Case ID: us-ct-cl_148/html/0681-01.html
Source: Caselaw Access Project
Author: {"author": "JoNes, Chief Judge,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

JULIETTE G. WEIL v. THE UNITED STATES
    [No. 219-57.
    Decided January 20, 1960.
    Plaintiff’s motion for rehearing overruled April 6, 1960] 
    
    
      
      Mr. John P. Allison for the plaintiff. Messrs. Marshall, Bralter, Greene, Allison & Tucker were on the brief.
    
      Mr. Harold 8. Larsen, with whom was Mr. Assistant Attorney General Charles K. Bice, for the defendant. Messrs. James P. Garland and Lyle M. Turner were on the brief.
    
      
      Plaintiff’s petition for writ of certiorari denied by the Supreme Court, 364 U.S. 822.
    
   JoNes, Chief Judge,

delivered the opinion of the court:

The plaintiff in this action seeks to recover Federal income taxes for the years 1962 through 1955. The issue involved here is whether the plaintiff, as a life tenant under the will of her deceased husband, is taxable, either as an individual or as a fiduciary, on the capital gains realized from the sale of the securities held by her as a life tenant.

All material facts have been stipulated. The plaintiff is the surviving spouse of Lawrence W. Weil, who died on March 20, 1937, domiciled in the State of Alabama, leaving a will which was probated in the Probate Court of the County of Montgomery, Alabama.

The will directed that the entire residuary estate be bequeathed to plaintiff for life with the contingent remainders to their children.

The will further provided:

During the life of my wife, Juliette Weil, she shall have possession and control of my entire estate and shall be entitled to the entire income therefrom, and should she find it necessary for her comfortable maintenance and support to use any part of the corpus of said estate, she shall have the full right to do so. She shall have the right to collect any or all indebtedness of any land that may be due to my estate and shall also have the right, in her absolute discretion, to sell, mortgage, pledge or dispose of all or any part of said estate, real, personal or mixed, for such amount and on such terms and in any manner that she may see fit. Any amounts collected by her, however, from any indebtedness due my estate or form the sale of all or any part of my estate shall be reinvested by her either in real or personal property of any kind and in her discretion, such rein-vestments to take the place of and stand as a substitute for the amounts collected by her or for the assets of the estate sold by her. Any purchaser from her, however, shall not be responsible for the proper reimvestment [sic] of the funds.

All of the property devised and bequeathed by the will of Lawrence W. Weil was distributed during 1989 and the administration of the estate was concluded in that year. A decree of the probate court, after reciting “that all the securities listed * * * [in the decree] were bequeathed to Juliette G. Weil for life, with the power of selling such securities as she should think best,” ordered that such securities “be transferred to Juliette G. Weil as life tenant under the will of Lawrence W. Weil, deceased.”

On May 17,1949, the plaintiff executed a document whereby she relinquished the right accorded her by the will to use any part of the corpus of the estate for her comfortable maintenance and support. She reserved, however, all other rights and interests vested in her by the will.

During the calendar years 1952-1955, inclusive, the plaintiff sold various securities held by her as life tenant, pursuant to authority granted under the will. Net capital gains were realized on these sales during each of the several years involved. These securities which had been sold had either been distributed to the plaintiff under the decree of the probate court or had been acquired by reason of reinvestment of the proceeds of the sale of securities so distributed.

All the securities owned by the plaintiff as life tenant during the years in question, including the securities on which the capital gain was realized, were in the custody of an investment firm in an account which was maintained in the name of the plaintiff as life tenant. All such securities were registered in a “street” name.

The net capital gains realized from the sale of the securities were reported on income tax returns for the years 1952-1955 by plaintiff and filed in the name of the Estate of Lawrence W. Weil. All the taxes paid were attributable to the capital gains realized on the sale of the securities held by the plaintiff as life tenant. The plaintiff filed claims for refund of these taxes on the ground that she is not taxable either as an individual or as a fiduciary on capital gains realized from the sale of securities held by her as a life tenant. The claims for the years 1952, 1953, and 1955 were rejected by the Commissioner of Internal Revenue. No action has been taken by the Commissioner with respect to the refund claimed for the year 1954.

We shall examine first the Government’s somewhat equivocal contention that the plaintiff is taxable in her individual capacity, and its underlying premise that the capital gain should be treated as the plaintiff’s income. In taxing the income “of every individual” (Int. Rev. Code of 1939, §§ 11(a) and 12(b)) the Congress taxes the owner of the income. The concept of ownership for income tax purposes is of course broader than at common law, but the control exercised by the plaintiff over the property held in the life tenancy cannot fairly be equated with ownership.

Although plaintiff is entitled to “the entire income” from the residuary estate for life, this “income,” under the terms of the will, does not include gains realized on the sale of the assets. Her only interest in capital gains was a right to the income from their reinvestment. Unquestionably, the plaintiff might derive some economic benefit from the capital gains realized on the sale of the securities. The benefit, however, is necessarily limited to the possible increase in ordinary income resulting from the increase in the value of the corpus.

Furthermore, the plaintiff could not bequeath the property held as life tenant. We therefore hold that the capital gains in question were not income to the plaintiff in her individual capacity.

The alternative question presented is whether the plaintiff is required to pay a tax on the gain as a fiduciary of a trust. Section 161(a) (1) of the Internal Revenue Code of 1939 (now Internal Revenue Code of 1954, § 641(a)(1)) provides:

Sec. 161. Imposition of Tax.

(a) Application of Tax. — The taxes imposed by this chapter upon individuals shall apply to the income of estates or of any kind of property held in trust, including—

(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust.

Section 142 of the Internal Revenue Code of 1939 requires returns from every fiduciary (except a receiver appointed by authority of law in possession of part only of the property of an individual), and section 3797(a) (6) defines the term “fiduciary” to mean a guardian, trustee, executor, administrator, receiver, conservator, “or any person acting in any fiduciary capacity for any purpose.”

In Helvering v. Butterworth, 290 U.S. 365, 369 (1933), the Supreme Court stated that

The evident general purpose of the statute [43 Stat. 275 (1924) (the predecessor of Int. Rev. Code of 1939, § 161) ] was to tax in some way the whole income of all trust estates. * * * Certainly, Congress did not intend any income from a trust should escape taxation unless definitely exempted.

The question, then, is whether there is a trust within the meaning of section 161. Our approach to this issue is influenced by the repeated dictum of the Supreme Court that there is a “legislative design to reach all gain constitutionally taxable unless specifically excluded.” General Investors Co. v. Commissioner, 348 U.S. 434, 436 (1955).

The plaintiff urges that the phrase “property held in trust” in section 161 refers to a technical trust, and that the relationship between the life tenant and the remaindermen in the case at bar does not meet the requirements of a technical trust under applicable state law. We believe that plaintiff’s interpretation is too narrow, and that the statute refers, instead, to relationships which are “clothed with the characteristics of a trust.”

It is evident that had a life interest been given to a technical trustee to be administered by him for the benefit of the plaintiff with contingent remainders over to the children of the deceased the gain involved here would have been taxable to the fiduciary. However, “in such case the relations between the trustee of a life interest only and the owners of succeeding future interests are identical to the relations between an ordinary legal life tenant and the owners of succeeding future interests. The trust character of the first holding has significance as between the trustee and the person entitled to beneficial life interest but cannot regulate the relations between the trustee and the persons entitled to the succeeding legal interests.” [Restatement, Property, § 202, comment d (1936).

In light of this we believe that the taxability of the gains involved here should depend, not on whether there is a separation of the legal and equitable interests in the life estate, but on the relationship between the holder of the life interest and the owners of the succeeding future interests.

Under applicable state law the legal life tenant and the trustee of a life interest only have the same fiduciary obligation toward the owners of succeeding future interests. They cannot appropriate the principal to themselves or intentionally injure the remaindermen by the way in which they use the property. And a court of equity may require a life tenant to safeguard the remainderman’s interest by giving security for property in his possession. Frye v. Community Chest of Birmingham and Jefferson Co., 241 Ala. 591, 4 So. 2d 140 (1941). See also Restatement, Property, § 202, comment d (1936).

It is in this sense that the plaintiff (as well as a technical trustee for a life interest only) is the fiduciary of “property held in trust” within the meaning of section 161.

We therefore hold that the income involved in this case is taxable under section 161 as the income of “property held in trust” and that the plaintiff was required to pay the tax in her capacity as a fiduciary.

The plaintiff is not entitled to recover and the petition is dismissed.

It is so ordered.

Barksdale, District Judge, sitting by designation; Lara-more, Judge; MaddeN, Judge; and Whitaker, Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff is the surviving spouse of Lawrence W. Weil, who died on or about March 20,1937, domiciled in the State of Alabama and leaving a last will and testament, which was duly admitted to probate in the Probate Court for the County of Montgomery, Alabama (hereinafter referred to as “the probate court”), on or about March 26, 1937. The will, after directing that the testator’s just debts and funeral expenses be paid and bequeathing $600 to a cousin of the testator, provided as follows:

HI
All the rest, residue and remainder of my estate and all real, personal or mixed property of every kind, character and description, wherever situate, of which I shall die seized and possessed or to which I may be entitled or in which I may be interested at the time of my decease, I give, devise and bequeath to my beloved wife, Juliette Weil, for and during the term of her natural life and at her death to my two children, Lawrie W. Burnham and Bichard Weil, share and share alike, but should they or either of them be dead at the time of the death of my wife the share of such deceased child shall go to the children or descendants of such deceased child, per stirpes, if any, but if such child is then dead without at that time leaving any children or descendants living, the share of such child shall go to the other child or its children or descendants, as the case may be, per stirpes. During the life of my wife, Juliette Weil, she shall have possession and control of my entire estate and shall be entitled to the entire income therefrom, and should she find it necessary for her comfortable maintenance and support to use any part of the corpus of said estate, she shall have the full right to do so. She shall have the right to collect any or all indebtedness of any kind that may be due to my estate and shall also have the right, in her absolute discretion, to sell, mortgage, pledge or dispose of all or any part of said estate, real, personal or mixed, for such amount and on such terms and in any manner that she may see fit. Any amounts collected by her, however, from any indebtedness due my estate or from the sale of all or any part of my estate shall be reinvested by her either in real or personal property of any kind and in her discretion, such reinvestments to take the place of and stand as a substitute for the amounts collected by her or for the assets of the estate sold by her. Amy purchaser from her, however, shall not be responsible for the proper reimvestment [sic] of the funds.
IY
I hereby nominate and appoint my wife, Juliette Weil; my son-in-law, I. W. Burnham II; my brother-in-law, Leon Weil; and my cousin, Lee H. Weil; or their survivor or survivors, to be the Executors or this my last will and testament, and hereby exempt them from giving any bond as such Executors.
V
It is my will and I hereby direct that my said Executors shall not be required to file any inventory in or to make any report to or settlement with any Court in so far as the administration of my estate is concerned, it being my wish will and direction that no Court proceedings shall be had in the administration of my estate, except the probate of this will and the issuance of letters testamentary thereunder.
VI
I hereby authorize and empower my said executors to have and exercise full control over all matters pertaining to the settlement of my affairs and my estate, and I hereby authorize them to sell and dispose of any or all of my effects and property, real, personal or mixed, according to their best judgment, whenever they see fit to do so, and in such manner and upon such terms as they may think best, without the order of any court whatsoever. And I hereby authorize and empower my said Executors to make and execute all necessary deeds and conveyances to any of my property, real, personal or mixed, the same as I could do myself if living.

2. Letters testamentary under the will of Lawrence W. Weil were issued on or about March 26, 1937 by the probate court to the plaintiff, Lee H. Weil, and I. W. Burnham II.

3. All the property devised and bequeathed by the will of Lawrence W. Weil was distributed during 1939, and the administration of the estate was concluded in that year. A decree of the probate court dated June 17,1939, after reciting “that all the securities listed * * * [in the decree] were bequeathed to Juliette G. Weil for life, with the power of selling such securities as she should think best, the said Juliette G. Weil being one of the executors of the estate,” ordered that such securities “be transferred to Juliette G. Weil as life tenant under the will of Lawrence W. Weil, deceased.”

4. The executors of the will of Lawrence W. Weil were discharged by a decree of the probate court dated September 26,1939.

5. On May 17, 1949, the plaintiff, whose name was then Juliette G. Freund, duly executed a document whereby she relinquished the right accorded her by the will of Lawrence W. Weil to use any part of the corpus of the estate for her comfortable maintenance and support. She reserved, however, all other rights and interests vested in her by the will. The document was duly filed in the probate court.

6.During the calendar years 1952-1955, inclusive, the plaintiff sold various securities held by her as life tenant pursuant to authority granted by the will of Lawrence W. Weil. Net capital gains were realized on such sales during the several years, as follows:

Year Net gain
1952 $13,286.62
1953 3,517.70
1954 40,536.98
1955 118, 735.49

The securities thus sold had either been distributed to the plaintiff in accordance with the decree of the probate court dated June 17,1939 (see finding 3), or had been acquired by reinvestment of the proceeds of sales of securities so distributed.

7. All the securities owned by the plaintiff as life tenant during the years in question, including the securities mentioned in finding 6 as having been sold, were in the custody of Burnham & Company, a member of the New York Stock Exchange, in an account that was maintained in the name of the plaintiff as life tenant. All such securities were registered in a “street” name. All purchase and sale orders were given by the plaintiff orally.

8. The net capital gains referred to in finding 6 were reported on income tax returns for the current years 1952, 1953, 1954, and 1955 signed by the plaintiff and filed in the name of the Estate of Lawrence W. Weil with the District Director of Internal Revenue, Upper Manhattan District, New York, N.Y.

9. The plaintiff paid the District Director of Internal Revenue the income taxes assessed with respect to the income tax returns for the years 1952-1955 in the amounts and on the dates set out below:

All the taxes paid were attributable to the capital gains referred to in finding 6.

10. On March 14, 1956, the plaintiff filed claims with the District Director of Internal Eevenue, Upper Manhattan District, New York, N.Y., for refund of income taxes for the years 1952 to 1954, inclusive, in the following amounts:

Taxable year Refund claimed
1952 -$4,125. 58
1953 _ 699. 75
1954 - 10,144.65

On March 21, 1956, the plaintiff filed in the same office a claim for refund of income tax for the year 1955 in the amount of $29,388.99. In the claims for refund, the plaintiff alleged that the entire amount of taxes involved was paid with respect to capital gains upon property held by her as life tenant of the Estate of Lawrence W. Weil, and that she was not taxable upon such capital gains.

11. The plaintiff’s refund claims for the years 1952, 1953, and 1955 were rejected by the Commissioner of Internal Eevenue on or about May 17, 1957. No action has been taken by the Commissioner of Internal Eevenue with respect to the refund claim for the year 1954.

12. No part of the amounts of tax with respect to which the refund claims were filed by the plaintiff has been repaid to the plaintiff.

13. The plaintiff is the sole owner of the claims involved in this litigation, and has not at any time assigned or transferred such claims or any part thereof or interest therein.

14. Except as stated in the previous findings, no action has been taken with respect to the claims involved in this litigation, either by Congress or by any of the departments of the Government.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover and the petition is dismissed. 
      
       Poe T. Seaborn, 282 U.S. 101, 109 (1930).
     
      
       See Helvering v. Clifford, 309 U.S. 331 (1940).
     
      
       We are not called upon to determine -what might have been the tax consequences had the plaintiff failed to release her power to invade the corpus of the estate prior to the realization of the capital gains in question.
     
      
       “[T]axation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid.” Corliss v. Bowers, 281 U.S. 376, 377-378 (1930). See also Burnet v. Wells, 289 U.S. 670, 677-678 (1933).
     
      
      
         See William R. Todd, 44 B.T.A. 776 (1941) ; United States v. Cooke, 228 F. 2d 667 (9th Cir. 1955).
     
      
       Sections 6012 (a), (b) and 6065 (a) of the Internal Revenue Code of 1954 contain similar requirements.
     
      
       Internal Revenue Code of 1939, § 3797(a)(6), was reenacted as § 7701(a) (6) of the Internal Revenue Code of 1954.
     
      
      
        Linenthal v. Birmingham, Trust & Savings Company, 249 Ala. 631, 32 So. 2d 368 (1947).
     
      
      
        Ferguson v. Forstmann, 25 F. 2d 47, 49 (3d Cir. 1928) ; see also Hart v. Commissioner, 54 F. 2d 848 (1st Cir. 1932) ; Commissioner v. Owens, 78 F. 2d 768, 773 (10th Cir. 1935).
     
      
       The Treasury Regulations 118, promulgated under the Internal Revenue Code of 1939, § 39.3797-3, definition of a trust purports only to distinguish between an ordinary trust and a trust which is an association taxable as a corporation, and is therefore not applicable here. Moreover, the fiduciary obligation of the life tenant and the trustee of a life interest only is enforceable in a tribunal exercising equitable jurisdiction and with the procedures characteristic of equity. Frye v. Community Chest of Birmingham and Jefferson Co., 241 Ala. 591, 4 So. 2d 140 (1941) ; see also Restatement, Property, § 202, comment g (1936).
     
      
       We have examined the case pf United States v. Cooke, 228 F. 2d 667 (9th Cir. 1955), but must respectfully disagree with its interpretation of section 161.