Schaffner v. Harrison

• Decision Date: 18 June 1940
• Docket Number: No. 7139.,7139.
• Citation: 25 AFTR 398,113 F.2d 449
• Parties: SCHAFFNER v. HARRISON, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Seventh Circuit

25 AFTR 398, 113 F.2d 449 (1940)

SCHAFFNER v. HARRISON, Collector of Internal Revenue.

No. 7139.

Circuit Court of Appeals, Seventh Circuit.

June 18, 1940.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Leon F. Cooper, Sp. Assts. to the Atty. Gen., and William J. Campbell, U. S. Atty., of Chicago, Ill., for appellant.

Carl Meyer, Herbert Friedlich, and Louis A. Kohn, all of Chicago, Ill., for appellee.

Before EVANS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

Defendant appeals from a judgment entered in the District Court for the recovery of alleged overpayment of income taxes for the year 1930, in the sum of $19,730.68, and for 1931, $11,685.39 and interest, paid to defendant, Collector of Internal Revenue, by plaintiff, the taxpayer. Judgment was entered upon the pleadings, it appearing that there was no controversy as to the correctness of facts therein averred.

Joseph Schaffner, a resident of Chicago, died testate, June 20, 1918. By the Sixteenth section of his will, duly admitted to probate, he created a residuary trust, designating his wife, the taxpayer, beneficiary of all the income therefrom during her life-time, and directing it to be paid to her currently.

On December 23, 1929, the taxpayer executed irrevocable assignments of $84,000 of the net income of the trust for the year 1930, to three children, and on November 14, 1930, similar assignments of $54,000 of the net income for the year 1931, except that the latter assignments were made in part to the surviving husband of one of her daughters, who had, in the interim, died. Each of the instruments transferred "such portion of the income as shall equal the sum of $......... from and out of the net income that may be derived during the year 1930 from the trust estate created by the Sixteenth section of the last will and testament of Joseph Schaffner." Each recited that the assignee should be entitled to receive and collect the sum assigned and that the trustees were directed to pay it to the transferee in installments during the year. It was further provided that the trustees might pay the sum "out of whatever specific income derived as aforesaid from said trust estate during the year they may elect or appropriate for that purpose," and their selection and allocation were made conclusive upon the assignees. The transfers were made "absolute and irrevocable" and "wholly free from my (the assignor's) individual control and direction." The moneys to be paid to each assignee were, by the instruments, to be "deemed income in her hands and she shall be regarded as substituted pro tanto as beneficiary for the year (to the extent of the sum assigned) in my place." The sums assigned were paid by the trustees to the assignees. The taxpayer did not account for any of the same in her tax returns. The commissioner held the assigned amounts taxable income of the taxpayer and assessed against her deficiency taxes for the years 1930 and 1931, which were paid and for return of which judgment was entered in this suit.

The District Court relied upon Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465. There the taxpayer, who was beneficiary for life of a testamentary trust, assigned to his daughter an interest amounting to $6,000 for the remainder of the calendar year and to $9,000 in each year thereafter out of the income to which he was entitled during his life under the trust. He made like assignments to another daughter and a son, and in later years, by similar instruments, he assigned to his children additional interests and to another son, another specified interest in the net income. The court held the assignments valid and assignees taxable upon the income, not the assignor.

The Government there relied upon Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L. Ed. 731; Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665. The court distinguished these from the facts of the Blair case, saying that Lucas v. Earl was decided upon the taxing act and holding that where an attorney had assigned his earned income to his wife, the tax should be assessed against him upon his earnings. The Burnet case had to do with the assignment of an interest in a partnership income earned by the partner. This, the court held, under the statute, resulted in earnings of a partner taxable to him.

The court, after discussing the pertinent statutory provisions, said 300 U.S. 5, 57 S.Ct. 333, 81 L.Ed. 465: "These provisions cannot be taken to preclude valid assignments of the beneficial interest, or to affect the duty of the trustee to distribute income to the owner of the beneficial interest, whether he was such initially or becomes such by valid assignment. The one who is to receive the income as the owner of the beneficial interest is to pay the tax. If under the law governing the trust the beneficial interest is assignable, and if it has been assigned without reservation, the assignee thus becomes the beneficiary and is entitled to rights and remedies accordingly. * * * The will creating the trust entitled the petitioner during his life to the net income of the property held in trust. He thus became the owner of an equitable interest in the corpus of the property. Brown v. Fletcher, 235 U.S. 589, 598, 599, 35 S.Ct. 154, 157, 59 L.Ed. 374; Irwin v. Gavit, 268 U.S. 161, 167, 168, 45 S.Ct. 475, 476, 69 L.Ed. 897; Senior v. Braden, 295 U.S. 422, 432, 433, 55 S.Ct. 800, 803, 79 L.Ed. 1520, 100 A.L.R. 794; Merchants' Loan & Trust Co. v. Patterson, 308 Ill. 519, 530, 139 N.E. 912. By virtue of that interest he was entitled to enforce the trust, to have a breach of trust enjoined and to obtain redress in case of breach. The interest was present property alienable like any other, in the absence of a valid restraint upon alienation. Commissioner v. Field (C.C.A.) 42 F.2d 820, 822; Shanley v. Bowers (C.C.A.) 81 F.2d 13, 15. The beneficiary may thus transfer a part of his interest as well as the whole. See Restatement of the Law of Trusts, §§ 130, 132 et seq. The assignment of the beneficial interest is not the assignment of a chose in action but of the `right, title, and estate in and to property.'"

There as here the Government argued that, under the Revenue Act of 1928, § 162, 26 U.S.C.A.Int.Rev.Acts p. 405, the assignment covered only the right to receive income and did not amount to an assignment of any equitable right, title or interest in the trust estate itself. The court said in respect to this: "This construction seems to us to be a strained one. We think it apparent that the conveyancer was not seeking to limit the assignment so as to make it anything less than a complete transfer of the specified interest of the petitioner as the life beneficiary of the trust, but that with ample caution he was using words to effect such a transfer."

The only difference...