Morrill v. United States

• Citation: 228 F. Supp. 734
• Decision Date: 27 April 1964
• Docket Number: Civ. No. 7-162.
• Court: U.S. District Court — District of Maine
• Parties: George B. MORRILL, Jr., and Elizabeth H. Morrill, Plaintiffs, v. UNITED STATES of America, Defendant.

228 F. Supp. 734

George B. MORRILL, Jr., and Elizabeth H. Morrill, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 7-162.

United States District Court D. Maine, S. D.

April 27, 1964.

Brooks Whitehouse, John A. Mitchell, Portland, Me., for plaintiffs.

Alton A. Lessard, U. S. Atty., Dist. of Me., Portland, Me., Rufus E. Stetson, Jr., Atty., Tax Division, Dept. of Justice, Washington, D. C., for defendant.

GIGNOUX, District Judge.

This is an action for refund of federal income taxes for the years 1959, 1960 and 1961 in the amounts of $1,736.75, $2,344.50 and $3,064.63, respectively. The only question presented is whether the amounts of the income of four trusts established by George B. Morrill, Jr., which the trustees applied to the payment of the tuition and room charges of the taxpayers' four minor children at private schools and colleges, were taxable as income to him under the provisions of Section 677(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 677(a).

The relevant facts, which have been stipulated, may be briefly stated: In April, 1959 Mr. Morrill established four short-term trusts, one for the benefit of each of his four minor children, and named a corporate trustee of each trust. The income of each trust was to be accumulated until the child became 21 years of age, at which time the accumulated income, and thereafter during the remaining term of the trust any current income, was to be distributed to the beneficiary. Ten years after the date of their creation, the trusts were to terminate and the corpus of each was to revert to Mr. Morrill. Each of the trusts also provided that during the minority of the beneficiary, the trustee might, in its discretion, use the trust income "for the payment of room, tuition, books and travel to and from any private school, college or other institution of learning at home or abroad."

During the tax years in question, the taxpayers' children attended Vassar College, Connecticut College, Brown University, The Holderness School and The Waynflete School. Mr. Morrill expressly assumed responsibility for the payment of the tuition, room, board and other expenses of his children at Vassar College and Connecticut College.¹ There was no express agreement between Mr. Morrill and Brown University, The Holderness School, or The Waynflete School regarding the payment of the expenses of his children at those schools. However, each school submitted its bills to Mr. Morrill. He then wrote out a personal check to the institution for that portion of the bill other than room and tuition, sent the bill with his personal check to the trustee of the appropriate trust, and requested the trustee to pay from the trust the room and tuition charges on the bill. The trustee then mailed to the institution its check in payment of the room and tuition charges, together with Mr. Morrill's check for the balance of the bill involved.

George B. Morrill, Jr. and Elizabeth H. Morrill, as husband and wife, filed joint federal income tax returns for the calendar years 1959, 1960 and 1961. They did not include in the returns any of the income of the four children's trusts. Upon audit of the returns, the Commissioner determined that the amounts of trust income which had been applied in payment of the children's tuition and room charges had been used to satisfy legal obligations of Mr. Morrill, as father of the children, and were therefore taxable as income to him under Section 677 of the 1954 Code.² Plaintiffs paid under protest the resulting deficiency assessments, and instituted this suit after their claims for refund were disallowed. For reasons which it will state briefly, this Court has concluded that the Commissioner was correct.

Section 671 of the Internal Revenue Code of 1954, 26 U.S.C. § 671, provides that the income of a trust is taxable to the person specified in the Code as the owner of the trust. Section 677 (a) of the Code provides in relevant part:

"§ 677. Income for benefit of grantor

"(a) General rule. — The grantor shall be treated as the owner of any portion of a trust * * * whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be —

"(1) distributed to the grantor;"

A long line of judicial decisions applying Section 677(a) and its predecessor statutes has established that trust income which is used to satisfy a legal obligation of the grantor is, in effect, distributed to him and is, therefore, taxable to him. Douglas v. Willcuts, 296 U.S. 1, 56 S.Ct. 59, 80 L.Ed. 3 (1935) (trust income used to discharge divorced settlor's alimony obligation); Helvering v. Stokes, 296 U.S. 551, 56 S.Ct. 308, 80 L.Ed. 389 (1935), reversing, C. I. R. v. Stokes, 3 Cir., 79 F.2d 256 (trust income used to discharge settlor's legal obligation to support, educate and maintain his minor children); Helvering v. Schweitzer, 296 U.S. 551, 56 S.Ct. 304, 80 L.Ed. 389 (1935), reversing 7 Cir., 75 F.2d 702 (trust income used to discharge settlor's legal obligation to support, educate and maintain his minor children); Helvering v. Blumenthal, 296 U.S. 552, 56 S.Ct. 305, 80 L.Ed. 390 (1935), reversing 2 Cir., 76 F.2d 507 (trust income used to discharge settlor's debt); Helvering v. Coxey, 297 U.S. 694, 56 S.Ct. 498, 80 L.Ed. 986 (1936), reversing 3 Cir., 79 F.2d 661 (trust income used to discharge settlor's alimony and support obligation); Helvering v. Fitch, 309 U.S. 149, 60 S.Ct. 427, 84 L.Ed. 665 (1940) (trust income used to discharge divorced settlor's alimony obligation); Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L.Ed. 154 (1942) (trust income used to discharge settlor's legal obligation to support, educate and maintain his minor children); Mairs v. Reynolds, 120 F.2d 857 (8th Cir. 1941) (trust income used to discharge settlor's legal obligation to support and educate his minor children); Hamiel's Estate v. Comm'r, 253 F.2d 787 (6th Cir. 1958) (trust income used for the support, maintenance and education of settlor's minor child); Sheaffer's Estate v. Comm'r, 313 F.2d 738 (8th Cir.), cert. denied, 375 U.S. 818, 84 S.Ct. 55, 11 L.Ed. 2d 53 (1963) (trust income used to discharge settlor's primary obligation to pay gift taxes arising from transfers in creation of the trust.) The Treasury Regulations reflect this fundamental principle. Treas. Reg. § 1.677(a)-1(d). The transaction is regarded "as being the same in substance as if the money had been paid to the taxpayer and he had transmitted it to his creditor." Douglas v. Willcuts, supra, 296 U.S. at 9, 56 S.Ct. at 63, 80 L. Ed. 3. The income is taxable to the grantor when used to discharge his individual obligation, whether imposed by law or by contract. 6 Mertens, Federal Income Taxation § 37.06 at 434 (1948); compare Douglas v. Willcuts, supra with Helvering v. Blumenthal, supra.

In the present case, the trust income paid to each of the schools and colleges was used to defray expenses for which Mr. Morrill was legally liable. The taxpayers concede that Mr. Morrill was personally obligated for payment of his children's expenses at Vassar College and Connecticut College, because he had expressly assumed that responsibility. It also seems very evident that Mr. Morrill had impliedly obligated hmself to pay his children's bills at Brown University, The Holderness School and The Waynflete School. It is a settled principle of contract law that when one renders services to another at the request, or with the knowledge and consent, of the other, and the surrounding circumstances make it reasonable for him to believe that he will receive payment therefor from the other, and he does so believe, a promise to pay will be inferred, and there is an implied contract. 3 Corbin, Contracts, § 566 (1960); Restatement, Contracts § 72 (1932); Saunders v. Saunders, 90 Me. 284, 38 A. 172 (1897); Leighton v. Nash, 111 Me. 525, 90 A. 385 (1914); Gordon v. Keene, 118 Me. 269, 107 A. 849 (1919); Stinson v. Bridges, 152 Me. 306, 129 A.2d 203 (1957). The implied obligation to pay arises whether the services are rendered directly to the other person or to a third person at the request of the...