8 B.T.A. 190

A. W. Henn, as Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.

Docket No. 4303.

Promulgated September 22, 1927.

David A. Gashill, Esq., for the petitioner.

Harold Allen, Esq., for tbe respondent.

*194OPINION.

Phillips : The decision of this appeal involves the interpretation of the trust instrument and the application thereto of the provisions of section 219 of the Revenue Act of 1918, the pertinent portions of which are as follows:

Seo. 219. (a) That tbe tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
* * * * Jj: * *
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. 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, * * * and in cases under paragraph (4) of subdivision (a) of this section and the fiduciary shall include in the return a statement of each beneficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, * * *. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In cases under paragraph (4) of subdivision (a), * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year-, * * ».

Counsel have not referred us to any decisions of the courts, (if such there be) construing similar provisions with respect to the accumulation or distribution of the trust income. There are, however, certain well established principles of interpretation which will assist us. The provisions are to be construed as a whole to give effect to each and every one, if possible, without undue emphasis upon any single provision. In case of doubt the courts favor a construction creating vested interests as against contingent interests. Moreover, the courts do not look with great favor upon provisions for accumulation of income, and in case of doubt, resolve the question in favor of its distribution; this latter being in the nature of an extension of the rule favoring vested as against contingent interests.

Looking at the trust instrument as a whole it does not appear to differ materially from the usual “ spendthrift ” trust. The intention *195that each of the children shall share equally in the income and in the principal is clearly expressed and it is made evident that only in certain cases is the trustee to exercise any discretion in the distribution of the income or principal. It would seem that the intention of the testator could be expressed and effect given to all of the terms of the trust instrument with respect to the discretion lodged in the trustee by paraphrasing the wording somewhat as follows:

In the event of tlie bankruptcy, incompetency, improvidence, profligacy or misfortune of any of said beneficiaries the trustee may ex'ercise a discretion in the distribution either of income or of principal. In the exercise of such discretion consideration shall be given to the age, necessities, earning capacity, possession of other resources, and habits of life of each of the beneficiaries and distribution made according to the several needs and habits of life of each of them.

During the taxable years and, indeed, to the date of the hearing, none of the enumerated events giving rise to the exercise of a discretion on the part of the trustee had occurred. It is our opinion that under a proper construction of the instrument the facts are such that no discretion was lodged in the trustee during the taxable years to make any unequal distribution of the income of the trust for those years, except as distribution to the minors was limited to their necessities.

Eeferring again to the language of the trust, we find separate provision made for those beneficiaries who have reached the age of 21 and those under that age. During the years involved two of the children were in the former class and two in the latter class. As to those over twenty-one it is provided:

The Trustee shall annually, or oftener in his discretion, pay to such of the beneficiaries hereunder as may have arrived at the age of twenty-one years, his or her share of said income;

Clearly if, as we have decided is the case, the provisions for other distribution or for accumulation are ineffective in these years, the income is distributable to the beneficiaries. The evidence discloses that it was not all distributed, but this can not affect the result, for the beneficiary must include in his return his distributable share, whether distributed or not, and the fiduciary is not taxable on such share.

It might be pointed out that the amount not paid to these beneficiaries does not appear to have been withheld by the trustee because of any claim of a right to do so. The evidence regarding the amounts expended by the father, who was also the trustee in these years, from his personal funds for the benefit of these children, supports the testimony that the purpose in not making distribution was to aid in building up and preserving the property of the children.

*196We are of the opinion that one-half of the taxable income was properly distributable in the taxable years in equal shares to Edwin C. Henn and Howard E. Henn, is taxable as their income, and is not taxable to the fiduciary.

With respect to the minor children the trust provides:

During the minority of any beneficiary hereunder, tbe Trustee may use such of the income accruing to said beneficiary, * * * for the support, care, maintenance or education of such minor as in the judgment of said Trustee may be necessary or proper. Any income withheld or retained by the Trustee by reason of the minority of any beneficiary hereunder, shall, when such beneficiary shall have arrived at the age of twenty-one years, together with any income thereof, if any, be paid over to such beneficiary; subject, always, however, to the discretion herein conferred upon the Trustee.

It is contended by the petitioner’s counsel that the situation here presented is similar to that in the case of Willcuts v. Ordway, 19 Fed. (2d) 917, wherein the Circuit Court of Appeals determined that the income of the minors there involved was to be taxed to the beneficiaries and not to the fiduciary. The distinction seems to us to be that in that case the beneficiaries were entitled to all of the income in any event so that it could be said to be theirs, but in the present case the minor beneficiaries are entitled to the accumulated income only in the event that the discretion of the trustee to make an unequal distribution is not exercised before they reach their majority. While the rights of the .children in the trust and its income may have been vested rights, their claim to the income wa§ subject to divestment by the proper exercise of the discretion of the trustee at any time before the income which was accumulated became payable to them. This was not so in the case cited. We are of the opinion that the one-half of the income accruing to the minors which was withheld is properly to be classified as income held for future distribution under the terms of the trust and is taxable to the fiduciary.

This leaves for consideration the proper treatment of that portion of the income which was paid out to the -minor children or for their support, care, maintenance or education. It is clear that to the extent that income is distributed it does not fall within either paragraphs (2) or (3) of subdivision (a), section 219. There is no express provision in the statute that such income is to be taxed to the fiduciary. We understand the position of the respondent to be that the trustee was vested with a discretion to distribute or accumulate, that it can not be said that the income was to be distributed so as to fall within paragraph (4) of subdivision (a), section 219 and be taxable to the beneficiary and that, therefore, it must be taxable to the fiduciary. To reach this conclusion it must be assumed (1) that any income which does not fall within any of the numbered *197paragraphs must be taxed to the fiduciary, and (2) that paragraph (4) should read “ income which is required by the terms of the trust to be distributed.” We have heretofore held in William E. Scripps, 1 B. T. A. 491; Mary L. Barton, 5 B. T. A. 1008; and Elizabeth S. Sprague, 8 B. T. A. 173, that the second assumption is not the proper interpretation of the statute, and our decision of the instant proceeding might well be based upon the reasoning used in the opinions in those cases.

It appears, however, that even if the assumptions stated were a correct interpretation of the statute, we should decide that the trustee is not taxable upon any income distributed for the support, care, maintenance or education of the minor beneficiaries. While the trust instrument provides that the trustee may use such of the income accruing to the beneficiary as in the judgment of the trustee may be proper or necessary for those purposes, the provision must be construed as mandatory. No court of equity would permit the trustee to accumulate the income for the minor if necessary for any of the purposes enumerated. Under the terms of the instrument the trustee would be required to distribute so much of the income as might be required to care for and educate the beneficiary. The discretion of the trustee was not to determine whether any income was to be distributed but was limited to a determination of the amount necessary or advisable. Even this was a limited discretion for a court would not hesitate to take jurisdiction to compel distribution in the event that the discretion was abused. We come then to the conclusion that the trust instrument required the distribution of so much of the income accruing to the minors as was necessary or advisable for their support and education, that the only discretion in the trustee was to determine in the first instance how much was necessary or advisable for those purposes, and that the income is not taxable to the fiduciary to the extent that distribution was made from the one-half of the income accruing to the minors.

Reviewed by the Board.

Decision will be entered on 15 days'1 notice, under Rule 50.

Henn v. Commissioner
8 B.T.A. 190

Case Details

Name
Henn v. Commissioner
Decision Date
Sep 22, 1927
Citations

8 B.T.A. 190

Jurisdiction
United States

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