296 Mass. 415 | Mass. | 1937
The questions here presented relate to the allocation as between capital and income of “deficiency” income taxes assessed by the commissioner of internal revenue upon
So much of the taxes paid as are attributable to "capital gains” should be charged against principal. Although the Federal statutes which were in force during the years here involved treat and tax capital gains as a form of income, Revenue Act of 1928, §§ 22, 101, 45 U. S. Sts. at Large, 797, 811, Revenue Act of 1932, §§ 22, 101, 47 U. S. Sts. at Large, 178, 191, Revenue Act of 1934, §§ 22, 117, 48 U. S. Sts. at Large, 686, 714, Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509, yet for purposes of accounting by fiduciaries such gains are additions to principal. Tax Commissioner v. Putnam, 227 Mass. 522, 529. Williams v. Milton, 215 Mass. 1, 11. A tax upon such gains is a tax upon capital transactions the substantial benefit of which goes to capital. It is an expense incident to dealings in capital and not an expense incident to the collection of income. It differs from the ordinary annual taxes assessed locally upon real estate, and formerly also upon securities, which in Parkhurst v. Ginn, 228 Mass. 159, 170, were held chargeable to income, in that instead of being imposed at stated intervals merely as a condition of continuing ownership and in the nature of a current expense, it is imposed with respect to particular transactions resulting in profit and only if such transactions take place. See Cogswell v. Weston, 228 Mass. 219, 222; Plympton v. Boston Dispensary, 106 Mass. 544. The true character of this tax in so far as it affects the relation between fiduciaries and beneficiaries is not obliterated by the fact that capital gains are income within the broad sweep of the Sixteenth Amendment to the Constitution of the United States or by the requirements of annual return and assessment. The American Law Institute in its Restatement of Trusts § 233, comment f, lays down the rule as follows: "Any tax levied by any authority, federal, State or foreign, upon profit or gain which is allocable to principal is payable
That portion of the Federal income tax not attributable to capital gains is a regularly recurring incident of the receipt or collection of income and is properly chargeable to income. It is true that in this estate much of the income goes to pay annuities which would be payable out of principal if the income were insufficient. And it is true that the Federal government, in computing its tax, allows a trustee to deduct from “net income” the amount of income of the trust “which is to be distributed currently by the fiduciary to the beneficiaries,” (see § 162 in each of the revenue acts mentioned above,) but does not allow such deduction for payments of annuities which would be payable out of principal if the income should be insufficient therefor, on the ground that such payments are gifts or legacies rather than distributions of income. Helvering v. Butterworth, 290 U. S. 365, 370. Burnet v. Whitehouse, 283 U. S. 148. But it does not follow that, as certain respondents contend, the trustee in accounting with his beneficiaries, under the law of this Commonwealth should by analogy charge the tax to principal so as to relieve of the burden resulting from it those who receive income “distributed currently.” The Federal law establishes the nature of the tax as a true tax upon income, assessed to the trust as an entity and based upon income received by the trust. But that law does not control the accounting between the trustee and his beneficiaries, and the law which does control that accounting, in accord with sound general principles of long standing, requires that ordinary items of current expense, such as taxes assessed upon the right to receive income, should be charged to income.
We cannot accede to the contention of the respondent M. Francesca Grebe Ginn, the widow of the testator, that because of the provisions of an agreement entered into January 5, 1915, by her and the other beneficiaries of the trust
However deeply the testator may have been interested in the objects of the World Peace Foundation, we can discover nothing in the terms of the will relating to that beneficiary which can be said to indicate an intent of the testator to exempt it from the consequences which would otherwise naturally flow from the imposition upon the estate of the taxes here in question.
The decree of the Probate Court is to be modified in accordance with this opinion in respect to so much of the taxes as is or shall be attributable to capital gains and as so modified is affirmed.
Costs of this appeal as between solicitor and client are to be in the discretion of the Probate Court.
Ordered accordingly.