Court Rules Against Getty Heirs on Taxes : Capital Gains Must Be Paid From Trust Income

In a preliminary decision that will be expensive for beneficiaries of the mammoth $4-billion Getty family trust, a Los Angeles Superior Court judge tentatively ruled Monday that $1.1 billion in capital gains taxes must be taken from the income distributed to beneficiaries.

Attorneys for the three petitioners, who are the granddaughters of Getty Oil founder J. Paul Getty, had argued that Getty had intended that the $800 million in federal and $300 million in state capital gains taxes be paid out of the principal or assets of the trust instead of the interest income because income from the trust is already subject to income taxes.

In an eight-page memorandum to lawyers involved in the case, Superior Court Judge Richard P. Byrne concluded: “It appears to the court that the . . . trustee (is required) to pay the capital gains taxes when due and payable from income, to the extent that there is income available to pay the taxes, and the balance from principal.”

Byrne’s decision is not final until a court order is drafted later on this month. However, lawyers close to the case said such tentative rulings are almost never reversed.

Bitter Court Case

Attorneys representing the petitioners either could not be reached or declined comment.

However, Joseph Wyatt, who represents a separate client, 16-year-old Tara Getty (who stands to inherit some of the principal of the same trust) said: “All the people we represent have an interest in the principal; it was to their financial benefit the decision turned out the way it did.”

The bitter court case, which involves more than a dozen lawyers, stems from a dispute over the management of a trust established in 1934 by industrialist J. Paul Getty, then 42, and his mother, Sarah Catherine Getty, then 81. The trust has been managed by Gordon Getty, a 51-year-old musician who is sole trustee and uncle to the three petitioners.

Although income from the trust reached a hefty $330 million in 1984, three nieces, Claire Getty, Caroline Getty and Anne Getty Earhart, accused Gordon Getty of breaching his duties as trustee when he arranged for Texaco Inc.’s $10-billion acquisition of Getty Oil last year. The trust had owned 40.2% of Getty Oil before the sale, and the trust provides each of the petitioners with a portion of the trust. In 1984, that portion totaled $35 million for each petitioner.

In their lawsuit, the nieces accused Gordon Getty, whose trust share reportedly totaled $110 million plus a $20-million trustee’s fee, of exposing Getty Oil to takeover bids, of disclosing confidential information to third parties and of failing to provide information to other trust beneficiaries. They also accused their uncle of being “unfit to continue to serve as trustee of the trust.”

They asked that Byrne replace him with another person or corporation, or both.

Byrne did not rule on that question, but he rejected a petition filed two weeks ago by lawyers for Gordon Getty that claimed that Byrne did not have jurisdiction to hear the dispute.