365 F.2d 70 | 7th Cir. | 1966
Lead Opinion
The plaintiff, Lewis Sehimberg, the executor of the estate of Anna H. Collins, deceased, appeals from the partial dismissal of a claim for a refund of federal income taxes brought against the United States of America under 28 U.S.C. § 1346(a). The question presented concerns the validity of Treasury Regulations sections 1.652(c)-2 and 1.662 (c)-2, intended to implement sections 652 (c) and 662(c) of the Internal Revenue Code of 1954.
The facts were stipulated. Anna H. Collins died on November 29, 1957. The plaintiff, as the executor of the estate, filed an income tax return for the decedent covering the period from January 1, 1957 to the date of death. The decedent was the sole income beneficiary of the Philip Henrici trust, which kept its books and filed its income tax returns for fiscal years beginning February 1 and ending January 31, and a forty per cent income beneficiary of the William M. Collins trust, which kept its books and filed tax returns for fiscal years beginning April 1 and ending March 31. The decedent kept her books and filed tax returns on the cash basis for calendar years.
In the decedent’s final income tax return, the plaintiff included the following: (1) the decedent’s distributive share of the income of the Henrici and Collins trusts for their fiscal years ending January 31, 1957 and March 31, 1957, respectively; (2) $27,621.69, that portion of the income from the Henrici trust for its fiscal year ending January 31, 1958 which was actually distributed to the decedent prior to her death; (3) $7,-041.57, that portion of the income from the Collins trust for its fiscal year ending March 31, 1958 which was actually distributed to the decedent before her death.
The general rule that an individual taxpayer must report his income in the year that it is received is different as to income received by the beneficiary of a trust. Section 652(c) of the Internal Revenue Code provides that “[i]f the taxable year of a beneficiary is different from that of the trust, the amount which the beneficiary is required to include in gross income * * * shall be based upon the amount of income of the trust for any taxable year or years of the trust ending within or with his taxable year.” The literal language of this “different taxable years” provision has been modified by the regulations in an attempt to resolve the anomaly arising when the death of the trust beneficiary presents a situation in which the taxable year of the trust will not end “within or with” the final taxable year of the beneficiary. In such cases Treasury Regulation section 1.652(c)-2 provides that the “gross income for the last taxable year of a beneficiary on the cash basis includes only income actually distributed to the beneficiary before his death” and that trust income distributed to the beneficiary’s estate is to be included in the gross income of the estate as “income in respect of a decedent” under section 691 of the Internal Revenue Code.
The plaintiff concedes the applicability of the regulations but contends, drawing support from commentators,
The plaintiff maintains that the regulations are unreasonable because they permit “bunching” of more than twelve months’ trust income in the decedent’s final return. He also notes that the regulations do not afford deceased trust beneficiaries the same tax treatment extended to a deceased partner’s share of partnership income in the year
The decision of the district court is affirmed.
. Since sections 652(c) and 662(c) and tlieir corresponding regulations are substantially identical but for their respective application to simple and comjjlex trusts, all reference will be based upon section 652(c).
. Income from the Collins trust in the amount of $2,893.02 for its fiscal year ending March 31, 1958 which was paid to the decedent’s estate following her death was included both in the decedent’s final return and in the first return filed
. Somers, Some Income Tax Problems Incident to the Termination of a Trust, 14 Tax L.Rev. 85, 99-100 (1958) ; Winton, Income Taxation of Trusts and Estates— The Proposed Regulations, N.Y.U. 15th Inst, on Fed.Tax 979, 991 (1957).
. Schimberg v. United States, 245 F.Supp. 616, 619 (N.D.Ill.1965).
. Int.Rev.Code of 1954, § 706(a) provides in part:
In computing the taxable income of a partner for a taxable year, the inclusions required * * * with respect to a partnership shall be based on the income * * * of the partnership ending within or with the taxable year of the partner. Treas.Reg. § 1.706-1 (c) (3) (ii) provides in part:
The distributive share of partnership taxable income for a partnership taxable year ending after the decedent’s last taxable year is includible in the return of his estate or other successor in interest.
Dissenting Opinion
(dissenting) .
In my judgment, under the plain, unambiguous language of the statutory provisions involved, the taxpayer should prevail. The Treasury Regulations relied upon should not be sustained on the pretext that they are no more than a permissible interpretation or construction of such provisions. The government in its brief states, “Certainly, Congress did not intend any income from a trust should escape taxation unless definitely exempted.” The point is that the income in the instant case was by statute “definitely exempted,” and it is only by reason of the Treasury Regulations that it was “definitely” required to be reported. The government continues, “Obviously, the trust income herein is not definitely exempted and therefore will have to be reported some place in order that it be subjected to tax.” So, based on the premise that it should be reported someplace and being unable to find any place provided by Congress, the Commissioner promulgates the regulations contrary to the statutory provisions. This must be a novel approach in seeking to justify the regulations.
In June 1956, at the time the regulations were proposed, the Section of Taxation of the American Bar Association, through its committee on the Taxation of Estates and Trusts, transmitted to the Commissioner its comments on the proposed regulations. Inasmuch as I thoroughly agree with the views therein expressed, I take the liberty of quoting in part as follows:
“Sections 652(c) and 662(c) unequivocally provide that, if the taxable year of the beneficiary is different from that of the trust, the amount which the beneficiary includes in gross income ‘shall be based upon the amount of income of the trust for any taxable year or years of the trust ending within or with his taxable year.’ There are no exceptions in the statute. Thus, since the taxable year of the beneficiary will end with his death, he should include nothing under the statute with respect to any year of the trust which ends after his death. The regulations contain the statement that Sections*74 652(c) and 662(c) of the Code do not apply to amounts paid to the beneficiary during the taxable year of the trust in which he dies. There is absolutely no statutory justification for this statement.”
The same committee included in its comments the further pertinent observation:
“Furthermore, the rule which the regulations purport to set forth with no statutory justification can result in the bunching of income in the final taxable year of the beneficiary. For example, let us assume that the beneficiary is on a calendar year and that the trust is on an January 31 fiscal year. The beneficiary dies on December 1, 1956. The regulations would require that the beneficiary’s last tax return include all of the income from the trust for its fiscal year 1956, plus the income of the trust payable to the beneficiary for the period from February 1, 1956 to December 1, 1956. This result is most unjust and is completely contrary to the statute.”
I would reverse the judgment.