First Nat. Bank of Birmingham v. United States

• Decision Date: 22 August 1935
• Docket Number: No. 4466-B.,4466-B.
• Citation: First Nat. Bank of Birmingham v. United States, 12 F.Supp. 301 (N.D. Ala. 1935)
• Parties: FIRST NAT. BANK OF BIRMINGHAM et al. v. UNITED STATES.
• Court: U.S. District Court — Northern District of Alabama

12 F. Supp. 301

FIRST NAT. BANK OF BIRMINGHAM et al. v.UNITED STATES.

No. 4466-B.

District Court, N. D. Alabama, S. D.

August 22, 1935.

Bradley, Baldwin, All & White, of Birmingham, Ala., for plaintiffs.

Frank J. Wideman, Asst. Atty. Gen., Andrew D. Sharpe and Thomas G. Carney, Sp. Assts. to the Atty. Gen., and Jim C. Smith, U. S. Atty., and William R. Bradford, Asst. U. S. Atty., both of Birmingham, Ala., for the United States.

GRUBB, District Judge.

This is an action to recover the sum of $3,044.27, representing taxes alleged to have been overpaid on the income for the year 1930 of the trust created under the will of J. C. Patterson, deceased resident of Birmingham, Ala.The case was tried before the court, sitting without a jury, and the facts, for the most part stipulated, may be summarized as follows: Under the will of J. C. Patterson, deceased, the plaintiffs, the First National Bank of Birmingham and decedent's widow, Christina Patterson, were named trustees to hold his residuary estate and to pay the income therefrom to the widow, Christina Patterson, during her life.The pertinent provision of the will is, in part, as follows: "(b)The Trustees shall hold said trust estate in trust for the use and benefit of my wife, Christina Patterson, for and during her lifetime and shall pay over to her in such installments as may be found most satisfactory to her, the entire net income from said trust estate.If at any time in the opinion of said Trustees the net income from said trust estate shall not be sufficient for the proper support and comfort of my said wife, the Trustees shall pay over to my said wife such additional sum or sums out of the principal of said trust estate as to them may seem necessary or desirable for such purposes."

The widow elected to take under the will in lieu of her dower and/or statutory rights.The plaintiff bank, with the knowledge, consent, and approval of the individual plaintiff, was the active trustee, keeping the records of the trust, preparing and filing the income tax returns filed and the claim for refund on the rejection of which this suit is brought.

The plaintiff bank, on March 14, 1931, filed an individual income tax return on Treasury Department Form 1040, disclosing a net income to the trust of $40,164.58 and a tax due and payable thereon in the amount of $3,044.27, which was thereafter paid.The sum of $40,010.83 had been distributed or was distributable by the plaintiffs to the widow out of the net income of the trust for the calendar year 1930.Neither the plaintiff bank nor the individual plaintiff filed a fiduciary return of the income of the trust for the year 1930.The widow, on March 6, 1931, filed her individual income tax return for the calendar year 1930 disclosing a taxable net income of $32,442.93 on which she paid a tax of $1,945.62.However, none of the income received by her from the trust was included in her return.

In the stipulation of facts it is shown that the tax in the amount of $3,044.27, paid by the plaintiffs, was charged to the principal of the trust as and when paid, but that thereafter the principal was reimbursed out of income otherwise distributable to the widow in the year 1932.This accounting practice had been followed in the years preceding the year 1930.It is also stipulated as a fact, subject however to plaintiffs' objections to its relevancy, that, had the widow included in her return, as income subject to tax, the income which was distributed or distributable to her during the year 1930, she would have paid additional tax in excess of the amount of tax paid by the plaintiffs which they now seek to recover.The assessment and collection of any additional tax from the widow for the calendar year 1930 was barred two years after her return was filed.Section 275, Revenue Act of 1928,c. 852,45 Stat. 791, 856(26 USCA § 275 and note).

The plaintiff bank, as active trustee, on March 11, 1933, filed a claim for refund of the tax of $3,044.27, paid on the net income of the trust, on the ground that it had failed to take as a deduction from the net income of the trust the amount of income distributed or distributable to the widow during the year 1930.The plaintiffs claim the right to the deduction under section 162 (b) of the Revenue Act of 1928(26 USCA § 162 (b) and note), the material part of which is as follows: "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 distributable 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."

The defendant practically concedes that the plaintiffs were entitled to take as a deduction from the net income of the trust the amount of income distributed or distributable to the widow during the year 1930.Helvering v. Butterworth, 290 U. S. 365, 54 S. Ct. 221, 222, 78 L. Ed. 365.Defendant, however, interposed the defense that, since the Butterworth Case, supra, is equally authoritative on the responsibility of the widow to pay a tax on the income, which she has not done, and as the defendant is precluded by the applicable statute of limitations from proceeding against her, plaintiffs in equity and good conscience are not entitled to recover, because they are merely nominal parties suing for the benefit of the widow, the real party in interest, to whom any recovery by them must necessarily inure.

Defendant also urges that the doctrine of estoppel be invoked against plaintiffs on the grounds that they elected to decline to take this deduction; that the return filed by the plaintiff bank did not disclose to the Commissioner of Internal Revenue that any amounts had been distributed or were distributable to the widow which might have been deducted by them, or that the tax paid by them was in excess of that properly due and owing; and since the commissioner relied upon the payment by the plaintiffs as in full satisfaction of any tax due and payable on the income of the trust, plaintiffs are now barred from changing their position to the damage of the defendant, since it cannot now assess the tax where, strictly speaking, it belongs, i. e., on the widow.Defendant further urges as a fact in support of its plea of estoppel that the widow, the real party in interest in this proceeding, has benefited by the method in which the income of the trust has been taxed.

This court does not agree that plaintiffs are estopped from now claiming this deduction to which the trust was evidently entitled.Defendant does not establish any facts on which it may base estoppel of any kind against plaintiffs.

With reference to the equitable defense interposed by defendant, plaintiffs urge that the same is not available to the defendant for the reason that it is an attempt to set off or recoup out of a claim due one taxpayer a debt owed defendant by another taxpayer.Plaintiffs advance the further argument that, a claim, on which an affirmative action by defendant was barred by the statute of limitations at the time the plaintiffs' action accrued, may not be availed of as a defense in the nature of an equitable set-off or recoupment in the main action.The recent case of Ernest M. Bull, Sole Surviving Executor & Trustee of the Estate of Archibald H. Bull, deceased, v. United States, 295 U. S. 247, 55 S. Ct. 695, 79 L. Ed. 1421, decided by the Supreme Court of the United States, April 29, 1935, seems definitely to overcome the last-mentioned argument of the plaintiffs.In that casethe Supreme Court, speaking of recoupment, says that such a defense is never barred by the statute of limitations so long as the main action itself is timely.The case of Conner v. Smith, 88 Ala. 300, 7 So. 150, was cited by the Supreme Court in support of its decision.The Alabama case says (88 Ala. 300, page 311, 7 So. 150, 153): "So long as the contract, upon a breach of which the claim is predicated, subsists, and may be enforced, the claim itself may be pleaded in reduction, at least, of the demand on the contract; and this, notwithstanding the matter of recoupment, independently considered, may be barred, not only when it is pleaded, but also when the right of action, against which it is asserted, accrued.Wood, Lim.pp. 602, 603, § 282."The statute of limitations, therefore, being no bar to the assertion of the equitable defense interposed by defendant, this court will concern itself with deciding whether or not the facts establish it as an effective defense.The solution should be found when a realistic view of the situation is taken."Taxes are very real things and statutes imposing them are estimated by practical results."Nichols v. Coolidge, 274 U. S. 531, 541, 47 S. Ct. 710, 713, 71 L. Ed. 1184, 52 A. L. R. 1081.

Plaintiffs contend that section 162 (b), supra, when properly interpreted, indicates an intention on the part of Congress to treat a trust and its beneficiary as separate and distinct taxable entities, and, from that proposition, argue that an overpayment due the former may not be credited against a deficiency due from the latter, and may not be treated as a payment by, or on behalf of, the latter.

Defendant concedes that a trust and its beneficiary are treated as separate taxable entities, but insists that that treatment should not be extended to the point of nullifying the general purpose of the income tax laws, namely, to tax the income of all persons, including estates and trusts.The Supreme Court of...