Opinion
Docket No. 5612.
1945-08-17
KATHRYN E. T. HORN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Walter T. Fahy, Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent.
Petitioner is the life beneficiary of a testamentary trust. The trust corpus included an undivided interest in certain real estate owned by testator at his death. During the years 1929 to 1940 the expenses of the trust incident to this real estate exceeded the income therefrom by approximately $6,500. These excess expenses were deducted from the other trust income before distributions were made to petitioner. In 1940, in an accounting of the trust and at the request of petitioner, the court having jurisdiction over the trust ordered that $6,500 (representing this accumulated excess of expenses over income) be awarded from trust principal to trust income, and thereupon awarded the trust income, increased by the $6,500 to petitioner, who received payment thereof from the trust in 1940. Held, this $6,500 is includible in petitioner's gross income for the year 1940. Walter T. Fahy, Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent.
In this proceeding respondent has determined a deficiency in petitioner's income tax for the year 1940 in the sum of $1,280.69. This deficiency arises by reason of respondent's determination that a certain payment made to petitioner during that year by the trustees of a testamentary trust created by her deceased husband should be included in her gross income for the taxable year.
FINDINGS OF FACT.
The parties have filed herein a stipulation of facts. We find them to be as stipulated and set out below those facts necessary for an understanding of the issue here presented.
Franklin S. Horn, the husband of petitioner, died testate on April 15, 1928. By his will, which was duly probated in Philadelphia County, Pennsylvania, he named the petitioner and one John C. Tracy as executors and trustees. To them he devised and bequeathed the residue of his estate remaining after the payment of his funeral expenses, masses for the repose of his soul, and a bequest of personal belongings to his wife. This residue was to be held in trust and the net amount of the income therefrom was to be paid pursuant to the will to petitioner during her life. Upon her death certain specific bequests were to be paid to numerous legatees out of principal, and the balance of the principal was to be divided among three charities. Among the properties of which decedent died seized was an undivided 7/36 interest in certain real estate located at 1515 Arch Street, Philadelphia, Pennsylvania.
On March 1, 1929, the first account of the executors was filed. On May 1, 1940, the executors and trustees under decedent's will filed with the clerk of the Orphans' Court of Philadelphia County, Pennsylvania, the account of the trust created under the will, and this account was duly called for audit on June 30, 1940. In the account it was indicated that the expenses incident to the real estate above described from the period 1929 to June 30, 1940, inclusive, exceeded the income therefrom in the amount of $6,483.46, as follows:
+-------------------------------+ ¦Year ¦Rents received ¦Expenses ¦ +-----+---------------+---------¦ ¦1929 ¦$473.25 ¦$1,165.71¦ +-----+---------------+---------¦ ¦1930 ¦9.64 ¦850.58 ¦ +-----+---------------+---------¦ ¦1931 ¦8.75 ¦1,064.33 ¦ +-----+---------------+---------¦ ¦1932 ¦2.32 ¦734.60 ¦ +-----+---------------+---------¦ ¦1933 ¦313.96 ¦664.43 ¦ +-----+---------------+---------¦ ¦1934 ¦35.00 ¦616.06 ¦ +-----+---------------+---------¦ ¦1935 ¦35.00 ¦772.44 ¦ +-----+---------------+---------¦ ¦1936 ¦204.17 ¦545.05 ¦ +-----+---------------+---------¦ ¦1937 ¦221.67 ¦502.47 ¦ +-----+---------------+---------¦ ¦1938 ¦221.66 ¦493.70 ¦ +-----+---------------+---------¦ ¦1939 ¦221.67 ¦507.43 ¦ +-----+---------------+---------¦ ¦1940 ¦none ¦313.75 ¦ +-----+---------------+---------¦ ¦Total¦1,747.09 ¦8,230.55 ¦ +-----+---------------+---------¦ ¦ ¦ ¦1,747.09 ¦ +-----+---------------+---------¦ ¦ ¦ ¦6,483.46 ¦ +-------------------------------+
The account also indicated that during that period of time the excess of expenses over income with regard to this property had been deducted by the trustees from the other income of the trust estate which was distributable to petitioner under decedent's will.
On June 6, 1940, an adjudication upon the trustee's account was filed by the presiding judge of the Orphans' Court of Philadelphia County. The pertinent parts of this adjudication are as follows:
This account is filed to determine the right of the life beneficiary to have carrying charges of non-productive real estate charged against principal.
The widow and life tenant requests that carrying charges of a 7/36ths interest in premises 1515 Arch Street for the time since the decedent's death and amounting to $6,483.46 should be charged to principal instead of income. This sum represents the excess cost of carrying the property, chiefly taxes, over and above the income therefrom. The persons interested in opposition to request are the pecuniary legatees who are to be paid at her death, and the three charities. All have had notice of the audit and make no objection. The remainder of the estate was stated at the audit to be valued at $300,000.00 and it appears that the money legacies, listed in the petition for distribution, approximate $47,000.00. The real parties in interest would therefore appear to be the three charities (interested at the widow's death after the legatees), which expressly agree. Under the authority of Develon's Estate, 26 D. & C. 19, Levey's Estate, 333 Pa. 440, and Mark's Estate, 2598 of 1932, the request is granted.
There was no objection to the account which shows a balance of principal personalty of $53,181.34, and a deficit real estate principal of $5,993.39, which, composed as indicated, less one-half costs of this accounting (counsel fee $750.00), filing fee $125.00, and affidavits $.75, total $875.75), or $437.87, is awarded: $6,483.46 to income in reimbursement of overdraft re premises 1515 Arch Street, as above, and the balance to the accountant in trust for the uses and purposes of the will.
The account of income shows a balance of income personalty of $5,968.15, income 1225 Market Street of $51,312.76; income 304 East Baltimore Street of $58,533.68; which balances, with income to date of payment, less one-half costs of this accounting as above, $437.88, together with award from principal, $6,483.46, in reimbursement of deficit re 1515 Arch Street, is awarded to Kathryn E. T. Horn, subject to distribution properly made.
Leave is given to execute and deliver all necessary transfers and assignments.
Pursuant to this adjudication the trustees of the decedent's estate paid to the petitioner during the taxable year the sum of $6,483.46, but this amount was not reported by petitioner in her Federal income tax return for that year.
OPINION.
KERN, Judge:
The respondent has determined that the amount paid to petitioner in 1940 as beneficiary of a trust pursuant to a decree of the Orphans' Court of Philadelphia County, Pennsylvania, is includible in the gross income of petitioner for the taxable year 1940 under sections 22(a) and 42 of the Internal Revenue Code. This amount represented the carrying charges of unproductive trust real estate accumulated for twelve years which had been deducted from the gross income of the trust and had therefore in that amount reduced the income distributed to petitioner, the life beneficiary, by the trust during those years. Petitioner contends that she was entitled to the amounts so deducted in each of the prior years on account of carrying charges, that therefore such amounts were in effect distributable to her in those years, and concludes that to the extent the payment made in the taxable year represents the carrying charges for prior years it is not properly includible in her gross income for the taxable year.
The background of state law necessary to an understanding of the issue here involved is to be found in Commissioner v. Lewis, 141 Fed.(2d) 221, affirming 1 T.C. 449. Carrying charges of unproductive trust real estate are ordinarily payable from trust income and not chargeable to principal. However, when the equities in the case demand a contrary rule a court of first instance in its sound discretion can so decree. See Levy's Estate, 333 Pa. 440.
In the instant case the state court having jurisdiction over the trust, in an account of the trustees and upon a request of petitioner, entered an order in 1940 awarding $6,483.46 from trust principal ‘to income in reimbursement of overdraft re premises 1515 Arch Street (the unproductive trust real estate in question)‘ and a awarding the balance of income personalty of the trust as shown by the trustees' account plus the ‘award from principal $6,483.46, in reimbursement of deficit re 1515 Arch Street‘ to the petitioner, the life beneficiary of the trust.
It does not appear that the petitioner made any such request before 1940. Nothing in the record suggests that if such a request had been made the equities of the case would have warranted a court in granting it. See the Lewis case, supra. Therefore, before the order entered by the Orphans' Court in 1940 we are unable to agree with petitioner that she was entitled of right to have the carrying charges of the unproductive trust real estate paid from trust principal rather than trust income. Not until the state court entered this order in 1940 was the income account of the trust increased by charging these expenses against principal, and not until then were any additional payments on account of trust income distributable to petitioner. It is for that year that the total amount of the payment in question should be included in petitioner's gross income. See Theodore R. Plunkett, 41 B.T.A. 700; affd., 118 Fed.(2d) 644; Robert W. Johnston, 1 T.C. 228; affd., 141 Fed.(2d) 208.
Decision will be entered for the respondent.