Watkins v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 13 March 1941 |
| Docket Number | Docket No. 100640. |
| Citation | 43 BTA 900 |
| Parties | FLORENCE H. WATKINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
John W. Windhorst, Esq., for the petitioner.
Lucien W. Shaw, Esq., for the respondent.
The issues here involved concern income taxes asserted against petitioner for the calendar years 1935, 1936, and 1937 in the sums of $6,119.63, $6,032.58, and $2,629.03, respectively. In addition thereto, petitioner claims a refund for the year 1937 in the amount of $10.31. The question presented is whether dividends and interest received by a trust prior to the years for which they were normally payable are distributable, and, therefore, taxable to the life beneficiary of the trust in the year of their receipt by the trustees.
FINDINGS OF FACT.
All the facts involved herein have been either admitted by the parties in their pleadings or have been stipulated by counsel, and we find them to be as admitted and stipulated. The following is a resumé of all of those facts which we consider pertinent to a clear understanding of this case.
On April 23, 1928, in the State of Massachusetts, a trust agreement was drawn up by Paul Watkins wherein he, as settlor, named Florence H. Watkins, his wife, the petitioner herein, as a beneficiary. Upon the settlor's death, if his wife should survive him along with issue of the settlor, the trustees were directed to pay over to the petitioner such portions of the net income of the trust as she might request, and to accumulate the rest, adding the same to capital during her lifetime, and upon her death to pay over the corpus as she might by her last will appoint, or, in default of appointment, to the issue then living of the settlor.
On December 24, 1931, Paul Watkins died. The petitioner and four children were alive and of full legal age and capacity during all of the years here involved. Pursuant to discretion vested in the trustees, they established four separate funds and made separate income tax returns on these funds during the years here involved. However, no question as to the validity or effect of this action is involved in this proceeding. The rights of the petitioner in each of these funds is identical, and, consequently, we shall in the future speak of them collectively.
After the death of the settlor, the bulk of the assets held by the executors consisted of a substantial block of the common stock of the J. R. Watkins Co. On August 25, 1934, the Paul Watkins Estate, Inc., a Delaware corporation, was organized and on September 11, 1934, the assets remaining in the hands of the executors were transferred to the Paul Watkins Estate, Inc. This last mentioned organization thereupon issued three classes of stock to the executors and to certain legatees under the will of Paul Watkins. Common and preferred stock was issued by the Paul Watkins Estate, Inc., on September 11, 1934, and subsequently was transferred to various trusts and persons, but during all the time the wife and children of the deceased, or trusts created for their benefit, were the owners of substantially all the stock. The Paul Watkins Estate, Inc., during the three years here involved was a personal holding company within the meaning of section 351 of the Revenue Acts of 1934 and 1936 and of Title I-A of the Revenue Act of 1936 as amended by section 1 of the Revenue Act of 1937.
The trustees of the four trust funds in question accepted from the executors of the estate of Paul Watkins, deceased, 6,450 shares of the preferred stock, series B, issued by Paul Watkins Estate, Inc. This stock entitled the owner to receive dividends at the fixed annual rate of 6 percent of the par value thereof and no more.
On or about July 5, 1935, in accordance with the terms of the trust agreement, the petitioner filed the following request and direction in writing with the trustees:
Until further notice you will consider this an order to pay to me for deposit in my account with your company the income that arises from the Paul Watkins Trust Fund, monthly.
This request and direction thereafter remained in full force and effect, without change, during all the taxable years involved in this proceeding.
On December 26, 1934, a dividend was declared on the common and preferred stock of the Paul Watkins Estate, Inc., and the following day this dividend was received by the stockholders. On December 21, 1935, another dividend was declared on both common and preferred stock, the dividend payment being received by the stockholders on December 22, 1935.
On December 27, 1935, at a meeting of the board of directors of the corporation, the secretary reported, inter alia, according to the minutes:
* * * the net income of the corporation for the year 1935 to the date of the meeting was the sum of $138,041.52, and that it was not expected that the corporation would have any further income for the year 1935. The Secretary further explained that the dividend on the Preferred B Stock of this corporation to and including December 31, 1935, had been paid and that the dividend this year paid upon the Preferred B stock of the corporation for the three months' period from September 30 to December 31, 1935, together with the dividend paid upon the Common Stock of this corporation on December 21, 1935, aggregated $25,000. The Secretary thereupon explained that, according to the Articles of Incorporation of the corporation, dividends upon the Common Stock for any year were restricted to the difference between $100,000 and the Preferred Stock dividend for such year; that a dividend upon the Preferred Stock for the entire year 1936 would amount to $47,764.50, and that the maximum dividend, therefore, permissible to the Common Stock for the year 1936 would be in the sum of $52,235.50. The Secretary stated that the cash of the corporation on hand, after making payment of all expenses of the corporation, amounted to $48,181.82, and that if the Preferred Stock dividend for the full year 1936 were to be paid in cash there would remain in the treasury of the corporation the sum of $417.32, and further stated that the corporation held 600 shares of the capital stock of The Chase National Bank of the City of New York, 60 shares of Amerex Holding Corporation, and 640 shares of The National City Bank, and that the market value thereof, together with the cash on hand, was less than the dividend which, under the Articles of Incorporation, could be paid to the common stockholders, to-wit, the sum of $52,235.50.
Immediately after receiving this report the directors adopted the following resolution:
BE IT RESOLVED That a dividend is hereby declared upon each share of the Preferred B Stock of the corporation outstanding in the amount of $6.00 per share, being the dividend to accrue upon said stock for the entire calendar year 1936, said dividend to be payable December 28, 1935, to the stockholders of record at the close of business on the same date.
BE IT FURTHER RESOLVED That there is hereby declared to the common stockholders of the corporation a dividend in kind consisting of the 600 shares of the stock of The Chase National Bank of the City of New York, the 60 shares of Amerex Holding Corporation, and the 640 shares of the stock of National City Bank of the City of New York owned by this corporation, said stocks to be distributed ratably to the common stockholders on December 28, 1935, to the common stockholders of record on said date.
Pursuant to the foregoing resolution the dividend on preferred series B stock was received by the trustees on December 28, 1935, in the amount of $38,700. All of this sum was included in gross income by the trustees in their income tax returns for the calendar year 1935, and no part of it was deducted in those returns under section 162 of the Revenue Act of 1934, or paid in 1935 by the trustees to the petitioner or included by the petitioner in the gross income disclosed by her 1935 income tax return. Respondent treated this $38,700 as income distributable by the trustees in 1935 to the petitioner and added it to the gross income disclosed by her return for 1935. Respondent also added $40, which adjustment is not contested by petitioner. No part of this $38,700 was paid to the petitioner during 1935, but all of this sum was paid to her by the trustees during 1936. In its personal holding company income tax return for the year 1935, the corporation received a credit of $38,700 for dividends paid, and thereby reduced its tax liability for that year.
On December 26, 1936, the secretary of the corporation made a report somewhat similar to that of ...
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