Opinion
Docket No. 34244.
1954-03-17
MIRIAM C. LINDAU, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles E. Roth, Esq., for the petitioner. George W. Calvert, Esq., for the respondent.
Charles E. Roth, Esq., for the petitioner. George W. Calvert, Esq., for the respondent.
The petitioner received $7,000 in 1948 from a trust. Under the terms of the indenture the payment was a lump-sum gift, payable in any event out of the income or principal of the trust and, therefore, under the provisions of section 22(b)(3) of the Internal Revenue Code, was not properly included in petitioner's gross income.
This proceeding involves a redetermination of a deficiency in petitioner's income tax for the year 1948 in the amount of $1,489.60. The controversy was submitted on stipulated facts and exhibits. The question is whether a gift of $7,000 received by the petitioner in 1948 under the terms of a trust indenture is excluded from her gross income for that year under the provision of section 22(b)(3) of the Internal Revenue Code.
FINDING OF FACT.
The petitioner, Miriam C. Lindau, resides in Greensboro, North Carolina. For the taxable year 1948, she filed her individual income tax return with the collector of internal revenue for the first district of Ohio.
The Moses H. Cone Memorial Hospital, hereinafter called the corporation, is a charitable corporation which was organized on May 29, 1911, under the laws of the State of North Carolina. The corporation was exempt from Federal income taxes under the provisions of section 101 of the Internal Revenue Code in all the years here material.
On May 30, 1911, under three separate trust indentures, Bertha L. Cone, widow of Moses H. Cone, conveyed real estate and personal property of considerable value to the corporation. Under one of the indentures, she transferred to the corporation all of the stock of the Cone Export and Commission Company and the Proximity Manufacturing Company (now both merged into the Cone Mills Corporation) which she had received upon the death of her husband. She reserved a life estate in this personal property, and provided that after her death the fund should be used by the corporation for the construction and maintenance of The Moses H. Cone Memorial Hospital and for the maintenance of a park in honor of her husband.
Item IV, paragraphs (j) and (l) of the trust indenture, provided as follows:
That after the death of the party of the first part of the party of the second part, Trustee, as aforesaid, shall hold the said stocks or the property into which they may have been converted and invested, subject to the following immediate and primary charges and payments, that is to say: The party of the second part, out of the income from the said fund, shall pay the following annuities to relatives of the party of the first part, to-wit:
(j) Unto Miriam Landau, niece of the grantor herein, the sum of Five Thousand Dollars ($5,000.00) payable when she shall come to be twenty-five years old, or on her marriage if she shall marry before she attains that age, and in the event that she shall die before arriving at twenty-five years of age, not having theretofore married, then the said gift or bequest is to lapse and become a part of the estate of the grantor herein.
(l) That on the death of either of the said brothers of the grantor herein, viz: J. W. Lindau, A. M. Lindau, J. H. Lindau, and S. J. Lindau, the party of the second part herein shall pay unto the surviving widow and each surviving child of such deceased brother the sum of Two Thousand Dollars ($2,000.00), and such brother's annuity shall cease; this sum to each of the nieces of the grantor herein to be in addition to the Five Thousand Dollars ($5,000.00) hereinbefore provided to be paid to each of them.
Miriam Landau is the petitioner in this proceeding. She is a niece of the grantor, a surviving child of S. J. Lindau, who predeceased the grantor, and she had reached the age of 25 prior to the death of Bertha Cone.
Item IV (n) of the indenture provided as follows:
(n) If for any cause the annual income from the property herein conveyed shall at any time be insufficient to pay the annuities regularly as provided in sub-items a, b, c, d, e, f, g, and h, then they shall abate ratably and proportionately.
The specific gifts to be paid under sub-items i, j. k, l and m may be paid out of the principal of the estate herein granted if the income shall not be sufficient.
The $7,000 here involved consists of the specific gifts paid to the petitioner under the paragraphs above recited granting $5,000 directly to Miriam Lindau and $2,000 to her as the surviving child of S. J. Lindau.
Bertha Cone died on June 8, 1947. Her will was probated in the Superior Court of Watauga County, North Carolina, on June 9, 1947, and made bequests to some of the same persons who were benefited by the provisions of Item IV of the indenture referred to above.
Item X of the will provided as follows:
Notwithstanding the provisions of the indenture which I entered into under date of May 30, 1911, with The Moses H. Cone Memorial Hospital, Incorporated, under which I transferred, conveyed and assigned to said hospital, as trustee, shares of stock in Cone Export and Commission Company and Proximity Manufacturing Company, upon the trusts, conditions and limitations therein set out, it is my purpose, intent and desire that the bequests made in this will shall be in addition to and not in lieu of the annuities and specific gifts provided for in said indenture, or any part thereof, and that The Moses H. Cone Memorial Hospital shall not be entitled to any credit against or deduction from any of the annuities or specific gifts provided for in said indenture on account of the bequests made in this will.
The foregoing provision of the will was in apparent conflict with a provision of Item IV of the trust indenture which provided, in substance, that the grantor, Bertha Cone, intended to satisfy certain of the gifts or annuities provided for in the indenture including those of petitioner, either by inter vivos transfers or in her will, and to the extent that the annuities and gifts were so satisfied, the provisions of the indenture were to abate or be reduced.
Because of this conflict, the corporation brought an action in the Superior Court of Guilford County, North Carolina, for a construction of the trust indenture in the light of the provisions in the last will and testament of Bertha Cone. The pleading in that action recited that the testatrix, Bertha Cone, had not satisfied any of the annuities or gifts during her lifetime and requested the court to determine whether, in view of the provision in Item X of the will, above, the trustees should credit the annuitants and the legatees under the trust indenture with the annuities and bequests granted them in the will. Petitioner and all other parties in interest were defendants in this proceeding.
In describing the provisions of the trust indenture insofar as they relate to this petitioner, the pleading stated that ‘The terms of said indenture * * * provided that, on the death of the grantor, the plaintiff should pay, out of the income or principal of the properties held in trust, the sum of $5,000.00 to * * * Miriam Landau‘ when she should reach the age of 25 years or on her earlier marriage. The pleading requested in its prayer for relief (in part) as follows:
Whether the plaintiff shall make payments of gifts in the following amounts to the following defendants out of the income or principal of the properties held in trust by the plaintiff under the indenture of 30 May 1911:
(11) $7,000.00 to the defendant, Miriam Lindau.
A final judgment was entered in the construction proceeding on January 14, 1948. The substance of that judgment was that the annuities and bequests granted in the indenture were not to be offset by the annuities and gifts to the same parties given under the will of Bertha Cone. Insofar as the petitioner is concerned, the judgment of the court recited that:
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the plaintiff shall make payment of gifts in the following amounts to the following defendants out of the income or principal of the properties held in trust by the plaintiff under the indenture of 30 May 1911:
(12) $7,000.00 to the defendant, Miriam Lindau.
Pursuant to the provisions of Item IV, paragraphs (j) and (l) of the indenture and the judgment of the Superior Court of Guilford County, North Carolina, the trustees paid $7,000 to the petitioner on January 23, 1948.
The petitioner did not include the $7,000 as income on her Federal income tax return for any taxable year. The respondent has determined that the $7,000 was taxable income of the petitioner in 1948. The payment was made out of a bank account which was not segregated as to principal and income. The aggregate amount paid by the corporation to the petitioner and others under the direction of the indenture and the judgment of the court was $43,000. The $43,000 was comprised of payments of specific gifts totaling $39,000, plus a $4,000 payment on an annuity to one of the beneficiaries under the indenture.
The $43,000 disbursement appears as a charge against income on the hospital's books and records and on the statement of its operations for the period May 29, 1911, to June 30, 1950, prepared by its accountants. These payments were charged to the income account of the hospital by its auditors on or about September 30, 1950, in classifying the receipts and disbursements of the hospital for the period before mentioned. This classification was accepted by the trustees of the hospital.
The books of The Moses H. Cone Memorial Hospital disclose receipts of the following large items of income after June 8, 1947, and in the year 1948:
+--------------------------+ ¦Date ¦Dividends ¦ +--------------+-----------¦ ¦Sept. 2,1947 ¦$165,592.00¦ +--------------+-----------¦ ¦Dec. 2, 1947 ¦491,070.00 ¦ +--------------+-----------¦ ¦Dec. 20, 1947 ¦654,760.00 ¦ +--------------+-----------¦ ¦Mar. 1, 1948 ¦194,308.00 ¦ +--------------+-----------¦ ¦June 1, 1948 ¦194,308.00 ¦ +--------------+-----------¦ ¦Sept. 2, 1948 ¦388.616.00 ¦ +--------------+-----------¦ ¦Dec. 2, 1948 ¦485,770.00 ¦ +--------------------------+
The $7,000 paid to petitioner was a lump-sum gift granted by the trust indenture of May 30, 1911, to be paid primarily out of the income of the property transferred but nevertheless to be paid in any event out of the trust property.
OPINION.
ARUNDELL, Judge:
The question in this proceeding is whether $7,000 received by petitioner in 1948 under the terms of a trust indenture executed by her aunt was properly excluded from her gross income in 1948 under the provisions of section 22(b)(3) of the Internal Revenue Code.
SEC. 22. GROSS INCOME.(b) EXCLUSIONS FROM GROSS INCOME.— The following items shall not be included in gross income and shall be exempt from taxation under this chapter:(3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES.— The value of property acquired by gift, bequest, devise or inheritance. There shall not be excluded from gross income under this paragraph, the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property;
The petitioner contends that the $7,000 gift was a lump-sum payment, payable, in any event, either out of the income or principal of the property held under the trust indenture.
The respondent contends, first, that the $7,000 was payable out of the income from the trust property, although the trustees were given discretionary authority to invade corpus, if the income from the trust property were not sufficient to make the payment. Secondly, the respondent contends that, even if the gift were to be found to be payable in any event out of income or corpus, it was not a gift of a lump sum but, rather, of periodic payments which were paid or payable only out of income.
The variance between the parties' positions results from the different tax consequences under section 22(b)(3) of (1) a gift paid periodically from income from property; (2) a gift of periodic payments of a sum certain payable, in any event, out of income or corpus; and (3) a lump-sum gift payable, in any event, out of income or corpus.
A gift of income from property is included
in the beneficiary's gross income under the provisions of section 22(b)(3). This has been the rule ever since Irwin v. Gavit, 268 U.S. 161.
As section 22(b)(3) states it: ‘There shall not be excluded from gross income * * * the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income.‘
However, before the changes brought about by the Revenue Act of 1942, a different rule obtained where a beneficiary or devisee received a periodic payment of a sum certain payable, in any event, out of income or principal. In this case, the Supreme Court held, before 1942, that the payments were not included in the beneficiary's gross income, even though paid out of income. Burnet v. Whitehouse, 283 U.S. 148.
The 1942 amendment changed the Whitehouse rule insofar as it applied to gifts of ‘periodic‘ payments. Now, such payments are taxable to the beneficiary to the extent that they are made out of income from property. However, the rule in Burnet v. Whitehouse still applies to lump-sum payments to be made in any event out of income or corpus. P. L. 753, 77th Cong., 2d Sess., sec. 111; H. Rept. No. 2333, 77th Cong., 2d Sess. (1942), pp.66-68.
We must turn to the provisions of the trust indenture itself, and such other facts that illuminate its provisions, to determine whether the gift is payable out of income or corpus. Basically, our problem is to interpret the provisions of the indenture in the light of the applicable law above.
After a full consideration of the provisions of the trust indenture, we conclude that the grantor, Bertha Cone, intended that the petitioner should receive a lump-sum payment, in any event, out of either income or corpus. Reading the instrument as a whole, as it must be read, indicates that Bertha Cone intended that her more distant relatives, such as the petitioner, were to receive specific gifts which were to be ‘immediate and primary charges and payments‘ against the trust property. The only support that respondent finds for his position is in the language in paragraph (n) which states that the specific gifts, petitioner's included, ‘may‘ be paid out of principal if income were not sufficient. Contrasting this language with the mandatory language in other parts of the indenture, the respondent argues that Bertha Cone knew how to distinguish between a mandatory direction to her trustees and a discretionary direction. However, we think that ‘may‘ in this context is equivocal and is at least as consistent with a mandatory direction to the trustees as it is with a permissive direction. Other parts of the indenture indicate the settlor's intention more clearly and point to an intention to give specific gifts, in the amounts stated, to her relatives without consideration of whether there was sufficient income to make the payments. The conclusion which we have reached is in harmony with the understanding of the parties, as evidenced by the pleadings and by the order of the state court.
Finally, we think there is no merit in respondent's contention that petitioner's gift was not a lump-sum gift. We find nothing to support this argument and we think it is answered with the language in the indenture which states that the specific gifts were to be ‘immediate‘ charges on the trust which was admittedly large enough to make them.
Decision will be entered for the petitioner.