Reporter's Statement of the Case whether the plaintiffs come within the exemption, and it must be held that they are not entitled to be exempted. The petition should be dismissed, and it is so ordered. Moss, Judge; BOOTH, Judge; and CAMPBELL, Chief Justice, concur. ROBERT W. JOHNSON, JR., JOHN S. JOHNSON, AND EVANGELINE B. JOHNSON, BENEFICIARIES UNDER THE WILL OF ROBERT WOOD JOHNSON, v. THE UNITED STATES [No. E-375. Decided April 2, 1928] On the Proofs Income tax; trust fund of estate; division into three trusts.-The will of plaintiffs' testator, after directing that certain payments should be made from the income of his estate, provided: "I direct my trustees to hold and invest and * reinvest all the remainder of such income and to hold and retain the same and all accumulations thereof in order that said trust fund may increase and keep the same intact until my said three children * shall respectively arrive at the age of twenty-five years, dividing the said trust fund, however, into three equal parts, one of the said parts to be so held for each of my said children, respectively, and in adding to such fund from I direct that such additions shall be made equally to each of said three parts and as my said children shall respectively arrive at the age of twenty-five years the principal of such portion of said accumulated fund so held for such child shall be paid to such child or the lawful issue thereof." Held, that the trust so created was that of one fund, the provision for dividing it being merely directory, and that an assessment by the Commissioner of Internal Revenue of income tax against the estate on the basis of one trust, taxable as an entity, instead of three separate trusts, was correctly made. * income of my estate The Reporter's statement of the case: Mr. Paul Myers for the plaintiffs. Williams, Myers, Quiggle & Breeding were on the brief. Mr. Dwight E. Rorer, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. Reporter's Statement of the Case The court made special findings of fact, as follows: I. Robert Wood Johnson, of New Brunswick, New Jersey, died February 6, 1910, leaving a will, a true and correct copy of which is attached to the petition as Exhibit A and made a part hereof by reference. II. The estate of Robert Wood Johnson, by its trustees appointed by said will, made, at the proper time in 1918, a return for Federal income-tax purposes covering the calendar year 1917, and on June 15, 1918, paid the tax shown therein, amounting to $45,235.77, to the collector of internal revenue at Newark, New Jersey. On October 19, 1922, the said estate filed a nontaxable amended return for the calendar year 1917 on Form 1041, setting forth a distribution of the income of the estate for 1917 equally for the three children of the testator, viz, Robert W. Johnson, jr., John S. Johnson, and Evangeline B. Johnson, and on the same date, to wit, October 19, 1922, Robert C. Nicholas, one of the trustees named in the will of Robert Wood Johnson, deceased, filed three separate returns, one as trustee for Robert W. Johnson, jr., one as trustee for John S. Johnson, and one as trustee for Evangeline B. Johnson, reporting in each the income distributed to the trustee by the estate for each beneficiary. The said three returns filed by the trustee as aforesaid set forth a total tax liability of $18,526.41. The aforesaid trustee thereupon, on October 22, 1922, filed with the said collector of internal revenue a claim for refund of $26,709.39 tax paid for 1917. III. The said claim for refund was rejected by the Commissioner of Internal Revenue on June 14, 1923, and again on August 19, 1924. On or about June 16, 1923, the Commissioner of Internal Revenue notified the said trustees of a proposed additional assessment of income tax for 1917 against the said estate in the amount of $13,318.88. The additional assessment was thereafter made, and on August 29, 1924, the said trustees paid, upon notice and demand and under protest, to the collector of internal revenue at Newark, New Jersey, the said additional assessment of $13,318.88, plus interest, amounting to $317.43, or a total payment of $13,636.31. The trustees immediately filed with the said collector a claim for refund of the said amount of $13,636.31, Reporter's Statement of the Case claiming that the will of Robert Wood Johnson created three trusts, each in itself a taxable entity, instead of one trust taxable as a single entity, and that the dividends paid by Johnson & Johnson, New Brunswick, New Jersey, on February 8, 1917, were paid out of 1916 earnings, and therefore should be taxed at 1916 rates. On or about January 30, 1925, the said claim was rejected by the Commissioner of Internal Revenue. IV. On February 8, 1917, the trustees of the estate of Robert Wood Johnson received dividends totaling $85,568.00 on its stockholdings in Johnson & Johnson, New Brunswick, New Jersey, as follows: $32,288.00 on preferred stock and $53,280.00 on common stock. The Commissioner of Internal Revenue has determined that only $42,666.62 of the said $85,568.00 is taxable at rates prescribed by the revenue act of 1916, while the balance, or $42,901.38, is taxable at rates prescribed by the revenue act of 1917. The said trustees take the position that the entire amount of $85,568.00 should be taxed at 1916 rates. V. On February 6, 1917, the board of directors of Johnson & Johnson held a semiannual meeting, the minutes of which contain the following: "On motion of Mr. Jones, duly seconded, a semiannual dividend of 4% on preferred stock and 3% on the common stock was declared, payable at the discretion of the treasurer." The treasurer's report, which was submitted to the board of directors at the said meeting held on February 6, 1917, disclosed the earnings of the corporation for the year 1916. The total dividend declared on the preferred and common stock on February 6, 1917, amounted to $163,000.00, and the stockholders who received the said dividend on February 8, 1917, were notified that the dividend was paid out of 1916 earnings of the corporation. The net earnings of the corporation from operations from January 1, 1917, to June 30, 1917, were $464,735.34. The Commissioner of Internal Revenue acted upon the theory that a proportionate part of said six months' net earnings was earned prior to February 8, 1917, and accordingly, in computing the amount of the said dividend taxable at 1917 rates, he apportioned a part of the Opinion of the Court said net earnings to the first 38 days of 1917, to wit, $83,720.84. The total net earnings of the corporation for the calendar year 1917 were $1,451,779.22, and the total dividends declared in 1917 were $425,000.00. The surplus on December 31, 1916, as shown by its books of account, was $1,898,701.30. VI. Johnson & Johnson close their books twice a year; that is, on June 30 and December 31. For a long period of years, including the years here in question, it has been the custom of the board of directors of said corporation to meet during the first or second week of February and August of each year, after the books of the company have been closed for the preceding six months' period ending December 31 and June 30, and dividends have been declared at such meetings. VII. If under the provisions of the will of Robert Wood Johnson three separate taxable trusts were created, each in itself a taxable entity, and the dividends received by such trusts are taxable partly at 1916 rates and partly at 1917 rates, as apportioned by the Commissioner of Internal Revenue, the amount recoverable in this suit would be $33,902.12. with interest on $20,265.84 thereof from June 5, 1918, and on $13,636.28 thereof from August 29, 1924. If the said will created but one trust, taxable as a separate entity, and if the dividends are taxable as determined by the Commissioner of Internal Revenue, no amount is recoverable in this suit. The court decided that plaintiffs were not entitled to recover. GRAHAM, Judge, delivered the opinion of the court 1: This case was heard on a stipulation of facts, which the plaintiffs state in their brief to be "the entire facts out of which this controversy arises." The court has adopted the stipulation as its special findings of fact. The question here arises out of the construction of the third paragraph of the will quoted infra. The Commissioner of Internal Revenue construed this paragraph as creating one trust fund undistributed and undistributable in 1917, and assessable for that year as a single Filed May 28, 1928. Opinion of the Court entity. The plaintiffs contend that it created three separate trust funds. The provision of the will is as follows: "Third. (4th) After the foregoing annual payments shall have been made as aforesaid out of said income and after all of the aforesaid legacies shall have been made thereout, then I direct my trustees to hold and invest and from time to time to reinvest all the remainder of such income and to hold and retain the same and all accumulations thereof in order that said trust fund may increase and keep the same intact until my said three children by my wife Evangeline A. (that is, Robert Wood, John Seward, and Evangeline Brewster) shall respectively arrive at the age of twentyfive years, dividing the said trust fund, however, into three equal parts, one of the said parts to be so held for each of my said children, respectively, and in adding to such fund from the residue of said annual income of my estate as aforesaid I direct that such additions shall be made equally to each of said three parts and as my said children shall respectively arrive at the age of twenty-five years the principal of such portion of said accumulated fund so held for such child shall be paid to such child or the lawful issue thereof." (Italics ours.) The applicable statutes are as follows: Section 1, Title I, of the income tax act of September 8, 1916, as amended by the act of October 3, 1917, provides in part: "(a) That there shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax- of two per centum upon such income * * Subsection (b) of section 1 of the said act emphasizes what is ordinarily referred to as a surtax upon the total net income referred to in section 1. Section 2 (b) of the said act provides: "Income received by estates of deceased persons during the period of administration or settlement of the estate shall be subject to the normal and additional tax and taxed to their estates and also such income of estates or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income held for 358-28-c C-VOL. 65—19 |