Freuler v. Helvering, No. 129

CourtUnited States Supreme Court
Writing for the CourtROBERTS
Citation78 L.Ed. 634,54 S.Ct. 308,291 U.S. 35
PartiesFREULER v. HELVERING, Com'r of Internal Revenue
Docket NumberNo. 129
Decision Date08 January 1934

291 U.S. 35
54 S.Ct. 308
78 L.Ed. 634
FREULER

v.

HELVERING, Com'r of Internal Revenue.

No. 129.
Argued Dec. 8, 1933.
Decided Jan. 8, 1934.

Page 36

Messrs. Claude R. Branch, of Providence, R.I., Felix T. Smith, of San Francisco, Cal., and W. W. Spalding, of Washington, D.C., for petitioner.

The Attorney General and Mr. Erwin N. Griswold, of Washington, D.C., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

A. C. Whitcomb, a resident of California, died in 1889, and by his will, probated in that state, gave the residue of his estate in trust, one-third of the income to be paid to his widow for life, with limitations in remainder. The petitioner is the administrator of the estate of Mrs. Whitcomb, who died in 1921. The will of A. C. Whitcomb contained no direction for the computation of trust income, none for the keeping of the trustee's accounts and none for any allowance or deduction representing depreciation. Beginning about 1906 the trustee converted trust assets into real estate and other forms of investment

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subject to depreciation. In fiduciary income tax returns for 1921 and subsequent years, the trustee deducted from gross income an amount representing depreciation, but failed to withhold from the beneficiaries, to whom he paid income, the amount of the depreciation deduction, so that each beneficiary was paid his or her full ratable share of income for the taxable year. As Mrs. Whitcomb died in 1921 a portion of the year's income was paid to her and a portion to the petitioner as her administrator. Neither the petitioner, as administrator of Mrs. Whitcomb, nor any of the other beneficiaries, included in their returns, as income received, that proportion of the income represented by the depreciation deduction shown on the trustee's fiduciary return.

The applicable sections of the Revenue Act of 19211 are:

'Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—* * * (4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. * * *

'(d). In cases under paragraph (4) of subdivision (a) * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not. * * *'

In the belief that these provisions warranted his action, the Commissioner of Internal Revenue increased the income shown on the petitioner's return by so much of the amount received as reflected the proportionate share of

Page 38

the depreciation deducted by the trustee in his fiduciary return, and determined a deficiency accordingly. The petitioner appealed to the Board of Tax Appeals. 2

In 1928, while the case was pending before the Board, the trustee, who had annually rendered income statements to the beneficiaries, but had filed no accounts as trustee, lodged in a California court having jurisdiction of the trust, an account for the period 1903—1028 and prayed its approval. Due notice of the proceeding was given the parties in interest. Certain remaindermen objected to the account, on the ground that the trustee had paid the entire income to beneficiaries without deducting and reserving proper amounts for depreciation and for capital losses sustained. The matter coming on for hearing the court sustained the objection concerning depreciation and overruled that as to capital losses; found the amounts which should have been reserved for depreciation; refused to surcharge the trustee, but decreed that the life beneficiaries (including the estate of Louise P. V. Whitcomb) repay to the trustee the amounts which he should have withheld annually for depreciation. The sum fixed for the year 1921 was $43,003.16, which the Board of Tax Appeals has found was the correct amount, a pro rata share of which the petitioner had deducted from the reported income of Louise P. V. Whitcomb. Pursuant to this decree the petitioner repaid $10,700 to the trustee, which was more than petitioner's share of the required repayment for the year 1921. Since, however, Mrs. Whitcomb's estate owed additional amounts for each of the

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years 1913—1928 the balance was adjusted by a promissory note of her next of kin. Other beneficiaries also gave notes in settlement of amounts due the trustee.

The Board of Tax Appeals reversed the Commissioner.3 The state court's judgment was held conclusive of the fact that no part of the sums paid to the beneficiaries out of the amount required to be deducted by the trustee for depreciation belonged to them; and the conclusion was, therefore, that the amount distributable to the petitioner's decedent for 1921 was the income of the trust due her, less her proportionate share of the sum representing depreciation of the trust property.

The Commissioner petitioned the Circuit Court of Appeals to review the decision, and, after hearing, the court reversed the Board and sustained the Commissioner's ruling.4 The case is here on writ of certiorari.5

The petitioner insists the plain meaning of section 219 is that an income beneficiary of a trust shall pay tax, not on so much of the income as he actually receives, but on the amount he should properly have received in any tax year. His position is that if the amount of income properly 'distributable' to him is in excess of the amount paid, he must return and pay tax on the larger amount, irrespective of when in the future he may actually re-

Page 40

ceive the balance due him for the year in question. In this view the respondent concurs. But conversely, says the petitioner, if in any year the beneficiary is actually paid more than is properly distributable to him, he should not return and pay tax on the excess to which he was not entitled. The respondent disagrees with this proposition. If the question be decided in favor of the respondent we need go no further; but if in favor of the petitioner, we must inquire what are the criteria for determining whether the sum actually paid was in fact distributable. On this matter also the parties are in disagreement.

1. Section 219(a) declares that the income of estates and property held in trust is to bear the same tax as the income of individuals. The tax is measured by the gross income received by the fiduciary, less certain allowable deductions, as in the case of an individual. To clarify and emphasize this purpose it is stated that income received by a decedent's estate in course of administration, income to be accumulated for unborn or unascertained persons, income to be held for future distribution, income to be distributed periodically to beneficiaries, and income received by a guardian, to be held or distributed as the court may direct, is included in the taxable income of the estate or trust. Paragraphs (1) to (4).

Subsection (b) puts upon the fiduciary the duty of making a return and directs what it shall contain. As respects income which is to be distributed periodically to beneficiaries the return is to include 'a statement of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made.'

Subsection (c) requires the fiduciary to pay the tax on all net income of the estate or trust, save that which is

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distributable periodically, but subsection (d) directs, as respects the sort of income last mentioned, 'the tax shall not be paid by the fiduciary,' but in computing the income of each beneficiary there shall be included 'that part of the income of the estate or trust for its taxable year which pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not. * * *'

Subsection (e) covers a case where the total income to be returned by a fiduciary is made up of two classes, as, e.g., a portion to be held and accumulated and a portion to be distributed periodically to beneficiaries. The fiduciary must then prepare his return as if he were required to pay the tax on the whole and enter 'as an additional deduction' (in addition, that is, to the usual deductions allowed all taxpayers by the other sections of the act) that part of the estate or trust income 'which, pursuant to the instrument or order governing the distribution, is distributable during the (fiduciary's) taxable year to such beneficiary.' To remove all doubt of the intent of the act, a sentence is added to the effect that in such case each beneficiary's personal income shall include the portion of the trust's income which 'pursuant to the instrument or order governing the distribution, is distributable' to him.

Plainly the section contemplates the taxation of the entire net income of the trust. Plainly, also, the fiduciary, in computing net income, is authorized to make whatever appropriate deductions other taxpayers are allowed by law. The net income ascertained by this operation, and that only, is the taxable income. This the fiduciary may be required to accumulate, or, on the other hand, he may be under a duty currently to distribute it. If the latter, then the scheme of the act is to treat the amount so distributable, not as the trust's income, but as the beneficiary's. But as the tax on the entire net income of the trust

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is to be paid by the fiduciary or the beneficiaries or partly by each, the beneficiary's share of the income is considered his property from the moment of its receipt by the estate. This treatment of the beneficiary's income is...

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346 practice notes
  • Helvering v. Stuart, Nos. 49 and 48
    • United States
    • United States Supreme Court
    • November 16, 1942
    ...of local law. Blair v. Commissioner, 300 U.S. 5, 9, 57 S.Ct. 330, 331, 81 L.Ed. 465; Freuler v. Helvering, 291 Page 162 U.S. 35, 43—45, 54 S.Ct. 308, 311, 312, 78 L.Ed. 634.1 Congress has selected an event, that is the receipt or distributions of trust funds by or to a grantor, normally bro......
  • Kluger v. Comm'r of Internal Revenue, Docket No. 26124-83.
    • United States
    • United States Tax Court
    • September 11, 1984
    ...Under these circumstances, respondent has no basis for invocation of res judicata, waiver, or collateral estoppel. Freuler v. Helvering, 291 U.S. 35, 43 (1934); cf. [83 T.C. 320] Commissioner v. Estate of Bosch, 387 U.S. 456, 462-463 (1967); Commissioner v. Sunnen, 333 U.S. 591, 597 (1948).......
  • St. Louis Union Trust Co. v. Clarke, No. 38448.
    • United States
    • United States State Supreme Court of Missouri
    • February 7, 1944
    ...of the rights of the parties under the property law. Blair v. Commissioner of Internal Revenue, 300 U.S. 5; Freuler v. Helvering, 291 U.S. 35; Helvering v. Rhodes Estate, 117 Fed. (2d) 509; In re Franz' Estate, 127 S.W. (2d) 401. (14) Appellant neither represents creditors nor is subject to......
  • Evans v. Ockershausen, No. 7062-7065.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • October 31, 1938
    ...of depreciation, and to place upon the remaindermen the burden of any shrinkage of capital value of that nature." Freuler v. Helvering, 291 U.S. 35, 43, 54 S.Ct. 308, 311, 78 L.Ed. 634. See, also, Commissioner v. Freuler, 9 Cir., 62 F.2d 733; Whitcomb v. Blair, 58 App.D.C. 104, 25 F.2d 528;......
  • Request a trial to view additional results
346 cases
  • Helvering v. Stuart, Nos. 49 and 48
    • United States
    • United States Supreme Court
    • November 16, 1942
    ...of local law. Blair v. Commissioner, 300 U.S. 5, 9, 57 S.Ct. 330, 331, 81 L.Ed. 465; Freuler v. Helvering, 291 Page 162 U.S. 35, 43—45, 54 S.Ct. 308, 311, 312, 78 L.Ed. 634.1 Congress has selected an event, that is the receipt or distributions of trust funds by or to a grantor, normally bro......
  • Kluger v. Comm'r of Internal Revenue, Docket No. 26124-83.
    • United States
    • United States Tax Court
    • September 11, 1984
    ...Under these circumstances, respondent has no basis for invocation of res judicata, waiver, or collateral estoppel. Freuler v. Helvering, 291 U.S. 35, 43 (1934); cf. [83 T.C. 320] Commissioner v. Estate of Bosch, 387 U.S. 456, 462-463 (1967); Commissioner v. Sunnen, 333 U.S. 591, 597 (1948).......
  • St. Louis Union Trust Co. v. Clarke, No. 38448.
    • United States
    • United States State Supreme Court of Missouri
    • February 7, 1944
    ...of the rights of the parties under the property law. Blair v. Commissioner of Internal Revenue, 300 U.S. 5; Freuler v. Helvering, 291 U.S. 35; Helvering v. Rhodes Estate, 117 Fed. (2d) 509; In re Franz' Estate, 127 S.W. (2d) 401. (14) Appellant neither represents creditors nor is subject to......
  • Evans v. Ockershausen, No. 7062-7065.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • October 31, 1938
    ...of depreciation, and to place upon the remaindermen the burden of any shrinkage of capital value of that nature." Freuler v. Helvering, 291 U.S. 35, 43, 54 S.Ct. 308, 311, 78 L.Ed. 634. See, also, Commissioner v. Freuler, 9 Cir., 62 F.2d 733; Whitcomb v. Blair, 58 App.D.C. 104, 25 F.2d 528;......
  • Request a trial to view additional results

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