Case Name: WILLIAM F. PERRY AND JOSEPHINE M. PERRY v. THE UNITED STATES
Court: United States Court of Claims
Jurisdiction: United States
Decision Date: 1958-04-02
Citations: 142 Ct. Cl. 7
Docket Number: No. 27-56
Parties: WILLIAM F. PERRY AND JOSEPHINE M. PERRY v. THE UNITED STATES
Judges: Littleton, Judge, and Jones, Chief Judge, concur.
Reporter: United States Court of Claims Reports
Volume: 142
Pages: 7–19

Head Matter:
WILLIAM F. PERRY AND JOSEPHINE M. PERRY v. THE UNITED STATES
[No. 27-56.
Decided April 2, 1958.
Defendant’s motion for rehearing overruled October 8, 1958]
Mr. Richard S. Doyle for plaintiffs. Messrs. Blair, Korner, Doyle & Worth were on the briefs.
Mr. David R. Frazer, with whom was Mr. Assistant Attorney General Charles K. Rice, for defendant. Mr. James P. Garland was on the brief.

Opinion:
Whitaker, Judge,
delivered the opinion of the court:
Plaintiffs, who have filed a joint income tax return for the calendar year 1953, sue to recover taxes paid by them for that year in the amount of $8,287.26, plus interest as provided by law. The issue presented is whether an income tax may be imposed upon the corpus of a charitable trust that has been returned to the sole settlor when the donees thereof have refused to comply with the terms of the gift.
Plaintiff William F. Perry in 1944 created a trust for the benefit of the Town of Fitzwilliam, New Hampshire. The corpus was to be used for the construction of an addition to the Public Library and for no other purpose. The town decided that it did not desire to build the addition to the library, and the corpus of the trust was returned to the settlor in 1953.
The Commissioner of Internal ¡Revenue required plaintiffs to include in their income tax return for 1953 the amount returned to them in that year. Plaintiffs say this is improper, because what they received was a return of capital, and not income. The defendant says it was proper because plaintiffs, in the years they made contributions to the trust, deducted the amounts contributed from their income, and thus received a tax benefit in those years.
There can be no doubt that what the taxpayer received from the town in 1953 was a return of capital and not income, except for the accumulations of interest and dividends on the corpus. The taxpayer admits he is required to include these accumulations in his income.
The taxpayer does not admit that he is required to account for the appreciation in value of the securities, and we do not think he is. He gave the securities to the town for a specific purpose. When the securities were returned, because the town did not desire them for this purpose, it was as if they had remained in the taxpayer's possession all the time, and, hence, he was not required to account for the appreciation in value until he disposed of them.
As stated, the return to the taxpayer of the property he had tried to give away cannot possibly be considered as income — he merely got back his own property. It cannot possibly be considered as income, except on the ground that he had deducted from his income the amount contributed in each year, thus reducing his taxes. In such cases the courts have heretofore required the inclusion of an item recovered, where a deduction had been taken for it in a prior year.
The only rational basis for such decisions is that it would be inequitable for the taxpayer to reduce his taxes for prior years on account of the contributions, and not to pay taxes on them when he got them back. This is the so-called tax benefit rule. It is a rule enunciated by the courts, and not by Congress, and is based altogether on equitable considerations. But the Supreme Court, in the case of Lewyt Corp. v. Commissioner, 349 U. S. 237, 240, had this to say of equitable considerations in the administration of tax law:
But the rule that general equitable considerations do not control the measure of deductions or tax benefits cuts both ways. It is as applicable to the Government as to the taxpayer. Congress may be strict or lavish in its allowance of deductions or tax benefits. The formula it writes may be arbitrary and harsh in its applications. But where the benefit claimed by the taxpayer is fairly within the statutory language and the construction sought is in harmony with the statute as an organic . whole, the benefits will not be withheld from the taxpayer though they represent an unexpected windfall.
In other words, the Supreme Court said that equitable considerations have no place in the laws of taxation. The tax benefit rule is based upon equitable considerations, and if we are to take the statement in Lewyt Corp. v. Commissioner, supra, at its face value, we miist hold that the amounts received in 1953 are not to be included in gross income merely because the taxpayer had received a tax benefit on account of them in prior years.
We must say, however, that the tax benefit rule seems well entrenched in judicial decision. The Supreme Court impliedly recognized it in Dobson v. Commissioner, 320 U. S. 489, and had done so many times before.
The only Congressional sanction for the tax benefit rule is section 22 (b) (12) of the Eevenue Act of 1939, as amended, which prohibits the inclusion within income of a subsequent year of all amounts recovered as to which the taxpayer had received no tax benefit as the result of a deduction in a prior year. This was limited, however, to the recovery of bad debts, and taxes and delinquency amounts.
The present case does not come within the provisions of that statute. The Commissioner of Internal Revenue, however, after the enactment of section 22 (b) (12) made the section applicable to transactions other than bad debts and taxes. In T. D. 5454 (1945 Cum. Bull. 68) it was provided that tax benefit principles should apply to "other losses, expenditures, and accruals made the basis for deductions."
If, therefore, we should hold that the amounts received in 1953 were not includable in gross income at all, we would be going contrary to prior judicial decisions, and to the express provisions of the Treasury Regulations. Therefore, bowing to the weight of judicial precedents, and in the face of the language in the Lewyt case, supra, we feel compelled to hold that we must take into account the tax benefit received by the taxpayers in prior years.
By this we mean that in computing income for 1953, the taxpayers should exclude from their income the amount of the corpus returned to them in that year, but they should add to the tax thus computed on their 1953 income the amount by which their taxes in prior years had been decreased on account of the deductions made for contributions to this trust fund. So computed, the Government would recoup the taxes escaped in the prior year on account of the deduction. It would be inequitable to require plaintiffs to include in their income for 1953 the aggregate of the deductions claimed in prior years, because of the fact that the rates of taxation vary greatly from year to year, and because the inclusion in one year of all the deductions taken in several years would probably put the taxpayer in a higher tax bracket.
In computing the gain on the stock sold by the settlor shortly after it was returned to him, original cost should be used as a basis.
Plaintiffs are entitled to recover, including interest as provided by law, and judgment is entered to that effect. The amount of recovery will be determined under Eule 38 (c).
It is so ordered.
Littleton, Judge, and Jones, Chief Judge, concur.