Van Dyke v. Wilkinson

• Decision Date: 05 March 1928
• Citation: 25 F.2d 763
• Parties: VAN DYKE v. WILKINSON.
• Court: U.S. District Court — Eastern District of Wisconsin

25 F.2d 763 (1928)

VAN DYKE v. WILKINSON.

District Court, E. D. Wisconsin.

March 5, 1928.

Van Dyke & Hauxhurst, of Milwaukee, Wis., for plaintiff.

L. H. Bancroft, U. S. Atty., of Milwaukee, Wis., for defendant.

GEIGER, District Judge.

The plaintiff brings this action to recover federal income taxes paid for the year 1924; the complaint sets forth in detail the facts out of which the claim arises, and the defendant has framed an answer, to which the plaintiff has demurred, and thereby, as the parties agree, a single question of law is presented upon the facts detailed in the complaint, which, upon the demurrer, as a matter of relation, are before the court without controversy.

George H. Lawrence, a resident of Milwaukee, died on October 22, 1923. His will, duly admitted to probate, provided for the payment of certain legacies, and the remainder was devised and bequeathed in trust, to be held during the lives of certain persons and 21 years thereafter, and to pay the income from the estate to three persons, of whom the plaintiff is one; that, upon the death of any one of the three, such decedent's share of the income was directed to be paid to the survivors under the trust provision. Upon the termination of the trust the principal of the estate was to be distributed to certain institutions specified.

The will provided: "I direct that my executor shall pay out of the principal of my estate all inheritance taxes, both state and federal, that may be assessed upon my estate or upon the interests of the beneficiaries therein."

In the year 1924 the executor paid to the state of Wisconsin a sum sufficient to cover any and all inheritance taxes that might be due to the state of Wisconsin, which amount was afterwards determined to be $116,384.02.

The plaintiff, having filed his personal income tax return for the year 1924, paid the taxes due thereon to the government, then filed an amended return, in which he sought to take deduction, under section 214(a) of the Revenue Act of 1924 (26 USCA § 955(a); Comp. St. § 6336 1/6g(a), for the sum of $39,435.64, which was claimed to be his portion of the said inheritance tax paid by the executor.

The plaintiff filed his claim for a refund of this amount, which the Commissioner of Internal Revenue denied, and thereupon the plaintiff brought this suit. The case is concisely stated by the plaintiff:

"That the tax was a proper deduction by some one is not denied, nor is it denied that it was a proper deduction either by the plaintiff in his income tax return for 1924, as claimed by him, or by the executor of the estate in making the income tax return for the estate for 1924. The precise question here presented is which of these two was entitled to take the deduction.

"The answer to this question, obviously, is that the tax was deductible by the person on whom it was imposed, and by whom it was in fact paid, whether paid directly or indirectly. In other words, if the tax was imposed on the estate of the deceased as an entirety, based on decedent's right to transmit, and paid out of decedent's gross estate, then it would follow that the deduction therefor should be taken by the estate. But, on the other hand, if the tax was in fact imposed on each legatee and devisee separately, based on his right to receive, and was paid by each legatee or devisee, or was paid for his benefit and account by the executor out of the residue or principal of the estate, pursuant to the direction of testator's will, then the tax is properly deductible by the recipient of the legacy or devise so taxed, and this is the plaintiff's contention."

Moreover, the parties do not disagree in this: That the federal income tax law, while permitting a deduction for state inheritance taxes paid, does not designate in words the person who may take it. Obviously, the legislative intent must have been that such deduction — as a matter of justice — should be allowed to the one who really bears the burden of the state tax. In other words, and this is the plaintiff's contention, the deduction is intended to be awarded with reference, not to the nominal, but to the real incidence of the state tax. Much of the discussion in the case is directed to the effect of decisions of the United States Supreme Court, particularly in Keith v. Johnson, 271 U. S. 1, 46 S. Ct. 415, 70 L. Ed. 795, 44 A. L. R. 1432, and U. S. v. Mitchell, 271 U. S. 9, 46 S. Ct. 476, 70 L. Ed. 799. The former of these cases deals with a deduction claimed by a New York, the latter with one claimed by a Texas, executor, in making income tax returns for their estates, for taxes paid under the inheritance tax laws of these states respectively.

And while the defendant collector herein seems content to rest his case upon an oft-repeated insistence that these cases not only determine, but foreclose the question in, this case, the plaintiff claims, not only that they accord with his contention, but that he expressly invokes them as prescribing the only test of deductibility to be applied, viz.: "The meaning and proper application of the state" tax law according to the "decisions of the state courts." The collector further makes the broad claim that there are no decisions of the state courts of Wisconsin enabling the application of the test prescribed, wherefore he concludes that the Wisconsin law is open to interpretation by the federal courts, and, obediently to these decisions, must give to the Wisconsin law the same interpretation which the Supreme Court (on the strength of New York decisions) gave to the New York and the Texas law with respect to this fundamental matter.

It is assumed that, if the test be stated in the terms above quoted, the question whether the state courts have spoken on the matter does not necessitate finding an authority dealing precisely with a deduction claimed under the federal income tax law. The point is whether the state court has given the meaning and proper application of the state law to fix the real incidence of the state tax.

Therefore the hypothesis upon which the plaintiff presses his case necessitates an examination of the Wisconsin law and judicial utterances respecting it. It may, however, be noted that the position taken by the plaintiff, viewing it from the standpoint of the administrators of the federal income tax law, is not at all novel, and, notwithstanding the insistence of the defendant, it for many years has found recognition in regulations promulgated under successive income tax laws, and not the least important is the fact that such regulations were re-enacted subsequently to the decisions of the Supreme Court upon which the defendant here so confidently relies; that like recognition has been and is being given to the principle by the department and the tax board in applying the regulations referred to; and that it is accepted by the text-writers in dealing with the question, the latter not only assuming the binding force of the principle, but, in attempting to aid in the application thereof, classify the states with reference to the imposition of the state inheritance tax upon the "right or privilege to transmit rather than upon the right or privilege to receive or succeed." Holmes, Federal Income Taxes, 6th Ed.

Regulations of the Treasury Department, promulgated under authority of the Revenue Act of 1921 (42 Stat. 227) subsequently reenacted, and now in force, are as follows:

"Estate, succession, legacy, or inheritance taxes, imposed by any state, territory, or possession of the United States, or foreign country, are deductible by the estate, subject to the provisions of section 214, where, by the laws of the jurisdiction exacting them, they are imposed upon the right or privilege to transmit rather than upon the right or privilege of the heir, devisee, legatee, or distributee, to receive or to succeed to the property of the decedent passing to him. Where such taxes are imposed upon the right or privilege of the heir, devisee, legatee, or distributee, so to receive or to succeed to the property, they constitute, subject to the provisions of section 214, an allowable deduction from his gross income.

"Where, in accordance with a direction contained in the testator's will, the taxes upon the right to receive any particular devise or devises, legacy or legacies, are so payable as to relieve the particular devisee or devisees, legatee or legatees from the burden thereof, then the person or persons entitled to the fund or other property out of which payment is made may not take deduction of the taxes so paid, but deduction thereof is available only by such devisee or devisees, legatee or legatees; each, if there be more than one, being authorized to deduct such part of the taxes so paid as he would otherwise have been entitled to do had there been no such testamentary direction.

"Where there is a life estate and a remainder, and, by the laws of the jurisdiction imposing them, the taxes in respect to both interests are payable out of the remainder interest, with no legal obligation imposed whereby the remainderman is entitled to reimbursement, then deduction of the taxes so paid may be taken only by the remainderman. Where, in the case of an annuity, the taxes in respect thereto are, by the laws of the jurisdiction imposing them, payable in the first instance out of the fund set aside for creating the annuity, but are to be repaid or restored to such fund from the annuity, then deduction thereof may be taken only by the annuitant.

"The accrual dates of such taxes shall be the due date thereof except as otherwise provided by the law of the jurisdiction imposing them. Where deduction is claimed of any such taxes, the amount thereof and the name of the state, territory, or possession of the United States, or foreign country, by which they have been imposed shall be stated in the return."

What, then, in view of legislative and judicial utterances, is the law of Wisconsin upon this fundamental...