84 F. Supp. 769 | N.D. Iowa | 1949
This is an action by the four beneficiaries of two trusts against the United States for
On December 20th, 1934, Jacob A. Spies, deceased, a resident of Palo Alto County, Iowa, executed a trust agreement in which he transferred in trust to plaintiffs Charles J. Spies, Adolph A. Spies, and Elizabeth Spies Hossack, as trustees, a large number of bonds which he then owned. This is known and referred to as the Bond Trust. The beneficiaries of the trust, plaintiffs in this action, were his wife, Anna Spies, and his three children, the trustees above named. Article Two of said trust provided in part that upon the death of the Settlor:
“There shall be paid to Settlor’s wife, Anna Spies, so much of; the net income of the .trust estate, which, added to other income which she shall be entitled to receive fropi other sources, shall produce a monthly income to her, of Five Hundred Dollars ($500). In the event that said Five Hundred Dollar ($500) monthly income shall be insufficient to properly maintain, care for and support her, then the Trustees in their sole discretion ma.y pay to her an additional sum of Three Hundred Dollars. ($300) in any one month so as to provide for her proper maintenance, comfort' and support.”
The balance of the income from the trust, after an accumulation-of $10,000 in a “Trust Reserve Fund,” was to be paid “in convenient installments, to Settlor’s children * * * in equal shares, so long as they shall live.”
The trustees were vested with complete discretion to determine in what manner expenses áre to be borne and receipts are to be allocated between principal and income, and also to determine what shall be “income” and “net income.” Anticipated payments of income were expressly made nontransferable and nonassignable either voluntarily or by operation of law. The trustees were authorized to act with the concurrence of any two of them, and provision was made for the absolute right of selection and removal of successor trustees by any of the original trustees still acting as such, the total number of trustees always to be maintained at three.
Upon the death of the Settlor, Jacob A. Spies, there was admitted fo probate in the District Court of Iowa in and for Palo Alto County his last will -and testament and three codicils thereto which established a second trust in favor of -the same beneficiaries and with the same trustees. This is known and referred to as the Testamentary Trust. This trust, among other things not here 'involved, provided that the trustees pay from the trust any amount needed -to make up the $500 per month income for the wife provided by the other trust, and distribute -the balance equally among the three children. Paragraph 8 of the third codicil to the will provided: 1
“The distribution hereinabove contemplated shall not be anticipated or alienated in any manner, voluntarily or involuntarily. It is my intention that my own children, and, under the conditions above set forth, their own children, shall enjoy said distribution, and if for any reason- the trustees conclude that any beneficiary normally entitled to share in a distribution would not for any reason enjoy the substantial benefits of "the distribution, personally, then the trustees shall have the right to refrain from making any distribution to such beneficiary, or beneficiaries, and may add such portion of the funds to the funds being distributed to the other beneficiaries."
The trustees filed fiduciary returns showing net income of $9225.47 and $6205.90 for the years 1941 and 1943, respectively, from the Bond Trust, and showing net income of $2553.47 and $8551.89 for the same years, respectively, from the Testamentary Trust. On the Bond Trust return for the year 1943 deductions were taken for $15,-000 distributed to each of the three trustee-beneficiaries in that year, and on the Testamentary Trust returns for the years 1941 and 1943 deductions were taken for distributions made to Anna Spies of $2500 and $4000 respectively.
On audit of these fiduciary returns and of the individual returns of -each of the beneficiaries for these years, -the Commissioner of Internal Revenue determined that the beneficiaries should have included the
Bond Trust 1941i 1943
Anna Spies $6000.00 $6000.00
Elizabeth Spies Hossack $1075.09 $ 105.48
Charles J. Spies $1075.09 $ 105.48
Adolph A. Spies $1075.09 $ 105.48
Testamentary Trust
Anna Spies ($2500.00) ($4000.00)
Elizabeth Spies Hossack $1554.81 $2850.63
Charles J. Spies $1554.81 $2850.63
Adolph A. Spies $1554.81 $2850.63
Since there was sufficient income in the Bond Trust to pay the wife, Anna Spies, the $500 a month which that Trust provided for her, the Commissioner determined that' $6000 was taxable to her in each of the years for which deficiencies were declared out of the Bond Trust and not out of the Testamentary Trust. Therefore, the amounts actually paid to her for the years in question out of the Testamentary Trust and upon which she paid income tax was credited to her. This is indicated by parentheses around those figures in the above schedule.
By letter, dated March 28th, 1946, the Commissioner advised each of the plaintiffs that he had determined deficiencies against them individually for the years 1941 and 1943, and on October 18th, 1946, these deficiencies plus interest were assessed in the following amounts:
1941; 1943 Total
Anna Spies $593.45 $ 829.83 $1423.28
Elizabeth Spies Hossack $779.01 $1433.81 $2212.82
Charles J. Spies $667.71 $1409.17 $2076.88
Adolph A. Spies $826.27 $1718.62 $2544.89
Each of the plaintiffs paid such amounts assessed against them on November 13th, 1946, under protest, and each filed a claim for refund on March 4th, 1948.
On the 29th day of January, 1948, the trustees of the two trusts, individually and as such trustees, filed two petitions in the District Court of Iowa in and for Palo Alto County, Equity Nos. 15864 and 15865, in both of which petitions Anna Spies and all of the Settlor-Testator’s grandchildren were named as defendants. Both petitions sought a declaratory judgment under the provisions of Rule 264 of the Iowa Rules of Civil Procedure, No. 15864 requesting a construction of the Testamentary Trust and No. 15865 requesting a construction of the Bond Trust. Notice of these petitions was given to the Commissioner when the claims for refund were filed, and he was requested to appear and participate in the proceedings but he did not do so. That court on the 28th day of October, 1948, filed its Findings of Fact and Conclusions of Law in each case, and on the 16th day of November, 1948, filed its Decree and Judgment in each case. In each Judgment it was decreed that the trust being construed was a valid spendthrift trust under the Iowa law and that any income to be distributed by the trustees was not the property of any of the beneficiaries until the trustees made actual distribution. Paragraph 6 of the Judgment in No. 15865 states:
“It is further declared, adjudged and decreed that it is the true construction of said trust instrument, having due regard to all the terms of the instrument, including the provisions thereof creating a spendthrift trust and all other provisions, that it was the intention of the Settlor that the Trustees were to be, and they are, vested with full discretion and authority to distribute to, or withhold from distribution to, the three children of the testator, Elizabeth Spies Hossack, Charles J. Spies, and Adolph A. Spies, income, gains and profits, although the same accrued as income and was earned within the taxable year; and that income from the Trust property and assets in the possession of said Trustees is not, as the Trust Instrument is by the Court interpreted and construed, income required*772 to be distributed -currently by the said Trustees to the -beneficiaries.”
The Judgment does not Specifically pass upon the question of whether Anna Spies, Settlor’s wife, was entitled to the, $500 monthly income as provided by the trust as a matter of right or whether that provision was likewise subject to the discretion of the trustees.
This action was, commenced on the 27th day of November, 1948, after more than six months had elapsed since plaintiffs had filed their claims for refund during which time the Commissioner had neither approved nor rej ected their claims.
Section 22(a) of 26 U.S.C.A. defines “gross income” for the purposes of income taxation. It is provided therein that “gross income” shall include “income * * . * of whatever kind.” In 26 U.S.C.A. § 162(b) and (c) it is provided as follows:
“(b) There shall be allowed as an additional deduction in computing the net incomé 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;
“(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 is taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.”
The ultimate question for decision in the case of the widow Anna Spies is whether the income in question is in her case taxable to her under the provisions of 26 U. S.C.A. § 162(b) above set out. The ultimate question for decision in the case of the -three children is whether the income in question is taxable to them either under the provisions of 26 U.S.C.A. § 162(b) above set out or under the provisions of 26 U.S. C.A. § 22(a) above noted.
One of the legal storm centers in the arguments in this case was the status of the declaratory judgments rendered by the state court relating to the two -trusts in question. It is the claim of the Government that those two judgments are not entitled to determinative recognition by this Court because they were collusive in character and hence should not be accorded judicial recognition. It is the further contention of the Government that even if it should be held that the judgments in question were not collusive in character, they are not binding on this Court. It is the contention of the plaintiffs that the judgments in question were valid judgments and are binding upon -this Court in the matter of the relation of the plaintiffs to the income from the trusts in question. The plaintiffs in connection with this contention cite and rely, among others, upon the cases of Blair v. Commissioner, 1937, 300 U.S, 5, 57 S.Ct. 330, 81 L.Ed. 465, and Freuler v. Helvering, Commissioner, 1934, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634.
The question of whether state court decisions are binding upon the Federal Courts in passing upon Federal tax questions is one as to which the Federal Courts have long been in conflict. See annotation to the case of Eisenmenger v. Commissioner, 8 Cir., 1944, 145 F.2d 103, 156 A.L.R. 741; see also Bennett v. Commissioner, 5 Cir., 113 F.2d 837, 130 A.L.R. 374; United States v. Nunnally Inv. Co., 316 U.S. 258, 62 S.Ct. 1064, 86 L.Ed. 1455, 140 A.L.R. 797. Some of the decisions by the United States Court of Appeals for the Eighth Circuit dealing with this question are Eisenmenger v. Com
It is the view of this Court that the state court in question did not determine that the $500 monthly payment for the widow, Anna Spies, was not payable to her monthly as a matter of right. The widow had no other income during the years in question. Under these circumstances the income tax consequences on the particular income involved in her case would not be substantially different whether the income tax was paid by the trust or by her. The three children involved had such other income as to place them in a fairly high income tax bracket., Therefore, in their cases the matter of whether the income tax was payable by the trust or by them was and is a matter of serious tax consequences. In the petitions, findings of fact, conclusions of law, and judgments in the two state court declaratory judgment actions, the emphasis was upon the relation of the three children to the income from the two trusts in question. In no place therein did the state court specifically hold or declare that the trustees could rightfully deny or postpone the $500 monthly payments to Anna Spies if her income from other sources did not amount to that much. The provision in the Bond Trust relating to such payments is mandatory in character. It is plain that the husband-settlor had in mind and understood the difference between mandatory payments and discretionary payments for in the same paragraph providing for the $500 monthly payments he provided that the additional monthly payment of $300 was to be discretionary with the trustees. It is believed that it was not the intent of the husband-settlor and husband-testator by any other provisions in the Bond Trust or the Testamentary Trust to negative the mandatory language contained in the provision in the Bond Trust providing for the $500 monthly payments, which were obviously intended for the care and support of Anna Spies. It is the view of the Court that during the years in question the $500 monthly payments were currently payable to her as a matter of right. Under the express provisions of Section 162(b) heretofore set out, the widow Anna Spies was legally liable to report and pay income tax on the entire sum of $6000 for each of the years in question, even though all of that sum was not demanded by her or paid to her during those years.
The major emphasis in the arguments in the present case was as to the income tax situation of the three children under the two trusts. It has been heretofore noted that the three children of the settlor and testator are the plaintiffs Charles J. Spies, Adolph A. Spies, and
Because there are three trustee-beneficiaries of the spendthrift trusts in question and no one of them is free to deal alone with his own interest, the rule relating to sole trustee-beneficiary is not applicable. Blades v. Norfolk Southern R. Co., 1944, 224 N.C. 32, 29 S.E.2d 148, 151 A.L.R. 1278. It has been heretofore noted that under the provisions of the trusts in question, concurrence of two of the trustees was required for trustee action. It is held that where there are joint trustees they together form one collective trustee. Nichols v. Pospiech, 1939, 289 Mich. 324, 286 N.W. 633; see also 26 R.C.L., p. 1333.
In the present case it will be assumed without so deciding that the trusts in question were valid spendthrift trusts under the laws of the State of Iowa and that the payments of income to the three beneficiaries of such trusts is discretionary with the three trustees. Since that is what the state court adjudicated in the judgments referred to, no conflict with those adjudications arises in the present case. Since the distribution of the spendthrift trust income was and is discretionary with the three trustees, such income would not be “currently distributable” and would not be taxable to the beneficiaries under the provisions of Section 162(b). However, the fact that income is not taxable under the provisions of Section 162(b) does not prevent its being taxable under the provisions of Section 22(a), relating to taxability of income in general; Mallinckrodt v. Nunan, 8 Cir., 1945, 146 F.2d 1, certiorari denied, 324 U.S. 871, 65 S.Ct. 1017, 89 L.Ed. 1426.
The income in question was not in fact paid to the beneficiaries during the years in question so that they in fact did not receive it. Therefore, in the present case, such income could only be chargeable to them for income tax purposes under the “command of income” theory. This theory is exemplified by the cases of Corliss v. Bowers, 1930, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916; Helvering v. Clifford, 1940, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788; and Helvering v. Gordon, 8 Cir., 1937, 87 F. 2d 663. In both the Clifford and Corliss cases the Settlor of a trust by provisions in the trust retained control of and command over the trust property. The United States Supreme Court held that the income from the trust property was taxable to the Settlor under Section 22(a). In the Corliss case, 281 U.S. page 378, 50 S.Ct. page 336, supra, the Court states: “But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed.”
It is without legal significance that the command over the income arises out of reservations made by the Settlor or arises out of a grant of authority by the Settlor. Mallinckrodt v. Nunan, 8 Cir., 1945, 146 F.
It is the view of the Court that the plaintiffs Charles J. Spies, Adolph A. Spies, and Elizabeth Spies Flossack, had such command and control over the income in question as to make them chargeable therewith for Federal income tax purposes under the provisions of Section 22(a). It is the holding of the Court that the additional income taxes assessed by the Commissioner against the plaintiffs were legally owing by the plaintiffs, and that the claims of the plaintiffs be dismissed with prejudice and final judgment rendered in favor of the defendant.