Opinion
Docket No. 40393.
1953-05-19
W. HAROLD WARREN AND LILIA L. WARREN, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert V. Carton, Esq., for the petitioners. John J. Hopkins, Esq., for the respondent.
From January 12, 1939, to and including June 14, 1947, petitioner W. Harold Warren was a substituted trustee for trusts created under the will of T. Frank Appleby, deceased. In such capacity he received commissions for collecting the income of the trusts and also commissions based on the corpus of the trusts. In determining whether petitioner is entitled to the relief provided for in section 107, Internal Revenue Code, as amended, for the taxable year 1947, held, the ‘total compensation for personal services‘ as those words are used in the Code include both the commission for collecting income and also commissions paid as compensation for looking after the corpus. The Commissioner is sustained in thus applying the statute. Paul H. Smart, 4 T.C. 846, affd. (C.A. 2) 152 F.2d 33, followed. Robert V. Carton, Esq., for the petitioners. John J. Hopkins, Esq., for the respondent.
The Commissioner has determined a deficiency in petitioner's income tax for the year 1947 of $995.03. The deficiency is due to two adjustments made by the Commissioner to the net income as disclosed by the return. These adjustments were:
+-------------------------------------+ ¦(a)¦Net profit from business¦$18.25 ¦ +---+------------------------+--------¦ ¦(b)¦Trustee's commissions ¦5,922.44¦ +-------------------------------------+
The petitioners do not contest adjustment (a). Adjustment (b) is explained in the deficiency notice as follows:
(b) It has been determined that the benefits of section 107(a) of the Internal Revenue Code are not allowable with respect to an amount of $6,262.50 received as trustee's commissions in 1947 from the Estate of T. Frank Appleby, deceased.
Petitioners by an appropriate assignment of error contest the action of the Commissioner in making adjustment (b).
FINDINGS OF FACT.
The facts have been embodied in a stipulation of facts with exhibits attached thereto. The facts are found as stipulated. The following is believed to be a sufficient summary of them for the purpose of a discussion of the issue to be decided.
The petitioners are husband and wife whose address is Asbury Park, New Jersey. W. Harold Warren will sometimes hereafter be referred to as petitioner. The petitioners filed a joint income tax return for the taxable year 1947 with the collector for the first district of New Jersey at Camden, wherein they reported income on the case receipts and expenditures basis of accounting.
From January 12, 1939, to and including June 14, 1947, petitioner was a substituted trustee for trusts created under the last will and testament of T. Frank Appleby, deceased. During the period in which the petitioner acted as substituted trustee the corpus of the trust consisted of realty only.
During the period in which the petitioner acted as substituted trustee he received the following trustee commissions under authority of the designated accountings, court order, or statutory authority:
+---------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Total ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦ ¦Year ¦Commissions¦Commissions¦commission¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Authority ¦received¦on income ¦on corpus ¦received ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Fourth Intermediate Accounting ¦1940 ¦$1,028.62 ¦ ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Fifth Intermediate Accounting ¦1941 ¦1,091.02 ¦ ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Sixth Intermediate Accounting ¦1942 ¦852.19 ¦ ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Seventh Intermediate Accounting¦1944 ¦1,214.43 ¦ ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Final Accounting ¦1946 ¦2,824.96 ¦ ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦Order of Court ¦1947 ¦4,395.23 ¦$6,662.50 ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦N.J.S A. 3:11-2 ¦1947 ¦224.77 ¦ ¦ ¦ +-------------------------------+--------+-----------+-----------+----------¦ ¦ ¦ ¦$11,631.22 ¦$6,662.50 ¦$18,293.72¦ +---------------------------------------------------------------------------+
On June 14, 1947, an order from the Court in Chancery of New Jersey was entered approving the account of petitioner, sole surviving trustee of the estate of T. Frank Appleby, deceased. This order provided for trustee's commissions to be paid petitioner on corpus and on income in the amounts set out above. This order reads in part as follows:
And it is further ORDERED, ADJUDGED, and DECREED, that there be allowed to the trustees, present and prior, commissions of 2 1/2 per cent based upon the agreed corpus of $500,000.00, amounting to the sum of $12,500.00, said sum to be apportioned among and paid to the several trustees or their representatives to the approval of the Court. The allowance of commissions on corpus hereby made is in lieu of commissions on corpus heretofore allowed by order of this court dated September 21, 1944, and which remain unpaid.
And it is further ORDERED, ADJUDGED and DECREED, that W. Harold Warren be allowed commissions at the rate of 5 per cent on income in the amount of $4,395.23;
OPINION.
BLACK, Judge:
The issue here involved may be stated thus: In construing the phrase ‘total compensation for personal services‘ for the purpose of applying section 107 (a) of the Code, are commissions received by a trustee of a trust governed by New Jersey law severable as between commissions received for collecting income and those received for administering corpus? The applicable statute is printed in the margin.
SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.(a) PERSONAL SERVICES.— If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.
As will be seen from our Findings of Fact petitioner collected in 1947 as surviving trustee of the estate of T. Frank Appleby, deceased, commissions covering corpus and collection of income which aggregated $11,057.73. Petitioner had also collected in prior years other commissions as trustee of the same estate so that the total of the commissions which he collected for his services, including those collected in 1947, aggregated $18,293.72. The total of $11,057.73 which he collected in 1947 would not be ‘at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more‘ as those words are used in section 107, if the commissions are lumped together. Eighty per cent of $18,293.72 would be $14,634.97. Petitioner realizes that fact but he contends that the $6,662.50 commissions which he collected on corpus in 1947 should be viewed as a separate class of commissions and that inasmuch as he had not collected in prior years any commissions on corpus, he collected, in 1947, 100 per cent of that class of commissions and, therefore, is entitled to use the provisions of section 107 as to this $6,662.50. Petitioners have used that method in their joint income tax return for 1947.
We do not think there is any merit in petitioner's contention. Commissions are commissions whether they are paid on the collection of income or are based on corpus. Added together they represented petitioner's compensation for his services as trustees of the estate. We see no warrant for separating these commissions into two separate classes for the purpose of applying the provisions of section 107 of the Code. There is nothing in the statute indicating that this should be done. We so decided in Paul H. Smart, 4 T.C. 846. In that case we held that in deciding whether a taxpayer is entitled to the relief provided for in section 107, as amended, the ‘total compensation for personal services‘ as that term is used in the Code must include both the commissions for collecting income and also commissions for looking after the corpus. That case involved commissions paid to a trustee of a New Jersey trust under circumstances which we think are not distinguishable from those which are present in the instant case. Our decision was affirmed by the second circuit in Smart v. Commissioner, 152 F.2d 333, certiorari denied 327 U.S. 804.
The petitioner, however, contends that the Smart case, supra, was wrongly decided. Says petitioner in his brief: ‘Smart v. Commissioner of Internal Revenue, 152 F.(2d) 333 (2CCA) 1945, does not correctly state the law of New Jersey and is not controlling in regard thereto.‘ It should be kept in mind that it is not a statute of New Jersey which we are construing. It is an act of Congress as embodied in section 107 of the Code and that section, we think, was properly construed in the Smart case. This case has been adhered to by the courts on several subsequent occasions. See Spears v. Commissioner, (C.A. 3, 1947) 164 F.2d 486, affirming 7 T.C. 1271; George J. Hoffman, Jr., 11 T.C. 1057; Ralph E. Lum, 12 T.C. 375; Rosalyne A. Lesser, 17 T.C. 1479; Alfred J. Loew v. Commissioner, 201 F.2d 368, affirming 17 T.C. 1347. We are altogether unconvinced by petitioner's argument that the Smart case, supra, was wrongly decided. We adhere to it and decide the issue involved in favor of respondent.
Decision will be entered for the respondent.