Court Opinion

ID: 9653072
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:38:16.253099+00
Date Added: 2024-06-11T18:12:56.257874
License: Public Domain

WILSON, Circuit Judge
(dissenting).
I am unable to concur in the disposition of the case arrived at in the opinion of my colleagues. The contention of the appellee and the order of the Board of Tax Appeals seem to me to ignore certain facts that to my mind should be decisive of the case.
Marcus Beebe, the decedent, died in January, 1924, and by his will devised and bequeathed all the residue of his estate to the appellee and a brother, Frederick Beebe, as trustees, and named them as executors of his will, and directed his executors and trustees to pay to his son, Marcus Beebe, Jr., when he arrived at the age of thirty years, one-third of all the rest, residue, and remainder of his estate then remaining in their hands.
Two years after the testator died, or January 26,1926, the petitioner filed his account as executor — whether his coexecutor and co-trustee had in the meantime died or resigned does not appear. The record merely states that the petitioner, following the filing of his account, was appointed trustee.
I think the inference from the record is beyond dispute, that the appellee had filed his final account as executor, having settled the estate, when he received the residuum as trustee on January 26, 1926, since the residuum can only be determined when an estate has been finally settled.
Marcus, Jr., became thirty years of age on April 27, 1927, and received his share of the then corpus of the trust fund. It is, perhaps, unfortunate that the reeord does not show whether there were other beneficiaries of the trust fund than the son, Marcus, Jr. The inference from the record is that there were other beneficiaries as the will provides for only one-third of the residuum to be paid to him when he arrives at thirty years of age. If so, the trustee should not in any event pay out of ineome of the trust fund, two-thirds of which belonged to other beneficiaries, taxes, the entire amount of which it was incumbent on Marcus, Jr., to pay, and which should have been deducted from his share of the corpus of the trust fund" before payment to him. Section 17, chap. 65, G. L. Mass.
The opinion of the Board of Tax Appeals and the opinion of the majority of the court cite section 7 of chapter 65, G. L. Mass., which provides that the executor, administrator, or trustee shall pay to the state treasurer the succession taxes imposed by that chapter, but, as it seems to me, fail to take into consideration section 17 of this chapter, which provides that an executor, administrator, or trustee shall first deduct the tax or collect it of the legatee before turning over to him any property or specific legacy subject to a succession tax.
In other words, the succession taxes of Massachusetts are, in the final analysis, payable by the legatee or beneficiary and not by executors or trustees from an estate, whether in process of settlement or held in trust.
The Supreme Court in Leach v. Nichols, 285 U. S. 165, 169, 52 S. Ct. 338, 340, 76 L. .Ed. 681, affirming the decision of this court in Nichols v. Leach, 50 F.(2d) 787, said: “The Massachusetts statute by plain words [referring to section 17, chap. 65, G. L.] places the real burden of the tax upon the legatee or other person who receives a decedent’s property. Payments required of an ■ executor are only preliminary; ultimately they must be met by the beneficiaries.”
Whatever may be the effect of section 23 (e) of the Revenue Act of 1928 (chapter 852, 45 Stat. 799, 26 TJSCA § 2023 (c) as to estates in the hands of executors or administrators, while in process of settlement, I cannot subscribe to a construction that permits a *666trustee, after distribution to him of the residue under a will for payment to certain beneficiaries under the terms of a will, to deduct from income of the trust fund a tax which, under section 17 of chapter 65, G. L. Mass., must be deducted from the share paid to each of the beneficiaries, and, therefore, is never paid from the income of the trust, or which a trustee, at least, has no right to pay from the income, but must be deducted before payment from that part of the corpus of. the trust paid to a beneficiary.
Whether Congress intended by the concluding clause of section 23 (e) that an executor could deduct a succession tax, which in Massachusetts an executor does not pay from the income of the estate while in the process of settlement, may be a question, but it is not necessary to decide that question in this ease. In passing, however, it may be said that such a construction of section 23 (c) of the Revenue Act of 1928 is so' contrary to sound reason and the general policy as to deductions indicated in section 23 (26 USCA § 2023) as a whole, that I think it should be construed as merely settling the question previously in doubt (see section 763 of the 1928 act [26 USCA § 2703]) as to whether a succession tax can be deducted by a legatee in determining his income tax, or must be held to be a deduction from the corpus of the estate distributed to him; and that Congress intended thereby no more than that inheritance taxes are deductible by an estate when the estate pays them.
This is plainly indicated by the report of the Committee of each House of Congress in recommending the addition to section 214 (a) (3) of the 1926 act, 26 USCA § 955- (a) (3), the provision now found at the end of section 23 (c) of the 1928 act. The Finance Committee of the Senate in its report explaining the purpose of the addition -said: “This is a change in existing law and is a substantial simplification. Furthermore, there is no sound policy which requires the deduction to be allowed to the beneficiary. The distributions of corpus which he receives are not treated as income and the tax which he is required to pay in effect is merely a decrease in the corpus transmitted to him.” The house report was to the same effect.
This construction also finds support in the language of section 23, which provides:
• “In computing net income there shall be allowed as deductions:
“(a) * * *
“(b) * * *
“(e) Taxes Generally. Taxes paid or accrued within the taxable year, except—
“(1) * * *
“(2) * • * *
“(3) * * *
“For the purpose of this subsection, estate, inheritance, legacy, and succession taxes * * * shall be allowed as a deduction only to the estate.” (Italics supplied.)
Since section 23 (e) allows deductions only for “taxes paid or accrued,” Congress must be held to have intended under this subsection to allow a deduction to a taxpayer only in case he has paid a tax, whether an individual, corporation, or an .estate, or, if his books were kept on an accrual basis, when a tax has become an accrued obligation. An estate, therefore, should only be permitted to deduct under subsection (e) a tax which it has paid, or was under obligation to pay and winch had accrued. This is the only consistent construction of subsection (e), and is in accord with sound reason.
When an estate has been settled and the residuum paid to trustees for the benefit of certain beneficiaries, who alone are liable for a succession tax in Massachusetts, there is, at least, no ground for extending the addition to section 23 (c) to cover taxes, which a trustee is not only not authorized to pay, but by section 17 of chapter 65, G. L. Mass., is prohibited from paying. An intention so inconsistent with the actual facts and contrary to the plain effect of a state statute, should not be attributed to Congress.
Congress, having prohibited a beneficiary from deducting such a tax, should not be held to have intended that a trustee, holding property solely- for the benefit of a beneficiary, who holds the vested title thereto under a will, possession only being deferred, could do what the beneficiary was prohibited from doing.
Any regulation of the Commissioner to the contrary must be held invalid as contrary to the intent of Congress.