Silverstein v. United States

• Decision Date: 15 November 1968
• Docket Number: Civ. A. No. 66 C 142.
• Citation: 293 F. Supp. 1106
• Parties: H. M. SILVERSTEIN and Continental Illinois National Bank and Trust Company, Co-Executors of the Estate of Mary H. Thompson, Deceased, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Illinois

293 F. Supp. 1106

H. M. SILVERSTEIN and Continental Illinois National Bank and Trust Company, Co-Executors of the Estate of Mary H. Thompson, Deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. A. No. 66 C 142.

United States District Court N. D. Illinois, E. D.

November 15, 1968.

Sol A. Hoffman, Maurice L. Davis, David I. Hoffman, and Melvin A. Blum, Hoffman & Davis, Chicago, Ill., for plaintiffs.

Thomas A. Foran, U. S. Atty., for the Government.

MEMORANDUM OPINION

Cross Motions for Summary Judgment

MAROVITZ, District Judge.

This is an action to recover income taxes alleged to have been illegally and erroneously assessed and collected. This Court has jurisdiction under 28 U.S.C. § 1346(a) (1).

Mary Harding Thompson (hereafter Mary) instituted this suit to recover federal income taxes on January 20, 1966. She died on January 27, 1966. By order of this Court the present plaintiffs, co-executors of her estate, were substituted on October 24, 1966.

Mary timely filed her 1959, 1960 and 1961 individual income tax returns with the Internal Revenue Service and paid the amount of tax computed by her to be due. The District Director of Internal Revenue then assessed additional taxes for those three years on the basis that an additional $10,000 should be included in her income in the year 1959, and that an additional $12,000 should be included in her income for each of the years 1960 and 1961. The additional taxes, for all three years, amounted to $18,357.50, and were paid by Mary to the District Director, together with interest, on January 29, 1965. On March 5, 1965, Mary Thompson filed claims for refund of those taxes with the District Director; these claims have not been allowed.

George F. Harding, Mary's father, died testate on April 2, 1939. George Harding's will left the residue of his estate in trust to Jessie Katz, as trustee, directing the trustee to pay out of income, or from the corpus if income was insufficient, the sum of $12,000 per year, in monthly installments, to Mary, his sole heir at law, for life and thereafter $6,000 per year in monthly installments to each of his two grandchildren (Mary's children) George and Penelope, for life. Any income of the trust estate not payable to these three was to go to the George F. Harding Collection, now known as the George F. Harding Museum. Upon the death of the last of these three, the trustee was to distribute the remainder of the trust estate to the museum.

Subsequent to the 1942 amendment of the Internal Revenue Code, a dispute arose between Mary and the museum as to the interpretation of the trust instrument with respect to the payment of income taxes on sums distributed to Mary by the trustee. It was contended by Mary that her father had intended that she receive trust distributions free of taxation. It was the position of the museum that the trust instrument was subject to interpretation in this regard and in 1950 the trustee filed suit in Superior Court of Cook County, Illinois requesting an interpretation of the trust with respect to the propriety of the payment from the trust estate of income taxes becoming payable by Mary on sums distributed to her by the trustee.

On July 9, 1951, Mary, the museum and the trustee entered into an agreement which, as later amended, provided that (1) the Superior Court case would be held in abeyance until the youngest of Mary's children attained majority; (2) the trustee would make payment to Mary of a sum equal to her income taxes (computed at her highest tax bracket) payable by reason of her receipt from the trust estate of $12,000.00 per year during the years 1942 through 1950 and would make payment to Mary in each year of a sum equal to her income tax (computed at her highest tax bracket) payable by reason of her receipt from the trust estate of $12,000.00 during the previous year; (3) Mary and the museum each retained the right to apply to a court of competent jurisdiction to determine Mary's right to receive such income tax reimbursement under her father's will; and (4) if such issue were determined adversely to Mary she would refund all such reimbursements to the trustee.

Between 1951 and 1957 the trustee and Mary, for personal reasons, found it increasingly difficult to maintain a compatible relationship. In 1957, the trustee instituted a suit, amended by her in 1958, whereby she sought to have her accounts approved and to have the question of the trust's liability for Mary's income taxes on the amounts paid to her resolved and to have herself discharged as trustee.

The successor trustee, as nominated by the decedent, refused to serve.

Early in the next year, on January 15, 1959, the three life beneficiaries under George Harding's will, together with the trustee and the museum (the remainderman), entered into an agreement whereby, with court approval, the trust would terminate and all of the assets would go to the museum as the absolute owner, free of trust, with the proviso that the museum would "continue to make the annual payments of $12,000.00 per year to Mary Harding Thompson throughout her lifetime". Provision was also made in the agreement to make the $6,000 per year payments to George and Penelope on Mary's death.

The agreement also contained a proposed form of court decree which was entered, without change, by the Circuit Court of Cook County on March 16, 1959, approving the parties' actions. This decree approved the accounts of the trustee, permitted her resignation, terminated the trust and distributed all of the assets to the museum as absolute owner thereof.

Consequently, the trustee was no longer the source of monthly payments to Mary. The museum began making the $1,000 payments as of March, 1959. It made no payments to Mary during the years 1959, 1960, and 1961 on account of income taxes.

It is the museum's monthly payments which are the subject of this action. The question to be decided is whether the transaction under which the museum received the assets of the trust in exchange for the obligation to pay Mary and her children their respective allotments was, in fact, a sale of a capital asset, as contended by plaintiffs, or was a meaningless change in payors, as contended by the Government. The determination of whether a sale of a capital asset occurred requires an examination of the nature of a capital asset and the purpose of the law relating to the sale of such entities. Commissioner of Internal Revenue v. Gillette Motor Transport, Inc., 364 U.S. 130, 134, 80 S.Ct. 1497, 4 L.Ed.2d 1617 (1960); Commissioner of Internal Revenue v. P. G. Lake, Inc., 356 U.S. 260, 265, 78 S.Ct. 691, 2 L.Ed.2d 743 (1958). Further, as with most tax questions, we must look to the substance and effect rather than just to the form of the transaction. Commissioner of Internal Revenue v. P. G. Lake, Inc., 356 U.S. 260, 266-267, 78 S.Ct. 691 (1958); Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788 (1940).

The Internal Revenue Code, 26 U.S.C. § 1221 defines a capital asset as "property held by the taxpayer (whether or not connected with his trade of business)," but not including five particular categories of property not relevant here. However, the concept of a "capital asset" is not an expansive one.

"(I)t is evident that not everything which can be called property in the ordinary sense and which is outside the statutory exclusions qualifies as a capital asset. This Court has long held that the term `capital asset' is to be construed narrowly in accordance with the purpose of Congress to afford capital-gains treatment only in situations typically involving the realization of appreciation in value accrued over a substantial period of time, and thus to ameliorate the hardship of taxation of the entire gain in one year. (citation omitted)." Commissioner of Internal Revenue v. Gillette Motor Transport, Inc., 364 U.S. 130, 134, 80 S.Ct. 1497, 1500 (1960).

The instant case does not involve the appreciation of property which was held over a long period of time in a risk situation. United States v. Midland-Ross Corp., 381 U.S. 54, 57, 85 S.Ct. 1308, 14 L.Ed.2d 214 (1965); Lowndes v. United States, 384 F.2d 635 (4th Cir. 1967). There is no threat of an inordinately large and burdensome tax being levied on accumulated gain. Rather, the consideration which Mary was to receive over time, from the museum, was a substitute for the payments which she was to have received from the trust. In Commissioner of Internal Revenue v. P. G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691 (1958), the taxpayer had received a lump sum consideration for the assignment of certain oil payment rights which were carved out by taxpayer from a larger mineral interest producing taxable income. In holding that there was no capital asset and that the consideration received was ordinary...