Beck v. Comm'r of Internal Revenue
| Citation | 15 T.C. 642 |
| Decision Date | 16 November 1950 |
| Docket Number | Docket No. 20112. |
| Parties | MARION A. BURT BECK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
1. Fair market value of petitioner's interest in iron ore lands determined as of March 2, 1919.
2. Held, the respondent did not err in applying the ‘dilution theory‘ in section 23(m), I.R.C., in reducing the petitioner's allowance for depletion.
3. Under the terms of a compromise agreement by which petitioner acquired iron ore lands and cash from the estate of her father, it was provided that petitioner would pay the proportionate share of Federal estate and State inheritance taxes. It was further provided in the agreement that the trustee (under the will of petitioner's father) would advance the money for payment of these taxes and be repaid by withholding certain amounts from the royalties received from the iron ore lands. Held, the sums withheld by the trustee in repayment of the money advanced for payment of petitioner's share of taxes on the inherited property was income to petitioner and taxable to her. Held, further, the taxes so paid by the petitioner are not additional cost of the inherited property so as to be the subject of ‘exhaustion‘ or depletion allowance. Held, further, the amounts so paid are not an expense and deductible under section 23(a)(2).
4. The petitioner created trusts in 1932, 1937, and 1938 for the benefit of her husband. The trust property consisted of a part of the petitioner's interest in certain iron ore lands. The trusts created in 1937 and 1938 were for the life of the husband, with reversion in the wife. The 1932 trust, as provided for by its terms, was revoked in 1938 and the trust income accrued for last quarter of 1937 was paid to the husband in 1938.
Held, the income from the 1937 and 1938 trusts is not taxable to petitioner.
Held, further, the income from the 1932 trust is taxable to the petitioner and since she was on a cash basis, the income accrued by the trust in 1937 but paid the husband in 1938 is taxable to petitioner in 1938.
5. The petitioner believed, and was so advised by competent legal counsel, that she had a vested interest in the trust of personalty under her father's will. A suit for construction of that will resulted in a five to two decision by the Michigan Supreme Court in 1947, holding that the ‘legal heirs‘ in the will of petitioner's father would be determined as of the termination of the trust of his personalty. The remoteness of the date of the termination of the trust precludes petitioner from ever succeeding to an interest therein. Petitioner planned to devise the home to Harvard University for the furtherance of oriental art. In order to provide the recipient of the property on her death with funds to carry on the art project, petitioner created trusts in 1939, 1940, and 1941, to which, in each year, she transferred an undivided one-fiftieth of her asserted remainder interest in the trust of her father's personalty. Held, the value of the interest is not deductible under section 23(o) as a contribution to a trust operated for educational purposes.
6. Held, the payment for legal services, incurred in a suit for construction of a will, is not deductible as a non-trade or business expense under section 23(a)(2). Watson Washburn, Esq., for the petitioner.
Scott A. Dahlquist, Esq., for the respondent.
The respondent determined deficiencies in the petitioner's income tax liabilities as follows:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1938 ¦$11,886.73 ¦
+------+-----------¦
¦1939 ¦16,377.08 ¦
+------+-----------¦
¦1940 ¦27,206.92 ¦
+------+-----------¦
¦1941 ¦35,612.16 ¦
+------------------+
The issues are:
(1) The fair market value on March 2, 1919, of the petitioner's interest in certain Minnesota iron ore lands.
(2) Whether the respondent erred in reducing the depletion allowance in the taxable years under the provisions of section 23(m) of the Internal Revenue Code and the Revenue Act of 1938.
(3) Whether certain amounts representing the Federal estate and the State inheritance taxes on petitioner's inherited property, paid for petitioner by the trustee who was repaid out of petitioner's royalties, should be included in petitioner's gross income.
(4) Whether the income from certain trusts created by petitioner should be taxed to her.
(5) Whether, under section 23(o), the petitioner is entitled to a deduction for gifts to an educational trust of her supposed interest in the residuary trust of property under her father's will.
(6) Whether the petitioner is entitled to a deduction under section 23(a)(2) for payment for legal services rendered.
The case was submitted on a stipulation of facts, exhibits and oral testimony.
The stipulated facts are so found and in so far as they appear pertinent to the issues are incorporated in the following findings of fact. The other facts are found from the evidence.
The petitioner is an individual residing in Millbrook, New York, and was born on June 30, 1877. She is the wife of Walter Beck who was born on March 11, 1864. She is the daughter of Wellington R. Burt of Saginaw, Michigan, who died March 2, 1919, leaving a large estate consisting principally of stocks and bonds and valuable iron ore lands on the Mesaba range in the State of Minnesota. The bulk of these iron ore lands had been leased by Burt to two subsidiaries of the United States Steel Corporation. In his last will Burt left most of his estate in trust, a large part of the income of which was to be accumulated for nearly one hundred years (until the death of the survivor of his two grandsons) before final distribution to his heirs to be then determined. His children and grandchildren were left with comparatively small annuities.
Burt's four surviving children, the child of a deceased daughter, and the three children of a deceased son (referred to hereinafter as the heirs 1 ), joined in a contest of his will which resulted finally in a compromise agreement with the Second National Bank of Saginaw, the executor and trustee under Burt's will. By the terms of this compromise agreement, the heirs surrendered the annuities to the estate and received all of the iron ore lands and $720,000 in cash. The petitioner, as one of Burt's surviving children, acquired under the compromise agreement one-sixth of the cash and a one-sixth undivided interest in the iron ore lands.
This compromise dated July 1, 1920, was approved by the Circuit Court, in Chancery, for the County of Saginaw, Michigan, on July 27, 1920, and an order was entered in the Probate Court in accordance with the Circuit Court's judgment admitting to probate as the will of Wellington R. Burt, the will (including the codicils), as modified by the compromise agreement. No appeal was taken and these orders became final.
The settlement and distribution of the Burt estate in Minnesota was closed by the final order of the Probate Court on February 3, 1922, in which there is set forth a detailed description of the property in Minnesota owned by Wellington R. Burt at the time of his death (consisting principally of the iron ore mines referred to above). The concluding paragraphs are as follows:
NOW THEREFORE, by virtue of the power and authority vested in this court by law.
IT IS HEREBY ORDERED, ADJUDGED AND DECREED, and the said court does hereby order, adjudge and decree that all and singular the above described property, including all of decedent's rights, ownership and interest in said mining leases hereinbefore mentioned and described, together with all other estate of said decedent in the State of Minnesota, be, and the same hereby is, assigned to and vested in the above named persons in the following proportions, to wit:
To Jane Burt Hay, George R. Burt, Emma Burt Hutchings, Marion Burt Stone (the petitioner herein) and Margaret Ashley Paddock, each an undivided one-sixth (1/6) thereof, and to Alice Burt McDowell, Mary Bell LeBus and Marion Stone Burt, each, an undivided one-eighteenth (1/18) thereof.
TO HAVE AND TO HOLD THE SAME, together with all the hereditaments and appurtenances thereunto belonging or in anywise appertaining, to the above-named persons, their heirs, and assigns, without prejudice, however, to any lawful conveyance of said property, or any part thereof, or any interest therein or lien thereon, or any assignment of any income, royalty, or profit therefrom by said persons or any of said persons made, more specifically set forth in that certain indenture recorded in the office of the Register of Deeds of St. Louis County, Minnesota, in Book 442 of Mortgages, on pages 34 et seq.
Under the terms of the compromise agreement the Burt heirs were charged with that proportion of the Federal estate tax and State inheritance taxes which the value of the money and the iron ore lands they received under the agreement bore to the total value of the estate. Also under the terms of the compromise agreement and as a means of financing the payment of these taxes, the trustee agreed to advance and loan to the heirs from the general funds of the estate in its possession an amount sufficient to pay the heirs' proportionate share of the taxes due from Burt's estate. This money was to be repaid by the heirs in 26 annual payments to begin 5 years from the date of the final decree approving the compromise agreement. As security for the repayment of this loan and in accordance with the compromise agreement, the trustee under the will held in trust the iron ore lands received under the terms of the compromise agreement. In a separate instrument the heirs also gave the trustee a mortgage on the lands as further security. Under the compromise agreement the trustee also had the full power to manage those lands to protect its security.
The bulk of those iron ore lands had been leased by Burt to two subsidiaries of the United States Steel Corporation. One of the leases...
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