Lynch v. Union Trust Co. of San Francisco

• Decision Date: 05 October 1908
• Docket Number: 1,507.
• Citation: 164 F. 161
• Parties: LYNCH, Collector, v. UNION TRUST CO. OF SAN FRANCISCO et al.
• Court: U.S. Court of Appeals — Ninth Circuit

164 F. 161

LYNCH, Collector, v. UNION TRUST CO. OF SAN FRANCISCO et al.

No. 1,507.

United States Court of Appeals, Ninth Circuit.

October 5, 1908

This is an action to recover from the government the amount of certain taxes imposed and collected by it under the supposed sanction of Act June 13, 1898, c. 448, 30 Stat. 464 (U.S Comp. St. 1901, p. 2286), entitled 'An act to provide ways and means to meet war expenditures and for other purposes, ' commonly referred to as the 'War Revenue Act.' The material facts upon which the action arises are these:

Richard H. Follis, a resident of the city and county of San Francisco, died May 31, 1900, leaving a last will whereby after certain provisions with which we are not concerned, he left the entire residue of his estate to trustees, in trust to receive the rents, issues, and profits thereof, and, after necessary expenditures for care, maintenance, insurance taxes, alterations, reconstruction, etc.: '(6) To pay the net proceeds of the income, rents, issues and profits of said trust quarterly, upon the first day of each and every quarter of the year equally, share and share alike, to all of my children, Margaret, James, Richard, Mary and George up to and until such time as each of them shall respectively attain to the ages following, that is to say: Until said Margaret E Follis, now wife of Dr. De Vecchi, shall attain the age of thirty-nine years, until said James H. Follis shall attain the age of thirty-three years, until said Richard H. Follis, Jr., shall attain the age of thirty-one years, until said Mary Lilly Follis shall attain the age of twenty-nine years, and until said George Clarence Follis shall attain the age of twenty-seven years. ' The will then provides for the turning over to each legatee as he reaches the age designated of the one-fifth of the corpus of the estate. The will was duly admitted to probate, and thereafter in due course the residue of the estate was distributed to the trustees named therein, under and in strict accord with the trust clause above set forth. In proper time, and prior to such distribution, the executors, as provided by said act, made to the collector of internal revenue for the district a schedule and return, showing the facts required for the purposes of assessment, from which it appeared that the value of the personal estate remaining for distribution to the trustees, after payment of all expenses, and from which the devisees in the will would each be entitled to receive one-fifth of the net income for the period prescribed in said will, was $778,491.28. It further showed that the period during which said beneficiaries would respectively be entitled to receive such income before payment over of his or her share of the corpus was as to three of them a fraction over four years, and as to the other two a fraction over five years, and that the present worth or value of the respective rights of the legatees to receive such income during such period, as estimated by the collector in accordance with mortuary or annuity tables upon a four per cent. basis, was: Margaret E. De Vecchi, $23,068.83; James H. Follis, $23,778.52; Richard H. Follis, $30,759.41; Lillian Mary Griffin, $28,574.43; Clarence George Follis, $29,424.53.

The rights of the devisees, as shown by such schedule, were separately assessed; the tax upon such several rights aggregating a total of $1,349.88. This amount was subsequently paid to the collector under protest; and a proper demand that it be refunded having been thereafter denied, this action ensued to recover that sum with interest. It was stipulated by the parties, for the purpose of judgment, that the right of the legatees to receive such income was capable of a present clear valuation, and that the valuations in said schedule and return were correct clear valuations of said rights, and 'that the present clear value of the rights to the beneficial enjoyment of the bequest passing to each of said legatees by reason of the said will creating said legacies, derived from said personal property, thus computed, was in each case over $10,000. ' It was further stipulated 'that the total amount received by each of said beneficiaries to said trust hereinbefore mentioned, as income from said trust property, on the legacies which they will ultimately receive, if they live to the date referred to in the decree of distribution, aggregated in amount prior to July 1, 1902 (the date when the repeal of the act took effect), the total sum of $8,750 in each case, and no more, and that no other sums were due and payable from the trustees to the legatees prior to July 1, 1902.'

The Circuit Court held that the tax was illegally collected, upon the ground that the rights passing to the devisees, upon which the tax was levied, were not subject to the tax, and awarded judgment in favor of the plaintiffs below, the defendants in error here, for the recovery of the amount sued for; and this judgment is now here for review.

Robert T. Devlin, U.S. Atty., and George Clark, Asst. U.S. Atty.

Heller & Powers (E. S. Heller, Frank H. Powers, and Sidney M. Ehrman, of counsel), for defendants in error.

Before GILBERT and ROSS, Circuit Judges, and VAN FLEET, District judge.

VAN FLEET, District Judge (after stating the facts as above).

No question is made as to the propriety of the amount of tax paid if the interest was subject thereto; the sole question presented for consideration being whether the right or interest passing to the legatees, and upon which the tax was assessed, was of a character to subject it to the burden imposed by the act. That question, to employ the language of counsel for the government, is:

'Whether a tax may be imposed, under the provisions of the war revenue act, upon the right to receive the income from personal property left in trust for a certain period, which period terminated after the repeal of the war revenue act.' Upon this question he states his position thus:

'It is to be noted that the tax was not imposed upon moneys or personal property to be actually received by or passing into the hands of the legatees. The tax was imposed upon the right of each legatee to enjoy the income from the corpus of the trust estate, which was delivered to the trustees for the benefit of the various legatees. The property is to be managed by the trustees for the sole use and benefit of the legatees. The legatees receive the whole of the income therefrom. They are the true owners for a stated term.'

And further:

'The position of the government in the case is that each of the legatees virtually received an equitable estate for a term in a portion of the trust estate.'

And that:

'The action of the collector amounted to the levying of the tax upon an equitable estate for a term of years; the legal title to the term being in the trustees, but the enjoyment of the property being vested entirely in the beneficiaries.'

This fairly presents the attitude of the government in the controversy, and is, perhaps, as strong a statement of the case as the facts would warrant. Was such an interest a proper subject of taxation under the act?

This inquiry is to be answered from a consideration of the provisions of the act in the light afforded by certain adjudicated cases wherein these provisions have been under review. Primarily in this connection it is necessary to keep in view a cardinal principle, to be applied generally to the interpretation of legislation whereby the government seeks to impose a duty or burden upon the property or rights of the citizen in the nature of taxation, and more especially applicable to statutes such as this, seeking to impose a burden of a special or unusual character, and that is that, in all cases of doubt or ambiguity arising on the terms of such a statute, every intendment is to be indulged against the taxing power. This principle has been aptly stated in two cases involving the application of the statute under consideration: Eidman v. Martinez, 184 U.S. 578, 583, 22 Sup.Ct. 515, 46 L.Ed. 697; Disston v. McClain, 147 F. 114, 116, 77 C.C.A. 340.

The feature of the act more immediately involved is found in section 29, which, so far as material to be stated, is as follows:

'That any person or persons having in charge or trust, as administrators, executors or trustees, any legacies or distributive shares arising from personal property, where the whole amount of such personal property as aforesaid shall exceed the sum of ten thousand dollars in actual value, passing, after the passage of this act, from any person possessed of such property, either by will or by the intestate laws of any state or territory, or any personal property or interest therein, transferred by deed, grant, bargain, sale, or gift, made or intended to take effect in possession or enjoyment after the death of the grantor or bargainer, to any person or persons, or to any body or bodies, politic or corporate, in trust or otherwise, shall be and hereby are, made subject to a duty or tax, to be paid to the United States, as follows,' etc. Act June 13, 1898, c. 448, 30 Stat. 464 (U.S. Comp. St. 1901, p. 2307).

This section was repealed, to take effect July 1, 1902 (Act April 12, 1902, c. 500, Sec. 7, 32 Stat. p. 97 (U.S. Comp. St Supp. 1907, p. 649)), but all taxes or duties imposed thereby and the amendment thereto, prior to the taking effect of the repeal, were reserved from the operation thereof. Subsequently, on June 27, 1902 (Act June 27, 1902, c. 1160, Sec. 3, 32 Stat. 406 (U.S. Comp. St. Supp. 1907, p. 652)), Congress passed an act, commonly known as the 'Refunding Act,' which authorized and directed the refunding by the Secretary of the Treasury, upon proper application, of all such taxes 'as may have been collected on...