United States District Court, Northern District of Illinois, E.D
April 15, 1965
LEWIS SCHIMBERG, EXECUTOR OF THE ESTATE OF ANNA H. COLLINS, DECEASED, PLAINTIFF,
UNITED STATES OF AMERICA, DEFENDANT.
The opinion of the court was delivered by: Campbell, Chief Judge.
This is an action under § 1346(a) of Title 28, United States
Code to obtain a refund of federal income taxes allegedly
illegally assessed by the District Director of Internal Revenue.
Plaintiff filed a claim for refund with the District Director
on April 14, 1961, and the instant suit was commenced more than
six months after that date. The District Director has neither
allowed the claim nor granted credit, in whole or in part, for
the amount claimed. Plaintiff has therefore complied with §
6532(a)(1) of Title 26, United States Code.
The facts, as stipulated by the parties, are as follows:
Plaintiff is the Executor of the estate of Anna H. Collins
(hereinafter referred to as the decedent), who died on November
29, 1957. On April 15, 1958 plaintiff filed an income tax return
for the decedent for the period commencing January 1, 1957 and
ending November 29, 1957. Income taxes of $68,432.72 were paid
for said period. Decedent was the sole income beneficiary of
the Phillip Henrici Trust (hereinafter referred to as the
"Henrici Trust") and was also a 40% beneficiary of the William M.
Collins Trust (hereinafter referred to as the "Collins Trust").
The Henrici Trust kept its books and filed its income tax returns
for fiscal years beginning February 1 and ending January 31; the
Collins Trust kept its books and filed its income tax returns for
fiscal years beginning April 1 and ending March 31. Decedent kept
her books and filed income tax returns on the cash basis for
In the return, plaintiff included in gross income decedent's
share of the income of the Henrici Trust for its fiscal year
ended January 31, 1957, and of the Collins Trust for its fiscal
year ended March 31, 1957. Plaintiff also included gross income
of the Henrici Trust for its fiscal year ended January 31, 1958,
which was actually distributed to decedent prior to her death.
There was also included in gross income the following
distributions from the Collins Trust for its fiscal year ended
March 31, 1958: $12,967.77 representing income of the trust
actually distributed to the decedent prior to her death; and
$2,893.02 of trust income which was paid to plaintiff as executor
of decedent's estate. The Government now concedes plaintiff's
right to recover taxes attributable to the inclusion in the
decedent's final return of the last stated amount, i.e., the
$2,893.02 which was paid to the estate after the decedent's
The remaining dispute and the issue presently before me
concerns only sums actually distributed to decedent prior to her
death which were earned in a trust year ending after her death.
The question, stated simply, is whether these sums should be
taxable to the decedent or to her estate.
These funds were not amounts paid for a trust year ending
with or within the taxable year of the beneficiary. §§ 652(c) and
662(c) of the Internal Revenue Code commonly referred to as the
"different taxable years rules" provides so far as material here
— that if;
"the taxable year of the beneficiary is different
from that of the trust, the amount which the
beneficiary is required to include in gross income in
accordance with the provisions of this section shall
be based upon the amount of income of the trust for
any taxable year or years of the trust ending
within or with his taxable year." (emphasis
Treasury Regulations promulgated to implement these sections
draw an exception to the above rule where — because of the
beneficiary's death — the taxable year of the trust does not end
within or with the last taxable year of the beneficiary. (T.R.
1.652(c)(2) and 1.662(c)(2). In such cases, so state the
regulations, a cash basis beneficiary must include in gross
income, amounts actually received prior to death. In compliance
with these regulations, plaintiff included in gross income
amounts actually received by the decedent from the respective
trusts for the periods February 1, 1957, (Henrici Trust) and
April 1, 1957, (Collins Trust) to November 29, 1957, the date of
Plaintiff does not question the applicability of the
regulations to the facts, but contends instead that the
regulations are arbitrary, unreasonable and inconsistent with the
expressed provisions of the Revenue Act (§§ 652(c) and 662(c))
and as such are illegal and void. He argues that the regulations
work undue and unintended hardship on a deceased trust
beneficiary because their application may result in a "bunching"
of more than 12 months trust income in the last return of the
decedent.*fn1 He further argues that the rule applicable to an
analogous partnership situation — which avoids the harsh rule of
"bunching" income in the last return of a decedent partner —
should be applied to trust beneficiaries.
Although the arguments advanced by the plaintiff are impressive
and may even suggest a more desirable approach, I find that these
regulations are generally reasonable and non-oppressive in their
application, and are not inconsistent with the Revenue Act.
Though, admittedly, in some cases*fn2 these regulations may
increase the tax burden of the beneficiary by bunching income in
his last return, yet I find in the basic statute no intent on the
part of Congress to relieve this apparent hardship.
In considering whether a decedent trust beneficiary should be
given tax treatment similar to a decedent partner, I have found a
review of the legislative history and case law development of the
"analogous" partnership sections quite enlightening.
The Internal Revenue Code's sub-chapter on partners and
partnerships contains a "different taxable year rule" very
similar to the sections applicable to trusts.
"Year in which partnership income is includable (1)
in computing his taxable income for a taxable year, a
partner is required to include his distributive share
of partnership items * * * for any partnership year
ending within or with his taxable year. * * *"
(I.R.C. § 706(a)).
An early case applying this rule determined that, upon the
death of a partner, the partnership would terminate and its
taxable year end. (Guaranty Trust Co. of New York v.
Commissioner, 303 U.S. 493, 58 S.Ct. 673, 82 L.Ed. 975 (1938)).
The effect of this decision was to cause the last "short
partnership year" to be included in the last return of the
deceased partner, thereby causing a bunching of more than 12
months income in his final return. Later cases circumvented the
harshness of this rule by holding that, where the partners had
provided by agreement that the partnership would not terminate on
the death of a partner, then the partnership taxable year would
not end within or with the last taxable year of the decedent
partner and the income from that partnership year would not be
includable in his final return. This income would instead be
included in the return of his estate filed after the end of the
partnership year.*fn3 (See Commissioner of Internal Revenue v.
Mnookin, 184 F.2d 89 (8th Cir. 1950); Girard Trust Co. v. U.S.,
182 F.2d 921 (3rd Cir. 1950); and Henderson's Estate v.
Commissioner of Internal Revenue, 155 F.2d 310 (5th Cir. 1946).
These cases, however, lay stress on the fact that, because the
partnership does not terminate, the translation of earnings into
individual income is deferred until the end of the next
partnership fiscal year with no partnership gain or loss to
report for the period immediately preceding death. They further
indicate that if an accounting and distribution of profits had
occurred upon the death of a partner that income would be taxable
to the decedent. This distinction was noted by the Court of
Appeals for the Fourth Circuit in Knipps Estate v. Commissioner
of Internal Revenue, 244 F.2d 436, 441, where after citing the
above cases the court remarked:
"In those cases (unlike the case before that court)
there was a continuation of the sharing of
partnership income after the death of a partner.
The two situations are so different as to require a
difference in result."
In this light it is interesting to note that state law in the
instant case commands an accounting upon the death of a trust
beneficiary. (Income and Principal Act, Illinois Rev.Stat. c. 30,
§ 162). And while federal revenue laws are not deemed subject to
state law, a district court may look to local law to appraise the
nature of the transaction or the legal effect of facts presented.
To finally alleviate the burdens of bunched income, as it
affected partnerships, the code sub-chapter on partners and
partnerships was amended and the Congress added § 706(c), which
provides in general that the taxable year of the partnership
shall not close as the result of the death of a partner. (I.R.C.
§ 706(c); See also U.S. Code Congressional and Administrative
News, 1954 p. H.R. 4093) No like provision has been made for a
Congress was not unaware of the problem as it affected trust
beneficiaries. A leading text (Montgomery, Income Taxation of
Estates, Trusts and Gifts 1951-52) published before the 1954
amendment of the Code, recites at page 246, a factual situation
not dissimilar from the case at bar.
"The Treasury has ruled that where a life income
beneficiary of a trust having a fiscal year ending
September 30 dies the succeeding November 1 the
currently distributable income of the trust for its
fiscal year ended September 30 and the currently
distributable income of the trust for the period
October 1 to November 1 are both includable in the
decedent beneficiaries final return, whether or not
the trust terminates on the death of the beneficiary.
(Special Ruling Letter, Dated February 6, 1947 Signed
by E.I. McLarney, Deputy Commissioner)".
Plaintiff has further attempted to strengthen the alleged
partnership "analogy" by noting a Treasury Regulation which
provides that a trust shall not terminate with the death of a
beneficiary. (T.R.I. 641(b)(3)(a)) My reading of that
regulation is that the trust shall not terminate as to the
trustee and any surviving beneficiaries and that therefore no
trust return must be filed on the death of a beneficiary.
However, as to the individual return of the decedent, the
specific regulations (1.652(c)(2) and 1.662(c)(2) remain
Turning to the regulations themselves, I believe their
reasonableness is amply evidenced by the fact that it is not
necessary to include all distributable net income of the trust
earned and accrued at the date of death, but only that
distributable net income which was actually distributed to and
received by the decedent beneficiary prior to his death. This
factor somewhat reduces the extent to which income is bunched in
the last year. The hardship attributed to the bunching of income
may also be avoided by withholding distribution of trust income
until the end of the trust year. It is difficult to find
oppressive a regulation which attempts only to impose tax
liability on income the taxpayer has actually received and
enjoyed prior to the taxing date.
The hardship of bunching is also mitigated by the fact that by
choosing a fiscal trust year, the beneficiary has had the
benefit of postponing the tax burden on income received in the
past. In Knipps Estate, supra at 443, of 244 F.2d the court
stated with respect to the hardship of bunching income:
"Moreover, were the hardship of bunching a pertinent
consideration, it would be mitigated by the fact that
for a number of years, these taxpayers had the
advantage of paying their taxes almost a year late
because the partnership fiscal year deferred taxes on
eleven months of
firm profits until the following year."
In light of the foregoing considerations, I find that the
regulations here in question are neither oppressive,
unreasonable, nor in conflict with §§ 652(c) and 662(c) of the
Internal Revenue Code. The Supreme Court has advised,
"[T]hat Treasury regulations must be sustained unless
unreasonable and plainly inconsistent with the
revenue statutes and that they constitute
contemporaneous constructions by those charged with
the administration of these statutes which should not
be overruled except for weighty reasons."
Commissioner of Internal Revenue v. South Texas
Lumber Co., 333 U.S. 496, 68 S.Ct. 695, 92 L.Ed. 831
It is therefore hereby ordered that, with exception to the
$2,893.02 conceded by the government to have been erroneously
taxed and for which sum I hereby award judgment to the plaintiff;
the suit be and the same is hereby dismissed and judgment is
hereby entered for the defendant.
In view of the foregoing, it is unnecessary to consider the
government's suggestion that to tax the estate for income
actually received by the decedent would result in an
unconstitutional direct tax on principal because the receipts
would pass from the decedent to the estate not as income but as
In passing however, I should observe that the government
suggestion strains somewhat the extent to which a distinction is
to be drawn between a decedent and his estate. The executor of an
estate is the personal representative of the decedent, and the
estate itself acquires all its rights and liabilities from the
decedent. I believe this would include any tax liabilities
attributable to income received and enjoyed prior to his death.
Furthermore, I see no reason why funds of a decedent must change
in character from income to principal merely because of their
transfer to his estate.