Bell's Estate v. Commissioner of Internal Revenue, 12484

• Decision Date: 04 August 1943
• Docket Number: No. 12484,12485.,12484
• Citation: 137 F.2d 454
• Parties: BELL'S ESTATE v. COMMISSIONER OF INTERNAL REVENUE. BELL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

137 F.2d 454 (1943)

BELL'S ESTATE v. COMMISSIONER OF INTERNAL REVENUE.

BELL v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 12484, 12485.

Circuit Court of Appeals, Eighth Circuit.

August 4, 1943.

Albert L. Hopkins, of Chicago, Ill. (Anderson A. Owen, Harry D. Orr, Jr., and Samuel H. Horne, all of Chicago, Ill., on the brief), for petitioners.

L. W. Post, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before SANBORN, WOODROUGH, and RIDDICK, Circuit Judges.

SANBORN, Circuit Judge.

The question for decision is whether, under the Revenue Act of 1936, the consideration received by the life beneficiary of a trust for the transfer of the life interest to the remainderman was ordinary income or was capital.

The facts are agreed to and are as stated in the opinion of the Board of Tax Appeals (now the Tax Court of the United States), 46 B.T.A. 484. It is unnecessary to restate them in detail.

Frederic Somers Bell (now deceased) and Frances Laird Bell, husband and wife, of Winona, Minnesota, on April 28, 1932, each created a trust. The corpus of each trust consisted of 550 shares of the common stock of the Thorncroft Company. The trustees of the Frederic S. Bell trust were Laird Bell, George R. Little, and Willard L. Hillyer. The trustees of the Frances L. Bell trust were Laird Bell, George R. Little, and Frederic S. Bell. Laird Bell is the son of the grantors of the trusts. The trust agreement executed by Frederic S. Bell provided: "The Trustees shall pay to Frances Laird Bell, wife of the Grantor, during her lifetime, the entire net income of the Trust Estate. Upon her death, the Trustees shall pay, deliver, and convey the Trust Estate to Laird Bell, son of the Grantor."

The trust agreement executed by Frances L. Bell provided: "The Trustees shall pay to Frederic Somers Bell, husband of the Grantor, during his lifetime, the entire net income of the Trust Estate. Upon his death, the Trustees shall pay, deliver, and convey the Trust Estate to Laird Bell, son of the Grantor." The shares of stock constituting the corpus of each trust were transferred to the trustees. On February 1, 1936, Frederic S. Bell assigned to Laird Bell "all his Frederic S. Bell's right, title and interest in, to and under the trust property held by George R. Little, Frederic Somers Bell and Laird Bell, as Trustees under trust agreement between Frances L. Bell and said Trustees, dated April 28, 1932, in consideration of the receipt of $104,349.26 cash and securities, paid as hereinafter stated, the receipt whereof is hereby acknowledged." On the same day, Frances L. Bell assigned to Laird Bell "all her right, title and interest, in, to and under the trust property held by Laird Bell, George R. Little and Willard L. Hillyer, as Trustees under trust agreement between Frederic S. Bell and said Trustees, dated April 28, 1932, in consideration of the receipt of $93,060.87 cash and securities (being 16.57144% of the agreed value of the trust property), paid as hereinafter stated, the receipt whereof is hereby acknowledged." The consideration delivered by Laird Bell to each of the life beneficiaries represented the value, at the time of the assignments, of their respective life interests, apparently computed upon the basis of a 4% yield on the agreed value of the trust corpus for the life expectancy of each of the life beneficiaries. Laird Bell, having then acquired absolute title to the corpus of each of the trusts, received the trust assets, and the trusts were terminated. In his income tax return for each subsequent year, Laird Bell included the income from the former trust assets.

Frederic S. Bell and Frances L. Bell, in the belief that the consideration which they had received from Laird Bell for the life interests conveyed to him represented the proceeds of a sale of capital assets,¹ made their respective income tax returns for the year 1936 upon that basis, the return of each of them showing a small capital gain resulting from the sale. The Commissioner of Internal Revenue ruled that the entire consideration received by the life beneficiaries was income under § 22(a) of the Revenue Act of 1936, 49 Stat. 1648². The Board of Tax Appeals affirmed the Commissioner, and the decision of the Board is now before this Court for review.

The Commissioner contends that the consideration received by the life beneficiaries for their respective life interests was in reality an advance payment of future income of the trusts during their life expectancies, and was taxable as ordinary income, even if the son, who acquired the interests, is required to include in his returns all income received by him from the former trust assets. This contention is based mainly upon the opinion of the Supreme Court in Hort v. Commissioner, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168, in which it was held that the amount received by a lessor from a lessee as consideration for the cancellation of a lease was, in effect, a substitute for the future rents reserved in the lease, and was therefore income and not a return of capital. However, there was no transfer of any interest in the lease or of any property involved in that case. The court said (page 32 of 313 U.S., page 759 of 61 S.Ct., 85 L.Ed. 1168): "* * * The cancellation of the lease involved nothing more than relinquishment of the right to future rental payments in return for a present substitute payment and possession of the leased premises."

If the parents of Laird Bell, instead of creating these trusts in 1932, had transferred the stock in the Thorncroft Company to him in consideration of his agreement to pay to each of them annually a certain sum for life, and if, in 1936, he had purchased from them releases of his obligations to make further annual payments, the consideration received by them in 1936 would unquestionably have been income, under the ruling in the Hort case. But that is not the situation here.

If the case of Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465, is still the law, the decision of the Board will, in our opinion, have to be reversed. Blair was the life beneficiary of a testamentary trust. He assigned to his children portions of the net trust income which he was entitled to receive. The Commissioner ruled that, notwithstanding the assignments, the entire income of the trust continued to be taxable to Blair. The question presented to the Board of Tax Appeals, on petition to review, was "whether the petitioner, by the assignments in question, assigned future income or a present interest in property." Blair v. Commissioner, 31 B.T.A. 1192, 1204. The Board ruled that he had assigned a present interest in property, and was not liable for taxes on income accruing to the assignees under the assignments. The Board said (at page 1205 of 31 B.T. A.): "* * * The instant proceedings, in so far as this phase of our question is concerned, are quite similar to Marshall Field v. Commissioner, supra 15 B.T.A. 718, followed by the Board in Edward T. Blair v. Commissioner, supra, 18 B.T.A. 69, and affirmed by the United States Circuit Court of Appeals for the Second Circuit in Commissioner v. Field, supra, 42 F.2d 820. The following cases, involving circumstances more or less similar, also sustain our conclusion herein in this respect. Eugene Siegel, Executor v. Commissioner, 20 B.T.A. 563; petition to review dismissed by the United States Circuit Court of Appeals for the Sixth Circuit on October 6, 1931; Copland v. Commissioner, 7 Cir., 41 F.2d 501; Rosenwald v. Commissioner, 7 Cir., 33 F.2d 423; certiorari denied, 280 U.S. 599, 50 S.Ct. 69, 74 L.Ed. 644; Shellabarger v. Commissioner, 7 Cir., 38 F.2d 566; Nelson v. Ferguson, 3 Cir., 56 F.2d 121; certiorari denied, 286 U.S. 565, 52 S.Ct. 646, 76 L. Ed. 1297; and Hall v. Burnet, 60 App.D. C. 332, 54 F.2d 443, 83 A.L.R. 86; certiorari denied, 285 U.S. 552, 52 S.Ct. 408, 76 L.Ed. 942."

The Circuit Court of Appeals for the Seventh Circuit, upon review, reversed the Board's decision. Commissioner v. Blair, 83 F.2d 655. That court, after an analysis of the relevant authorities, stated its conclusion as follows (at page 662 of 83 F.2d):

"The question is not one of the validity of the assignments but for the purpose of determining income tax liability it is one involving the date when the income became transferable. This question turns upon whether the assignor had such an interest in the corpus of the trust as to permit of its transfer or whether the assignor's interest was separate from the property and limited to the income which accrued from year to year.

"The latter seems to be the situation. The testator made an income provision for his son. It was in the trustees' hands beyond the reach of the son's creditors. The son could not create obligations enforceable against it. Upon the son's death the said income ceased. It passed to either his children or to the heirs of the testator or in part to the widow of the son, depending upon survivorship, etc. The income passed to them not by act of the son, but by the testamentary trust provision of the testator. The son's interest was therefore not in any way attached to the corpus of the estate that produced the income. The income was not even subject to his disposition until he received it. The attempted assignment to his children was in legal effect merely a direction to the trustees to pay to his children, out of the income due to him, various specified amounts each year. It does not militate against the conclusion that the income was his, and was due to him. While he could authorize the trustees to deliver to another what was due to him, it was not deliverable until it was his to dispose of."

The Supreme Court, on certiorari, in a unanimous opinion (Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465), reversed the decision of the Circuit Court of Appeals, and affirmed that of the Board. The...