1. Under § 219 of the Revenue Act of 1921, the fiduciary of a
trust estate, in computing the net income for the taxable year,
makes the same deductions from gross income that are allowed in
cases of individual income, including deductions for depreciation;
those parts of the net income which, by the instrument or order
governing the distribution, are distributable during the tax year
to beneficiaries are specified in the fiduciary's return, but they
are income of the beneficiaries as of the time of their receipt by
the fiduciary and are returnable by and taxable to the
beneficiaries, whether distributed to them or not; if, by mistake,
the fiduciary omits to make proper deductions for depreciation, and
so overstates the net income of the estate and overpays a
beneficiary, the excess received by the latter is no part of his
income, and need not be included in his return. P.
291 U. S.
40.
2. A decree of a state court having jurisdiction of a trust
determining that annual deductions for depreciation of the trust
property should have been taken from gross income before making
distributions to
Page 291 U. S. 36
life income beneficiaries, and requiring them to make
restitution accordingly, establishes the rights of the parties and
is an "order governing the distribution" of the income within the
meaning of § 219(d) of the Revenue Act of 1921. Pp.
291 U. S. 43,
291 U. S.
45.
3. Proceedings in a state court resulting in such a decree
held not to have been collusive. P.
291 U. S.
45.
4. Retention by the income beneficiaries of the excess paid them
by the trustee, under an agreement with the possible remaindermen
permitting substitution of promissory notes,
held not to
have rendered it taxable as income from the trust. P.
291 U. S.
45.
62 F.2d 733 reversed.
Certiorari, 290 U.S. 610, to review a judgment reversing, on
appeal, a decision of the Board of Tax Appeals, which had set aside
a deficiency assessment of income tax. 22 B.T.A. 118.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
A.C. Whitcomb, a resident of California, died in 1889, and by
his will, probated in that state, gave the residue of his estate in
trust, one-third of the income to be paid to his widow for life,
with limitations in remainder. The petitioner is the administrator
of the estate of Mrs. Whitcomb, who died in 1921. The will of A.C.
Whitcomb contained no direction for the computation of trust
income, none for the keeping of the trustee's accounts, and none
for any allowance or deduction representing depreciation. Beginning
about 1906, the trustee converted trust assets into real estate and
other forms of investment
Page 291 U. S. 37
subject to depreciation. In fiduciary income tax returns for
1921 and subsequent years, the trustee deducted from gross income
an amount representing depreciation, but failed to withhold from
the beneficiaries, to whom he paid income, the amount of the
depreciation deduction, so that each beneficiary was paid his or
her full ratable share of income for the taxable year. As Mrs.
Whitcomb died in 1921, a portion of the year's income was paid to
her and a portion to the petitioner as her administrator. Neither
the petitioner, as administrator of Mrs. Whitcomb, nor any of the
other beneficiaries, included in their returns, as income received,
that proportion of the income represented by the depreciation
deduction shown on the trustee's fiduciary return.
The applicable sections of the Revenue Act of 1921 [
Footnote 1] are:
"219. (a) That the tax imposed by §§ 210 and 211 shall apply to
the income of estates or of any kind of property held in trust,
including -- . . . (4) Income which is to be distributed to the
beneficiaries periodically, whether or not at regular intervals,
and the income collected by a guardian of an infant to be held or
distributed as the court may direct. . . ."
"(d). In cases under paragraph (4) of subdivision (a). . . the
tax shall not be paid by the fiduciary, but there shall be included
in computing the net income of each beneficiary that part of the
income of the estate or trust for its taxable year which, pursuant
to the instrument or order governing the distribution, is
distributable to such beneficiary, whether distributed or not. . .
."
In the belief that these provisions warranted his action, the
Commissioner of Internal Revenue increased the income shown on the
petitioner's return by so much of the amount received as reflected
the proportionate share of
Page 291 U. S. 38
the depreciation deducted by the trustee in his fiduciary
return, and determined a deficiency accordingly. The petitioner
appealed to the Board of Tax Appeals. [
Footnote 2]
In 1928, while the case was pending before the Board, the
trustee, who had annually rendered income statements to the
beneficiaries, but had filed no accounts as trustee, lodged in a
California court having jurisdiction of the trust an account for
the period 1903-1028 and prayed its approval. Due notice of the
proceeding was given the parties in interest. Certain remaindermen
objected to the account, on the ground that the trustee had paid
the entire income to beneficiaries without deducting and reserving
proper amounts for depreciation and for capital losses sustained.
The matter coming on for hearing the court sustained the objection
concerning depreciation and overruled that as to capital losses;
found the amounts which should have been reserved for depreciation;
refused to surcharge the trustee, but decreed that the life
beneficiaries (including the estate of Louise P. v. Whitcomb) repay
to the trustee the amounts which he should have withheld annually
for depreciation. The sum fixed for the year 1921 was $43,003.16,
which the Board of Tax Appeals has found was the correct amount, a
pro rata share of which the petitioner had deducted from
the reported income of Louise P. V. Whitcomb. Pursuant to this
decree, the petitioner repaid $10,700 to the trustee, which was
more than petitioner's share of the required repayment for the year
1921. Since, however, Mrs. Whitcomb's estate owed additional
amounts for each of the
Page 291 U. S. 39
years 1913-1928, the balance was adjusted by a promissory note
of her next of kin. Other beneficiaries also gave notes in
settlement of amounts due the trustee.
The Board of Tax Appeals reversed the Commissioner. [
Footnote 3] The state court's judgment
was held conclusive of the fact that no part of the sums paid to
the beneficiaries out of the amount required to be deducted by the
trustee for depreciation belonged to them, and the conclusion was
therefore that the amount distributable to the petitioner's
decedent for 1921 was the income of the trust due her, less her
proportionate share of the sum representing depreciation of the
trust property.
The Commissioner petitioned the Circuit Court of Appeals to
review the decision, and, after hearing, the court reversed the
Board and sustained the Commissioner's ruling. [
Footnote 4] The case is here on writ of
certiorari. [
Footnote 5]
The petitioner insists the plain meaning of § 219 is that an
income beneficiary of a trust shall pay tax not on so much of the
income as he actually receives, but on the amount he should
properly have received in any tax year. His position is that, if
the amount of income properly "distributable" to him is in excess
of the amount paid, he must return and pay tax on the larger
amount, irrespective of when in the future he may actually
receive
Page 291 U. S. 40
the balance due him for the year in question. In this view the
respondent concurs. But, conversely, says the petitioner, if in any
year the beneficiary is actually paid more than is properly
distributable to him, he should not return and pay tax on the
excess to which he was not entitled. The respondent disagrees with
this proposition. If the question be decided in favor of the
respondent, we need go no further, but if in favor of the
petitioner, we must inquire what are the criteria for determining
whether the sum actually paid was in fact distributable. On this
matter also, the parties are in disagreement.
1. Section 219(a) declares that the income of estates and
property held in trust is to bear the same tax as the income of
individuals. The tax is measured by the gross income received by
the fiduciary, less certain allowable deductions, as in the case of
an individual. To clarify and emphasize this purpose, it is stated
that income received by a decedent's estate in course of
administration, income to be accumulated for unborn or
unascertained persons, income to be held for future distribution,
income to be distributed periodically to beneficiaries, and income
received by a guardian, to be held or distributed as the court may
direct, is included in the taxable income of the estate or trust.
Paragraphs (1) to (4).
Subsection (b) puts upon the fiduciary the duty of making a
return and directs what it shall contain. As respects income which
is to be distributed periodically to beneficiaries the return is to
include "a statement of the income of the estate or trust which,
pursuant to the instrument or order governing the distribution, is
distributable to each beneficiary, whether or not distributed
before the close of the taxable year for which the return is
made."
Subsection (c) requires the fiduciary to pay the tax on all net
income of the estate or trust, save that which is
Page 291 U. S. 41
distributable periodically, but subsection (d) directs, as
respects the sort of income last mentioned, "the tax shall not be
paid by the fiduciary," but, in computing the income of each
beneficiary there shall be included
"that part of the income of the estate or trust for its taxable
year which pursuant to the instrument or order governing the
distribution, is distributable to such beneficiary, whether
distributed or not. . . ."
Subsection (e) covers a case where the total income to be
returned by a fiduciary is made up of two classes, as,
e.g., a portion to be held and accumulated and a portion
to be distributed periodically to beneficiaries. The fiduciary must
then prepare his return as if he were required to pay the tax on
the whole and enter "as an additional deduction" (in addition, that
is, to the usual deductions allowed all taxpayers by the other
sections of the Act) that part of the estate or trust income
"which, pursuant to the instrument or order governing the
distribution, is distributable during the [fiduciary's] taxable
year to such beneficiary." To remove all doubt of the intent of the
Act, a sentence is added to the effect that in such case each
beneficiary's personal income shall include the portion of the
trust's income which, "pursuant to the instrument or order
governing the distribution, is distributable" to him.
Plainly the section contemplates the taxation of the entire net
income of the trust. Plainly also, the fiduciary, in computing net
income, is authorized to make whatever appropriate deductions other
taxpayers are allowed by law. The net income ascertained by this
operation, and that only, is the taxable income. This the fiduciary
may be required to accumulate, or, on the other hand, he may be
under a duty currently to distribute it. If the latter, then the
scheme of the act is to treat the amount so distributable not as
the trust's income, but as the beneficiary's. But, as the tax on
the entire net income of the trust
Page 291 U. S. 42
is to be paid by the fiduciary or the beneficiaries or partly by
each, the beneficiary's share of the income is considered his
property from the moment of its receipt by the estate. This
treatment of the beneficiary's income is necessary to prevent the
possibility of postponement of the tax to a year subsequent to that
in which the income was received by the trustee. If it were not for
this provision, the trustee might pay on part of the income in one
year and the beneficiary on the remainder in a later year. For the
purpose of imposing the tax, the Act regards ownership, the right
of property in the beneficiary, as equivalent to physical
possession. The test of taxability to the beneficiary is not
receipt of income, but the present right to receive it. Clearly an
overpayment to a beneficiary by mistake of law or fact would render
him liable for the taxable year under consideration not on the
amount paid, but on that payable. If the trustee should have
deducted a sum for depreciation from the year's gross income before
ascertaining the amount distributable to Mrs. Whitcomb and the
other beneficiaries, but failed to do so, he paid her more than was
properly distributable for the taxable year. Both the language used
and its aptness to effect the obvious scheme for the division of
tax between the estate and the beneficiary seem so plain as not to
require construction. The administrative interpretation has been in
accord with the meaning we ascribe to the section, [
Footnote 6] and no decision to the contrary
has been brought to our attention.
The respondent suggests that income distributable within the
meaning of the § is income which was reasonably regarded by the
parties as distributable at the time it was distributed. We think
such a construction would do violence to the plain import of the
words used.
The respondent relies on
North American Oil
Consolidated
Page 291 U. S. 43
v. Burnet, 286 U. S. 417.
That case, however, involved the receipt of income in 1917 through
a money award of a court. An appeal was taken, and the award was
not confirmed by the appellate court until 1922. The taxpayer's
claim that the possibility of reversal shifted the receipt of the
income to the later year was overruled. Section 219 had no bearing
upon the question presented.
2. The will of A.C. Whitcomb contains no direction, and the
statutes of California make no provision, as to depreciation of
trust assets. In the absence of either, the Circuit Court of
Appeals thought the decision of the state court inconclusive in the
administration of the federal Revenue Act, and interpreted the will
according to the general law of trusts, which was held to forbid
deductions from distributable income on account of depreciation,
and to place upon the remaindermen the burden of any shrinkage of
capital value of that nature. The petitioner challenges the ruling,
insisting upon the binding force of the state court's decree.
Obviously that decree had not the effect of
res judicata,
and could not furnish the basis for invocation of the full faith
and credit clause of the federal Constitution in the present case.
The petitioner, however, says that it furnishes the standard for
the application of § 219, since the section plainly so declares;
but even if this be not true, the decision settles the property
rights of the beneficiaries which § 219 intended should be observed
in distributing the burden of the tax.
The first position is supported by citation of the language of
subsection (d) that
"there shall be included in computing the net income of each
beneficiary that part of the income of the estate or trust for its
taxable year which, pursuant to the instrument or order governing
the distribution, is distributable to such beneficiary, whether
distributed or not. . . ."
The decree of the state court is said to be the order governing
distribution
Page 291 U. S. 44
of this estate. The respondent reads the language as making the
terms of the trust instrument controlling where there is one, and
resorting to an order only where there is no instrument governing
payments of income, and he adverts to the language of § 219,
subsec. (a)(4) exempting the fiduciary from returning "income
collected by a guardian of an infant to be held or distributed as
the court may direct," as explaining the use of the word "order" in
subsection (d) and rendering it applicable only to income collected
by a guardian. But a moment's reflection will shown this is an
error. The whole of a minor's income received by his guardian is
taxable to the minor irrespective of its accumulation in the
guardian's hands, distribution to the minor, or payment for his
support or education. This is the reason that a fiduciary in
receipt of such income is not bound to return it as trust income.
Either the minor or his guardian must make the return, but, in
either case, it embraces all the income and is the minor's
individual return, not that of the guardian or the trust. [
Footnote 7]
The word "order" must be given some meaning as applied to trust
income which is to be distributed periodically, and we think it
clear that the section intended that the order of the court having
jurisdiction of the trust should be determinative as to what is
distributable income for the purpose of division of the tax between
the trust and the beneficiary. We understand the respondent to
concede the binding force of a state statute, or a settled rule of
property, followed by state courts, and, as well, an antecedent
order of the court having jurisdiction of the trust pursuant to
which payments were made. But if the order of the state court does
in fact govern the distribution, it is difficult to see why,
whether it antedated actual payment or was subsequent to that
event, it should
Page 291 U. S. 45
not be effective to fix the amount of the taxable income of the
beneficiaries. We think the order of the state court was the order
governing the distribution within the meaning of the Act.
Moreover, the decision of that court, until reversed or
overruled, establishes the law of California respecting
distribution of the trust estate. It is none the less a declaration
of the law of the state because not based on a statute or earlier
decisions. The rights of the beneficiaries are property rights, and
the court has adjudicated them. What the law as announced by that
court adjudges distributable is, we think, to be so considered in
applying § 219 of the Revenue Act of 1921.
The respondent suggests that the proceeding in the state court
was a collusive one -- collusive in the sense that all the parties
joined in a submission of the issues and sought a decision which
would adversely affect the Government's right to additional income
tax. We cannot so hold, in view of the record in the state court
which is made a part of the record here. The case appears to have
been initiated by the filing of a trustee's account, in the usual
way. Notice was given to the interested parties. Objections to the
account were presented, and the matter came on for hearing in due
course, all parties being represented by counsel. The decree
purports to decide issues regularly submitted, and not to be in any
sense a consent decree. The court ruled against the remaindermen on
one point, and in their favor on another -- that here involved --
but refused to surcharge the trustee, for reasons stated, and
ordered repayment by the life tenants of overpayments of income
consequent on the trustee's failure to withhold sums for a
depreciation reserve.
But, it is said, the life beneficiaries gave their notes for the
indebtedness due by them to the trust, as determined by the state
court, some of which were jointly executed
Page 291 U. S. 46
by those who would take in remainder, and therefore these
beneficiaries are permitted to retain and enjoy the full amounts
distributed to them without reference to proper deductions for
depreciation, and are therefore taxable thereon as income
distributed.
After the decree had been entered, two of the life beneficiaries
delivered their own notes to the trustee. One life beneficiary, who
may become possessed of an interest in remainder, gave her note.
Louise P. V. Whitcomb's daughter, a life beneficiary, executed her
note, in which her two children, who are possible takers in
remainder, joined. The notes were without interest, and were
payable to the order of those who should be entitled in remainder
at the termination of the trust. The persons so entitled are the
descendants of the two children of the testator, per stirpes. What
persons if, any, may fill this description is, of course, unknown.
In the event of the failure of issue, the ultimate remainder is to
Harvard College.
The parties evidently proceeded upon the theory that, if the
fund were restored to the trust, it would be invested and the life
beneficiaries would receive the income from it, and that a
satisfactory settlement of the matter would be to have the life
beneficiaries give their notes payable at the termination of the
trust. At most, this form of settlement amounted to a concession or
gift on the part of the remaindermen to the life beneficiaries. Any
advantage obtained by the latter through the adjustment was
obviously not effected by the state court's decree, but by the
voluntary action of the remaindermen. The decree was a judgment
which fixed the rights of the remaindermen and the obligations of
the life tenants. If the parties in interest chose to adjust these
obligations in some manner other than by present payment of cash,
their action in no wise altered the quality of the trustee's
overpayments of income. We cannot seize on the form of
Page 291 U. S. 47
the settlement made between the parties either to impugn the
good faith and judicial character of the state court's decree or to
ignore the decree and its conclusiveness as to what was, in fact
and in law, income distributable to the beneficiaries under the
trust.
The judgment of the Court of Appeals is
Reversed.
* Pursuant to stipulation, the decisions in the following cases
are reversed on the authority of this case: Nos. 130 and 131,
Freuler, Administrator v. Helvering, on writs of
certiorari to the Circuit Court of Appeals for the Ninth Circuit;
No. 139,
Marguerite T. Whitcomb v. Helvering; No. 140,
Charlotte A. W. Lepic v. Helvering; No. 141,
Marie M.
E. G. T. Whitcomb v. Helvering; Nos. 142 and 143,
Charlotte A. W. Lepic v. Helvering, and No. 144,
Marie
M. E. G. Whitcomb v. Helvering, on writs of certiorari to the
Court of Appeals of the District of Columbia.
[
Footnote 1]
Revenue Act of 1921, ch. 136, § 219, 42 Stat. 246.
[
Footnote 2]
The propriety of taxing the full amount of the annual
distributions of income in this estate in the years 1918-1920 was
tested by certain of the beneficiaries.
Whitcomb v. Blair,
58 App.D.C. 104, 25 F.2d 528; Appeal of Louise P. V. Whitcomb, 4
B.T.A. 80. It was held in those cases that the beneficiaries must
return what they in fact received, and that depreciation, as it
affected only capital assets, and not income, could not be deducted
by the life beneficiaries.
[
Footnote 3]
Whitcomb v. Commissioner, 22 B.T.A. 118.
[
Footnote 4]
Commissioner v. Freuler, 62 F.2d 733.
[
Footnote 5]
Other beneficiaries prosecuted like appeals to the Board with
like result. The Circuit Court of Appeals for the Ninth Circuit, 62
F.2d 733, reversed the Board, and the taxpayers were granted
certiorari in Numbers 130 and 131. The Court of Appeals of the
District of Columbia reversed the Board in the cases of six
beneficiaries,
Burnet v. Whitcomb, 65 F.2d 803, 809. These
cases are also here on certiorari as Numbers 139-144, inclusive. By
a stipulation filed in this Court November 15, 1933, if the
judgment of the Circuit Court of Appeals be affirmed in this case,
the like judgment shall be entered in the other cases enumerated,
and if the judgment in this case be reversed, the like judgment
shall be entered in the others.
[
Footnote 6]
Treasury Regulations 62, ed. 1922, Arts. 345 and 347.
[
Footnote 7]
See Regulations 62, ed. 1922, Arts. 347, 403, 422.
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 same day (September 19, 1928) the
direction to make payment by the delivery of promissory notes was
omitted, and the decree thereupon
Page 291 U. S. 48
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 for $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 comakers with her. Louise Whitcomb, a daughter
of a deceased son of the testator, made a note for $118,353.85,
signing by her guardian. Her interest was partly that of a
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
Page 291 U. S. 49
persons entitled in remainder when the trust shall
terminate.
I assume in aid of the petitioner that an enforceable 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 fulfillment 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 had
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 distributing
Page 291 U. S. 50
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 income 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 misapplied.
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 patience 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.
Page 291 U. S. 51
For 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 anyone. 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 descendants who
elect to take under the wills to cancel any claim
Page 291 U. S. 52
that 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 law. 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 are important benefits. They would be unhesitatingly
recognized as such by any investor or by any man of business. Some
account should be taken 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 anyone.
I think the Court of Appeals did not err in upholding the
assessment, and that its decree should be affirmed.
MR. JUSTICE BRANDEIS and MR. JUSTICE STONE join in this
dissent.
*
Cf. American Law Institute, Restatement of the Law of
Trusts, § 210.