McAllister v. Comm'r of Internal Revenue, Docket No. 4037.

• Decision Date: 13 September 1945
• Docket Number: Docket No. 4037.
• Citation: 5 T.C. 714
• Parties: BEULAH EATON MCALLISTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 714

BEULAH EATON MCALLISTER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4037.

Tax Court of the United States.

Promulgated September 13, 1945.

Payment to petitioner in return for termination of her life interest in income of trust and in full settlement therefor, held taxable as ordinary income in year of receipt. Charles B. Collins, Esq., William Diebold, Esq., and Rudolph J. Welti, C.P.A., for the petitioner.

Lawrence F. Casey, Esq., for the respondent.

This case involves income tax for the calendar year 1940. Respondent has determined a deficiency in the sum of $19,468.59.

The only question remaining for our consideration is whether the transaction by which the sum of $55,000 was paid to petitioner on July 19, 1940, and accepted by her in full settlement of her interest in a certain trust created by the will of Richard McAllister, deceased, under which trust petitioner was entitled to receive the income for life, resulted in the receipt by petitioner of ordinary income taxable in full, or constituted a sale or exchange of a capital asset resulting in a deductible capital loss.

FINDINGS OF FACT.

We adopt as part of our findings of fact the stipulation of facts filed by the parties, including the exhibits referred to therein and admitted in evidence. Such parts of the stipulation of facts and of the exhibits referred to therein as are necessary to an understanding of the question presented are summarized below. We also include additional findings of fact based upon evidence adduced at the hearing.

Beulah Eaton McAllister (hereinafter sometimes referred to as petitioner) is an individual residing in Beverly Hills, California. She filed her Federal income tax return for the calendar year 1940 with the collector of internal revenue for the second district of New York on February 26, 1941.

Petitioner was the lawful widow of John McAllister, who died, leaving no children, on May 1, 1937, on which date petitioner was 32 years, 4 months, 26 days old, having been born on December 4, 1904. John McAllister was the son of Richard McAllister, who died on or about April 6, 1926.

The last will and testament (executed March 3, 1921) and codicil thereto (executed September 3, 1921) of Richard McAllister (hereinafter sometimes referred to as the decedent) provided in part as follows: That a trust fund of $100,000 be set up, the income to be paid to John McAllister for life and upon his death to his wife (the petitioner herein) in the event John McAllister left no children; the trust to terminate upon the death of the widow of John McAllister; that the residue go to Josephine C. McAllister, the testator's wife, and Richard McAllister, his son. The will and codicil further provided:

* * * I further direct that the income from the various trusts hereinabove created shall not be subject to any transfers, assignments or encumbrances, made or created by any of the respective beneficiaries, and shall not be subject to any suits, liens, judgments, attachments, or executions resulting from any debts or acts of any of the respective beneficiaries, nor shall the same be subject to any suits, actions or proceedings, of any kind, brought against any of them.

CODICIL

SECOND: I will and direct that all the shares of principal and income by this my will given to or directed to be held for the use and benefit of the several and respective beneficiaries in the Trusts in this my will mentioned or set out shall not be in any way or manner subject or liable to their or either of their anticipation, sale, pledge, debts, contracts, engagements or liabilities, and not subject or liable to attachment or sequestration under any legal or equitable or other process.

The decedent's son, Richard McAllister (hereinafter sometimes referred to as Richard, Jr.,) and John Casey were designated executors and these two, together with the Provident Life & Trust Co. of Philadelphia, were designated trustees. The will and codicil thereto were admitted to probate by the surrogate of Atlantic County, New Jersey, on May 26, 1926, and Richard, Jr., and John Casey were duly authorized to administer the estate.

Josephine C. McAllister died on or about April 16, 1935, leaving a last will which was duly admitted to probate and under which Richard, Jr., and Josephine Curtis duly qualified as executors.

In a proceeding (Docket No. 119/561 in the Court of Chancery of New Jersey) between Beulah Eaton McAllister, petitioner herein, complainant, and Richard McAllister, John Casey, and Provident Trust Co. of Philadelphia, defendants, a final decree, dated June 2, 1939, was entered, which provided in part as follows: That Beulah Eaton McAllister was the lawful widow of John J. McAllister, upon his death on May 1, 1937, and that she was entitled to receive for life the net income from the $100,000 trust fund set up by Richard McAllister, which income the trustees were ordered to pay to her.

The $100,000 bequeathed in trust by the third clause of the decedent's will was invested in a certain bond and mortgage for $100,000 made by Richard, Jr., and decedent's widow on January 3, 1928, to the trustees designated in decedent's will. The mortgage covered premises in Atlantic City, New Jersey, and the investment in this bond and mortgage was the subject of a surcharge decree dated June 8, 1936, rendered by the Chancery Court of New Jersey, against the trustees in a proceeding (Docket No. 110/403) between John McAllister and Beulah Eaton McAllister, his wife, complainants, and Richard McAllister et al., defendants. On April 8, 1940, the Chancery Court directed the trustees to comply with that decree, requiring them to deliver $100,000 to themselves as trustees for the purpose of the trust.

In a further proceeding in the Chancery Court of New Jersey (Docket No. 125/47), petitioner, individually and as administratrix of the estate of her husband, recovered possession of 120 shares of R. McAllister, a corporation, an asset of the estate of John McAllister which had been pledged as security for payment of legal fees owing by petitioner as administratrix of her husband's estate. These 120 shares were the only assets of the estate of John McAllister. Claims had been filed against the estate for funeral services and doctor's bills; also claims were filed by R. McAllister (the corporation) for $471.38 and McAllister Coal Co., a corporation, for $5,049.77. An attempt to sell these 120 shares to protect the estate of John McAllister from insolvency or bankruptcy resulted in the receipt of an offer to purchase at only $210 per share, although the book value of this stock was about $800 a share.

On June 24, 1940, a proceeding was commenced in the Court of Chancery of New Jersey (Docket No. 129/370) between Beulah Eaton McAllister, complainant, and Richard McAllister, John Casey, and the Provident Trust Co. of Philadelphia, a corporation, as trustees of the trust set up in the third clause of the will of Richard McAllister, deceased, Richard McAllister, individually, and Richard McAllister and Josephine Curtis, as executors of, and trustees under, the will and codicil of Josephine C. McAllister, deceased, defendant. The bill of complaint filed in this proceeding, after setting forth substantially all the facts hereinbefore set forth in our findings of fact, further provided as follows:

12. Complainant, by reason of the present economic conditions and a desire to terminate litigation which has been pending for a long period of time, as well as further contemplated expensive litigation, and by reason of her desire to return to Kentucky where her immediate relatives reside, and by reason of the necessity of obtaining money with which to pay various claims of the estate of her husband, John McAllister, which to date remain unpaid due to insufficient funds in the estate of said John McAllister, has indicated to the aforesaid trustees, the remaindermen, the officers of R. McAllister, a corporation, and Richard McAllister, individually, her desire to terminate the trust set forth in the Third clause of the will of Richard McAllister, deceased, and to affect (sic) a sale of said 120 shares of stock of R. McAllister, a corporation. Complainant is advised and verily believes that said trustees and remaindermen, hereinabove mentioned, are willing to consent to the termination of said trust and will pay to complainant the sum of $55,000, together with all accumulated income from the trust corpus, which is payable to her at 6% per annum, computed to the date on which she receives the said sum of $55,000, in full consideration of the surrender by her of her life interest in said trust, which settlement figure is based to a large extent upon her present life expectancy. Complainant, however, is unwilling to terminate said trust as hereinbefore stated unless Richard McAllister, or his nominee, agrees to purchase from her individually and as administratrix of the estate of John McAllister, deceased, said 120 shares of stock of R. McAllister, a corporation, for the sum of $50,000, to the end that all litigation regarding said stock may be finally terminated. Said Richard McAllister has advised complainant, individually and as administratrix, that he or his nominee will purchase from her, in said capacity, the said 120 shares of stock of R. McAllister, a corporation, for $50,000, in the event that the trust is terminated as hereinbefore set forth, and that all claims of R. McAllister, a corporation and McAllister Coal Company, a corporation, against the estate of John McAllister will be settled upon payment of $5,000 by complainant as administratrix to said corporation and the mutual exchange of general releases between all interested parties herein.

Complainant is without adequate remedy in the courts of law, and therefore prays:

That the trust set up in and by the Third clause of the will of Richard McAllister, deceased, be terminated by the decree of this...