Opinion
No. 46515.
June 28, 1948.
Allen H. Gardner, of Washington, D.C. (Morris, Kix Miller Baar, of Washington, D.C., on the brief), for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Theron Lamar Caudle, Asst. Atty. Gen. (Robert N. Anderson and Andrew D. Sharpe, both of Washington, D.C., on the brief), for defendant.
Before JONES, Chief Justice, and HOWELL, MADDEN, WHITAKER, and LITTLETON, Judges.
Action by Robert L. Scott against the United States for refund of part of income taxes paid by plaintiff for the calender year 1936.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following:
Special Findings of Fact
1. Plaintiff is a citizen of the United States and a resident of Chicago, Illinois.
2. On March 15, 1937, plaintiff duly filed his Federal income tax return for the year 1936. That return disclosed an income tax liability of $12,342.77 which was duly paid in the amounts and on the dates shown below:
Amount Paid: Date paid
$3,109.39 ....................... March 15, 1937. $3,062.00 ....................... June 15, 1937. $3,085.69 ....................... September 15, 1937. $3,085.69 ....................... December 15, 1937.
3. Thereafter, the Commissioner of Internal Revenue assessed a deficiency in plaintiff's income tax liability for the year 1936 of $1,791.68. Plaintiff paid that amount, with interest thereon of $433.83, on March 27, 1941.
4. On March 25, 1943, plaintiff duly filed a claim for the refund with interest of $1,465.52 ($1,179.86 tax and $285.66 interest) of the amount paid on March 27, 1941. The Commissioner rejected that claim, and on September 15, 1944, mailed to plaintiff, by registered mail, a notice of the disallowance in full of the claim.
5. During the year 1936, plaintiff was one of the income beneficiaries of a trust established by the last will and testament of Charles F. Grey who died on May 10, 1925, a resident of Evanston, Illinois. That will is in evidence as Exhibit 1 of a stipulation filed by the parties and it is incorporated herein by reference.
By paragraph 23(c) of his will, that testator gave, devised, and bequeathed the residue of his estate to his grandsons, Charles F. Grey, 2d, and Newton Fox Grey, as trustees, to receive, hold, and manage the properties; to invest and reinvest the principal and proceeds thereof; to collect the income and profits from the properties to sell and lease the properties under certain conditions; to perform certain other acts in the management of the properties; to pay all costs, charges, and expenses of the trust estate; and to pay out the net income for twenty years, one-half to designated individuals, their survivors, or their issue (hereinafter referred to as the individual beneficiaries), and one-half for charitable and other organizations and purposes of the kind specified in section 162(a) of the Revenue Act of 1936 (hereinafter referred to as charitable organizations). There was no specific provision in the will concerning a deduction for or an apportionment of depreciation on the trust property.
6. Plaintiff's share of the amount of trust net income for the year 1936 which was to be distributed currently to the individual beneficiaries was 25 percent, of which 16 2/3 percent was obtained as an original beneficiary of the trust, and 8 1/3 percent was derived under the terms of the will from the share of a deceased beneficiary.
7. During the year 1936, the trust established by the will of Charles F. Grey, referred to as the testamentary trust, had nontaxable income, taxable income, allowable depreciation, and deductible expenditures as follows:
Nontaxable income (gross) .................... $5,189.23 Taxable income (gross) ....................... 85,899.51 Depreciation ................................. 16,548.47 Deductible expenditures ...................... 11,654.09
8. During the year 1936, and pursuant to the terms of the will, $38,386.72 of the income of the trust for that year was paid or permanently set aside for the charitable organizations hereinbefore mentioned and $38,386.72 of the income for that year was distributed currently to the individual beneficiaries.
9. In his individual income tax return for 1936, plaintiff reported as the total amount of taxable income received from the trust an amount of $2,641.90. That amount, described on the trust return as "dividends," represented the amount shown on the trust return as taxable to plaintiff out of the total amount of $10,082.67 distributed to him by the trust.
In arriving at the deficiency referred to in finding 3, the Commissioner increased plaintiff's taxable income received from the trust from $2,641.90 to $7,212.12 which he determined was plaintiff's distributive and taxable share of the net income of the trust for the year 1936. In arriving at this amount the Commissioner determined that the trust had net income of $57,696.98, of which one-half was distributable to the charitable organizations and one-half to the individual beneficiaries. The computation was made as follows:
Taxable gross income ........................ $85,899.54 Less: Depreciation ................... $16,548.47 Deductible expenditures ........ 11,654.09 ---------- 28,202.56 ---------- Net income ............................ 57,696.98 One-half distributable to charitable organizations ............................ 28,848.49 One-half distributable to individual beneficiaries ............................ 28,848.49
The $7,212.12 allocated by the Commissioner to the plaintiff as his taxable share of the trust income was computed at 25 percent of the one-half, that is, $28,848.49, of the trust net income shown as distributable to the individual beneficiaries in the foregoing computation.
10. In computing the trust net income which he allocated to the charitable organizations and to the individual beneficiaries in a total amount of $57,696.98, as set forth in finding 9, the Commissioner adjusted the net income reported on the fiduciary return of income filed by the trust for the year 1936 as follows:
Net income reported on trust return.............. $9,356.41 Additions: Rents increased ................... $2,393.59 Depreciation disallowed ........... 6,231.89 Contributions disallowed .......... 37,175.53 Capital loss deducted on return ............. $2,539.56 Capital loss allowed to trust ................. 1,877.11 --------- Capital loss decreased ........... 662.45 --------- 46,463.46 --------- Net income as adjusted for trust........... 55,819.87 Addition: Capital loss allowed to trust, but disallowed in computing the net income allocated to the charitable organizations and individual beneficiaries................ 1,877.11 --------- Net income used by Commissioner in making allocation ....................... 57,696.98
The deduction of $37,175.53 for contributions was taken on the trust return of income (form 1041) which provided for a deduction of contributions from gross income in computing the net income of a trust.
11. The total amount actually paid or permanently set aside for the charitable organizations during the year 1936 amounted to $40,330.69, and the total amount actually paid to the individual beneficiaries in 1936 also amounted to $40,330.69, but a portion of these equal amounts was paid out of sources other than 1936 income, as will appear from the reconciliation in the computation given hereinafter. This computation reconciles the nontaxable and taxable income less deductible expenditures set out in finding 7 with the $76,773.44 total of the two equal amounts shown in finding 8 and with the total of the two equal amounts mentioned in the next preceding sentence of this finding. The reconciliation computation is as follows:
Nontaxable income ............................ $5,189.23 Taxable income ............................... 85,899.54 --------- Total income ................................. 91,088.77 Less: Deductible expenditures ................ 11,654.09 --------- Income less deductible expenditures .......... 79,434.68 Less: Items deducted on books but not deductible for income tax purposes: Amortization of premiums ......... $150.47 Special assessment taxes ......... 117.18 Capital items deducted in rent account ......................... 2,393.59 -------- $2,661.24 --------- Total amounts distributable to charitable organizations and to individual beneficiaries out of 1936 income ......... 76,773.44 Add: Amount paid out of real estate tax reserve set up in prior year and not paid out of 1936 income ......................... 3,887.94 ---------
Total payments in 1936 to charitable organizations and to individual beneficiaries ............................ 80,661.38
12. Plaintiff contended in his refund claim (upon which the present suit is based and which was disallowed by the Commissioner as shown in finding 4) that the Commissioner, in computing the amount of trust income taxable to the individual beneficiaries (of which amount plaintiff had a 25 percent share), should have reduced the trust gross income by the total amount of trust income which was, pursuant to the will of Charles F. Grey, paid or permanently set aside for the charitable organizations previously mentioned, thus allocating nontaxable income and depreciation of the trust entirely to the taxable individual beneficiaries instead of allocating a portion thereof to the charitable organizations.
This is a suit for refund of a part of the income taxes paid by plaintiff for the calendar year 1936. The case turns on the amount of depreciation which should be allowed plaintiff because of his interest in the property from which the revenue was derived.
The details are set out in the findings of fact. During the year 1936 plaintiff was one of the beneficiaries of a trust established by the will of Charles F. Grey, who died May 10, 1935.
By the terms of the will one-half of the net income for a period of twenty years was to be paid to certain charitable organizations, the other half to individuals. Plaintiff as one of the beneficiaries received during the taxable year one-fourth of the one-half of the income that was allotted to individuals, or, in other words, one-eighth of the total net income for that year.
By the terms of the will the trustees were to receive, hold and manage the properties, collect the income and profits, sell and lease the properties under certain conditions, pay all costs, charges and expenses of the estate and pay out the income currently on the basis indicated. There was no specific provision in the will as to deduction for or apportionment of depreciation on the trust property.
The income of the trust for 1936 was as follows.
Nontaxable income (gross) ................... $5,189.23 Taxable income (gross) ...................... 85,899.54 Depreciation ................................ 16,548.47 Deductible expenditures ..................... 11,654.09
In reporting his income for 1936, which included income from other sources, the plaintiff reported $2,641.90 as the total amount of taxable income received from the trust.
The Commissioner of Internal Revenue determined that plaintiff's taxable income received from the trust was $7,212.12. The computation was as follows:
Taxable gross income ....................... $85,899.54 Less: Depreciation ................. $16,548.47 Deductible expenditures ...... 11,654.09 ---------- 28,202.56 ---------- Net income ............................... 57,696.98 One-half distributable to charitable organization .............................. 28,848.49 One-half distributable to individual beneficiaries ............................. 28,848.49
The plaintiff's share was computed as one-fourth of the one-half distributable to individuals. The Commissioner accordingly levied a deficiency assessment which was paid.
Plaintiff filed a timely claim for refund with interest in the aggregate sum of $1,465.52.
The gist of plaintiff's claim is that under the applicable statute the Commissioner should have allocated the nontaxable income, and the entire depreciation to the taxable individual beneficiaries instead of allocating a portion of it to the charitable organizations which were nontaxable. The plaintiff has waived the question as to the apportionment of nontaxable income.
The question is whether the plaintiff, who received one-eighth of the distributable income of the trust in 1936, is entitled to a deduction of one-eighth of the depreciation sustained on the trust property, or whether he is entitled to claim one-fourth on the ground that individual beneficiaries are entitled to deduct the entire depreciation.
The applicable statutes are set out in the footnote.
Revenue Act of 1936, c. 690, 49 Stat. 1652.
"Sec. 23. Deductions from gross income.
"In computing net income there shall be allowed as deductions:
Plaintiff makes a very plausible argument that the language of section 162(a), especially the expression "without limitation", shows that the intention of Congress was to give the taxable-income beneficiaries the entire depreciation, and that therefore since plaintiff is entitled to one-fourth of the taxable income he is entitled to one-fourth of the depreciation. He appeals to the legislative history of the quoted sections as bearing out his interpretation.
The effect of plaintiff's contention would be to give him the benefit of depreciation on that part of the property in which he had neither a legal nor an equitable interest. If such position is correct, the settlor of a trust might convey 95 percent of the income to charities and 5 percent to an individual and such an individual, by deducting depreciation on the entire property, might escape taxes altogether. To justify such an inequitable conclusion would require a very clear mandate of the statute. Of course, if the statute shows that as the manifest intention of the Congress we have no choice but to apply it, regardless of the result.
Do the provisions of the statute when read together show this to be the intent of the Congress? We think not.
Section 23( l) under the heading of "Depreciation" contains the following language:
"In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each."
It is the effect of plaintiff's position that the term "income beneficiaries" as here used refers to taxable income beneficiaries, and that since the charitable beneficiaries are not taxable, it applies in the case at bar only to the individual beneficiaries. A careful reading of the quoted sentence shows otherwise. The term "income beneficiaries" in the first part of the sentence is carried forward with the same meaning into the last expression "on the basis of the trust income allocable to each."
If there had been a provision in the trust instrument that the trustee should set up a reserve for depreciation and distribute the net balance, then charitable beneficiaries would have borne their part of the depreciation and the plaintiff would have received only that part of the depreciation which was allocable to his interest. Since the instrument did not provide for such a reserve, the charitable organizations bore the loss that was occasioned by depreciation in the form of subsequently reduced income. It seems very clear from this provision that plaintiff was entitled only to the depreciation allocable to his interest, and not to his interest plus a corresponding part of the depreciation attributable to the interest of the charitable beneficiaries.
Plaintiff, however, contends that section 162(a), by the use of the words "without limitation", shows that he was entitled to the depreciation on his proportion of the taxable income. This position was decided adversely to plaintiff in the case of Grey v. Commissioner, 41 B.T.A. 234, and in the same case by the Circuit Court of Appeals for the Seventh Circuit, 118 F.2d 153, 141 A.L.R. 1113. In fact, the identical questions involved here were presented in that case by another of the beneficiaries under this trust instrument. In the Grey case, supra, the Board of Tax Appeals in construing the words "without limitation" at page 243 of 41 B.T.A. uses the following language:
"Petitioner argues that the words `without limitation' appearing in section 162(a) preclude us from doing what we have indicated we think should be done, but we do not so construe these words. When they are examined in their context it is obvious that they were used merely to direct that a trust, more than 15 percent of the income of which was used for the prescribed — charitable — purposes, should not be limited to `15 per centum of the taxpayer's net income' as provided in section 23( o). The parenthetical clause of section 162(a), we think, clearly justifies this conclusion. We, therefore, sustain the respondent upon this issue and hold that petitioner is entitled to deduct only 4 1/6 percent of the depreciation sustained upon the trust property."
In the case of Newbury v. United States, 57 F. Supp. 168, 102 Ct.Cl. 192, 202, the court quoted the committee report explaining changes in the Revenue Act of 1928 which were made by the act of 1934. This report shows the purposes for which the changes were made and indicates that they were other than those contended for by the plaintiff. The same applicable provisions were carried forward into the act of 1936.
We find nothing in the legislative history nor in the previous decisions in similar cases, nor in the wording of the statute itself, when construed as a whole, to support the contention that the expression "income beneficiaries", as used in the statute, is limited to taxable income beneficiaries.
We are unable to give substantial weight to the plaintiff's position that the Congress made the additional allowance for depreciation to taxable income beneficiaries in order to encourage charitable bequests. The charitable organizations would get no benefit from such a construction. The additional allowance would result in the plaintiff's paying a lesser amount of income tax, but would not affect the charitable beneficiaries in any way.
We do not regard the facts and the decision in the case of Commissioner v. Pupin's Estate, 2 Cir., 107 F.2d 745 applicable to the facts in this case. That case involved the liability of the executor for an estate tax and concerned other provisions of the Revenue Act than those involved in the case at bar.
We find that the Commissioner was right in allocating the depreciation allowable to the plaintiff on the basis of his proportionate interest in the entire income distributable by the terms of the trust instrument.
Plaintiff is not entitled to recover and the petition is dismissed.
HOWELL, MADDEN, WHITAKER, and LITTLETON, Judges, concur.
* * * * * *
"( l) Depreciation. A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.* * * * * *
"( o) Charitable and other contributions. In the case of an individual, contributions or gifts made within the taxable year to or for the use of:* * * * * *
"(2) A corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation;* * * * * *
"Sec. 162. Net income."The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that —
"(a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23(o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit;
"(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year." 26 U.S.C.A. Int.Rev. Acts, pages 829, 893.