Spies v. United States, Civ. No. 413.

• Court: United States District Courts. 8th Circuit. Northern District of Iowa
• Writing for the Court: GRAVEN
• Citation: 84 F. Supp. 769
• Parties: SPIES et al. v. UNITED STATES.
• Decision Date: 18 July 1949
• Docket Number: Civ. No. 413.

84 F. Supp. 769

SPIES et al.
v.
UNITED STATES.

Civ. No. 413.

United States District Court N. D. Iowa, Central Division.

July 18, 1949.

D. M. Kelleher, Fort Dodge, Iowa, Edward D. Kelly, Emmetsburg, Iowa, for plaintiffs.

Theron Lamar Caudle, Assistant Attorney General, Ruppert Bingham, Special Assistant to Attorney General, Tobias E. Diamond, U. S. District Attorney, Sioux City, Iowa, Wm. B. Danforth, Assistant U. S. District Attorney, Sioux City, Iowa, for defendant.

GRAVEN, District Judge.

This is an action by the four beneficiaries of two trusts against the United States for

84 F. Supp. 770

refunds of individual income taxes assessed and collected from each of said beneficiaries under protest, for the years 1941 and 1943, involving the question of whether the income from the trusts was taxable to the fiduciaries or to the beneficiaries

On December 20th, 1934, Jacob A. Spies, deceased, a resident of Palo Alto County, Iowa, executed a trust agreement in which he transferred in trust to plaintiffs Charles J. Spies, Adolph A. Spies, and Elizabeth Spies Hossack, as trustees, a large number of bonds which he then owned. This is known and referred to as the Bond Trust. The beneficiaries of the trust, plaintiffs in this action, were his wife, Anna Spies, and his three children, the trustees above named. Article Two of said trust provided in part that upon the death of the Settlor:

"There shall be paid to Settlor's wife, Anna Spies, so much of the net income of the trust estate, which, added to other income which she shall be entitled to receive from other sources, shall produce a monthly income to her of Five Hundred Dollars ($500). In the event that said Five Hundred Dollar ($500) monthly income shall be insufficient to properly maintain, care for and support her, then the Trustees in their sole discretion may pay to her an additional sum of Three Hundred Dollars ($300) in any one month so as to provide for her proper maintenance, comfort and support."

The balance of the income from the trust, after an accumulation of $10,000 in a "Trust Reserve Fund," was to be paid "in convenient installments, to Settlor's children * * * in equal shares, so long as they shall live."

The trustees were vested with complete discretion to determine in what manner expenses are to be borne and receipts are to be allocated between principal and income, and also to determine what shall be "income" and "net income." Anticipated payments of income were expressly made nontransferable and nonassignable either voluntarily or by operation of law. The trustees were authorized to act with the concurrence of any two of them, and provision was made for the absolute right of selection and removal of successor trustees by any of the original trustees still acting as such, the total number of trustees always to be maintained at three.

Upon the death of the Settlor, Jacob A. Spies, there was admitted to probate in the District Court of Iowa in and for Palo Alto County his last will and testament and three codicils thereto which established a second trust in favor of the same beneficiaries and with the same trustees. This is known and referred to as the Testamentary Trust. This trust, among other things not here involved, provided that the trustees pay from the trust any amount needed to make up the $500 per month income for the wife provided by the other trust, and distribute the balance equally among the three children. Paragraph 8 of the third codicil to the will provided:

"The distribution hereinabove contemplated shall not be anticipated or alienated in any manner, voluntarily or involuntarily. It is my intention that my own children, and, under the conditions above set forth, their own children, shall enjoy said distribution, and if for any reason the trustees conclude that any beneficiary normally entitled to share in a distribution would not for any reason enjoy the substantial benefits of the distribution, personally, then the trustees shall have the right to refrain from making any distribution to such beneficiary, or beneficiaries, and may add such portion of the funds to the funds being distributed to the other beneficiaries."

The trustees filed fiduciary returns showing net income of $9225.47 and $6205.90 for the years 1941 and 1943, respectively, from the Bond Trust, and showing net income of $2553.47 and $8551.89 for the same years, respectively, from the Testamentary Trust. On the Bond Trust return for the year 1943 deductions were taken for $15,000 distributed to each of the three trustee-beneficiaries in that year, and on the Testamentary Trust returns for the years 1941 and 1943 deductions were taken for distributions made to Anna Spies of $2500 and $4000 respectively.

On audit of these fiduciary returns and of the individual returns of each of the beneficiaries for these years, the Commissioner of Internal Revenue determined that the beneficiaries should have included the

84 F. Supp. 771

following income from the two trusts in reporting their individual income for the years 1941 and 1943

 Bond Trust 1941 1943
                 Anna Spies $6000.00 $6000.00
                 Elizabeth Spies
                 Hossack $1075.09 $ 105.48
                 Charles J. Spies $1075.09 $ 105.48
                 Adolph A. Spies $1075.09 $ 105.48
                 Testamentary Trust
                 Anna Spies ($2500.00) ($4000.00)
                 Elizabeth Spies
                 Hossack $1554.81 $2850.63
                 Charles J. Spies $1554.81 $2850.63
                 Adolph A. Spies $1554.81 $2850.63
                

Since there was sufficient income in the Bond Trust to pay the wife, Anna Spies, the $500 a month which that Trust provided for her, the Commissioner determined that $6000 was taxable to her in each of the years for which deficiencies were declared out of the Bond Trust and not out of the Testamentary Trust. Therefore, the amounts actually paid to her for the years in question out of the Testamentary Trust and upon which she paid income tax was credited to her. This is indicated by parentheses around those figures in the above schedule.

By letter, dated March 28th, 1946, the Commissioner advised each of the plaintiffs that he had determined deficiencies against them individually for the years 1941 and 1943, and on October 18th, 1946, these deficiencies plus interest were assessed in the following amounts:

 1941 1943 Total
                 Anna Spies $593.45 $ 829.83 $1423.28
                 Elizabeth Spies Hossack $779.01 $1433.81 $2212.82
                 Charles J. Spies $667.71 $1409.17 $2076.88
                 Adolph A. Spies $826.27 $1718.62 $2544.89
                

Each of the plaintiffs paid such amounts assessed against them on November 13th, 1946, under protest, and each filed a claim for refund on March 4th, 1948.

On the 29th day of January, 1948, the trustees of the two trusts, individually and as such trustees, filed two petitions in the District Court of Iowa in and for Palo Alto County, Equity Nos. 15864 and 15865, in both of which petitions Anna Spies and all of the Settlor-Testator's grandchildren were named as defendants. Both petitions sought a declaratory judgment under the provisions of Rule 264 of the Iowa Rules of Civil Procedure, No. 15864 requesting a construction of the Testamentary Trust and No. 15865 requesting a construction of the Bond Trust. Notice of these petitions was given to the Commissioner when the claims for refund were filed, and he was requested to appear and participate in the proceedings but he did not do so. That court on the 28th day of October, 1948, filed its Findings of Fact and Conclusions of Law in each case, and on the 16th day of November, 1948, filed its Decree and Judgment in each case. In each Judgment it was decreed that the trust being construed was a valid spendthrift trust under the Iowa law and that any income to be distributed by...