Schweitzer v. Commissioner of Internal Revenue

• Decision Date: 23 February 1935
• Docket Number: No. 5323,5324.,5323
• Citation: 75 F.2d 702
• Parties: SCHWEITZER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

75 F.2d 702 (1935)

SCHWEITZER v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 5323, 5324.

Circuit Court of Appeals, Seventh Circuit.

February 23, 1935.

Hugh W. McCulloch, of Chicago, Ill., for petitioner.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and Arnold Raum, Sp. Assts. to Atty. Gen., for respondent.

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

SPARKS, Circuit Judge.

These petitions for review involve petitioner's income taxes for 1928 and 1929. The questions presented are identical in both cases and the causes were consolidated for hearing.

Schweitzer created two trusts. The trustee was to divide the estate into three equal parts, the income of which was to be paid to himself until his three minor children should attain the age of twenty-one years, and was to be solely used by petitioner, or in case of his death then by the trustee, for the support, maintenance, and education of said children. As each child should attain the age of twenty-one years the trustee was directed to pay the net income from one of the shares of the trust estate to that one until he or she should attain the age of thirty-five years, at which time he or she should receive from the trustee one share of the corpus of said trust estate, together with any accumulated income. In case of death of a child before the designated dates, his interest was to go to his heirs if any, and if none, to the surviving brother and/or sister if any, and if none, then to the mother, Lillian Schweitzer, if living, and if not, then to the heirs at law of such child of grantor pursuant to the statutes of descent of Illinois. The trusts were revocable by petitioner only with the consent of his wife, who had a contingent interest in the remainder. The petitioner actually received the income of the trusts in question and disbursed it in 1928 and 1929 pursuant to the terms of the trust agreements. A return was made upon the income and a tax paid by the fiduciary. During 1928 his children had no source of income other than that provided by the trusts, but in 1929 they did have other source of income. The Commissioner taxed the income of the trusts for those years as income to petitioner, and the Board of Tax Appeals sustained that ruling, but has since overruled that decision in Grosvenor v. Commissioner, 31 B. T. A. No. 117. The sole question presented here is whether the trust income which was actually applied by petitioner to the support, maintenance, and education of the three minor children is taxable as income to petitioner.

A normal tax and a surtax were imposed on individuals by sections 11 and 12 of the Revenue Act of 1928 (26 USCA §§ 2011, 2012). Section 161 (a) (2) and (4) of the same title and act (26 USCA § 2161 (a) (2, 4) provided that such taxes should apply to income of any kind of property held in trust, including "Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;" and "Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated." Section 161 (b), 26 USCA § 2161 (b) provided that such tax should be computed upon the net income of the trust, and paid by the fiduciary, except as provided in section 166 (26 USCA § 2166), which relates to trusts revocable by the creator alone, or in conjunction with any person not a beneficiary of the trust; and except as provided in section 167 (26 USCA § 2167), which relates to certain income for the benefit of the grantor.¹ Substantially the same provisions as these were contained in the Revenue Acts of 1924 and 1926.

It seems that the Commissioner had based his determination that the trust income was taxable as petitioner's income under section 166 (26 USCA § 2166) on the ground that the trusts were revocable. The Board held that the ruling could not be sustained under section 166, for the reason that the trusts were not revocable under that section, citing Smith v. Commissioner (C. C. A.) 59 F.(2d) 56; Jones v. Commissioner, 27 B. T. A. 171; Stetson v. Commissioner, 27 B. T. A. 173. That ruling is not questioned here. It was further contended by the Commissioner before the Board that since the income of the trusts was payable, and was in fact paid, to the petitioner during the taxable years, the tax was properly assessed against him under section 22 of the same Act (26 USCA § 2022), which requires that all gains or profits and income derived from any source whatever shall be included in gross income. This contention was sustained by the Board.

The petitioner contends, however, that the question whether the trust income should be included in his gross income as defined by section 22 (26 USCA § 2022), was not properly before the Board, since the Commissioner had not based his ruling upon that section, and had not raised the question by proper pleading before the Board. He bases this contention upon Moise v. Burnet (C. C. A.) 52 F.(2d) 1071, and analogous cases. We think they are not applicable. In the Moise Case the Board not only sustained the Commissioner's ruling, but it allowed greatly increased deficiencies for which the Commissioner had not asked, and which were not included in the Commissioner's deficiency letters from which the appeals were taken. The court held that the Board exceeded its authority under section 274 (e) of the Revenue Act of 1926 (26 USCA § 1048c). There the claims allowed by the Board were different from the claims asserted by the Commissioner to the extent of the excess over the original claim. Here the claims are identical with those contained in the deficiency letter, and the facts before the Board were the same as those presented to the Commissioner. The difference is only as to the theory of recovery and we think the Board was warranted in passing upon the petitioner's liability under section 22. Hughes v. Commissioner (C. C. A.) 38 F. (2d) 755; Hurwitz v. Commissioner (C. C. A.) 45 F.(2d) 780; Helvering v. Gregory (C. C. A.) 69 F.(2d) 809, affirmed by the Supreme Court, 55 S. Ct. 266, 79 L. Ed. ___, January 7, 1935.

It is next contended by petitioner that the income of the trust for the years in question should not be included in his gross income as defined under section 22. That section imposes no tax, but it merely provides that the term "gross income" shall include income of every kind and from every source. It does not purport to include the income of one taxpayer in the gross income of another, but it presupposes that each taxpayer shall be assessed on his own income. If the income in question is to be considered as petitioner's income, it, of course, is to be considered within the purview of section 22, for that section is all inclusive, but if it is properly another's income and not the petitioner's it can not be so included. It is not denied that primarily the income in question was that of the property held in trust, and under section 161 (a) and (b) the tax laid thereon must be paid by the fiduciary, unless it comes within the provisions of sections 166 or 167. It is conceded that section 166 is not applicable, and the question before us is whether petitioner is taxable under section 167.

The issue, therefore, is narrowed down to the question whether any part of the income of the trust might, in petitioner's discretion, be distributed to him or held or accumulated for future distribution to him. The Commissioner admits that the petitioner had no power to expend the trust income in any other manner than for the support, maintenance, and education of his children. The theory upon which he seeks to sustain the ruling of the Board is that the petitioner actually received the income of the trusts and expended it in the discharge of his legal obligation to his children. He argues that the trust income was so closely devoted to petitioner's use and benefit in such a substantial manner as to make it reasonable and just to deal with him as its owner. He contends that during the years in question, there was a legal obligation resting upon the petitioner to support, maintain, and educate his minor children. This contention is controverted by the petitioner, and in support of his position he relies upon Hunt v. Thompson, 4 Ill. (3 Scam.) 179, 36 Am. Dec. 538; Plaster v. Plaster, 47 Ill. 290; McMillen v. Lee, 78 Ill. 443; and People v. Waddell, 247 Ill. App. 255. In the Hunt Case the plaintiff had furnished clothing to a minor child who had voluntarily abandoned his home. The court disallowed the claim and stated that there was a natural obligation on the part of a father to furnish clothing to such child but there was no municipal law enforcing the duty. The court intimated, however, that if the child had left home at the request of the father there might have been a liability. In the Plaster Case the court held that the father was bound for reasonable support. In the McMillen Case the court stated that there was no liability unless there was an express promise of the father to pay, or that the circumstances under which certain medical services were rendered were such that a promise would be implied. The court held that there was an implied promise, and rendered judgment for the plaintiff. In the Waddell Case the defendant was indicted for not supporting his child. The mother had left the father, taking the minor child with her. The court held that the father was not compelled to support the child away from his home unless he had refused to support it in his home.

Regardless of the principles laid down in those decisions, the later decisions of Illinois, as well as other states and text-writers, support the respondent's contention that there was a duty resting upon petitioner to support his minor children in a manner commensurate with his position in life. Peters v. Industrial Commission, 314 Ill. 560, 145 N. E. 629; Panther Creek Mines v....