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Harrison v. Commissioner of Internal Revenue.

May 5, 1941


Petition for Review of Decision of the United States Board of Tax Appeals.

Author: Kerner

Before MAJOR and KERNER, Circuit Judges, and BRIGGLE, District Judge.

KERNER, Circuit Judge.

Petitioner asks us to review an order of the Board of Tax Appeals sustaining a deficiency determination of the Commissioner of Internal Revenue on the ground that she had not included $21,041.41 in her gross income for the calendar year 1931. The question presented is whether the $21,041.41 that she received from the estate of a decedent constituted taxable income under the Revenue Act of 1928, § 22(a), (b)(3), 45 Stat. 791, 791, 26 U.S. C.A. Int. Rev. Acts, page 354.

Petitioner and John H. harrison, both resident in the State of Illinois, were married on June 28, 1928. June 22, 1928, they entered into a prenuptial agreement by which he agreed to keep in force a will which would provide the following, among other things: " * * * that property of his having a value of not less than Two Hundred Fifty Thousand Dollars ($250,000.00) shall be set aside in trust for and during the natural life of said Lucille Brian Gilmore, and of which said property so placed in trust, she shall receive after his death and for and during her natural life, the entire income thereof for her own use and benefit. * * * "

Harrison died on March 2, 1931, leaving a last will and testament, which has been duly probated in the Probate Court of Vermilion County, Illinois. By Article II of the will petitioner was to receive certain household articles and automobiles. By Article IV she was given a life estate in certain real property, remainder in fee to DePauw University. By Articles V and VI several corporate legatees received specific sums for charitable purposes. Article VIII required the executors to sell and convert into money or into high-class income bearing securities all of testator's property not specifically bequeathed or devised. By Article IX DePauw University was to receive the "residue of the money and/or securities," except as provided in Article X.By Article X the testator bequeathed money and securities having a value of $300,000 to the Chicago Trust Company in trust to pay the income therefrom to petitioner for life, less a payment of $150 per month to testator's cousin for life, and on the death of the surviving income beneficiary to convey the corpus to DePauw University.*fn1 Article XI, subparagraph 3, empowered the executors "To continue any investments by me made, or to realize upon them, and invest or reinvest the proceeds thereof." Article XI, subparagraph 5, provided that the executors might make distribution in kind to the residuary legatee. Article XI, subparagraph 6, expressed the testator's desire "that the shares of stock of the Commercial News Company owned by me shall be sold by my Executors for what they deem its fair market value." Article XI, subparagraph 7, stated that "Because I place the most complete confidence in the judgment and integrity of said Executors, it is my will and desire that their determination * * * shall be conclusive."

At his death Harrison left surviving him his widow, the petitioner, as his sole heir at law and next of kin. Under Illinois statutory law she was entitled, except for the prenuptial agreement, to renounce the will and to take in her own right one-half of the real and personal estate of her husband. Chap. 41 § 12, Ill. Rev. Stat. 1939, Smith-Hurd Stats. Ill. c. 41, § 12.

The net worth of Harrison at the time of entering into the prenuptial agreement and the net value of his estate at the time of his death was in each case approximately $1,200,000.Petitioner contended that at the time of the making of the prenuptial agreement Harrison failed to disclose fully to her his financial resources and that such resources were much in excess of what she believed them to be at the time of the agreement. That the prenuptial agreement could have been set aside on this ground, see Slater v. Slater, 310 Ill. 454, 463, 142 N.E. 177; Debolt v. Blackburn, 328 Ill. 420, 425, 159 N.E. 790.

On November 25, 1930, the petitioner and DePauw University, the residuary legatee under the will, entered into a compromise agreement, the pertinent provisions of which are contained in the footnote.*fn2 In 1931 the executors paid to the petitioner The sums of $100,000 and $21,041.41 in accordance with the compromise agreement. The record discloses that the executors have never transferred the property in trust, as provided in Article X of the will, and that as late as 1940 the testamentary trust had not been set up.In the verified claim for refund filed by petitioner in 1936, she assigned the following reasons why the trust was not set up: "The trust provided for under Article X of the Will of John H. Harrison was never set up, due to the fact that the executors prior to 1934 could not make an advantageous sale of assets. In 1934, by agreement between taxpayer and DePauw University, the interest of taxpayer under the will was released in exchange for annuities agreed to be paid by DePauw University."

Section 22(b)(3) of the Revenue Act of 1928 provides that the value of property acquired by inheritance is exempt from income tax but that the income from such property is includible in gross income. In this case the Government conceded that the real estate item and the $100,000 item constituted property acquired by inheritance pursuant to a compromise settlement, and hence came within the income tax exemption of § 22(b)(3) above. As to these two items, Lyeth v. Hoey, 305 U.S. 188, 196, 59 S. Ct. 155, 83 L. Ed. 119, 119 A.L.R. 410, is exactly in point.

However, the Government insists that the item of $21,041.41, the sum of the payments received in 1931 pursuant to clause #3 of the compromise agreement, stands on a different footing than do the other items for two reasons: (1) because it represented an amount which petitioner was entitled to receive and in fact would have received under her husband's will, as a beneficiary of the trust therein provided for, without regard to the compromise settlement; and (2) because it was, at most, income from property acquired by inheritance and hence expressly includible in gross income under § 22(b)(3) above.

On the other hand, petitioner contends that the item of $21,041.41 stands on the same footing as do the real estate item and the $100,000 item, that all three items were received by her in spite of the will and "over and above what she would have received under the will," and that Lyeth v. Hoey, supra, is authority for the proposition that the same treatment should be accorded the three items. The Board held against the petitioner, stated that the nature of the payments of the $100,000 item and the $21,041.41 item was not the same, although the payments were made under the same compromise agreement, and concluded that Lyeth v. Hoey, supra, did not support petitioner's contention. 41 B.T.A. 1217, 1223, 1224.

The first question to be determined is whether the petitioner, as income beneficiary of the trust described in the will, was entiteld to receive income from the date of the death of the testator, irrespective of any compromise settlement. Petitioner argues that under Illinois case law she was not entitled to receive income under the will until the setting up of the trust. City Trust & Saving Bank v. Knight, 249 Ill.App. 617, 628; Clifford v. Davis, 22 Ill.App. 316, 320, 324; Valentine v. Ruste, 93 Ill. 585. The most recent pronouncement by the Illinois Supreme Court is to be found in the case of State Bank of Chicago v. Gross, 344 Ill. 512, 176 N.E. 739, 75 A.L.R. 172. Consequently, we may ignore the cases cited by petitioner to the extent that they differ from the Gorss case, supra.

The Gross case applied the general rule that unless a contrary intention appears, an income beneficiary is entitled to the income from the trust property from the date of the death of the testator. See also the Restatement of the Law of Trusts, Section 234. On page 518, of 344 Ill., 176 N.E. on ...

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