Case ID: us-ct-cl_63/html/0455-01.html
Source: Caselaw Access Project
Author: {"author": "Moss, Judge,\n    ", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

EDWARD T. ESTY, AS EXECUTOR OF THE WILL OF GEORGE I. ALDEN, DECEASED, v. THE UNITED STATES
    [No. E-258.
    Decided May 2, 1927]
    
      On the Proofs
    
    
      Income tax; trust fund; income subject to disposition by beneficiary. — Where the creator of a trust fund grants to himself as beneficiary the right to the net income therefrom as often as he may request it of the trustees, the income tax imposed by section 219(d) of the revenue act of 1918 upon the beneficiary applies to the entire net income subject to the trust and is not limited to the part thereof paid to the beneficiary.
    
      
      The Reporter's statement of the case:
    
      Mr. L. Russell Alden for the plaintiff. Messrs. Frederieh L. Fishbaclc and Harry A. Fellows were on the briefs.
    
      Mr. Fred K. Dyar, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. Plaintiff’s decedent, George I. Alden, hereinafter referred to as the decedent, in whose name this suit was originally brought, was at all of the times mentioned herein and until his death a citizen of the United States and a resident of Worcester in the State of Massachusetts. He died on September 13, 1926, while this suit was pending, and on October 5, 1926, Edward T. Esty, who is the duly appointed, qualified, and acting executor of the will of the decedent, was by order of court herein admitted as such executor to prosecute this suit.
    II. On August 24, 1912, the decedent executed and delivered to himself, George I. Alden, Albert H. Stone, and Edward T. Esty, all of Worcester, Mass., a certain instrument or deed in trust whereby he conveyed to the said George I. Alden, Albert H. Stone, and Edward T. Esty as trustees thereunder certain property upon certain trusts and subject to certain reservations therein set forth, to be known as the “ George I. Alden Trust,” a copy of which instrument or deed in trust, together with all amendments thereto, is attached to the petition in this case, marked “ Exhibit A,” and is by reference made a part of this finding.
    III. Clause 2 of said instrument or deed in trust of August 24, 1912, provides as follows:
    “2. The trustees shall pay, as often as requested, to me during my life the net cash income from said trust fund; and they may further pay to me from time to time as much of the principal as they may in their judgment deem advisable.”
    IY. On November 24, 1917, the decedent acting under and in conformity with the power of amendment reserved to himself in clause 27 of the said instrument or deed in trust of August 24, 1912, amended the same in certain respects and in particular by substituting for said clause 2 thereof the following:
    
      “2. The trustees shall pay, as often as requested, to me during my life the net cash income from said trust fund, and they may further pay to me from time to time as much of the principal as they may in their judgment deem advisable.
    “Upon my death any income then in the hands of the trustees shall be disposed of by the trustees as income accruing subsequent to my death, except as hereinafter provided in clause 10:”
    V. On July 5, 1918, the decedent acting under and in conformity with the power of amendment reserved to himself in clause 26 of the said instrument or deed in trust of August 24, 1912, as amended by the third amendment thereof, dated November 24, 1917 (being the same in wording as clause 27 of the original instrument or deed in trust of August 24, 1912), further amended the same in certain respects and in particular by substituting for clause 2 as previously amended the following:
    “ 2. The trustees shall pay to my daughter, Clara L. Alden, during my lifetime, at such times during each year as may be convenient to the trustees, twenty-seven per cent (27%) of the net cash income from said trust fund, shall pay, as often as requested, to me during my lifetime the balance of said net cash income, and they may further pay to me from time to time as much of the principal as they may in their judgment deem advisable.
    “Upon my death any income then in the hands of the trustees shall be disposed of by the trustees as income accruing subsequent to my death, except as hereinafter provided in clause 10.”
    VI. On March 10, 1920, the decedent, acting under and in conformity with the power of amendment, reserved to himself in clause 26 ,of the said instrument or deed in trust of August 24, 1912, as amended by the third amendment thereof dated November 24, 1917 (being the same in wording as clause 27 of the original instrument or deed in trust of August 24, 1912), further amended the same in certain respects and in particular by substituting for clause 2 as previously amended the following:
    “ 2. The trustees shall pay to my daughter, Clara L. Alden, during my lifetime, at such times during each year as may be convenient to the trustees, twenty-seven per cent (27%) of the income from the Norton Company stock, without deductions on account of charges, contributions, or expenses, but not including interest on accrued interest from the trust fund or from any securities in which accrued interest may have been invested, shall pay, as often as requested, to me during my lifetime the balance of the net cash income, including said interest, and they may further pay to me from time to time as much of the principal as they may in their judgment deem advisable. Upon my death any income then in the hands of the trustees shall be disposed of by the trustees as income accruing subsequent to my death, except as provided in clause 10 of the alteration of the trust ■instrument dated November 24, 1917.”
    VII. On July 16, 1920, decedent acting under and in conformity with the power of amendment reserved to himself in clause 26 of the said instrument or deed in trust of August 24, 1912, as amended by the third amendment thereof dated November 24, 1917 (being the same in wording as clause 27 of the original instrument or deed in trust of August 24, 1912), further amended the same in certain respects and in particular by adding to clause 2 as previously amended the following:
    
      “ In explanation of the twenty-seven per cent (27 %) above stated, twenty-seven per cent of the shares of stock originally forming the trust was the property of my said daughter; said shares were given by her to me for the purpose of creating the trust in connection with the shares of stock owned by me.”
    VIII. For the year 1918, 73 per cent of the entire net income of the trust fund amounted to $90,196.06, of which decedent asked for and was paid by the said trustees $60,-752.90; for the year 1919, 73 per cent of the entire net income of the trust fund amounted to $95,114.42, of which decedent asked for and was paid by said trustees $54,831.53; for the year 1920, 73 per cent of the entire net income of the trust fund amounted to $201,242.34, of which decedent asked for1 and was paid by the said trustees $95,286.61.
    IX. On or before March 15, 1919, the decedent made and filed with the United States collector of internal revenue for the district of Massachusetts his Federal income-tax return for the year 1918 and included therein, along with his other income, the whole sum of $90,196.06; the total tax shown to be due on the said return amounted to $21,890.86, which was paid by decedent in quarterly installments as follows:
    Mar. 22, 1919_$5, 472. 71
    June 14, 1919_ 5, 472. 71
    Sept. 15, 1919_ 5,472.71
    Dec. 16, 1919_ 5,472.7a
    Total___ 21, 890. 86
    The decedent, upon request of the Commissioner of Internal Revenue, paid on September 6, 1921, further taxes amounting to $25.71.
    On February 17, 1928, as a result of a reaudit of the return in question, decedent received a refund of $302.47, leaving a total payment by him for the year 1918 of $21,614.10.
    On March 21, 1923, the decedent prepared and filed an amended income-tax return for the year 1918, including along with his other income the item of $60,752.90, which he had asked for and actually received from the trust fund, and omitting therefrom the item of $90,196.06 (being the amount reported in the original return as having been received.from the trust fund); the tax shown to be due on the amended return was $11,901.47, being $9,712.63 less than the total payment made by him on the original return as adjusted by the commissioner’s audit; and on or about March 21, 1923, decedent filed a claim for refund of $9,712.63, which claim was rejected by the Commissioner of Internal Revenue on August 19, 1924.
    X. On or before March 15, 1920, decedent made and filed with the United States collector of internal revenue for the district of Massachusetts his Federal income-tax return for the year 1919 and included therein along with his other income the whole sum of $95,114.42; the total tax shown to be due on the said return amounted to $20,968.76, which was paid by the decedent in quarterly installments as follows:
    Mar. 12, 1920_$5,242.19
    June 14, 1920_ 5,242.19
    Sept 16, 1920_ 5,242.19-
    Dec. 16, 1920_ 5,242.19
    Total. 20,968.76
    
      On February 17,1923, as a result of the audit of the return in question, decedent received a refund of $125.58, leaving a total payment by him for the year 1919 of $20,843.18.
    On March 21, 1923, decedent prepared and filed an amended income-tax return for the year 1919, including along with his other income the item of $54,831.53, which he had asked for and actually received from the trust fund, and omitting therefrom the item of $95,114.42 (being the amount reported in the original return as having been received from the trust fund); the tax shown to be due on the amended return was $8,213.93, being $12,629.25 less than the total payment made by him on the original return as adjusted by the commissioner’s audit; and on or about March 21, 1923, decedent filed a claim for refund of $12,629.25, which claim was rejected by the Commissioner of Internal Revenue on August 19,1924.
    XI. On or about March 12, 1921, decedent made and filed with the United States collector of internal revenue for the district of Massachusetts his Federal income-tax return for the year 1920 and included therein, along with his other income, the whole sum of $201,242.34; the total tax shown to be due on the said return amounted to $70,651.32, which was paid by decedent in quarterly installments as follows:
    Mar. 16, 1921-$17,662.83
    June 17, 1921_ 17,662.83
    Sept. 22, 1921_ 17, 662. 83
    Dec. 15, 1921_ 17,662.83
    Total- 70, 651. 32
    On March 21, 1923, decedent prepared and filed an amended income-tax return for the year 1920, including along with his other income the item of $95,286.61, which he had asked for and actually received from the trust fund, and omitting therefrom the item of $201,242.34 (being the amount reported in the original return as having been received from the trust fund); the tax shown to be due on the return was $22,098.81, being $48,552.51 less than the total payment made by him on the original return; and on or about March 21, 1923, decedent filed a claim for refund of $48,552.51, which claim was rejected by the Commissioner of Internal Revenue on August 19,1924.
    The court decided that plaintiff was not entitled to recover.
   Moss, Judge,

delivered the opinion of the court:

On August 24, 1912, plaintiff’s decedent, George I. Alden, executed and delivered to Albert H. Stone, Edward T. Esty,. and to himself, a certain trust instrument by the terms of which he conveyed certain properties to said trustees, with direction and authority to collect the income and make disposition thereof during the lifetime of plaintiff’s decedent. After the death of the beneficiaries under the trust the entire income was to be used for certain charitable and educational! purposes. The instrument was several times modified, but. the particular provision involved in this controversy was never altered. It is contained in clause 2 of the original conveyance, and is as follows: “The trustees shall pay, as often as requested, to me during my lifetime the net cash income of the said trust fund: and they may further pay to me from time to time, as much of the principal as they may in their judgment deem advisable.” ‘

During the years 1918, 1919, and 1920 plaintiff’s decedent, requested the payment of only a part of the net income, and the trustees paid to him only the amount so requested. However, he included in his tax return for each of said years the entire net income as if the whole amount had been actually received, and paid the tax for each year computed on the income shown by his returns. Later, plaintiff’s decedent filed a claim for refund based on the contention that he should have included in his tax returns only that amount of the income which had actually been received by him. This claim was rejected by the Commissioner of Internal Revenue and this action is for the recovery of same. The amount involved is $70,894.39.

The tax in this case was collected under the revenue act of 1918, 40 Stat. 1057, the applicable provisions of which are as follows:

“ Sec. 210. That, in lieu of the taxes imposed by' subdivision (a) of section 1 of the revenue act of 1916 and by section 1 of the revenue act of 1917, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax. at the following rates: * *

(Here follow the rates.)

“ Sec. 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 cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) 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 computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate, or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income is computed. In such cases 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.”

It is the contention of plaintiff that the provision of the trust deed that “ The trustees shall pay as often as requested to me during my lifetime the net cash income from said trust fund * * created and vested in plaintiff’s decedent a general power of appointment and that he acquired no property in said income, and did not under the language of the act of 1918 above set forth become a beneficiary of the net cash income of the trust fund, until he had exercised his power of appointment by requesting its payment and collecting same. The court is unable to agree with this theory.

Under the terms of the trust instrument the trustees were required to pay to plaintiff’s decedent not merely such part of the net income as he might request but to pay the entire amount at such times as he might request. No right whatever was reserved to the trustees as to any part of the net income which he might not request. Plaintiff’s decedent was the unqualified owner of the net income. It was held by the trustees subject to payment to the founder of the trust “ as often as requested.” The trustees were not authorized to invest any uncollected portion, nor to add same to the principal, nor to make any other disposition of it. They did have authority under clause 10 of the trust instrument “ to use as much of the income during my lifetime as I may request in writing * * * for. the promotion of the objections set forth in Clause XI, and may add to the principal so much of the income, from time to time, as I may request in writing.” It does not appear that this authority was ever exercised. Plaintiff’s decedent alone had the disposition of the net income, and it is taxable under section 219 (d) which provides that “ there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the trust.”

It is the judgment of the court that plaintiff’s petition be, and the same is hereby, dismissed.

Graham, Judge; Hat, Judge; Booth, Judge; and Campbell, Chief Justice, concur.