Fidelity & Columbia Trust Co. v. Lucas

• Decision Date: 31 July 1935
• Docket Number: No. 1072.,1072.
• Citation: 11 F. Supp. 537
• Parties: FIDELITY & COLUMBIA TRUST CO. v. LUCAS, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Kentucky

11 F. Supp. 537

FIDELITY & COLUMBIA TRUST CO. v. LUCAS, Collector of Internal Revenue.

No. 1072.

District Court, W. D. Kentucky, at Louisville.

July 31, 1935.

Crawford, Middleton, Milner & Seelbach, of Louisville, Ky., for plaintiff.

Bunk Gardner, Dist. Atty., G. Oldham Clarke, Asst. Dist. Atty., both of Louisville, Ky., and Robert H. Jackson, Asst. Gen. Counsel, Bureau of Internal Revenue, and Franklin F. Korell, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for defendant.

HAMILTON, District Judge.

The plaintiff in this case is seeking to recover alleged overpayment of income taxes for the calendar years 1917 to and including 1926. One of the questions involved is the proper construction of the will of L. P. Ewald. This case was before this court on demurrer to the answer of the defendant, which was overruled and a written opinion delivered and reported in 52 F.(2d) 298. On appeal to the Circuit Court of Appeals, Sixth Circuit, the judgment of this court was reversed, 66 F.(2d) 116, 120. The case is now finally submitted on the pleadings, evidence, and exhibits, and pursuant to the requests of both parties, the court has separately stated the facts and its conclusions of law.

The two former opinions in the case are referred to for a statement of facts. The principal controversy between the parties now is the correct interpretation of the opinion of the Court of Appeals for the Sixth Circuit.

The evidence in the case and supporting exhibits have added nothing that was not involved in construing the will as set up in the pleadings and the parties do not so contend. There is a difference of opinion between them as to what is the proper application of the decision of the Circuit Court of Appeals to the evidence.

The defendant contends that the appellate court decided there was one trust res and that the current income, excluding capital gain, arising from the trust estate was constructively distributed in three parts to the three Ewald children, and that it follows from this that the tax liability should be determined by allowing the plaintiff to deduct in its return as trustee the full amount of current income, excluding gain from the sale of capital assets, as income, distributed to the beneficiaries, and assessing each beneficiary on the portion of the income constructively credited to his or her separate income account. Capital gains would be taxed to the trustee.

The plaintiff contends that the opinion of the court should be construed as deciding that the plaintiff would make three returns as trustee or guardian, one for each of the children, including therein all income arising from ordinary sources and capital gain, and would deduct the amount of income paid to or for each of the children, the child reporting the income paid or used for it and paying the taxes thereon.

Under the defendant's method of determining the tax, the total overpayment in income taxes for the years involved would be $23,324.39. Under the plaintiff's method of determining the tax, the total overpayment would be $62,700.73.

The Circuit Court of Appeals 66 F.(2d) 116, 117 in its opinion said:

"Both parties to the present appeal agree that the question presented to this court is one of construction of the provisions of the will which are above recited. By codicil, the Columbia Trust Company was substituted as executor and trustee, and, later, the Fidelity Trust Company and the Columbia Trust Company combined, forming the Fidelity & Columbia Trust Company, the present appellant, but these matters are of no moment. If, under proper construction of the will, it was intended that the amounts expended for the `liberal maintenance and education' of each of the three children, until each in turn reached the age of twenty-one years, were to be aggregated and charged in bulk against the income of the residuary estate, without regard to which child or children were benefited thereby, and that any surplus income, over that expended for or paid to the several children, was not to be apportioned or held for the individual accounts of such children, but would become part of the principal of the original trust estate, then as to such surplus income the trustee must make an income tax return as the taxpayer, and the government (in the person of the collector) must here prevail.

"If, on the other hand, the true intent was that each child should share equally in the income from the beginning, unrestricted possession and enjoyment of a part of it being merely postponed or deferred until such child reached the age of thirty years; that is, if it was the duty of the trustee to credit each child's account with one-third of the net income, and charge it with one-third of the general expenses in which such child shared, and, in addition, with whatever sums the trustee had expended for that child's sole use, or had paid to him or to her, then it is conceded that the returns were properly made in the names of, and on behalf of, the several beneficiaries."

After this statement and citing and discussing cases laying down the principles for the construction of wills, the court said: "Applying these tenets of construction, we are of the opinion that the language used by the testator clearly manifests the intent that each of his children should share equally in his estate."

The court, in its opinion, refers time and again to the expression in the will, referring to the three children, "share and share alike." It is clear that the court held in its opinion that Ewald had by his will set up one trust res, but the income arising therefrom was to be kept entirely separate as to each of his three children and immediately become the property of the child upon its being earned, but to continue in trust for the child's future benefit.

The opinion of the Circuit Court of Appeals is the law of this case. It is a finality and the conclusion is inescapable that for income tax purposes three trust estates were established by the will and it was the duty of the trustee or guardian to file three separate returns and include in each all income, both ordinary and capital gain, and deduct therefrom whatever sums were made available to or paid out for each respective child. The general expenses of the estate were to be allocated one-third to each child, and if deductible as an expense under the Revenue Statutes, were to be deducted by the trustee from the taxable income of that child.

The defendant strenuously contends the above interpretation requires the court to decide that the will created "three subsidiary beneficiary trusts." Neither the will nor the opinion is susceptible to this construction. The will is much more simple than that. No strained construction is required to reach the conclusion that the testator intended that each of his three children was to be treated exactly alike. Each of them was to enjoy the income arising from the estate on equal footing. The expenses incurred for all were to be divided proportionately to each of them and the expenses incurred for...