APPEAL from the Circuit Court of Cook County; the Hon. DANIEL
A. COVELLI, Judge, presiding.
MR. JUSTICE ADESKO DELIVERED THE OPINION OF THE COURT:
This is an appeal from a decree of the Circuit Court of Cook County construing the will of Norman W. Harris. The decree authorized the trustees under the will to amortize the principal cost of real estate improvements constructed or purchased by the trust over the useful lives of the improvements.
The issues on review are: (1) Whether Illinois law permits the trustees to depreciate the cost of a rental building for trust accounting purposes; and (2) whether the court erred in interpreting the will to give the trustees discretion to depreciate the cost of buildings owned by the trust.
Norman W. Harris died July 15, 1916, leaving a will dated January 24, 1911, and three codicils dated December 26, 1911, January 30, 1913 and April 20, 1914. The portion of his will concerning the establishment of the trust in question contains the following provision authorizing the trustees to invest in real estate:
"It is also my will and I direct, that the said Trustees shall have power to invest said trust estate in centrally located business real estate, either in the City of Chicago, or in the City of New York, City of Philadelphia, City of St. Louis or the City of Boston, and to make long ground leases of such property, or to improve the same for business uses, and to do all such acts in connection therewith as may be necessary or proper in their judgment to render such property safe, secure and productive."
In 1966, the trust purchased a parcel of improved real estate at Wacker Drive and Adams Street in downtown Chicago for a purchase price of $1,760,232.17. Of the total cost, $214,000 was allocated to the buildings, each of which had an estimated economic useful life of ten years. The trustees decided to depreciate the cost of the buildings by the straight line method over their useful lives. Thus, they deducted 10 per cent each year from the gross income generated by the property for depreciation cost in determining net trust income.
Before the instant suit was filed, the trustees decided to demolish the existing structures and to construct a new office building on the site. The cost of this project was estimated at $25,000,000 and the economic useful life of the structure was estimated to be from 40 to 60 years. For trust accounting purposes, the trustees desired to amortize the cost of this structure on a straight line basis by periodic charges against income, over its maximum estimated useful life. The trial court construed the will of Norman W. Harris to authorize the trustees, in their discretion, to amortize the cost of real estate improvements, and entered a decree approving the trustees' amortization of the cost of such improvements over their estimated useful lives for trust accounting purposes. It is from that decree that defendant, Gordon Gale MacLean, one of the trust's income beneficiaries appeals.
Defendant's initial contention on appeal is that Illinois law does not permit trustees to depreciate the cost of a rental building owned by the trust. In support of his contention, defendant relies upon an Illinois Supreme Court case and several Federal tax cases dealing with Illinois trusts. These cases are distinguishable however from the case at bar.
In Hopkins v. Austin State Bank, 410 Ill. 67, 101 N.E.2d 536, cited by defendant, the court approved a failure by trustees to deduct for the depreciation of real estate improvements in determining trust income. But the court found such failure to amortize proper only when the trust instrument could not be construed to allow such amortization. Similarly, in the Federal tax cases cited by defendant (Laflin v. Commissioner (7th Cir. 1934), 69 F.2d 460, Dixon v. Commissioner (7th cir. 1934), 69 F.2d 461 cert. den. (1934), 293 U.S. 560; United States v. Blow (7th cir. 1935), 77 F.2d 141; and Lambert Tree Trust Estate (1962), 38 T.C. 392, depreciation of trust realty was disapproved only when the instrument could not be construed to allow such amortization. In the instant case, the trial court did construe the will of Norman W. Harris to authorize the trustees to depreciate investment realty purchased by the trust.
In Mollie Netcher Newburry (1932), 26 BTA 101, the United States Tax Court (then the Board of Tax Appeals) considered the permissibility of trustees under an Illinois will amortizing the cost of realty purchased by the trust and held that such amortization was entirely proper when the settlor's will could be construed to allow such amortization. The court held:
"Where a trustee makes investments with the corpus of an estate, he is duty bound to see that so far as reasonably may be, the corpus always includes the equivalent of the amount invested. * * * The will gave the trustee authority to thus borrow and build. There is nothing in the will indicating that the testator intended the trustee should not deduct depreciation on any buildings she might erect. * * * Had the trustee made no provision for replacing the building * * * obviously the testator's wish could have been carried into effect only at the expense of other property constituting corpus of the estate in violation of rights of remaindermen. * * * We think that they [the income beneficiaries] had no right under the will to have the annual income from the building distributed to them except as it exceeded an appropriate amount to restore the cost of the building at the end of its estimated life." 26 BTA 101 at 106-7.
The Seventh Circuit Court of Appeals reversed the Tax Court's decision in Newburry, in Commission v. Netcher (7th cir. 1944), 143 F.2d 484, cert. den. (1944), 323 U.S. 759, but the decision was based solely upon the fact that the Tax Court had improperly allocated the depreciation deduction between the trust and beneficiaries for income tax purposes. The Court of Appeals expressly approved the Tax Court's determination that for trust accounting purposes, the depreciation of trust realty was entirely proper when the will of the settlor could be construed to authorize such deduction.
The rationale for allowing a depreciation deduction when a will can be construed to allow such deduction is summarized by Professor Austin Scott ...