2009 California Civil Code - Section 731-731.15 :: Chapter 2.6. Legal Estates Principal And Income Law

CIVIL CODE
SECTION 731-731.15

731.  This chapter may be cited as the Legal Estates Principal and
Income Law.

731.01.  Nothing in this chapter shall affect the provisions of the
Personal Income Tax Law and the Bank and Corporation Tax Law.

731.02.  This chapter shall apply to all transactions by which a
principal was established without the interposition of a trust on or
after September 13, 1941, or is hereafter so established.
Transactions by which a principal is held in trust are governed by
Chapter 3 (commencing with Section 16300) of Part 4 of Division 9 of
the Probate Code.

731.03.  (a) "Principal" as used in this chapter means any realty or
personalty which has been so set aside or limited by the owner
thereof or a person thereto legally empowered that it and any
substitutions for it are eventually to be conveyed, delivered, or
paid to a person, while the return therefrom or use thereof or any
part of such return or use is in the meantime to be taken or received
by or held for accumulation for the same or another person;
   (b) "Income" as used in this chapter means the return derived from
principal;
   (c) "Tenant" as used in this chapter means the person to whom
income is presently or currently payable, or for whom it is
accumulated or who is entitled to the beneficial use of the principal
presently and for a time prior to its distribution;
   (d) "Remainderman" as used in this chapter means the person
ultimately entitled to the principal, whether named or designated by
the terms of the transaction by which the principal was established
or determined by operation of law.

731.04.  This chapter shall govern the ascertainment of income and
principal and the apportionment of receipts and expenses between
tenants and remaindermen in all cases where a principal has been
established without the interposition of a trust, except that in the
establishment of the principal, provision may be made touching all
matters covered by this chapter, and the person establishing the
principal may himself direct the manner of ascertainment of income
and principal and the apportionment of receipts and expenses or grant
discretion to the tenant or other person to do so, and such
provision and direction, where not otherwise contrary to law shall
control notwithstanding this chapter. The exercise by the tenant or
other designated person, of such discretionary power if in good faith
and according to his best judgment, shall be conclusive,
irrespective of whether it may be in accordance with the
determination which the court having jurisdiction would have made.

731.05.  (a) All receipts of money or other property paid or
delivered as rent of realty or hire of personalty, or interest on
money loaned, or interest on or the rental or use value of property
wrongfully withheld or tortiously damaged or otherwise in return for
the use of principal, shall be deemed income unless otherwise
expressly provided in this chapter. Dividends on corporate shares,
payable in stock or otherwise, shall be deemed income except as
provided in Section 731.07.
   (b) All receipts of money or other property paid or delivered as
the consideration for the sale or other transfer, not a leasing or
letting, of property forming a part of principal, or as a repayment
of loans, or in liquidation of the assets of a corporation, or as the
proceeds of property taken on eminent domain proceedings where
separate awards to tenant and remainderman are not made, or as
proceeds of insurance upon property forming a part of the principal
except where such insurance has been issued for the benefit of either
tenant or remainderman alone, or otherwise as a refund or
replacement or change in form of principal, shall be deemed principal
unless otherwise expressly provided in this chapter. Any profit or
loss resulting upon any change in form of principal shall inure to or
fall upon principal, except in the case of property referred to and
defined by Section 731.14, in which case the provisions of Section
731.14 shall govern.
   (c) All income, after payment of expenses properly chargeable to
it, shall be paid and delivered to the tenant or retained by him if
already in his possession or held for accumulation where legally so
directed by the terms of the transaction by which the principal was
established; while the principal shall be held for ultimate
distribution as determined by the terms of the transaction by which
it was established or by law, except in the case of property referred
to and defined by Section 731.14, in which case the provisions of
Section 731.14 shall govern.

731.06.  Whenever a tenant's right to income shall cease by death,
or in any other manner, all payments theretofore actually paid to the
tenant shall belong to the tenant or to his personal representative;
all income actually received after such termination shall be paid to
the person next entitled to income by the terms of the transaction
by which the principal was established.

731.07.  (a) All dividends on shares of a corporation forming a part
of the principal which are payable
   (1) In shares of the declaring corporation of the same kind and
rank as the shares on which such dividend is paid; and
   (2) In shares of the declaring corporation of a different kind or
rank to the extent that they represent a capitalization of surplus
not derived from earnings, shall be deemed principal.
   Subject to the provisions of this section, all dividends, other
than those awarded to principal under (1) and (2) above, including
ordinary and extraordinary dividends and dividends payable in shares
or other securities or obligations of corporations other than the
declaring corporation, shall be deemed income.
   Where the tenant shall have the option of receiving a dividend
either in cash or in the shares of the declaring corporation, it
shall be considered as a cash dividend and deemed income,
irrespective of the choice made by the tenant except as provided in
subdivision (f) of this section.
   (b) All rights to subscribe to the shares or other securities or
obligations of a corporation accruing on account of the ownership of
shares or other securities in such corporation, and the proceeds of
any sale of such rights shall be deemed principal. All rights to
subscribe to the shares or other securities or obligations of a
corporation accruing on account of the ownership of shares or other
securities in another corporation, and the proceeds of any sale of
such rights, shall be deemed income.
   (c) Where the assets of a corporation are liquidated, amounts paid
upon corporate shares as cash dividends declared before such
liquidation occurred or as arrears of preferred or guaranteed
dividends shall be deemed income; all other amounts paid upon
corporate shares on disbursement of the corporate assets to the
stockholders shall be deemed principal. All disbursements of
corporate assets to the stockholders, whenever made, which are
designated by the corporation as a return of capital or division of
corporate property shall be deemed principal.
   (d) Where a corporation succeeds another by merger, consolidation,
or reorganization or otherwise acquires its assets, and the
corporate shares of the succeeding corporation are issued to the
shareholders of the original corporation in like proportion to, or in
substitution for, their shares of the original corporation, the two
corporations shall be considered a single corporation in applying the
provisions of this section. But, two corporations shall not be
considered a single corporation under this section merely because one
owns corporate shares of or otherwise controls or directs the other.
   (e) In applying this section the date when a dividend accrues to
the person who is entitled to it shall be held to be the date
specified by the corporation as the one on which the stockholders
entitled thereto are determined, or in default thereof the date of
declaration of the dividend.
   (f) Distributions made from ordinary income by a regulated
investment company or by a trust qualifying and electing to be taxed
under federal law as a real estate investment trust are income. All
other distributions made by the company or trust, including
distributions from capital gains, depreciation, or depletion, whether
in the form of cash or an option to take new stock or cash or an
option to purchase additional shares, are principal.
   (g) The tenant may rely upon the statement of the paying
corporation as to whether dividends are paid from profits or earnings
or are a return of capital or division of corporate property, and as
to any other fact, relevant under any provision of this chapter,
concerning the source or character of dividends or disbursements of
corporate assets.

731.08.  Where any part of the principal consists of bonds or other
obligations for the payment of money, they shall be deemed principal
at their inventory value as fixed by the appraiser or appraisers
regularly appointed by the court, or, in default thereof, at their
market value at the time the principal was established, or at their
cost where purchased later, regardless of their par or maturity
value; and upon their respective maturities or upon their sale or
other disposition any loss or gain realized thereon shall fall upon
or inure to the principal, except in the case of property referred to
and defined by Section 731.14, in which case the provisions of
Section 731.14 shall govern. Where any part of the principal consists
of a bond or other obligation for the payment of money, bearing no
stated interest but redeemable at maturity or a future time at an
amount in excess of the amount in consideration of which it was
issued, such accretion, as when realized, shall inure to income.

731.09.  (a) Whenever a tenant is authorized by the terms of the
transaction by which the principal was established or by law, to use
any part of the principal in the continuance of a business which the
original owner of the property comprising the principal had been
carrying on, the net profits of such business attributable to such
principal shall be deemed income.
   (b) Where such business consists of buying and selling property,
the net profits for any period shall be ascertained by deducting from
the gross returns during, and the inventory value of the property at
the end of, such period, the expenses during, and the inventory
value of the property at the beginning of, such period.
   (c) Where such business does not consist of buying and selling
property, the net income shall be computed in accordance with the
customary practice of such business, but not in such way as to
decrease the principal.
   (d) Any increase in the value of the principal used in such
business shall be deemed principal, and all losses in any one
calendar year, after the income from such business for that year has
been exhausted, shall fall upon principal.

731.10.  Where any part of the principal consists of animals
employed in business, the provisions of Section 731.09 shall apply;
and in other cases where the animals are held as a part of the
principal partly or wholly because of the offspring or increase which
they are expected to produce, all offspring or increase shall be
deemed principal to the extent necessary to maintain the original
number of such animals and the remainder shall be deemed income; and
in all other cases such offspring or increase shall be deemed income.

731.11.  (a) Where any part of the principal consists of property in
lands from which may be taken timber, minerals, oils, gas, or other
natural resources, and the tenant in possession is not under a duty
to change the form of the investment of the principal, or (the duty
to change the form of the investment being absent) is authorized by
law or by the terms of the transaction by which the principal was
established, to lease or otherwise develop such natural resources,
and no provision is made for the disposition of the net proceeds
thereof after the payment of expenses and carrying charges on such
property, such proceeds shall be deemed income, whether received as
rent or bonus on a lease or as a consideration, by way of royalties
or otherwise for the permanent severance of such natural resources
from the lands. A duty to change the form of the investment shall be
negatived, and authority to develop such natural resources shall be
deemed to exist (not excluding other cases where appropriate intent
is manifested) where: (1) the resources or the right to exploit them
is specifically devised or granted, or (2) where development or
exploitation of the resources had begun prior to the transaction by
which the principal was established, or (3) where by the terms of
that transaction a general authority to lease or otherwise develop is
conferred, or (4) where the lands are directed to be retained. The
fact that such property received upon creation of the principal does
not fall within the category of investments which the tenant or a
trustee would be authorized to make under the law or the terms of the
particular instrument by which the principal is established, nor the
conferring of a mere authority, as distinguished from a direction,
to sell such property, shall not be deemed to evidence an intent that
the form of the investment shall be changed.
   (b) Where any part of the principal consists of property in lands
containing such natural resources, and the conditions under which the
proceeds thereof become income shall not exist, then in the absence
of the expression of contrary intent in the terms of the transaction
by which the principal was established, all such proceeds from such
resources, not in excess of 5 percent per annum of the inventory
value of such resources as fixed by the appraiser or appraisers
regularly appointed by the court, or in default thereof their fair
market value at the time the principal was established, or their cost
if acquired later, shall be deemed income and the remainder
principal.
   (c) Nothing in this section shall be construed to abrogate or
extend any right which may otherwise have accrued by law to a tenant
to develop or work such natural resources for his own benefit.

731.12.  Where any part of the principal consists of property
subject to depletion, such as leaseholds, patents, copyrights, and
royalty rights, and the tenant in possession is not under a duty to
change the form of the investment of the principal, the full amount
of rents, royalties, or income from the property shall be income to
the tenant; but where the tenant is under a duty to change the form
of the investment, either at once or as soon as a reasonable price,
not representing an undue sacrifice of value, may be obtained, then
the rents, royalties or income from such property not in excess of 5
percent per annum of its inventory value as fixed by the appraiser or
appraisers regularly appointed by the court, or in default thereof
its market value at the time the principal was established or at its
cost where purchased later, shall be deemed income and the remainder
principal.

731.13.  (a) Where any part of a principal in the possession of a
tenant consists of realty or personalty which for more than a year
and until disposed of as hereinafter stated has not produced an
average net income of at least 1 percent per annum of its inventory
value as fixed by the appraiser or appraisers regularly appointed by
the court, or in default thereof its market value at the time the
principal was established or of its cost where purchased or otherwise
acquired later, and the tenant is under a duty to change the form of
the investment as soon as a reasonable price, not representing an
undue sacrifice of value, may be obtained and such change is delayed,
but is made before the principal is finally distributed, then the
tenant shall be entitled to share in the net proceeds received from
the property as delayed income to the extent hereinafter stated.
   (b) Such income shall be the difference between the net proceeds
received from the property and the amount which, had it been placed
at simple interest at the rate of 5 percent per annum for the period
during which the change was delayed, would have produced the net
proceeds at the time of change, but in no event shall such income be
more than the amount by which the net proceeds exceed the inventory
value of the property as fixed by the appraiser or appraisers
regularly appointed by the court, or in default thereof its market
value at the time the principal was established or its cost where
purchased later. The net proceeds shall consist of the gross proceeds
received from the property less any expenses incurred in disposing
of it and less all carrying charges which have been paid out of
principal during the period while it has been unproductive.
   (c) The change shall be taken to have been delayed from the time
when the duty to make it first arose, which shall be presumed in the
absence of evidence to the contrary, to be one year after the tenant
first received the property if then unproductive, otherwise one year
after it became unproductive.
   (d) If the tenant has received any income from the property or has
had any beneficial use thereof during the period while the change
has been delayed, his share of the delayed income shall be reduced by
the amount of such income received or the value of the use had.
   (e) As between successive tenants, or a tenant and a remainderman,
delayed income shall be apportioned in the same manner as provided
for income by Section 731.06.

731.14.  (a) Where any part of the principal in possession of the
tenant consists of an obligation for the payment of money secured by
a mortgage or other hypothecation of real or personal property, and
by reason of the enforcement of such obligation or by agreement in
lieu of enforcement the tenant acquires any property, real or
personal, of whatsoever kind, including a money judgment, such
property shall be treated as a single substituted asset, and
thereafter all income therefrom, expenses incident thereto and
proceeds received upon sale, satisfaction, or transfer thereof, not a
leasing or letting, excepting gain or profit on such sale,
satisfaction or transfer, shall be apportioned in the same manner as
provided by this chapter for property of like character acquired by
purchase or held as a part of the estate at the time the principal
was established.
   Gain or profit realized on sale, satisfaction, or transfer, not a
leasing or a letting, of property referred to in this section shall
be credited to the income in an amount up to, but not exceeding, the
accrued unpaid interest on the original obligation secured by such
property as of the date of its acquisition by enforcement of the
obligation or agreement in lieu thereof, and the balance shall be
credited to principal. Such credit to income on account of accrued
interest shall be in addition to any and all other credits due income
by the terms of any other section of this chapter. Should any
portion of such credit to income on account of accrued interest be in
a form other than cash, then, and in that event, the full amount of
such credit to income shall be paid first out of any sums received
from the conversion of such asset into cash whether by payment, sale,
or transfer before any sums so received shall be paid to principal.
   As between successive tenants or a tenant and a remainderman, all
sums paid hereunder on account of accrued interest shall be
apportioned in the same manner as provided for income by Section
731.06.
   The cost price of the property shall be the unpaid balance of the
principal sum of the debt secured by such property, plus all sums
whenever paid on any of the following items:
   (1) All costs, charges, and expenses incident to the acquisition
of such property;
   (2) All taxes, bonds, and assessments, or any of them, which were
payable at the date of the acquisition of such property by the
tenant, excepting, however, interest accruing thereon from the date
of the acquisition of such property by the tenant; and all such sums
shall be a charge against the principal.
   (b) Upon the sale, surrender, or other disposition of a bond,
debenture, note, or other evidence of an indebtedness, voluntarily
created, or of a certificate of deposit evidencing the deposit of any
such instrument with a protective or reorganization committee, or of
stock or other security received through paricipation in the
enforcement of such obligation or the foreclosure of the security
therefor, upon which bond or other obligation there is overdue unpaid
interest which accrued after the establishment of the principal, the
proceeds realized upon such sale, surrender, or other disposition,
after repayment (1) of expenses incurred in connection therewith and
(2) of any sums paid to protect or preserve such security, shall be
divided pro rata between income and principal, computing interest at
the rate specified in such obligation. The amount allocable to income
shall in no case exceed the interest accrued and unpaid on the
original obligation up to the time of such sale or other disposition
or, where another security has been received in lieu of the original
obligation, the income which would have accrued on the latter up to
such time, less income received from the original or the substituted
security. The terms sale, surrender, or other disposition, as above
used, shall include compromise, settlement, accord and satisfaction,
and similar arrangements.

731.15.  (a) All ordinary expenses incurred in connection with the
principal or with its administration and management, including
regularly recurring taxes assessed against any portion of the
principal, water rates, premiums on insurance taken upon the estates
of both tenant and remainderman, interest on mortgages on the
principal, ordinary repairs, compensation of assistants and court
costs on regular accountings, except attorneys' fees, shall be paid
out of income. But such expenses where incurred in disposing of, or
as carrying charges on, unproductive property as defined in Section
731.13, shall be paid out of principal, subject to the provisions of
subdivision (b) of Section 731.13. Attorneys' fees for ordinary or
current services shall be paid one-half out of income; one-half out
of principal or in such other proportion as the court may direct.
   (b) Attorneys' fees and other costs incurred in maintaining or
defending any action to protect the property or assure the title
thereof, unless due to the fault or cause of the tenant, costs of, or
assessments for, improvements to property forming part of the
principal, brokers' commissions, title charges, and other costs
incurred in connection with purchasing, selling, or leasing property,
or investing or reinvesting principal, and all other expenses,
except as specified in subdivision (a) of this section, shall be paid
out of principal. Any tax levied by any authority, federal, state,
or foreign, upon profit or gain defined under the terms of
subdivision (b) of Section 731.05 shall be paid out of principal,
notwithstanding such tax may be denominated a tax upon income by the
taxing authority.

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