Buckley v. Commissioner of Internal Revenue

• Citation: 66 F.2d 394
• Decision Date: 17 July 1933
• Docket Number: No. 2.,2.
• Parties: BUCKLEY, Chamberlain, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

66 F.2d 394 (1933)

BUCKLEY, Chamberlain, v. COMMISSIONER OF INTERNAL REVENUE.

No. 2.

Circuit Court of Appeals, Second Circuit.

July 17, 1933.

Robert H. Montgomery, of New York City (Thomas G. Haight, of Jersey City, N. J., Roswell Magill and James O. Wynn, both of New York City, and George G. Tennant, Jr., of Jersey City, N. J. of counsel), for petitioner.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Andrew D. Sharpe, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and W. R. Lansford, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before MANTON, SWAN, and CHASE, Circuit Judges.

CHASE, Circuit Judge (after stating the facts as above).

The petitioner claims that what has been called income and taxed is only a restoration of the principal of the award which would have been received by the remainderman had there been no election by the life tenant to take a lump sum in lieu of income. No doubt this is the theory designed to be worked out by the operation of the law under which the payment was made to the life tenant and the remainder invested and held. It was so recognized in respect to this very fund in Matter of Tucker, 187 App. Div. 502, 175 N. Y. S. 769, affirmed 228 N. Y. 505, 126 N. E. 923. But whether the accumulations were income taxable by the federal government after its income tax became effective presents a broader question. This fund, whatever the purpose to be achieved by holding it and adding the accumulations to it, was held in trust by the petitioner during the years in question. He did receive what it earned each year. These receipts fall within the definition of income contained in every applicable Revenue Act. Section 2 (a) of the Revenue Act of 1916 (39 Stat. 757); section 1200 of the Revenue Act of 1917 (40 Stat. 329); section 213 (a) of the Revenue Acts of 1918 and 1921 (40 Stat. 1065; 42 Stat. 237); Revenue Acts 1924 and 1926, § 213 (a), 26 USCA § 954. So, too, are they covered by the general and accepted definition of income for taxation purposes which the Supreme Court has held to be "the gain derived from capital, from labor, or from both combined." Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 193, 64 L. Ed. 521, 9 A. L. R. 1570; Merchants' Loan & Trust Co., Tr., v. Smietanka, 225 U. S. 509, 517, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305. Do they then have a different character because of the theory that they were received to rebuild a capital fund depleted in 1877? Such a contention, first, presupposes that the remainderman had an absolute right after the action of the New York court when it divided the award to receive the same amount in money which would have been held for him had the New York law permitted no such division; and, second, that Congress has seen fit to make a distinction between such a trust fund as this and trust funds whose income generally is taxable. Section 2 (b) of the Revenue Act of 1916 (39 Stat. 757); section 219 (a) of the Revenue Acts of 1918 and 1921 (40 Stat. 1071; 42 Stat. 246); Revenue Acts 1924 and 1926, § 219 (a), 26 USCA § 960 note.

After the court order of 1877, the ultimate taker, who will for convenience be referred to as though he were one person at all times known, although he was then neither ascertained nor ascertainable, was clearly entitled only to the part set aside for him as the then present worth of his interest in the award. That and not the original award became the principal sum of the trust created for his benefit. Instead of having a principal sum held in trust without accumulations, he was given its then computed equivalent, viz. a principal sum plus accumulations. Instead of being entitled to a sum certain at the death of the life tenant, the remainderman became entitled to his then present interest in the award plus whatever this interest would earn during the duration of the trust. As the trust was to terminate at the death of the life tenant, if the present worth in 1877 of the remainderman's interest happened to be computed in exact accordance with every contingency which arose, he would receive the amount of the original award. But obviously no one did or could know in 1877 how long the life tenant would live; nor how much the fund would earn; nor what the expenses of its administration would be; nor what losses might be sustained; nor what taxes might be imposed either upon it, or upon the income derived from it. The remainderman was not entitled, perforce, to more than his interest as the beneficiary of the trust actually created. As the uncertainties inherent in computing the principal of this fund were made certain by subsequent events he might gain or lose. So far as we are informed, the principal of that trust has never been depleted. Indeed, it has been increased by the accumulations, and all the time the trust was in existence the remainderman was entitled to receive upon its termination, not the amount of the original award for the land, but the amount of the trust, whether it were more or less than the original award. Matter of Tucker, supra, and Livingston v. Tucker, 107 N. Y. 549, 14 N. E. 443, bear no further on the present issue than that. The value in terms of the original award which the trust fund set up in 1877 was thought to represent is now immaterial. Of course, it is true that, had there been no division of the award and that sum been made the principal, the remainderman would have received it free of income tax, but that is only indicating what might have been and losing sight...