United States v. Bolster

• Decision Date: 13 June 1928
• Docket Number: No. 2208.,2208.
• Parties: UNITED STATES v. BOLSTER.
• Court: U.S. Court of Appeals — First Circuit

26 F.2d 760 (1928)

UNITED STATES v. BOLSTER.

No. 2208.

Circuit Court of Appeals, First Circuit.

June 13, 1928.

Thomas H. Lewis, Jr., Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (Frederick H. Tarr, U. S. Atty., and J. M. Leinenkugel, Sp. Asst. U. S. Atty., both of Boston, Mass., C. M. Charest, Gen. Counsel Bureau of Internal Revenue, of Washington, D. C., on the brief), for the United States.

O. W. Taylor, of Boston, Mass., for defendant in error.

Before BINGHAM and JOHNSON, Circuit Judges, and HALE, District Judge.

HALE, District Judge.

Sarah A. Davenport, of Boston, was the beneficiary under the will of her husband, Orlando H. Davenport, who died on the 11th day of January, 1915. The will provided that the residue of the decedent's estate should be held in trust, and, after payment of expenses of administering the trust, the income was to be paid over to Sarah A. Davenport, for and during her life, and that the provision made for her should be "in lieu of dower and all claims she might or could have by any possibility upon the estate."

The wife accepted the provisions made for her in the will, and received the net income of the trust during the years 1919 to 1923, inclusive, namely, $113,811.82. This sum Sarah A. Davenport included in her income tax returns for the above years as a part of her gross income.

On May 28, 1923, Sarah A. Davenport died; Wilfred Bolster was duly qualified and appointed her executor. Contending that the amounts paid to Sarah A. Davenport under the trust provisions were erroneously included by her in her gross income, the executor filed a claim for refund. The Commissioner of Internal Revenue rejected this claim. The executor then brought a petition in the nature of a suit to recover the federal income taxes for the years 1919 to 1923 upon the amounts which she accepted and received from the estate of her husband Orlando H. Davenport "in lieu of dower and every and all claims she may or can have, by any possibility, upon my estate."

The defendant demurred. On November 7, 1927, the District Court of Massachusetts entered its decree, overruling the demurrer and giving judgment to the petitioner for the sum of $20,266.09. The case comes before us on writ of error upon the petition for same by the United States. The substantial question involved is presented on the second assignment of errors. It is this:

Where a widow accepts the provisions of her husband's will and is paid, annually, the entire income from his estate, in lieu of her statutory share of the corpus of the estate, are such annual payments taxable income to her, before or until the aggregate amount of such annual payments equals and exceeds the value of the property she relinquished by accepting the provisions of the will?

The plaintiff, the executor, contends that, by the provision of the husband's will, Sarah A. Davenport acquired the legal status of a purchaser for value; that the basis for determining whether she realized any taxable gain or income is the value of a statutory share of the corpus of the estate as of the date she was entitled to receive it; that the annual payments received by Sarah A. Davenport during the years in dispute did not exceed the value of her statutory share in the corpus of the estate; and that those payments by the trustee represented returns of capital, not income.

The government urges that this contention of the petitioner overlooks section 213-b-3 of the Acts of 1918 and 1921 (Comp. St. § 6336 1/8ff a, 3), which provides that, although the value of the property acquired by gift, bequest, devise, or inheritance shall not be included in the gross income, the income from such property shall be included in the gross income. It contends that Mrs. Davenport, the taxpayer, acquired her right to the income by bequest; that the cost to her of her dower right was nothing, she having acquired it by marrying; and that, while this was a valid consideration, it does not represent a financial cost or outlay. Prewit v. Wilson, 103 U. S. 22, 26 L. Ed. 360; Doyle v. Mitchell Brothers Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054.

The federal income tax laws recognize the legal status of the taxpayer as created by local law, and fix the taxes in accordance with such law. By the General Laws of Massachusetts (chapter 191, § 15), as well as under the earlier statutes, a surviving husband or wife may refuse to accept the provisions of a will and take his or her statutory share in the corpus of the estate as if the deceased had died intestate. When the surviving husband or wife accepts the provisions of the will, whether or not such provisions are expressly declared to be "in lieu of such statutory rights," the survivor is in the position of one who sells property to the estate, and acquires the legal status of "a purchaser for a valuable consideration."

In Pollard v. Pollard, 1 Allen, 490, 491, speaking for the Supreme Judicial Court of Massachusetts, Chief Justice Bigelow said:

"The bequest in this case to the widow of the testator is made in express terms in lieu of dower, and on condition that she relinquishes all her right and title thereto.

"A wife cannot be deprived of her dower except by her own consent. Therefore, when she accepts a provision in her husband's will as a substitute for this existing legal right, the law regards her as standing in the light of a purchaser for a valuable consideration, and entitled to receive the whole of the sum given by the will, for which she has relinquished her life estate in one-third of the testator's real estate, in preference to other legatees, who, being only objects of the bounty of the testator, and not having any legal claim on his estate, are regarded as volunteers, and are not allowed to take until the widow has received the full amount of the bequest to her."

See Towle v. Swasey, 106 Mass. 100, 105; Farnum v. Bascom, 122 Mass. 282, 283, 288, 289.

In Borden v. Jenks, 140 Mass. 562, 564, 5 N. E. 623, 625 (54 Am. Rep. 507), speaking for the court, Judge Devens said:

"The widow is a purchaser for value in accepting the provisions of the will, and is not treated as a gratuitous object of the testator's bounty. By relinquishment of her dower, the estate acquires a valuable right of property. Whether the provisions be more or less, so far as the testator, the widow, and all pure beneficiaries under the will are concerned, it is the right of the testator to affix what consideration he pleases for the relinquishment of dower, and for the widow to accept or reject it."

Under the principles announced by the Supreme Judicial Court of Massachusetts, we think that, in the case before us, the payments made to Sarah A. Davenport during the years in dispute represented "purchase money" or "installment payments" by the estate, in consideration for her share in the corpus of the estate. We think, then, that she was a "purchaser for value."

Article 347 of the Regulations 45 relating to the federal income tax provides:

"In ascertaining whether an estate or trust comes within any one of the cases just enumerated, the provisions of the federal statutes and regulations — rather than the provisions of the will or trust and the provisions of state laws — shall determine what items constitute taxable income or allowable deductions; the provisions of the will or trust and of state laws shall determine the allocation of items of gross income or deduction; that is, to which of the different interests making up the whole of such items shall be charged or allowed."

In the case at bar the local law gave Sarah A. Davenport the status of a "purchaser for value." The federal...