United States v. Hancock Bank

• Decision Date: 11 September 1968
• Docket Number: No. 23711.,23711.
• Citation: 400 F.2d 975
• Parties: UNITED STATES of America, Appellant, v. HANCOCK BANK, Trustee of the Estate of Anna F. C. Martin, Appellee. HANCOCK BANK, Trustee of the Estate of Anna F. C. Martin, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

400 F.2d 975 (1968)

UNITED STATES of America, Appellant, v. HANCOCK BANK, Trustee of the Estate of Anna F. C. Martin, Appellee.

HANCOCK BANK, Trustee of the Estate of Anna F. C. Martin, Appellant, v. UNITED STATES of America, Appellee.

No. 23711.

United States Court of Appeals Fifth Circuit.

September 11, 1968.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Meyer Rothwacks, David O. Walter, Karl Schmeidler, Attys., Dept. of Justice, Washington, D. C., Robert E. Hauberg, U. S. Atty., Jackson, Miss., for United States.

Lucien C. Gwin, Natchez, Miss., Landman Teller, Vicksburg, Miss., for Hancock Bank.

Before RIVES, COLEMAN and GODBOLD, Circuit Judges.

GODBOLD, Circuit Judge:

Included in Anna F. C. Martin's estate when she died in 1942 was a 1/6 interest in Berkely Plantation, located in Adams County, Mississippi. Her will left most of her estate, including the 1/6 interest in Berkely Plantation to named trustees for the benefit of two life tenants, with remainder over in fee to her heirs at law.

In 1945 the surviving trustees and one life beneficiary executed an oil and gas lease, purporting to cover all of Berkely Plantation, in favor of Humble Oil & Refining Company. During 1946 the other life beneficiary and all remaindermen save one, Mabel Martin, ratified the lease. Under the lease and ratifications all royalties were payable to the trustees. Humble commenced drilling operations in 1950 which resulted in production.

Litigation concerning construction of Mrs. Martin's will was begun in the Mississippi courts in 1949 and concluded in 1957. The sole question in that litigation relevant to the 1/6 interest in Berkely Plantation was whether the proceeds of the oil lease should be paid to the life beneficiary or should be retained as corpus and invested, with only the income from such investment to be paid to the life beneficiary. There was no question in that proceeding which would have affected the validity of the lease. Nevertheless, during the course of the litigation Humble suspended payment to the trustee¹ of royalties earned and credited the royalties to an account earmarked for "the heirs or devisees of Anna F. C. Martin."

At the conclusion of the state court litigation the trustee demanded payment. Humble responded with a check for $50,949.75 representing oil royalties attributable to the entire 1/6 interest in Berkely which had been owned by Anna Martin. In making out the trust's cash basis income tax return for 1957 the trustee reported this entire amount as trust income for the year of receipt, 1957. The trustee had never reported any portion of this royalty income in the years 1950-1956. By reporting all royalties attributable to production from 1950 through 1957 as taxable income in 1957 the trustee paid a 1957 trust income tax on the royalties in the amount of $16,552.04.

Believing that a mistake had been made in the reporting of this income, on April 12, 1961, only a few days before the running of the statute of limitations for asserting a deficiency for 1957, 26 U.S.C.A. § 6501, or for filing a claim for refund for that year, the successor trustee filed a refund claim in the amount of $8,550.55 plus interest. The refund claim was accompanied by a schedule showing the actual royalties earned in each of the years 1950 through 1957, and a computation of the tax claimed by the trustee to be owed for each of the years. The basis of the claim was that royalty income was constructively received in each year when Humble credited an amount to the special suspended payment account. According to the trustee's computations, the refund due was the difference between the amount paid in 1957 and the total of taxes owed for the years 1950-1957.

On January 15, 1962, the trustee filed an amended claim for refund and alleged that the total refund due was $15,235.26. The trustee claimed the statute of limitations barred any collection of tax deficiencies for the years 1950-1956, that the only tax due was the amount attributable to royalty payments for 1957, and that the claim for refund should not be offset by the amount of taxes owed for the years 1950-1956. The Internal Revenue Service disallowed the original claim and refused to consider the amended claim, taking the position that it was barred by the statute of limitations. The trustee sued for refund. The case was tried on stipulated facts. The district court held the royalty payments were constructively received by the trustee in each of the years 1950-1956, but the refund for overpayment in 1957 must be offset by taxes due but not paid in each of the earlier years. Judgment was entered based on 80% of the amount of the original claim.^1A

The United States appeals and the trustee cross-appeals.

I. Constructive Receipt

The applicable tax regulation provides:

Income although not actually reduced to a taxpayer\'s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer\'s control of its receipt is subject to substantial limitations or restrictions.

Treas.Reg. § 1.451-2, T.D. 6723, 1964-1 Cum.Bull. 73. The doctrine of constructive receipt of income applies both to cash and accrual basis taxpayers. North American Oil Consol. v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197 (1932). The question presented is whether for the years 1950-1956, when Humble credited royalty payments under the lease to the special account, the payments were set apart for the trustee "so that he could have drawn upon them during the taxable year if notice of intention to withdraw had been given," or whether Humble's withholding of the payments amounted to a substantial limitation or restriction on the trustee's control of their receipt.² The finding of the district court that the trustee's right to receive the payments was not subject to substantial restrictions not being clearly erroneous,³ we conclude its decision on this issue must be affirmed.

Humble's decision to retain the royalty payments, crediting them to a special account, was based on its feeling that "the will of Mrs. Martin was so difficult and uncertain of interpretation." The will was then being construed in state court. In addition, Humble labored under the misconception that J. G. Martin, with whom it corresponded concerning payment of the royalties, was only the executor of Mrs. Martin's estate. Because it felt Martin was only an executor and "an executor does not have the power and authority with respect to real property interests that he may exercise with respect to personal property unless the will expressly so provides," Humble concluded the prudent course was to retain the royalties pending the outcome of the state litigation.

With respect to the state court litigation it is stipulated that

The sole question presented by the Trustee involving the 1/6th interest in Berkely Plantation was whether the proceeds of the oil lease should be paid to the life beneficiary or should be retained as corpus and invested, with the income from such investments only to be paid to the life beneficiary. No question by any of the the parties to said proceeding was presented which would have affected the validity of said lease as to the 4/5ths of the 1/6th interest of Berkely Plantation covered by the aforesaid lease and ratifications.

Thus the considerations which led Humble to retain the royalties were not involved in the state litigation.

Humble's caution stemmed neither from doubt as to the validity of its lease nor from a contention the royalties were not due thereunder. Its only asserted basis for establishing the suspense account was doubt as to who was entitled to the payments under the will. In retrospect its belief this question would be resolved by the state litigation was ill-founded.

"It is now well settled that income which is subject to a taxpayer's unfettered command and which he is free to enjoy at his own option is taxed to him as his income whether he sees fit to enjoy it or not." 2 Mertens, supra § 10.01, at 2; Corliss v. Bowers, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916 (1930); Llewellyn v. Commissioner of Internal Revenue, 295 F.2d 649 (7th Cir. 1961); Hedrick v. Commissioner of Internal Revenue, 154 F.2d 90 (2d Cir. 1946).⁴ Although Humble undoubtedly placed an obstacle in the trustee's path to receiving the funds by placing them in a suspense account, the obstacle was wholly without legal basis. Humble was at all times liable to the trustee for the royalties credited to the special account. See William Parris, 20 B.T.A. 320. Under such circumstances we cannot say the district court erred in finding this did not amount to a "substantial limitation or restriction" on the trustee's control of its receipt.

Decisions by this court in Farrell v. Commissioner of Internal Revenue, 134 F.2d 193 (5th Cir. 1943), and Parr v. Scofield, 185 F.2d 535 (5th Cir. 1950), do not require a different result. In both of those cases the litigation which prevented actual receipt of the funds concerned the taxpayer's legal right to receive them. The state court litigation Humble relied on to retain the royalties involved here concerned no more than what the trustee was to do with the funds once he received them. However the state court might resolve the issue the trustee's right to receive the funds from Humble was unaffected.

II

The district court set off the taxes due for the earlier years on the ground that it would be unfair and unjust to allow the taxpayer to recover on the amended claim, that by its actions the taxpayer had made voluntary payment of what was justly and rightfully due the United States, and that the taxpayer's concession and admission of liability for the years 1950-56...