The opinion of the court was delivered by: LEIBELL
The plaintiff, as trustee under the will of Cortlandt F. Bishop, deceased, brings this action to recover $ 6,802.43, paid as income tax and interest thereon for the year 1940. After the death of Mr. Bishop on March 30, 1935, his will was admitted to probate in the Surrogate's Court, New York County, on April 25, 1935. His estate was in the hands of the three executors named in his will, Amy Bend Bishop, Edith Nixon (now Edith Nixon Falcke) and George L. Allin. Disagreements arose among the executors and they filed an intermediate account in the Surrogate's Court, New York County. Objections to the account were filed by the New York Trust Company and other interested parties. One executor was surcharged in an opinion filed by the Surrogate. A settlement was made and a decree was entered on a stipulation on July 31, 1939.
The will created a trust of the residuary estate. The three executors and the New York Trust Company were named trustees of this trust. As part of the settlement, the executors agreed not to qualify as testamentary trustees. Only the New York Trust Company so qualified, letters of trusteeship having been issued to it on April 12, 1938. The assets of the estate were turned over to the said trustee by the executors to carry out the directions contained in the Surrogate's decree and to act as sole testamentary trustee. A substantial part of the work of the executors remained unfinished and the trustee was required to complete the work ordinarily performed by executors, such as the determination and payment of State and Federal taxes and various other matters set forth in the decree. The decree contained a provision that the trustee pay the executors' commissions, calculated on the receipt and disbursement of income of the estate, while in the hands of the executors, which to the extent of about 56% or 58% was income on the property that became part of the residuary estate and thus part of the testamentary trust.
The provisions of the decree in respect to the executors' commissions were as follows: --
'Ordered, adjudged and decreed that the commissions to which the Executors are entitled for receiving gross rents be, and the same hereby are, fixed and allowed in the aggregate sum of Fifteen Thousand and Five Hundred Forty One and 92/100 ($ 15,541.92) Dollars, and the Trustee is hereby directed to pay the same to said Amy Bend Bishop, Edith Nixon and George L. Allin, in equal one-third shares or portions, as hereinafter provided; and it is further
'Ordered, adjudged and decreed that the normal commissions to which the executors are entitled for receiving and paying out income be, and the same hereby are, fixed in the sum of Eight Thousand Five Hundred One and 50/100 ($ 8,501.50) Dollars, in the case of each Executor, or in the aggregate sum of Twenty-five Thousand Five Hundred Four and 50/100 ($ 25,504.50) Dollars, and the Trustee is hereby directed to pay the same to said Amy Bend Bishop, Edith Nixon and George L. Allin, as hereinafter provided; and it is further
'Ordered, adjudged and decreed that, in accordance with the provisions (a) of the aforesaid waivers and consents of Amy Bend Bishop and Edith Nixon, as trust income beneficiaries, acknowledged July 27, 1939, and (b) of the aforesaid stipulation by the parties herein, dated July 25, 1939, the Trustee be, and it hereby is, directed to pay to Amy Bend Bishop, Edith Nixon and George L. Allin, the five per cent (5%) commissions for receiving gross rents and the normal commissions for receiving and paying out income, in the respective amounts hereinabove allowed therefor, such payments to be made by said Trustee within the period of thirty (30) days from and after January 1, 1940, and to be made out of principal, to the extent that the trust income then available shall be insufficient for such purpose, subject to reimbursement by income account to principal account from future trust income for any deficiency so paid;
'And it appearing from Schedule E of said supplemental affidavit, sworn to July 14, 1939, that there exists an overdraft in income account due to payments made by the Executors out of principal in discharge of obligations properly chargeable against, and payable from, income, which overdraft amounts to the sum of Four Thousand Four Hundred Seventy-nine and 89/100 ($ 4,479.89) Dollars; it is further
'Ordered, adjudged and decreed that, out of the first available income coming into the hands of the Trustee transfer and pay over to principal account a sum sufficient to discharge the aforesaid overdraft, and the amounts paid out of principal of the said five per cent (5%) commissions for receiving gross rents and the normal commissions for receiving and paying out income, which shall have been paid as hereinabove provided'.
In the calendar year 1940 the New York Trust Company, as testamentary trustee,$ paid the executors their income commissions, totalling $ 41,046.42, pursuant to the decree of the Surrogate's Court. During that year the trust estate had gross income of only $ 36,501.18. As a result it paid no income tax. The Commissioner in auditing the return of the trustee, disallowed a deduction of the $ 41,046.42, and on January 11, 1944, proposed a deficiency of income tax for the trust for 1940 in the sum of $ 5,637.50. The trustee paid the deficiency on September 5, 1944, together with interest of $ 1,164.93, a total of $ 6,802.43. A claim for a refund of that amount was filed September 3, 1946 and disallowed by the Commissioner on September 24, 1947, and this action was thereafter instituted.
The parties hereto have stipulated the facts in several stipulations of fact, one of which (undated), with certain exhibits, is annexed to the pre-trial order herein. The functions of the executors which the testamentary trustee took over and performed pursuant to the Surrogate's decree are set forth in seven sub-paragraphs (a to g) of paragraph 6 of the said stipulation. One of them (sub-paragraph g) recites the 'payment of Executors' Commissions in the amount of $ 41,046.42', made January 30, 1940.
A Second Supplemental Stipulation of Facts, dated June 10, 1953, states: --
'1. No income commissions were paid to the executors of the estate of Cortland F. Bishop prior to the year 1940, and no deduction for income commissions was taken by said executors on the income tax returns filed for the estate for the years 1935 through 1939. The executors' final return was filed for the year 1939.
'2. No deduction was taken on the Federal Estate Tax return of the estate of Cortlandt F. Bishop for income commissions paid to the Executors.
'3. The income tax returns for both the estate of Cortlandt F. Bishop and the testamentary trust created under his Will were prepared and filed on the ...