Bagnall v. Commissioner

HEALY, Circuit Judge. . This is a proceeding to review a decision of the Board qf Tax Appeals sustaining the assessment of a deficiency. In 1928 Albert Lawrence Bagnall, a resident of California, established a trust inter vivos, vesting in the trustee title to certain- shares of corporate stock. The trust was irrevocable and was admittedly made in contemplation of death. It was created primarily for the benefit of the trustor’s wife, petitioner here, it b.eing provided that she is to receive during her- life the entire net income of the property. Bagnall died testate in September, 1929, leaving an estate appraised at approximately $46,000 aside from the assets of the trust theretofore created. An administrator was appointed with the will annexed. The estafe of the decedent, including both the property in the hands of the administrator’ and that in the possession of the trustee, was assessed for state inheritance and federal estate tax purposes, the total of the taxes being approximately $30,000. In the discharge of these assessments the trustee paid a proportionate part ($26,547.20) and the administrator paid the [957] remainder. These payments were made in 1930. The following returns for that year were thereafter made by the parties in interest: The administrator made an income tax return, deducting the amounts of estate and inheritance taxes which he had paid. The trustee filed a fiduciary return, setting up therein as a deduction from the gross income of the trust the amounts of state inheritance and federal estate taxes paid by it. In her income tax return the petitioner reported the net income shown from the statement of the trustee, after the deduction from the income of the trust of the amounts of these payments.1 The deduction of the amounts of estate and inheritance taxes paid by the trustee was disallowed by the Commissioner, and these deductions were transferred from the return filed for the trust to the return filed for the estate “in accordance with the provisions of section 23(c) of the Revenue Act of 1928 [45 Stat. 799, 26 U.S.C.A. § 23 note] and article 154 of Regulations 74.” The distributed earnings or net income of the trust were increased, and the net income set forth in petitioner’s return was increased by a similar amount, namely, in the amount of $26,547.20. A deficiency was accordingly assessed against the petitioner. This deficiency assessment presents the matter in controversy. The return of the trustee was the “information” return exacted of all fiduciaries under section 143 of the 1928 act, 45 Stat. 833, 26 U.S.C.A. § 142 and note. In it the fiduciary is required to state “specifically the items of gross income thereof and the deductions and credits allowed under this title.” (Italics supplied.) As we understand it, the difference of opinion which-arose between the petitioner and the Commissioner, resulting in the matter being brought before the Board of Tax Appeals, concerned the validity of the fiduciary return. The petitioner claims that the trustee was permitted by the terms of the act to deduct the estate and inheritance taxes. The Commissioner contends that these deductions were allowable only to the estate of the decedent. Each party relies upon the provisions of section 23(c) of the 1928 act. This provides that, with certain exceptions, in computing net income there shall be allowed as deductions taxes paid or accrued within the taxable year. The permission to deduct taxes is, however, circumscribed by the following provision found at the end of the applicable subsection: “For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue'on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.” (Italics supplied.) Petitioner contends that “the estate” includes a trust estate, and she points to the fact that the trust corpus was included in the estate against which these succession taxes were assessed. Reliance is placed on Commissioner v. Beebe, 1 Cir., 67 F.2d 662, 92 A.L.R. 862; Commissioner v. Pennsylvania Co. for Insurance, 3 Cir., 83 F.2d 545; Gillette v. Commissioner, 2 Cir., 76 F.2d 6; and Martz v. Commissioner, 9 Cir., 82 F.2d 110. The view of the Commissioner, which the Board of Tax Appeals upheld (Bagnall v. Commissioner, 35 B.T.A. 1), is that “the estate” has reference to a taxable person and that the deduction of estate and inheritance taxes is permitted to be made only by an executor or administrator, or by a testamentary trustee charged with the administration of property of the decedent. We think the ruling of the Board was correct. The power of Congress to tax gross income is unquestionable. The extent to which deductions from gross income may be made is a matter of legislative grace; and only where the law clearly provides for it may any deduction be taken. Further, the rule that ambiguities in statutes imposing taxes are to be resolved in favor of the taxpayer does not apply in determining what the taxpayer may deduct. New Colonial Ice Co. v. Helvering, 292 U. S. 435, 54 S.Ct. 788, 78 L.Ed. 1348; Helvering v. Inter-Mountain Life Insurance Co., 294 U.S. 686, 689, 574, 55 S.Ct. 572, 79 L.Ed. 1227. Section 701 of the 1928 act, 45 Stat. 878, 26 U.S.C.A. § 1696 and note, defines the term “person” as meaning an individual, a trust or estate, a partnership, or a corporation. The right to deduct succession taxes from current income appears to be limited to the person or persons charged with the administration of the estate of the decedent. In. the report of the Senate Finance Committee on the 1928 act it is explained that section 23(c) allows deductions of in [958] heritance and similar taxes “only to the decedent’s estate” and not to the beneficiary. Report No.'960, 70th Congress, 1st Sess., p. 20. An irrevocable trust carved out of the estate of the trustor in his lifetime is no part of his estate after his death, except for the limited purposes of the succession tax. Certainly, there is not in the law any clear authorization permitting the trustee of an inter vivos trust to deduct inheritance or estate taxes in reporting trust income. It is of interest to note that under the 1934 and 1936 acts, § 23(c), 26 U.S.C.A. § 23(c)(3), these taxes are no longer deductible even by the estate. What has been said disposes of the specific question dealt with by the Board and presented he,re for review. However, after the submission of the case to us it was suggested that so much of the corrected net income of the trust as had supposedly been devoted to the payment of these taxes was not, under the terms of the trust instrument, currently distributable to the petitioner; hence, that the trustee, and not the petitioner, was taxable on that part of the income. See section 162(b) of the act, 45 Stat. 838, 26 U.S.C.A. § 162 and note. The trust declaration provides that from the gross income of the trust, or from the principal if there be no income, the trustee, shall first pay all taxes, including inheritance and federal estate taxes; and that there shall be paid to the beneficiary the net income derived from the trust. While they “lurked in the record,” questions concerning the effect of these or any other provisions of the instrument upon the legal relation subsisting between the trustee and the beneficiary, or their effect upon the incidence of the tax on the trust income, do not appear to have been presented to the Board. Certainly they were not dealt with. Nor is there any mention of the trust instrument in the petition for review filed with this court, or in the assignments of error contained in the petition,2 or in the brief or argument of the petitioner. The petitioner planted herself squarely on the fiduciary return and sought to justify it by appealing to a broad interpretation of section 23(c) of the revenue laws. She made no appeal to the provisions of the trust instrument, as they obviously had no bearing on the point she sought to have determined. In short, the terms of the declaration of trust are now for the first time injected into the controversy. Compare United States v. Garbutt Oil Co., 302 U.S. 528, 58 S.Ct. 320, 82 L.Ed. -, decided by the Supreme Court January 3, 1938. This court in a proceeding of the sort before us is not a fact-finding tribunal, nor may it consider or determine any point not pressed before the Board of Tax Appeals or ruled upon by that body. General Utilities & Operating Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154; Helvering v. Salvage, 297 U.S. 106, 56 S.Ct. 375, 80 L.Ed. 511; Sunset Scavenger Co. v. Commissioner, 9 Cir., 84 F.2d 453; Kottemann v. Commissioner, 9 Cir., 81 F.2d 621. Once we undertake to construe and apply the trust instrument, numerous and perplexing collateral questions, some of law, others of fact, intrude themselves and demand answer — questions not ruled upon by the Board, not presented by the assignments, and discussed, if at all, only in belated and inadequate briefs filed at the request of the court long subsequent to the argument. It would be fruitless, to enumerate these questions. In reviewing orders of the Board made on petitions to redetermine the assessment of deficiencies we are dealing with intricate and difficult problems in- . herent in the administration of a great department of the government, as well as with the equally intricate provisions of the revenue laws themselves. This case illustrates as well as any the good sense of the rule which confines the courts to a review of the points presented to or ruled on by the administrative tribunal clothed by Congress with full authority to inquire into and determine disputes, both as to the law and as to the facts. Order affirmed. Footnotes [1] The record does not disclose whether in fact the petitioner actually received from the trustee only the amount shown as net income on the fiduciary return. [2] These are: “1. The decision of the Board that the inter vivos trustee was not entitled to deduct the inheritance and estate taxes paid by the said inter vivos trust and deducted in its fiduciary return of income tax for 1930. “2. The decision of the Board that the inter vivos trust estate was not ‘the estate’ within the meaning of section 23 (c) of the Revenue Act of 1928. “3. The Board’s failure to bold that the fiduciary of an inter vivos trust made in contemplation of death was entitled to take the deduction for inheritance and estate taxes paid, as permitted the fiduciaries of other property left by the decedent by virtue of said section 23 (c). “4. The Board’s refusal to hold that there is no deficiency in petitioner’s income tax return for 1930.”