Court Opinion

ID: 4481387
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:52.042378+00
Date Added: 2024-06-11T14:54:00.739932
License: Public Domain

Simpson, J., dissenting: I must disagree with the Court with respect to both issues involved in this case. I am aware that the majority’s conclusion as to the first issue is supported by prior decisions of this and other courts. United States v. Higginson, 238 F. 2d 439 (C.A. 1, 1956); Estate of Robert L. Dula, 23 T.C. 646 (1955), affirmed sub nom. Polt v. Commissioner, 233 F. 2d 893 (C.A. 2, 1956); Robert F. Chapman, 3 T.C. 708 (1944); F. T. Bedford, 2 T.C. 1189 (1943), affd. 150 F. 2d 341 (C.A. 2, 1945); Thalia W. Malcom, 36 B.T.A. 358 (1937), affd. 97 F. 2d 381 (C.A. 2, 1938). Although no judge should lightly cast aside the accumulated wisdom of precedent, it is also true, as stated by Justice Brandéis, that “Stare decisis is not, like the rule of res judicata, a universal, inexorable command.” Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 405 (1932). In my judgment, this case presents one of those situations in which the rule of stare decisis should not be applied. In Mary Clark DeBrabant, 34 B.T.A. 951 (1936), aff'd. 90 F. 2d 433 (C.A. 2, 1937), Mrs. DeBrabant was the beneficiary of a trust and, under the trust instrument, was entitled to have trust income distributed to her currently. However, in 1930, the trustee withheld from her certain distributions which it received on corporate stock because it believed that such distributions constituted principal and not income. In 1933, Mrs. DeBrabant obtained an adjudication by the New Jersey courts that all of the distributions were income, and such income was thereupon distributed to her. Both the Board of Tax Appeals and the Court of Appeals for the Second Circuit held that all the income was taxable to Mrs. DeBrabant in 1930. The Second Circuit said at 90 F. 2d 435: The question before us is whether the income received by the trustee in 1930, which the New Jersey Court of Chancery held to belong 'to the taxpayer, was: “Income accumulated in trust for the benefit of * * * unascertained persons, * * * and income field for future distributions under tfie terms of tfie * * * trust,” in wfiiefi case it was taxable against tfie trustee, or whether it was “income * * * to be distributed currently by tfie fiduciary to tfie beneficiaries,” in wfiiefi ease it was deductible by tfie trustee in its return but to be “included in computing tfie net income” of tfie beneficiary and taxable against her. It seems evident that tfie income of any trust wfiiefi under tfie terms of tfie trust instrument is made payable to a life beneficiary is “to be distributed currently by tfie fiduciary,” but that it was to be thus distributed here is especially plain because of the direction in tfie trust deed that “all payments of income hereunder shall be made on tfie second days of January and July in each and every year.” We are satisfied that tfie instrument specifically provides for current distributions of income and can nowhere find in it even a suggestion of an accumulation of income “for tfie benefit of * * * unascertained persons." Tfie clause of section 161(a) (1) of the Revenue Act of 1928 (26 U.S.C.A. § 161 and note) wfiiefi refers to accumulations of income for “unascertained persons” indicates tfie sort of persons contemplated when it uses tfie words “unborn” and “with contingent interests” to describe the class it has in mind. Thus under tfie rule of “ejusdem generis,” as well as by reason of tfie almost inevitable meaning of tfie words “unascertained persons,” reference is made to those whose identification depends on future contingencies rather than on a correct understanding of tfie application of the law to existing facts. A careful examination, of tlie reasoning in this case convinces me that there are several objections to the Court’s conclusion. The principal objection to the DeBrabant rule is that it is based upon an untenable interpretation of the statute. In DeBrabant, the trust instrument apparently made no express provision for the trustee to withhold income when he was in doubt as to whether a beneficiary .was entitled to it, and the court appears to have based its decision on the lack of such a provision in the trust instrument. However, section 1.651 (a)-2, Income Tax Kegs., provides in part: “The determination of whether trust income is required to be distributed currently depends upon the terms of the trust instrument and the applicable local law.” Almost identical language appears in the committee reports accompanying the enactment of section 651, and those reports indicate that such rule is merely the continuation of the rule previously established. H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 61, A196 (1954); S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 84, 345 (1954); Smith’s Estate v. Commissioner, 168 F. 2d 431 (C.A. 6, 1948); Hale v. Anglim, 140 F. 2d 235 (C.A. 9, 1944); Letts v. Commissioner, 84 F. 2d 760 (C.A. 9, 1936); Horace Greeley Hill, 24 T.C. 1133 (1955). Under local law, when a trustee, acting in good faith, is uncertain as to whether a beneficiary is entitled to income, he may seek an interpretation of the governing trust instrument, and until he secures such an interpretation, he is not required to distribute the income. Such actions on his part are consistent with his fiduciary responsibility, and no penalty will be imposed upon liim for his failure to distribute the income in controversy. Bogert, Trust and Trustees, sec. 814 (2d ed. 1962); 2 Scott, Trusts, sec. 182 (3d ed. 1967). See also Feldmeier v. Superior Court, 12 Cal. 2d 302, 83 P. 2d 929 (1938). Thus, although the Brockman trust instrument included no express authorization for the trustee to withhold income, it was, as a matter of local law, not required to distribute the income to Miss Bruchmann during the years 1949 through 1955. Pier right to the income during those years was no greater than what it would have been had the trust instrument expressly authorized the trustee to accumulate the income under these circumstances. In my opinion, the DeBrabant holding is inconsistent with the statute in failing to inquire into local law and in failing to recognize that the trustee was not required to distribute the income. In Horace Greeley Hill, Jr., supra, this Court did consider the effect of local law. We said at page 1138: In order that income be currently distributable within the meaning of section 162(b), the person or persons to whom such income is so distributable must have a present, enforceable, vested right to such income. * * * This right must be clear, and not subject to any condition as to its enforceability. The mere right to apply to a court of competent jurisdiction to compel distribution, where it is possible, but not clear, that such application would be granted, is not equivalent to a present enforceable right.* * * Clearly, Miss Bruchmann had no such enforceable right. During the years 1949 through 1955, she had merely a hope that the trust instrument would be construed so as to include her as an income beneficiary. However, there existed the possibility that the term “issue” might be construed to exclude adopted children, and in that event, she would receive none of the trust income. Hence, it is anomalous to say that the trust income was required to be distributed to her in the years in issue. Another criticism of the DeBrabant holding is that it rests in part upon an unsound application of language contained in Freuler v. Helvering, 291 U.S. 35, 42 (1934). In Freuler, the Supreme Court said that “The test of taxability to the beneficiary is not receipt of income, but the present right to receive it,” and this statement was relied upon by DeBrabant to tax the beneficiary on income which she had not received. However, in Freuler, the beneficiaries had received more than they were entitled to, and the question was whether they were taxable on the entire amount that they had in hand, or only on the amount to which they were entitled. The Court held that the tax was limited to the amount to which they were entitled. Although the language quoted from Freuler appears to apply to the DeBrabant problem, the issues are significantly different. The language was used to justify taxing beneficiaries on only that income received by them to which they had a right; it is not at all clear that the Supreme Court would have applied the same test to a beneficiary who claimed a right but who possessed nothing. For the beneficiary, the DeBrabant rule results in tax consequences that are inconsistent with general principles of taxation. Under DeBrabant, a beneficiary is taxed because he has a so-called right, although in fact all that he has is a mere claim to income. His claim is quite different than the fixed right which is taxable to a taxpayer using the accrual method of accounting. See secs. 1.446-1 (c) (1) (ii), 1.451-1(a), Income Tax Regs.; Boston Elevated Railway Co., 16 T.C. 1084, 1104 — 1105 (1951), aff'd. 196 F. 2d 923 (C.A. 1, 1952); Cold Metal Process Co., 17 T.C. 916, 932 (1951). ISTor is the beneficiary like a taxpayer who has received a corporate distribution which may be a taxable dividend or a nontaxable return of capital. See Lou Levy, 30 T.C. 1315, 1328 (1958). Such a taxpayer has something in hand which may be taxable in some manner, but the beneficiary has received nothing. ISTor can the DeBrabant rule be justified as the most workable interpretation of the statute; on the contrary, it results in administrative problems for the beneficiary, the trustee, and the Government. While the right to the income is being adjudicated, the taxable years of the beneficiary and the trust may be kept open so that appropriate adjustments may be made when the litigation is concluded, but that course may postpone for a number of years the final accounting for the years to which the income is attributable and subject to the beneficiary and the trust to liability for interest on underpayments of tax. On the other hand, the trustee and the beneficiary must act at their peril, if they act without awaiting the final settlement of the controversy. In addition, this case illustrates well the plight of a beneficiary who seeks to follow DeBrabant. If Miss Bruchmann’s share of the income had been reported each year, with what was the tax to be paid ? During the years 1949 through 1955, all that she had was a hope that the court would eventually determine that she was entitled to a share of the trust income, but it is doubtful that the respondent would accept that hope as currency for the payment of the tax. Although this Court has followed DeBrabant, it has narrowly restricted its applicability. Prior to DeBrabant, it was held that a claimant was not taxable on income which was withheld from him pending an adjudication of his right to it. Ferguson v. Forstmann, 25 F. 2d 47 (C.A. 3, 1928); Commissioner v. Owens, 78 F. 2d 768 (C.A. 10, 1935). DeBrabant distinguished such cases on the basis that they did not involve express trusts. Cases arising after DeBrabant have not applied its holding when the years in which the income was earned were closed by the statute of limitations, when an estate rather than a trust was involved, and when the beneficiary was unaware of his claim to the income. Mary DeF. Harrison Geary, 9 T.C. 8 (1947); Horace Greeley Hill, Jr., supra; Ralph E. Hedges, 18 T.C. 681 (1952), affirmed per curiam 212 F. 2d 593 (C.A. 9, 1954). See also Surrey & Warren, Federal Income Taxation 901-902 (1962); Moore & Sorlien, “Homeless Income,” 8 Tax L. Rev. 425 (1953). There are no sonnd reasons for distinguishing these cases from DeBrabant. It is difficult to see how the existence, or nonexistence, of an "express trust should affect the taxa-bility of a claimant to income which is withheld from him because of a dispute over his right to it. 17or is there any reason for applying a different rule when the statute of limitations has run, or when an estate is involved (since the same statutory provisions are applicable to estates and trusts), or when the claimant is unaware of his rights to the income. The reluctance to apply the DeBrabant rule more broadly must reflect an inherent dissatisfaction with the consequences of such rule. Although I am reluctant to disagree with the earlier decisions of this and other courts, I am convinced that on this occasion, we should decline to follow those decisions. For us to apply such rule once more would merely breathe additional life into a rule that lacks justification and would compound the difficulty of bringing about its demise. The objections to the DeBrabant rule lead me to conclude that it is clearly wrong. In addition, the impracticability of the rule has frequently led to its challenge by both taxpayers and the respondent; the courts, for their part, have drawn questionable distinctions in order to avoid having to apply the rule. See, e.g., United States v. Higginson, supra; Estate of Robert L. Dula, supra; Mary DeF. Harrison Geary, supra; Rev. Ral 62-147, 1962-2 C.B. 151; I.T. 1733, II-2 C.B. 169 (1923). Thus, the DeBrabant holding, despite the time that has passed, has not succeeded in settling the controversy. In these circumstances, I believe that we should recognize DeBrabant to be a mistake made by the courts, which can and should be corrected by the courts. See Final Report on Estates, Trusts, Beneficiaries, and Decedents from the Advisory Group on Subchapter J of the Internal Revenue Code of 1954, p. 41 (1958). I also disagree with the Court’s conclusion with respect to the second issue. Section 451, relating to the general rule for the year of the inclusion of income, and section 461, relating to the general rule for the year of deductions, and the cases of American Automobile Assn. v. United States, 367 U.S. 687 (1961), and Schlude v. Commissioner, 372 U.S. 128 (1963), are all applicable in determining the year in which the trust should report the income which it receives and the year in which the trust may deduct its expenses. However, those rules are not applicable in determining what income is taxable to the beneficiary of a trust. Section643(b) provides: For purposes of this subpart and subparts B, O, and D, the term “income”, when not preceded by the words “taxable”, “distributable net”, “undistributed net”, or “gross”, means the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law. * * * This definition of “income” is applicable in determining wbat income is deductible by the trust under section 651 and what income is taxable to the beneficiary under section 652. The effect of the definition is that the trust may deduct what is popularly known as “trust income,” and it is the “trust income” that is taxable to the beneficiary. In Central Hanover Bank & Trust Co., 34 B.T.A. 741 (1936), the Court said at page 743: Where the trust instrument provides for payment of expenses, taxes, and other charges, it is not until after provision therefor is made by the trustee that he can determine the amount of income currently distributable. * * * In Edith M. Bryant, 14 T.C. 127 (1950), this Court held that in determining the distributable income of a trust for 1943, the taxes and trustee fees attributable to such year should be taken into consideration, although the trust used the cash method of accounting and such expenses were not paid until the subsequent year. In McCrory v. Commissioner, 69 F. 2d 688 (C.A. 5, 1934), the trust instrument provided that reserves for estimated expenses should be established, and the court held that the funds which should have been set aside in 1924 to meet estimated expenses were not a part of the income currently distributable for that year. In this case, the trust instrument directed the trustee to distribute “net income,” and it was only the “net income” that was distributed to the Estate of Miss Bruchmann. From the amounts that had been credited to her account, the trustee, in accordance with the California court judgment, subtracted the expenses allocable to such account. No reserves were actually established in this case, because the income was impounded during the years of the dispute, and not distributed. Nevertheless, the result is substantially the same as if the amounts that were credited to Miss Bruchmann’s account in the years 1949 through 1955 had been reduced by the amount of the estimated expenses of litigation. Only the “net income” was deductible by the trust as a distribution, and in my opinion, only that amount should be taxable to the beneficiary. To carry out the Court’s conclusion with respect to the first issue, the amount taxable in each of the years 1949 through 1955 might be determined by allocating the amount actually distributed in 1962 to each year in proportion to the total amounts credited to her account for such years. FoReestee, Dawson, and Tannenwald, JJagree with this dissent.