Union Trust Co. v. Commissioner of Internal Revenue
| Citation | 111 F.2d 60 |
| Decision Date | 27 February 1940 |
| Docket Number | No. 7034.,7034. |
| Parties | UNION TRUST CO. OF INDIANAPOLIS v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Merlin M. Dunbar, Lucien L. Dunbar, Paul Y. Davis, Kurt F. Pantzer, Ernest R. Baltzell, and William G. Sparks, all of Indianapolis, Ind., for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, Edward M. English, J. P. Wenchel, and Claude R. Marshall, Sp. Assts. to Atty. Gen., for respondent.
Before EVANS, MAJOR, and KERNER, Circuit Judges.
This is a petition to review an order of the Board of Tax Appeals entered March 28, 1939, in a proceeding for redetermination of an alleged deficiency in petitioner's income tax for the calender year, 1932. The determination by the Commissioner of Internal Revenue, sustained by the Board, involves two items, here in dispute, (1) the inclusion, in petitioner's gross income for the year 1932, the sum of $603,983.25, representing a refund of Federal estate tax received that year, and (2) a disallowance of a claimed deduction of $105,583.34, representing income properly paid during the same year to the beneficiaries of a testamentary trust.
The facts, stipulated before the Board, briefly are as follows: Petitioner's decedent died on December 11, 1928, a resident of Indianapolis, Indiana. The executor of his estate paid Federal estate tax as follows:
December 11, 1929 ........... $564,299.23
July 1, 1930 ................ 14,992.00
January 15, 1931 ............ 233,859.15
Deductions were claimed by the estate and allowed as to said amounts for the appropriate years. Deductions were also allowed for state inheritance tax due under the laws of Indiana as they existed prior to March 6, 1931. On that day, the state law was amended so as retroactively to affect the amount of inheritance tax due the state, and, as a result, petitioner, on June 16, 1932, paid an additional state inheritance tax in the amount of $611,228.58, which was claimed and allowed as a deduction from the gross income of the estate for the year here involved. In the meantime, a proceeding was instituted before the Commissioner for redetermination of the Federal estate tax because of the increased liability to the State of Indiana. By stipulation before the Board, petitioner was allowed full credit for the additional inheritance tax due the state and, as a result, there was refunded to the petitioner on October 12, 1932, the sum of $603,983.25, being the amount which petitioner contends was erroneously included in its gross income for the year in question. These are the facts material to the first question, except it may be pertinent to point out that petitioner's books were kept and its returns made upon a cash receipts-and-disbursements basis and, that the Statute of Limitations now has run against additional assessments for the years 1929, 1930 and 1931.
Petitioner contends that the refund does not constitute income as defined in Section 22(a) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Code, § 22(a), which defines gross income as "gains, profits * * * and income derived from any source whatever." It is argued that this refund can not be considered as gain or profit for the reason that when it was wrongfully paid in previous years it was from the corpus and not the income of the estate. Thus, it is sought to distinguish the instant situation from those cases1 which have held, under a variety of circumstances, that a refund of taxes is properly included in the gross income for the year received. Under the circumstances, we think that the distinction sought to be made can not be justified. The fact is, that the sum total of the transactions constitutes a saving to the estate, and we think may properly be said to be a gain or profit. This is rather forcibly illustrated by reference to the situation actually existing. Referring to the year 1929 as illustrative, we see that petitioner's gross income was $574,308.43. There was claimed and allowed against this, a deduction in the amount of $564,299.23, paid on account of Federal estate tax. Other deductions were allowed in the sum of $24,500.
Thus it is apparent, without the wrongful deduction because of Federal estate tax, that petitioner, for that year, would have been liable for a substantial income tax, but by employing this wrongful deduction, a saving was thereby effected. In fact, by reason of this deduction there was no net income and no tax paid. Petitioner also was enabled, by these wrongful deductions for the years 1930 and 1931, to escape the payment of an income tax for which it otherwise would have been liable. It now is too late to revise the returns for those years and to require the petitioner to pay the tax which would have been required of it except for the wrongful deductions.
Respondent acknowleged the wrongful collection of the Federal estate tax, but petitioner, when made whole in the form of a refund, after having utilized such payments as deductions, with the resultant saving to the estate, takes the position that such refund should not be included in its gross income. The Board decided to the contrary and, we think properly so.
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