Bence v. United States

• Decision Date: 05 April 1937
• Docket Number: No. 42911.,42911.
• Parties: BENCE v. UNITED STATES.
• Court: U.S. Claims Court

18 F. Supp. 848

BENCE v. UNITED STATES.

No. 42911.

Court of Claims.

April 5, 1937.

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Newell W. Ellison, of Washington, D. C. (Wm. Merrick Parker and Covington, Burling, Rublee, Acheson & Shorb, all of Washington, D. C., on the brief), for plaintiff.

Elizabeth B. Davis, of Washington, D. C., and Robert H. Jackson, Asst. Atty. Gen., for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.

LITTLETON, Judge.

The question presented in this case is whether the amounts received by plaintiff during the taxable years 1927 to 1930, inclusive, as the sole beneficiary of a distributable trust created by the will of her husband, Percy Russell Grace, were taxable to her as income from sources within the United States in accordance with sections 213 (c) and 217 of the Revenue Act of 1926, 44 Stat. 26, 30.

The amounts received by plaintiff upon which she was held taxable consisted of dividends of a domestic corporation received by her during the taxable years from the trustee of a distributable testamentary trust created by her former husband.

Plaintiff contends that under the applicable revenue acts she is subject to income tax only on income from sources within the United States; that the amounts received by her were income from a foreign testamentary trust and not income to her from sources within the United States; that the trust was a separate entity; and that the revenue acts do not provide that income received by a nonresident alien from a foreign testamentary trust shall be treated as income from sources within the United States, nor is any such provision made in any rules or regulations prescribed by the Commissioner of Internal Revenue. Stated another way, plaintiff contends that what she received was trust income rather than dividends, and that, since the stock of the domestic corporation upon which such dividends were paid was held by the trustee and the dividends upon such stock were paid to the trustee, such dividends, if taxable at all, were taxable only to the trust and that the character of such dividends as being income from sources within the United States ceased upon their receipt by the trust.

The power of Congress to tax the income in question is conceded, but it is contended that Congress did not intend to tax it in circumstances here present and that the language of the pertinent sections of the revenue acts does not reach it. We are of opinion that the income in question was taxable to plaintiff as dividends from a domestic corporation and that the Commissioner correctly denied her claims for refund on this ground. It is generally true that a trustee is not the agent of a beneficiary and that the receipt by a trustee does not amount to a receipt by the beneficiary, but this rule is subject to important exceptions, particularly with respect to federal taxation. The argument that a trustee is not an agent for a beneficiary and that the language of the revenue acts does not, in the circumstances, reach this income fails to take proper account of the structure and the underlying purpose of the revenue acts providing for the taxation of the income of the trust and also of the fact that a beneficiary of a distributable trust has an equitable, if not a legal, interest in the trust property. See Edward T. Blair v. Commissioner of Internal Revenue, 299 U.S. ___, 57 S.Ct. 330, 81 L.Ed. ___, decided February 1, 1937. The purpose to exact a tax upon all incomes of nonresident aliens from sources within the United States is clear. And it was the obvious purpose of Congress to impose such tax upon the person required by the statute to report such income and pay the tax thereon. The revenue acts provide that a trust shall pay the tax upon income which is not distributable, or distributed, to the beneficiary and that the trustee shall make a return and pay the taxes. In the case of receipt by a trust of nondistributable income from sources within the United States, the identity of such income as being from such source ceases upon its being returned and taxed to the trustee and it is not subsequently taxable to the beneficiary if and when it is distributed. In the case of a distributable trust, the statutes provide that the trustee shall deduct amounts taxable to the beneficiary and that the beneficiary shall report and pay the tax on the amounts distributed or distributable. Thus the intent to tax the entire income of the trust, either to the trustee or to the beneficiary, is clear. A distributable trust is treated by the statute as a mere conduit through which the income passes to the beneficiary who is made taxable thereon and, in instances of the character with which we are here concerned, the amounts received by the beneficiary retain their identity...