Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Charles Edgar Woodward, Judge.
Before ALSCHULER and SPARKS, Circuit Judges, and WILKERSON, District Judge.
WILKERSON, District Judge.
This appeal involves income taxes on two trust estates created under trust deeds which are the same in all essential respects.
The deeds were executed on June 28, 1919, and each of them transferred to the appellant bank as trustee one hundred seventy-five shares of the stock of the Ford Motor Company. The deeds were in the usual form and amounted in effect to a figt of the stock for the use of the named beneficiaries.
On June 10, 1919, there had been terminated by the Supreme Court of Michigan a suit to compel a distribution of the accumulated cash surplus of the Ford Company. That suit was brought in the circuit court of Wayne county, Mich., in 1916, and in December, 1917, a decree was entered ordering a distribution to the extent of one-half of the cash surplus then on hand.An appeal was taken by the Ford Company to the Supreme Court of Michigan, and on February 7, 1919, the order of distribution was affirmed. (Dodge v. Ford Motor Co., 204 Mich. 457, 170 N.W. 668, 3 A.L.R. 413). On June 10, 1919, a petition for rehearing was denied and the mandate of the Michigan Supreme Court issued. On July 10, 1919, the directors of the Ford Company authorized a distribution of dividends in compliance with the decree of the circuit court of Wayne county and appellant bank received in each of the trust estates $182,106.18 as such dividends and interest thereon from the Ford Company. The facts with reference to the litigation in the Michigan court are more fully stated in Dodge v. United States, 64 C. Cl. 178, and Kales v. Woodworth (C.C.A.) 32 F.2d 37.
On March 15, 1920, appellant bank as trustee filed its fiduciary and individual returns of income for 1919 in respect of such trusts, and paid $6,589.93 income tax for each of the beneficiaries. On September 23, 1922, after an audit by the commissioner, an additional tax of $66,519.43 was assessed against each of the beneficiaries. The taxes so assessed were paid on November 10, 1922, under protest. On October 8, 1923, claims for refund, together with amended fiduciary and individual returns for 1919, were filed with the collector, and after the rejection of such claims on August 2, 1924, these suits were brought.
Appellant in its returns had computed the taxes on the basis of the rates applicable for 1916, the year in which the suit to compel the distribution was brought. The additional assessment was made on the basis of rates for 1919, the year in which the dividends were paid.
Appellant claims that in view of sections 213 (b) and 202 of the Revenue Act of 1918 (40 Stat. 1065, 1060) and the regulations promulgated under the Revenue Act of 1918 (article 1562, Regulations 45 [1920 Ed.], as amended by T.D. 3206, C.B. July-December, 1921, p. 55), the Ford distribution was not income to the trustee. It is also claimed that in computing the net income in each case the trustee's fees and commissions, which amounted to $3,529.98, should have been deducted. Section 214 (a) (1), Revenue Act of 1918, 40 Stat. 1066.
The United States urges that regardless of the soundness of the propositions now put forward by appellant as grounds of recovery, but not presented to the commissioner, the suits cannot be maintained because the claims for refund do not comply with the requirements of the Revenue Act and Regulations.
In the original returns made by the trustee the Ford distributions were listed as "dividends received directly from Ford Motor Company and paid under order of court out of surplus in the hands of corporation, July 31, 1916." In amended returns the income was described as "dividends and interest paid under order of court dated 7-31-16, taxable at 1916 rates as set forth in the statement of facts attached hereto."
In the statement accompanying the amended returns the facts relative to the litigation are set forth with the conclusion that "as a result of said distribution there was received by Illinois Trust and Savings Bank, trustee of the trust estate * * *, the sum of $181,142.33, upon which sum said trustee paid an income tax computed on the basis of the surtax prescribed in the Revenue Act of 1916, as income derived during 1916."
In the exception s filed to the proposed additional assessment, there is no mention made of the date of the trust agreements, nor is there any statement concerning the terms of those agreements. There are no averments to the effect that there are no other documents relating to the liability for taxes on the distribution. In short, the facts stated are those relating to the litigation in the Michigan courts, which were relied upon to support the claim that the tax should be estimated on the basis of 1916 surtax rates.
In the exceptions is the following: "However, if for any reason the amount received by this trustee upon which additional assessment is proposed to be levied, is not 1916 income, then it should be held ...