Court Opinion

ID: 4601654
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:28:04.298027+00
Date Added: 2024-06-11T07:52:31.840216
License: Public Domain

Estate of P. D. George, Mercantile-Commerce Bank and Trust Company and John Edwin George, Executors, Petitioners, v. Commissioner of Internal Revenue, RespondentGeorge v. CommissionerDocket No. 8767United States Tax Court8 T.C. 867; 1947 U.S. Tax Ct. LEXIS 222; April 23, 1947, Promulgated *222 Decision will be entered for the respondent.  Held, Congress, in amending section 22 (b) (3) of the Internal Revenue Code by section 111 of the Revenue Act of 1942, did not change the law with respect to the taxation of trust income to the grantor under code section 22 (a) and the principles of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. The question of liability for tax on the income of the trust for 1942 and 1943 is res judicata under our prior decision holding grantor taxable on the income of the trust for 1939.  H. M. Stolar, Esq., for the petitioners.Frank M. Cavanaugh, Esq., for the respondent.  Arundell, Judge.  ARUNDELL*867  This case involves an income tax deficiency for 1943 in the amount of $ 4,088.79.  Pursuant to the Current Tax Payment Act of 1943, the computation of the deficiency for 1943 includes income for 1942.The deficiency results principally from respondent's inclusion in the income of P. D. George, now deceased, of the income of a trust established by the decedent in 1939.  Petitioners contend that this action was erroneous.  Respondent has pleaded res judicata, based on a memorandum opinion of this Court involving the decedent's tax liability for 1939 and holding the decedent-grantor taxable on the trust income for that year under section 22 (a) of the Internal Revenue Code.The facts have been stipulated.FINDINGS OF FACT.Petitioners*224  are the executors of the estate of P. D. George, who died January 11, 1945, a resident of St. Louis County, Missouri.  The income *868  tax returns of P. D. George for 1942 and 1943 were filed with the collector for the first district of Missouri.On December 23, 1939, P. D. George transferred to himself and two other individuals, as trustees, upon trust for his seven sons, certain shares of stock in the P. D. George Co.  Under the provisions of the trust instrument, P. D. George retained the right and power to change the beneficiaries of the income and corpus and also the right to accelerate the distribution of the property in trust.Respondent determined that, by reason of the powers retained by P. D. George, the income of the trust for the year 1939 was taxable to P. D. George, as grantor. This Court, in a memorandum opinion, P. D. George, Docket No. 109866, entered July 16, 1943, approved the determination of the respondent, holding the grantor taxable on the trust income under section 22 (a) of the Internal Revenue Code and the principles of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. On appeal by the taxpayer, the Circuit Court of Appeals*225  for the Eighth Circuit affirmed, George v. Commissioner, 143 Fed. (2d) 837. Certiorari was denied by the Supreme Court, 323 U.S. 778">323 U.S. 778.Prior to 1942 P. D. George caused all of the stock held in trust for six of his seven sons to be distributed to them free of trust.  The only property remaining in the trust during the years 1942 and 1943 was 100 shares of stock in P. D. George Co. held by the trustees for the seventh son of decedent, Pericles Francis George.Pursuant to the provisions of the trust agreement, the income of the trust for each of the years 1942 and 1943 was all distributed to Pericles Francis George, the sole remaining beneficiary of the property held in trust in those years.  The trust income, amounting to $ 4,875 in 1942 and $ 5,362.50 in 1943, was reported by Pericles Francis George in his income tax returns for those years, and the tax thereon was paid by him.On February 10, 1945, respondent mailed a notice of deficiency to the petitioners, asserting gift tax deficiencies for 1942 and 1943 in the respective amounts of $ 210 and $ 567, based entirely on gifts from P. D. George to Pericles Francis George*226  of the trust income for 1942 and 1943 in the respective amounts of $ 4,875 and $ 5,362.50.  The deficiency notice stated: "It has been determined that donor made a gift * * * to Pericles Francis George by releasing income from a revocable trust created by donor December 23, 1939."Petitioners duly filed a petition with this Court, seeking redetermination of the gift tax deficiencies.  Pursuant to stipulation of the parties, the Court entered decision on March 5, 1946, approving the deficiencies determined by respondent.  Estate of P. D. George, Docket No. 7890.*869  In the instant proceeding respondent has determined that the trust income for 1942 and 1943 was properly taxable to P. D. George, as grantor, under the provisions of section 22 (a) of the code.OPINION.Respondent contends that the question of liability for tax on the income of the trust for 1942 and 1943 is res judicata under our prior decision holding grantor taxable on the income of the trust for 1939.  This Court there held the decedent-grantor taxable on the trust income under section 22 (a) of the code and the principles of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. Our decision*227  was affirmed on appeal. George v. Commissioner, 143 Fed. (2d) 837.On brief petitioners concede that if there has been no material change in the statutory law affecting the instant problem, the decision here should be for the respondent, not only on the plea of res judicata, but even on the merits.  They contend, however, that Congress, by amending section 22 (b) (3) of the code in 1942, made so material a change in the statutory law as to render inapplicable the doctrine of res judicata and require a decision in their favor on the merits.  In this posture of the case, our sole inquiry is whether the amendment has that effect.Prior to 1942 section 22 (b) (3) of the code read as follows:SEC. 22.  GROSS INCOME.* * * *(b) Exclusions from Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:* * * *(3) Gifts, bequests, and devises. -- The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).By section 111 of the Revenue Act of 1942, paragraph (3) of section 22 (b) of the code*228  was amended to read as follows:(3) Gifts, bequests, devises, and inheritances. -- The value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph, the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income.  For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property.Petitioners argue that the income involved is income from property; that it was given to Pericles Francis George, the trust beneficiary; that it was thus a gift of income from property; and that *870 section 22 (b) (3), as amended, provides that this income shall be includible in the income of the donee and thereby excludes it from the income of the donor. In short, this can amount to nothing more than a contention that Congress, in amending section 22 (b) (3), overruled*229  the Clifford case.In the report of the Senate Finance Committee 1 explaining the amendment to section 22 (b) (3) by section 111 of the Revenue Act of 1942, it is stated:* * * Under existing law, the value of property acquired by gift, bequest, devise, or inheritance, but not the income therefrom, is excluded from gross income by the provisions of section 22 (b) (3) of the Code.  This section has been construed as not requiring the exclusion from gross income of amounts received under a gift, bequest, or devise of a right to income from property ( Irwin v. Gavit, 268 U.S. 161">268 U.S. 161 * * *).  This construction of the existing law is now written into the bill for the sake of clearness.The existing law has also been construed, however, as excluding from gross income amounts received under a gift, devise, bequest, or inheritance of recurrent payments to be made in any event, whether or not out of corpus ( Burnet v. Whitehouse, 283 U.S. 148">283 U.S. 148 * * *).  Although such amounts are not dependent solely upon income as the source of payment, they may be, and frequently are, by direction under the terms of the gift or bequest, *230  paid in whole or in part out of income.  Such cases most frequently arise in the case of trusts described as annuity trusts.  Because annuities paid by a trust under the terms of a gift or bequest, if not dependent upon income, are excluded under section 22 (b) (3) from the gross income of the beneficiary, it has been held that the trustee, in computing its net income under section 162, can not deduct the amount of trust income distributed in payment of such annuity ( Helvering v. Pardee, 290 U.S. 365">290 U.S. 365 * * *).  This construction of existing law results in payment of the tax by the trust upon income received by a beneficiary, and, accordingly, in some cases furnishes an instrument for tax avoidance by the beneficiary and in some cases results in hardship to other beneficiaries whose share of trust income is reduced by the taxes paid for the benefit of another.This section, therefore, changes the treatment of gifts, bequests, devises, and inheritances to be paid in any event by treating them, if under the terms of the gift, bequest, devise, or inheritance the payment, crediting, or distribution thereof is to be made at intervals, as gifts, bequests, *231  devises, or inheritances of income from property to the extent that they are paid, credited, or to be distributed out of income from property.  Such change will provide the same treatment for amounts paid by a trustee out of the income of a trust in the case of a gift or bequest in terms of a right to such payments at intervals (regardless of income) as in the case of a gift or bequest in terms of a right to income; in neither case will the amounts paid at intervals out of income be excluded under section 22 (b) (3) from the beneficiary's income.  This section is not intended to state a new rule with respect to taxability of trust income between the nominal beneficiary and the creator of the trust where the latter would be taxable under section 22 (a) upon the income of the trust, or with respect to the assignment of earnings or other income where the assignor remains taxable.  The section applies only to those cases where the amounts paid or credited at intervals were excluded from the beneficiary's or donee's income by reason of the provisions of section 22 (b) (3).  [Italics supplied.]*232 *871   The report of the House Ways and Means Committee 2 contains substantially identical language.It is apparent that the attention of Congress was directed to an entirely different problem, wholly unrelated to the problem involved here.  Whatever may be one's views as to the wisdom of the tax policy inherent in the Clifford case, it would be strange indeed if Congress should undertake to change that policy without at least some mention of the case itself in the legislative history.  At the date Congress was considering the Revenue Act of 1942, the judicial progeny of that decision were numerous; now they are myriad.  Therefore, even if the committee reports had omitted the positive statement that the amendment was not intended to change the rule with respect to the taxability of trust income to the grantor under section 22 (a), we could not agree that by the change in language of section 22 (b) (3)Congress had, as*233  petitioners in effect contend, overruled the Clifford case.We conclude that there has been no material change in the statutory law affecting the instant problem since our earlier decision involving the liability of the grantor for tax on the income of the same trust.  Accordingly,Decision will be entered for the respondent.  Footnotes1. S. Rept. No. 1631, 77th Cong., 2d sess.  (1942-2 C. B. 558↩).2. H. Rept. No. 2333, 77th Cong., 1st sess.  (1942-2 C. B. 424↩).