Eisenmenger v. Commissioner of Internal Revenue

• Decision Date: 23 October 1944
• Docket Number: No. 12828.,12828.
• Parties: EISENMENGER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

145 F.2d 103 (1944)

EISENMENGER v. COMMISSIONER OF INTERNAL REVENUE.

No. 12828.

Circuit Court of Appeals, Eighth Circuit.

October 23, 1944.

Pierce Butler, Jr., of St. Paul, Minn. (Jack C. Foote, Edgar G. Vaughan, and Doherty, Rumble, Butler, Sullivan & Mitchell, all of St. Paul, Minn., on the brief), for petitioner.

Robert Koerner, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to the Atty. Gen., and Helen R. Carloss, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before GARDNER, THOMAS, and RIDDICK, Circuit Judges.

GARDNER, Circuit Judge.

This is a petition to review a decision of the Tax Court of the United States determining a deficiency in petitioner's income taxes for the calendar years 1936 and 1937. The facts are not in dispute. The issue is whether dividends received during the tax able years by a trust, in the form of deferred debenture notes, constituting income for the years involved, were distributable by the trust to the petitioner.

On December 31, 1931, Charles W. Eisenmenger, husband of petitioner, created a trust, the corpus of which consisted of 200 shares of the common stock of the Chamar Investment Company. The settlor, the petitioner, and Ottilie Eisenmenger were named as trustees, and petitioner was named a beneficiary in the trust. The trust instrument provided in part as follows: "The trustees shall pay to Marie Anna Eisenmenger, the wife of the grantor, for and during the term of her natural life, annually or as received, the net cash income received by them from the said shares of stock."

On December 28, 1936, a resolution was adopted by the Board of Directors of the Chamar Investment Company, declaring a dividend of $40,000, of which 10 per cent was to be paid in cash and the balance to be paid in 5 per cent subordinated debenture notes, payable on or before December 31, 1946. Pursuant to this resolution the trustees received as dividends on the stock held in trust $1,600 in cash and a 5 per cent subordinated debenture note in the amount of $14,400, dated December 28, 1936, and payable on or before December 31, 1946. The trustees retained the note and deposited the cash received to the account of the trustees, but no distribution of any portion of the cash or notes was made to the beneficiary of the trust in 1936.

On December 29, 1937, the Board of Directors of the Chamar Investment Company adopted a similar resolution declaring a dividend of $35,000, payable to the stockholders of record December 29, 1937, of which 15 per cent was to be paid in cash and the remaining 85 per cent was to be paid in 4 per cent subordinated debenture notes of the company. In due course the trustees received as dividends on the stock held in trust $2,100 in cash and a 4 per cent subordinated debenture note in the amount of $11,900, payable on or before December 31, 1946. The trustees retained the note and deposited the cash so received to the account of the trustees, together with an item of $720, making a total deposit of $2,820. This item of $720 represented interest on the 5 per cent note issued to the trustees as a dividend in 1936. No distribution of any portion of the cash or the note was made to the beneficiary of the trust in 1937.

The trustees filed their fiduciary income tax return for the year 1936 and reported the receipt of the dividends consisting of both the cash and the subordinated debenture note. No credit was taken on the return for distributions to the beneficiary, and the trustees paid an income tax of $1,290 upon the reported basis as the 1936 income tax. They also prepared and filed in due course their fiduciary income tax return for the year 1937, reporting the receipt of dividends in the amount of $14,000 and $720 interest, and they paid an income tax of $1,247.75 on this amount as the 1937 income tax. The fair market value of the debenture notes received as dividends in 1936 and 1937 respectively was the face value of the notes. Petitioner in her individual income tax returns for the years 1936 and 1937, not having received any income from the trust, did not include any such income from the trustees for either of such years.

Respondent, in the deficiency notice dated June 7, 1939, included as additional income to petitioner for the year 1936 the sum of $16,000, and for the year 1937 the sum of $14,675. These amounts included the dividends declared in cash and notes by the Investment Company for the years involved and the interest of $720 received by the trust during 1937, respondent expressing the view that the notes and cash received by the trustees during the years 1936 and 1937 as dividends were income distributable to the beneficiary of the trust. On petition for redetermination of the deficiency, the tax court sustained the contention of the commissioner. On June 2, 1941, the trustees tinder the trust filed in the District Court of Ramsey County, Minnesota, a petition for a confirmation of their appointment as trustees, and on the same date the court entered an order confirming the appointment. They also filed a petition requesting, a construction of the trust instrument an on June 5, 1941, the court entered its order for hearing of the petition and prescribed the notice to be given. Hearing was had pursuant to the order and notice on July 3, 1941, and the court entered its findings of fact and conclusions of law and judgment. The court found, among other things, "That during the years 1936, 1937, 1938, 1939, and 1940, the trustees received as income of the trust, dividends on the shares of stock of Chamar Investment Company constituting the corpus of the trust in the form of cash, dividends on said stock in the form of subordinated debenture notes, and interest on such debenture notes, in the form of cash."

The court concluded as a matter of law that:

"1. The words `net cash income' as used in Section 1 of the Charles W. Eisenmenger Trust No. 1 were intended by the grantor of the trust to, and do, refer solely to income received by the trustees in the form of cash, and Marie Anna Eisenmenger, the beneficiary named in said Section 1, is entitled to receive only such income as may be received by the trustees in the form of cash.

"2. That the interest payments received in cash by the trustees on the subordinated debenture notes received by the trustees as dividends on the shares of stock constituting the original corpus of the trust is cash income subject to distribution to Marie Anna Eisenmenger pursuant to the provisions of Section 1 of said trust.

"3. That the use of the word `net' to modify the term `cash income' as used in Section 1 of said trust was intended by the grantor of the trust to, and does authorize and direct the trustees to retain out of the cash income received by them during any year such amount as the trustees may reasonably estimate to be necessary for the payment of income taxes on the non-distributable items of income not in the form of cash received by them during such year, provided that when such income taxes are actually determined, any excess of the amount theretofore retained by the trustees out of the cash income of the trust for the payment of taxes over the amount actually needed is distributable to Marie Anna Eisenmenger under the terms of Section 1 of said trust. Further, the term `net cash income' was intended to, and does, authorize the trustees to pay the current expenses of the trust out of the cash income received by them, and the amount necessary to pay such expenses is therefore not distributable under Section 1 of said trust to Marie Anna Eisenmenger."

The entry of this judgment being called to the attention of the tax court by motion, a rehearing was granted. On the rehearing the court adhered to its decision as originally entered.

In seeking review of the tax court's decision petitioner contends that (1) the subordinated debenture notes received by the trustees as dividends did not, under the terms of the trust instrument, constitute income distributable to the petitioner within the meaning of Section 162 of the pertinent Act; (2) the tax court erred in failing to follow and give effect to the construction placed upon the trust instrument by the District Court of Minnesota.

Section 162 of the Revenue Act, 26 U.S. C.A.Int.Rev.Code, § 162 so far as here applicable, provides as follows:

"The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that —

* * * * *

"(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries * * *, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *"

Under this section of the Revenue Act of 1936, petitioner was liable for an income tax on all income which she was entitled to receive during the years...