Bank of New York v. Helvering, 21.

• Decision Date: 04 January 1943
• Docket Number: No. 21.,21.
• Parties: BANK OF NEW YORK et al. v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

132 F.2d 773 (1943)

BANK OF NEW YORK et al. v. HELVERING, Com'r of Internal Revenue.

No. 21.

Circuit Court of Appeals, Second Circuit.

January 4, 1943.

William Mason Smith, of New York City (Lewis A. Spence, of New York City, of counsel), for petitioners.

Earl C. Crouter, Sp. Asst. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and A. F. Prescott, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

The executors of Demarest appeal from an order of the Tax Court, assessing a deficiency against them upon their testator's income tax for a part of the year 1937: i.e., for the period between January 1 and July 11, the day on which the testator died. At the time of his death Demarest had qualified and he and one, Hotaling, were acting as executors of Jennie E. Read, who had died in New York on February 22, 1936, and upon whose will letters testamentary were issued to them on April 6, 1936. For the purposes of this case the important words of the will were as follows: "I direct that each of them so specifically named above by me as executors and trustees shall receive, and I give to each of them in lieu of statutory commissions for his services five percent (5%) of the principal of my estate and five percent (5%) each year upon the income." If either or both should die before her, or should "fail to qualify, or resign or be removed or die before completing either as executors or trustees the administration of my Will and trusts thereunder," the testatrix appointed a bank as substitute, and directed that it should receive only statutory commissions. At the time of the execution of the will — June 4, 1934 — Demarest was over 70 years old, Hotaling was 77. While Demarest lived he received as executor and trustee within the period mentioned, over $81,000, and after his death his executors collected $8,000 more, making nearly $90,000 in all: five percent of the estate. His executors included in his gross income for 1937 two-fifths of this sum, two percent being the statutory commission allowed by the New York statute; they regarded the remaining three percent as a legacy and as not taxable for that reason. The Commissioner assessed a deficiency upon this three percent on the theory that the whole five percent was "compensation for personal service" under § 22(a) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 825; and the Tax Court affirmed his ruling.

In United States v. Merriam, 263 U.S. 179, 44 S.Ct. 69, 68 L.Ed. 240, 29 A.L.R. 1547, a wealthy testator bequeathed to six persons by the eleventh article of his will, legacies: two of $500,000, one of $250,000, two of $200,000; and by the sixteenth article he appointed the legatees his executors and trustees, and concluded as follows: "The bequests herein made to my said executors are in lieu of all compensation or commissions to which they would otherwise be entitled as executors or trustees." Both the district court — 275 F. 109, 110 — and the Supreme Court (though not this court — 282 F. 851) assumed that, although the executors were obliged in good faith to qualify in order to become entitled to the legacies, they needed to do no more. In the district court I had thought that the legacies were within the statutory phrase, "compensation for personal service," because the testator had bequeathed them to some extent — "in part, anyway" — as compensation for services which he expected the executors to render; but the Supreme Court held that the test was, not whether the testator gave the legacies for services, but whether the legatees had to perform the services in order to earn the bequests. This result apparently did not depend upon the...