Court Opinion

ID: 4491596
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:02:57.829104+00
Date Added: 2024-06-11T08:49:23.260628
License: Public Domain

Murdock,
dissenting: The decedent died in 1889 and the trust in question, so far as we know, began to function shortly thereafter. The account which was objected to covered only the period from February 28,1903, to February 23,1928. Prior accounts must have been approved in which there was no deduction for depreciation. Wear, tear and exhaustion of property, sometimes called depreciation, does not depend upon revenue acts. Yet, we see that the objection of those opposing the account related to depreciation which had been sustained from 1913 to 1927 only. Nineteen hundred and thirteen was the first year that there was an income tax act which might affect these petitioners. We must assume that during all of the years that the trust existed, up to the year 1928, the income from the trust property, undiminished by any amount representing depreciation, had been paid regularly to those having life estates. During the taxable years here in question no one made any objection to this action of the trustee, and he had the advice of counsel that under the terms of the trust it was his duty to distribute the full amount to those having life estates. The will made no specific provision for depreciation, and the general rule in such cases is that the life beneficiaries take all income undiminished by depreciation. In re Hoyt, 160 N. Y. 607; 55 N. E. 282; Devenney v. Devenney, 74 Ohio St. 96; 77 N. E. 688; Old Colony Trust Co. v. Smith (Mass.), 165 N. E. 657; Blair v. Blair, 82 Kans. 464; 108 Pac. 827; Reed v. Longstreet, 71 N. J. Eq. 37; 63 Atl. 500; Dooley v. Penland (Tenn.), 300 S. W. 9.
There is no reason to suppose that this testator in 1889 intended that the income from his estate should be reduced by depreciation before being distributed to the life beneficiaries. Gay v. Focke, 291 Fed. 721. No reserve for depreciation was established or provided for by the trustee until several years after the taxable years involved. Then, apparently by mutual consent, a retroactive order of a court was obtained as. a result of which the trustee in January, 1929, for the first time, was enabled to show a reserve for depreciation of $622,434.11 on his books, although he had in his possession only *127$10,700 returned by the estate of Louise P. V. Whitcomb. Others to whom distributions had been made, including those who objected to the account, gave the trustee their notes bearing no interest and payable only at the termination of the trust. These notes were supposed to restore to the trustee the balance of the amounts which had been distributed by him which in reality represented depreciation.
Louise P. V. Whitcomb, Charlotte A. W. Lepic, and Marguerite T. Whitcomb were the petitioners in the case of Louise P. V. Whitcomb et al., 4 B. T. A. 80. That case involved the years 1917 to 1920. The petitioners there contended that, under the same will which is involved in this case, the net income of the trust, the distributable share of which was taxable to the beneficiaries, was the statutory net income divided into the number of shares provided in the will. We there held, on April 23, 1926, that the life beneficiaries were taxable with their full distributable share of the income of the trust undiminished by depreciation. Marguerite T. Whitcomb appealed from the decision of the Board in that case as to the year 1918, to the Court of Appeals of the District of Columbia. The facts as to that year were similar to the facts before the Board in the present case. The Court, in affirming the Board’s decision, stated:
The appellant as life tenant in the trust estate was entitled to receive the full one-ninth of the income therefrom without regard to exhaustion or wear and tear of the corpus of the estate, and that is what appellant actually received from the trustee as her distributive share of the income. The trustee was not entitled to withhold any part of the income of the trust estate in order to make good the exhaustion or wear and tear of the capital assets of the estate; nor did the trustee in fact do so. Capital losses in such cases fall 'upon the reversioners or remaindermen, and not upon the life tenant. Therefore, the payment made by the trustee to appellant was in fact and law the distributive share of the income to which she was entitled as life tenant, and consisted in no part of capital depreciation restored to her. It was therefore taxable in her hands. This conclusion is not negatived by the fact that the trustee was entitled to enter deductions for capital losses or gains in his return for the trust estate as a single entity.
This decision of the court was rendered on April 2, 1928. Prior thereto, on January 14, 1925, the Circuit Court of Appeals, First Circuit, had decided similarly in Baltzell v. Mitchell, 3 Fed. (2d) 428; certiorari denied, 268 U. S. 690. Thereafter, on September 5, 1928, the trustee filed the account and the question of his duty to reserve depreciation was raised for the first time. There was a close family relation between the life beneficiaries and the remainder men who made the objections to the account. It is easily conceivable that the only benefit sought from the probate court proceeding was support for the position taken by the life beneficiaries in excluding *128from their income tax returns the amounts representing depreciation, and thus avoidance of the effect of the adverse decisions of this Board and of the Court of Appeals of the District of Columbia on their income tax liability for other years. During all of those years the petitioners actually received and enjoyed the amounts here in controversy, and during those years they had no reason to suppose that their enjoyment of these amounts vrould ever be questioned. The only reason that even a semblance of question arose was because some of those persons who were enjoying the amounts, in effect, asked the probate court to hold that they had no right to enjoy them, and nobody objecting, the court so held. Under such circumstances, I do not believe that they should be relieved from including as a part of their gross income the full amount which they received and enjoyed during each of the taxable years'in question. Cf. Jackson v. Smietanka, 272 Fed. 970; Lucas v. American Code Co., 280 U. S. 445; Commissioner v. Sanford & Brooks, 282 U. S. 359. If the trustee erred in failing to deduct depreciation before distributing the income of this trust, the error had its inception long prior to the taxable years in question and long prior to 1913. The amount returned to the trustee in 1928 and the amount of the notes delivered to him at that time, then represent only a part of the amounts erroneously distributed, and there was no reason for holding that it was the amounts they received in the taxable years which they returned. The order of the court will, of course, have its effect prospectively upon distributions, but under the circumstances of this case I do not think it should be given retroactive effect to accomplish the purpose sought by these petitioners. Cf. Weiss v. Wiener, 279 U. S. 333; Rosenberger v. McCaughn, 25 Fed. (2d) 699.
Smith, Stebnhagen, Phillips, Akundell, and Black agree with this dissent.