White v. Stone

• Citation: 78 F.2d 136
• Decision Date: 25 May 1935
• Docket Number: No. 3019.,3019.
• Parties: WHITE v. STONE et al.
• Court: U.S. Court of Appeals — First Circuit

78 F.2d 136 (1935)

WHITE v. STONE et al.^*

No. 3019.

Circuit Court of Appeals, First Circuit.

May 25, 1935.

Joseph M. Jones, Sp. Asst. to the Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for appellant.

Thomas Allen, of Boston, Mass. (Burdett, Wardwell & Ranney, of Boston, Mass., on the brief), for appellees.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

BINGHAM, Circuit Judge.

This is an action at law brought by Robert G. Stone and Carrie M. Stone, trustees under the will of Galen L. Stone, in which they seek to recover, in the first count, the sum of $24,870.66 and interest from the date or dates of payment as money had and received for the plaintiffs' benefit.

In the second count they alleged that they paid to the defendant under protest the sum of $24,995.50, stating the dates of the payments; that as trustees in their return of income received by them during the calendar year 1928 they disclosed income received and amounts paid to Carrie M. Stone, sole beneficiary under the will of Galen L. Stone, and, at the same time, filed a return showing taxable profits received by them as trustees during the calendar year 1928, which sum was not payable to said beneficiary, and the return disclosing the same did not include the amounts of income received and paid to Carrie M. Stone; that the Department of Internal Revenue, after examination of the returns, included the income paid to the beneficiary as income taxable to the plaintiffs as trustees, resulting in a tax thereon of $24,995.50; that this action of the Department was illegal and erroneously denied to the plaintiffs the right to deduct the income paid the beneficiary under the provisions of the Revenue Act of 1928 (26 USCA § 2001 et seq.).

In answer to the plaintiffs' declaration, the defendant pleaded the general issue, and as an equitable set-off or defense further answered that, under the will of Galen L. Stone, the plaintiff, Carrie M. Stone, was named as sole trustee and was the sole beneficiary for her life. That the plaintiff, Robert G. Stone, was appointed trustee to act with Carrie M. Stone. That on March 19, 1929, Carrie M. Stone filed her individual income tax return for the year 1928 reporting a net income in the amount of $224,706.53 and disclosing a tax due in the amount of $37,441.35, which was duly paid. That in said return Carrie M. Stone did not include for taxation any portion of the income of $153,545.37 received by her from the plaintiffs as trustees under the will of Galen L. Stone, and that her return contains the following statement:

"Income from Trust — Galen L. Stone u/w of is not included in accordance with Bolster Decision (D8286)."

That the taxes which Carrie M. Stone should have paid to the defendant on account of said income of $153,545.37 are largely in excess of the amount claimed in the plaintiff's declaration. That the assessment and/or collection of the taxes against Carrie M. Stone are now barred by the statute of limitations. That the plaintiffs, as trustees, and Carrie M. Stone are the same parties in interest. That any recovery by the plaintiffs in this action will inure to the benefit of Carrie M. Stone and that the income in question will not be taxed.

It appeared that Galen L. Stone by his will, after making certain specific bequests, bequeathed the residue of his property to his wife, Carrie M. Stone, as trustee, to pay over the net income to herself at such times and in such amounts as she may deem best for and during her natural life, that Robert G. Stone was afterwards appointed a cotrustee, and that the facts alleged in the plaintiffs' declaration as to the making of returns and the assessment and payment by plaintiffs of $24,995.50 on the income paid by them to the beneficiary in the year 1928 are correct. It also appeared that a claim for refund was duly made, that the claim was denied and this suit seasonably brought, and that the facts alleged by the defendant in his answer as an equitable set-off or defense are true.

The controversy arises out of the denial by the Commissioner of a deduction of the income paid to Carrie M. Stone in 1928, which the plaintiffs claim should have been deducted under section 162 (b) of the Revenue Act of 1928, 26 USCA § 2162 (b), which provided:

"(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not."

It seems that at the time of the assessment and collection of these taxes in 1929 the Courts of Appeals for this Circuit United States v. Bolster, 26 F.(2d) 760, 59 A. L. R. 491, for the Second Circuit Warner v. Walsh, 15 F.(2d) 367, and for the Eighth Circuit Allen v. Brandeis, 29 F.(2d) 363 had held that, when a widow relinquishes her statutory rights in her husband's estate (as Mrs. Stone did in this case) by electing to take in lieu thereof the provisions made for her in his will, she acts as purchaser for a valuable consideration, and the income thereafter paid to her under the trust constitutes a return of capital until the payments equal the value of her statutory rights, and consequently are not taxable to her as a beneficiary. See, also, Atkins v. Commissioner, 63 F. (2d) 88 (C. C. A. 1st. Cir., decided January 31, 1933). It was because of these decisions and of the fact that Mrs. Stone, at the time of the assessment, had not received the value of her statutory rights, that the Commissioner included the income for 1928 paid to Mrs. Stone in the assessment against the trustees and omitted to assess the same against Mrs. Stone. In fact, it was not until December, 1933, that the Commissioner learned that the decision of this court in United States v. Bolster and the like decisions in the Second and Eighth Circuits were not the law, when the Supreme Court in Helvering v. Butterworth, 290 U. S. 365, 54 S. Ct. 221, 78 L. Ed. 365, decided that the income distributed to the beneficiary under the circumstances of this case should have been taxed to the beneficiary and not to the trustees.

The only question before the District Court was and this court is whether the defendant in his answer stated a good equitable set-off in defense of the suit, Mrs. Stone not having been assessed for or paid any tax upon the income received by her, and the time within which a tax could be assessed and collected against her having expired. Section 275 of the Revenue Act of 1928 (45 Stat. 856, 26 USCA § 2275).

In the District Court (8 F. Supp. 354, 355) it was held that: "The fact that the government did not seasonably pursue its remedy against Mrs. Stone within the time when it could have done so, and the fact that Mrs. Stone has paid no tax on the income in question, do not constitute a defense to this action by trustees, whose trust, for income tax purposes, is an entity separate and distinct from the beneficiary of the trust. The same conclusion is reached if the trust is not regarded as an entity. The trustees jointly own a legal chose in action, and a barred claim at law against one of them cannot be used as a defense to any action by them both."

Section 274b of the Judicial Code (38 Stat. 956, title 28 USCA § 398) provides:

"Sec. 274b. In all actions at law equitable defenses may be...