Opinion
Docket Nos. 36567 36568 36569.
1955-09-29
HORACE GREELEY HILL, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MAMIE WILSON HILL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FRANCES HILL CALDWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John M. Barksdale, Esq., for the petitioners. Frederick T. Carney, Esq., and S. Earl Heilman, Esq., for the respondent.
The will of a decedent provided that the executors, in their absolute discretion, could require or waive refunding bonds before paying income to the residuary legatees. Held, such provision prevents the right of the legatees to current income from being vested and absolute, and such income, to the extent not actually distributed or irrevocably credited to them is not includible in their taxable incomes. See 162(b), I.R.C. 1939. John M. Barksdale, Esq., for the petitioners. Frederick T. Carney, Esq., and S. Earl Heilman, Esq., for the respondent.
Respondent has determined deficiencies in the income tax of the petitioners as follows:
+---------------------------------------------+ ¦ ¦Horace Greeley¦Mamie Wilson¦Frances Hill¦ +----+--------------+------------+------------¦ ¦Year¦Hill, Jr. ¦Hill ¦Caldwell ¦ +----+--------------+------------+------------¦ ¦ ¦ ¦ ¦ ¦ +----+--------------+------------+------------¦ ¦1943¦$3,469.10 ¦$3,480.50 ¦$2,803.78 ¦ +----+--------------+------------+------------¦ ¦1944¦11,018.56 ¦10,248.83 ¦7,768.23 ¦ +----+--------------+------------+------------¦ ¦1945¦10,942.19 ¦8,997.52 ¦6,764.25 ¦ +----+--------------+------------+------------¦ ¦1946¦8,404.50 ¦7,681.96 ¦5,575.33 ¦ +----+--------------+------------+------------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------+
The sole issue is whether income received by the estate of Horace Greeley Hill, deceased, during the above taxable years, was income which was ‘to be distributed currently’ within the purview of section 162(b) of the Internal Revenue Code of 1939. The year 1942 is before the Court by virtue of the Current Tax Payment Act of 1943, solely for the correct computation of the income tax liability of the petitioners for the taxable year 1943.
Certain minor adjustments, including small deficiencies in respect of the taxable year 1947, have not been contested and may be taken into account in a computation made pursuant to Rule 50.
FINDINGS OF FACT.
A stipulation of facts filed by the parties is hereby adopted as a part of our findings.
The petitioners, residents of Davidson County, Tennessee, filed their Federal income tax returns for the taxable years in question with the collector of internal revenue for the district of Tennessee at Nashville, Tennessee. Petitioners are three of the four residuary legatees of the estate of Horace Greeley Hill, deceased. The fourth residuary legatee, Elizabeth Hill Penick, resides in New Orleans, Louisiana.
Horace Greeley Hill died October 17, 1942, his last will and testament being duly probated on October 22, 1942, in Davidson County, Tennessee. The will, after making provision for payment of debts, taxes, funeral and administration expenses, and a specific bequest to the testator's wife, bequeathed the residue of the estate equally to the wife, son, and two daughters of the testator. The petitioners herein are the wife, son, and one of the daughters.
Item III of the will provided in part as follows:
I hereby give, devise and bequeath until my * * * wife and * * * children * * * all the rest and residue of my property, real, personal and mixed * * * to be theirs absolutely and equally share and share alike; * * *
Item IV of the will reads in part as follows:
I hereby nominate and appoint my son, Horace G. Hill, Jr., and the Nashville Trust Company of Nashville, Tennessee, as co-executors * * *
Any and all dividends, interest, or other income declared or accruing after my death on or from my estate, or any part thereof, and received by my executors, during the administration of my estate and prior to final distribution and among my legatees and devisees in the manner and as provided for in the foregoing Item III of this my last will and testament; such distributions shall be made periodically every six months, or at more frequent intervals if my executors, in their sole and absolute discretion desire to make any such distributions at more frequent intervals; and in making such distributions and payments of income my executors, in their sole and absolute discretion, may waive or require refunding bonds, from time to time or at any time.
Horace Greeley Hill, Jr., and the Nashville Trust Company of Nashville, Tennessee, duly qualified as executors of the estate of the decedent. They filed Federal income tax returns for the estate on a calendar year basis.
The estate of Horace Greeley Hill consisted of personal property and income from personal property. The bulk of the estate was made up of 4,600 shares of common stock in H. G. Hill Company, a closely held corporation controlled by decedent and other members of his immediate family.
The major portion of the income of the estate during the taxable years involved consisted of dividends received on the stock of H. G. Hill Company. Smaller amounts of income were also realized from savings accounts, United States Government bonds, and Treasury Certificates. The income of the estate during the taxable years 1943 to 1946, inclusive, was as follows:
+--------------------------+ ¦Year ¦Amount of income ¦ +------+-------------------¦ ¦1943 ¦$58,829.02 ¦ +------+-------------------¦ ¦1944 ¦62,191.75 ¦ +------+-------------------¦ ¦1945 ¦69,000.00 ¦ +------+-------------------¦ ¦1946 ¦69,000.00 ¦ +--------------------------+
The estate also received $32,269.24,
representing income earned between the death of the decedent on October 17, 1942, and December 31, 1942.
This figure was taken from the stipulation. The fiduciary return of the estate for that period, however, shows the total income of the estate to have been $36,801.03, of which $32,200 is listed as dividends and $4,601.03 as salary from H. G. Hill Company.
In 1943, $70,932.92, of which $38,663.68 represented income earned in 1943, was distributed to the legatees, out of income earned in 1944. No other or further distributions of income to the legatees took place during the years 1943 to 1946, inclusive. The executors paid income taxes on all income earned by the estate less amounts actually distributed to the legatees in the taxable year when earned. Petitioners paid income tax only upon the amounts so distributed to them.
The Federal estate tax due and payable with the return was $266,917.53, and the State inheritance tax due and payable with the return to the State of Tennessee amounted to $52,621.27. On December 31, 1943, the executors had only $155,666.90 cash on hand, although the estate was solvent. The executors then borrowed $35,447.23 from each of the four residuary legatees, or a total of $141,788.92. In addition, United States Savings and Defense Bonds in the amount of $16,955 and United States Treasury Tax Notes in the amount of $5,128 were redeemed. The cash on hand, plus the amounts received as a result of the foregoing loans and redemptions, were expended in January of 1944 in payment of the above death taxes.
On December 31, 1944, there still remained unliquidated in the corpus of the estate 4,600 shares of stock in H. G. Hill Company and 42 9/10 shares of stock in the Nashville Trust Company. An overdraft of $14,393.65 existed in the corpus account, and, in order to balance the cash the overdraft was covered by the transfer of that amount from the income account. Immediately after such transfer and the payment of commissions, the balance in the income account was $28,731.87.
On December 6, 1945, the executors borrowed $141,788.92 from the Nashville Trust Company in order to repay the indebtedness of the estate to the residuary legatees. On December 31, 1945, there was no cash on hand in the corpus account. The balance in the income account, after a transfer of $16,153.47 to corpus to cover an overdraft in that amount was $45,240.04. As of December 31, 1945, the executors owed Nashville Trust Company a total of $278,277.68 on account of various sums borrowed on behalf of the estate.
The stock of H. G. Hill Company was not listed on any exchange, nor were shares thereof regularly purchased and sold. No ready market existed for the shares, and it did not appear that any such shares could be sold to outside interests except at a substantial sacrifice.
In 1946 the executors borrowed $147,223.73 from the residuary legatees, and also transferred $19,054.80 from income to corpus. The following payments were then made:
+-----------------------------------------------------------------------------+ ¦Date ¦Nature of payment ¦Amount ¦ +-----------+-----------------------------------------------------+-----------¦ ¦ ¦ ¦ ¦ +-----------+-----------------------------------------------------+-----------¦ ¦May 15 ¦Deficiency in decedent's 1942 income tax ¦$3,830.34 ¦ +-----------+-----------------------------------------------------+-----------¦ ¦May 27 ¦Balance of State inheritance tax ¦23,222.76 ¦ +-----------+-----------------------------------------------------+-----------¦ ¦July 17 ¦Balance of Federal estate tax ¦107,567.15 ¦ +-----------+-----------------------------------------------------+-----------¦ ¦August 2 ¦Fee to C. P. A. ¦3,000.00 ¦ +-----------+-----------------------------------------------------+-----------¦ ¦September ¦Payment on indebtedness to Nashville Trust Company ¦28,777.68 ¦ ¦20 ¦ ¦ ¦ +-----------+-----------------------------------------------------+-----------¦ ¦September ¦Reimbursement to agents of the residuary legatees ¦30.60 ¦ ¦23 ¦ ¦ ¦ +-----------+-----------------------------------------------------+-----------¦ ¦ ¦Payment of executor's commission to Nashville Trust ¦10,000.00 ¦ ¦ ¦Company ¦ ¦ +-----------+-----------------------------------------------------+-----------¦ ¦ ¦ ¦ ¦ +-----------+-----------------------------------------------------+-----------¦ ¦Total ¦ ¦$176,428.53¦ +-----------------------------------------------------------------------------+
Considerable difficulty was encountered in arriving at a valuation of the shares of stock in H. G. Hill Company satisfactory both to the executors and the taxing authorities. The executors had valued the stock at $175 per share in the Federal estate tax return. The agent of the respondent proposed a valuation of $375 per share, and a valuation of $315 per share was finally agreed upon.
The total outstanding indebtedness of the estate in the amount of $397,223.73 and an overdraft of $10,000, together with certain other costs and expenses, were finally paid in 1947 from funds raised as follows:
1316 shares of stock in H. G. Hill Company were sold to the residuary legatees and to H. G. Hill Company at a price of $315 per share, or a total purchase price of $414,540.
$740.88 was received from the Scottish Rite Bodies Board. 2 9/10 shares of stock in Nashville Trust Company were sold to Horace Greeley Hill, Jr., for $236.58.
Administration of the estate was completed and the estate closed on October 29, 1947. The remaining shares of stock of H. G. Hill Company and Nashville Trust Company were distributed to the four residuary legatees, share for share.
OPINION.
RAUM, Judge:
The statutory provisions dealing with the income of estates and trusts evidence an intention that all such income shall be taxed.
Cf. Central Hanover Bank & Trust Co., Executor, 34 B.T.A. 741. Section 162(b) and 162(c) of the Internal Revenue Code of 1939, together with various other sections, deal with the question of when such income is taxable to the legatee, heir, or beneficiary.
SEC. 161. IMPOSITION OF TAX.(a) APPLICATION of TAX.— The taxes imposed by this chapter (other than the tax imposed by subchapter E, relating to tax on self-employment income) upon individuals shall apply to the income of estates or of any kind of property held in trust, including—SEC. 162. NET INCOME.The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—(b) 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 legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, ‘income which is to be distributed currently’ includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. * * *(c) In the case of income received by estates of deceased persons during the period of administration of settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary:
Section 162(b) provides that when the income is ‘to be distributed currently’ all of such income shall be deductible by the fiduciary and taxed to the legatee, heir, or beneficiary whether or not so distributed. On the other hand, as provided in section 162(c), if distribution is at the discretion of the trustee, and in the case of an estate in the process of administration, only that part of the income actually distributed or made unequivocally available to the distributee id deductible by the fiduciary and taxable to the legatee, heir, or beneficiary. All the remaining income of the estate or trust is taxable to the fiduciary. Cf. McCrory v. Commissioner, 69 F.2d 688 (C.A. 5); Commissioner v. Stearns, 65 F.2d 371 (C.A. 2), certiorari denied 290 U.S. 670; Ethel Holmshaw Fickert, 15 T.C. 344; Mary Pyne Filley, 45 B.T.A. 826; Estate of Austin C. Brant, 44 B.T.A. 1306; Leonard Marx, 39 B.T.A. 537.
The respondent has taken the position that the income of the estate of Horace Greeley Hill, during the taxable years 1943 to 1946, inclusive, was ‘to be distributed currently’ to the legatees within section 162(b) and that, consequently, all of such income is taxable to the legatees, whether distributed to them out. We cannot agree.
In order that income be currently distributable within the meaning of section 162(b), the person or persons to whom such income is so distributable must have a present, enforceable, vested right to such income. Freuler v. Helvering, 291 U.S. 35; Commissioner v. Lewis, 141 F.2d 221 (C.A. 3); Estate of Isador Zellerbach, 9 T.C. 89, affirmed per curiam 169 F.2d 275 (C.A. 9), certiorari denied 335 U.S. 903; Jack M. Franks, 32 B.T.A. 260. This right must be clear, and not subject to any condition as to its enforceability. The mere right to apply to a court of competent jurisdiction to compel distribution, where it is possible, but not clear, that such application would be granted, is not equivalent to a present enforceable right. Estate of B. Brasley Cohen, 8 T.C. 784; Marjorie V. L. Hudson, 8 T.C. 950.
Assuming arguendo that section 162(b) could apply in an appropriate case to an estate in the process of administration, an examination of the will in the instant case convinces us that its terms do not purport to make the income of the estate currently distributable to the legatees as required by the foregoing cases. Item IV permits the executors, ‘in their sole and absolute discretion,’ either to waive or to require refunding bonds, as they see fit. The Government does not argue that this provision is void or unenforceable in Tennessee, and we cannot ignore it. If a demand for refunding bonds had been asserted by the executors it is at least highly doubtful whether a legatee would have the right to compel the payment of income in excess of the amount the executors desired to distribute, without first furnishing such bond. The furnishing of such a bond is not an insubstantial condition, and could well be highly burdensome. The power of the executors to require it as a condition of the distribution of current income prevents the legatee from having at any time the present enforceable right contemplated by section 162(b). Cf. Freuler v. Helvering, supra.
It has been stated generally that whether income is ‘to be distributed currently’ must be resolved by reference to local law. However, we have not been shown, and we know of no example of local law which would require as a general rule of law that the income of an estate in process of administration must always be distributed currently despite the fact that the will itself has not so provided. Respondent does not suggest that such is the law in Tennessee. Of course, void or unenforceable provisions in a will could be ignored, but there is no suggestion that the provision in the present will respecting refunding bonds is in any way so defeasible. The necessity of resorting to local law normally arises after it is ascertained that the will or trust instrument by its terms alone purports to require that income be distributed currently. It then becomes necessary to resort to local law to determine whether it will permit the terms of the will or trust instrument to be literally enforced, and cause to vest in the legatee, heir, or beneficiary the absolute right apparently conferred upon him by the testator or settlor. The will itself, in the instant proceeding, does not purport to confer such right. Cf. Saulsbury v. United States, 199 F.2d 578 (C.A. 5), certiorari denied 345 U.S. 906; Kathryn Titus MacMurray, 16 T.C. 616; Edna C. Gutman, 1 T.C. 365, affirmed 143 F.2d 201 (C.A. 2); Ether S. Garrett, 45 B.T.A. 848. See also, Smith's Estate v. Commissioner, 168 F.2d 431 (C.A. 6).
Thus, the petitioners, during the taxable years 1943 to 1946, inclusive, lacked such a present, absolute right to receive income as is contemplated by section 162(b). Accordingly, they may not be required by section 162(b) to include in their returns for those years amounts in excess of income actually distributed to them.
The deficiencies determined by the Commissioner were based solely on sections 162(b) and 22(a), Internal Revenue Code of 1939. For the reason discussed above, we have concluded that section 162(b) is inapplicable. The Commissioner has presented no independent argument to sustain the deficiencies under section 22(a). And it is also clear that section 162(c) cannot be applicable since the income in question was not in fact ‘paid or credited’ to petitioners during the taxable years.
Section 162(c) deals in part with ‘Income received by estates of deceased persons during the period of administration or settlement of the estate.’ Accordingly, it might be arguable that such income may be taxed to the beneficiaries, if at all, only under section 162(c), and that if section 162(c) is inapplicable, then resort may not be had to section 162(b). Cf. Estate of Peter Anthony Bruner, 3 T.C. 1051; Marie B. Hirsch, 9 T.C. 896. The result of such reasoning here would be that since section 162(c) is inapplicable the deficiencies must be disapproved. However, we find it unnecessary to pass upon the question whether subsections (b) and (c) are mutually exclusive, since we have concluded that, in any event, the deficiencies cannot be sustained under either (b) or (c).
Reviewed by the Court.
Decisions will be entered under Rule 50.
BRUCE, J., concurring:
I concur in the result reached by the majority but think that under the facts in the instant case it is unnecessary to decide whether income is to be distributed currently within the purview of section 162(b) where the executor can require the distributee to furnish a refunding bond. A decision on this ground is somewhat broad as a refunding bond could apparently have been required by the executors under the law in Tennessee (Williams, Code of Tennessee (1934), sec. 8336), and no doubt could be required in a large number of other states having similar statutes, even if there had been no provision concerning refunding bonds in the will. Where, as here, under the law of Tennessee, the State having jurisdiction of the administration and distribution of the estate, the petitioners did not have a present enforceable right to the income in question regardless of whether they could have been required to furnish refunding bonds, it appears to me unnecessary and inappropriate to rest the decision on the ground adopted by the majority.
Under the common law (McClanahan v. Davis, et al., 49 U.S. 169, 178) applicable in Tennessee (Nashville & American Trust Co. v. Baxter, 171 Tenn. 494, 105 S.W.2d 108, 113; Hadley v. Kendrick, 78 Tenn. 525), the executor is required to apply the personal estate first to the payment of debts (including taxes) and the legatees are not entitled to possession of the estate without the executor's consent, even though the testator has provided otherwise. Since income received by the estate during the period of administration becomes part of the personal estate and is subject to the claims of creditors (Union Planters National Bank & Trust Co. v. Beeler, 172 Tenn. 317, 112 S.W.2d 11; Bonham v. Bonham, 180 Tenn. 364, 175 S.W.2D 328; Globe Indemnity Co. v. Bruce, (C.a. 10) 81 F.2d 143, 152, certiorari denied ,97 U.S. 716; People's Pittsburgh Trust Co. v. United States, 6 F.Supp. 447, 454), the legatees had ‘no present enforceable right’ to the income in question in the absence of the assent of the executors to its distribution, while the debts and taxes remained unpaid, even though the will is construed to state the cry.
Respondent has cited no statutes that would require a different conclusion and none have been found by an independent research. Williams, Code of Tennessee, section 8335, providing for the distribution of the surplus ‘immediately after the expiration of eighteen months' has been construed to be directory and not mandatory (Nashville & American Trust Co. v. Baxter, supra). Also, while the petitioners might have had the right to apply to an equity court to compel a distribution, it was certainly within the discretion of such court to refuse their request and to grant the executors additional time. Williams, Code of Tennessee, sec. 8196.7. In general the language in the decisions of the Supreme Court of Tennessee indicated that it would be improper to make a distribution while, as here, the debts and taxes remained unpaid. Delaney v. Delaney, 190 Tenn. 632, 231 S.W.2d 328, 330; Union Planters National Bank & Trust Co. v. Beeler, supra; Hutchinson v. Montgomery, 172 Tenn. 375, 112 S.W.2D 827, 828; Nashville & American Trust Co. v. Baxter, supra. See also Nashville Trust Co. v. Commissioner, (C.A. 6) 136 F.2d 148, 151; 1291, 1292, 1297, 1298, 1309; Regs. 105, sec. 81.99. As petitioners at best had only the right to apply to a court to compel distribution, under the authorities cited in the majority opinion the income was not distributable currently regardless of the executor's right to require a refunding bond.
For the same reasons I consider it unnecessary to determine whether, under the terms of the will, which designated his wife and named children ‘or to such of them who survive me and are living at the time of actual final distribution of my estate’ as his residuary legatees, the petitioners were entitled to distribution of the income of the estate prior to ‘actual final distribution’ of the estate.