Sharpe v. Commissioner

*135 The Commissioner determined the following deficiencies in income taxes for the calendar year 1924, only part of which are in controversy:

Each petitioner alleges that the Commissioner erred (1) in determining the amount of taxable income received from the estate of Richard Sharpe for the year 1924, and (2) in failing to allow depletion in connection with part of the income received from the estate of Richard Sharpe for the year 1924.

FINDINGS OF FACT.

Richard Sharpe died on April 21, 1895, a resident of Wilkes-Barre, Luzerne County, Pa. His widow and five children survived him. *136 His widow died in 1905. Mary A. Sharpe, Richard Sharpe, and Martha Sharpe Tucker, three of the five children, instituted these proceedings. Mary Sharpe Tucker died testate on February 18, 1926, and Henry St. George Tucker, her executor, was substituted for her as party*2348 petitioner. The other two children were elizabeth M. Sharpe, who died testate and without issue on June 6, 1924, and Sally Sharpe, who died testate and without issue on September 25, 1924.

Richard Sharpe, the father, in his last will and testament and a certain codicil thereto, which will together with the codicil was duly probated, provided as follows:

Having leased to the Alden Coal Company my interest in coal lands in Newport Township, Luzerne County, owned in common with the heirs of the late Francis Weiss of Bethlehem, Pennsylvania, I do hereby make and constitute my son, Richard and my daughters, Mary A., and Elizabeth M., who are named this my last will and testament as the executors thereof, and I also appoint them trustees with full power to receive and receipt for the mine rents and the income from the land aforesaid, and to distribute the same as follows: one-eighth to my wife Sally, one-eighth part to each of my children, viz, Mary A., Elizabeth M., Richard, Sallie and Martha, the other two-eighths shall be invested by my said trustees in good securities which said investment shall be held and applied by said trustees as capital the annual income therefrom to be added*2349 to and distributed with the annual rents aforesaid, in equal five parts for and during the respective lives of my said children for their support and maintenance, free and clear from liability for the debts of any of my said children, and not subject to anticipation; the receipts of my said daughters, whether married or sole to be good and sufficient vouchers. In trust upon the death of any of my said children to pay the said annual income rents as aforesaid to the child or children of such decedent who may be living at the time of such decedent's death, and the issue of any deceased child or children, until their respective arrival at the age of twenty-one years, in equal parts and upon their respective arrivals at such age, then in trust to pay, assign and transfer to him or her so attaining his or her majority the proper proportionate part of the corpus or principal of such trust estate, such issue aforesaid taking always by representation the share of their deceased parent and not per capita. And lastly in the event of the death of any of my said children without leaving a child or children at the time of such death, then in trust for the use of my surviving children, their heirs*2350 and assigns, in equal parts, And to the end that the trusts aforesaid may be continued notwithstanding the death or resignation of either or all of the above named trustees, I order and direct that in such an event, the Orphan's Court of the County of Luzerne shall on petition of any one in interest under this will, appoint some suitable person or persons in place of such trusts or trustees, who shall have like powers as by this will are given to the trustees named, and such trustee or trustees shall not be required to give security for the performance of their duties. In trust upon the expiration or sooner determination, by forfeiture or otherwise of the said lease to the said Alden coal Company and before the workable coal is exhausted on the said demised premises, to demise, lease and let the same, or any part thereof, with the right to mine and remove the coal and other minerals, in such manner and upon such terms as to such trustees may seem meet, In Trust *137 upon the expiration of the lease to the said Alden Coal Company or their successors, by reason of the exhaustion of the coal or otherwise, to grant, bargain and sell and by good and sufficient deed or deeds to convey*2351 and said land and appurtenances, or any part thereof in such manner and upon such terms as to the said trustees may seem meet, and without liability on the part of the purchaser or purchasers thereof to see to the proper application of the purchase money; and money arising from such sale shall go to and form part of my residuary estate. And as to the residue of my estate, real, personal and mixed, (including the shares of stock I hold in the Alden Coal Company, as also all other stock and bonds not specified above), I give and bequeath it to my children, viz: Mary A., Elizabeth M., Richard, Sallie and Martha, share and share alike.

* * *

The one-eighth part of the mine rent or income from the coal lands hereinbefore bequeathed to my wife during her life, shall at her death be equally divided between my children; in that event each will be entitled to three-twentieths (3/20) instead of one-eighth of the same.

* * *

CODICIL.

* * *

FIRST: As to the disposition of my interest in the property in Newport Township, held in common with the heirs of the late Francis Weiss; that whenever the mineable coal is exhausted, so that there shall not be any more royalty or rent received*2352 from the same, then the Real Estate may be sold and the proceeds thereof, together with the whole amount of two-eighths part of the rent provided to be set aside, shall be divided in five equal parts between my children or their representatives, and the Trust created by my will shall terminate, whether my immediate descendants or heirs are living or dead.

In accordance with the above will, the trustees accumulated two-eights of the royalties received from the Alden Coal Co. lease. On April 26, 1924, the Orphans' Court of Luzerne County, Pennsylvania, ordered the distribution of the fund so accumulated, holding that the testator's five children were being deprived of the full use and enjoyment of this trust fund for an unreasonable period of time; the direction in the will to accumulate offended against the rule of law in Pennsylvania which forbade the imposition of restraints upon the use and enjoyment of property for an unreasonable period of time; the testator's five children had equal vested interests in the trust fund and in that one-fourth of the future royalties which the will directed should be accumulated; and they were entitled to have the trust fund distributed to them*2353 in equal shares and were entitled to have distributed to them from time to time, one-fourth of future royalties which might be received by the trustees.

The same court in connection with a petition for a declaratory judgment in the estate of Richard Sharpe, held, on January 18, 1926, that in the clause "in the event of the death of any of my said children without leaving a child or children at the time of such death, then in *138 trust for the use of my surviving children and heirs and assigns in equal parts," the words "my surviving children" referred to the children surviving at the death of the testator, so that Elizabeth having died without issue, and Sally thereafter having died without issue, the life interest of Sally, to wit, three-twentieths of the coal royalties, vested in the children surviving at the death of the testator or in other words in Richard Sharpe, Mary Sharpe, Martha Sharpe Tucker and the estate of Elizabeth Sharpe and the interest of the latter would pass under her will. The Orphans' Court of Luzerne County in 1928, in connection with an audit of the estate of Richard Sharpe, in ordering distribution of the fund derived from the sale of certain real*2354 estate in Newport Township, Luzerne County, Pennsylvania, held that under the codicil of the will above quoted, a vested absolute interest in the real estate mentioned in the codicil passed to the decedent's five children.

The Commissioner determined that for the year 1924 the respective shares of the petitioners in the income from the estate of Richard Sharpe were as follows:

The correct amounts of the respective shares of the petitioners in the income from the estate of Richard Sharpe were as follows:

In 1924 the trustees received gross royalties from the Alden lease in the amount of $236,442.19.

The parties stipulated that the total amount of depletion sustained in the year 1924 and applicable to the interest of the Richard Sharpe Estate was $46,377.30, being at a rate of 29.93 cents per ton.

OPINION.

MURDOCK: The petitioners contend that the Commissioner incorrectly*2355 determined the amounts of their respective gross shares of the income from the estate of Richard Sharpe. The Commissioner did not attempt to explain or justify his determination. The records *139 of the trustee under the will of Richard Sharpe were presented to us in detail, and from an examination of these records in connection with the testimony of the trustee himself, if appears that the Commissioner overstated the total amount distributable to and received by the three petitioners from the trustee. This total amount consisted of a small item of interest on bonds and a large item of royalties as set forth in our findings of fact.

Richard Sharpe, the father of the petitioners, had provided in his will that one-eighth of the mine rents and income from the land leased to the Alden Coal Co. should be distributed to his wife. She died before the taxable years in question, and by the terms of his will this one-eighth of the mine rent and income from the coal lands was to be divided equally among the children. Thus, after the death of the mother, each child was entitled to three-twentieths for life instead of one-eighth, which had theretofore been given them. This was the*2356 situation at the beginning of the year 1924. The petitioners concede that they are not entitled to depletion in regard to the three-twentieths which each of them received for life under these provisions of the will.

Richard Sharpe, the father, also provided in his will that two-eighths of the mine rents and income from the land leased to the Alden Coal Co. should be invested by his trustees and the annual income from the investments distributed in equal parts to his five children. This part of the will was found by the Orphans' Court of Luzerne County to offend against the rule of Pennsylvania law which forbade the imposition of restraints upon the use and enjoyment of property for an unreasonable period of time. The court further held that the testator's five children were entitled to have the fund, which had been accumulated under this provision of the will, distributed to them in equal shares, and, from time to time, to have distributed to them, in equal shares, one-fourth of the royalties which might be received in the future by the trustees. The five children were also entitled to share equally in the residue of the father's estate which was not specifically devised or*2357 bequeathed by him. The provision of the will directing accumulation having failed, this part of the father's estate was then a part of the residue and went to the children not for life only, but forever, subject, however, to the trust. With these portions of the royalties received by the trustee during 1924 we are now concerned.

Elizabeth Sharpe, one of the original five children of the testator, Richard Sharpe, died on June 6, 1924, without issue. This terminated her life estate in the three-twentieths of the income from the coal property, and under the terms of her father's will the four surviving children were thereafter entitled to receive this income. *140 On September 25, 1924, Sally Sharpe, one of the original five children, died without issue and the question arose as to who was entitled to the three-twentieths of the income from the mine property which had been hers for life under the terms of her father's will. This question depended upon what their father had meant in his will when he said "in the event of the death of any of my said children without leaving a child or children at the time of such death, then in trust for the use of my surviving children, *2358 their heirs and assigns in equal parts," and particularly what he meant in this clause by the words "my surviving children."

All of the parties in interest petitioned the court of Luzerne County to settle this question and the court did so by deciding that the words meant surviving at the death of the testator. In its opinion the court stated that after the death of Sally, the three-twentieths of the coal royalties would vest in Richard Sharpe, Mary A. Sharpe, Martha Sharpe Tucker and the estate of Elizabeth Sharpe. The petitioners contend that they are entitled to deduct depletion from that part of the income from the Alden lease which represents their respective shares of the two-eighths which was to be accumulated, of three-twentieths of the income which was formerly paid to Elizabeth for life, and also of three-twentieths of the income which was formerly Sally's for life.

Under the will of Richard Sharpe a trust was created, the income from which for the year 1924 should have been reported in accordance with the provisions of section 219 of the Revenue Act of 1924. This was not the kind of a trust that was dealt with in *2359 . The trustee had other duties beside merely collecting the income and paying it over to the beneficiaries. The petitioners do not contend that the trustee was relieved from reporting any part of the gross income received from the Alden lease. There is nothing to indicate that after the decree of the Orphans' Court on April 26, 1924, the trustee should not receive and distribute all of the gross royalties in accordance with the will as modified by the order of the court, nor is there anything to indicate that after the decree of January 18, 1926, the trustee should not receive and distribute all of the royalties in accordance with the will as modified by the two orders. Thus, all of the gross royalties were apparently properly received by a trustee during the year 1924 and in reporting this income, the provisions of section 219 of the Revenue Act of 1924 governed.

Section 219 of the Revenue Act of 1924 provides for the taxation of the income of any kind of property held in trust. The income of the trust estate must be reported by the fiduciary. From the net income of the trust depletion may be deducted by the fiduciary. *2360 *141 There is also allowed as a deduction in computing the net income of the trust, the amount of the income thereof for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, but the amount so allowed as a deduction must be included in computing the net income of the beneficiaries whether distributed to them or not. There is no provision in section 219 for the deduction of depletion by the beneficiary from the net income of the trust which is to be distributed currently by the fiduciary to the beneficiary. As Congress has not seen fit to allow the beneficiaries to deduct depletion from their distributive shares of the net income of the trust, then of course we can not. On the question of depletion our judgment is for the respondent. ; certiorari denied, . Cf. ; , and other cases cited in these two cases.

The conclusion which we have reached that Congress has not given the beneficiaries the right to deduct depletion is strengthened*2361 by a further consideration of section 219. There, in subdivision (c), Congress provided that if no part of the income of the trust is included in computing the net income of any beneficiary, then the trust shall be allowed, in addition to other credits, the same credits as are allowed by subdivisions (a) and (b) of section 216, and in subdivision (d) of section 219, Congress provided that if any part of the income of a trust is included in computing the net income of any beneficiary, such beneficiary shall, for the purpose of the normal tax, be allowed as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as under section 219 are required to be included in computing his net income, and any remaining portion of such amounts specified in subdivisions (a) and (b) of section 216, shall, for the purpose of the normal tax, be allowed as credits to the trust. Thus, Congress specifically provided for the division between the trust and the beneficiary of the credit for dividends and interest, and had Congress intended that the deduction for depletion should be divided in any way*2362 between the trust and the beneficiaries, it is only reasonable to suppose that it would have made specific provision for it instead of merely providing that the trust should have the deduction.

Counsel for the petitioners at the time of the hearing moved to vacate the Commissioner's answers and for entry of judgment by default because of the fact that the answers were filed late without the time therefor being properly extended under the Board's rules. This motion is denied, for, as we have pointed out, the facts alleged by *142 the petitioners do not, in our opinion, entitle them to any relief on the depletion question, while on the other question our judgment is in their favor regardless of the motion.

Judgment will be entered under Rule 50.