Court Opinion

ID: 9418796
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:39:43.633029+00
Date Added: 2024-06-11T17:22:10.533283
License: Public Domain

Mr. Justice Cardozo,
dissenting.
I assume for present purposes that the duty of the trustee under the will of Mr. Whitcomb has been adjudicated without fraud or collusion by the Superior Court of California, and that the taxing officers of the United States as well as the parties to the accounting must govern themselves accordingly.
I- dissent from the conclusion that the effect of the adjudication is to diminish the taxable income of the life beneficiaries to-the extent of the difference between the amount actually distributed and the amount that would have-been distributed if the trustee had done his duty. '
By the. decree in its first form, the court adjudged that the trustee was at fault in failing to make an annual reserve for depreciation, for the years 1913 to 1927 inclusive, but also adjudged that he had acted in good faith after obtaining the advice of counsel, and should therefore be relieved of any personal liability. By the same decree the recipients of the income were directed to repay to the trustee the excess payments (amounting in all to $622,-440.90) “by making, executing and delivering to said Trustee their respective promissory notes payable without interest at the termination of said trust to the order of the remaindermen under said trust as they may be determined at the time of the termination of said trust.”
By an.amended decree made the samé day (September 19, 1928) the direction to make payment by the delivery of promissory notes was omitted, and the decree there*48upon stood as one commanding payment simply, without statement of the time or manner.
The recipients of the income reverted at once to the method of payment prescribed by the original decree, and did so with the approval -of the trustee and the- presumptive owners of the remainders. ■ Charlotte A. Lepic, a daughter of the testator, and a life beneficiary, made her promissory note ior $305,867.06, payable without interest at the termination of the trust, and her two children, Napoleon (and Charlotte, whose interest- was solely as remaindermen, were co-makers with her. Louise Whit-comb, a daughter of- a deceased son of the testator-, made a note fo $118,353.85, signing by her guardian. Her interest Was pa tly that of &. beneficiary, and partly as the presumptive owner of an estate in remainder. Lydia, whose interest was the same as that of Louise, made her note for a like amount. Marie, the widow of the deceased son, made her note for $69,159.35. Her interest ’was in income only. All the notes were payable to the order of “ the remaindermen under-the said trust as they may be determined to be ” when the trust is at an end. All were without interest. • The sum total of the notes is substantially equal to the total overpayments, except for $10,700, paid in cash by the administrator of the widow of the testator who died during the pendency of these proceedings. -There is nothing to show that the cash was applied upon account of the overpayment due for the years covered by the assessment. In the absence of-such evidence, the law appropriates the payment to the items first in point of time. The conclusion therefore . follows that as to any overpayments made by the trustee during the years of the contested liability for taxes, the limit of any obligation now. resting on the beneficiaries of the trust is the payment- of these promissory notes to the *49persons entitled in remainder when the trust shall terminate. •
I assume in aid of .the petitioner that an enforcible duty of repayment existing at the time of an assessment of a tax will call for the reduction of the taxable income to the same extent as if repayment has been actually made, though much can be said in support of another view. The existence of a duty is, however, an indispensable' condition. If money distributed to a beneficiary is to be freed from taxation on the ground that, though received and enjoyed, it will have to be returned, the recipient must make it plain that burden and benefit are exact equivalents. He must show that the effect of the fulfilment of the obligation .to repay will be to cancel all the gain, and leave him in the same position as if the income had-never been received.
At the time of the review of these assessments by the Board of Tax Appeals, the California court had announced by its decree that the trustee had distributed to the beneficiaries more income than was due; but the presumptive owners of the remainders Jjad exonerated the recipients from any duty of repayment until the end of the trust, and then without interest upon moneys overpaid. In effect, the act of the fiduciary had been adopted and confirmed to a proportionate extent.* Whether there was ratification or confirmation in a strict and narrow sense is not decisive of the controversy. The law of taxation is more concerned with the substance of economic opportunity than with classifying legal concepts, and tagging them with names and labels. Burnet v. Harmel, 287 U.S. 103. If the testator had stated in so many words that there should be no deduction for depreciation in distribut*50ing the income, but that at the termination of the trust the beneficiaries would owe to the remaindermen without interest a sum equivalent to the deduction that would otherwise have been made, the result in its practical aspect would have been identical with the one achieved under this will through confirmation' or consent. Here the parties' by agreement have made their own rule, which relates back to the year when the ihcome was received.
To put the case in another way: the remaindermen might have signed an order before the income was paid over directing the trustee to make no deduction for depreciation of the trust. They did not do so then, but by relation backwards they did it afterwards. Without the aid of the agreement the decree of the California court would have imposed upon the trustee a duty to use diligent endeavor to collect without delay the moneys mis-: applied. Through the acceptance of these notes the presumptive owners of the remainders absolved him from that duty and thus confirmed his action. Consent or confirmation may supplement a will or deed of trust, with the result that income “distributed” will have become “ distributable ” also. It may work a like result where the meaning of the instrument has been established by. an “ order ” of a court. The order is no more than evidence of preexisting rights and duties. If the obligation to make restitution had been extinguished for all time, and the agreement extinguishing it had been proved to the assessing officers before the assessment became final, a court would listen with little patiencé to the taxpayer’s complaint that a tax was not due because there had been an interval during which the money would have been reclaimable if the law had run its course. The situation is not different in principle where the benefits confirmed .to the recipients of the income are something less than they would be if the duty to return had been extinguished altogether.
*51For the benefits, though not complete, are not illusory or trivial. The Commissioner’s assessment is supported by a presumption of correctness. If a taxpayer would overthrow it, he has the burden of proving it erroneous, and of fixing in dollars and cents the amount of the error. By the decision just announced, the taxpayer is relieved of that burden. He has received upon account of his taxable income an allowance of the face amount of an indebtedness payable in the future without deduction for the benefits resulting from the time and manner of. the payment.- How substantial those benefits are will be obvious if we let them pass before us in review.
The beneficiaries, instead of restoring the overpaid income to the corpus of the estate, are permitted to retain it until the termination of the trust and to dispose of it as their own. They gain thereby the benefit of investing or consuming, with the opportunity for profit or enjoyment that goes along with such a privilege. If gain is derived, it is theirs without accountability to any one. If a loss ensues and the money is used up, a court of bankruptcy is open to them, in the event of their insolvency, to discharge the liability. At the making of the notes, their resources may have been adequate to enable them to restore what had been unlawfully obtained. At the time when the notes become due, they may find themselves without a dollar except their interest in the trust estate.
But this does not exhaust the catalogue of benefits. In any reckoning of these, account must be taken of the relation of kinship between makers and payees. Except in remote contingencies the notes will be payable either to the children or descendants of the makers, or to the makers themselves. If the makers are dead at the termination of the trust, they will have had it in their power to write a clause into their wills requiring their descend* ants who elect to take under the wills to cancel any claim *52that has accrued upon the notes. If the makers are then alive, they will have put their names to notes that will be payable to themselves. There is grave doubt, to say the least, whether any one of them will ever have to pay a dollar.
Up to this, attention has been confined to terms of the notes that have to do with the restitution of the principal. The postponement of payment of the principal was, however, accompanied by .a provision that there should be no liability for interest. On its face this was a gain. The argument is made, however, that the gain is unreal for the reason that the overpayments, if restored, would be accretions to the corpus of the trust, and that the income on the accretions would be due to the same persons absolved from liability^ for interest. But this is only a part truth. The makers gained the difference between interest at the legal rate upon the principal of the notes and the lower rate of income likely to be earned by a trustee who invests the funds of a trust in conformity with lawl ■ What is even more important, they gained the privilege in the meantime of retaining for themselves what would otherwise be principal in the hands of the trustee and of using it as they pleased.
These arc important benefits. They would be unhesitatingly recognized as such by any investor or by any man of business; Some account should be takén of them before we say that the income of the trust was not income in the hands of the beneficiaries, who received it as their own and who for all that appears may never come under a duty to pay it back to any one.
I think the Court of Appeals did not err in upholding the assessment and that its decree should be affirmed.
Me. Justice Brandeis and Mr. Justice Stone join in this dissent.

 Cf. American Law Institute, Restatement of the Law of Trusts, § 210.