Stone v. White

• Citation: 81 L.Ed. 1265,57 S.Ct. 851,301 U.S. 532
• Decision Date: 24 May 1937
• Docket Number: No. 202,202
• Parties: STONE et al. v. WHITE
• Court: United States Supreme Court

301 U.S. 532

57 S.Ct. 851

81 L.Ed. 1265

STONE et al.

v WHITE.

No. 202.

Argued April 29, 1937.

Decided May 24, 1937.

As Amended on Denial of Rehearing Oct. 11, 1937.

Mr. Thomas Allen, of Boston, Mass., for petitioner.

Mr. J. Paul Jackson, of Norfolk, Va., for respondent.

Mr. Justice STONE delivered the opinion of the Court.

The question for decision is whether the petitioners, testamentary trustees, who have paid a tax on the income of the trust estate, which should have been paid by the beneficiary, are entitled to recover the tax, although the government's claim against the beneficiary has been barred by the statute of limitations. The present suit to recover the tax, brought by petitioners against respondent, the Collector, in the District Court for Massachusetts, resulted in a judgment for petitioners, 8 F.Supp. 354, which was reversed by the Circuit Court of Appeals for the First Circuit, 78 F.(2d) 136. We granted certiorari, 300 U.S. 643, 57 S.Ct. 610, 81 L.Ed. —-, because of the conflict of the decision below with that of the Circuit Court of Appeals for the Third Circuit, United States v. Arnold, 89 F.(2d) 246.

Testator, by his will, left property in trust, to pay over the net income to his wife as sole beneficiary, at such times and in such amounts as she should deem best, during her natural life. She elected to take the bequest under the will in lieu of her dower or statutory interest. At that time several circuit courts of appeals had held that in these circumstances, the income payments to the widow are annuities purchased by surrender of the dower interest and not taxable as income to her, until they equal the value of the dower interest. Warner v. Walsh (D.C.) 15 F.(2d) 367; United States v. Bolster (C.C.A.) 26 F. (2d) 760, 59 A.L.R. 491; Allen v. Brandeis (C.C.A.) 29 F.(2d) 363. In conformity to the ruling of these decisions, the beneficiary did not include, in her 1928 tax return, any portion of the income received by her from the trust. A deficiency against the trustees was assessed by the Commissioner before, and was paid by them, under protest, from income of the trust, after collection from the beneficiary had been barred by the statute of limitations. After the statute had run, this Court held in Helvering v. Butterworth, 290 U.S. 365, 54 S.Ct. 221, 78 L.Ed. 365 (interpreting section 219, Revenue Act of 1924, c. 234, 43 Stat 253, 275, corresponding to sections 161, 162 of the Revenue Act of 1928, c. 852, 45 Stat. 791, 838 (26 U.S.C.A. §§ 161, 162, and notes), under which the present tax was assessed), that the income was taxable to the beneficiary and not to the trustees.

In the present suit, brought by the trustees to recover the tax as erroneously collected, the Collector interposed the defense, sustained by the court below, that the tax which should have been paid by the beneficiary exceeded that paid by petitioners, and that, as any recovery would inure to the advantage of the beneficiary, the defendant could set off the tax debt due from her. One judge concurred, denying the right of set off in view of the bar of the statute, but holding the petitioners not entitled, in equity and good conscience, to recover.

The action, brought to recover a tax erroneously paid, although an action at law, is equitable in its function. It is the lineal successor of the common count in indebitatus assumpsit for money had and received. Originally an action for the recovery of debt, favored because more convenient and flexible than the common law action of debt, it has been gradually expanded as a medium for recovery upon every form of quasi-contractual obligation in which the duty to pay money is imposed by law, independently of contract, express or implied in fact. Ames, The History of Assumpsit, 2 Harv.L.Rev. 53; Woodward, Law of Quasi-Contracts, § 2.

Its use to recover upon rights equitable in nature to avoid unjust enrichment by the defendant at the expense of the plaintiff, and its control in every case by equitable principles, established by Lord Mansfield in Moses v. Macferlan, 2 Burr. 1005 (K.B. 1750), have long been recognized in this Court. See Nash v. Towne, 5 Wall. 689, 702, 18 L.Ed. 527; Gaines v. Miller, 111 U.S. 395, 397, 4 S.Ct. 426, 28 L.Ed. 466; Atlantic Coast Line R. Co. v. Florida, 295 U.S. 301, 309, 55 S.Ct. 713, 716, 79 L.Ed. 1451. It is an appropriate remedy for the recovery of taxes erroneously collected, Elliott v. Swartwout, 10 Pet. 137, 156, 9 L.Ed. 373; Cary v Curtis, 3 How. 236, 246—250, 11 L.Ed. 576. The statutes authorizing tax refunds and suits for their recovery are predicated upon the same equitable principles that underlie an action in assumpsit for money had and received. United States v. Jefferson Electric Co., 291 U.S. 386, 402, 54 S.Ct. 443, 449, 78 L.Ed. 859. Since, in this type of action, the plaintiff must recover by virtue of a right measured by equitable standards, it follows that it is open to the defendant to show any state of facts which, according to those standards, would deny the right, Moses v. Macferlan, supra, 2 Burr. 1005, at page 1010; Myers v. Hurley Motor Co., 273 U.S. 18, 24, 47 S.Ct. 277, 278, 71 L.Ed. 515, 50 A.L.R. 1181; cf. Winchester v. Hackley, 2 Cranch 342, 2 L.Ed. 299, even without resort to the modern statutory authority for pleading equitable defenses in actions which are more strictly legal, Jud.Code, § 274b, 28 U.S.C. § 398 (28 U.S.C.A. § 398).

In the present case it is evident that but a single tax was due upon the particular income assessed and that petitioners' demand arises from the circumstance that the tax was paid from the income by the trustees when it should have been paid by the beneficiary. If the court may have regard to the fact that so far as the equitable rights of the parties are concerned petitioners, in seeking recovery of the tax, are acting for the account of the beneficiary, it would seem clear that the case is not one in which the petitioners are entitled to recover ex equo et bono; for under the construction of the will by the court below, which we adopt, any recovery in this action will be income to the beneficiary, and will deprive the government of a tax to which it is justly entitled and enable the beneficiary to escape a tax which she should have paid.

It is said that as the revenue laws treat the trustee and the beneficiary as distinct tax-paying entities, a court of equity must shut its eyes to the fact that in the realm of reality it was the beneficiary's money which paid the tax and it is her money which the petitioners ask the government to return. Formerly, trustee and cestui que trust were likewise distinct in the eyes of the law, as they are today for many purposes. But whenever the trustee brings suit in a court which is free to consider equitable rights and duties, his right to maintain the suit may be enlarged or diminished by reference to the fact that the suit, though maintained in the name of the trustee alone, is for the benefit and in the equitable interest of the cestui.

He can sue to set aside his own voluntary conveyance and impeach it as a breach of trust known to the transferee, because the action, brought to recover property for the trust estate, will inure to the advantage of the innocent beneficiary. Wetmore v. Porter, 92 N.Y. 76; Zimmerman v. Kinkle, 108 N.Y. 282, 15 N.E. 407; Atwood v. Lester, 20 R.I. 660, 665, particularly at page 669, 40 A. 866, 868—870; Franco v. Franco, 3 Ves.Jr. 75; American Law Institute, Restatement of the Law of Trusts, § 294.¹ His suit to recover a debt due him as trustee, and payable by him over to the cestui, is subject to the equitable defense that the cestui has discharged the claim, McBride v. Wright, 46 Mich. 265, 9 N.W. 275 (Cooley, J.); Smith v. Brown, 5 Rich.Eq.(S.C.) 291; American Law Institute, Restatement of the Law of Trusts, § 328. That the cestui owes a like amount can be shown by way of equitable plea in set-off, Campbell v. Hamilton, Fed.Cas.No.2,359; Waddle v. Harbeck, 33 Ind. 231, 234; Ward v. Martin, 3 T.B.Mon(19 Ky.) 18; Driggs v. Rockwell, 11 Wend.(N.Y.) 504, 508; Wolf v. Beales 6 Serg. & R. (Pa.) 242, 243, 9 Am.Dec. 425; Agra and Masterman's Bank, Ltd. v. Leighton, L.R. 2 Ex. 56, 65; American Law Institute, Restatement of the Law of Trusts, § 329. In an action in general assumpsit, this defense may be shown under the plea of non assumpsit, compare Winchester v. Hackley, supra.

In such cases equity does not countenance the idle ceremony of allowing recovery by the trustee only to compel him to account to the beneficiary who would then have to pay the proceeds to the original defendant. To avoid this circuity of action a court of equity takes cognizance of the identity in interest of trustee and cestui que trust. Likewise here, the fact that the petitioners and their beneficiary must be regarded as distinct legal entities for purposes of the assessment and collection of taxes does not deprive the court of its equity powers or alter the equitable principles which govern the type of action which petitioners have chosen for the assertion of their claim.

Equitable conceptions of justice compel the conclusion that the retention of the tax money would not result in any unjust enrichment of the government....