Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; James H. Wilkerson, Judge.
Before MAJOR, TREANOR, and KERNER, Circuit Judges.
These appeals are from judgments of the District Court denying plaintiff's claim for a refund of income tax. Cause No. 6699 involves such tax in the amount of $5,985.11 for the year 1928, and Cause No. 6700 in the amount of $6,500.29 for the year 1929. The facts were stipulated and substantially the same questions are involved in each appeal. They will, therefore, be considered together.
The plaintiff is a sole surviving beneficiary and was the executor of the estate of his wife, Pauline W. Caldwell, who was the granddaughter of Paul Brown, and a legatee under his last will and testament. Paul Brown died testate November 18, 1927, being at the time of his death a resident of the City of St. Louis and State of Missouri. Letters testamentary were issued November 22, 1927, by the Probate Court of that city.
In Item 21 of his will, a one-sixth interest of all the residue and remainder of his estate was bequeathed and devised to each of the following persons: Inez Herford Brown, wife; Julia Radford, Georgie Pauline Blosser and Nellie Perkins Keller, daughters; Pauline w. Caldwell, granddaughter and deceased wife of plaintiff, and the Mercantile Trust Company, in trust for the benefit of the children of Paul Brown, Jr., a deceased son.
In Clause 20 of Item 21, it is directed that all inheritance, estate, transfer or succession taxes assessed against the trust estate established for the benefit of the children of Paul Brown, Jr., deceased, shall be paid out of the principal of the trust estate. In Item 1 of the codicil to Paul Brown's will, the testator expressed the wish that the final settlement of his estate be not made until three years after his death. The executors were instructed "to retain the residuary estate provided for in Item 21 of my said last will and testament, for a period of three years after my death, at which time the distribution of my said residuary estate shall be made to the persons and corporations named in said Item 21." The executors, during that period, were given the same powers and authority "with reference to control, management and disposition, that I have given unto the trustee in the trust created for the benefit of the children of Paul Brown, Jr." The codicil further, after empowering the executors to make investments and reinvestments in their sole discretion, contains the following clause: "And I direct my Executors to pay over the net income and revenue received by them from the property and securities in their hands, from the date of my death until the final settlement of my estate, unto the beneficiaries named in Item Twenty-One of my said last will and testament, in the same proportions and the same manner as therein provided, in as nearly equal monthly installments as possible; the payments to begin on the fifteenth day of the second month after my death."
The fair market value of assets of the estate at the date of his death was some $14,000,000, but in the probate proceedings such assets were valued at something more than $7,500,000. On July 18, 1928, the executors filed their first settlement with the Probate Court in which the value of the assets of the estate was placed at $6,368,000. Semi-annual reports were made thereafter in each of which the value of the assets was placed at something less than $5,000,000, until the last report made on December 4, 1930, which disclosed such assets to be worth $5,148,000. All of the specific bequests under the will were satisfied prior to July 18, 1928. Also, prior to that time, all known claims except those for additional estate and federal taxes were paid.
At the time of the death, Paul Brown was a member of the stock brokerage firm of Paul Brown and Company, and under the terms of the partnership agreement, surviving partners elected to continue the business, and the estate of Paul Brown became a limited or special partner in said brokerage firm and so continued for a period of two years subsequent to November 18, 1927.
The net income from the residuary estate for the year 1928 was $681,520.91, including the sum of $88,563.32 due and owing to the estate from the partnership of Paul Brown and Company. This latter amount, however, was not actually received by the estate until January 21, 1929. During the year 1928, the estate paid a total of $894,415.58 in estate inheritance taxes and federal estate taxes.After deducting commissions for services in collecting and distributing the income from the residuary estate, all of the income was distributed to the beneficiaries in accordance with the terms of the will. Payments were made to the legatees on an installment basis and were included in the settlements or reports filed by the executors and approved by the Probate Court. Plaintiff's decedent's share of the 1928 net income from the residuary estate of her grandfather was $111,549.32, which amount was included in her taxable income for 1928 upon which the tax in controversy was assessed. The executors employed a system of bookkeeping by which all items of income were credited to income account and all disbursements made by the executors for inheritance and estate taxes were charged to capital. The installment payments made to the various legatees during the year 1928 were charged on such books against the income account.
The same procedure was followed during the year 1929 - the income from the estate, the distribution made and the amount included in plaintiff's decedent's income tax return were substantially the same as in 1928. Inasmuch as only questions of law are to be determined, the exact figures for 1929 are not essential. This distinction is pointed out in that the income derived from the partnership of Paul Brown and Company was actually received by the estate in 1929, while the income from such partnership was no actually received in 1928.
In each case, the essential question presented is: Was the amount distributable in 1928 (or 1929) to plaintiff's decedent as a beneficiary of the estate of Paul Brown, deceased, and actually received by her, properly included in her taxable income for the year in question, although payments by the estate during such year for federal estate and estate inheritance taxes exceeded the net income distributable to the beneficiaries? In addition to this question, applicable to the tax for both years, there is the further question as to the tax paid for the year 1928: Was that portion of the estate's share of the distributable profits of the partnership of Paul Brown and Company, not actually received by it until the following year, to be treated as distributable income of the estate for the taxable year so as to require inclusion in the income of the beneficiaries? The court below, as to the 1928 tax, made the following conclusion of law: "That, under the Will, the sum of $681,520.91 was properly distributable by the executors in 1928 to the beneficiaries of the residuary estate, including the plaintiff's decedent, as the 1928 income and revenue from the residuary estate, even if the estate had no statutory net income as the result of the payment of Federal estate taxes and state inheritance taxes." The same conclusion (except as to amounts) was made as to the year 1929. It is about this conclusion that the involved controversy largely revolves.
It is the contention of the plaintiff that inasmuch as the total income of the Paul Brown estate for each of the years in question was far less than the total amount paid by the executors thereof in estate and inheritance tax, that the estate had no net income during either of these years; and it must be held that distributions made during those years were from the corpus of the estate rather than from income and are, therefore, not taxable to the legatees. There is no dispute but what such taxes paid by the estate for the years in question exceeded such income, but it is contended by the defendant that under the express language of the testator's will, the executors were without authority to pay such taxes or any part thereof from said income, but were charged with the duty of distributing the income among the six legatees, including a one-sixth part of plaintiff's decedent.
Such contention necessitates a reference to material clauses of the will, which we have heretofore related. It seems there is little room for doubt but what the testator, by the codicil to his will, directed that the residuary estate be preserved by the executors for a period of three years and that no distribution thereof be made during that time. I seems equally plain that it was the purpose of the testator to provide for these legatees, and members of his family, during the period he had placed an inhibition upon the distribution of the residuary.To be certain this purpose was accomplished, he directed that disbursements be made, not yearly, but in monthly installments, to begin on the 15th day of the second month after his death. It is argued that by use of the words "to pay over the net income and revenue" it must be held that the estate's income should have first been applied to the payment of all proper charges against the estate, including the inheritance and estate taxes. If so, there would have been no "net income" for distribution. We do not think, however, this language is susceptible of such a construction. The words "net income," no doubt, had reference to that portion of the income remaining after deducting the ordinary expenses which might be incurred in its collection. To conclude otherwise would be inconsistent with his expressed intention to care for his family while his estate was in the course of administration. But in addition to this, the language of the will itself negatives such a construction. In his codicil, the testator confers upon his executors, during the three-year period, wherein the estate is committed to their care, the "same powers and authority, with reference to the control, management and disposition, that I have given unto the trustee in the trust created for the benefit of the children of Paul Brown, Jr." Clause 20 ...