Maxwell, Comr. of Revenue v. . Waddell

"WiNBORNE, J. Upon tbe agreed facts of this case, are the net rents received by the defendant from the Paragon Building taxable income within the meaning of the Revenue Act of 1928, and subsequent years ? The answer is, Yes. The question of law here presented has not heretofore been considered by this Court. Therefore,- that the question may be clearly considered, it is appropriate to analyze pertinent sections of the Income Tax Schedule of the Revenue Act, ch. 4, Public Laws 1923, which were effective at the beginning of the tax years involved here. Thus we find: The general purpose of the act is to impose a tax for the use of the State government upon and with respect to the net income as therein defined, of each resident, individual or corporation, of the State, and upon the income earned within the State of every nonresident individual or corporation having a business or agency in the State for the calendar year 1923 collectible in the year 1924, and similarly for subsequent years. Secs. 104 and 200. The tax is likewise “imposed upon resident fiduciaries, . . . which shall be levied, collected and paid annually with respect to: (a) That part of the net income of estates and trusts which has not become distributable during the income tax year. . . .” Sec. 205. Then, too, “Every individual taxable under this act who is a beneficiary of an estate or trust shall include in his gross income the distributable share of the net income of the estate or trust, received by him or distributable to him during the income year.” Sec. 302. “Net income” means “the gross income' of taxpayer less the deductions allowed by this act.” Sec. 300. “The words ‘net income’ mean the gross income of a taxpayer from . . . rents . . . and income derived from any source whatever.” Sec. 301 (1). “The words ‘gross income’ do not include the following items, which shall he exempt from taxation under this act: (c) The value of property acquired by gift, bequest, devise or descent (but the income from such property shall be included in gross income).” Sec. 301 (2). The purpose and intent of the Legislature is manifest. The language is understandable and needs no judicial interpretation. It is clear that the Legislature intended, in the general plan of taxing all incomes, to tax incomes from trust estates: (1) To the trustee, if not distributable during the tax year; (’2) to the beneficiary, if distributed or distributable during the tax year. In the present case the effect of the will is to devise the Paragon Building to D. C. Waddell, Jr., trustee, in trust to collect the rents, and, *575 after paying to another a stipulated sum annually, the net rents therefrom are distributable to D. 0. Waddell, Jr., individually, annually for life, with remainder over. The defendant contends, however, that the income to him from the Paragon Building is a bequest within the meaning of sec. 301 (2) (c), ch. 4, Public Laws 1923, and that until he shall have received therefrom an amount equal to the value of the Paragon Building apportioned to him on which he paid inheritance tax, any amount received by him therefrom is not income, but a part of the gift. The same question and contention, upon similar state of facts, and under like statute, has been presented to and decided by the Supreme Court of the United States. The Federal act contains a provision in the exact language of see. 301 (2) (c), ch. 4, Public Laws 1923. The case of Irwin v. Gavit, 268 U. S., 161, 69 L. Ed., 879, 45 S. Ct., 475, decided 27 April, 1925, is fully in point, and is decisive of the instant ease. Under the will there involved the residue of the estate was left in trust, and a portion of the income therefrom was directed to be paid to Gavit during his life, subject to be cut off by certain prescribed conditions. The contention was made by the defendant and the court below held that the gift to Gavit was a bequest and not taxable under that provision of subsection B of sec. 2 of the Federal Income Tax Act of 1913, ch. 16, which prescribed that “the value of,property acquired by gift, bequest, devise or descent” is not to be included in net income, but only the income derived from such property is subject to such tax. Justice Holmes, after quoting from sections of the Federal Income Tax Act of 1913, said: “The language quoted leaves no doubt in our minds that if a fund were given to trustees for A. for life with remainder over, the income received by the trustees and paid over to A. would be income of A. under the statute. It seems to us hardly less clear that even if there were a specific provision that A. should have no interest in the corpus, the payments would be income none the less, within the meaning of the statute and the Constitution, and by popular speech. In the first case it is true that the bequest might be said to be of the corpus for life, in the second it might be said to be of the income. But we think that the provision of the act that exempts bequests assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so-called simply because of a severance between it and the principal fund. No such conclusion can be drawn from Eisner v. Macomber, 252 U. S., 189, 206, 207. The money was income in the hands of the trustees and we know of nothing in the law that prevented its being paid and received as income by the donee. The courts below went on the ground that the gift to plaintiff was a bequest and carried no interest in the corpus of the fund. We *576 do not regard those considerations as conclusive, as we have said, but if it were material a gift of the income of a fund ordinarily is treated by equity as creating an interest in the fund. Apart from technicalities, we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it. The fund is appropriated to the production of the same result whichever form the gift takes.” The appellate courts of New York, considering a statute in the exact language of sec. 301 (2) (c), ch. 4, Public Laws 1923, have followed the decision of the United States Supreme Court. In the case of People ex rel. Knight v. Lynch, 255 N. Y., 323, 174 N. E., 696, testator had devised and bequeathed all of his property, both real and personal, to the executors in trust to collect the rents therefrom and to pay over one-third of the net income from such property to his wife for and during the term of her natural life, in at least quarterly payments. She contended that the payments were not income. The Court of Appeals of New York, speaking to the question, said: “In a word, the income which a widow receives on her dower interest, whichever way she takes it, is income taxable under the law, and not a capital payment in any sense. . . . That the income from this trust estate is not exempt as a gift or bequest, see Irwin v. Gavit, 268 U. S., 161, 45 S. Ct., 475, 69 L. Ed., 897.” Again, more pertinent to the instant case is White v. Gilchrist, 211 N. Y. S., 746, where a beneficiary receiving income from property devised in trust, contested liability for income tax thereon. After citing and quoting Irwin v. Gavit, supra, the New York Court said: “We think that, under the holding of the Supreme Court, the claim of the petitioner herein cannot be sustained, namely, that as to her the annual payments constituted a legacy’ not subject to income tax under that provision of the law . . . which excludes from gross income the value of property acquired by . . . bequest. . . . The sum involved is thus income to the estate. . . . Moreover, the mere fact that the intangible interest of petitioner was described as an ‘annuity’ and its capitalized value was fixed for inheritance tax purposes in 1911, the tax upon which was paid by the petitioner, does not make these annual payments exempt from income tax. This worked no real change in the character of the payments, and the State is not estopped.” In support of his contention that the income to him is a bequest within the meaning of the act, defendant relies upon Burnett v. Logan, 283 U. S., 404, and Burnett v. Whitehouse, 283 U. S., 148, 75 L. Ed., 918. These cases are distinguishable from and are not applicable to the facts in the instant case. In the Logan case, supra, the transaction Avas the sale of stock. Part of the consideration was to be paid annually *577 thereafter. The question related to profit — which was realizable only after the value of the stock had been paid. The Whitehouse case, supra, provided for an annuity of $5,000 to the defendant. Authority was given to the executors to retain personal property to provide for the payment. Justice McReynolds, writing the opinion, said: “As held below, the bequest to Mrs. 'Whitehouse was not to be paid from income, but of a sum certain, payable at all events during each year so long as she should live. . . . Irwin v. Gavit is not applicable. The bequest to Gavit was to be paid out of income from a definite fund. If that yielded nothing, he got nothing. This Court concluded that the gift was of money to be derived from income and to be paid and received as income by the donee. Here the gift did not depend upon income, but was a charge upon the whole estate during the life of the legatee to be satisfied like an ordinary bequest.” "While the question of inheritance tax is not now before the Court, it is appropriate to refer to the section of the Inheritance Tax Schedule AA, ch. 4, Public Laws 1923, under which that tax was assessed. Sec. 11 in part provides: “If the legacy or devise subject to the tax be given to a beneficiary for life, . . . with remainder to take effect upon the termination of the life estate, . . . the tax on the whole amount shall be due and payable as in other cases, and the tax shall be apportioned between such life tenant and the remainderman, such apportionment to be made by computation based upon the mortuary and annuity tables set out in sections 1790 and 1791 of the Consolidated Statutes, and upon the basis of 6 per cent of the gross value of the estate for the period of the expectancy of the life tenant in determining the value of the respective interests.” The value of the legacy was the value of the Paragon Building, and for inheritance tax purposes that value was apportioned among the legatees in accordance with their respective interest in the legacy. The right to receive the rents from the building vested in defendant an interest — an equitable interest — in the corpus of the legacy. Irwin v. Gavit, supra; Brown v. Fletcher, 235 U. S., 589, 59 L. Ed., 374; Blair v. Comrs., 300 U. S., 5, 81 L. Ed., 265. The judgment below is Affirmed. ClaRKSON, J., took no part in the consideration or decision of this case.