of The Warner Brothers Company, Two hundred thousand dollars ($200,000) par value of first mortgage bonds bearing interest at a rate not less than four per cent per annum, in trust, nevertheless, to hold, invest and reinvest in safe and conservative investments, and from the dividends, interests, income and increase thereof to pay over to my wife during the term of her natural life, annually, in quarterly payments, the sum and amount of Twenty-five thousand (25,000) dollars. All the dividends, interest and income of the trust fund hereby created in excess of the said sum of twenty-five thousand dollars annually to be held, invested and reinvested by my Trustees in some safe and conservative investments until the amount and value of the entire principal or corpus of the trust fund hereby created shall be augmented and increased to the sum and value of Fifty thousand dollars ($50,000) more than at the time of my decease when the excess of dividends, interest, income and increase of the entire fund over and above the sum and amount of Twenty-five thousand dollars ($25,000) annually shall1935 BTA LEXIS 837">*841 be paid annually by my Trustees during the life of wife, to my son DeVer H. Warner, to my daughter Annie L. Bishop, and to my son Ira Follett Warner, share and share alike, the child or children of any deceased child to take the share its parent would have taken if living. At the death of my wife the principal and accumulations of the trust fund created under this item shall be disposed of under the Sixth Item of my will.
If I should not own at my decease the amount and description of bonds and stocks in this item specified, I direct my Executors to procure the same, or other safe and conservative investments of such character and amount as in their judgment will most likely produce a reliable income for the regular payment of the annuity to my wife herein provided for, by the sale of such portions and items of my estate as they shall deem most judicious, to the end that the same may be held and devoted to the purposes specified in this item.
The provisions made in this will for my wife shall be in lieu of her statutory share in my estate.
The last item of the will provides:
NINTH: It is my will that the annuity provided for my wife in the Fifth item of this will shall1935 BTA LEXIS 837">*842 be paid to her out of the income of the trust property held for that purpose if it be sufficient but, if insufficient, then I hereby direct 32 B.T.A. 1181">*1183 and authorize my Trustees to take from the principal of said trust fund a sufficient sum to make up the deficiency so that, at all events, and every year, my said wife shall receive the full sum and amount of Twenty-five thousand (25,000) dollars.
Subsequent codicils designated additional shares of stock of named corporations to be added to the trust fund and increased to $50,000 the amount of the annual payments to be made to the testator's widow, but the provisions for its payment were otherwise unchanged.
By other provisions of the will and codicils thereto the testator's wife was given the use for life, or so long as she remained testator's widow, of testator's homestead in Bridgeport, Connecticut, and of his house and farm at Fairfield, Connecticut, known as Restmore, and was given outright certain personal property.
On or about the 22d day of April 1913 the widow duly signed and filed with the Probate Court her election to accept the benefits given her by the will and she has from the date of death of her husband received1935 BTA LEXIS 837">*843 and enjoyed such benefits.
At the time of his death decedent owned stock in the several corporations named in his will sufficient in amount to comply with the directions of his will and codicils as to the composition of the trust fund established by item fifth.
The corporations whose stocks were included in the trust fund had long records of substantial payments of yearly dividends. Three of the corporations were and had been for some years under the active management of decedent's son, DeVer H. Warner.
By 1916 the trustee had accumulated from the surplus income, after payments to the widow of $50,000 of such income, the amount of $50,000 which decedent directed to be accumulated out of such excess income and added to the principal of the said fund.
In each year from January 11, 1914, to January 11, 1927, the income from the trust fund, not including as income any capital gains, less administrative expenses and charges of all kinds, exceeded the $50,000 of such income directed to be paid to the widow, such excess being from $20,214 to $46,500, an average over the whole period from the date of death to January 11, 1927, of $29,959.
The net income for the first 12 months1935 BTA LEXIS 837">*844 after decedent's death was slightly less than $50,000 due to the fact that the semiannual dividend on one of the stocks included, which was paid on January 15, 1913, having been declared payable to holders of record at a date prior to decedent's death, was treated as being a part of the corpus of the estate and not income of the trust fund. The trustee has paid to the widow each year to the date of hearing $50,000 in quarterly installments out of the income of the fund, except $3,393.93 in the first year which was paid from the corpus of the fund. The 32 B.T.A. 1181">*1184 balance of the income from the trust in each year has been distributed to the children of decedent.
For each of the taxable years the trustee filed a timely fiduciary income tax return, form 1041, reporting fully all sums received by him as dividends and otherwise, arising upon the stock and other securities and property held by him as trustee, less the expense of administration of the trust, leaving net income for 1924, 1925, and 1926 in the respective amounts of $86,906.56, $92,313.68, and $67,829.34. As trustee he paid each year to the testator's widow, Eva F. Warner, the sum of $50,000 and divided the balance of1935 BTA LEXIS 837">*845 the net income from the trust fund equally between the testator's three children, as directed in the will. The trustee reported no part of this income on form 1040, nor did he pay any tax on this income. The widow, Eva F. Warner, paid income taxes on the payments made to her in 1924 and 1925 and later made applications for refund.
For the year 1926, in addition to the above, the trustee reported asprofits on sales the sum of $6,432.43 and this amount was reported by the trustee as income on form 1040 and income tax was duly paid thereon.
The respondent has determined that the amount of $50,000 which was paid to the decedent's widow by the trustee in each of the years involved herein, in accordance with the provisions of the will, is not deductible in computing the income of the trust for these years.
OPINION.
LEECH: The question in this case is whether the petitioner, surviving trustee of the testamentary trust established by the will of I. DeVer Warner, is entitled to deduct that portion of the income of the trust which was distributed to Eva Follett Warner, widow of testator, under the provisions of the will.
The provisions of the Revenue Acts of 1924 and 1926 here1935 BTA LEXIS 837">*846 applicable are contained in section 219 and are identical. They are quoted in the margin. 1
32 B.T.A. 1181">*1185 Petitioner contends that under the will here involved the gift to the widow by item fifth1935 BTA LEXIS 837">*847 of the will was a gift of income to be derived from a particular fund, which fund was earmarked for that purpose, composed of securities named by the will and codicils, and that the provision in item ninth is a separate, secondary, and subordinate gift and a bequest of capital intended to be effective only in case the income from the fund in any year is less than $50,000. ; ; affd., , on authority of Irwin v. Gavit; and , are cited as most closely resembling this case and as supporting petitioner's contention.
Respondent contends that under the terms of the trust established by the testator for the widow, the latter was an ordinary legatee since the payment of $50,000 per annum to her was to be made at all events and was not dependent upon income, citing .
We agree with respondent. The disposition of our single inquiry is obviously controlled by the intent of the testator. This is to be ascertained here, not from item fifth, item1935 BTA LEXIS 837">*848 ninth, or any other separate provision of the decedent's will, but from that will construed as one entirety. ; . Items of the will, other than the fifth and ninth, provide a home for decedent's widow, ample provision for his children, by the bequest to them of the residue of his large estate, and, in addition thereto, bequeath, share and share alike, the income, as such, if the trust estate should have income in excess of the amount of payments to be made to decedent's widow. The ninth item describes the bequest to the widow as an annuity. Both the fifth and ninth items deal entirely with the same trust estate and, together, declare the testator's intention that his widow shall be paid a specified "sum and amount" annually "at all events" as a charge upon the whole trust estate, regardless of whether the latter had income or not. Clearly, an annuity of $50,000 to the widow, payable at all events, was thus intended and granted. 1935 BTA LEXIS 837">*849 ;.
Neither the fact that the widow elected to accept the provisions of the will, by virtue of which the disputed payments were made, in lieu of her statutory rights, nor the present adventitious circumstance of actual payment, wholly from income, during the pending tax years, affects that conclusion. 2 Nor does the fact that the present trust corpus did not include all of the testator's estate, change its character as corpus here, and so, does not disturb that result. ; Boston Safe Deposit &32 B.T.A. 1181">*1186 ; certiorari denied, ; ; certiorari denied, .
We conclude that the widow was the legatee of an annuity, a charge upon the whole trust estate, both income and1935 BTA LEXIS 837">*850 corpus; that the payments in question to her were made by the trustee, not as a payment of income, as such, but in discharge of that legacy, and, accordingly, upon the authority of the Pardee and Whitehouse cases, supra, were not deductible from the gross income of the trust estate in computing its taxable income.
Reviewed by the Board.
Decision will be entered pursuant to Rule 50.
MATTHEWS, dissenting: It is elementary that the intention of the testator governs as to the character of testamentary gifts. Although the terms of the will of I. DeVer Warner are not identical with the terms of either will before the Supreme Court in Helvering v. Butterworth,290 U.S. 365">290 U.S. 365, and Helvering v. Pardee,290 U.S. 370">290 U.S. 370, it is my opinion that the provisions of the Warner will creating the trust are more nearly like those of the Butterworth will. By item fifth the testator established a trust and directed the trustees "from the dividends, interest, income and increase thereof, to pay over to my wife during the term of her natural life, annually, in quarterly payments, the sum and amount of" $50,000. Then after1935 BTA LEXIS 837">*851 accumulating from the excess income the sum of $50,000 which was to be added to the corpus of the trust, the trustees were to pay the balance of the income annually to the testator's three children, share and share alike. At the death of his wife, the principal and accumulations of the trust fund were to be disposed of as part of his residuary estate which was to go to his three children. By another provision, item ninth, the testator reiterated that "It is my will that the annuity provided for my wife in the Fifth item of this will shall be paid to her out of the income of the trust property held for that purpose, if it be sufficient", but if insufficient the trustees were directed to take from the principal a sufficient amount to make up the deficiency, "so that, at all events, and every year, my said wife shall receive the full sum and amount of" $50,000. In my opinion the testator's intention tention or "will" to make his wife a beneficiary of the income of the trust, to the extent of $50,000 each year, could not be more clearly expressed. The fact that in item ninth the testator provided for the payment of a part of the corpus to his wife in any year in which the income of1935 BTA LEXIS 837">*852 the trust should be less than $50,000, thereby making 32 B.T.A. 1181">*1187 what we may designate as a conditional bequest of a part of the corpus, does not change the nature of the gift made by item fifth, which is a gift of income. 290 U.S. 365">Helvering v. Butterworth, supra; Heiner v. Beatty, 17 Fed.(2d) 743; affd., 276 U.S. 598">276 U.S. 598, on authority of Irwin v. Gavit,268 U.S. 161">268 U.S. 161.
It is to be noted further that although the testator herein refers to his gift as an "annuity", he did not give his wife outright an annuity of $50,000, such as was given by Calvin Pardee to his wife, and the amount payable to the widow by virtue of item fifth is not payable without regard to income but is payable wholly out of income. Under the undisputed facts of this case, the amounts paid by the trustees to the widow in the taxable years before us were paid solely by virtue of item fifth. Except in the first year after the testator's death the income of the trust has been greatly in excess of $50,000, and such excess has been distributed to the other beneficiaries. Furthermore, it is only in the event that the income of the trust is less than $50,0001935 BTA LEXIS 837">*853 that there will be paid to her any amount from the corpus, by virtue of item ninth, and if it should be necessary to make up the deficiency, as directed, such amount will be a bequest and not taxable. It appears to me that this conditional bequest should not be so construed as to constitute the testator's gift to the widow a legacy of corpus.
For the reasons set out herein I am strongly of the opinion that the widow in the instant case is a beneficiary of the income of a testamentary trust created by the will of I. DeVer Warner, within the intendment of the statute, and that the petitioner is entitled, under section 219(b)(2) of the Revenue Acts of 1924 and 1926, to deduct the income of the trust which was distributable and distributed to her in the taxable years.
Footnotes
1. SEC. 219. (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including -
* * *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
* * *
(b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that -
* * *
(2) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * * ↩
2. The dissenting opinion of Chief Justice Hughes expresses the contrary view on the latter point, which is answered in the majority opinion. ↩