Comer v. Davis

HOLMES, Circuit Judge. This appeal is from an order sustaining appellee’s motion to dismiss appellant’s amended complaint filed under the Tucker Act, 28 U.S.C.A. § 41 (20), for the recovery of an alleged overpayment of taxes for the year 1930. The statute involved is Section 22 of the Revenue Act of 1928, 45 Stat. 791, 797, set out in the margin.1 — 356 — The case is that appellant, together with eight brothers and sisters, executed an agreement on May 16, 1927, conveying to himself and four brothers and sisters, as trustees, 3926-26/49 shares of stock of the Jefferson Building and Realty Company, together with other property all yielding substantial income. The trustees were directed to collect all income and indebtedness accruing to the estate and to pay over the net income share and share alike, to the beneficiaries. The agreement contained a further provision that “all salary received by either one of the trustees under this trust for services as an officer of the Jefferson Building and Realty Company shall be paid over to the trustees under this trust and the same shall be held as a part of the income of the trust estate under this trust.” Having been elected president of the Jefferson Building and Realty Company, on the vote of the trust shares, which were more than ninety-eight per cent of the outstanding stock, appellant was paid a salary of $5,000 for the year 1930. This sum was duly paid to the trust, the total income of which was distributed between the nine beneficiaries, appellent’s share being $14,337.88, of which $555.55 represented one-ninth of the salary. Appellant filed his return for 1930 disclosing a tax liability of $1,426.26, and paid this amount. Thereafter, the commissioner levied a deficiency assessment for %97>6.27 and interest thereon, being the tax on the unreported salary balance, which represented the amount claimed by the commissioner as appellant’s liability for the salary mentioned above. The deficiency assessment having been satisfied, appellant filed a claim for refund, alleging overpayment and contending that the salary was not income as to him; that he was not taxable thereon except as a beneficiary of the trust, and, as such beneficiary, only as to one-ninth, or his distributive share. He also contended that, in the event he should be held liable for the tax on the salary, his gross income, including the salary, should be adjusted to equal his distributive share of the disbursements from the trust, plus other income. The claim for refund was denied, except for $63.02, which represented the tax on one-ninth of the salary, admittedly paid by appellant on his original return, and this action was begun for the recovery of the balance. The original complaint contained allegations that appellant rendered no service to the Jefferson Building and Realty Company differing from that rendered by other trustees, who were directors of the corporation, but that the management and control of the property of the corporation was performed by a salaried employee. However, this allegation was omitted from the amended complaint, so that the case now presented turns on the question of whether or not the trust agreement converted the salary of the president of the corporation from compensation to appellant to income from the trust property, taxable only under Section 162 of the act of 1928, 45 Stat. 791, 838.2 Appellant contends that the trust agreement was an extension of the principle of the law of trusts, that a trustee may make no profit out of the estate, because of the fiduciary relationship existing between him and the beneficiaries of the trust. If this principle be given its greatest weight, it does not follow that the salary here involved was profit from the trust or income from the trust property. It ignores the fiction of a corporate entity intervening in ownership of the corporate property, and assumes that the property and not the stock was owned and managed by the trustees. Whether or not such an assumption might be indulged if the trust had owned all of the stock need not be considered here, since there was other stock outstanding, and the corporation was a real — 357 — entity, owning and managing property and receiving and disbursing funds for its own account and profit. Thus, on the pleadings before us, it must be assumed that the salary paid to appellant was for service or services which he had undertaken to perform for the corporation and not for the trust. Any other assumption would convict appellant or the trustees of bad faith as to the minority stockholders, or of an attempt to withdraw a part of the corporate earnings under the guise of expense of operation. Conceding that the salary was compensation for services rendered or agreed to be rendered by appellant, the problem is simply one of the application of Section 22 of the act of 1928. The act defines gross income as including salaries, wages, or compensation for personal services, of whatever kind and in whatever manner paid. It is obvious that, unless the trust agreement had the effect of converting the payment of salary to appellant to a payment to the trust estate, the entire salary, and not merely, his distributive share, was taxable against him under the express provisions of the act. In Van Meter v. Commissioner, 8 Cir., 61 F.2d 817, it was said that the earner of income was the one whose personal efforts had produced it. In Lucas v. Earl, 281 U. S. 111, 50 S.Ct. 241, 74 L.Ed. 731, a similar provision of an earlier tax law was applied to a case in which the taxpayer had executed an agreement vesting one-half of his earnings in his wife. Upon the claim that the intention was to tax only the income beneficially received, it was pointed out that, however the matter might stand as between husband and wife, he was the only party to thé contracts by which the salaries were received, and the only one by whom the last step in the completion of the execution of the contracts could be taken. That is, under the present case, payment by the Jefferson Building and Realty Company to the trust, without additional facts, would not be a discharge of the obligation of the corporation to pay salary to appellant. But the court went further and said: “There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to protect the salary when paid from vesting even for a second in the man who earned it.” The principle announced is not in conflict with that announced in Poe Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239, since, in the latter case, the interest of the wife was held to vest as soon as earned by the husband, not because it first vested in the husband and then passed to the wife, but because under the community property law the interest of the wife was coextensive and coexistent with that of the husband. No assignment was relied upon to create or vest her • interest. While her interest may have been derivative, no act of his to transfer and no acceptance by her were necessary to vest it. In the instant case, the assignment itself provides that “all salary received * * * shall be paid over to the trustees. * * * ” It recognizes the exclusive right of the earner to receive the salary, and seeks only to bind him to pay it over to the trust. It is well established that earned income is taxable to those who earn it, notwithstanding a contractual disposition after it is received. The statute here involved so levies the tax, and to question appellant’s liability therefor is not so much a matter of statutory construction as a challenge to the power of Congress to levy the tax against the person who earns the income. Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665; Mitchel v. Bowers, 2 Cir., 15 F.2d 287, certiorari denied 273 U.S. 759, 47 S.Ct. 473, 71 L.Ed. 877; Van Meter v. Commissioner, supra. Appellant’s second contention is without merit for the same reasons set out above. The salary was income when appellant received it. The Revenue Act of 1928 so provides. It was not income to the trust. The beneficiaries were taxable on their distributive shares of the moneys disbursed. In addition to the salary, appellant was taxable on his other income, including that received from the trust. A refund having been allowed for his distributive share of the $5,000 returned to him by the trust, he is not being subjected to double taxation on the same income. The case of Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465, relied upon by the appellant, is not in point. In that case, the assignment was of an interest in a trust. The income sought to be taxed against the assignor was from the interest in the trust which had been assigned. Unlike appellant in the present case, the assignor neither earned, received, nor was entitled to receive it. It was not “gains, profits, and — 358 — income” within the meaning of Section 22 of the Act of 1928. The judgment of the district court is affirmed. Footnotes [1] “Sec. 22. Gross income “(a) General definition. ‘Gross income’ includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.” 26 U.S.C.A. § 22(a). [2] “The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that— * * # # * “(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.” 26 U.S.C.A. § 162(b).