BANK OF AMERICA NAT. T. & SAV. ASS'N v. Com'r of Int. Rev., 9837.
| Decision Date | 21 February 1942 |
| Docket Number | No. 9837.,9837. |
| Citation | 126 F.2d 48 |
| Parties | BANK OF AMERICA NAT. TRUST & SAVINGS ASS'N v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Ninth Circuit |
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J. W. Radil, F. J. Kilmartin, R. M. Sims, Jr., and Knight, Boland & Riordan, all of San Francisco, Cal., for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Gerald L. Wallace, Bernard Chertcoff, and Benjamin M. Brodsky, Sp. Assts. to the Atty. Gen., for respondent.
Before DENMAN, STEPHENS, and HEALY, Circuit Judges.
This is a review of an order of the United States Board of Tax Appeals determining certain deficiencies in the income taxes of appellant trustee, hereinafter called taxpayer, for the tax years 1935 and 1936.
(1) With reference to the tax year 1935, the Board held the Commissioner of Internal Revenue had properly computed a proposed deficiency assessment in disallowing a deduction from gross income of a capital gain realized from the sale of certain securities in the corpus of the taxpayer's trust estate. This capital gain, it is claimed by the taxpayer, is allowable as such a deduction because, "pursuant to the terms of the * * * deed creating the trust," it had been "permanently set aside" "to be used exclusively" for certain charities having a residuary interest in the trust estate, as provided in section 162(a) of the Revenue Act of 1934, 26 U.S.C.A. Int. Rev.Code, § 162(a).1 It is to be noted that it is this particular part of the income of 1935 which the taxpayer must show is "permanently set aside" from the other assets of the trust estate for this "exclusive" charitable use.
In the tax year 1935 certain securities, a part of the corpus of the trust estate, had appreciated in value. This gain, amounting to $32,785.40, was realized by a sale of the securities for cash. A part, if not all, of the cash was reinvested in 1935 in other securities. The taxpayer concedes that at least $29,714.78 was so invested, hence making determinable the future use to which the securities might be put by the taxpayer, "pursuant to the terms of the * * * deed creating the trust."
It is agreed that the California law controls in construing the trust instrument, and that under that law this gain remains a part of the corpus of the trust estate. However, the gain is nonetheless an identified entity because a part of the corpus. Taxpayer concedes that it is subject to the federal income tax unless the facts adduced show that it falls within the deduction for charitable purposes of section 162(a). In the proceeding before the Board the taxpayer had the burden of proof that the taxpayer was entitled to make the deduction. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348.
The taxpayer is the trustee of the John and Pauline Tonningsen Trust created August 7, 1930. The trust names John Tonningsen as the first trustor and Pauline E. Tonningsen, his wife, as the second trustor. Under the terms of the trust the net income was payable to the first trustor during his lifetime. At his death the trust was to become irrevocable and the net income was to be paid to the second trustor.
On the death of the survivor of John and Pauline Tonningsen the trustee was directed to pay "(a) Out of the income of the trust fund and estate, if that be sufficient, or out of the principal thereof, if necessary, * * * the costs and expenses of the surviving Trustor's last illness and of his or her funeral and burial, unless other provision shall have been made therefor, and the inheritance tax upon all distributive shares of or interests in the trust fund and estate, if any be due, and any Federal Estate Tax due upon the whole thereof, and the costs and expenses of the trust, * * *."
(b) Specific gifts to individuals amounting to $104,000 which were made a charge upon both the undistributed income and the principal of the trust funds; (c) annuities aggregating $600 per month; (d) all of the net income not required for any of the foregoing purposes was to be paid to six organizations qualifying as charitable organizations under the applicable provisions of the revenue act.
The trust estate was composed of real and personal property and yielded net income as follows:
1931 ........................ $70,970.00
1932 ........................ 73,984.18
1933 ........................ 47,693.67
1934 ........................ 45,571.58
1935 ........................ 45,938.85
John Tonningsen died on November 28, 1933. At the time of her husband's death, Pauline Tonningsen was 81 years old. She was paralyzed and confined to her bed and wheel chair. This condition continued until the time of her own death on January 25, 1936.
In determining whether the securities in which the reinvestment of the gain was made were permanently set aside for any purpose, we must consider the uses to which the trust deed permitted the taxpayer to put them, looking forward from the end of the tax year 1935. Ithaca Trust Co. v. United States, 279 U.S. 151, 154, 49 S.Ct. 291, 73 L.Ed. 647.
At the end of that year, Mrs. Tonningsen was over 83 years of age, paralyzed, with the seeds of death in her, as shown by her demise twenty-five days later. All the trust income had been paid her or was payable to her or her estate. It was at least a reasonable possibility on December 31, 1935, that she would die in the succeeding year, receiving the income of the trust estate to that time. There would then fall due for payment the $104,000 in gifts. This $104,000 obligation then due was a charge upon both undistributed income and the principal of the trust estate. At no time had the income of the estate amounted to $74,000 per annum. The average annual income for the last three years amounted to less than $47,000, and there was a prior charge on income of $600 per month.
The trustee had a discretion in administering the estate, either to pay the whole amount of the gifts from current income or sell the stock and other assets in the corpus and pay them at once. The taxpayer has not maintained its burden nor shown at all that on December 31, 1935, it was its fixed and binding intention to pay them from income, even if this were capable of proof. On the contrary, the taxpayer might find that it was a wise business choice to sell the securities and pay off the gifts, in which event, instead of being "used exclusively" for the benefit of the charities, its direct use is for a non-charitable purpose. With this option in their use, it cannot be said the capital gain invested...
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