Spies v. United States
| Decision Date | 18 July 1949 |
| Docket Number | Civ. No. 413. |
| Citation | 84 F. Supp. 769 |
| Parties | SPIES et al. v. UNITED STATES. |
| Court | U.S. District Court — Northern District of Iowa |
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.
This is an action by the four beneficiaries of two trusts against the United States for 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:
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 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 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 the trustees was not the property of any of the beneficiaries until the trustees made actual distribution. Paragraph 6 of the Judgment in No. 15865 states:
"It is further declared, adjudged and decreed that it is the true construction of said trust instrument, having due regard to all the terms of the instrument, including the provisions thereof creating a spendthrift trust and all other provisions, that it was the intention of the Settlor that the Trustees were to be, and they are, vested with full discretion and authority to distribute to, or withhold from distribution to, the three children of the testator, Elizabeth Spies Hossack, Charles J. Spies, and Adolph A. Spies, income, gains and profits, although the same accrued as income and was earned within the taxable year; and that income from the Trust property and assets in the possession of said Trustees is not, as the Trust Instrument is by the Court interpreted and construed, income required to be distributed currently by the said Trustees to the beneficiaries."
The Judgment does not specifically pass upon the question of whether Anna Spies, Settlor's wife, was entitled to the $500 monthly income as provided by the trust as a matter of right or whether that provision was likewise subject to the discretion of the trustees.
This action was commenced on the 27th day of November, 1948, after more than six months had elapsed since plaintiffs had filed their claims for refund during which time the Commissioner had neither approved nor rejected their claims.
Section 22(a) of 26 U.S.C.A. defines "gross income" for the purposes of income taxation. It is provided therein that "gross income" shall include "income * * * of whatever kind." In 26 U.S.C.A. § 162(b) and (c) it is provided as follows:
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...1120. In recent cases the United States Court of Appeals for the Eighth Circuit has also approved that doctrine. Spies v. United States, D.C.N.D.Iowa 1949, 84 F. Supp. 769; affirmed, 8 Cir., 180 F.2d 336, and Keokuk & Hamilton Bridge Company v. Commissioner, 8 Cir., 1950, 180 F.2d It is app......
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Spies v. United States, 14040.
...both questions in the affirmative in an opinion which adequately states the pertinent facts, the issues involved, and the applicable law. 84 F.Supp. 769. Nothing would be gained by a repetitious or redundant elaboration of that We think the District Court's conclusion that the widow of the ......