Estate of Bedford v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 25 May 1939
• Docket Number: Docket No. 90104.
• Parties: ESTATE OF EDWARD T. BEDFORD, TITLE GUARANTEE AND TRUST COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

39 B.T.A. 1039 (1939)

ESTATE OF EDWARD T. BEDFORD, TITLE GUARANTEE AND TRUST COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 90104.

Board of Tax Appeals.

Promulgated May 25, 1939.

Holt S. McKinney, Esq., for the petitioner.

Loren P. Oakes, Esq., for the respondent.

The Commissioner determined a deficiency of $632.76 in the income tax of this estate for the calendar year 1934.

FINDINGS OF FACT.

Edward T. Bedford died on May 21, 1931, while residing at Greens Farms, Westport, Connecticut. His large estate was still in process of administration during all of the taxable year. His country residence at Greens Farms was valued for Federal estate tax purposes at over $1,000,000. He had maintained extensive gardens on that estate during the latter part of his life which were open to the public every day without charge.

The ninth paragraph of his will provided that the Greens Farms estate, consisting of about twelve acres, together with the residence, garage, gardens, cottages, and other outbuildings on it, and also all the household property, including automobiles and gardening equipment used in connection with the estate, should go to his wife for life. She died on March 16, 1934.

The will provided that after the death of the wife the decedent's daughter, Grace Bedford Lloyd, could occupy the Greens Farms property as a residence during her life. The ninth paragraph of the will contained the following provision:

* * * In case my said daughter while occupying said premises shall plant and replant and maintain the garden on that part thereof lying north of the Shore Road and adjacent to the garage and green houses substantially as now so used and permit the public to enjoy the same in the manner and to the extent that I have done during my lifetime, I direct my said Trustee to pay to my said daughter, each year said garden is so maintained such further sum, not exceeding Ten Thousand Dollars ($10,000.) in any calendar year as may be required for planting, replanting and maintaining such garden.

The trustees were permitted to sell the property, with the written consent of the wife and daughter or the survivor, and were directed to sell the estate after the death of the survivor.

A codicil of the will provided that in case the net income of the trust should be insufficient to pay the charges mentioned in the ninth paragraph and certain other paragraphs, the trustees were ordered and directed to have recourse to the principal of the trust to such extent as should be necessary to meet the charges.

The executor of the will in 1934 paid $7,500 under that portion of the ninth paragraph of the will above quoted, which was used by the daughter to maintain the gardens. Those gardens were open to the public at all times during that period. They were visited by many people during the year 1934. They were on the opposite side of the road from the residence.

OPINION.

MURDOCK:

The Commissioner makes two arguments in support of his determination that the amount paid by the executors for the planting, replanting, and maintenance of the gardens was not deductible. He assumes, for the purpose of his first contention, that the payments were exclusively for charitable or educational purposes, but points out that the payments were to be made out of principal, if the income was insufficient, and reasons from that that the payments were annuities, citing Burnet v. Whitehouse, 283 U. S. 148. He then cites Helvering v. Pardee, 290 U. S. 365; Estate of William H. Block, 39 B. T. A. 338; Bush v. Commissioner, 89 Fed. (2d) 596; and Congden v. Commissioner, 99 Fed. (2d) 318, as authority for the proposition that distributions to beneficiaries are not deductible by an estate or trust unless they are taxable to the beneficiaries, and since an annuity is not taxable to a beneficiary, but is a tax-free bequest, distributions from income in payment of annuities are not deductible by trusts and estates.

Although the cited cases support the Commissioner's statement, nevertheless they are not in point here. The courts and the Board in those cases were considering deductions claimed under subsections (b) and (c) of section 162 of the acts beginning with the Revenue Act of 1928, and paragraphs (2) and (3) of section 219 (b) or their counterparts in the revenue acts prior to that of 1928. Section 162 (b) allows an estate or trust a deduction for "the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries", "but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not." (c) is similar. The opinions cited by the respondent point out that the scheme of Congress in allowing deductions under those particular provisions was to permit no income to escape taxation, unless definitely exempt. That is, the income was deductible by the estate or trust only if it was taxable to the beneficiaries. The opinions held that since an annuity was not taxable to the beneficiaries, it was not deductible by the estate or trust under either of the provisions mentioned. Neither the provisions of ...