Lead Opinion
This аppeal involves income taxes for the year 1921, and is prosecuted by the Commissioner of Internal Revenue from an order of redetermination of the Board of Tax Appeals.
The controversy relates to the estate of A. C. Whitcomb, deceased, a resident of the state of California, who died in the year 1889, leaving a last will which was admitted to probate by the superior court of San. Francisco. The decedent left surviving him his widow, Louise P. V. Whitcomb, a daughter, Charlotte A. W. Lepic, and a son, Adolph Whitcomb. The latter died on September 5, 1914, survived by his widow, Marguerite T. Whitcomb, the respondent herein, and his children, Louise A. Whitcomb and Lydia L. Whitcomb.
Item seventh of decedent’s will reads as follows: “7th. I give to my hereinafter named executor, Jerome Lincoln, of said San Francisco, all the rest of my property, real, personal, or mixed, except what I may have in France, of every kind and nature and not hereinbefore disposed of, after the payment of my debts, in trust, nevertheless, tо pay over to my said wife, Louise Palmyre Vion Whitcomb, one-third part of the interest thereon or income therefrom for and during her natural life, and the other two-thirds parts to my two children, born of her:
The will contains no directions as to the manner in which the income from the trust shall be computed, and makes no provision relating to depletion nor a depletion reserve fund.
Since the year 1905, James Otis has served as trustee of the trust thus created. The original trust estate consisted largely of cash, bonds, stocks, and notеs. On February 23, 1906, the trust estate consisted of similar securities of a total value of more than $3,000,-000, together with certain parcels of real estate, most of which were in San Francisco. On April 18, 1906, the San Francisco earthquake and fire occurred. All of the improvements on the San Francisco real estate owned by the trust were destroyed by the fire. Some time after this the trustee adopted the policy of improving the real estate owned by the trust and of converting the other assets of the estate to accomplish that purpose. As a result of this policy and of the acquisition of additional parcels of real estate, the assets of the trust for several years prior to 1921, and during the years 1921 to 1926, inclusive, consisted almost entirely of improved real estate, including the Whitcomb Hotel and its furniture and equipment. The latter item represented an investment of more than $2,000,000.
During the years 1921 to 1926, inclusive, the trust estate suffered exhaustion, wear, and tear, as follows:
1921 ......................... $43,003.16
1922 ......................... 39,408.00
1923 ......................... 39,408.00
1924 ......................... I 39,258.00
1925 ......................... 39,108.00
1926 ......................... 55,833.00
The trustee of the trust filed fiduciary income tax returns for the years 1921 to 1926, inclusive, and deducted in computing the net income of the trust for each year the respective amounts above set forth, representing exhaustion, wear, and tear sustained by the trust. The trustee, however, did not withhold these amounts or any part of the income of the trust estate from the beneficiaries to whom income payments were due, and each of them received his undiminished share of the income of the trust. From 1903 to 1928, the trustee prеsented an annual account of his proceedings to the beneficiaries, but did not file any account in the superior court of San Francisco, which had jurisdiction over the trust. However, on September 5, 1928, the trustee filed with the court an account covering the period from February 23, 1903, to February 23, 1928, and setting out all of the payments made to the beneficiaries during that period. This was accompanied by a petition for its allowance.
The allowance of the account was opposed by Napoleon Charles Louis Lepie and Charlotte de Rouchechouart, children of Charlotte A. W. Lepie, one of the beneficiaries herein, who are two of the remainder-men entitled to part of the corpus of the trust upon the termination thereof, if they be then living. In their objections, which were filed with the court, they alleged that the trust property had sustained depreciation during the years 1913 to 1927, inclusive, in the amount of $622,434.11; that no reserve or other provision for such depredation had been made from the gross income of the trust estate; that such amount of $622,-434.11 had been paid by the trustee to the beneficiaries as income of the trust, thus impairing the trust property to that extent, and they prayed that the trustee be charged therewith. All of the parties interested in the trust estate were notified of the filing of the account and of the objections, and were represented by counsel at the hearing held thereon.
On September 19, 1928, the court entered an order in the matter which is in part as follows:
“It is hereby ordered, adjudged, and decreed that the objection of said Napoleon Charles Louis Lepie and Charlotte de Roehe-chouart to said account that no reserve or other provisions for annual depreciation for the years 1913 to 1927, both inclusive, as set forth in said objections, has been made, be, and the same is hereby, sustained; that the amount specified in said objections for each of said respectivе years from 1913 to 1927 is a proper amount to be allowed for depreciation, said amount for each of said respective years being as follows, to wit:
1913 ......................... $23,751.00
1914 ......................... 23,070.00
1915 ......................... 23,748.00
1917 ......................... 41,222.83
1918 ...........'.............. 55,302.96
1919 ........... 56,273.93
1920 ......................... 55,585.23
1921 ......................... 43,003.16
1922 ......................... 39,408.00
1923 ......................... 39,408.00
1924 ......................... 39,258.00
1925 ......................... 39,108.00
1926 ......................... 55,833.00
1927 ............'............. 56,214.00
“That James. Otis, the said trustee, made the disbursements as stated in his said fourteenth account without deduction of reserves or other provision for depreciation, under and pursuant to the advice of counsel learned in the law and retained by said trustee, to the effect that under and by virtue of the terms of said trust it was the duty of said trustee to make such disbursements with such deduction; that said trustee in making said disbursements without such deduction was entitled to rely upon said advice of the said counsel, and that said disbursements were so made by said trustee in good faith and without objection on the part of either the said Napoleon Charles Louis Lepic and/or the said Charlotte de Rouehechouart, or any other person interested in said trust, and that no personal liability of any kind or nature should or does attach to said trustee or to said Jаmes Otis by reason of having made such disbursements or any of them without deductions.
“It is further ordered, adjudged, and decreed that the recipients of the income of said trust estate during the period from February 23, 1913, to February 23, 1927, repay to the said trustee the respective amounts received by them during the years 1913 to 1927, both inclusive, as set forth in said objections of the said Napoleon Charles Louis Lepic and Charlotte de Roeheehouart as the respective amount which should have been retained by said trustee as a reserve for depreciation for each of said years 1913 to 1927, both inclusive.
“It is further ordered, adjudged, and decreed that from and after the year ending February 23, 1927, and until the termination of said trust, the said trustee withhold annually as a reserve for depreciation from the income from the trust property such an amount as may be proper according to the rules and regulations prescribed by the Government of the United States in connection with income-tax returns, and if thеre be no such rules or regulations then such an amount as may be reasonable and proper.”
Thereupon, on January 17, 1929, Louise A. Whitcomb, Marguerite T. Whitcomb, Lydia L. Whitcomb, Charlotte A. W. Lepic, Napoleon Charles Louis Lepic, and Charlotte de Roeheehouart, acting in conformity with the court’s order, executed and delivered to the trustee their promissory notes for the-amounts by which the distributions made to them exceeded the distribution which would have been made had the trustee retained a reserve for depreciation of the trust property. The notes were to bear no interest and were made payable at the termination of the trust, that is, upon the death of Charlotte A. W. Lepic.
The respondent in her return of income for the year 1921 did not include the full amount paid to her by the trustee, but omitted therefrom her proportionate share of the depreciation deducted on the fiduciary return of the estate. The Commissioner increased the incomе shown on the return by such proportionate share of the depreciation and determined a deficiency in tax accordingly. The Board of Tax Appeals, six members dissenting, reversed and set aside the determination of the Commissioner, who then appealed for a review by this court.
The question at issue is whether respondent, as life beneficiary under the testamentary trust aforesaid, is entitled to a deduction for depreciation of the corpus of the trust, notwithstanding that she recеived from the trustee her full share of the accruing income of the trust undiminished because of depreciation or otherwise. The statute involved reads as follows (Revenue Act of 1921, c. 136, § 219, 42 Stat. 227, 246):
“See. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including— * * *
“(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. * * *
“(d) In eases under paragraph (4) of subdivision (a), and in the ease of any income of an estate during the period of administration or settlement permitted by subdivision (e) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in com*806 ■puting the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, or, if his taxable year is different from that of the estate or trust, then there shall be included in computing his net ineome his distributive share of the ineome of the estate or trust for its taxable year ending within the taxable year of the beneficiary. In such eases the beneficiary shall, for the purpose of the normal tax, be allowed as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.”
The present issue may be considered first as the ease stands without regard to the decision of the California court. The authorities up to that time were unanimous in support of the proposition that a life beneficiary of a trust estate is taxable upon the full amount of ineome actually received by or distributable to him during the taxable year, without deduction for depreciation sustained by the corpus of the trust.
In Baltzell v. Mitchell,
In the ease of Whitcomb v. Blair, 58 App. D. C. 104,
In Kaufman v. Commissioner,
The question next arises whether the decision of the California court has made this case an exception to that rule. We think it has not. That decision does not rest upon an
In American Security & Trust Company v. Payne, 33 App. D. C. 178, we held that, in construing a will for the purpose of determining whether it is the duty of the trustee thereunder to pay the entire income derived from a trust fund to the life tenant, or to make certain deduсtions therefrom for the benefit of the remainderman, the question involved is not to be determined by any arbitrary rule, but by ascertaining, if possible, the meaning and intention of the testator from the language employed in the creation of the trust, from the relation of the parties to each other, their condition, and the surrounding facts and circumstances of the ease.
It is fair to assume in this ease that, had the testator intended that the trustee should establish such a reserve fund for depreciation, thеre would have been apt and effective language in the will to declare that purpose. By the terms of the will the testator undertook to provide for his widow and his two children primarily. They were the principal and immediate objects of his bounty, and it is unreasonable to believe that he intended that the annual payments of income to them should be made dependent upon the vicissitudes attending the corpus of the fund. At the time of the execution of the will, the testator’s assets consisted almost entirely of notes, bonds, and other like property. It was not until many years after the death of the testator that the assets were in large part converted into improved real estate and the subject of depreciation became one of present importance.
The trustee continued the control of the trust from 1903 to 1928, making annual accounts with the life beneficiaries of the trust, and it appears that during those years no action was taken to establish a resеrve for depreciation; nor did the trustee during all of that period file any account of his proceedings with the probate court having jurisdiction over the trust estate. In the year 1928 for the first time, following shortly after the decision of this court in the ease of Whitcomb v. Blair, supra, the trustee filed an account in the probate court, and the court ordered the trustee to establish a reserve fund for depreciation and determined the amount thereof for the years 1913 to 1927. The life beneficiarios were ordered to refund that amount to the trustee. They did this by executing promissory notes bearing no interest, and payable at the termination of the trust.
It is claimed in effect that this record conclusively establishes the right of the life beneficiaries to deduct from their income tax returns for the years 1921 to 1926, inclusive, the amounts found to be due in those years to the trustee for the reserve fund for depreciation.
We are of the opinion, however, that the order of the probate сourt made in the settlement of the trustee’s account is not sufficient authority to overcome the general rule theretofore established under the federal income tax law. There are many decisions showing the mutual respect exhibited by the federal and state courts in dealing with one another’s decisions. It seems needless in this ease to enter into a discussion of them, for in our opinion the bare statement of the facts in this case shows that we may without disrespect to the Californiа probate court follow the ruling which this court, respecting this identical trust, reported prior to the decision of that court, and which has since been approved and adopted by the other federal courts above named.
In Ford v. Commissioner,
In Fidelity & Columbia Trust Company v. Lucas (D. C.)
Our conclusion herein follows the opinion of the Circuit Court of Appeals for the Ninth Circuit in the ease of Commissioner v. Freuler,
In our opinion, therefore, the decision of the Board of Tax Appeals was erroneous; it is reversed, and the cause is remanded for further proceedings not inconsistent herewith.
Dissenting Opinion
(dissenting).
I am unable to agree, and I shall state the reasons of my dissent briefly.
The question at issue is controlled by the provisions of section 219 of the Revenue Act of 1921 (42 Stat. 246). Subdivision (d) of that section imposes a tax on the net income of each beneficiary of an estate or trust received in the taxable year “whieh, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or nоt. * * * ”
Fairly construed, I think it cannot be doubted that the true test of liability depends upon whether the income is distributable. If it is, it is taxable whether received or not. If it is not, it would seem to me to follow that it is nontaxable, even though received, as, for instance by mistake. If I have correctly stated the rule, then it follows that in this case the decision would turn on the question whether the income sought to be taxed was properly distributable to the taxpayer.
In Whitcomb v. Blair, referred to in the opinion of the court, there was agreement between both parties that the taxpayer was entitled to the sums received and taxed, and on that basis we held the taxpayer was “in fact and in law” entitled to receive the income whieh was taxed. After our decision, two of the remaindermen filed timely objections to the trustee’s account. The superior court of California having jurisdiction of the trust, all parties in interest being then before the court, entered a decree charging the beneficiaries, including taxpayer, in the amount of $622,000 on the ground that that amount, representing depreciation for the years 1913 to 1927, had been unlawfully paid to them by the trustee, and also directing the trustee to withhold annually thereafter for depreciation a reasonable and proper amount from the income of the trust property. One of the beneficiaries paid in cash his share of the amount required to be returned to the trustee, but the others, including taxpayer, gave the trustee their notes beаring interest and payable at the termination of the trust. The acceptance of the notes was apparently with the consent of the remaindermen.
The case, therefore, is one in whieh a state court having jurisdiction of the estate and of the parties has decreed that the taxpayer was not entitled to certain portions of the income received by her over a period of years, including the year involved here, and that the sum so improperly received should be returned to the trustee, and the court’s order has been obeyed. If, therefore, the statute taxes only the income properly received, and if the final decree of the state court is in accordance with the California law, as I think it is, and is therefore conclusive and binding, as it seems to me it is (Keith v. Johnson,
In this aspect there remains only the question whether the decree of the state court was obtained in a eollusive suit. There is nothing in the record to sustain a contention of that sort.
I think, therefore, the decision of the Board of Tax Appeals should be affirmed.